SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x ~~QUARTERLY~~Quarterly ~~REPORT~~Report ~~PURSUANT~~Pursuant TOto ~~SECTION~~Section 13 ORor 15(d) OFof ~~THE~~the ~~SECURITIES~~Securities ~~EXCHANGE~~Exchange ~~ACT~~Act OFof 1934

For the quarterly period ended July 2631, ~~2003~~2004

¨ ~~TRANSITION~~Transition ~~REPORT~~Report ~~PURSUANT~~Pursuant TOto ~~SECTION~~Section 13 ORor 15(d) OFof ~~THE~~the ~~SECURITIES~~Securities ~~EXCHANGE~~Exchange ~~ACT~~Act OFof 1934

Commission File Number ~~333~~000-~~88212~~ 22791

COLLINS & AIKMAN FLOORCOVERINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware		58-2151061
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

311 Smith Industrial Boulevard, Dalton, Georgia		30721
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number: (706) 259-9711

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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 ¨.

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

The Registrant has 1,000 shares of Common Stock, par value $.01 per share, issued and outstanding as of ~~August~~September 3010, ~~2003~~2004.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

INDEX

			Page No.
Part I.	Financial Information
	Item 1.	Financial Statements
	Consolidated Statements of Operations – Thirteen Weeks and Twenty-Six Weeks Ended July 27, 2002 and July 26, 2003		3
		Consolidated Balance Sheets – As of January 31, 2004 and July 31, 2004	3
	Consolidated Balance Sheets – As of January 25, 2003 and July 26, 2003		4
		Consolidated Statements of Income – Thirteen Weeks and Twenty-Six Weeks Ended July 26, 2003 and July 31, 2004	4
	Consolidated Statements of Stockholder’s Equity – Twenty-Six Weeks Ended July 26, 2003		5
		Consolidated Statements of Stockholder’s Equity – Twenty-Six Weeks Ended July 31, 2004	5
	Consolidated Statements of Cash Flows – Twenty-Six Weeks Ended July 27, 2002 and July 26, 2003		6
		Consolidated Statements of Cash Flows – Twenty-Six Weeks Ended July 26, 2003 and July 31, 2004	6
	~~Notes to Consolidated Financial Statements~~	Notes to Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2325
	Item 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	3133
	Item 4.	Controls and Procedures	3133
Part II.	Other Information
	Item 1.	Legal Proceedings	3233
	Item 6.	Exhibits and Reports on Form 8-K	3234
Signatures			33
Signature			35
Certifications			34

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED ~~STATEMENTS~~BALANCE OFSHEETS ~~OPERATIONS~~

(~~Unaudited and~~ In Thousands)

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	January 31,2004			July 31, 2004
	July 27,2002			July 26,2003			July 27,2002			July 26,2003
				(Unaudited)
NET SALES	$	99,899		$	93,931		$	166,316		$	165,500
ASSETS
COST OF GOODS SOLD		62,118			59,169			105,219			107,501
CURRENT ASSETS:
SELLING, GENERAL & ADMINISTRATIVE EXPENSES		18,962			20,980			36,317			39,966
Cash and cash equivalents	$	11,041		$	10,024
		81,080			80,149			141,536			147,467
Accounts receivable, net of allowances of $918 and $856 in fiscal 2003 and 2004, respectively		36,019			51,269
OPERATING INCOME		18,819			13,782			24,780			18,033
Inventories		35,463			43,916
MINORITY INTEREST IN INCOME (LOSS) OF SUBSIDIARY		(10	)		32			6			16
Deferred tax assets		4,013			4,850
EQUITY IN EARNINGS OF AFFILIATE		533			326			1,009			687
Prepaid expenses and other		4,961			2,449
NET INTEREST EXPENSE		4,788			5,199			13,287			10,605
Total current assets		91,497			112,508
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		14,574			8,877			12,496			8,099
PROPERTY, PLANT AND EQUIPMENT, net		66,062			64,243
INCOME TAX EXPENSE		5,540			3,799			4,810			3,118
GOODWILL		98,378			98,378
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		9,034			5,078			7,686			4,981
OTHER INTANGIBLE ASSETS, net		34,255			32,722
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		—			—			(3,240	)		—
OTHER ASSETS		8,956			8,562
NET INCOME	$	9,034		$	5,078		$	4,446		$	4,981
TOTAL ASSETS	$	299,148		$	316,413
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	17,722		$	19,464
Accrued expenses		20,298			29,177
Current portion of long-term debt		1,791			1,553
Total current liabilities		39,811			50,194
OTHER LIABILITIES, including post-retirement benefit obligation		4,768			4,306
DEFERRED TAX LIABILITIES		19			1,615
LONG-TERM DEBT, net of current portion		207,516			206,121
MINORITY INTEREST		342			320
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER’S EQUITY:
Common stock; $.01 par value per share, 1,000 shares authorized, issued, and outstanding in fiscal 2003 and 2004		—			—
Paid-in capital		72,648			72,648
Retained deficit		(24,509	)		(17,313	)
Accumulated other comprehensive loss:
Foreign currency translation adjustment		(493	)		(524	)
Minimum pension liability adjustment, net of tax		(954	)		(954	)
Total stockholder’s equity		46,692			53,857
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	299,148		$	316,413

The accompanying notes are an integral part of these consolidated financial statements.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED ~~BALANCE~~STATEMENTS ~~SHEETS~~OF INCOME

(Unaudited and In Thousands)

	January 25,2003				July 26,2003
	Thirteen Weeks Ended						Twenty-Six Weeks Ended
					(Unaudited)
	July 26,2003			July 31,2004			July 26,2003		July 31, 2004
ASSETS
NET SALES	$	93,931		$	99,602		$	165,500	$	177,287
CURRENT ASSETS:
COST OF GOODS SOLD		59,169			60,567			107,501		111,983
Cash and cash equivalents	$	20,907			$	8,334
SELLING, GENERAL & ADMINISTRATIVE EXPENSES		19,452			20,130			36,910		41,134
Accounts receivable, net of allowances of $917 and $865 in fiscal 2002 and 2003, respectively		38,527				52,253
AMORTIZATION		1,528			765			3,056		1,531
Inventories		35,721				44,551
OPERATING EXPENSES		80,149			81,462			147,467		154,648
Deferred tax assets		1,863				2,903
OPERATING INCOME		13,782			18,140			18,033		22,639
Prepaid expenses and other		1,699				2,384
MINORITY INTEREST IN INCOME (LOSS) OF SUBSIDIARY		32			14			16		(22	)
Total current assets		98,717				110,425
EQUITY IN EARNINGS OF AFFILIATE		326			365			687		776
PROPERTY, PLANT, AND EQUIPMENT, net		66,258				65,991
NET INTEREST EXPENSE		5,199			5,150			10,605		10,273
DEFERRED TAX ASSETS		870				446
INCOME BEFORE INCOME TAXES		8,877			13,341			8,099		13,164
GOODWILL		98,378				98,378
INCOME TAX EXPENSE		3,799			5,390			3,118		5,968
OTHER INTANGIBLE ASSETS, net		43,100				40,044
NET INCOME	$	5,078		$	7,951		$	4,981	$	7,196
OTHER ASSETS		11,090				8,784
TOTAL ASSETS	$	318,413			$	324,068
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	15,919			$	22,112
Accrued expenses		18,714				25,725
Current portion of long-term debt		12,105				997
Total current liabilities		46,738				48,834
OTHER LIABILITIES, including post-retirement benefit obligation		5,529				5,414
LONG-TERM DEBT, net of current portion		218,666				218,947
MINORITY INTEREST		330				345
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER’S EQUITY:
Common stock; $.01 par value per share, 1,000 shares authorized, issued, and outstanding in fiscal 2002 and 2003		—				—
Paid-in capital		72,648				72,648
Retained deficit		(23,480	)			(20,762	)
Accumulated other comprehensive loss		(2,018	)			(1,358	)
		47,150				50,528
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	318,413			$	324,068

The accompanying notes are an integral part of these consolidated financial statements.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

FOR THE TWENTY-SIX WEEKS ENDED JULY 2631, ~~2003~~2004

(Unaudited and In Thousands, Except Share Amounts)

									Accumulated OtherComprehensive Income (Loss)
	Common Stock			Paid - in Capital		RetainedEarnings (Deficit)			Accumulated Other Comprehensive Income (Loss)						Total
	Common Stock			Paid - in Capital		Retained Earnings (Deficit)			Foreign CurrencyTranslation Adjustment			MinimumPension Liability			Total
	Shares	Amount							Foreign Currency TranslationAdjustment			Minimum Pension Liability
	Shares	Amount
BALANCE, January 31, 2004	1,000	$	—	$	72,648	$	(24,509	)	$	(493	)	$	(954	)	$	46,692
BALANCE, January 25, 2003	1,000	$	—	$	72,648	$	(23,480	)	$	(809	)	$	(1,209	)	$	47,150
Net income	—		—		—		7,196			—			—			7,196
Net income	—		—		—		4,981			—			—			4,981
Foreign currency translation Adjustment	—		—		—		—			(31	)		—			(31	)
Dividends to Tandus Group, Inc.	—		—		—		(2,263	)		—			—			(2,263	)
Total Comprehensive Income (Loss)	—		—		—		7,196			(31	)		—			7,165
Foreign currency translation adjustment	—		—		—		—			660			—			660
BALANCE, July 31, 2004	1,000	$	—	$	72,648	$	(17,313	)	$	(524	)	$	(954	)	$	53,857
BALANCE, July 26, 2003	1,000	$	—	$	72,648	$	(20,762	)	$	(149	)	$	(1,209	)	$	50,528

The accompanying notes are an integral part of these consolidated financial statements.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and In Thousands)

	Twenty-Six Weeks Ended
	July 27,2002			July 26,2003
	July 26,2003			July 31,2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,~~446~~981		$	47,~~981~~196
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and leasehold amortization		45,~~122~~024			5,~~024~~119
Amortization of other intangible assets		13,~~958~~056			31,~~056~~531
Amortization and write-off of deferred financing fees		~~3,324~~630			~~630~~840
Deferred income tax expense		3,001			(616	)
Change in deferred income tax		(616	)		759
Equity in earnings of affiliate		(~~1,009~~687	)		(~~687~~776	)
Minority interest in income of subsidiary		6			16
Minority interest in income (loss) of subsidiary		16			(22	)
Cumulative effect of change in accounting principle		3,240			—
Changes in operating assets and liabilities:
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(13,726	)		(15,250	)
Accounts receivable		(21,785	)		(13,726	)
Inventories		(8,830	)		(8,453	)
Inventories		(8,595	)		(8,830	)
Accounts payable		6,193			1,742
Accounts payable		7,135			6,193
Accrued expenses		7,010			8,879
Accrued expenses		6,857			7,010
Other, net		(683	)		1,695
Other, net		(1,887	)		(365	)
Total adjustments		(2,613	)		(3,936	)
Total adjustments		(3,633	)		(2,295	)
Net cash provided by operating activities		2,368			3,260
Net cash provided by operating activities		813			2,686
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of a business		(35,127	)		—
Equity distribution from affiliate		2,282			922
Equity distribution from affiliate		971			2,282
Additions to property, plant, and equipment		(4,130	)		(3,411	)
Additions to property, plant, and equipment		(3,522	)		(4,130	)
Net cash used in investing activities		(1,848	)		(2,489	)
Net cash used in investing activities		(37,678	)		(1,848	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		175,000			3,500
Proceeds from revolving credit facility		3,500			15,280
Repayments of long-term debt		(131,767	)		(14,630	)
Repayments of revolving credit facility		(3,500	)		(15,280	)
Dividends to Tandus Group, Inc.		(2,139	)		(2,263	)
Repayments of long-term debt		(11,130	)		(1,573	)
Financing costs		(6,627	)		(18	)
Cash dividends to Tandus Group, Inc.		(2,263	)		—
Net cash provided by (used in) financing activities		34,467			(13,411	)
Financing costs		(18	)		(237	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(2,398	)		(12,573	)
Net cash used in financing activities		(13,411	)		(1,810	)
CASH AND CASH EQUIVALENTS, beginning of period		6,234			20,907
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		318			22
CASH AND CASH EQUIVALENTS, end of period	$	3,836		$	8,334
NET CHANGE IN CASH AND CASH EQUIVALENTS		(12,573	)		(1,017	)
CASH AND CASH EQUIVALENTS, beginning of period		20,907			11,041
CASH AND CASH EQUIVALENTS, end of period	$	8,334		$	10,024

The accompanying notes are an integral part of these consolidated financial statements.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted ~~accounting~~in ~~principles~~the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted ~~accounting~~in ~~principles~~the United States for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Form 10-K for the year ended January 31, 2004, which was filed in May 2004 with the Securities and Exchange Commission ~~on April 25, 2003~~. The accompanying unaudited consolidated financial statements, in the opinion of management, include all adjustments necessary for fair presentation. All such adjustments are of a normal and recurring nature.

2. Organization

Based on annual sales and product brands, Collins ~~and~~ & Aikman Floorcoverings, Inc. (the “Company”), a Delaware corporation, is a leading manufacturer of floorcovering products for the North American specified commercial carpet market. The Company’s floorcovering products include (i) vinyl-backed six-foot roll carpet and modular carpet tile, and (ii) high style tufted and woven broadloom carpet. The Company designs, manufactures and markets its C&A, Monterey and Crossley brands ~~under the “Tandus Group” name~~ for a wide variety of end markets, including corporate offices, education, healthcare, government facilities and retail stores. Because of the Company’s diversity of its end markets, management believes its business tends to be less cyclical than that of many of its competitors, which rely more heavily on the corporate market. The ability to provide a “package of product offerings” in various forms, coupled with flexible distribution channels, allows the Company to provide a wide array of floorcovering solutions tailored for each of its customers. The Company is headquartered in Georgia, with additional locations in California, Canada, the United Kingdom, Singapore and ~~Singapore~~China.

The Company is a wholly owned subsidiary of Tandus Group, Inc. (“Tandus Group”)~~, formerly known as CAF Holdings, Inc~~. Subsequent to a recapitalization transaction on January 25, 2001, ~~a majority of Tandus’s outstanding capital stock is controlled by~~ investment funds managed by Oaktree Capital Management, LLC (“Oaktree”) and Banc of America Capital Investors (“BACI”) control a majority of the outstanding capital stock of Tandus Group.

3. Reclassifications

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

4. Cash and Cash Equivalents

Cash and cash equivalents include all cash balances and investments with an original maturity of three months or less.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Inventories

Net inventory balances are summarized below (in thousands):

	January 25,2003		July 26, 2003
	January 31,2004		July 31, 2004
			(Unaudited)
Raw materials	$	16,~~085~~074	$	2021,~~009~~942
Work in process		5,~~309~~153		7,~~815~~458
Finished goods		14,~~327~~236		1614,~~727~~516
	$	35,~~721~~463	$	4443,~~551~~916

6. Revenue Recognition

Revenue is recognized when ~~carpet~~goods ~~products and related accessories~~ are shipped., ~~The~~which is ~~terms~~when ~~for~~legal ~~these~~title ~~sales~~passes ~~are~~to ~~FOB~~the ~~shipping point~~customer. For product installations subject to customer approval, revenue is recognized upon acceptance by the customer. The Company provides certain installation services to customers utilizing independent third-party contractors. The billings and expenses for these services are included in net sales and cost of goods sold, respectively. These billings and expenses were $6.0 million and $5.7 million for the twenty-six weeks ended July 31, 2004 and July 26, 2003, respectively, and $3.5 million and $3.4 million for the thirteen weeks ended July 31, 2004 and July 26, 2003, respectively.

