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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended October 29, 2005



or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



Commission File Number 000-22791



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COLLINS & AIKMAN FLOORCOVERINGS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|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.



Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).    Yes ̈No  x.



The Registrant had 1,000 shares of Common
Stock, par value $.01 per share, issued and outstanding as of December 9, 2005.



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES



INDEX



|          |  |                       |  |                                                                                                                          |  |     
|--------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ----
|          |  |                       |  |                                                                                                                          |  | Page
|Part I.   |  | Financial Information |  |                                                                                                                         
|          |  |                       | 
|          |  | Item 1.               |  | Financial Statements                                                                                                     |  |     
|          |  |                       | 
|          |  |                       |  | Consolidated Balance Sheets  As of October 29, 2005 and January 29, 2005                                                |  | 3   
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Operations  Thirteen Weeks and Thirty-Nine Weeks Ended October 29, 2005 and October 30, 2004 |  | 4   
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Stockholders Equity  Thirty-Nine Weeks Ended October 29, 2005                               |  | 5   
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Cash Flows  Thirty-Nine Weeks Ended October 29, 2005 and October 30, 2004                    |  | 6   
|          |  |                       | 
|          |  |                       |  | Notes to Consolidated Financial Statements                                                                               |  | 7   
|          |  |                       | 
|          |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                    |  | 26  
|          |  |                       | 
|          |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                                               |  | 35  
|          |  |                       | 
|          |  | Item 4.               |  | Controls and Procedures                                                                                                  |  | 35  
|          |  |                      
|Part II.  |  | Other Information     |  |                                                                                                                         
|          |  |                       | 
|          |  | Item 1.               |  | Legal Proceedings                                                                                                        |  | 36  
|          |  |                       | 
|          |  | Item 5.               |  | Other Information                                                                                                        |  | 36  
|          |  |                       | 
|          |  | Item 6.               |  | Exhibits                                                                                                                 |  | 37  
|          | 
|Signature |  | 38                   



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PART I  FINANCIAL INFORMATION



Item 1. Financial Statements



COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)



|                                                                                                                 |  |                 |   |  |                 |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------- | - |  | --------------- | -
|                                                                                                                 |  | October 29,2005 |   |  | January 29,2005 |  
|                                                                                                                 |  | (Unaudited)     |   |  |                 |  
|ASSETS                                                                                                           |  |                 |   |  |                 |  
|CURRENT ASSETS:                                                                                                  |  |                 |   |  |                 |  
|Cash and Cash Equivalents                                                                                        |  | 16,632          |   |  | 25,726          |  
|Accounts Receivable, net of allowances of $1,012 and $822 in fiscal 2005 and 2004, respectively                  |  | 43,515          |   |  | 41,863          |  
|Inventories                                                                                                      |  | 44,257          |   |  | 38,978          |  
|Deferred Tax Assets                                                                                              |  | 6,525           |   |  | 5,412           |  
|Prepaid Expenses and Other                                                                                       |  | 1,739           |   |  | 1,813           |  
|                                                                                                                 |  |                 |   |  |                 |  
|Total Current Assets                                                                                             |  | 112,668         |   |  | 113,792         |  
|PROPERTY, PLANT AND EQUIPMENT, net                                                                               |  | 71,105          |   |  | 67,687          |  
|GOODWILL                                                                                                         |  | 98,378          |   |  | 98,378          |  
|OTHER INTANGIBLE ASSETS, net                                                                                     |  | 29,138          |   |  | 31,143          |  
|OTHER ASSETS                                                                                                     |  | 6,409           |   |  | 7,610           |  
|                                                                                                                 |  |                 |   |  |                 |  
|TOTAL ASSETS                                                                                                     |  | 317,698         |   |  | 318,610         |  
|                                                                                                                 |  |                 |   |  |                 |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                             |  |                 |   |  |                 |  
|CURRENT LIABILITIES:                                                                                             |  |                 |   |  |                 |  
|Accounts Payable                                                                                                 |  | 17,378          |   |  | 18,213          |  
|Accrued Expenses                                                                                                 |  | 19,428          |   |  | 28,228          |  
|Current Portion of Long-Term Debt                                                                                |  | 3,827           |   |  | 713             |  
|                                                                                                                 |  |                 |   |  |                 |  
|Total Current Liabilities                                                                                        |  | 40,633          |   |  | 47,154          |  
|OTHER LIABILITIES, including post-retirement benefit obligation                                                  |  | 4,620           |   |  | 4,884           |  
|DEFERRED TAX LIABILITIES                                                                                         |  | 7,579           |   |  | 4,979           |  
|LONG-TERM DEBT, net of current portion                                                                           |  | 214,983         |   |  | 207,536         |  
|MINORITY INTEREST                                                                                                |  | 416             |   |  | 440             |  
|COMMITMENTS AND CONTINGENCIES (Note 14)                                                                          |  |                |   |  |                |  
|STOCKHOLDERS EQUITY:                                                                                            |  |                 |   |  |                 |  
|Common Stock ($.01 par value per share, 1,000 shares authorized, issued and outstanding in fiscal 2005 and 2004) |  |                |   |  |                |  
|Paid-in Capital                                                                                                  |  | 72,648          |   |  | 72,648          |  
|Retained Deficit                                                                                                 |  | (23,035         | ) |  | (17,806         | )
|Accumulated Other Comprehensive Income (Loss):                                                                   |  |                 |   |  |                 |  
|Foreign Currency Translation Adjustment                                                                          |  | 808             |   |  | (271            | )
|Minimum Pension Liability Adjustment, net of tax                                                                 |  | (954            | ) |  | (954            | )
|                                                                                                                 |  |                 |   |  |                 |  
|Total Stockholders Equity                                                                                       |  | 49,467          |   |  | 53,617          |  
|                                                                                                                 |  |                 |   |  |                 |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |  | 317,698         |   |  | 318,610         |  
|                                                                                                                 |  |                 |   |  |                 |  



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 OPERATIONS

(Unaudited and In Thousands)



