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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-Q



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended July 26, 2003



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



Commission File Number 333-88212



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



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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 30, 2003.



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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 25, 2003 and July 26, 2003                                            |  | 4                                                                                    
|               |  |                                                                                                                  
|               |  | Consolidated Statements of Stockholders Equity  Twenty-Six Weeks Ended July 26, 2003                            |  | 5                                                                                    
|               |  |                                                                                                                  
|               |  | Consolidated Statements of Cash Flows  Twenty-Six Weeks Ended July 27, 2002 and July 26, 2003                    |  | 6                                                                                    
|               |  |                                                                                                                  
|               |  | Notes to Consolidated Financial Statements                                                                        |  | 7                                                                                    
|               |  |                                                                                                                   | 
|               |  | Item 2.                                                                                                           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 23      
|               |  |                                                                                                                   | 
|               |  | Item 3.                                                                                                           |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 31      
|               |  |                                                                                                                   | 
|               |  | Item 4.                                                                                                           |  | Controls and Procedures                                                               |  | 31      
|               |  |                                                                                                                  
|Part II.       |  | Other Information                                                                                                 |  |                                                                                      
|               |  |                                                                                                                   | 
|               |  | Item 1.                                                                                                           |  | Legal Proceedings                                                                     |  | 32      
|               |  |                                                                                                                   | 
|               |  | Item 6.                                                                                                           |  | Exhibits and Reports on Form 8-K                                                      |  | 32      
|               | 
|Signatures     |  | 33                                                                                                               
|               | 
|Certifications |  | 34                                                                                                               



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PART 1  FINANCIAL INFORMATION



Item 1. Financial Statements



COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and In Thousands)



|                                                                                   |  | Thirteen Weeks Ended |        | Twenty-Six Weeks Ended
|---------------------------------------------------------------------------------- |  | -------------------- | ------ | ----------------------
|                                                                                   |  | July 27,2002         |        |                       
|NET SALES                                                                          |  | $                    | 99,899 |                       
|                                                                                   |  |                      |        |                       
|COST OF GOODS SOLD                                                                 |  |                      | 62,118 |                       
|SELLING, GENERAL & ADMINISTRATIVE EXPENSES                                         |  |                      | 18,962 |                       
|                                                                                   |  |                      |        |                       
|                                                                                   |  |                      | 81,080 |                       
|                                                                                   |  |                      |        |                       
|OPERATING INCOME                                                                   |  |                      | 18,819 |                       
|MINORITY INTEREST IN INCOME (LOSS) OF SUBSIDIARY                                   |  |                      | (10    | )                     
|EQUITY IN EARNINGS OF AFFILIATE                                                    |  |                      | 533    |                       
|NET INTEREST EXPENSE                                                               |  |                      | 4,788  |                       
|                                                                                   |  |                      |        |                       
|INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |  |                      | 14,574 |                       
|INCOME TAX EXPENSE                                                                 |  |                      | 5,540  |                       
|                                                                                   |  |                      |        |                       
|INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                  |  |                      | 9,034  |                       
|CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                                |  |                      |       |                       
|                                                                                   |  |                      |        |                       
|NET INCOME                                                                         |  | $                    | 9,034  |                       
|                                                                                   |  |                      |        |                       



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



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands)



|                                                                                                                 |  | January 25,2003 |         |   | July 26,2003 |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ------------ | -
|                                                                                                                 |  |                 |         |   | (Unaudited)  |  
|ASSETS                                                                                                           |  |                 |         |   |              |  
|CURRENT ASSETS:                                                                                                  |  |                 |         |   |              |  
|Cash and cash equivalents                                                                                        |  | $               | 20,907  |   |              | $
|Accounts receivable, net of allowances of $917 and $865 in fiscal 2002 and 2003, respectively                    |  |                 | 38,527  |   |              |  
|Inventories                                                                                                      |  |                 | 35,721  |   |              |  
|Deferred tax assets                                                                                              |  |                 | 1,863   |   |              |  
|Prepaid expenses and other                                                                                       |  |                 | 1,699   |   |              |  
|                                                                                                                 |  |                 |         |   |              |  
|Total current assets                                                                                             |  |                 | 98,717  |   |              |  
|                                                                                                                 |  |                
|PROPERTY, PLANT, AND EQUIPMENT, net                                                                              |  |                 | 66,258  |   |              |  
|                                                                                                                 |  |                
|DEFERRED TAX ASSETS                                                                                              |  |                 | 870     |   |              |  
|                                                                                                                 |  |                
|GOODWILL                                                                                                         |  |                 | 98,378  |   |              |  
|                                                                                                                 |  |                
|OTHER INTANGIBLE ASSETS, net                                                                                     |  |                 | 43,100  |   |              |  
|                                                                                                                 |  |                
|OTHER ASSETS                                                                                                     |  |                 | 11,090  |   |              |  
|                                                                                                                 |  |                 |         |   |              |  
|TOTAL ASSETS                                                                                                     |  | $               | 318,413 |   |              | $
|                                                                                                                 |  |                 |         |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                             |  |                 |         |   |              |  
|CURRENT LIABILITIES:                                                                                             |  |                 |         |   |              |  
|Accounts payable                                                                                                 |  | $               | 15,919  |   |              | $
|Accrued expenses                                                                                                 |  |                 | 18,714  |   |              |  
|Current portion of long-term debt                                                                                |  |                 | 12,105  |   |              |  
|                                                                                                                 |  |                 |         |   |              |  
|Total current liabilities                                                                                        |  |                 | 46,738  |   |              |  
|                                                                                                                 |  |                
|OTHER LIABILITIES, including post-retirement benefit obligation                                                  |  |                 | 5,529   |   |              |  
|                                                                                                                 |  |                
|LONG-TERM DEBT, net of current portion                                                                           |  |                 | 218,666 |   |              |  
|                                                                                                                 |  |                
|MINORITY INTEREST                                                                                                |  |                 | 330     |   |              |  
|                                                                                                                 |  |                
|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  |   |              |  
|Retained deficit                                                                                                 |  |                 | (23,480 | ) |              |  
|Accumulated other comprehensive loss                                                                             |  |                 | (2,018  | ) |              |  
|                                                                                                                 |  |                 |         |   |              |  
|                                                                                                                 |  |                 | 47,150  |   |              |  
|                                                                                                                 |  |                 |         |   |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |  | $               | 318,413 |   |              | $
|                                                                                                                 |  |                 |         |   |              |  



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



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE TWENTY-SIX WEEKS ENDED JULY 26, 2003