~~The~~A ~~Company~~customer ~~provides~~claims ~~installation~~reserve ~~services~~and toallowance ~~customers~~for ~~utilizing~~product ~~independent~~returns ~~third-party~~is ~~contractors.~~established ~~The~~based ~~billings~~upon ~~and~~historical ~~expenses~~claims ~~for~~experience ~~these~~as ~~services~~a ~~are~~percent ~~included~~of ~~in net~~gross sales. ~~and~~The allowance ~~cost~~for customer claims is recorded upon shipment of goods ~~sold,~~and ~~respectively,~~is inrecorded ~~the~~as ~~accompanying~~a ~~consolidated~~reduction ~~statements~~ of ~~operations~~sales. ~~These~~While ~~billings~~we ~~and~~believe ~~expenses~~the ~~were~~customer ~~$5.7~~claims ~~million~~reserve and ~~$4.8~~allowance ~~million~~ for ~~the~~product ~~twenty-six~~returns ~~weeks~~is ~~ended~~adequate ~~July~~and ~~26,~~the ~~2003~~judgment ~~and~~applied ~~July~~is ~~27,~~appropriate ~~2002,~~based ~~respectively,~~upon ~~and~~historical ~~$3.4~~experience ~~million~~for ~~and~~these ~~$2.9~~items, ~~million~~actual ~~for~~amounts ~~the~~determined ~~thirteen~~to ~~weeks~~be ~~ended~~due ~~July~~and ~~26,~~payable ~~2003~~could differ and ~~July~~additional ~~27,~~allowances ~~2002,~~may ~~respectively~~be required.

7. Accrued Expenses

Accrued expenses are summarized below (in thousands):

	January 25,2003		July 26, 2003
	January 31,2004		July 31, 2004
			(Unaudited)
Payroll and employee benefits	$	5,~~466~~952	$	68,~~912~~385
Accrued taxes		~~390~~—		5,~~014~~068
Customer claims		12,~~817~~206		2,~~362~~716
Accrued interest		78,~~892~~145		78,~~985~~172
Customer deposits		515		—
Accrued professional fees		2,862		3,197
Accrued professional fees		1,412		1,525
Other		1,133		1,639
Other		1,222		1,927
	$	20,298	$	29,177
	$	18,714	$	25,725

8. Goodwill and Other Intangible Assets

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

~~SFAS~~COLLINS ~~No.~~& ~~142~~AIKMAN ~~requires~~FLOORCOVERINGS, ~~among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually~~INC. InAND ~~addition,~~SUBSIDIARIES SFAS No. 142 requires companies to identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment by using certain fair value based tests. SFAS No. 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized.

	July 26, 2003
	Gross CarryingAmount		AccumulatedAmortization
Amortized intangible assets:
Non-compete	$	12,000	$	(11,436	)
Patent		27,000		(15,927	)
Supply Agreement		8,000		(3,206	)
Total	$	47,000	$	(30,569	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~The~~(Unaudited) patent is being amortized over an eleven-year period using the straight-line method. The non-compete is being amortized over a seven-year period using the double-declining balance method. The supply agreement is being amortized over a three-year period using the straight-line method.

8. Goodwill and Other Intangible Assets

The Company adopted the provisions of Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) on January 27, 2002.

The gross carrying amount and accumulated amortization of the intangible assets subject to amortization as of July 31, 2004 are as follows:


	July 31, 2004
	Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Non-compete	$	12,000	$	(12,000	)
Patent		27,000		(18,383	)
Supply Agreement		8,000		(7,508	)

Total	$	47,000	$	(37,891	)

The Company’s non-compete with its former parent was being amortized over a seven-year period using the double-declining balance method and was fully amortized as of January 31, 2004. The patent is being amortized over an eleven-year period using the straight-line method. The supply agreement is being amortized over a three-year period using the straight-line method. In the fourth quarter of fiscal 2003, CAF Extrusion, Inc. (“Extrusion”), a wholly-owned subsidiary, recorded a non-cash impairment charge of $1.6 million, net of tax, related to the supply agreement with the seller. The impairment charge was to reduce the net carrying value of the supply agreement to its fair value.


Unamortized intangible assets:
Trade name	$	23,613

Thirteen Weeks Ended

Twenty-Six Weeks Ended

July 27, 2002

July 26, 2003

July 27, 2002

July 26, 2003

July 31, 2004

July 26, 2003

July 31, 2004

Aggregate amortization expense

~~987~~1,528

~~1,528~~765

13,~~958~~056

31,~~056~~531

Estimated amortization expense:
Fiscal 2003	$	6,229
Fiscal 2004	$	3,090
Fiscal 2004	$	5,122
Fiscal 2005	$	2,639
Fiscal 2005	$	3,224
Fiscal 2006	$	2,450
Fiscal 2006	$	2,455
Fiscal 2007	$	2,455
Fiscal 2008	$	—

For the period ended July 31, 2004, there were no changes to the carrying value of goodwill.

~~The~~COLLINS ~~changes~~& inAIKMAN ~~the carrying amount of goodwill for the period ended July 26~~FLOORCOVERINGS, ~~2003~~INC. ~~are~~AND asSUBSIDIARIES ~~follows:~~

	FLOORCOVERINGSSEGMENT		EXTRUSIONSEGMENT		TOTAL
Balance as of January 25, 2003	$	92,747	$	5,631	$	98,378
Goodwill acquired during the year		—		—		—
Impairment loss		—		—		—
Balance as of July 26, 2003	$	92,747	$	5,631	$	98,378

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Stock~~(Unaudited) ~~Based Compensation~~

At July 26, 2003, the Company has one stock-based employee compensation plan, which is described more fully in Note 14 of the audited consolidated financial statements included in the Company’s Form 10-K which was filed with the Securities and Exchange Commission on April 25, 20039. ~~The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for~~ Stock Issued to Employees”, and related interpretations. The Company will account for these options as variable options and will record expenses and income based on increases and decreases in the fair market value of the Company’s common stock at the end of each reporting period. These options vest only upon the achievement of certain earnings targets, as defined. As of July 26, 2003 and July 27, 2002, the Company has not recorded any expense as the Company has not achieved its earnings targets and the fair market value of the Company’s common stock has not increased from the date of grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, ~~to the stock-based employee compensation (in thousands).~~

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 27, 2002			July 26, 2003			July 27, 2002			July 26, 2003
Net income as reported	$	9,034		$	5,078		$	4,446		$	4,981
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax		(12	)		(7	)		(23	)		(15	)
Proforma net income	$	9,022		$	5,071		$	4,423		$	4,966

As of July 31, 2004, the Company had one stock-based employee compensation plan, which is described more fully in Note 13 of the audited consolidated financial statements included in the Company’s Form 10-K for the year ended January 31, 2004, which was filed in May 2004 with the Securities and Exchange Commission. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company accounts for these options as variable options and records expense based on increases and decreases in the fair market value of the Company’s common stock at the end of each reporting period. These options vest only upon the achievement of certain earnings targets, as defined. As of July 31, 2004 and July 26, 2003, the Company had not recorded any expense related to this plan as the Company had not achieved its earnings targets, and the fair market value of the Company’s common stock has not increased from the date of grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation,” to the stock-based employee compensation (in thousands).

9. Recent Accounting Pronouncements


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 26, 2003			July 31, 2004			July 26, 2003			July 31, 2004
Net income as reported	$	5,078		$	7,951		$	4,981		$	7,196
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax		(7	)		(10	)		(15	)		(18	)

Proforma net income	$	5,071		$	7,941		$	4,966		$	7,178

~~In November 2002, the FASB issued Interpretation No~~10. ~~45, “Guarantor’s~~Recent Accounting ~~and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 supercedes Interpretation No. 34, “Disclosure of Indirect Guarantees of~~ ~~Indebtedness~~Pronouncements of Others,” and provides guidance on the recognition and disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. The initial recognition and measurement provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002, and are to be applied prospectively. The disclosure requirements are effective for financial statements for interim or annual periods ending after December 15, 2002. The adoption of FIN 45 has no impact to the Company’s consolidated financial statements beyond the additional disclosures as presented in Note 15.

In ~~January~~May 2003, the FASB issued Statement ~~Interpretation~~of Financial Accounting Standards No. 46150, “~~Consolidation~~Accounting offor ~~Variable~~Certain ~~Interest~~Financial ~~Entities,~~Instruments anwith ~~interpretation~~Characteristics of ~~ARB~~ ~~No.~~Both 51Liabilities and Equity” (“~~FIN~~SFAS 46No. 150”). ~~FIN~~SFAS 46No. ~~addresses~~150 modifies the ~~consolidation~~accounting byfor ~~business enterprises of variable interest entities that have~~ certain ~~characteristics. Generally~~financial instruments, athat ~~variable~~under ~~interest~~previous ~~entity~~guidance iscould ~~any~~be ~~legal~~accounted ~~structure used~~ for ~~business purposes~~as ~~that~~ either ~~(1)~~a ~~does~~liability ~~not~~or ~~have~~ equity, ~~investors~~to ~~with~~require ~~voting~~liability ~~rights~~treatment orfor ~~(2)~~those ~~has~~instruments ~~equity~~in ~~investors~~a ~~that~~company’s dostatement ~~not~~of ~~provide sufficient~~ financial ~~resources for the entity to support its operations~~position. ~~FIN~~This 46statement ~~requires~~is ~~variable~~effective ~~interest~~for ~~entities~~our ~~to be~~interim ~~consolidated~~periods bybeginning ~~the~~after ~~company~~December if15, it2003. isThe ~~subject~~adoption toof aSFAS ~~majority~~150 ofdid ~~the~~not ~~risk~~have ofan ~~loss~~impact ~~from~~on ~~the~~our ~~variable~~financial ~~interest~~position, ~~entity’s~~results of operations or ~~entitled~~cash toflows. ~~receive a~~

In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosure about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106” (“SFAS No. 132”). The revision of SFAS No. 132 provides for additional disclosures including the description of the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows and components of net periodic benefit cost recognized in interim periods. The revision of SFAS No. 132 is effective for our consolidated financial statements as of January 31, 2004 and did not have an impact on our financial position, results of operations or cash flows.

11. Long-Term Debt

On August 18, 2004, the Company executed Amendment No. 3 (the “Amendment”) to its Senior Credit Facility. The Amendment provides for, among other things, 1) the transfer of certain of the broadloom manufacturing fixed assets located in Santa Ana, California to the Company’s facility located in Truro, Nova Scotia, 2) the disposal of and/or transfer to Collins & Aikman Floorcoverings, Inc. of substantially all of the remaining Santa Ana, California fixed assets and transfer all or substantially all of the accounts receivable, inventory and other liquid current assets from its Monterey Carpets, Inc. legal entity to Collins & Aikman Floorcoverings, Inc., 3) the release of Monterey Carpets as a subsidiary guarantor under the

~~majority~~COLLINS of& ~~the~~AIKMAN ~~entity’s residual returns. FIN 46 requires consolidation of variable interest entities created after January 31~~FLOORCOVERINGS, ~~2003 and applies to existing variable interest entities in the first year or interim period beginning after June 15, 2003~~INC. ~~The~~AND ~~Company~~SUBSIDIARIES ~~is in the process of determining the impact of FIN 46 on its financial statements.~~

~~Monterey~~NOTES ~~Carpets,~~TO ~~Inc.,~~CONSOLIDATED aFINANCIAL ~~wholly-owned~~STATEMENTS subsidiary of the Company, holds a variable interest in a partnership described in further detail in Note 12. The Company currently accounts for the partnership under the equity method of accounting. As a result, the partnership may be considered a variable interest entity, and the Company may be required to consolidate the partnership as of July 27, 2003, the beginning of the Company’s third quarter. Consolidated net income and Adjusted EBITDA for the period and the Company’s partnership equity at the end of the period are the same whether the investment in the partnership is accounted for under the equity method or the partnership is consolidated. Any change in disclosure or presentation has no impact on the Company’s debt covenants. The Company’s maximum exposure to loss as a result of its involvement with the partnership is limited primarily to its initial investment in the partnership and its undistributed share of the partnership’s earnings. The partners have historically financed the operation of the business of the partnership by utilizing the initial capital contributions of the partners, internally generated funds and proceeds from the third party loans. To the extent that the operations of the partnership cannot be financed in this manner, the partnership agreement allows for a call for additional capital contributions, which is obligatory to the partners. Historical and current results of the partnership’s operations indicate that current sources of funds will continue to be adequate, and that no such call for additional capital contributions should be required.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (~~collectively referred to as derivatives~~Unaudited) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for contracts entered into or modified after June 30, 2003. SFAS No. 149 is not expected to materially impact the Company’s financial statements.

Insubsidiary ~~May~~guarantee ~~2003,~~agreement and the ~~FASB~~security ~~issued~~agreement ~~SFAS~~and ~~No.~~any ~~150,~~other ~~“Accounting~~loan ~~for~~documents ~~Certain~~to ~~Financial Instruments~~which ~~with~~it ~~Characteristics~~is ofa ~~Both~~party, ~~Liabilities~~4) ~~and~~the exclusion ~~Equity.”~~from ~~SFAS~~the ~~No.~~calculation ~~150~~of ~~establishes~~covenants ~~standards~~of ~~for~~the ~~how~~costs anincurred ~~issuer~~in ~~classifies~~connection ~~and~~with ~~measures~~the ~~certain~~consolidation ~~financial~~of ~~instruments~~up ~~with~~to ~~characteristics~~$10.0 ofmillion, ~~both liabilities~~ and ~~equity~~5) asthe ~~well~~reduction asof ~~imposes additional~~the ~~disclosure~~credit ~~requirements.~~spread ~~This~~to ~~statement~~Libor isplus ~~effective~~2.75 ~~for~~on ~~financial~~the ~~instruments~~Term ~~entered~~B ~~into~~Loan. orThe ~~modified~~Amendment ~~after~~further ~~May~~authorizes ~~31,~~the collateral ~~2003,~~agent ~~and~~to ~~otherwise~~release isany ~~effective~~and atall ~~the~~liens ~~beginning~~held ofby the ~~first~~collateral ~~interim~~agent ~~period~~in ~~beginning~~or ~~after~~on ~~June~~the ~~15,~~assets ~~2003.~~to ~~SFAS~~be ~~No. 150~~transferred isfrom ~~not~~Santa ~~expected~~Ana, California to ~~materially~~Truro, ~~impact~~Nova ~~the Company’s financial statements~~Scotia.

10Effective May 1, 2004, the Company amended its Senior Credit Facility to revise certain covenants. The amended principal ~~Long-Term~~financial ~~Debt~~covenants are as follows:

During the twenty-six weeks ended July 26, 2003 and July 27, 2002, the Company prepaid $10.0 million and $125.0 million, respectively, of its term debt. The $10.0 million term debt prepayment was funded by cash accumulated from operations. The $125.0 million term debt repayment was funded by a portion of the proceeds of the February 20, 2002 issuance of $175.0 million of 9.75% senior subordinated notes due 2010. In connection with these term debt prepayments, the Company recorded the write-off of a pro-rata share of deferred financing costs associated with the term debt. The amounts of these expenses were $0.2 million and $2.6 million for the periods ended July 26, 2003 and July 27, 2002, respectively. These items are reflected in interest expense in the consolidated statement of operations.


	Q1	Q2	Q3	Q4	Thereafter
Fixed charge coverage ratio	1.00:1.00	1.00:1.00	1.00:1.00	1.10:1.00	1.10:1.00
Interest coverage ratio	1.75:1.00	1.75:1.00	1.85:1.00	2.00:1.00	2.25:1.00

The Company’s fixed charge coverage ratio and interest coverage ratio were 1.49:1.00 and 2.29:1.00, respectively, at July 31, 2004. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Senior Credit Facility, the Company will also be subject to the provisions of a cross-default for the 9.75% Senior Subordinated Notes. The Company was in compliance with all covenants as of July 26 31, ~~2003~~2004 and expects to remain in compliance throughout fiscal 2004, although no assurances to that effect can be given.