|                                                 |  |                      |        |   |                         |   |        |                 |  |   |                 |   |  |   |        
|------------------------------------------------ |  | -------------------- | ------ | - | ----------------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | -------
|                                                 |  | Thirteen Weeks Ended |        |   | Thirty-Nine Weeks Ended
|                                                 |  | October 29,2005      |        |   | October 30,2004         |   |        | October 29,2005 |  |   | October 30,2004
|Net Sales                                        |  | $                    | 81,746 |   |                         | $ | 82,501 |                 |  | $ | 245,134         |   |  | $ | 259,788
|                                                 |  |                      |        |   |                         |   |        |                 |  |   |                 |   |  |   |        
|Cost of Goods Sold                               |  |                      | 58,822 |   |                         |   | 55,014 |                 |  |   | 171,832         |   |  |   | 166,997
|Selling, General & Administrative Expenses       |  |                      | 20,529 |   |                         |   | 17,548 |                 |  |   | 60,473          |   |  |   | 58,682 
|Amortization                                     |  |                      | 614    |   |                         |   | 768    |                 |  |   | 2,006           |   |  |   | 2,299  
|                                                 |  |                      |        |   |                         |   |        |                 |  |   |                 |   |  |   |        
|Operating Expenses                               |  |                      | 79,965 |   |                         |   | 73,330 |                 |  |   | 234,311         |   |  |   | 227,978
|                                                 |  |                      |        |   |                         |   |        |                 |  |   |                 |   |  |   |        
|Operating Income                                 |  |                      | 1,781  |   |                         |   | 9,171  |                 |  |   | 10,823          |   |  |   | 31,810 
|                                                 |  |                      |        |  
|Minority Interest in (Income) Loss of Subsidiary |  |                      | (15    | ) |                         |   | (2     | )               |  |   | 24              |   |  |   | 20     
|Equity in Earnings of Affiliate                  |  |                      |       |   |                         |   | 117    |                 |  |   |                |   |  |   | 893    
|Loss on Disposal of Fixed Assets                 |  |                      | 31     |   |                         |   |       |                 |  |   | 125             |   |  |   |       
|Net Interest Expense                             |  |                      | 5,357  |   |                         |   | 4,876  |                 |  |   | 15,350          |   |  |   | 15,149 
|Other Expense                                    |  |                      |       |   |                         |   | 133    |                 |  |   |                |   |  |   | 133    
|                                                 |  |                      |        |   |                         |   |        |                 |  |   |                 |   |  |   |        
|Income (Loss) Before Income Taxes                |  |                      | (3,622 | ) |                         |   | 4,277  |                 |  |   | (4,628          | ) |  |   | 17,441 
|Income Tax Expense                               |  |                      | 198    |   |                         |   | 2,450  |                 |  |   | 601             |   |  |   | 8,418  
|                                                 |  |                      |        |   |                         |   |        |                 |  |   |                 |   |  |   |        
|Net Income (Loss)                                |  | $                    | (3,820 | ) |                         | $ | 1,827  |                 |  | $ | (5,229          | ) |  | $ | 9,023  
|                                                 |  |                      |        |   |                         |   |        |                 |  |   |                 |   |  |   |        



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 THIRTY-NINE WEEKS ENDED OCTOBER 29, 2005

(Unaudited and In Thousands, Except Share Amounts)



|                                        |  |              |  |        |   |                |                                               |                 |  |   |                                       |   |  |                                      |       |   |       |   |      |   |  |   |        |  
|--------------------------------------- |  | ------------ |  | ------ | - | -------------- | --------------------------------------------- | --------------- |  | - | ------------------------------------- | - |  | ------------------------------------ | ----- | - | ----- | - | ---- | - |  | - | ------ | -
|                                        |  | Common Stock |  |        |   |                | Accumulated Other Comprehensive Income (Loss) |                 |  |   |                                      
|                                        |  | Shares       |  | Amount |   | Paid-inCapital |                                               | RetainedDeficit |  |   | Foreign CurrencyTranslationAdjustment |   |  | Minimum Pension Liability Adjustment |       |   | Total |  
|BALANCE, January 29, 2005               |  | 1,000        |  | $      |  |                | $                                             | 72,648          |  | $ | (17,806                               | ) |  | $                                    | (271  | ) |       | $ | (954 | ) |  | $ | 53,617 |  
|                                        |  |              |  |        |   |                |                                               |                 |  |   |                                       |   |  |                                      |       |   |       |   |      |   |  |   |        |  
|Net Loss                                |  |             |  |        |  |                |                                               |                |  |   | (5,229                                | ) |  |                                      |      |   |       |   |     |   |  |   | (5,229 | )
|Foreign Currency Translation Adjustment |  |             |  |        |  |                |                                               |                |  |   |                                      |   |  |                                      | 1,079 |   |       |   |     |   |  |   | 1,079  |  
|                                        |  |              |  |        |   |                |                                               |                 |  |   |                                       |   |  |                                      |       |   |       |   |      |   |  |   |        |  
|Total Comprehensive Income (Loss)       |  |             |  |        |  |                |                                               |                |  |   | (5,229                                | ) |  |                                      | 1,079 |   |       |   |     |   |  |   | (4,150 | )
|                                        |  |              |  |        |   |                |                                               |                 |  |   |                                       |   |  |                                      |       |   |       |   |      |   |  |   |        |  
|BALANCE, October 29, 2005               |  | 1,000        |  | $      |  |                | $                                             | 72,648          |  | $ | (23,035                               | ) |  | $                                    | 808   |   |       | $ | (954 | ) |  | $ | 49,467 |  
|                                        |  |              |  |        |   |                |                                               |                 |  |   |                                       |   |  |                                      |       |   |       |   |      |   |  |   |        |  



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 CASH FLOWS

(Unaudited and In Thousands)



|                                                                                                   |  |                         |        |   |                 |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | --------------- | - | ------- | -
|                                                                                                   |  | Thirty-Nine Weeks Ended |       
|                                                                                                   |  | October 29,2005         |        |   | October 30,2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                         |        |   |                 |   |         |  
|Net Income (Loss)                                                                                  |  | $                       | (5,229 | ) |                 | $ | 9,023   |  
|                                                                                                   |  |                         |        |   |                 |   |         |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                         |        |   |                 |   |         |  
|Depreciation and leasehold amortization                                                            |  |                         | 7,567  |   |                 |   | 7,688   |  
|Amortization of other intangible assets                                                            |  |                         | 2,006  |   |                 |   | 2,299   |  
|Amortization of deferred financing fees                                                            |  |                         | 1,259  |   |                 |   | 1,259   |  
|Change in deferred income tax                                                                      |  |                         | 1,487  |   |                 |   | 5,625   |  
|Equity in earnings of affiliate                                                                    |  |                         |       |   |                 |   | (893    | )
|Minority interest in loss of subsidiary                                                            |  |                         | (24    | ) |                 |   | (20     | )
|Loss on disposal of fixed assets                                                                   |  |                         | 125    |   |                 |   |        |  
|Changes in operating assets and liabilities:                                                       |  |                         |        |   |                 |   |         |  
|Accounts receivable                                                                                |  |                         | (1,652 | ) |                 |   | (4,445  | )
|Inventories                                                                                        |  |                         | (5,279 | ) |                 |   | (9,859  | )
|Accounts payable                                                                                   |  |                         | (835   | ) |                 |   | (1,743  | )
|Accrued expenses                                                                                   |  |                         | (8,800 | ) |                 |   | 3,127   |  
|Other, net                                                                                         |  |                         | (469   | ) |                 |   | 2,016   |  
|                                                                                                   |  |                         |        |   |                 |   |         |  
|Total adjustments                                                                                  |  |                         | (4,615 | ) |                 |   | 5,054   |  
|                                                                                                   |  |                         |        |   |                 |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                         | (9,844 | ) |                 |   | 14,077  |  
|                                                                                                   |  |                         |        |   |                 |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                         |        |   |                 |   |         |  
|Equity distribution from affiliate                                                                 |  |                         |       |   |                 |   | 922     |  
|Additions to property, plant, and equipment                                                        |  |                         | (9,597 | ) |                 |   | (6,647  | )
|                                                                                                   |  |                         |        |   |                 |   |         |  
|Net cash used in investing activities                                                              |  |                         | (9,597 | ) |                 |   | (5,725  | )
|                                                                                                   |  |                         |        |   |                 |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                         |        |   |                 |   |         |  
|Proceeds from revolving credit facilities                                                          |  |                         | 18,960 |   |                 |   | 15,280  |  
|Repayments of revolving credit facilities                                                          |  |                         | (8,888 | ) |                 |   | (15,280 | )
|Proceeds from issuance of long-term debt                                                           |  |                         | 749    |   |                 |   |        |  
|Repayments of long-term debt                                                                       |  |                         | (260   | ) |                 |   | (1,618  | )
|Financing costs                                                                                    |  |                         | (97    | ) |                 |   | (380    | )
|                                                                                                   |  |                         |        |   |                 |   |         |  
|Net cash provided by (used in) financing activities                                                |  |                         | 10,464 |   |                 |   | (1,998  | )
|                                                                                                   |  |                         |        |   |                 |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                       |  |                         | (117   | ) |                 |   | 163     |  
|                                                                                                   |  |                         |        |   |                 |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                            |  |                         | (9,094 | ) |                 |   | 6,517   |  
|CASH AND CASH EQUIVALENTS, beginning of period                                                     |  |                         | 25,726 |   |                 |   | 11,041  |  
|                                                                                                   |  |                         |        |   |                 |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                                                           |  | $                       | 16,632 |   |                 | $ | 17,558  |  
|                                                                                                   |  |                         |        |   |                 |   |         |  



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 and Critical Accounting Policies



The accompanying unaudited consolidated financial statements of Collins & Aikman Floorcoverings, Inc. (the Company) have been
prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) 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 US GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes
thereto included in the Companys Form 10-K for the year ended January 29, 2005, which was filed with the Securities and Exchange Commission on April 29, 2005. 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.