(Unaudited and In Thousands, Except Share Amounts)



|                                        |  |              |  |                   |   |                             |   |        | Accumulated OtherComprehensive Income (Loss) |   |         |                          | 
|--------------------------------------- |  | ------------ |  | ----------------- | - | --------------------------- | - | ------ | -------------------------------------------- | - | ------- | ------------------------ | 
|                                        |  | Common Stock |  | Paid - in Capital |   | Retained Earnings (Deficit) |   |        | Foreign CurrencyTranslation Adjustment       |   |         | MinimumPension Liability | 
|                                        |  | Shares       |  | Amount            |   |                             |   |        |                                             
|BALANCE, January 25, 2003               |  | 1,000        |  | $                 |  |                             | $ | 72,648 |                                              | $ | (23,480 | )                        | 
|Net income                              |  |             |  |                   |  |                             |   |       |                                              |   | 4,981   |                          | 
|Dividends to Tandus Group, Inc.         |  |             |  |                   |  |                             |   |       |                                              |   | (2,263  | )                        | 
|Foreign currency translation adjustment |  |             |  |                   |  |                             |   |       |                                              |   |        |                          | 
|                                        |  |              |  |                   |   |                             |   |        |                                              |   |         |                          | 
|BALANCE, July 26, 2003                  |  | 1,000        |  | $                 |  |                             | $ | 72,648 |                                              | $ | (20,762 | )                        | 
|                                        |  |              |  |                   |   |                             |   |        |                                              |   |         |                          | 



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and In Thousands)



|                                                                                  |  | Twenty-Six Weeks Ended |         
|--------------------------------------------------------------------------------- |  | ---------------------- | --------
|                                                                                  |  | July 27,2002           |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                        |         
|Net income                                                                        |  | $                      | 4,446   
|                                                                                  |  |                        |         
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                        |         
|Depreciation and leasehold amortization                                           |  |                        | 4,122   
|Amortization of other intangible assets                                           |  |                        | 1,958   
|Amortization and write-off of deferred financing fees                             |  |                        | 3,324   
|Deferred income tax expense                                                       |  |                        | 3,001   
|Equity in earnings of affiliate                                                   |  |                        | (1,009  
|Minority interest in income of subsidiary                                         |  |                        | 6       
|Cumulative effect of change in accounting principle                               |  |                        | 3,240   
|Changes in operating assets and liabilities, net of effects of acquisitions:      |  |                        |         
|Accounts receivable                                                               |  |                        | (21,785 
|Inventories                                                                       |  |                        | (8,595  
|Accounts payable                                                                  |  |                        | 7,135   
|Accrued expenses                                                                  |  |                        | 6,857   
|Other, net                                                                        |  |                        | (1,887  
|                                                                                  |  |                        |         
|Total adjustments                                                                 |  |                        | (3,633  
|                                                                                  |  |                        |         
|Net cash provided by operating activities                                         |  |                        | 813     
|                                                                                  |  |                        |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                        |         
|Acquisition of a business                                                         |  |                        | (35,127 
|Equity distribution from affiliate                                                |  |                        | 971     
|Additions to property, plant, and equipment                                       |  |                        | (3,522  
|                                                                                  |  |                        |         
|Net cash used in investing activities                                             |  |                        | (37,678 
|                                                                                  |  |                        |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                        |         
|Proceeds from issuance of long-term debt                                          |  |                        | 175,000 
|Repayments of long-term debt                                                      |  |                        | (131,767
|Dividends to Tandus Group, Inc.                                                   |  |                        | (2,139  
|Financing costs                                                                   |  |                        | (6,627  
|                                                                                  |  |                        |         
|Net cash provided by (used in) financing activities                               |  |                        | 34,467  
|                                                                                  |  |                        |         
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                           |  |                        | (2,398  
|                                                                                  |  |                       
|CASH AND CASH EQUIVALENTS, beginning of period                                    |  |                        | 6,234   
|                                                                                  |  |                        |         
|CASH AND CASH EQUIVALENTS, end of period                                          |  | $                      | 3,836   
|                                                                                  |  |                        |         



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



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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 generally accepted accounting principles 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 generally accepted accounting principles 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 which was filed 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 for each of its customers. The Company is headquartered in Georgia, with additional locations in California, Canada, the United Kingdom, and Singapore.



The Company is a wholly owned subsidiary of Tandus Group, Inc. (Tandus),
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 and Banc of
America Capital Investors.



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.



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5. Inventories



Net inventory balances are summarized below (in thousands):



|                |  | January 25,2003 |        | July 26, 2003
|--------------- |  | --------------- | ------ | -------------
|                |  |                 |        | (Unaudited)  
|Raw materials   |  | $               | 16,085 |              
|Work in process |  |                 | 5,309  |              
|Finished goods  |  |                 | 14,327 |              
|                |  |                 |        |              
|                |  | $               | 35,721 |              
|                |  |                 |        |              



6. Revenue Recognition



Revenue is recognized when carpet products and related accessories are shipped. The
terms for these sales are FOB shipping point. For product installations subject to customer approval, revenue is recognized upon acceptance by the customer.



The Company provides 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, in the accompanying consolidated statements of operations. These billings and expenses were $5.7 million and $4.8 million for the twenty-six weeks ended July 26, 2003 and July 27, 2002, respectively,
and $3.4 million and $2.9 million for the thirteen weeks ended July 26, 2003 and July 27, 2002, respectively.



7. Accrued Expenses



Accrued expenses are summarized below (in thousands):



|                              |  | January 25,2003 |        | July 26, 2003
|----------------------------- |  | --------------- | ------ | -------------
|                              |  |                 |        | (Unaudited)  
|Payroll and employee benefits |  | $               | 5,466  |              
|Accrued taxes                 |  |                 | 390    |              
|Customer claims               |  |                 | 1,817  |              
|Accrued interest              |  |                 | 7,892  |              
|Customer deposits             |  |                 | 515    |              
|Accrued professional fees     |  |                 | 1,412  |              
|Other                         |  |                 | 1,222  |              
|                              |  |                 |        |              
|                              |  | $               | 18,714 |              
|                              |  |                 |        |              



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.