Total net interest expense was $5.2 million and $45.82 million for the thirteen weeks ended July 2631, ~~2003~~2004 and July 2726, ~~2002~~2003, respectively, which included minimal interest income. Total net interest expense was $10.63 ~~million~~ and $1310.36 million for the twenty-six weeks ended July 2631, ~~2003~~2004 and July 2726, ~~2002~~2003, respectively, which included minimal interest income ~~of $0~~.1 million and $0.2 million, respectively. The twenty-six weeks ended July 27, 2002 include a charge to interest expense of $2.6 million to reflect the write-off of a pro-rata share of deferred financing costs

12. Segment Information

The Company has adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). This statement addresses reporting of operating segment information and disclosures about products, services, geographic areas, and major customers. Management has reviewed the requirements of SFAS No. 131 concluding that the Company operates its business as two reportable segments: Floorcoverings and Extrusion.

Accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance of the segments is evaluated on Adjusted EBITDA, which represents earnings before interest, taxes, depreciation and amortization plus Chroma cash dividends and minority interest in income (loss) of subsidiary, less equity in earnings of Chroma.

The Floorcoverings segment represents all floorcovering products. These products are six-foot roll carpet, modular carpet tile and tufted and woven broadloom carpet. The Extrusion segment represents the Company’s extrusion plant, which was acquired on May 8, 2002. Products in this segment are nylon and polypropylene extruded yarn.

No single customer amounted to or exceeded 10.0% of the Floorcovering segment’s sales for any period presented. The Extrusion segment’s largest customer accounted for 15.8% and 37.0% of sales and its second largest customer accounted for 10.2% and 10.3% of sales in the thirteen weeks and twenty-six weeks ended July 31, 2004, respectively.

~~associated~~COLLINS ~~with~~& ~~the~~AIKMAN ~~prepayment~~FLOORCOVERINGS, ~~of term debt from proceeds of the 9~~INC.~~75%~~ ~~notes~~AND ~~offering~~SUBSIDIARIES ~~and from cash generated from operations.~~

~~11.~~NOTES ~~Segment~~TO ~~Information~~CONSOLIDATED FINANCIAL STATEMENTS

~~The~~(Unaudited) Company has adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” This statement addresses reporting of operating segment information and disclosures about products, services, geographic areas, and major customers. Management has reviewed the requirements of SFAS No. 131 concluding that the Company operates its business as two reportable segments: Floorcoverings and Extrusion.

~~Accounting~~The ~~policies of~~table ~~the~~below ~~segments~~provides ~~are~~certain ~~the~~financial ~~same~~information asby ~~those~~segment ~~described~~ (in the summary of significant accounting policies. Performance of the segments is evaluated on Adjusted EBITDA which represents earnings before interest, taxes, depreciation, amortization and the cumulative effect of change in accounting principle, plus Chroma Systems Partners’ (“Chroma”thousands): ~~cash dividends and the minority interest in income of subsidiary, less equity in earnings of Chroma.~~

The Floorcoverings segment represents all floorcovering products. These products are six-foot roll carpet, modular carpet tile and tufted and woven broadloom carpet. The Extrusion segment represents the Company’s extrusion plant which was acquired on May 8, 2002. Products in this segment are nylon or polypropylene extruded yarn.


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 26, 2003			July 31, 2004			July 26, 2003			July 31, 2004
Net Sales to External Customers
Floorcoverings	$	86,743		$	94,917		$	150,540		$	164,927
Extrusion		7,188			4,685			14,960			12,360

Total Sales to External Customers	$	93,931		$	99,602		$	165,500		$	177,287


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 26, 2003			July 31, 2004			July 26, 2003			July 31, 2004
Adjusted EBITDA
Floorcoverings	$	16,881		$	21,484		$	25,662		$	28,133
Extrusion		1,346			598			2,733			2,078

Total Adjusted EBITDA	$	18,227		$	22,082		$	28,395		$	30,211


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 26, 2003			July 31, 2004			July 26, 2003			July 31, 2004
Net income	$	5,078		$	7,951		$	4,981		$	7,196
Income taxes		3,799			5,390			3,118			5,968
Net interest expense		5,199			5,150			10,605			10,273
Depreciation		2,512			2,533			5,024			5,119
Amortization		1,528			765			3,056			1,531
Chroma cash dividends		405			644			2,282			922
Equity in earnings in Chroma		(326	)		(365	)		(687	)		(776	)
Minority interest in income (loss) of subsidiary		32			14			16			(22	)

Adjusted EBITDA	$	18,227		$	22,082		$	28,395		$	30,211

No single customer amounted to or exceeded 10.0% of the Floorcovering segment’s sales for any period presented. The Extrusion segment’s largest customer accounted for 76.7% and 78.1% of sales in the thirteen weeks and twenty-six weeks ended July 26, 2003, respectively, as a result of a supply agreement with the seller. See Note 16 for subsequent event information related to the Extrusion operations.


	As of January 31, 2004		As of July 31, 2004
Consolidated Assets
Floorcoverings	$	267,090	$	287,470
Extrusion		32,058		28,943

Total Consolidated Assets	$	299,148	$	316,413

A non-cash goodwill impairment charge of $3.2 million was recorded in the Floorcoverings’ segment. The charge resulted from the Company’s adoption of SFAS No. 142 and was recorded retroactively to January 27, 2002 as a cumulative effect of a change in accounting principle.

~~The~~COLLINS ~~table~~& ~~below~~AIKMAN ~~provides~~FLOORCOVERINGS, ~~certain~~INC. ~~financial~~AND ~~information~~SUBSIDIARIES ~~by segment (in thousands):~~

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 27,2002			July 26,2003			July 27,2002			July 26,2003
Net Sales to External Customers
Floorcoverings	$	92,266		$	86,743		$	158,683		$	150,540
Extrusion		7,633			7,188			7,633			14,960
Total Sales to External Customers	$	99,899		$	93,931		$	166,316		$	165,500
	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 27,2002			July 26,2003			July 27,2002			July 26,2003
Adjusted EBITDA
Floorcoverings	$	21,097		$	16,881		$	30,481		$	25,662
Extrusion		1,350			1,346			1,350			2,733
Total Adjusted EBITDA	$	22,447		$	18,227		$	31,831		$	28,395
	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 27,2002			July 26,2003			July 27,2002			July 26, 2003
Net income	$	9,034		$	5,078		$	4,446		$	4,981
Cumulative effect of change in accounting principle		—			—			3,240			—
Income taxes		5,540			3,799			4,810			3,118
Net interest expense		4,788			5,199			13,287			10,605
Depreciation		2,222			2,512			4,122			5,024
Amortization		987			1,528			1,958			3,056
Chroma cash dividends		419			405			971			2,282
Equity in earnings in Chroma		(533	)		(326	)		(1,009	)		(687	)
Minority interest in income (loss) of subsidiary		(10	)		32			6			16
Adjusted EBITDA	$	22,447		$	18,227		$	31,831		$	28,395

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	As ofJanuary 25, 2003		As of July 26, 2003
Consolidated Assets
Floorcoverings	$	280,418	$	287,559
Extrusion		37,995		36,509
Total Consolidated Assets	$	318,413	$	324,068

(Unaudited)

13. Investment in Equity Affiliate

Monterey Color Systems, Inc., a wholly owned subsidiary of Monterey Carpets, Inc. (“Monterey Carpets”), has a fifty percent (50%) ownership interest in Chroma Systems Partners (“Chroma”), which operates a carpet dyeing and finishing plant. Because the Company does not exercise control over Chroma, the Company accounts for its interest in Chroma under the equity method of accounting. The unaudited condensed financial information of Chroma for the twenty-six weeks ended July 31, 2004 and July 26, 2003, and as of July 31, 2004 and January 31, 2004 are summarized below:


	As of January 31, 2004		As of July 31, 2004
Current Assets	$	2,203	$	2,094
Non-current Assets		7,925		7,861

Total Assets	$	10,128	$	9,955

Current Liabilities	$	1,517	$	1,105
Long Term Debt		8,513		8,420
Partners’ Capital		98		430

Total Liabilities and Partners’ Capital	$	10,128	$	9,955


	Twenty-Six Weeks Ended
	July 26, 2003		July 31, 2004
Net Sales	$	8,872	$	10,172
Cost of Goods Sold		7,004		8,100

Gross Profit		1,868		2,072
Income From Operations		1,412		1,573
Net Income		1,338		1,477

On August 11, 2004, Monterey Carpets gave notice to The Dixie Group, Inc. (“Dixie”) that it has elected to terminate its supply arrangement with Chroma effective August, 2005. Chroma currently dyes and finishes substantially all of Monterey Carpets’ carpet production and Dixie’s Fabrica Division’s carpet production and performs dyeing and finishing operations for other carpet mills. Under the terms of the partnership agreement, Monterey Carpets’ decision will effectively give Dixie the option to acquire Monterey Carpets’ interest in the partnership for a nominal value and assume full control of Chroma’s operations when the supply agreement terminates.

14. Comprehensive Income

Comprehensive income is as follows (in thousands):


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 26, 2003		July 31, 2004		July 26, 2003		July 31, 2004
Net Income	$	5,078	$	7,951	$	4,981	$	7,196
Other Comprehensive Income (Loss): Foreign Currency Translation Adjustments		245		21		660		(31	)

Comprehensive Income	$	5,323	$	7,972	$	5,641	$	7,165

~~12.~~COLLINS ~~Investment~~& inAIKMAN ~~Equity~~FLOORCOVERINGS, ~~Affiliate~~INC. AND SUBSIDIARIES

~~Monterey~~NOTES ~~Carpets,~~TO ~~Inc.~~CONSOLIDATED ~~has~~FINANCIAL aSTATEMENTS one-half ownership interest in Chroma Systems Partners (“Chroma”), which operates a carpet dyeing and finishing plant. Because the Company does not exercise control over the partnership, the Company currently accounts for the partnership under the equity method of accounting. The audited financial statements and related footnotes of Chroma are included in the Company’s Form 10-K which was filed with the Securities and Exchange Commission on April 25, 2003. In January 2003, the FASB issued FIN 46 which addresses consolidation by business enterprises of variable interest entities that have certain characteristics. FIN 46 is discussed in more detail in Note 9. As a result, the Company may be required to consolidate the partnership as of July 27, 2003, the beginning of the Company’s third quarter.

~~The~~(Unaudited) ~~condensed financial information of Chroma for the twenty-six weeks ended July 26, 2003 and July 27, 2002, and as of July 26, 2003 and January 25, 2003 are summarized below:~~

	As ofJanuary 25, 2003		As ofJuly 26, 2003
Current Assets	$	1,939	$	2,887
Non-current Assets		8,433		8,140
Total Assets	$	10,372	$	11,027
Current Liabilities	$	921	$	1,197
Long Term Debt		5,066		8,672
Partners’ Capital		4,385		1,158
Total Liabilities and Partners’ Capital	$	10,372	$	11,027

15. Commitments & Contingencies

	Twenty-Six Weeks Ended
	July 27,2002		July 26, 2003
Net Sales	$	8,837	$	8,872
Cost of Goods Sold		6,369		7,004
Gross Profit		2,468		1,868
Income From Operations		2,060		1,412
Net Income		2,039		1,338

During March 2004, a jury found in favor of Employers Mutual Insurance Companies (“EMC”) related to alleged violations of express oral warranty and implied warranty of fitness for particular purpose and awarded damages totaling $0.8 million. The Company has accrued the full judgment amount of $0.8 million as of January 31, 2004. During the thirteen and twenty-six weeks ended July 31, 2004, the Company incurred approximately $0.0 million and $0.5 million, respectively, of legal expenses related to this lawsuit. The Company continues to deny liability and is evaluating its options, which include a motion for a new trial. If the Company pursues those options and is unsuccessful, it will be required to pay the full judgment amount and related legal and professional fees. Subsequent to the end of the second quarter of fiscal 2004, the judgment amount was reduced from $0.8 million to $0.6 million. However, the reduction may be appealed by EMC through September 20, 2004.

13On August 10, 2004, the Company and its parent announced its intent to close its manufacturing facility in Santa Ana, California, and transfer the production to its existing Truro, Nova Scotia, Canada, facility. ~~Acquisition~~The plan to close the facility was approved on August 9, 2004, and is expected to be complete by the end of the Company’s first fiscal quarter in 2005. It is anticipated that there will be one-time costs of approximately $6.4 million consisting of severance, moving, reinstallation, professional fees and other costs. In addition the Company anticipates capital expenditures of approximately $2.8 million related to the move. No costs have been incurred or accrued as of July 31, 2004.

~~On May 8, 2002, CAF Extrusion, Inc~~16. ~~(“Extrusion”), a wholly-owned~~ ~~subsidiary,~~Employee ~~acquired~~Benefit aPlans yarn extrusion manufacturing plant located in Calhoun, Georgia. In addition, Extrusion purchased the real property on which the plant is located from a third party. The acquisition was funded from cash on hand. The cash purchase price was $34.8 million plus $0.3 million for acquisition related expenses and consisted of $2.4 million for the land and building, $1.4 million for inventory, $17.7 million for machinery and equipment, $5.6 million for goodwill (which was assigned an indefinite life), and $8.0 million for a supply agreement which will be amortized over its term of three years. The acquisition has been accounted for by the purchase method and, accordingly, the results of operations of Extrusion have been included in the Company’s consolidated financial statements from May 8, 2002.

The Company maintains a defined benefit program for its domestic employees, which was frozen during fiscal 2002. Accordingly, no new benefits are being accrued under the plan. Participant accounts are credited with interest at the rates defined by the plan. Company contributions are based on computations by independent actuaries, although the Company may decide to make additional contributions to the plan beyond minimum funding requirements as is deemed appropriate by management. Plan assets at July 31, 2004 and January 31, 2004 were invested primarily in mutual funds and money market funds.

Net periodic pension cost for the thirteen weeks and twenty-six weeks ended July 31, 2004 and July 26, 2003 was comprised of the following components:


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 26, 2003			July 31, 2004			July 26, 2003			July 31, 2004
Service cost – benefits earned during the period	$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation		(25	)		(136	)		145			137
Expected return on plan assets		23			65			(130	)		(181	)
Recognized net actuarial losses		(12	)		(88	)		73			49

Net periodic pension cost (benefit)	$	(14	)	$	(159	)	$	88		$	5

Employer contributions of $0.3 million and $0.2 million were made for the thirteen weeks ended July 31, 2004 and July 26, 2003, and $0.5 million and $0.5 million were made for the twenty-six weeks ended July 31, 2004 and July 26, 2003, respectively. There is no additional minimum employer contribution required for the remainder of fiscal 2004.

Canadian Defined Benefit Plan

Substantially all Canadian employees of Crossley Carpets Ltd. (“Crossley”) who meet eligibility requirements can participate in a defined benefit plan administered by the Company. Plan benefits are generally based on years of service and employees’ compensation during their years of employment. The Company’s policy is to contribute annually the maximum amount that can be deducted for income tax purposes. Assets of the pension plan are held in a trust invested primarily in mutual funds.