Significant accounting policies are more fully described in Note 2 to the audited consolidated financial statements included in the Companys Form
10-K for the year ended January 29, 2005. Certain of the accounting policies require the application of significant judgments 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 historical experience, terms of existing contracts, current economic trends in the industry, information
provided by customers, and information available from outside sources, as appropriate. The Companys significant accounting policies include:



Revenue Recognition. Revenue is recognized when goods are shipped, which is when legal title passes to the customer. For product installations subject to customer
approval, revenue is recognized upon acceptance by the customer. The Company provides certain installation services to customers utilizing independent third-party contractors. The billings and expenses for these services are included in net sales
and cost of goods sold, respectively. These billings and expenses were $10.6 million and $11.2 million for the thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively, and $4.7 million and $5.0 million for the thirteen
weeks ended October 29, 2005 and October 29, 2004, respectively.



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



Foreign Currency Translation.Effective July 31, 2005, the Companys Canadian subsidiary adopted the U.S. dollar as its functional currency. Prior to this date, the Canadian dollar had served as the
subsidiarys functional currency. The transition to the U.S. dollar as the functional currency is primarily due to the high volume of this subsidiarys transactions that are denominated in U.S. dollars, the high volume of intercompany
transactions, and the extensive interrelationship between the Companys U.S. operations and those of the Canadian subsidiary. The financial information of the Companys Canadian subsidiary for the quarter ended July 30, 2005 and prior
periods have been presented in U.S. dollars in accordance with a translation of convenience method using the exchange rate at July 30, 2005 of US$1.00 - CDN$1.2241, the Bank of Canada closing buying rate at July 30, 2005. For periods
subsequent to July 30, 2005, the Canadian dollar amounts are remeasured into the U.S. dollar reporting currency using the temporal method. When the temporal method is used to translate the local currency of a foreign entity into its functional
currency, the resulting translation adjustment is reported in the current periods statement of operations.



Assets and liabilities of the Companys United Kingdom (U.K.) and Asian subsidiaries are translated to U.S. dollars at period end exchange rates. Income
and expense items are translated at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of stockholders equity. Foreign currency gains (losses) are recognized in the current
periods statement of operations.



Foreign currency gains recognized in
the consolidated statements of operations were $0.1 million and $0.8 million for the thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively, and $0.8 million for the thirteen-week period ended October 30, 2004.
There was minimal foreign currency loss for the thirteen-week period ended October 29, 2005.



Impairment of Goodwill and Indefinite Lived Intangible Assets. In addition to the annual impairment tests required by Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, (SFAS No. 142) the Company may periodically evaluate the carrying value of its goodwill and indefinite lived intangible asset for potential impairment. Judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and operational performance. Future events could cause the Company to conclude that impairment indicators exist and that the goodwill and indefinite lived intangible asset associated



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



with acquired businesses is impaired. Any
resulting impairment loss could have a material adverse effect on the Companys financial condition and results of operations.



Accounts Receivable Allowances. 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.



Inventories. 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.



Income Taxes. The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and
their reported amounts in the consolidated financial statements using statutory rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the rate change.



2. Organization



Collins & Aikman Floorcoverings, Inc., a Delaware corporation, is a
manufacturer of floorcovering products principally 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 name for a wide variety of end markets, including corporate offices, education, healthcare, government
facilities and retail stores. 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. The Company is
headquartered in Georgia, with additional manufacturing locations in Canada, the U.K., and China.



The Company is a wholly-owned subsidiary of Tandus Group, Inc. Subsequent to a recapitalization transaction on January 25, 2001, investment funds
managed by Oaktree Capital Management, LLC and Banc of America Capital Investors control a majority of the outstanding capital stock of Tandus Group, Inc.



3. Reclassifications



Certain reclassifications have been made to the prior periods to conform to the current period 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. The Company invests its excess cash in short-term investments and has not experienced any losses on those investments.



5. Inventories



Net inventory balances are summarized below (in thousands):



|                |  |                 |        |                 |   |       
|--------------- |  | --------------- | ------ | --------------- | - | ------
|                |  | October 29,2005 |        | January 29,2005
|                |  | (Unaudited)     |        |                
|Raw materials   |  | $               | 20,983 |                 | $ | 20,315
|Work in process |  |                 | 6,949  |                 |   | 5,634 
|Finished goods  |  |                 | 16,325 |                 |   | 13,029
|                |  |                 |        |                 |   |       
|                |  | $               | 44,257 |                 | $ | 38,978
|                |  |                 |        |                 |   |       



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



6. Accrued Expenses



Accrued expenses are summarized below (in thousands):



|                              |  |                 |        |                 |   |       
|----------------------------- |  | --------------- | ------ | --------------- | - | ------
|                              |  | October 29,2005 |        | January 29,2005
|                              |  | (Unaudited)     |        |                
|Payroll and employee benefits |  | $               | 8,107  |                 | $ | 12,178
|Customer claims               |  |                 | 1,994  |                 |   | 2,715 
|Accrued interest              |  |                 | 3,949  |                 |   | 8,085 
|Accrued professional fees     |  |                 | 3,311  |                 |   | 3,184 
|Other                         |  |                 | 2,067  |                 |   | 2,066 
|                              |  |                 |        |                 |   |       
|                              |  | $               | 19,428 |                 | $ | 28,228
|                              |  |                 |        |                 |   |       



Included in the October 29, 2005
and January 29, 2005 balances are $0.1 million and $0.8 million, respectively, related to the Companys facility maximization project (see Note 15).



7. Goodwill and Other Intangible Assets



The gross carrying amount and accumulated amortization of the intangible assets subject to amortization as of October 29, 2005 are as follows (in
thousands):



|                             |  |                      |        |                         |   |       
|---------------------------- |  | -------------------- | ------ | ----------------------- | - | ------
|                             |  | October 29, 2005    
|                             |  | Gross CarryingAmount |        | AccumulatedAmortization
|Amortized intangible assets: |  |                      |        |                         |   |       
|Patent                       |  | $                    | 27,000 |                         | $ | 21,476
|Supply Agreement             |  |                      | 8,000  |                         |   | 8,000 
|                             |  |                      |        |                         |   |       
|Total                        |  | $                    | 35,000 |                         | $ | 29,476
|                             |  |                      |        |                         |   |       



The patent is being
amortized over an eleven-year period using the straight-line method. The supply agreement, which was fully amortized as of October 29, 2005, was amortized over a three-year period using the straight-line method.