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SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, 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 |       
|Amortized intangible assets: |  |                      |       
|Non-compete                  |  | $                    | 12,000
|Patent                       |  |                      | 27,000
|Supply Agreement             |  |                      | 8,000 
|                             |  |                      |       
|Total                        |  | $                    | 47,000
|                             |  |                      |       



The 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.



|Unamortized intangible assets: |  |   |       
|------------------------------ |  | - | ------
|Trade name                     |  | $ | 23,613
|                               |  |   |       



|                               |  | Thirteen Weeks Ended |     | Twenty-Six Weeks Ended
|------------------------------ |  | -------------------- | --- | ----------------------
|                               |  | July 27, 2002        |     | July 26, 2003         
|Aggregate amortization expense |  | $                    | 987 |                       
|                               |  |                      |     |                       



|Estimated amortization expense: |  |   |      
|------------------------------- |  | - | -----
|Fiscal 2003                     |  | $ | 6,229
|Fiscal 2004                     |  | $ | 5,122
|Fiscal 2005                     |  | $ | 3,224
|Fiscal 2006                     |  | $ | 2,455
|Fiscal 2007                     |  | $ | 2,455



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The changes in the carrying amount of goodwill for the period ended July 26, 2003 are as follows:



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



Stock 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, 2003. 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          |  
|Net income as reported                                                                                                          |  | $                    | 9,034 |   |                        | $
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of
tax |  |                      | (12   | ) |                        |  
|                                                                                                                                |  |                      |       |   |                        |  
|Proforma net income                                                                                                             |  | $                    | 9,022 |   |                        | $
|                                                                                                                                |  |                      |       |   |                        |  



9. Recent Accounting Pronouncements



In November 2002, the FASB issued Interpretation No. 45,
Guarantors 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 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 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51 (FIN 46). FIN 46 addresses the consolidation by business enterprises of variable interest entities that have certain characteristics. Generally, a variable interest entity is any legal structure used for business
purposes that either (1) does not have equity investors with voting rights or (2) has equity investors that do not provide sufficient financial resources for the entity to support its operations. FIN 46 requires variable interest entities to be
consolidated by the company if it is subject to a majority of the risk of loss from the variable interest entitys operations or entitled to receive a



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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. 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) 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.



10.
Long-Term Debt



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.



The Company was in compliance with all covenants as of July
26, 2003.



Total net interest expense was $5.2 million and $4.8 million
for the thirteen weeks ended July 26, 2003 and July 27, 2002, respectively. Total net interest expense was $10.6 million and $13.3 million for the twenty-six weeks ended July 26, 2003 and July 27, 2002, respectively, which included 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



11



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associated with the prepayment of term debt from proceeds of the 9.75% notes offering and from cash generated from operations.



11. Segment Information



The 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 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, amortization and the
cumulative effect of change in accounting principle, plus Chroma Systems Partners (Chroma) 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.



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.



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.



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The table below provides certain financial information by segment (in thousands):



|                                                    |  | Thirteen Weeks Ended |        |   | Twenty-Six Weeks Ended |  
|--------------------------------------------------- |  | -------------------- | ------ | - | ---------------------- | -
|                                                    |  | July 27,2002         |        |   | July 26,2003           |  
|Net Sales to External Customers                     |  |                      |        |   |                        |  
|Floorcoverings                                      |  | $                    | 92,266 |   |                        | $
|Extrusion                                           |  |                      | 7,633  |   |                        |  
|                                                    |  |                      |        |   |                        |  
|Total Sales to External Customers                   |  | $                    | 99,899 |   |                        | $
|                                                    |  |                      |        |   |                        |  
|                                                    |  |                     
|                                                    |  | Thirteen Weeks Ended |        |   | Twenty-Six Weeks Ended |  
|                                                    |  | July 27,2002         |        |   | July 26,2003           |  
|Adjusted EBITDA                                     |  |                      |        |   |                        |  
|Floorcoverings                                      |  | $                    | 21,097 |   |                        | $
|Extrusion                                           |  |                      | 1,350  |   |                        |  
|                                                    |  |                      |        |   |                        |  
|Total Adjusted EBITDA                               |  | $                    | 22,447 |   |                        | $
|                                                    |  |                      |        |   |                        |  
|                                                    |  |                     
|                                                    |  | Thirteen Weeks Ended |        |   | Twenty-Six Weeks Ended |  
|                                                    |  | July 27,2002         |        |   | July 26,2003           |  
|Net income                                          |  | $                    | 9,034  |   |                        | $
|Cumulative effect of change in accounting principle |  |                      |       |   |                        |  
|Income taxes                                        |  |                      | 5,540  |   |                        |  
|Net interest expense                                |  |                      | 4,788  |   |                        |  
|Depreciation                                        |  |                      | 2,222  |   |                        |  
|Amortization                                        |  |                      | 987    |   |                        |  
|Chroma cash dividends                               |  |                      | 419    |   |                        |  
|Equity in earnings in Chroma                        |  |                      | (533   | ) |                        |  
|Minority interest in income (loss) of subsidiary    |  |                      | (10    | ) |                        |  
|                                                    |  |                      |        |   |                        |  
|Adjusted EBITDA                                     |  | $                    | 22,447 |   |                        | $
|                                                    |  |                      |        |   |                        |  



|                          |  | As ofJanuary 25, 2003 |         | As of July 26, 2003
|------------------------- |  | --------------------- | ------- | -------------------
|Consolidated Assets       |  |                       |         |                    
|Floorcoverings            |  | $                     | 280,418 |                    
|Extrusion                 |  |                       | 37,995  |                    
|                          |  |                       |         |                    
|Total Consolidated Assets |  | $                     | 318,413 |                    
|                          |  |                       |         |                    



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12. Investment in Equity Affiliate



Monterey Carpets, Inc. has a 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 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  |                   
|Non-current Assets                      |  |                       | 8,433  |                   
|                                        |  |                       |        |                   
|Total Assets                            |  | $                     | 10,372 |                   
|                                        |  |                       |        |                   
|Current Liabilities                     |  | $                     | 921    |                   
|Long Term Debt                          |  |                       | 5,066  |                   
|Partners Capital                       |  |                       | 4,385  |                   
|                                        |  |                       |        |                   
|Total Liabilities and Partners Capital |  | $                     | 10,372 |                   
|                                        |  |                       |        |                   



|                       |  | Twenty-Six Weeks Ended
|---------------------- |  | ----------------------
|                       |  | July 27,2002          
|Net Sales              |  | $                     
|Cost of Goods Sold     |  |                       
|                       |  |                       
|Gross Profit           |  |                       
|Income From Operations |  |                       
|Net Income             |  |                       



13. Acquisition



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.