14COLLINS & AIKMAN FLOORCOVERINGS, INC. ~~Comprehensive~~AND ~~Income~~SUBSIDIARIES

	Thirteen WeeksEnded					Twenty-Six WeeksEnded
	July 27,2002			July 26,2003		July 27,2002			July 26,2003
Net Income	$	9,034		$	5,078	$	4,446		$	4,981
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments		(474	)		245		(330	)		660
Comprehensive Income	$	8,560		$	5,323	$	4,116		$	5,641

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~15.~~(Unaudited) ~~Condensed Consolidating Financial Statements~~

~~The~~Net ~~9.75%~~periodic ~~Notes~~pension ofcost ~~the~~for ~~Company are guaranteed by certain of~~ the ~~Company’s~~thirteen ~~domestic~~weeks ~~subsidiaries.~~and ~~The~~twenty-six ~~guarantee~~weeks ofended ~~the guarantor subsidiaries as of~~ July 2631, ~~2003~~2004 ~~arose in conjunction with the Company’s issuance of the 9.75% Notes on February 20, 2002~~ and the $109.0 million senior secured credit facility (“Senior Credit Facility”) which was amended by the Company on February 20, 2002. The guarantees’ terms match the terms of the 9.75% Notes and the Senior Credit Facility. The maximum amount of future payments the guarantors would be required to make under the guarantees as of July 26, 2003 iswas ~~$224.0~~comprised ~~million. This represents the principal amount outstanding~~ of the ~~Company’s~~following ~~Senior~~components: ~~Credit Facility, the 9.75% Notes and accrued interest on both obligations.~~

Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information as of July 26, 2003 and January 25, 2003, and for each of the thirteen weeks and twenty-six weeks ended July 26, 2003 and July 27, 2002 are presented. The condensed consolidating financial information of the Company and its subsidiaries are as follows:


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 26, 2003			July 31, 2004			July 26, 2003			July 31, 2004
Service cost – benefits earned during the period	$	166		$	198		$	199		$	279
Interest cost on projected benefit obligation		152			128			182			202
Expected return on plan assets		(154	)		(145	)		(185	)		(220	)
Recognized net actuarial losses		2			1			3			1

Net periodic pension cost	$	166		$	182		$	199		$	262

~~Guarantor~~Employer ~~Financial~~contributions for ~~Statements~~fiscal 2004 are dependent upon the amounts contributed by employees and were $0.1 million and $0.2 million for the thirteen weeks and twenty-six weeks ended July 31, 2004 and July 26, 2003, respectively. Company contributions are expected to be approximately $0.3 million in fiscal 2004.

~~Condensed~~Postretirement ~~Consolidating~~Benefit ~~Statements of Operations~~ Plan

~~For~~The Company provides a fixed dollar reimbursement for life and medical coverage for certain of the ~~Thirteen~~Company’s ~~Weeks~~retirees ~~Ended~~(over ~~July~~age ~~26,~~65 ~~2003~~with 10 years of service or more) under the plan currently in effect. The plan is unfunded.

~~(Unaudited~~Net periodic postretirement benefit costs for the thirteen weeks and Intwenty-six ~~Thousands)~~weeks ended July 31, 2004 and July 26, 2003 was comprised of the following components:

	Issuer		GuarantorSubsidiaries		Non-GuarantorSubsidiaries				Eliminations			ConsolidatedTotal
	Thirteen Weeks Ended				Twenty-Six Weeks Ended
Net Sales	$	64,962	$	23,438	$	11,831			$	(6,300	)	$	93,931
	July 26,2003		July 31,2004		July 26,2003			July 31, 2004
Cost of Goods Sold		37,527		17,743		10,199				(6,300	)		59,169
Service cost – benefits earned during the period	$	56	$	37	$	80		$	83
Selling, General & Administrative Expenses		13,940		5,335		1,705				—			20,980
Interest cost on projected benefit obligation		43		28		60			62
		51,467		23,078		11,904				(6,300	)		80,149
Net periodic postretirement benefit cost	$	99	$	65	$	140		$	145
Operating Income (Loss)		13,495		360		(73	)			—			13,782
Minority Interest in Income of Subsidiary		—		—		32				—			32
Equity in Earnings of Affiliate		—		326		—				—			326
Equity in Earnings of Subsidiaries		215		—		—				(215	)		—
Net Interest Expense		5,151		—		48				—			5,199
Income (Loss) Before Income Taxes		8,559		686		(153	)			(215	)		8,877
Income Tax Expense		3,481		282		36				—			3,799
Net Income (Loss)	$	5,078	$	404	$	(189	)		$	(215	)	$	5,078

17.

Condensed Consolidating Financial Statements

The 9.75% Notes of the Company are guaranteed by the Company’s domestic subsidiaries. Effective August 18, 2004, Monterey Carpets, Inc. was released as a guarantor. The guarantee of the guarantor subsidiaries is full and unconditional and joint and several and arose in conjunction with the Company’s issuance of the 9.75% Notes on February 20, 2002 and the $109 million Senior Credit Facility, which was amended by the Company on February 20, 2002, May 1, 2004 and August 18, 2004. The guarantees’ terms match the terms of the 9.75% Notes and the Senior Credit Facility. The maximum amount of future payments the guarantors would be required to make under the guarantees as of July 31, 2004 is $214.4 million. This represents the principal amount outstanding of the Company’s Senior Credit Facility, the 9.75% Notes and accrued interest on both obligations. The condensed consolidating financial information of the Company and its subsidiaries as of July 31, 2004 and January 31, 2004, and for each of the thirteen weeks and twenty-six weeks ended July 31, 2004 and July 26, 2003 are as follows:

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating ~~Statement~~Balance ofSheets ~~Operations~~

~~For the Thirteen Weeks Ended~~ July 2731, ~~2002~~2004

(Unaudited and In Thousands)

	Issuer			~~GuarantorSubsidiaries~~	GuarantorSubsidiaries		~~Non-GuarantorSubsidiaries~~	Non-GuarantorSubsidiaries			~~Eliminations~~	Eliminations			~~ConsolidatedTotal~~	ConsolidatedTotal
Net Sales	$	67,395		$	24,145		$	11,805			$	(3,446	)		$	99,899
ASSETS
Cost of Goods Sold		38,214			17,544			9,806				(3,446	)			62,118
CURRENT ASSETS:
Selling, General & Administrative Expenses		13,562			4,029			1,371				—				18,962
Cash and cash equivalents	$	6,290			$	—		$	3,734			$	—			$	10,024
		51,776			21,573			11,177				(3,446	)			81,080
Accounts receivable, net		33,056				11,218			6,995				—				51,269
Operating Income		15,619			2,572			628				—				18,819
Inventories		22,078				12,233			9,605				—				43,916
Minority Interest in Loss of Subsidiary		—			—			(10	)			—				(10	)
Deferred tax assets		3,290				859			701				—				4,850
Equity in Earnings of Affiliate		—			533			—				—				533
Prepaid expenses and other		783				448			1,218				—				2,449
Equity in Earnings of Subsidiaries		2,598			—			—				(2,598	)			—
Total current assets		65,497				24,758			22,253				—				112,508
Net Interest Expense		4,777			—			11				—				4,788
PROPERTY, PLANT AND EQUIPMENT, net		32,674				19,838			11,731				—				64,243
Income Before Income Taxes		13,440			3,105			627				(2,598	)			14,574
DEFERRED TAX ASSETS		—				2,225			1,871				(4,096	)			—
Income Tax Expense		4,406			1,100			34				—				5,540
GOODWILL		62,386				35,992			—				—				98,378
Net Income	$	9,034		$	2,005		$	593			$	(2,598	)		$	9,034
OTHER INTANGIBLE ASSETS, net		32,230				492			—				—				32,722
INVESTMENT IN SUBSIDIARIES		71,059				—			—				(71,059	)			—
OTHER ASSETS		8,468				3			91				—				8,562
TOTAL ASSETS	$	272,314			$	83,308		$	35,946			$	(75,155	)		$	316,413
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	9,483			$	5,400		$	4,581			$	—			$	19,464
Accrued expenses		18,506				7,666			3,005				—				29,177
Current portion of long-term debt		241				—			1,312				—				1,553
Total current liabilities		28,230				13,066			8,898				—				50,194
INTERCOMPANY (RECEIVABLE) PAYABLE		(25,715	)			1,586			24,129				—				—
OTHER LIABILITES, including post- retirement obligation		4,222				—			84				—				4,306
DEFERRED TAX LIABILITES		5,711				—			—				(4,096	)			1,615
LONG-TERM DEBT, net of current portion		206,009				—			112				—				206,121
MINORITY INTEREST		—				—			—				320				320
STOCKHOLDER’S EQUITY
Preferred stock		—				—			133				(133	)			—
Common stock		—				2,056			9,061				(11,117	)			—
Paid-in capital		72,648				49,699			2,365				(52,064	)			72,648
Retained earnings (deficit)		(17,313	)			16,901			(8,410	)			(8,491	)			(17,313	)
Accumulated other comprehensive loss		(1,478	)			—			(426	)			426				(1,478	)
Total stockholders’ equity		53,857				68,656			2,723				(71,379	)			53,857
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	272,314			$	83,308		$	35,946			$	(75,155	)		$	316,413

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating ~~Statement~~Balance ofSheets ~~Operations~~

~~For~~January ~~the Twenty-Six Weeks Ended July 26~~31, ~~2003~~2004

(~~Unaudited and~~ In Thousands)

	Issuer			~~GuarantorSubsidiaries~~	GuarantorSubsidiaries		Non- GuarantorSubsidiaries			Eliminations			ConsolidatedTotal
Net Sales	$	108,649		$	44,762		$	23,037		$	(10,948	)	$	165,500
ASSETS
Cost of Goods Sold		64,570			34,134			19,745			(10,948	)		107,501
CURRENT ASSETS:
Selling, General & Administrative Expenses		26,135			10,048			3,783			—			39,966
Cash and cash equivalents	$	6,667			$	106	$	4,268		$	—		$	11,041
		90,705			44,182			23,528			(10,948	)		147,467
Accounts receivable, net		18,443				10,882		6,694			—			36,019
Operating Income (Loss)		17,944			580			(491	)		—			18,033
Inventories		15,586				11,124		8,753			—			35,463
Minority Interest in Income of Subsidiary		—			—			16			—			16
Deferred tax assets		2,677				633		703			—			4,013
Equity in Earnings of Affiliate		—			687			—			—			687
Prepaid expenses and other		524				105		1,138			3,194			4,961
Equity in Earnings of Subsidiaries		676			—			—			(676	)		—
Total current assets		43,897				22,850		21,556			3,194			91,497
Net Interest Expense		10,525			—			80			—			10,605
PROPERTY, PLANT AND EQUIPMENT, net		34,232				21,607		10,223			—			66,062
Income (Loss) Before Income Taxes		8,095			1,267			(587	)		(676	)		8,099
DEFERRED TAX ASSETS		—				2,250		1,876			(4,126	)		—
Income Tax Expense (Benefit)		3,114			(66	)		70			—			3,118
GOODWILL		62,386				35,992		—			—			98,378
Net Income (Loss)	$	4,981		$	1,333		$	(657	)	$	(676	)	$	4,981
OTHER INTANGIBLE ASSETS, net		33,435				820		—			—			34,255
INVESTMENT IN SUBSIDIARIES		71,335				—		—			(71,335	)		—
OTHER ASSETS		8,687				177		92			—			8,956
TOTAL ASSETS	$	253,972			$	83,696	$	33,747		$	(72,267	)	$	299,148
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	8,487			$	5,751	$	3,484		$	—		$	17,722
Accrued expenses		8,260				6,096		2,748			3,194			20,298
Current portion of long-term debt		80				—		1,711			—			1,791
Total current liabilities		16,827				11,847		7,943			3,194			39,811
INTERCOMPANY (RECEIVABLE) PAYABLE		(24,520	)			4,585		19,935			—			—
OTHER LIABILITIES, including post-retirement obligation		4,667				—		101			—			4,768
DEFERRED TAX LIABILITIES		4,136				—		9			(4,126	)		19
LONG-TERM DEBT, net of current portion		206,170				—		1,346			—			207,516
MINORITY INTEREST		—				—		—			342			342
STOCKHOLDER’S EQUITY:
Preferred stock		—				—		133			(133	)		—
Common stock		—				2,056		9,061			(11,117	)		—
Paid-in capital		72,648				49,699		2,365			(52,064	)		72,648
Retained earnings (deficit)		(24,509	)			15,509		(6,751	)		(8,758	)		(24,509	)
Accumulated other comprehensive loss		(1,447	)			—		(395	)		395			(1,447	)
Total stockholders’ equity		46,692				67,264		4,413			(71,677	)		46,692
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	253,972			$	83,696	$	33,747		$	(72,267	)	$	299,148

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of ~~Operations~~Income

For the ~~Twenty-Six~~Thirteen Weeks Ended July 2731, ~~2002~~ 2004

(Unaudited and In Thousands)

	Issuer			GuarantorSubsidiaries	~~GuarantorSubsidiaries~~		Non-GuarantorSubsidiaries	~~Non- GuarantorSubsidiaries~~			Eliminations	~~Eliminations~~			ConsolidatedTotal	~~ConsolidatedTotal~~
Net Sales	$	~~110~~72,~~215~~161		$	$25,139	~~39,636~~	$	$13,773	~~22,811~~		$	$(11,471	~~(6,346~~)	)	$	$99,602	~~166,316~~
Cost of Goods Sold		6440,~~877~~999			19,663	~~27,647~~		11,376	~~19,041~~			(11,471	~~(6,346~~)	)		60,567	~~105,219~~
Selling, General & Administrative Expenses		2413,~~544~~060			4,508	~~8,836~~		2,562	~~2,937~~			—	—			20,130	~~36,317~~
		89,421				36,483			21,978				(6,346	)			141,536
Amortization		602			163			—				—				765
Operating Income		20,794				3,153			833				—				24,780
Operating Expenses		54,661			24,334			13,938				(11,471	)			81,462
Minority Interest in Income of Subsidiary		—				—			6				—				6
Operating Income		17,500			805			(165	)			—				18,140
Equity in Earnings of Affiliate		—				1,009			—				—				1,009
Minority Interest in Income of Subsidiary		—			—			14				—				14
Equity in Earnings of Subsidiaries		(36	)			—			—				36				—
Equity in Earnings of Affiliate		—			365			—				—				365
Net Interest Expense		13,272				—			15				—				13,287
Equity in Earnings of Subsidiaries		490			—			—				(490	)			—
Income Before Income Taxes and Cumulative Effect of Change in Accounting Principle		7,486				4,162			812				36				12,496
Net Interest Expense		5,123			—			27				—				5,150
Income Tax Expense		3,040				1,703			67				—				4,810
Income (Loss) Before Income Taxes		12,867			1,170			(206	)			(490	)			13,341
Income Before Cumulative Effect of Change in Accounting Principle		4,446				2,459			745				36				7,686
Income Tax Expense		4,916			456			18				—				5,390
Cumulative Effect of Change in Accounting Principle		—				—			(3,240	)			—				(3,240	)
Net Income (Loss)	$	7,951		$	714		$	(224	)		$	(490	)		$	7,951
Net Income (Loss)	$	4,446			$	2,459		$	(2,495	)		$	36			$	4,446

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating ~~Balance~~Statement ~~Sheets~~of Income

For the Thirteen Weeks Ended July 26, 2003

(Unaudited and In Thousands)