Unamortized intangible assets with an indefinite life (other than goodwill):



|           |  |   |       
|---------- |  | - | ------
|Trade name |  | $ | 23,614
|           |  |   |       



|                                |  |                      |     |                         |   |                 |  |                 |       |  |   |      
|------------------------------- |  | -------------------- | --- | ----------------------- | - | --------------- |  | --------------- | ----- |  | - | -----
|                                |  | Thirteen Weeks Ended |     | Thirty-Nine Weeks Ended
|                                |  | October 30,2004      |     | October 29,2005         |   | October 30,2004 |  | October 29,2005
|Aggregate amortization expense  |  | $                    | 768 |                         | $ | 614             |  | $               | 2,299 |  | $ | 2,006
|                                |  |                      |     |                         |   |                 |  |                 |       |  |   |      
|Estimated amortization expense: |  |                      |     |                         |   |                 |  |                 |       |  |   |      
|Fiscal 2005                     |  |                      |     |                         |   |                 |  |                 |       |  | $ | 2,619
|Fiscal 2006                     |  |                      |     |                         |   |                 |  |                 |       |  | $ | 2,455
|Fiscal 2007                     |  |                      |     |                         |   |                 |  |                 |       |  | $ | 2,455
|Fiscal 2008                     |  |                      |     |                         |   |                 |  |                 |       |  | $ |     
|Fiscal 2009                     |  |                      |     |                         |   |                 |  |                 |       |  | $ |     



For the period ended
October 29, 2005, there were no changes to the carrying value of goodwill.



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



8. Stock Based Compensation



As of October 29, 2005, the Company had one stock-based employee
compensation plan, which is described more fully in Note 12 of the audited consolidated financial statements included in the Companys Form 10-K for the year ended January 29, 2005. The Company accounts for this plan under the recognition
and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, (APB Opinion No. 25) and related interpretations. The Company accounts for these
options as variable options and records expense based on increases and decreases in the fair market value of the Companys common stock at the end of each reporting period. These options vest only upon the achievement of certain earnings
targets, as defined. As of October 29, 2005 and October 30, 2004, the Company had not recorded any expense related to this plan as the Company had not achieved its earnings targets, and the fair market value of the Companys common
stock has not increased from the date of grant.



The following
table illustrates the effect on net income if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation,
(SFAS No. 123) to the stock-based employee compensation (in thousands):



|                                                                                                                                |  |                      |        |                         |                 |   |                 |  |   |                 |   |  |   |      
|------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | ----------------------- | --------------- | - | --------------- |  | - | --------------- | - |  | - | -----
|                                                                                                                                |  | Thirteen Weeks Ended |        | Thirty-Nine Weeks Ended
|                                                                                                                                |  | October 29,2005      |        |                         | October 30,2004 |   | October 29,2005 |  |   | October 30,2004
|Net income (loss), as reported                                                                                                  |  | $                    | (3,989 | )                       |                 | $ | 1,827           |  | $ | (5,398          | ) |  | $ | 9,023
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of
tax |  |                      | 9      |                         |                 |   | 6               |  |   | 25              |   |  |   | 24   
|                                                                                                                                |  |                      |        |                         |                 |   |                 |  |   |                 |   |  |   |      
|Proforma net income (loss)                                                                                                      |  | $                    | (3,998 | )                       |                 | $ | 1,821           |  | $ | (5,423          | ) |  | $ | 8,999
|                                                                                                                                |  |                      |        |                         |                 |   |                 |  |   |                 |   |  |   |      



9. Recent Accounting Pronouncements



In October 2005, the FASB issued FASB Staff Position FAS
123(R)-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R) (FSP FAS 123(R)-2). FSP FAS 123(R)-2 provides an exception to the application of the concept of mutual
understanding as expressed in FASB Statement No. 123(R), Share-Based Payment (SFAS No. 123(R)), regarding the determination of whether a grant date or measurement date, as applicable, has occurred. The
exception permits companies to measure compensation cost for equity awards to employees on the Board approval date if certain conditions are met, provided that the communication to the employees occurs within a relatively short period of
time from the approval date. The guidance in FSP FAS 123(R)-2 is to be applied upon initial adoption of SFAS No, 123(R), or to the first reporting period after October 18, 2005, for which financial statements or interim reports have not
been issued should an entity have previously adopted the provisions of SFAS No. 123(R). The Company does not expect the adoption of FSP FAS 123(R)-2 to have a material impact on its consolidated financial statements.



In October 2005, the FASB issued FASB Staff Position FAS 13-1,
Accounting for Rental Costs Incurred during a Construction Period (FSP FAS 13-1). FSP FAS 13-1 states that rental costs associated with ground or building operating leases that are incurred during a construction period should
be recognized as rental expense and included in income from continuing operations. The guidance is to be applied to the first reporting period beginning after December 15, 2005. Early adoption and retrospective application are permitted but not
required. The Company does not expect the adoption of the provisions of FSP FAS 13-1 to have a material impact on its consolidated financial statements.



In August 2005, the FASB issued FASB Staff Position FAS 123(R)-1, Classification and Measurement of Freestanding Financial Instruments Originally
Issued in Exchange for Employee Services under FASB Statement No. 123(R) (FSP FAS 123(R)-1). FSP FAS 123(R)-1 defers indefinitely the requirement of SFAS No. 123(R) that a share-based payment to an employee subject to
SFAS No. 123(R) becomes subject to the recognition and measurement requirements of other applicable GAAP when the rights conveyed by the instrument are no longer dependent on the holder being an employee. A freestanding instrument issued to an
employee in exchange for past or future employee services that is subject to SFAS No. 123(R) or was subject to SFAS No. 123 (R) upon initial adoption shall continue to be subject to the recognition and measurement provisions of SFAS
No. 123(R) throughout the life of the instrument, unless its terms are modified when the holder is no longer an employee. The deferral excludes awards exchanged for nonemployee services or a combination of employee and nonemployee services. The
deferral does not have a material impact on the Companys consolidated financial statements.



In July 2005, the FASB issued FASB Staff Position APB 18-1, Accounting by an Investor for its Proportionate Share of Other Comprehensive Income of
an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18, The Equity



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Method of Accounting for Investments in Common
Stock, upon a Loss of Significant Influence (FSP APB 18-1). FSP APB 18-1 requires that if an investor loses significant influence over an investee, the investors proportionate share of the investees equity adjustments
for Other Comprehensive Income should be offset against the carrying value of the investment at the time significant influence is lost by the investor. To the extent that the offset results in a negative carrying value of the investment, an investor
should reduce the carrying value of the investment to zero and record the remaining balance in income. FSP APB 18-1 is effective as of the first reporting period beginning after July 12, 2005. Comparative financial statements shall be
retrospectively adjusted to reflect application of these provisions. The adoption of FSP APB 18-1 did not have an impact on the Companys consolidated financial statements.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections-a replacement of APB Opinion
No. 20 and FASB Statement No. 3 (SFAS No. 154). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS No. 154 requires retrospective application to prior periods financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that the adoption of SFAS No. 154 will have a
material impact on the Companys consolidated financial statements.



In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (FIN 47), which
requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. The Company does not expect the adoption of FIN 47 to have a material impact on its consolidated financial statements.