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14. Comprehensive Income



|                                         |  | Thirteen WeeksEnded |       | Twenty-Six WeeksEnded
|---------------------------------------- |  | ------------------- | ----- | ---------------------
|                                         |  | July 27,2002        |       |                      
|Net Income                               |  | $                   | 9,034 |                      
|Other Comprehensive Income (Loss):       |  |                     |       |                      
|Foreign Currency Translation Adjustments |  |                     | (474  | )                    
|                                         |  |                     |       |                      
|Comprehensive Income                     |  | $                   | 8,560 |                      
|                                         |  |                     |       |                      



15. Condensed Consolidating Financial
Statements



The 9.75% Notes of the Company are guaranteed by certain
of the Companys domestic subsidiaries. The guarantee of the guarantor subsidiaries as of July 26, 2003 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 is $224.0 million. This represents the principal amount outstanding of the Companys Senior 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:



Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended July 26, 2003

(Unaudited and In Thousands)



|                                           |  | Issuer |        | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotal
|------------------------------------------ |  | ------ | ------ | --------------------- | - | ------------------------- |  | - | ------------ | - |  | -----------------
|Net Sales                                  |  | $      | 64,962 |                       | $ | 23,438                    |  | $ | 11,831       |   |  | $                
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                  
|Cost of Goods Sold                         |  |        | 37,527 |                       |   | 17,743                    |  |   | 10,199       |   |  |                  
|                                           |  |        |        |                       |  
|Selling, General & Administrative Expenses |  |        | 13,940 |                       |   | 5,335                     |  |   | 1,705        |   |  |                  
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                  
|                                           |  |        | 51,467 |                       |   | 23,078                    |  |   | 11,904       |   |  |                  
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                  
|Operating Income (Loss)                    |  |        | 13,495 |                       |   | 360                       |  |   | (73          | ) |  |                  
|                                           |  |        |        |                       |  
|Minority Interest in Income of Subsidiary  |  |        |       |                       |   |                          |  |   | 32           |   |  |                  
|Equity in Earnings of Affiliate            |  |        |       |                       |   | 326                       |  |   |             |   |  |                  
|Equity in Earnings of Subsidiaries         |  |        | 215    |                       |   |                          |  |   |             |   |  |                  
|Net Interest Expense                       |  |        | 5,151  |                       |   |                          |  |   | 48           |   |  |                  
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                  
|Income (Loss) Before Income Taxes          |  |        | 8,559  |                       |   | 686                       |  |   | (153         | ) |  |                  
|Income Tax Expense                         |  |        | 3,481  |                       |   | 282                       |  |   | 36           |   |  |                  
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                  
|Net Income (Loss)                          |  | $      | 5,078  |                       | $ | 404                       |  | $ | (189         | ) |  | $                
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                  



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##### Table of Contents

Guarantor Financial Statements

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended July 27, 2002

(Unaudited and In Thousands)



|                                           |  | Issuer |        | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotal |       
|------------------------------------------ |  | ------ | ------ | --------------------- | - | ------------------------- |  | - | ------------ | - |  | ----------------- | ------
|Net Sales                                  |  | $      | 67,395 |                       | $ | 24,145                    |  | $ | 11,805       |   |  | $                 | (3,446
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                   |       
|Cost of Goods Sold                         |  |        | 38,214 |                       |   | 17,544                    |  |   | 9,806        |   |  |                   | (3,446
|                                           |  |        |        |                       |  
|Selling, General & Administrative Expenses |  |        | 13,562 |                       |   | 4,029                     |  |   | 1,371        |   |  |                   |      
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                   |       
|                                           |  |        | 51,776 |                       |   | 21,573                    |  |   | 11,177       |   |  |                   | (3,446
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                   |       
|Operating Income                           |  |        | 15,619 |                       |   | 2,572                     |  |   | 628          |   |  |                   |      
|                                           |  |        |        |                       |  
|Minority Interest in Loss of Subsidiary    |  |        |       |                       |   |                          |  |   | (10          | ) |  |                   |      
|Equity in Earnings of Affiliate            |  |        |       |                       |   | 533                       |  |   |             |   |  |                   |      
|Equity in Earnings of Subsidiaries         |  |        | 2,598  |                       |   |                          |  |   |             |   |  |                   | (2,598
|Net Interest Expense                       |  |        | 4,777  |                       |   |                          |  |   | 11           |   |  |                   |      
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                   |       
|Income Before Income Taxes                 |  |        | 13,440 |                       |   | 3,105                     |  |   | 627          |   |  |                   | (2,598
|                                           |  |        |        |                       |  
|Income Tax Expense                         |  |        | 4,406  |                       |   | 1,100                     |  |   | 34           |   |  |                   |      
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                   |       
|Net Income                                 |  | $      | 9,034  |                       | $ | 2,005                     |  | $ | 593          |   |  | $                 | (2,598
|                                           |  |        |        |                       |   |                           |  |   |              |   |  |                   |       



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Guarantor Financial Statements

Condensed Consolidating Statement of Operations

For the Twenty-Six Weeks Ended July 26, 2003

(Unaudited and In Thousands)



|                                           |  | Issuer |         | GuarantorSubsidiaries |   |        | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotal
|------------------------------------------ |  | ------ | ------- | --------------------- | - | ------ | -------------------------- |  | - | ------------ | - |  | -----------------
|Net Sales                                  |  | $      | 108,649 |                       | $ | 44,762 |                            |  | $ | 23,037       |   |  | $                
|                                           |  |        |         |                       |   |        |                            |  |   |              |   |  |                  
|Cost of Goods Sold                         |  |        | 64,570  |                       |   | 34,134 |                            |  |   | 19,745       |   |  |                  
|                                           |  |        |         |                       |  
|Selling, General & Administrative Expenses |  |        | 26,135  |                       |   | 10,048 |                            |  |   | 3,783        |   |  |                  
|                                           |  |        |         |                       |   |        |                            |  |   |              |   |  |                  
|                                           |  |        | 90,705  |                       |   | 44,182 |                            |  |   | 23,528       |   |  |                  
|                                           |  |        |         |                       |   |        |                            |  |   |              |   |  |                  
|Operating Income (Loss)                    |  |        | 17,944  |                       |   | 580    |                            |  |   | (491         | ) |  |                  
|                                           |  |        |         |                       |  
|Minority Interest in Income of Subsidiary  |  |        |        |                       |   |       |                            |  |   | 16           |   |  |                  
|Equity in Earnings of Affiliate            |  |        |        |                       |   | 687    |                            |  |   |             |   |  |                  
|Equity in Earnings of Subsidiaries         |  |        | 676     |                       |   |       |                            |  |   |             |   |  |                  
|Net Interest Expense                       |  |        | 10,525  |                       |   |       |                            |  |   | 80           |   |  |                  
|                                           |  |        |         |                       |   |        |                            |  |   |              |   |  |                  
|Income (Loss) Before Income Taxes          |  |        | 8,095   |                       |   | 1,267  |                            |  |   | (587         | ) |  |                  
|                                           |  |        |         |                       |  
|Income Tax Expense (Benefit)               |  |        | 3,114   |                       |   | (66    | )                          |  |   | 70           |   |  |                  
|                                           |  |        |         |                       |   |        |                            |  |   |              |   |  |                  
|Net Income (Loss)                          |  | $      | 4,981   |                       | $ | 1,333  |                            |  | $ | (657         | ) |  | $                
|                                           |  |        |         |                       |   |        |                            |  |   |              |   |  |                  