	Issuer			GuarantorSubsidiaries	~~GuarantorSubsidiaries~~		Non-GuarantorSubsidiaries	~~Non- GuarantorSubsidiaries~~			Eliminations	~~Eliminations~~			ConsolidatedTotal	~~ConsolidatedTotal~~
ASSETS
Net Sales	$	64,962		$	23,438		$	11,831			$	(6,300	)		$	93,931
CURRENT ASSETS:
Cost of Goods Sold		37,527			17,743			10,199				(6,300	)			59,169
Cash and cash equivalents	$	7,870			$	48		$	416			$	—			$	8,334
Selling, General & Administrative Expenses		13,066			4,681			1,705				—				19,452
Accounts receivable, net		32,281				11,557			8,415				—				52,253
Amortization		874			654			—				—				1,528
Inventories		22,249				10,363			11,939				—				44,551
Operating Expenses		51,467			23,078			11,904				(6,300	)			80,149
Deferred tax assets		2,124				678			101				—				2,903
Operating Income (Loss)		13,495			360			(73	)			—				13,782
Prepaid expenses and other		878				405			1,101				—				2,384
Minority Interest in Income of Subsidiary		—			—			32				—				32
Total current assets		65,402				23,051			21,972				—				110,425
Equity in Earnings of Affiliate		—			326			—				—				326
PROPERTY, PLANT AND EQUIPMENT, net		33,070				22,493			10,428				—				65,991
Equity in Earnings of Subsidiaries		215			—			—				(215	)			—
DEFERRED TAX ASSETS		—				820			1,631				(2,005	)			446
Net Interest Expense		5,151			—			48				—				5,199
GOODWILL		62,386				35,992			—				—				98,378
Income (Loss) Before Income Taxes		8,559			686			(153	)			(215	)			8,877
OTHER INTANGIBLE ASSETS, net		35,250				4,794			—				—				40,044
Income Tax Expense		3,481			282			36				—				3,799
INVESTMENT IN SUBSIDIARIES		70,739				—			—				(70,739	)			—
Net Income (Loss)	$	5,078		$	404		$	(189	)		$	(215	)		$	5,078
OTHER ASSETS		8,040				718			26				—				8,784
TOTAL ASSETS	$	274,887			$	87,868		$	34,057			$	(72,744	)		$	324,068
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	10,456			$	6,411		$	5,245			$	—			$	22,112
Accrued expenses		15,873				7,163			2,689				—				25,725
Current portion of long-term debt		863				—			134				—				997
Total current liabilities		27,192				13,574			8,068				—				48,834
INTERCOMPANY (RECEIVABLE) PAYABLE		(26,181	)			5,792			20,389				—				—
OTHER LIABILITIES, including post-retirement obligation		7,307				—			112				(2,005	)			5,414
LONG-TERM DEBT, net of current portion		216,041				—			2,906				—				218,947
MINORITY INTEREST		—				—			—				345				345
STOCKHOLDER’S EQUITY
Preferred stock		—				—			133				(133	)			—
Common stock		—				2,056			6,061				(8,117	)			—
Paid-in capital		72,648				49,699			2,365				(52,064	)			72,648
Retained earnings (deficit)		(20,762	)			16,747			(5,926	)			(10,821	)			(20,762	)
Accumulated other comprehensive loss		(1,358	)			—			(51	)			51				(1,358	)
		50,528				68,502			2,582				(71,084	)			50,528
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	274,887			$	87,868		$	34,057			$	(72,744	)		$	324,068

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating ~~Balance~~Statement ~~Sheets~~of Income

~~January~~For ~~25,~~the ~~2003~~Twenty-Six Weeks Ended July 31, 2004

(Unaudited and In Thousands)

	Issuer			GuarantorSubsidiaries		Non-GuarantorSubsidiaries			Eliminations			ConsolidatedTotal
ASSETS
Net Sales	$	121,606		$	50,992	$	25,348		$	(20,659	)	$	177,287
CURRENT ASSETS:
Cost of Goods Sold		72,107			39,823		20,712			(20,659	)		111,983
Cash and cash equivalents	$	19,047		$	—	$	1,860		$			$	20,907
Selling, General & Administrative Expenses		25,636			9,293		6,205			—			41,134
Accounts receivable, net		20,332			10,507		7,688						38,527
Amortization		1,204			327		—			—			1,531
Inventories		17,544			8,245		9,932						35,721
Operating Expenses		98,947			49,443		26,917			(20,659	)		154,648
Deferred tax assets		1,310			461		92						1,863
Operating Income (Loss)		22,659			1,549		(1,569	)		—			22,639
Prepaid expenses and other		467			222		1,010						1,699
Minority Interest in Loss of Subsidiary		—			—		(22	)		—			(22	)
Total current assets		58,700			19,435		20,582						98,717
Equity in Earnings of Affiliate		—			776		—			—			776
PROPERTY, PLANT AND EQUIPMENT, net		32,791			23,902		9,565						66,258
Deficit in Earnings of Subsidiaries		(246	)		—		—			246			—
DEFERRED TAX ASSETS		10			356		1,482			(978	)		870
Net Interest Expense		10,219			—		54			—			10,273
GOODWILL		62,386			35,992		—						98,378
Income (Loss) Before Income Taxes		12,194			2,325		(1,601	)		246			13,164
OTHER INTANGIBLE ASSETS, net		36,997			6,103		—						43,100
Income Tax Expense		4,998			933		37			—			5,968
INVESTMENT IN SUBSIDIARIES		69,395			—		—			(69,395	)		—
Net Income (Loss)	$	7,196		$	1,392	$	(1,638	)	$	246		$	7,196
OTHER ASSETS		8,777			2,287		26						11,090
TOTAL ASSETS	$	269,056		$	88,075	$	31,655		$	(70,373	)	$	318,413
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	7,808		$	3,475	$	4,636		$	—		$	15,919
Accrued expenses		9,625			7,001		2,088			—			18,714
Current portion of long-term debt		10,868			—		1,237			—			12,105
Total current liabilities		28,301			10,476		7,961			—			46,738
INTERCOMPANY (RECEIVABLE) PAYABLE		(28,766	)		10,437		18,329			—			—
OTHER LIABILITIES, including post-retirement obligation		6,380			—		127			(978	)		5,529
LONG-TERM DEBT, net of current portion		215,991			—		2,675			—			218,666
MINORITY INTEREST		—			—		—			330			330
STOCKHOLDER’S EQUITY:
Preferred stock		—			—		133			(133	)		—
Common stock		—			2,056		6,061			(8,117	)		—
Paid-in capital		72,648			49,699		2,365			(52,064	)		72,648
Retained earnings (deficit)		(23,480	)		15,407		(5,285	)		(10,122	)		(23,480	)
Accumulated other comprehensive loss		(2,018	)		—		(711	)		711			(2,018	)
		47,150			67,162		2,563			(69,725	)		47,150
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	269,056		$	88,075	$	31,655		$	(70,373	)	$	318,413

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of ~~Cash~~Income ~~Flows~~

For the Twenty-Six Weeks Ended July 26, 2003

(Unaudited and In Thousands)

	Issuer			GuarantorSubsidiaries	~~GuarantorSubsidiaries~~			Non-GuarantorSubsidiaries	~~Non-GuarantorSubsidiaries~~			Eliminations	~~Consolidated Total~~			ConsolidatedTotal
CASH FLOWS FROM OPERATING ACTIVITIES	$	3,876			$	(1,758	)		$	568			$	2,686
Net Sales	$	108,649		$	44,762			$	23,037			$	(10,948	)		$	165,500
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of Goods Sold		64,570			34,134				19,745				(10,948	)			107,501
Equity distribution from affiliate		—				2,282				—				2,282
Selling, General & Administrative Expenses		24,387			8,740				3,783				—				36,910
Additions to property, plant, and equipment		(2,772	)			(476	)			(882	)			(4,130	)
Amortization		1,748			1,308				—				—				3,056
Net cash (used in) provided by investing activities		(2,772	)			1,806				(882	)			(1,848	)
Operating Expenses		90,705			44,182				23,528				(10,948	)			147,467
CASH FLOWS FROM FINANCING ACTIVITIES:
Operating Income (Loss)		17,944			580				(491	)			—				18,033
Proceeds from issuance of long-term debt		3,500				—				—				3,500
Minority Interest in Income of Subsidiary		—			—				16				—				16
Repayments of long-term debt		(13,500	)			—				(1,130	)			(14,630	)
Equity in Earnings of Affiliate		—			687				—				—				687
Dividends to Tandus Group, Inc.		(2,263	)			—				—				(2,263	)
Equity in Earnings of Subsidiaries		676			—				—				(676	)			—
Financing costs		(18	)			—				—				(18	)
Net Interest Expense		10,525			—				80				—				10,605
Net cash used in financing activities		(12,281	)			—				(1,130	)			(13,411	)
Income (Loss) Before Income Taxes		8,095			1,267				(587	)			(676	)			8,099
NET CHANGE IN CASH AND CASH EQUIVALENTS		(11,177	)			48				(1,444	)			(12,573	)
Income Tax Expense (Benefit)		3,114			(66	)			70				—				3,118
CASH AND CASH EQUIVALENTS, beginning of period		19,047				—				1,860				20,907
Net Income (Loss)	$	4,981		$	1,333			$	(657	)		$	(676	)		$	4,981
CASH AND CASH EQUIVALENTS, end of period	$	7,870			$	48			$	416			$	8,334

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating ~~Statement~~Statements of Cash Flows

For the Twenty-Six Weeks Ended July 27 31, ~~2002~~2004

(Unaudited and In Thousands)

	Issuer			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Consolidated Total
CASH FLOWS FROM OPERATING ACTIVITIES	$	1(11,~~585~~588	)	$	(~~783~~736	)	$	1115,584		$	~~813~~3,260
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of a business		(35,127	)		—			—			(35,127	)
Equity distribution from affiliate		—			922			—			922
Equity distribution from affiliate		—			971			—			971
Additions to property, plant and equipment		(932	)		(186	)		(2,293	)		(3,411	)
Additions to property, plant and equipment		(2,619	)		(237	)		(666	)		(3,522	)
Net cash (used in) provided by investing activities		(932	)		736			(2,293	)		(2,489	)
Net cash provided by (used in) investing activities		(37,746	)		734			(666	)		(37,678	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		175,000			—			—			175,000
Proceeds from revolving credit facilities		15,280			—			—			15,280
Repayments of long-term debt		(131,500	)		—			(267	)		(131,767	)
Repayments of revolving credit facilities		(15,280	)								(15,280	)
Dividends to Tandus Group, Inc.		(2,139	)		—			—			(2,139	)
Repayments of long-term debt		—			—			(1,573	)		(1,573	)
Financing Costs		(6,627	)		—			—			(6,627	)
Financing costs		(237	)		—			—			(237	)
Net cash provided by (used in) financing activities		34,734			—			(267	)		34,467
Net cash used in financing activities		(237	)		—			(1,573	)		(1,810	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(1,427	)		(49	)		(922	)		(2,398	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		—			—			22			22
CASH AND CASH EQUIVALENTS, beginning of period		2,271			49			3,914			6,234
NET CHANGE IN CASH AND CASH EQUIVALENTS		(12,757	)		—			11,740			(1,017	)
CASH AND CASH EQUIVALENTS, end of period	$	844		$	—		$	2,992		$	3,836
CASH AND CASH EQUIVALENTS, beginning of period		19,047			—			(8,006	)		11,041
CASH AND CASH EQUIVALENTS, end of period	$	6,290		$	—		$	3,734		$	10,024

16. Subsequent Event

On September 4, 2003, The Dixie Group, Inc. (“Dixie”) announced a definitive agreement to divest assets of certain portions of their business. Dixie is the seller from whom the Company acquired the extrusion operations on May 8, 2002. The impact of the recently announced Dixie divestiture is not yet determinable, but Company management expects a reduction in the requirements of the extrusion operations to Dixie. The divestiture is subject to usual and customary regulatory and contractual contingencies and is expected to be finalized late in the Company’s third quarter.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statement of Cash Flows

For the Twenty-Six Weeks Ended July 26, 2003

(Unaudited and In Thousands)


	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
CASH FLOWS FROM OPERATING ACTIVITIES	$	3,876		$	(1,758	)	$	250		$	2,368

CASH FLOWS FROM INVESTING ACTIVITIES:
Equity distribution from affiliate		—			2,282			—			2,282
Additions to property, plant and equipment		(2,772	)		(476	)		(882	)		(4,130	)

Net cash provided by (used in) investing activities		(2,772	)		1,806			(882	)		(1,848	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility		3,500			—			—			3,500
Repayments of revolving credit facility		(3,500	)		—			—			(3,500	)
Repayments of long-term debt		(10,000	)		—			(1,130	)		(11,130	)
Dividends to Tandus Group, Inc.		(2,263	)		—			—			(2,263	)
Financing Costs		(18	)		—			—			(18	)

Net cash used in financing activities		(12,281	)		—			(1,130	)		(13,411	)


EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		—			—			318			318

NET CHANGE IN CASH AND CASH EQUIVALENTS		(11,177	)		48			(1,444	)		(12,573	)

CASH AND CASH EQUIVALENTS, beginning of period		19,047			—			1,860			20,907

CASH AND CASH EQUIVALENTS, end of period	$	7,870		$	48		$	416		$	8,334

18. Subsequent Events

On August 10, 2004, the Company and its parent announced its intent to close its manufacturing facility in Santa Ana, California, and transfer the production to its existing Truro, Nova Scotia, Canada, facility. The plan to close the facility was approved on August 9, 2004, and is expected to be complete by the end of the Company’s first fiscal quarter in 2005. It is anticipated that there will be one-time costs of approximately $6.4 million consisting of severance, moving, reinstallation, professional fees and other costs. In addition the Company anticipates capital expenditures of approximately $2.8 million related to the move. No costs have been incurred or accrued as of July 31, 2004.

On August 11, 2004, Monterey gave notice to Dixie that it has elected to terminate its supply arrangement with Chroma effective August 2005. Chroma currently dyes and finishes substantially all of Monterey’s carpet production and Dixie’s Fabrica Division’s carpet production and performs dyeing and finishing operations for other carpet mills. Under the terms of the partnership agreement, Monterey’s decision will effectively give Dixie the option to acquire Monterey’s interest in the partnership for a nominal value and assume full control of Chroma’s operations when the supply agreement terminates.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On August 18, 2004, the Company executed Amendment No. 3 (the “Amendment”) to its Senior Credit Facility. The amendment provides for, among other things, 1) the transfer of certain of the broadloom manufacturing fixed assets located in Santa Ana, California to the Company’s facility, located in Truro, Nova Scotia, 2) the disposal of and/or transfer to Collins & Aikman Floorcoverings, Inc. of substantially all of the remaining Santa Ana, California fixed assets and transfer all or substantially all of the accounts receivable, inventory and other liquid current assets from its Monterey Carpets, Inc. legal entity to Collins & Aikman Floorcoverings, Inc., 3) the release of Monterey Carpets, Inc. as a subsidiary guarantor under the subsidiary guarantee agreement and the security agreement and any other loan documents to which it is a party, 4) the exclusion from the calculation of covenants of the costs incurred in connection with the consolidation of up to $10.0 million, and 5) the reduction of the credit spread to Libor plus 2.75 on the Term B Loan. The Amendment further authorizes the collateral agent to release any and all liens held by the collateral agent in or on the assets to be transferred from Santa Ana, California to Truro, Nova Scotia.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with and is qualified in its entirety by reference to our consolidated financial statements and the accompanying notes. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Future results could differ materially from these discussed below for many reasons. See “Forward-Looking Statements.”

GENERAL

Based on annual sales and ~~product~~ ~~brands~~brand recognition, Collins & Aikman Floorcoverings, Inc. (the “Company”), a Delaware ~~Corporation~~corporation, is a leading manufacturer of floorcovering products for the North American specified commercial carpet market. The Company’s floorcovering products include (i) vinyl-backed six-foot roll carpet and modular carpet tile and (ii) high style tufted and woven broadloom carpet. The Company designs, manufactures and markets its C&A, Monterey and Crossley brands under the “ Tandus ~~Group”~~ name for a wide variety of end markets, including corporate offices, education, healthcare, government facilities and retail stores. Because of the ~~Company’s~~ diversity of ~~its~~the Company’s end markets, management believes its business tends to be less ~~cyclical~~sensitive ~~than~~to ~~that~~economic ofdownturns than many of its competitors, which rely more heavily on the corporate market. The ability to provide a “package of product offerings” in various forms, coupled with flexible distribution channels, allows the Company to provide a wide array of floorcovering solutions tailored for each of its customers. The Company is headquartered in Georgia, with additional locations in California, Canada, the United Kingdom, Singapore and ~~Singapore~~China.