In December 2004, the FASB issued FASB Staff Position 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes
(SFAS No. 109) to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (FSP 109-1). The American Jobs Creation Act of 2004 (the Jobs Act), enacted
October 22, 2004, introduces a special tax deduction of up to 9.0 percent when fully phased in, of the lesser of qualified production activities income or taxable income. FSP 109-1 clarifies that this deduction should be accounted
for as a special tax deduction in accordance with SFAS No. 109. The Company is currently evaluating the benefit, if any, that FSP No. 109-1 will have on its consolidated financial statements, and expects to complete the evaluation within
the fourth quarter of fiscal year 2005.



In December 2004, the
FASB issued FASB Staff Position 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2), which provides guidance under SFAS
No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial
reporting period of enactment for purposes of applying FASB Statement No. 109. The Company has not yet completed evaluating the impact of the repatriation provisions and has not adjusted its tax expense or deferred tax liability to reflect the
repatriation provisions of the Jobs Act.



In December 2004, the
FASB issued SFAS No. 123R, Share-Based Payment (SFAS No. 123R). This statement is a revision to SFAS No. 123 and supersedes APB Opinion No. 25. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Companies will be
required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an
employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models.
If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the
modification. SFAS No. 123R will be effective for fiscal years beginning after June 15, 2005, due to the Securities and Exchange Commissions Rule 2005-57, which amended the effective date of SFAS No. 123R. Accordingly the
Company will adopt SFAS No. 123R on January 29, 2006. The Company does not expect that the adoption of SFAS No. 123R will have a material impact on the Companys consolidated financial statements.



In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 151, Inventory Costs-An Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4,



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and
re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of so abnormal as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixed production
overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating SFAS No. 151 and does not
expect it to have a material impact on the Companys consolidated financial statements.



10. Long-Term Debt



Effective October 29, 2005, the Company amended its Senior Credit Facility to modify certain financial covenants. The amendment eliminated the interest coverage ratio requirement and modified the minimum fixed charge coverage ratio (as
defined) for third quarter of fiscal 2005 and all future measurement periods to be 1.0 to 1.0. The amendment also provides for the incurrence of additional costs related to the Companys broadloom consolidation project. There was no
modification to the senior leverage ratio covenant. The Company was in compliance with all covenants as of October 29, 2005 and currently expects to remain in compliance throughout fiscal 2005, although no assurances to that effect can be
given. In addition to the modification to the covenants, the amendment reset the Companys $5 million investment basket and provides the Company the ability to purchase its Subordinated Notes subject to a minimum senior leverage ratio and
minimum liquidity requirements. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Senior Credit Facility, the Company will also be subject to the provisions of a cross-default for the 9.75%
Senior Subordinated Notes (the 9.75% Notes).



Total
net interest expense was $5.4 million and $4.8 million for the thirteen weeks ended October 29, 2005 and October 30, 2004, respectively, which included minimal interest income. Total net interest expense was $15.4 million and $15.1 million
for the thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively, which included $0.2 million and $0.1 million of interest income, respectively.



11. Segment Information



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



Accounting policies of the segments are the same as those described in the discussion of significant accounting policies in Note 1 contained herein. Performance of the segments is evaluated on Adjusted EBITDA, which
represents earnings before interest, taxes, depreciation, amortization, non-cash charges or expenses (other than the write-down of current assets), costs related to board approved acquisitions and attempted acquisitions, expenses related to the
facility maximization project plus Chroma cash dividends and minority interest in income (loss) of subsidiary less equity in earnings of Chroma.



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



No single customer represented 10.0% or more of the floorcovering
segments sales for any period presented. The Extrusion segments largest customer accounted for 24.7% and 18.1% of sales in the thirteen weeks and thirty-nine weeks ended October 29, 2005, respectively. In the thirteen weeks ended
October 30, 2004, this segments four largest external customers accounted for 25.5%, 25.1%, 14.3%, and 10.3% of sales. The largest external customer accounted for 40.5% and the second largest external customer accounted for 14.1% of sales
in the thirty-nine weeks ended October 30, 2004.



The tables below provide certain financial information by segment (in thousands):



|                                  |  |                      |        |                         |   |                 |  |                 |         |  |   |        
|--------------------------------- |  | -------------------- | ------ | ----------------------- | - | --------------- |  | --------------- | ------- |  | - | -------
|                                  |  | Thirteen Weeks Ended |        | Thirty-Nine Weeks Ended
|                                  |  | October 29,2005      |        | October 30,2004         |   | October 29,2005 |  | October 30,2004
|Net Sales to External Customers   |  |                      |        |                         |   |                 |  |                 |         |  |   |        
|Floorcoverings                    |  | $                    | 75,319 |                         | $ | 76,835          |  | $               | 225,678 |  | $ | 241,762
|Extrusion                         |  |                      | 6,427  |                         |   | 5,666           |  |                 | 19,456  |  |   | 18,026 
|                                  |  |                      |        |                         |   |                 |  |                 |         |  |   |        
|Total Sales To External Customers |  | $                    | 81,746 |                         | $ | 82,501          |  | $               | 245,134 |  | $ | 259,788
|                                  |  |                      |        |                         |   |                 |  |                 |         |  |   |        



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|                      |  |                      |       |                         |   |                 |  |                 |        |  |   |       
|--------------------- |  | -------------------- | ----- | ----------------------- | - | --------------- |  | --------------- | ------ |  | - | ------
|                      |  | Thirteen Weeks Ended |       | Thirty-Nine Weeks Ended
|                      |  | October 29,2005      |       | October 30,2004         |   | October 29,2005 |  | October 30,2004
|Adjusted EBITDA       |  |                      |       |                         |   |                 |  |                 |        |  |   |       
|Floorcoverings        |  | $                    | 5,681 |                         | $ | 12,710          |  | $               | 24,606 |  | $ | 40,843
|Extrusion             |  |                      | 1,111 |                         |   | 816             |  |                 | 3,481  |  |   | 2,894 
|                      |  |                      |       |                         |   |                 |  |                 |        |  |   |       
|Total Adjusted EBITDA |  | $                    | 6,792 |                         | $ | 13,526          |  | $               | 28,087 |  | $ | 43,737
|                      |  |                      |       |                         |   |                 |  |                 |        |  |   |       



A reconciliation of
net income (loss) as reported in the consolidated statements of operations to Adjusted EBITDA as shown above is as follows (in thousands):



|                                                 |  |                      |        |   |                         |   |        |                 |  |   |                 |   |  |   |        |  
|------------------------------------------------ |  | -------------------- | ------ | - | ----------------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------ | -
|                                                 |  | Thirteen Weeks Ended |        |   | Thirty-Nine Weeks Ended |  
|                                                 |  | October 29,2005      |        |   | October 30,2004         |   |        | October 29,2005 |  |   | October 30,2004 |  
|Net income (loss)                                |  | $                    | (3,820 | ) |                         | $ | 1,827  |                 |  | $ | (5,229          | ) |  | $ | 9,023  |  
|Income tax expense                               |  |                      | 198    |   |                         |   | 2,450  |                 |  |   | 601             |   |  |   | 8,418  |  
|Net interest expense                             |  |                      | 5,357  |   |                         |   | 4,876  |                 |  |   | 15,350          |   |  |   | 15,149 |  
|Depreciation                                     |  |                      | 2,532  |   |                         |   | 2,569  |                 |  |   | 7,567           |   |  |   | 7,688  |  
|Amortization                                     |  |                      | 614    |   |                         |   | 768    |                 |  |   | 2,006           |   |  |   | 2,299  |  
|Chroma cash dividends                            |  |                      |       |   |                         |   |       |                 |  |   |                |   |  |   | 922    |  
|Equity in earnings of Chroma                     |  |                      |       |   |                         |   | (117   | )               |  |   |                |   |  |   | (893   | )
|Facility maximization costs                      |  |                      | 1,865  |   |                         |   | 1,018  |                 |  |   | 7,691           |   |  |   | 1,018  |  
|Loss on disposal of fixed assets                 |  |                      | 31     |   |                         |   |       |                 |  |   | 125             |   |  |   |       |  
|Minority interest in income (loss) of subsidiary |  |                      | 15     |   |                         |   | 2      |                 |  |   | (24             | ) |  |   | (20    | )
|Other noncash expense                            |  |                      |       |   |                         |   | 133    |                 |  |   |                |   |  |   | 133    |  
|                                                 |  |                      |        |   |                         |   |        |                 |  |   |                 |   |  |   |        |  
|Adjusted EBITDA                                  |  | $                    | 6,792  |   |                         | $ | 13,526 |                 |  | $ | 28,087          |   |  | $ | 43,737 |  
|                                                 |  |                      |        |   |                         |   |        |                 |  |   |                 |   |  |   |        |  