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Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Twenty-Six Weeks Ended July 27, 2002

(Unaudited and In Thousands)



|                                                                                   |  | Issuer |         |   | GuarantorSubsidiaries |   | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotal |       
|---------------------------------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | -------------------------- |  | - | ------------ | - |  | ----------------- | ------
|Net Sales                                                                          |  | $      | 110,215 |   |                       | $ | 39,636                     |  | $ | 22,811       |   |  | $                 | (6,346
|                                                                                   |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |       
|Cost of Goods Sold                                                                 |  |        | 64,877  |   |                       |   | 27,647                     |  |   | 19,041       |   |  |                   | (6,346
|                                                                                   |  |        |         |   |                      
|Selling, General & Administrative Expenses                                         |  |        | 24,544  |   |                       |   | 8,836                      |  |   | 2,937        |   |  |                   |      
|                                                                                   |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |       
|                                                                                   |  |        | 89,421  |   |                       |   | 36,483                     |  |   | 21,978       |   |  |                   | (6,346
|                                                                                   |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |       
|Operating Income                                                                   |  |        | 20,794  |   |                       |   | 3,153                      |  |   | 833          |   |  |                   |      
|Minority Interest in Income of Subsidiary                                          |  |        |        |   |                       |   |                           |  |   | 6            |   |  |                   |      
|Equity in Earnings of Affiliate                                                    |  |        |        |   |                       |   | 1,009                      |  |   |             |   |  |                   |      
|Equity in Earnings of Subsidiaries                                                 |  |        | (36     | ) |                       |   |                           |  |   |             |   |  |                   | 36    
|Net Interest Expense                                                               |  |        | 13,272  |   |                       |   |                           |  |   | 15           |   |  |                   |      
|                                                                                   |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |       
|Income Before Income Taxes and Cumulative Effect of Change in Accounting Principle |  |        | 7,486   |   |                       |   | 4,162                      |  |   | 812          |   |  |                   | 36    
|                                                                                   |  |        |         |   |                      
|Income Tax Expense                                                                 |  |        | 3,040   |   |                       |   | 1,703                      |  |   | 67           |   |  |                   |      
|                                                                                   |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |       
|Income Before Cumulative Effect of Change in Accounting Principle                  |  |        | 4,446   |   |                       |   | 2,459                      |  |   | 745          |   |  |                   | 36    
|Cumulative Effect of Change in Accounting Principle                                |  |        |        |   |                       |   |                           |  |   | (3,240       | ) |  |                   |      
|                                                                                   |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |       
|Net Income (Loss)                                                                  |  | $      | 4,446   |   |                       | $ | 2,459                      |  | $ | (2,495       | ) |  | $                 | 36    
|                                                                                   |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |       



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Guarantor Financial Statements

Condensed Consolidating Balance Sheets

July 26, 2003

(Unaudited and In Thousands)



|                                                        |  | Issuer |         |   | GuarantorSubsidiaries |   | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotal |        
|------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | -------------------------- |  | - | ------------ | - |  | ----------------- | -------
|ASSETS                                                  |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        
|CURRENT ASSETS:                                         |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        
|Cash and cash equivalents                               |  | $      | 7,870   |   |                       | $ | 48                         |  | $ | 416          |   |  | $                 |       
|Accounts receivable, net                                |  |        | 32,281  |   |                       |   | 11,557                     |  |   | 8,415        |   |  |                   |       
|Inventories                                             |  |        | 22,249  |   |                       |   | 10,363                     |  |   | 11,939       |   |  |                   |       
|Deferred tax assets                                     |  |        | 2,124   |   |                       |   | 678                        |  |   | 101          |   |  |                   |       
|Prepaid expenses and other                              |  |        | 878     |   |                       |   | 405                        |  |   | 1,101        |   |  |                   |       
|                                                        |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        
|Total current assets                                    |  |        | 65,402  |   |                       |   | 23,051                     |  |   | 21,972       |   |  |                   |       
|                                                        |  |        |         |   |                      
|PROPERTY, PLANT AND EQUIPMENT, net                      |  |        | 33,070  |   |                       |   | 22,493                     |  |   | 10,428       |   |  |                   |       
|DEFERRED TAX ASSETS                                     |  |        |        |   |                       |   | 820                        |  |   | 1,631        |   |  |                   | (2,005 
|GOODWILL                                                |  |        | 62,386  |   |                       |   | 35,992                     |  |   |             |   |  |                   |       
|OTHER INTANGIBLE ASSETS, net                            |  |        | 35,250  |   |                       |   | 4,794                      |  |   |             |   |  |                   |       
|INVESTMENT IN SUBSIDIARIES                              |  |        | 70,739  |   |                       |   |                           |  |   |             |   |  |                   | (70,739
|OTHER ASSETS                                            |  |        | 8,040   |   |                       |   | 718                        |  |   | 26           |   |  |                   |       
|                                                        |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        
|TOTAL ASSETS                                            |  | $      | 274,887 |   |                       | $ | 87,868                     |  | $ | 34,057       |   |  | $                 | (72,744
|                                                        |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                    |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        
|CURRENT LIABILITIES:                                    |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        
|Accounts payable                                        |  | $      | 10,456  |   |                       | $ | 6,411                      |  | $ | 5,245        |   |  | $                 |       
|Accrued expenses                                        |  |        | 15,873  |   |                       |   | 7,163                      |  |   | 2,689        |   |  |                   |       
|Current portion of long-term debt                       |  |        | 863     |   |                       |   |                           |  |   | 134          |   |  |                   |       
|                                                        |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        
|Total current liabilities                               |  |        | 27,192  |   |                       |   | 13,574                     |  |   | 8,068        |   |  |                   |       
|                                                        |  |        |         |   |                      
|INTERCOMPANY (RECEIVABLE) PAYABLE                       |  |        | (26,181 | ) |                       |   | 5,792                      |  |   | 20,389       |   |  |                   |       
|OTHER LIABILITIES, including post-retirement obligation |  |        | 7,307   |   |                       |   |                           |  |   | 112          |   |  |                   | (2,005 
|LONG-TERM DEBT, net of current portion                  |  |        | 216,041 |   |                       |   |                           |  |   | 2,906        |   |  |                   |       
|MINORITY INTEREST                                       |  |        |        |   |                       |   |                           |  |   |             |   |  |                   | 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
|Retained earnings (deficit)                             |  |        | (20,762 | ) |                       |   | 16,747                     |  |   | (5,926       | ) |  |                   | (10,821
|Accumulated other comprehensive loss                    |  |        | (1,358  | ) |                       |   |                           |  |   | (51          | ) |  |                   | 51     
|                                                        |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        
|                                                        |  |        | 50,528  |   |                       |   | 68,502                     |  |   | 2,582        |   |  |                   | (71,084
|                                                        |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY              |  | $      | 274,887 |   |                       | $ | 87,868                     |  | $ | 34,057       |   |  | $                 | (72,744
|                                                        |  |        |         |   |                       |   |                            |  |   |              |   |  |                   |        