During the twenty-six weeks ended July 26, 2003, the Company prepaid $10.0 million of the term loan. In connection with the term debt prepayments, the Company recorded the write-off of a pro-rata share of deferred financing costs associated with the term debt. The amount of these expenses was $0.2 million and are reflected in interest expense in the consolidated statement of operations.

On May 8, 2002, CAF Extrusion, Inc. (“Extrusion”), a wholly-owned subsidiary, acquired a yarn extrusion manufacturing plant located in Calhoun, Georgia. In addition, Extrusion purchased the real property on which the plant is located from a third party. The acquisition was funded from cash on hand. The cash purchase price was $34.8 million plus $0.3 million for acquisition related expenses and consisted of $2.4 million for the land and building, $1.4 million for inventory, $17.7 million for machinery and equipment, $5.6 million for goodwill (which was assigned an indefinite life), and $8.0 million for a supply agreement which will be amortized over its term of three years. The acquisition has been accounted for by the purchase method and, accordingly, the results of operations of Extrusion have been included in the Company’s consolidated financial statements from May 8, 2002.

RESULTS OF OPERATIONS

The following table sets forth certain operating results as a percentage of net sales for the periods indicated:

	Thirteen WeeksEnded				Twenty-Six WeeksEnded
	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 27,2002		July 26,2003		July 27, 2002		July 26,2003
	July 26,2003		July 31,2004		July 26,2003		July 31, 2004
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Goods Sold	6263.10		6360.08		6365.30		6563.02
Gross Profit	37.90		3739.02		3635.70		3536.08
Selling, General & Administrative Expenses	1920.07		2220.32		2122.83		2423.12
Operating Income	18.9		14.7		14.9		10.9
Amortization	1.6		0.8		1.8		0.8
Net Interest Expense	4.8		5.5		8.0		6.4
Operating Income	14.7		18.2		10.9		12.8
Net Income	9.0		5.1		2.7		2.8
Net Interest Expense	5.5		5.2		6.4		5.8
Net Income	5.4		8.0		3.0		4.1
Adjusted EBITDA	19.4		22.2		17.2		17.0

RESULTS OF OPERATIONS

Thirteen Weeks Ended July 26, 2003 As Compared with Thirteen Weeks Ended July 27, 2002

Net Sales. Net sales for the thirteen weeks ended July 26, 2003 were $93.9 million, a decrease of 6.0% from the $99.9 million for the thirteen weeks ended July 27, 2002. The decrease in net sales in the thirteen weeks ended July 26, 2003 was due to the slow demand throughout the specified commercial market in the United States. In particular, demand in the corporate office market has been slow since 2001. The difficulty in this end market has continued throughout fiscal 2003. For the thirteen weeks ended July 26, 2003, the Company’s sales to the corporate office market decreased by 11.2% as compared to the prior year. Net sales of the extrusion operation for the thirteen weeks ended July 26, 2003 were down approximately 6.0% as compared to the thirteen weeks ended July 27, 2002.

Cost of Goods Sold. Cost of goods sold was $59.2 million for the thirteen weeks ended July 26, 2003 as compared to $62.1 million in the thirteen weeks ended July 27, 2002. This decrease resulted from lower net sales and management cost reduction initiatives. As a percentage of sales, these costs were 63.0% for the thirteen weeks ended July 26, 2003 and 62.1% for the thirteen weeks ended July 27, 2002.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $19.5 million, excluding other intangible assets amortization of $1.5 million, for the thirteen weeks ended July 26, 2003, an increase of 8.2% from $18.0 million in the thirteen weeks ended July 27, 2002, which excluded goodwill and other intangible assets amortization of $1.0 million. This was primarily due to increases in salaries and related benefits of $0.3 million, professional services of $0.8 million, marketing and promotional expenses of $1.0 million, partially offset by lower sales commissions of $0.5 million. A portion of the increased salary and related benefits, marketing and promotional expenses and sampling expenses are related to the Company’s new selling strategy, which was implemented beginning January 26, 2003 and to support a number of new floorcovering product lines which were recently introduced. As a percentage of sales, these expenses, excluding amortization, increased to 20.7% from 18.0% in the prior year.

Interest Expense. Net interest expense for the thirteen weeks ended July 26, 2003 and thirteen weeks ended July 27, 2002 was $5.2 million and $4.8 million, respectively.

Net Income. Net income for the thirteen weeks ended July 26, 2003 was $5.1 million compared to $9.0 million in the thirteen weeks ended July 27, 2002. This was due to the combined result of the factors described above.

Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization and the cumulative effect of change in accounting principle, plus Chroma cash dividends and minority interest in income of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the thirteen weeks ended July 26, 2003 decreased to $18.2 million from $22.4 million in the thirteen weeks ended July 27, 2002. As a percentage of sales, Adjusted EBITDA was 19.4% in the thirteen weeks ended July 26, 2003 compared to 22.5% in the thirteen weeks ended July 27, 2002. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. The Company utilizes Adjusted EBITDA as (a) a benchmark for its annual budget and long range plan, (b) a valuation method for potential acquisitions, and (c) a measure to determine compliance with senior credit facility debt covenants. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to operating income or net income as a measure of operating performance or to net cash provided by operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies.

A reconciliation of net income to Adjusted EBITDA is as follows:

	Thirteen Weeks Ended
	July 27,2002			July 26,2003
Net income	$	9,034		$	5,078
Income taxes		5,540			3,799
Net interest expense		4,788			5,199
Depreciation and amortization		3,209			4,040
Chroma cash dividends		419			405
Equity in earnings in Chroma		(533	)		(326	)
Minority interest in loss of subsidiary		(10	)		32
Adjusted EBITDA	$	22,447		$	18,227

~~RESULTS~~Thirteen OFWeeks ~~OPERATIONS~~Ended July 31, 2004 As Compared with the Thirteen Weeks Ended July 26, 2003

~~Twenty-Six~~Net ~~Weeks~~Sales. ~~Ended~~Net sales for the thirteen weeks ended July 31, 2004 were $99.6 million, an increase of 6.1% from the $93.9 million for the thirteen weeks ended July 26, 2003. AsNet ~~Compared~~sales ~~with~~of ~~Twenty-Six~~the ~~Weeks~~Company’s ~~Ended~~Floorcovering segment were $94.9 million for the thirteen weeks ended July 2731, ~~2002~~2004 as compared to $86.7 million for the thirteen weeks ended July 26, 2003, an increase of $8.3 million or 9.6%. The increase in the Floorcovering segment’s net sales was due to improved demand throughout the specified commercial market in the United States. Net sales of the Extrusion segment were $4.7 million for the thirteen weeks ended July 31, 2004 as compared to $7.2 million for the thirteen weeks ended July 26, 2003, a decrease of $2.5 million or 34.8%. The reduction in sales for the Extrusion segment was due to lower sales to the Extrusion segment’s two largest customers as well as increased usage by the Company’s Floorcovering segment. The reduction was partially offset by increased sales to new and existing external customers as well as increased usage by the Company’s Floorcovering segment.

~~Net~~Cost ~~Sales.~~of ~~Net~~Goods ~~sales for the twenty-six weeks ended July 26, 2003 were $165~~Sold.5 ~~million,~~Cost ~~a decrease~~ of ~~0.5%~~goods ~~from~~sold ~~the~~was $~~166~~60.3 6 million for the ~~twenty-six~~thirteen weeks ended July 2731, ~~2002.~~2004 ~~The~~as ~~slight~~compared ~~decrease~~to in$59.2 ~~net~~million ~~sales~~ in the ~~twenty-six~~thirteen weeks ended July 26, 2003. ~~was~~As ~~due~~a topercentage ~~the~~of ~~continued~~sales, ~~slow~~costs ~~demand~~of ~~throughout~~goods ~~the~~sold ~~specified~~were ~~commercial market in the United States~~60.8% ~~In particular,~~and ~~demand~~63.0% infor the ~~corporate~~thirteen ~~office~~weeks ~~market~~ended ~~has~~July ~~been~~31, ~~slow~~2004 ~~since~~and ~~2001. For the twenty-six weeks ended~~ July 26, 2003, ~~the~~respectively. ~~Company’s~~The ~~sales~~percentage todecrease ~~the~~was ~~corporate~~primarily ~~office~~due ~~market decreased by 14.4% as compared~~ to the ~~prior~~increased ~~year.~~absorption ~~This~~of ~~decrease~~fixed ~~was~~manufacturing ~~partially offset~~costs byas ~~the~~a ~~inclusion~~result of ~~the~~improved ~~extrusion operation’s net~~ sales ~~for~~volume, ~~the~~increased ~~full~~usage ~~twenty-six~~of ~~weeks~~yarn ~~ended~~from the ~~July~~Company’s ~~26,~~Extrusion ~~2003.~~facility ~~The~~and ~~extrusion~~cost ~~operation~~manufacturing ~~was acquired May 8, 2002~~improvements.

~~Cost~~Selling, ofGeneral ~~Goods~~and ~~Sold~~Administrative Expenses. ~~Cost~~Selling, ofgeneral ~~goods~~and ~~sold~~administrative ~~was~~expenses increased to $~~107~~20.51 million for the ~~twenty-six~~thirteen weeks ended July 2631, ~~2003~~2004, asan ~~compared~~increase toof 3.1% from $~~105~~19.2 5 million in the thirteen ~~twenty-six~~ weeks ended July 2726, ~~2002~~2003. This increase ~~resulted~~was ~~from~~primarily ~~the~~due ~~inclusion~~to increased salaries, taxes and benefits of ~~the~~$0.8 million, sampling and related costs of ~~the~~$0.6 ~~extrusion~~million, ~~operation~~commissions ~~for~~of ~~the~~$0.1 ~~full~~million, ~~twenty-six~~and ~~weeks~~currency ~~ended~~exchange ~~July~~costs ~~26,~~of ~~2003,~~$0.3 million, partially offset by lower ~~net~~legal ~~sales~~and professional expenses of $0.9 million and ~~management~~advertising ~~cost reduction~~and ~~initiatives~~other of $0.2 million. As a percentage of sales, ~~cost~~these ofexpenses ~~goods~~decreased ~~sold~~to ~~were 65~~20.02% ~~and~~from 6320.37%, ~~respectively~~in the prior year.

~~Selling, General and Administrative Expenses~~Amortization. ~~Selling,~~Intangible ~~general~~asset ~~and~~amortization ~~administrative~~decreased ~~expenses,~~to ~~excluding goodwill and other intangible assets amortization of~~ $30.18 million, for the ~~twenty-six~~thirteen weeks ended July 2631, ~~2003~~2004 ~~increased~~as compared to $361.95 million, anfor ~~increase of 8.0% from $34.3 million in~~ the ~~twenty-six~~thirteen weeks ended July 2726, ~~2002 which excluded goodwill and other intangible assets amortization of $2~~2003.~~0 million.~~ The ~~increase~~decrease was ~~primarily~~ due to ~~increases~~the inCompany’s ~~salaries~~non-compete ~~and~~with ~~related~~its ~~benefits~~former ofparent ~~$1.3~~being ~~million,~~fully ~~sampling~~amortized ~~expenses~~as of ~~$0.2~~January ~~million~~31, ~~marketing~~2004, and ~~promotional expenses of $1.4 million, partially offset by~~ lower ~~sales commissions of $0.8 million~~ ~~and~~amortization ~~professional services~~ of ~~$0.1 million. A portion of~~ the ~~increased~~extrusion ~~salary~~supply ~~and~~agreement ~~benefits,~~due ~~marketing and promotional expenses and sampling expenses are related~~ to the ~~Company’s~~non-cash ~~new~~impairment ~~selling~~charge ~~strategy,~~during ~~which~~the ~~was~~fourth ~~implemented~~quarter ~~beginning January 26, 2003 and to support a number~~ of ~~new~~fiscal ~~floorcovering product lines which were recently introduced~~2003. ~~As a percentage of sales, these expenses, excluding amortization, were 22.3% and 20.7%, respectively.~~

Interest Expense. Net interest expense for the ~~twenty-six~~thirteen weeks ended July 2631, ~~2003~~ 2004 and ~~the~~thirteen ~~twenty-six~~ weeks ended July 2726, ~~2002~~2003 was $105.62 million ~~and~~for ~~$13.3 million~~both periods, ~~respectively,~~ which included minimal interest income ~~of $0~~.1 million and $0.2 million, respectively. The twenty-six weeks ended July 27, 2002 include a charge to interest expense of $2.6 million to reflect the write-off of a pro-rata share of deferred financing costs associated with the prepayment of term debt from proceeds of the 9.75% Notes offering and from cash generated by operations.

~~Net~~ Income Taxes. ~~Net~~The Company had income tax expense of $5.4 million for the ~~twenty-six~~thirteen weeks ended July 2631, ~~2003~~2004 ~~increased~~as compared to ~~$5.0~~ ~~million from~~ $43.48 million infor the thirteen weeks ended July 2726, ~~2002~~2003. ~~This~~The increase was predominantly due to the ~~combined~~higher ~~result~~profitability of the Company ~~factors~~during ~~described~~the ~~above~~second quarter of fiscal 2004.

~~Adjusted EBITDA~~Net Income. ~~Adjusted~~Net ~~EBITDA represents earnings before interest, taxes, depreciation, amortization and the cumulative effect of change in accounting principle, plus Chroma cash dividends and minority interest in~~ income ~~of subsidiary less equity in earnings of Chroma. Adjusted EBITDA~~ for the ~~twenty-six~~thirteen weeks ended July 2631, ~~2003~~2004 ~~decreased~~increased to $288.40 million ~~from~~compared to $315.81 million in the ~~twenty-six~~thirteen weeks ended July 2726, ~~2002~~2003. AsThis ~~a percentage of sales, Adjusted EBITDA~~ was ~~17.2%~~due ~~in the twenty-six weeks ended July 27, 2002 compared~~ to ~~19.1% in~~ the ~~twenty-six~~combined ~~weeks~~result ended July 27, 2002. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. The Company utilizes Adjusted EBITDA as (a) a benchmark for its annual budget and long range plan, (b) a valuation method for potential acquisitions, and (c) a measure to determine compliance with senior credit facility debt covenants. Adjusted EBITDA is not a measure of ~~financial~~the ~~performance~~factors ~~under~~described generally accepted accounting principles and should not be considered an alternative to operating income or net income as a measure of operating performance or to net cash provided by operating activities as a measure of liquidityabove. ~~Because Adjusted EBITDA is not calculated~~

Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization plus Chroma cash dividends and minority interest in income of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the thirteen weeks ended July 31, 2004 increased to $22.1 million from $18.2 million in the thirteen weeks ended July 26, 2003. As a percentage of sales, Adjusted EBITDA was 22.2% in the thirteen weeks ended July 31, 2004 compared to 19.4% in the thirteen weeks ended July 26, 2003. The increase was principally due to the increased sales volume. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. The Company utilizes Adjusted EBITDA as (a) a benchmark for its annual budget and long range plan, (b) a valuation method for potential acquisitions, and (c) a measure to determine compliance with senior credit facility debt covenants. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and should not be

considered an alternative to operating income or net income as a measure of operating performance or to net cash provided by operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies.