Consolidated EBITDA as
defined under the Companys Senior Credit Facility provides for additional adjustments.



|                          |  |                       |         |                       |   |        
|------------------------- |  | --------------------- | ------- | --------------------- | - | -------
|                          |  | As ofOctober 29, 2005 |         | As ofJanuary 29, 2005
|                          |  | (Unaudited)           |         |                      
|Consolidated Assets       |  |                       |         |                       |   |        
|Floorcoverings            |  | $                     | 291,295 |                       | $ | 291,525
|Extrusion                 |  |                       | 26,403  |                       |   | 27,085 
|                          |  |                       |         |                       |   |        
|Total Consolidated Assets |  | $                     | 317,698 |                       | $ | 318,610
|                          |  |                       |         |                       |   |        



12. Investment in Equity Affiliate



During the fourth quarter of fiscal 2004, the Company
successfully negotiated its exit from the Chroma partnership and entered into the Chroma Transition Agreement with Dixie Group, Inc. (Dixie) to allow for the transition of dyeing and finishing services needed until the Santa Ana,
California manufacturing facility has been closed. Prior to the execution of this Agreement, Monterey Color Systems, Inc. (Monterey Color Systems), a wholly-owned subsidiary of Monterey Carpets, Inc., had a fifty percent
(50%) ownership interest in Chroma, which operates a carpet dyeing and finishing plant. Because the Company did not exercise control over Chroma, the Company accounted for its interest in Chroma under the equity method of accounting.



On August 11, 2004, Monterey gave notice to Dixie that it
had elected to terminate its supply arrangement with Chroma effective August 2005. Chroma had historically dyed and finished substantially all of Montereys carpet production and Dixies Fabrica Divisions carpet production and
performed dyeing and finishing operations for other carpet mills. The Chroma Transition Agreement provided for the Companys withdrawal from the partnership and for the transition of the continued dyeing and finishing needs of Monterey, until
the closing of the Santa Ana, California facility was completed. A charge of $0.2 million was recorded as of October 30, 2004 to reflect the negotiated settlement related to Montereys early termination of its Dyeing and Finishing
Agreement with Chroma and withdrawal from the Chroma Partnership. Production at the Santa Ana, California facility had ceased by the end of the Companys third fiscal quarter in 2005.



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



13. Comprehensive Income



Comprehensive income is as follows (in thousands):



|                                        |  |                      |        |                         |                 |   |                 |  |   |                 |   |  |   |      
|--------------------------------------- |  | -------------------- | ------ | ----------------------- | --------------- | - | --------------- |  | - | --------------- | - |  | - | -----
|                                        |  | Thirteen Weeks Ended |        | Thirty-Nine Weeks Ended
|                                        |  | October 29,2005      |        |                         | October 30,2004 |   | October 29,2005 |  |   | October 30,2004
|Net income (loss)                       |  | $                    | (3,820 | )                       |                 | $ | 1,827           |  | $ | (5,229          | ) |  | $ | 9,023
|Other comprehensive income (loss):      |  |                      |        |                         |                 |   |                 |  |   |                 |   |  |   |      
|Foreign currency translation adjustment |  |                      | (333   | )                       |                 |   | 522             |  |   | 1,079           |   |  |   | 491  
|                                        |  |                      |        |                         |                 |   |                 |  |   |                 |   |  |   |      
|Comprehensive income (loss)             |  | $                    | (4,153 | )                       |                 | $ | 2,349           |  | $ | (4,150          | ) |  | $ | 9,514
|                                        |  |                      |        |                         |                 |   |                 |  |   |                 |   |  |   |      



14. Commitments &
Contingencies



On June 21, 2005, the Company filed in
Rome, Georgia a joint lawsuit with Shaw Industries Group, Inc. (Shaw) and Mohawk Industries, Inc. (Mohawk) against Interface Corporation, regarding a patent on a particular pattern of carpet tile that Interface recently
received (the Rome Action). The Rome Action asks the court to declare that the Interface patent is invalid, unenforceable and not infringed. Interface, on the same day, filed separate suits in Atlanta, Georgia against the Company and
other carpet manufacturers asserting infringement of the aforementioned patent. In response to motions filed both in the Rome Action and with the court in Atlanta, Interfaces suits against the Company, Shaw and Mohawk were transferred to Rome,
Georgia and consolidated with the Rome Action. The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. The parties are preparing a joint preliminary report and discovery plan that will be filed with the court on December 21, 2005.



As previously reported, Employers Mutual Insurance Companies
(EMC) filed suit in the United States District Court for the Southern District of Iowa on August 6, 2002 alleging that carpet tile sold by the Company to EMC in 1996 and 1997 experienced premature wearing and discoloration, and asserted
that the Company should pay damages based upon theories of violation of warranties, negligence and fraud. On March 18, 2004, the jury entered a verdict in favor of the Company on the fraudulent misrepresentation and fraudulent nondisclosure claims
and in favor of EMC on the express oral warranty and implied warranty of fitness for particular purpose and awarded EMC $0.8 million in damages for full replacement of this carpet. The Company appealed and on August 16, 2005, the appellate court
granted the Companys appeal. Subsequently, on September 12, 2005, EMC agreed to terminate its suit, releasing the Company of all liability for damages. Accordingly, the Company released the litigation accrual related to this suit in full in
the third quarter of fiscal 2005.



Monterey Carpets, Inc.,
(Monterey) in connection with its previous 50% ownership interest in Chroma Systems Partners (Chroma), is a co-defendant in an alleged claim by Enron Energy Services, Inc. (Enron) that Chroma and its partners are
liable for amounts related to certain energy contracts which existed between Chroma and Enron prior to the filing of Enrons Chapter 11 proceedings. The Company has agreed to enter into a $0.4 million settlement agreement, pending approval by
the bankruptcy court. During fiscal 2004, Monterey terminated its partnership interest in Chroma as part of the facility maximization project.



From time to time the Company is subject to claims and suits arising in the ordinary course of business, including workers compensation and product
liability claims, which may or may not be covered by insurance. Management believes that the various asserted claims and litigation in which the Company is currently involved will not have a material adverse effect on its financial position or
results of operations.