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Guarantor Financial Statements

Condensed Consolidating Balance Sheets

January 25, 2003

(In Thousands)



|                                                        |  | Issuer |         |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotal |        
|------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------------------------- |  | - | ------------ | - |  | ----------------- | -------
|ASSETS                                                  |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        
|CURRENT ASSETS:                                         |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        
|Cash and cash equivalents                               |  | $      | 19,047  |   |                       | $ |                          |  | $ | 1,860        |   |  | $                 |        
|Accounts receivable, net                                |  |        | 20,332  |   |                       |   | 10,507                    |  |   | 7,688        |   |  |                   |        
|Inventories                                             |  |        | 17,544  |   |                       |   | 8,245                     |  |   | 9,932        |   |  |                   |        
|Deferred tax assets                                     |  |        | 1,310   |   |                       |   | 461                       |  |   | 92           |   |  |                   |        
|Prepaid expenses and other                              |  |        | 467     |   |                       |   | 222                       |  |   | 1,010        |   |  |                   |        
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        
|Total current assets                                    |  |        | 58,700  |   |                       |   | 19,435                    |  |   | 20,582       |   |  |                   |        
|                                                        |  |        |         |   |                      
|PROPERTY, PLANT AND EQUIPMENT, net                      |  |        | 32,791  |   |                       |   | 23,902                    |  |   | 9,565        |   |  |                   |        
|DEFERRED TAX ASSETS                                     |  |        | 10      |   |                       |   | 356                       |  |   | 1,482        |   |  |                   | (978   
|GOODWILL                                                |  |        | 62,386  |   |                       |   | 35,992                    |  |   |             |   |  |                   |        
|OTHER INTANGIBLE ASSETS, net                            |  |        | 36,997  |   |                       |   | 6,103                     |  |   |             |   |  |                   |        
|INVESTMENT IN SUBSIDIARIES                              |  |        | 69,395  |   |                       |   |                          |  |   |             |   |  |                   | (69,395
|OTHER ASSETS                                            |  |        | 8,777   |   |                       |   | 2,287                     |  |   | 26           |   |  |                   |        
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        
|TOTAL ASSETS                                            |  | $      | 269,056 |   |                       | $ | 88,075                    |  | $ | 31,655       |   |  | $                 | (70,373
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                    |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        
|CURRENT LIABILITIES:                                    |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        
|Accounts payable                                        |  | $      | 7,808   |   |                       | $ | 3,475                     |  | $ | 4,636        |   |  | $                 |       
|Accrued expenses                                        |  |        | 9,625   |   |                       |   | 7,001                     |  |   | 2,088        |   |  |                   |       
|Current portion of long-term debt                       |  |        | 10,868  |   |                       |   |                          |  |   | 1,237        |   |  |                   |       
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        
|Total current liabilities                               |  |        | 28,301  |   |                       |   | 10,476                    |  |   | 7,961        |   |  |                   |       
|                                                        |  |        |         |   |                      
|INTERCOMPANY (RECEIVABLE) PAYABLE                       |  |        | (28,766 | ) |                       |   | 10,437                    |  |   | 18,329       |   |  |                   |       
|                                                        |  |        |         |   |                      
|OTHER LIABILITIES, including post-retirement obligation |  |        | 6,380   |   |                       |   |                          |  |   | 127          |   |  |                   | (978   
|LONG-TERM DEBT, net of current portion                  |  |        | 215,991 |   |                       |   |                          |  |   | 2,675        |   |  |                   |       
|MINORITY INTEREST                                       |  |        |        |   |                       |   |                          |  |   |             |   |  |                   | 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
|Retained earnings (deficit)                             |  |        | (23,480 | ) |                       |   | 15,407                    |  |   | (5,285       | ) |  |                   | (10,122
|Accumulated other comprehensive loss                    |  |        | (2,018  | ) |                       |   |                          |  |   | (711         | ) |  |                   | 711    
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        
|                                                        |  |        | 47,150  |   |                       |   | 67,162                    |  |   | 2,563        |   |  |                   | (69,725
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY              |  | $      | 269,056 |   |                       | $ | 88,075                    |  | $ | 31,655       |   |  | $                 | (70,373
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |        



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Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Twenty-Six Weeks Ended July 26, 2003

(Unaudited and In Thousands)