A reconciliation of net income to Adjusted EBITDA is as follows:

	Twenty-Six Weeks Ended
	Thirteen Weeks Ended
	July 27,2002			July 26,2003
	July 26, 2003			July 31,2004
Net income	$	45,~~446~~078		$	47,~~981~~951
Cumulative effect of change in accounting principle		3,240			—
Income taxes		3,799			5,390
Income taxes		4,810			3,118
Net interest expense		5,199			5,150
Net interest expense		13,287			10,605
Depreciation		2,512			2,533
Depreciation and amortization		6,080			8,080
Amortization		1,528			765
Chroma cash dividends		~~971~~405			~~2,282~~644
Equity in earnings in Chroma		(1,009	)		(687	)
Equity in earnings of Chroma		(326	)		(365	)
Minority interest in income of subsidiary		6			16
Minority interest of income of subsidiary		32			14
Adjusted EBITDA	$	3118,~~831~~227		$	2822,~~395~~082

~~LIQUIDITY~~RESULTS ~~AND~~OF ~~CAPITAL RESOURCES~~OPERATIONS

~~The~~Twenty-Six ~~Company’s~~Weeks ~~principal~~Ended ~~uses~~July ~~of cash have historically been for operating expenses~~31, ~~working~~2004 ~~capital,~~As ~~capital~~Compared ~~expenditures~~with ~~and~~the Twenty-Six ~~debt~~Weeks ~~repayment.~~Ended ~~The~~July ~~Company has financed its cash requirements through internally generated cash flows~~26, ~~borrowings~~2003 ~~and the offering of the senior subordinated notes.~~

Net ~~cash~~Sales. Net ~~provided~~sales byfor ~~operating~~the ~~activities~~twenty-six inweeks ended July 31, 2004 were $177.3 million, an increase of 7.1% from the $165.5 million for the twenty-six weeks ended July 26, 2003 ~~was~~. Net sales of the Company’s Floorcovering segment were $2164.79 million for the twenty-six weeks ended July 31, 2004 as compared to $0150.85 million infor the twenty-six weeks ended July 2726, ~~2002~~2003, an increase of $14.4 million or 9.6%. The ~~change~~increase isin the Floorcovering segment’s net sales was due to aimproved ~~positive~~demand throughout ~~impact~~the specified commercial market in the United States. Net sales of the Extrusion segment were $812.64 million infor ~~net~~the ~~working~~twenty-six ~~capital~~weeks ended July 31, ~~and~~2004 as compared to $215.0 million infor ~~depreciation~~the ~~and~~twenty-six ~~amortization~~weeks ~~partially~~ended ~~offset~~July by26, 2003, a decrease of $32.6 million or 17.3%. The reduction in ~~deferred~~sales ~~tax~~for ~~expense,~~the ~~$2.7~~Extrusion ~~million~~segment ofwas ~~deferred~~due ~~financing~~to ~~fee~~lower ~~amortization,~~sales ~~and~~to ~~$3.2~~the ~~million~~Extrusion ~~impact~~segment’s oftwo largest customers as well as increased usage by the ~~cumulative~~Company’s ~~effect~~Floorcovering ofsegment. ~~change~~The inreduction ~~accounting~~was partially ~~principle~~offset by increased sales to new and existing external customers.

~~Net~~Cost ~~cash~~of ~~used~~Goods inSold. ~~investing~~Cost ~~activities~~of ingoods sold was $112.0 million for the twenty-six weeks ended July 2631, ~~2003~~2004 ~~was~~as ~~$1.8 million~~ compared to $37107.75 million in the twenty-six weeks ended July 2726, ~~2002~~2003. ~~The~~As ~~decrease~~a inpercentage ~~cash~~of ~~used~~sales, incost of ~~investing~~goods ~~activities~~sold ~~was~~were ~~primarily~~63.2% ~~due~~and to65.0%, ~~the~~respectively. ~~acquisition~~The ofpercentage ~~the~~decrease ~~yarn~~was ~~extrusion~~primarily ~~manufacturing~~due ~~plant~~to ~~and~~ the ~~real~~increased ~~property~~absorption onof ~~which~~fixed ~~the~~manufacturing ~~plant~~costs isas ~~located~~a onresult ~~May~~of 8,improved ~~2002.~~sales ~~Capital expenditures for the twenty-six weeks ended July 26~~volume, ~~2003~~increased ~~were~~usage ~~$4.1~~of ~~million~~the ~~compared~~yarn tofrom ~~$3.5 million for~~ the ~~twenty-six~~Company’s ~~weeks~~Extrusion facility ~~ended~~and ~~July~~manufacturing ~~27,~~cost ~~2002~~improvements.

~~Net~~Selling, General ~~cash~~and ~~used~~Administrative inExpenses. ~~financing~~Selling, ~~activities~~general and administrative expenses for the twenty-six weeks ended July 2631, ~~2003~~2004 ~~was~~were $1341.41 million, ~~compared~~an toincrease ~~net~~of ~~cash~~11.3% ~~provided~~from ~~by financing activities of~~ $3436.5 9 million in the twenty-six weeks ended July 2726, ~~2002~~2003. The ~~decrease~~increase was inprimarily ~~cash~~due ~~provided~~to byincreased ~~financing~~salaries, ~~activities~~taxes ~~was~~and ~~due~~benefits ~~primarily~~of to$1.8 ~~the~~million, ~~issuance~~sampling ofand ~~the~~related costs of $0.9 million, commissions of $0.~~75%~~5 ~~Notes~~million, advertising and ~~repayment~~other of ~~the~~$0.2 ~~Senior~~million ~~Credit~~and ~~Facility~~currency ~~with~~exchange acosts ~~portion~~ of ~~the~~$1.1 ~~proceeds~~million, ~~during~~partially ~~the~~offset ~~twenty-six~~by ~~weeks~~lower ~~ended~~legal ~~July~~and ~~27,~~professional ~~2002~~expenses asof ~~well~~$0.3 asmillion. As a ~~net~~percentage ~~repayment~~ of ~~long-term~~sales, ~~debt~~these ofexpenses ~~$11.1~~increased ~~million~~to ~~during~~23.2% ~~the~~from ~~twenty-six~~22.3% ~~weeks~~in ~~ended~~the ~~July~~prior ~~26, 2003~~year.

~~The~~Amortization. ~~Company~~Intangible ~~has~~asset ~~significant~~amortization ~~indebtedness~~decreased ~~which,~~to ~~as of July 26, 2003, consists of~~ $~~175~~1.05 million offor ~~9.75%~~the ~~senior~~twenty-six ~~subordinated~~weeks ~~notes~~ended ~~due~~July ~~2010~~31, ~~$41.0~~2004 ~~million~~as ofcompared ~~senior term~~to ~~debt,~~ $03.71 million infor the ~~seller’s~~twenty-six ~~notes~~weeks ~~from~~ended ~~the Company’s~~ July ~~1999 acquisition of Crossley~~26, $02003.5 ~~million~~The indecrease ~~purchase~~was ~~money~~due ~~indebtedness~~to ~~and $2.6 million in sinking fund bonds under Crossley. As of July 26, 2003,~~ the Company’s ~~$50.0~~ ~~million~~non-compete ~~revolving~~with ~~line~~its offormer ~~credit~~parent ~~had~~being nofully ~~borrowings~~amortized ~~outstanding~~as ~~and $1.2 million~~ of ~~letters~~January of31, ~~credit~~2004 ~~outstanding~~and ~~leaving~~lower ~~total~~amortization ~~availability~~ of ~~$48.8~~the ~~million.~~Extrusion ~~The~~supply ~~Company~~agreement ~~was~~due into ~~compliance~~the ~~with~~non-cash impairment ~~all~~charge ~~covenants~~during asthe offourth ~~July~~quarter ~~26,~~of fiscal 2003.

Subsequent to July 26, 2003, the Company paid $8.5 million for the semi-annual interest due on the 9.75% Notes and prepaid $5.5 million of term debt. These payments were funded by cash generated from operations.

Interest Expense. Net interest expense for the twenty-six weeks ended July 31, 2004 and the twenty-six weeks ended July 26, 2003 was $10.3 million and $10.6 million, respectively, which included interest income of $0.1 million and $0.1 million, respectively. The twenty-six weeks ended July 26, 2003 included a charge to interest expense of $0.2 million to reflect the write-off of a pro-rata share of deferred financing costs associated with the prepayment of term debt from cash generated by operations.

Income Taxes. The Company has income tax expense of $6.0 million for the twenty-six weeks ended July 31, 2004 as compared to $3.1 million for the twenty-six weeks ended July 26, 2003. The increase was predominantly due to the higher profitability of the Company during the first six months of the current fiscal year combined with tax benefits on foreign losses which carry a full valuation allowance.

Net Income. Net income for the twenty-six weeks ended July 31, 2004 increased to $7.2 million from $5.0 million in the twnety-six weeks ended July 26, 2003. This was due to the combined result of the factors described above.

Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, plus Chroma cash dividends and minority interest in income (loss) of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the twenty-six weeks ended July 31, 2004 increased to $30.2 million from $28.4 million in the twenty-six weeks ended July 26, 2003. As a percentage of sales, Adjusted EBITDA was 17.0% in the twenty-six weeks ended July 26, 2003 compared to 17.2% in the twenty-six weeks ended July 26, 2003. The increase was principally due to the increased sales volume in the twenty-six weeks ended July 31, 2004, although it was partially offset by a special dividend of $1.8 million distributed by Chroma in the twenty-six weeks ended July 26, 2003. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. The Company utilizes Adjusted EBITDA as (a) a benchmark for its annual budget and long range plan, (b) a valuation method for potential acquisitions, and (c) a measure to determine compliance with senior credit facility debt covenants. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and should not be considered an alternative to operating income or net income as a measure of operating performance or to net cash provided by operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies.

A reconciliation of net income to Adjusted EBITDA is as follows:


	Twenty-Six Weeks Ended
	July 26, 2003			July 31, 2004
Net income	$	4,981		$	7,196
Income taxes		3,118			5,968
Net interest expense		10,605			10,273
Depreciation		5,024			5,119
Amortization		3,056			1,531
Chroma cash dividends		2,282			922
Equity in earnings of Chroma		(687	)		(776	)
Minority interest in income (loss) of subsidiary		16			(22	)

Adjusted EBITDA	$	28,395		$	30,211

LIQUIDITY AND CAPITAL RESOURCES

The Company’s principal uses of cash have historically been for operating expenses, working capital, capital expenditures and debt repayment. The Company has financed its cash requirements through internally generated cash flows, borrowings and the offering of the senior subordinated notes.

Net cash provided by operating activities in the twenty-six weeks ended July 31, 2004 was $3.3 million compared to $2.4 million in the twenty-six weeks ended July 26, 2003. The change was due to the increased profitability of $2.2 million partially offset by higher working capital requirements of $1.4 million.

Net cash used in investing activities in the twenty-six weeks ended July 31, 2004 was $2.5 million compared to $1.8 million in the twenty-six weeks ended July 26, 2003. The increase in cash used in investing activities in the current year was primarily due to a special dividend having been declared from Chroma Systems in the twenty-six weeks ended July 26, 2003, and no such special dividend in the twenty-six weeks ended July 31, 2004. Capital expenditures for the twenty-six weeks ended July 31, 2004 were $3.4 million compared to $4.1 million for the twenty-six weeks ended July 26, 2003. The Company anticipates capital expenditures for the remainder of the year to be approximately $6.0 to $7.0 million.

Net cash used in financing activities for the twenty-six weeks ended July 31, 2004 was $1.8 million compared to $13.4 million in the twenty-six weeks ended July 26, 2003. The decrease in cash used by financing activities was due primarily to lower prepayment amounts of the Senior Credit Facility and reduced dividends to the Company’s parent during the twenty-six weeks ended July 31, 2004 as compared to the twenty-six weeks ended July 26, 2003.

The Company has significant indebtedness which, as of July 31, 2004, consists of $175.0 million of 9.75% senior subordinated notes due 2010, $31.0 million of senior term debt, $0.5 million in purchase money and other indebtedness and $1.2 million in sinking fund bonds under Crossley. As of July 31, 2004, the Company’s $50.0 million revolving line of credit had no borrowings outstanding and $2.2 million of letters of credit outstanding leaving total availability of $47.8 million. The Company was in compliance with all covenants as of July 31, 2004.

The Company’s semi-annual interest payments of the 9.75% Notes are due on each February 15 and August 15 through February 15, 2010. The amount due on each date is $8.5 million.

During the first quarter of fiscal 2004, the Company leased a facility to be used for a carpet tile production facility in Suzhou, China. Products manufactured at this facility will be sold into mainland China and throughout southeast Asia. Funding of $3.0 million was provided during fiscal 2003 with additional $2.0 million provided on August 6, 2004. Additional funding of up to $1.0 million may be required during the remainder of the year.

During March 2004, a jury found in favor of Employers Mutual Insurance Companies (“EMC”) related to alleged violations of express oral warranty and implied warranty of fitness for particular purpose and awarded damages totaling $0.8 million. The Company has accrued the full judgment of $0.8 million as of January 31, 2004. During the thirteen and twenty-six weeks ended July 31, 2004, the Company incurred approximately $0.0 and $0.5 million, respectively, of legal expenses related to this lawsuit. The Company continues to deny liability and is evaluating its options, which include a motion for a new trial. If the Company pursues those options and is unsuccessful, it will be required to pay the full judgment amount and related legal and professional fees. Subsequent to the end of the second quarter of fiscal 2004, the judgment amount was reduced from $0.8 million to $0.6 million. However, the reduction may be appealed by EMC through September 20, 2004.

The Company’s ability to make scheduled payments of principal, interest, or to refinance its indebtedness, depends on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, and other factors beyond its control. However, there can be no assurance that the Company’s business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable the Company to service its indebtedness or to make necessary capital expenditures. We periodically evaluate potential acquisitions of businesses, which complement our existing operations. Depending on various factors, including, among others, the cash consideration required in such potential acquisitions, we may determine to finance any such transaction with existing sources of liquidity.

On August 18, 2004, the Company executed Amendment No. 3 to its Senior Credit Facility. The Amendment provides for, among other things, 1) the transfer of certain of the broadloom manufacturing fixed assets located in Santa Ana, California to the Company’s facility located in Truro, Nova Scotia, 2) the disposal of and/or transfer to Collins & Aikman Floorcoverings, Inc. of substantially all of the remaining Santa Ana, California fixed assets and transfer all or substantially all of the accounts receivable, inventory and other liquid current assets from its Monterey Carpets, Inc. legal entity to Collins & Aikman Floorcoverings, Inc., 3) the release of Monterey Carpets, Inc. as a subsidiary guarantor under the subsidiary guarantee agreement and the security agreement and any other loan documents to which it is a party, 4) the exclusion from the calculation of covenants of the costs incurred in connection with the consolidation of up to $10.0 million and 5) the reduction of the credit spread to Libor plus 2.75 on the Term B Loan. The Amendment further authorizes the collateral agent to release any and all liens held by the collateral agent in or on the assets to be transferred from Santa Ana, California to Truro, Nova Scotia.

Effective May 1, 2004, the Company amended its Senior Credit Facility to revise certain covenants. The amended principal financial covenants are as follows:


	Q1	Q2	Q3	Q4	Thereafter
Fixed charge coverage ratio	1.00:1.00	1.00:1.00	1.00:1.00	1.10:1.00	1.10:1.00
Interest coverage ratio	1.75:1.00	1.75:1.00	1.85:1.00	2.00:1.00	2.25:1.00

The Company’s fixed charge coverage ratio and interest coverage ratio were 1.49:1.00 and 2.29:1.00, respectively, at July 31, 2004. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Senior Credit Facility, the Company will also be subject to the provisions of a cross-default for the 9.75% Senior Subordinated Notes. The Company was in compliance with all covenants as of July 31, 2004 and expects to remain in compliance throughout fiscal 2004, although no assurances to that effect can be given.

Management believes that cash generated by its operations and availability under its $50.0 million revolving credit line will be sufficient to fund the Company’s current commitments and planned requirements.

EFFECTS OF INFLATION

The impact of inflation on the Company’s operations has not been significant in recent years. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company’s operating results.