15. Facility Maximization Project



On August 10, 2004, the Company and its parent announced its intent to
close its manufacturing facility in Santa Ana, California, and transfer the production to its existing Truro, Nova Scotia, Canada facility (the facility maximization project). The facility maximization project was approved by the
Companys Board of Directors on August 9, 2004, and the transition of all production processes was completed by the end of the Companys third fiscal quarter in 2005. The Company had previously expected that the consolidation of the
facilities would be completed by the end of the Companys first fiscal quarter. However, the transfer of production was slowed to accommodate the training of associates and the completion of certain manufacturing system enhancements. During the
delayed transition the Company experienced production inefficiencies which resulted in delayed deliveries to its customers. While the production processes have been transferred, it is currently estimated that the Company will incur an additional
$0.3 million of costs during the fourth fiscal quarter of 2005 primarily related to contingencies and other miscellaneous expenses to finalize the completion of the project. The benefits of the project are expected to begin to impact the
Companys statement of operations in the first fiscal quarter of 2006.



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



During the thirty-nine weeks of
fiscal 2005, the Company incurred approximately $7.7 million in costs associated with the facility maximization project, which consist of temporary production inefficiencies, equipment movement and installation costs, professional fees, severance
and other related costs. Cost of goods sold included $5.8 million and selling, general and administrative expenses included $1.9 million of these expenses in the accompanying consolidated statements of operations. In addition, capital expenditure
costs related to the project were $2.1 million during the thirty-nine weeks ended October 29, 2005. The Company anticipates total capital expenditures of approximately $4.7 million related to the project, $1.9 million more than originally
anticipated.



As part of the facility maximization project, the
Company negotiated with the Nova Scotia government the forgiveness of debt consisting of the remaining $1.2 million of Crossleys outstanding sinking fund bonds. The forgiveness will commence in the fourth quarter of fiscal 2005, will be over
the remaining five-year term of the current note, and is based upon maintaining a defined level of full-time equivalent employees during the year. The debt is also non-interest bearing.



The costs incurred and the anticipated expenditures remaining are as follows (in millions):



|                                              |  |                                                     |     |                                                         |   |      |                                       |  |                                  |      |  |   |    
|--------------------------------------------- |  | --------------------------------------------------- | --- | ------------------------------------------------------- | - | ---- | ------------------------------------- |  | -------------------------------- | ---- |  | - | ---
|(Amounts in millions)                         |  | Anticipated TotalExpenditures as of August 10, 2004 |     | Change in Estimate ofExpenditures as ofOctober 29, 2005 |   |      | Amounts Incurredas of October 29,2005 |  | AnticipatedRemainingExpenditures
|Severance Costs                               |  | $                                                   | 1.8 |                                                         | $ | 0.3  |                                       |  | $                                | 2.1  |  | $ |   
|Contractual Obligations and Professional Fees |  |                                                     | 3.1 |                                                         |   | (1.9 | )                                     |  |                                  | 1.2  |  |   |   
|Other Project Costs                           |  |                                                     | 1.5 |                                                         |   | 7.2  |                                       |  |                                  | 8.4  |  |   | 0.3
|                                              |  |                                                     |     |                                                         |   |      |                                       |  |                                  |      |  |   |    
|Gross Project Expenditures                    |  | $                                                   | 6.4 |                                                         | $ | 5.6  |                                       |  | $                                | 11.7 |  | $ | 0.3
|                                              |  |                                                     |     |                                                         |   |      |                                       |  |                                  |      |  |   |    



The accrued facility
maximization costs at October 29, 2005 and January 29, 2005 amounted to $0.1 million and $0.8 million, respectively, which consisted of severance and other project related costs. These costs are included in accrued expenses in the
accompanying consolidated balance sheets.



16. Employee Benefit Plans



The Company maintains a defined benefit program for its
domestic employees, which was frozen during fiscal 2002. Accordingly, no new benefits are being accrued under the plan. Participant accounts are credited with interest at the plan rates. Company contributions are based on computations by independent
actuaries, although the Company may decide to make additional contributions to the plan beyond minimum funding requirements as is deemed appropriate by management. The plan was funded as of January 29, 2005 such that no minimum contribution is
required in the 2005 plan year. Plan assets at October 29, 2005 and January 29, 2005 were invested primarily in mutual funds and money market funds.



Net periodic pension cost (benefit) for the thirteen weeks and thirty-nine weeks ended October 29, 2005 and October 30, 2004 was comprised of
the following components (in thousands):



|                                              |  |                      |     |   |                         |   |    |                 |  |   |                 |   |  |   |      |  
|--------------------------------------------- |  | -------------------- | --- | - | ----------------------- | - | -- | --------------- |  | - | --------------- | - |  | - | ---- | -
|                                              |  | Thirteen Weeks Ended |     |   | Thirty-Nine Weeks Ended |  
|                                              |  | October 29,2005      |     |   | October 30,2004         |   |    | October 29,2005 |  |   | October 30,2004 |  
|Interest cost on projected benefit obligation |  | $                    | 57  |   |                         | $ | 69 |                 |  | $ | 177             |   |  | $ | 206  |  
|Expected return on plan assets                |  |                      | (77 | ) |                         |   | (2 | )               |  |   | (243            | ) |  |   | (183 | )
|Recognized net actuarial (gains) losses       |  |                      | 32  |   |                         |   | 25 |                 |  |   | 94              |   |  |   | 74   |  
|Settlement loss                               |  |                      | 32  |   |                         |   |   |                 |  |   | 145             |   |  |   |     |  
|                                              |  |                      |     |   |                         |   |    |                 |  |   |                 |   |  |   |      |  
|Net periodic pension cost (benefit)           |  | $                    | 44  |   |                         | $ | 92 |                 |  | $ | 173             |   |  | $ | 97   |  
|                                              |  |                      |     |   |                         |   |    |                 |  |   |                 |   |  |   |      |  



The Company incurred a
settlement loss of $0.1 million during the thirty-nine weeks ended October 29, 2005 due to the closure of the Santa Ana, California facility (see Note 15  Facility Maximization Project).





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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Canadian Defined Benefit Plan



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



Net periodic pension cost for the thirteen weeks and thirty-nine weeks ended
October 29, 2005 and October 30, 2004 was comprised of the following components (in thousands):



|                                                 |  |                      |      |   |                         |   |      |                 |  |   |                 |   |  |   |      |  
|------------------------------------------------ |  | -------------------- | ---- | - | ----------------------- | - | ---- | --------------- |  | - | --------------- | - |  | - | ---- | -
|                                                 |  | Thirteen Weeks Ended |      |   | Thirty-Nine Weeks Ended |  
|                                                 |  | October 29,2005      |      |   | October 30,2004         |   |      | October 29,2005 |  |   | October 30,2004 |  
|Service cost  benefits earned during the period |  | $                    | 262  |   |                         | $ | 140  |                 |  | $ | 787             |   |  | $ | 419  |  
|Interest cost on projected benefit obligation    |  |                      | 116  |   |                         |   | 101  |                 |  |   | 347             |   |  |   | 303  |  
|Expected return on plan assets                   |  |                      | (133 | ) |                         |   | (110 | )               |  |   | (400            | ) |  |   | (330 | )
|Recognized net actuarial losses                  |  |                      |     |   |                         |   |     |                 |  |   | 2               |   |  |   | 1    |  
|                                                 |  |                      |      |   |                         |   |      |                 |  |   |                 |   |  |   |      |  
|Net periodic pension cost                        |  | $                    | 245  |   |                         | $ | 131  |                 |  | $ | 736             |   |  | $ | 393  |  
|                                                 |  |                      |      |   |                         |   |      |                 |  |   |                 |   |  |   |      |  



Post-retirement Benefit Plan



The Company provides a fixed dollar reimbursement for
life and medical coverage for certain of the Companys retirees (over age 65 with 10 years of service or more) under the plan currently in effect. The plan is unfunded.