|                                                    |  | Issuer |         |   | GuarantorSubsidiaries |   |        | Non-GuarantorSubsidiaries |  |   | Consolidated Total |  
|--------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------ | ------------------------- |  | - | ------------------ | -
|CASH FLOWS FROM OPERATING ACTIVITIES                |  | $      | 3,876   |   |                       | $ | (1,758 | )                         |  | $ | 568                |  
|                                                    |  |        |         |   |                       |   |        |                           |  |   |                    |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |        |         |   |                       |   |        |                           |  |   |                    |  
|Equity distribution from affiliate                  |  |        |        |   |                       |   | 2,282  |                           |  |   |                   |  
|Additions to property, plant, and equipment         |  |        | (2,772  | ) |                       |   | (476   | )                         |  |   | (882               | )
|                                                    |  |        |         |   |                       |   |        |                           |  |   |                    |  
|Net cash (used in) provided by investing activities |  |        | (2,772  | ) |                       |   | 1,806  |                           |  |   | (882               | )
|                                                    |  |        |         |   |                       |   |        |                           |  |   |                    |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |        |         |   |                       |   |        |                           |  |   |                    |  
|Proceeds from issuance of long-term debt            |  |        | 3,500   |   |                       |   |       |                           |  |   |                   |  
|Repayments of long-term debt                        |  |        | (13,500 | ) |                       |   |       |                           |  |   | (1,130             | )
|Dividends to Tandus Group, Inc.                     |  |        | (2,263  | ) |                       |   |       |                           |  |   |                   |  
|Financing costs                                     |  |        | (18     | ) |                       |   |       |                           |  |   |                   |  
|                                                    |  |        |         |   |                       |   |        |                           |  |   |                    |  
|Net cash used in financing activities               |  |        | (12,281 | ) |                       |   |       |                           |  |   | (1,130             | )
|                                                    |  |        |         |   |                       |   |        |                           |  |   |                    |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS             |  |        | (11,177 | ) |                       |   | 48     |                           |  |   | (1,444             | )
|                                                    |  |        |         |  
|CASH AND CASH EQUIVALENTS, beginning of period      |  |        | 19,047  |   |                       |   |       |                           |  |   | 1,860              |  
|                                                    |  |        |         |   |                       |   |        |                           |  |   |                    |  
|CASH AND CASH EQUIVALENTS, end of period            |  | $      | 7,870   |   |                       | $ | 48     |                           |  | $ | 416                |  
|                                                    |  |        |         |   |                       |   |        |                           |  |   |                    |  



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Guarantor Financial Statements

Condensed Consolidating Statement of Cash Flows

For the Twenty-Six Weeks Ended July 27, 2002

(Unaudited and In Thousands)



|                                                    |  | Issuer |          |   | GuarantorSubsidiaries |   |      | Non-GuarantorSubsidiaries |  |   | Consolidated Total |  
|--------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | ---- | ------------------------- |  | - | ------------------ | -
|CASH FLOWS FROM OPERATING ACTIVITIES                |  | $      | 1,585    |   |                       | $ | (783 | )                         |  | $ | 11                 |  
|                                                    |  |        |          |   |                       |   |      |                           |  |   |                    |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |        |          |   |                       |   |      |                           |  |   |                    |  
|Acquisition of a business                           |  |        | (35,127  | ) |                       |   |     |                           |  |   |                   |  
|Equity distribution from affiliate                  |  |        |         |   |                       |   | 971  |                           |  |   |                   |  
|Additions to property, plant and equipment          |  |        | (2,619   | ) |                       |   | (237 | )                         |  |   | (666               | )
|                                                    |  |        |          |   |                       |   |      |                           |  |   |                    |  
|Net cash provided by (used in) investing activities |  |        | (37,746  | ) |                       |   | 734  |                           |  |   | (666               | )
|                                                    |  |        |          |   |                       |   |      |                           |  |   |                    |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |        |          |   |                       |   |      |                           |  |   |                    |  
|Proceeds from issuance of long-term debt            |  |        | 175,000  |   |                       |   |     |                           |  |   |                   |  
|Repayments of long-term debt                        |  |        | (131,500 | ) |                       |   |     |                           |  |   | (267               | )
|Dividends to Tandus Group, Inc.                     |  |        | (2,139   | ) |                       |   |     |                           |  |   |                   |  
|Financing Costs                                     |  |        | (6,627   | ) |                       |   |     |                           |  |   |                   |  
|                                                    |  |        |          |   |                       |   |      |                           |  |   |                    |  
|Net cash provided by (used in) financing activities |  |        | 34,734   |   |                       |   |     |                           |  |   | (267               | )
|                                                    |  |        |          |   |                       |   |      |                           |  |   |                    |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS             |  |        | (1,427   | ) |                       |   | (49  | )                         |  |   | (922               | )
|                                                    |  |        |          |  
|CASH AND CASH EQUIVALENTS, beginning of period      |  |        | 2,271    |   |                       |   | 49   |                           |  |   | 3,914              |  
|                                                    |  |        |          |   |                       |   |      |                           |  |   |                    |  
|CASH AND CASH EQUIVALENTS, end of period            |  | $      | 844      |   |                       | $ |     |                           |  | $ | 2,992              |  
|                                                    |  |        |          |   |                       |   |      |                           |  |   |                    |  



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.



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##### Table of Contents

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, Collins & 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 for each of its customers. The Company is headquartered in Georgia, with additional locations in California, Canada, the United Kingdom and Singapore.



The Company is a wholly owned subsidiary of Tandus Group, Inc. (Tandus),
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 and Banc of
America Capital Investors.



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.



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.



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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 |  
|------------------------------------------ |  | ------------------- | - |  | --------------------- | -
|                                           |  | July 27,2002        |   |  | July 26,2003          |  
|Net Sales                                  |  | 100.0               | % |  | 100.0                 | %
|Cost of Goods Sold                         |  | 62.1                |   |  | 63.0                  |  
|                                           |  |                     |   |  |                       |  
|Gross Profit                               |  | 37.9                |   |  | 37.0                  |  
|Selling, General & Administrative Expenses |  | 19.0                |   |  | 22.3                  |  
|                                           |  |                     |   |  |                       |  
|Operating Income                           |  | 18.9                |   |  | 14.7                  |  
|Net Interest Expense                       |  | 4.8                 |   |  | 5.5                   |  
|Net Income                                 |  | 9.0                 |   |  | 5.1                   |  



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.



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##### Table of Contents

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         |       
|Net income                              |  | $                    | 9,034 
|Income taxes                            |  |                      | 5,540 
|Net interest expense                    |  |                      | 4,788 
|Depreciation and amortization           |  |                      | 3,209 
|Chroma cash dividends                   |  |                      | 419   
|Equity in earnings in Chroma            |  |                      | (533  
|Minority interest in loss of subsidiary |  |                      | (10   
|                                        |  |                      |       
|Adjusted EBITDA                         |  | $                    | 22,447
|                                        |  |                      |       



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RESULTS OF OPERATIONS



Twenty-Six Weeks Ended July 26, 2003 As Compared with Twenty-Six Weeks Ended July 27, 2002



Net Sales.Net sales for the twenty-six weeks ended July 26, 2003 were $165.5 million, a decrease of 0.5% from the $166.3
million for the twenty-six weeks ended July 27, 2002. The slight decrease in net sales in the twenty-six weeks ended July 26, 2003 was due to the continued slow demand throughout the specified commercial market in the United States. In particular,
demand in the corporate office market has been slow since 2001. For the twenty-six weeks ended July 26, 2003, the Companys sales to the corporate office market decreased by 14.4% as compared to the prior year. This decrease was partially
offset by the inclusion of the extrusion operations net sales for the full twenty-six weeks ended July 26, 2003. The extrusion operation was acquired May 8, 2002.