SEASONALITY

The Company experiences seasonal fluctuations, with generally lower sales and gross profit in the first and fourth quarters of the fiscal year and higher sales and gross profit in the second and third quarters of the fiscal year. The seasonality of sales and profitability is primarily a result of disproportionately higher education end market sales during the summer months.

RELIANCE ON PRIMARY THIRD-PARTY SUPPLIER OF NYLON YARN

E.Invista, IInc. ~~DuPont de Nemours and Company~~ (“~~DuPont~~Invista”) currently supplies a majority of ~~our~~the Company’s requirements for nylon yarn, the principal raw material used in ~~our~~the Company’s floorcovering products. The unanticipated termination or interruption of the supply arrangement with ~~DuPont~~Invista could have a material adverse effect on the usCompany because of the cost and delay associated with shifting this business to another supplier. Historically, wethe ~~have~~Company has not experienced significant interruptions in the supply of nylon yarn from ~~DuPont~~Invista, although no assurances can be given.

RECENT ACCOUNTING PRONOUNCEMENTS

In ~~November~~May ~~2002~~2003, the ~~Financial~~FASB ~~Accounting~~issued ~~Standards~~Statement ~~Board (“FASB”)~~of ~~issued~~Financial ~~Interpretation~~Accounting Standards No. 45150, “~~Guarantor’s~~ Accounting ~~and Disclosure Requirements~~ for ~~Guarantees,~~Certain ~~Including~~Financial ~~Indirect~~Instruments ~~Guarantees~~with Characteristics of ~~Indebtedness~~Both ofLiabilities ~~Others~~and Equity” (“~~FIN~~SFAS 45No. 150”). ~~FIN~~SFAS ~~45 supercedes Interpretation~~ No. ~~34,~~ ~~“Disclosure~~150 ofmodifies ~~Indirect~~the ~~Guarantees~~accounting offor ~~Indebtedness~~certain offinancial ~~Others~~instruments,” ~~and~~that ~~provides~~under previous guidance oncould ~~the~~be ~~recognition~~accounted ~~and~~for ~~disclosures~~as toeither ~~be made by~~ a ~~guarantor~~liability inor ~~its~~equity, ~~interim~~to ~~and~~require ~~annual~~liability ~~financial~~treatment ~~statements~~for ~~about~~those ~~its~~instruments ~~obligations~~in ~~under~~a ~~certain guarantees.~~company’s ~~The~~statement ~~initial recognition and measurement provisions~~ of ~~FIN~~financial ~~45 are effective for guarantees issued or modified after December 31, 2002, and are to be applied prospectively~~position. ~~The~~This ~~disclosure~~statement ~~requirements~~is ~~are~~ effective for ~~financial~~our ~~statements for~~ interim ~~or annual~~ periods ~~ending~~beginning after December 15, ~~2002~~2003. The adoption of ~~FIN~~SFAS 45150 ~~has~~did nonot ~~impact~~have ~~beyond~~an ~~the~~impact ~~additional~~on ~~disclosures~~our asfinancial ~~presented~~position, inresults ~~Note~~of 15operations toor ~~the~~cash ~~Company’s consolidated financial statements~~flows.

In ~~January~~December 2003, the FASB issued ~~Interpretation~~SFAS No. 46132 (revised 2003), “~~Consolidation~~Employers’ ofDisclosure ~~Variable Interest~~about ~~Entities~~Pensions and Other Postretirement Benefits, an amendment ~~interpretation~~ of ~~ARB~~FASB Statements No. 5187, 88 and 106” (~~FIN~~“SFAS 46No. 132”). ~~FIN~~The 46revision ~~addresses~~of ~~the~~SFAS ~~consolidation~~No. by132 ~~business~~provides ~~enterprises~~for ofadditional ~~variable~~disclosures ~~interest~~including ~~entities~~the ~~that~~description ~~have~~of ~~certain~~the ~~characteristics.~~types ~~Generally,~~of aplan ~~variable~~assets, ~~interest~~investment ~~entity~~strategy, ismeasurement ~~any~~date(s), ~~legal~~plan ~~structure~~obligations, ~~used~~cash ~~for~~flows ~~business~~and ~~purposes~~components ~~that~~of ~~either~~net ~~(1)~~periodic ~~does~~benefit ~~not~~cost ~~have~~recognized ~~equity~~in ~~investors~~interim ~~with~~periods. ~~voting~~The ~~rights~~revision orof ~~(2)~~SFAS ~~has~~No. ~~equity~~132 ~~investors~~is ~~that~~effective dofor ~~not~~our ~~provide~~consolidated ~~sufficient~~ financial ~~resources~~statements ~~for~~as ~~the~~of ~~entity~~January to31, ~~support~~2004 ~~its~~and ~~operations.~~did ~~FIN~~not 46have ~~requires~~an ~~variable interest~~impact ~~entities~~on toour befinancial position, ~~consolidated~~results byof ~~the~~operations ~~company~~or ifcash itflows. ~~is subject to~~

a majority of the risk of loss from the variable interest entity’s operations or entitled to receive a majority of the entity’s residual returns. FIN 46 requires consolidation of variable interest entities created after January 31, 2003 and applies to existing variable interest entities in the first year or interim period beginning after June 15, 2003. The Company is in the process of determining the impact of FIN 46 on its financial statements.

Monterey Carpets, Inc., a wholly-owned subsidiary of the Company, holds a variable interest in a partnership described in further detail in Note 12 to the consolidated financial statements. The Company currently accounts for the partnership under the equity method of accounting. As a result, the partnership may be considered a variable interest entity, and the Company may be required to consolidate the partnership as of July 27, 2003, the beginning of the Company’s third quarter. Consolidated net income and Adjusted EBITDA for the period and the Company’s partnership equity at the end of the period are the same whether the investment in the partnership is accounted for under the equity method or the partnership is consolidated. Any change in disclosure or presentation has no impact on the Company’s debt covenants. The Company is in the process of determining the impact of FIN 46 on its financial statements. The Company’s maximum exposure to loss as a result of its involvement with the partnership is limited primarily to its initial investment in the partnership and its undistributed share of the partnership’s earnings. The partners have historically financed the operation of the business of the partnership by utilizing the initial capital contributions of the partners, internally generated funds and proceeds from the third party loans. To the extent that the operations of the partnership cannot be financed in this manner, the partnership agreement allows for a call for additional capital contributions, which is obligatory to the partners. Historical and current results of the partnership’s operations indicate that current sources of funds will continue to be adequate, and that no such call for additional capital contributions should be required.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for contracts entered into or modified after June 30, 2003. SFAS No. 149 is not expected to materially impact the Company’s financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity as well as imposes additional disclosure requirements. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is not expected to materially impact the Company’s financial statements.

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are more fully described in Note 3 to the audited consolidated financial statements included in the Company’s Form 10-K for the year neded January 31, 2004, which was filed with the Securities and Exchange Commission onin ~~April~~May ~~25, 2003~~2004. Certain of the Company’s accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based on the Company’s historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate. The Company’s significant accounting policies include:

Revenue Recognition. Revenue is recognized when goods are shipped, which is when legal title passes to the customer. For product installations subject to customer approval, revenue is recognized upon acceptance by the customer. The Company provides certain installation services to customers utilizing independent third-party contractors. The billings and expenses for these services are included in net sales and cost of goods sold, respectively.

29A customer claims reserve and allowance for product returns is established based upon historical claims experience as a percent of gross sales as of the balance sheet date. The allowance for customer claims is recorded upon shipment of goods and is recorded as a reduction of sales. While we believe that our customer claims reserve and allowance for product returns is adequate and that the judgment applied is appropriate based upon our historical experience for these items, actual amounts determined to be due and payable could differ and additional allowances may be required.

Impairment of Goodwill and Indefinite Lived Intangible Assets. In addition to the annual impairment tests required by SFAS No. 142, the Company may periodically evaluate the carrying value of its goodwill and indefinite lived intangible asset for potential impairment. Judgments regarding the existence of impairment

~~utilizing~~indicators ~~independent~~are ~~third-party~~based ~~contractors.~~on ~~The~~legal ~~billings~~factors, market conditions and ~~expenses~~operational ~~for~~performance. ~~these~~Future ~~services~~events ~~are~~could ~~included~~cause inthe Company ~~net~~to ~~sales~~conclude that impairment indicators exist and ~~cost~~that ofgoodwill ~~goods~~and ~~sold,~~indefinite ~~respectively~~lived intangible asset associated with acquired businesses is impaired. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

~~Impairment~~Accounts ~~of Goodwill~~Receivable Allowances. The Company ~~periodically~~provides ~~evaluates~~allowances ~~acquired businesses~~ for ~~potential~~expected ~~impairment~~cash ~~indicators.~~discounts, ~~Judgments~~returns, ~~regarding~~claims ~~the~~and ~~existence~~doubtful ofaccounts ~~impairment indicators are~~ based onupon ~~legal~~historical ~~factors,~~experience ~~market conditions~~ and ~~operational~~periodic ~~performance~~evaluation of ~~our~~the ~~acquired~~financial ~~businesses.~~condition ~~Future~~of ~~events~~the ~~could~~Company’s ~~cause~~customers and collectability of the Company’s ~~to conclude~~accounts ~~that~~receivable. ~~impairment~~If ~~indicators~~the ~~exist~~financial ~~and~~condition ~~that~~of ~~goodwill~~the ~~associated~~Company’s ~~with~~customers ~~acquired~~were ~~businesses~~to isdeteriorate, ~~impaired.~~resulting ~~Any~~in ~~resulting~~an impairment ~~loss~~of ~~could~~their ~~have~~ability ato ~~material~~pay ~~adverse~~their ~~impact~~debts, onallowances recorded in the Company’s financial ~~condition~~statements may ~~and~~not ~~results~~be ~~of operations~~adequate.

Accounts Receivable. The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical experience and periodic evaluation of the financial condition of the Company’s customers and collectability of the Company’s accounts receivable. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to pay their debts, allowances recorded in the Company’s financial statements may not be adequate.

Inventory Reserves. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out, method. Reserves are established based on percentage markdowns applied to inventories aged for certain time periods and size of lot.

~~Allowance~~Income ~~and/or~~Taxes. ~~reserve~~The ~~for~~Company ~~product~~uses ~~warranty~~the ~~and~~liability ~~returns.~~method ~~Warranty~~in ~~reserve~~accounting ~~and allowance~~ for ~~product~~income ~~returns is established~~taxes. ~~based~~Deferred ~~upon~~tax ~~best~~assets ~~estimate~~and ofliabilities ~~the~~are ~~amounts~~recorded ~~necessary~~for totemporary ~~settle~~differences ~~future~~between ~~and~~the ~~existing~~tax ~~claims~~basis ~~on products sold as~~ of ~~the~~assets ~~balance~~and ~~sheet~~liabilities ~~date.~~and ~~While~~their wereported ~~believe~~amounts ~~that~~in ~~our~~the ~~warranty~~consolidated ~~reserve~~financial ~~and~~statements ~~allowance~~using ~~for~~statutory ~~product~~rates. ~~returns~~The iseffect ~~adequate~~on ~~and~~deferred ~~that~~tax ~~the judgment~~assets ~~applied~~and isliabilities ~~appropriate~~of ~~based~~a ~~upon~~change ~~our~~in ~~historical~~tax ~~experience~~rates ~~for~~is ~~these~~recognized ~~items,~~in ~~actual~~the ~~amounts~~results ~~determined~~of tooperations bein ~~due~~the ~~and~~period ~~payable~~that ~~would~~includes ~~differ~~the ~~and~~rate ~~additional allowances may be required~~change.

FORWARD-LOOKING STATEMENTS

The Company may from time to time make written and oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases and in reports to shareholders. The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements. The Company relies on this safe harbor in making such disclosures. All statements contained in this Quarterly Report on Form 10-Q as to future expectations and financial results including, but not limited to, statements containing the words “plans,” “believes,” “intend,” “anticipates,” “expects,” “projects,” “should,” “will” and similar expressions, should be considered forward-looking statements subject to the safe harbor. The forward-looking statements are based on management’s current beliefs and assumptions about expectations, estimates, strategies and projections for the Company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. The risks, uncertainties and assumptions regarding forward-looking statements include, but are not limited to, product demand and market acceptance risks; product development risks, such as delays or difficulties in developing, producing and marketing new products; the impact of competitive products, pricing and advertising constraints resulting from the financial condition of the Company, including the degree to which the Company is leveraged; cycles in the construction and renovation of commercial and institutional buildings; failure to retain senior executives and other qualified personnel; unanticipated termination or interruption of the Company’s arrangement with its primary third-party supplier of nylon yarn; debt service requirements and restrictions under credit agreements and indentures; general economic conditions in the United States and in markets outside of the United States served by the Company; government regulations; risks of loss of material customers; environmental matters; and other risks described in the Company’s Securities and Exchange Commission filings.

3032

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. Although we are not subject to material foreign currency exchange risk, we are exposed to changes in interest rates. Other than the 9.75% Notes, substantially all of our debt is variable rate debt. Therefore, interest rate changes generally do not affect the ~~fair~~ fair market value of such debt but do impact future earnings and cash flows, assuming other factors are held constant. Conversely, for fixed rate debt, interest rate changes do not impact future cash ~~flow~~flows and earnings, but do impact the fair market ~~value~~ value of such debt, assuming other factors are held constant. At July 2631, ~~2003~~2004, we had variable rate debt of $4131.02 million and fixed rate debt of $~~178~~176.94 million. The variable interest rate per annum applicable to borrowings under the Senior Credit Facility is equal to the Company’s choice of (a) an adjusted rate based upon LIBOR plus a Eurodollar margin or (b) an alternative base rate, as defined by the Senior Credit Facility, plus a base rate margin. The Eurodollar margin and the base rate margin adjust quarterly on a sliding scale based on our leverage ratio for the immediately preceding four fiscal quarters. The impact on our results of operations of a one-point change on the outstanding balance of our term loan as of the twenty-six weeks ended July 31, 2004 would be approximately $0.2 million annually, net of tax.

Item 4. Controls and Procedures

As of ~~the end~~July of31, ~~the period covered by this report~~2004, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-1415. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. The Chief Executive Officer and Chief Financial Officer also concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in ~~the~~ the Company’s periodic SEC filings. In connection with the new rules, the Company is in the process of further reviewing and documenting its disclosure controls and procedures, including its internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that the Company’s systems evolve with its business.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.

31 PART II Other Information

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company from time to time is subject to claims and suits arising in the ordinary course of business, including workers’ compensation and product liability claims that may or may not be covered by insurance. The ultimate outcome of all legal proceedings to which the Company is a party will not, in the opinion of the Company’s management, based on the facts presently known to it, have a material adverse effect on the Company’s financial condition or results of operations.

The Company is subject to federal, state, and local laws and regulations concerning the environment. In the opinion of the Company’s management, based on the facts presently known to it, the ultimate outcome of any environmental matters is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

10.1

Amendment No. 3 to Senior Credit Facility, dated August 18, 2004 (incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K filed on August 24, 2004)

31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

(b)

Reports on Form 8-K

~~None~~Current Report Form 8-K: Announcement of appointment of Leonard F. Ferro as the Company’s Vice President and Chief Financial Officer, dated June 9, 2004

3234

SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on September 814, ~~2003~~2004.

COLLINS & AIKMAN FLOORCOVERINGS, INC. (Registrant) By: /s/ ~~DARREL~~Leonard VF. ~~MCCAY~~Ferro ~~Darrel~~Leonard VF. ~~McCay~~Ferro Chief Financial Officer and Vice President (duly authorized officer and principal financial and accounting officer)

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Filing Compare · COLLINS & AIKMAN FLOOR COVERINGS INC