Cost of Goods Sold. Cost of goods sold was $107.5 million for the twenty-six weeks ended July 26, 2003 as compared to $105.2
million in the twenty-six weeks ended July 27, 2002. This increase resulted from the inclusion of the costs of the extrusion operation for the full twenty-six weeks ended July 26, 2003, partially offset by lower net sales and management cost
reduction initiatives. As a percentage of sales, cost of goods sold were 65.0% and 63.3%, respectively.



Selling, General and Administrative Expenses.Selling, general and administrative expenses, excluding goodwill and other intangible assets amortization of
$3.1 million, for the twenty-six weeks ended July 26, 2003 increased to $36.9 million, an increase of 8.0% from $34.3 million in the twenty-six weeks ended July 27, 2002 which excluded goodwill and other intangible assets amortization of $2.0
million. The increase was primarily due to increases in salaries and related benefits of $1.3 million, sampling expenses of $0.2 million, marketing and promotional expenses of $1.4 million, partially offset by lower sales commissions of $0.8 million
and professional services of $0.1 million. A portion of the increased salary and 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, were 22.3% and 20.7%, respectively.



Interest Expense. Net interest expense for the twenty-six weeks ended July 26,
2003 and the twenty-six weeks ended July 27, 2002 was $10.6 million and $13.3 million, respectively, which included 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. Net income for the twenty-six weeks ended July 26, 2003 increased to
$5.0 million from $4.4 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 twenty-six weeks ended July 26, 2003 decreased to $28.4 million from $31.8 million in the twenty-six weeks
ended July 27, 2002. As a percentage of sales, Adjusted EBITDA was 17.2% in the twenty-six weeks ended July 27, 2002 compared to 19.1% in the twenty-six 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



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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 27,2002           |       
|Net income                                          |  | $                      | 4,446 
|Cumulative effect of change in accounting principle |  |                        | 3,240 
|Income taxes                                        |  |                        | 4,810 
|Net interest expense                                |  |                        | 13,287
|Depreciation and amortization                       |  |                        | 6,080 
|Chroma cash dividends                               |  |                        | 971   
|Equity in earnings in Chroma                        |  |                        | (1,009
|Minority interest in income of subsidiary           |  |                        | 6     
|                                                    |  |                        |       
|Adjusted EBITDA                                     |  | $                      | 31,831
|                                                    |  |                        |       



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 26, 2003
was $2.7 million compared to $0.8 million in the twenty-six weeks ended July 27, 2002. The change is due to a positive impact of $8.6 million in net working capital, and $2.0 million in depreciation and amortization partially offset by $3.6 million
in deferred tax expense, $2.7 million of deferred financing fee amortization, and $3.2 million impact of the cumulative effect of change in accounting principle.



Net cash used in investing activities in the twenty-six weeks ended July 26, 2003 was $1.8 million compared to $37.7 million in the
twenty-six weeks ended July 27, 2002. The decrease in cash used in investing activities was primarily due to the acquisition of the yarn extrusion manufacturing plant and the real property on which the plant is located on May 8, 2002. Capital
expenditures for the twenty-six weeks ended July 26, 2003 were $4.1 million compared to $3.5 million for the twenty-six weeks ended July 27, 2002.



Net cash used in financing activities for the twenty-six weeks ended July 26, 2003 was $13.4 million compared to net cash provided by financing activities of $34.5
million in the twenty-six weeks ended July 27, 2002. The decrease in cash provided by financing activities was due primarily to the issuance of the 9.75% Notes and repayment of the Senior Credit Facility with a portion of the proceeds during the
twenty-six weeks ended July 27, 2002 as well as a net repayment of long-term debt of $11.1 million during the twenty-six weeks ended July 26, 2003.



The Company has significant indebtedness which, as of July 26, 2003, consists of $175.0 million of 9.75% senior subordinated notes due 2010, $41.0 million of senior
term debt, $0.7 million in sellers notes from the Companys July 1999 acquisition of Crossley, $0.5 million in purchase money indebtedness and $2.6 million in sinking fund bonds under Crossley. As of July 26, 2003, the Companys
$50.0 million revolving line of credit had no borrowings outstanding and $1.2 million of letters of credit outstanding leaving total availability of $48.8 million. The Company was in compliance with all covenants as of July 26, 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.



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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.



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. I. DuPont de Nemours and Company (DuPont) currently supplies a majority of our requirements for nylon yarn, the principal raw material used in our floorcovering products. The unanticipated termination or
interruption of the supply arrangement with DuPont could have a material adverse effect on us because of the cost and delay associated with shifting this business to another supplier. Historically, we have not experienced significant interruptions
in the supply of nylon yarn from DuPont.



RECENT ACCOUNTING PRONOUNCEMENTS



In November 2002, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 45, Guarantors 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 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 beyond the additional disclosures as presented in Note 15 to the Companys consolidated financial statements.



In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51 (FIN 46). FIN 46 addresses the consolidation by business enterprises of variable interest entities that have certain characteristics. Generally, a variable interest entity is any legal
structure used for business purposes that either (1) does not have equity investors with voting rights or (2) has equity investors that do not provide sufficient financial resources for the entity to support its operations. FIN 46 requires variable
interest entities to be consolidated by the company if it is subject to



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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 which was filed with the Securities and Exchange Commission on April 25, 2003. 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



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utilizing independent third-party contractors. The billings and expenses for these services are included in net sales and cost of goods sold, respectively.



Impairment of Goodwill. The Company periodically evaluates acquired
businesses for potential impairment indicators. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. Future events could cause the Company to
conclude that impairment indicators exist and that goodwill 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.



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 and/or reserve for product warranty and returns. Warranty reserve and allowance for product returns is established
based upon best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While we believe that our warranty 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 would differ and additional allowances may be required.



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.



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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
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 and earnings, but do impact the fair market value
of such debt, assuming other factors are held constant. At July 26, 2003, we had variable rate debt of $41.0 million and fixed rate debt of $178.9 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.



Item 4. Controls and Procedures



As of the
end of the period covered by this report, 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-14. 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 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.



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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
| | --- |  | --------



| | 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



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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 8, 2003.





COLLINS & AIKMAN FLOORCOVERINGS, INC. (Registrant)By:

/s/ DARREL V.
MCCAYDarrel V. McCay Chief Financial Officer and Vice President (duly authorized officer and principal financial and accounting officer)




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