Net periodic post-retirement benefit costs for the thirteen weeks and thirty-nine weeks ended October 29, 2005 and
October 30, 2004 was comprised of the following components (in thousands):



|                                                 |  |                      |    |                         |   |                 |  |   |                 |   |  |   |    
|------------------------------------------------ |  | -------------------- | -- | ----------------------- | - | --------------- |  | - | --------------- | - |  | - | ---
|                                                 |  | Thirteen Weeks Ended |    | Thirty-Nine Weeks Ended
|                                                 |  | October 29,2005      |    | October 30,2004         |   | October 29,2005 |  |   | October 30,2004
|Service cost  benefits earned during the period |  | $                    | 39 |                         | $ | 59              |  | $ | 130             |   |  | $ | 142
|Interest cost on projected benefit obligation    |  |                      | 30 |                         |   | 45              |  |   | 92              |   |  |   | 107
|Curtailment gain                                 |  |                      |   |                         |   |                |  |   | (77             | ) |  |   |   
|                                                 |  |                      |    |                         |   |                 |  |   |                 |   |  |   |    
|Net periodic post-retirement benefit cost        |  | $                    | 69 |                         | $ | 104             |  | $ | 145             |   |  | $ | 249
|                                                 |  |                      |    |                         |   |                 |  |   |                 |   |  |   |    



Due to the closure of
the Santa Ana, California facility (see Note 15-Facility Maximization Project), the Company incurred a curtailment gain of $0.1 million in the second quarter of fiscal 2005.



17. Income Taxes



The Company had income tax expense of $0.2 million and $0.6 million for the thirteen weeks and thirty-nine weeks ended October 29, 2005,
respectively, compared to $2.4 million and $8.4 million for the thirteen weeks and thirty-nine weeks ended October 30, 2004, respectively. During the thirteen weeks and thirty-nine weeks ended October 29, 2005, the Company reported net
profitability in its domestic operations against which tax expense was recorded. Larger losses were incurred in the Companys foreign operations for each of the respective time periods, against which no tax benefit can be recognized. The tax
expense for the thirteen weeks and thirty-nine weeks ended October 30, 2004 was primarily due to profitability in the Companys domestic operations, a loss in the Companys foreign operations against which no tax benefit can be
recognized, and the recognition in the third quarter of fiscal year 2004 of a $0.9 million valuation allowance against certain state income tax credits due to the closure of the Santa Ana, California facility (see Note 15  Facility
Maximization Project).



18. 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 while schools generally are closed and floorcoverings can be installed. The interim results reported herein should not be presumed as indicative of the results for the full fiscal year.



16



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



19. Condensed Consolidating Financial
Statements



The 9.75% Notes of the Company are guaranteed
by the Companys domestic subsidiaries. Effective August 18, 2004, Monterey was released as a guarantor. The guarantee of the guarantor subsidiaries is full and unconditional and joint and several and arose in conjunction with the
Companys issuance of the 9.75% Notes on February 20, 2002 and the $109.0 million Senior Credit Facility, which was amended by the Company on February 20, 2002, May 1, 2004, August 18, 2004, and October 29,
2005. The terms of the guarantees 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 October 29, 2005 is $216.9 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. The condensed consolidating financial information of the Company and its subsidiaries as of October 29, 2005 and January 31, 2004, and for each of the
thirteen weeks and thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively, are as follows:



17



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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Balance Sheets

October 29, 2005



(Unaudited and In Thousands)



|                                                        |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------ | ------------ |  | - | --------------------------- | - |  | ------------------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Issuer |         |   | GuarantorSubsidiaries |   |        | Eliminations |  |   | Subtotal Issuer& Guarantors |   |  | Non-GuarantorSubsidiaries |         |   | Eliminations |   |        | ConsolidatedTotal | 
|ASSETS                                                  |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|CURRENT ASSETS:                                         |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Cash and cash equivalents                               |  | $      | 14,664  |   |                       | $ | 1      |              |  |   |                            |   |  | $                         | 14,665  |   |              | $ | 1,967  |                   |  | $ |        |   |  | $ | 16,632  |  
|Accounts receivable, net                                |  |        | 89      |   |                       |   | 34,562 |              |  |   |                            |   |  |                           | 34,651  |   |              |   | 8,864  |                   |  |   |        |   |  |   | 43,515  |  
|Inventories                                             |  |        | 24,064  |   |                       |   | 3,473  |              |  |   |                            |   |  |                           | 27,537  |   |              |   | 16,720 |                   |  |   |        |   |  |   | 44,257  |  
|Deferred tax assets                                     |  |        | 4,232   |   |                       |   | 243    |              |  |   |                            |   |  |                           | 4,475   |   |              |   | 2,050  |                   |  |   |        |   |  |   | 6,525   |  
|Prepaid expenses and other                              |  |        | 888     |   |                       |   |       |              |  |   |                            |   |  |                           | 888     |   |              |   | 851    |                   |  |   |        |   |  |   | 1,739   |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current assets                                    |  |        | 43,937  |   |                       |   | 38,279 |              |  |   |                            |   |  |                           | 82,216  |   |              |   | 30,452 |                   |  |   |        |   |  |   | 112,668 |  
|                                                        |  |        |         |   |                       |   |       
|PROPERTY, PLANT AND EQUIPMENT, net                      |  |        | 34,158  |   |                       |   | 13,261 |              |  |   |                            |   |  |                           | 47,419  |   |              |   | 23,686 |                   |  |   |        |   |  |   | 71,105  |  
|DEFERRED TAX ASSETS                                     |  |        |        |   |                       |   |       |              |  |   |                            |   |  |                           |        |   |              |   | 3,017  |                   |  |   | (3,017  | ) |  |   |        |  
|GOODWILL                                                |  |        | 62,386  |   |                       |   | 5,631  |              |  |   |                            |   |  |                           | 68,017  |   |              |   | 30,361 |                   |  |   |        |   |  |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                            |  |        | 29,138  |   |                       |   |       |              |  |   |                            |   |  |                           | 29,138  |   |              |   |       |                   |  |   |        |   |  |   | 29,138  |  
|INVESTMENT IN SUBSIDIARIES                              |  |        | 82,519  |   |                       |   |       |              |  |   | (17,224                     | ) |  |                           | 65,295  |   |              |   |       |                   |  |   | (65,295 | ) |  |   |        |  
|OTHER ASSETS                                            |  |        | 6,144   |   |                       |   | 92     |              |  |   |                            |   |  |                           | 6,236   |   |              |   | 173    |                   |  |   |        |   |  |   | 6,409   |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL ASSETS                                            |  | $      | 258,282 |   |                       | $ | 57,263 |              |  | $ | (17,224                     | ) |  | $                         | 298,321 |   |              | $ | 87,689 |                   |  | $ | (68,312 | ) |  | $ | 317,698 |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                    |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|CURRENT LIABILITIES:                                    |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Accounts payable                                        |  | $      | 6,422   |   |                       | $ | 2,251  |              |  | $ |                            |   |  | $                         | 8,673   |   |              | $ | 8,705  |                   |  | $ |        |   |  | $ | 17,378  |  
|Accrued expenses                                        |  |        | 12,511  |   |                       |   | (146   | )            |  |   |                            |   |  |                           | 12,365  |   |              |   | 7,063  |                   |  |   |        |   |  |   | 19,428  |  
|Current portion of long-term debt                       |  |        | 321     |   |                       |   |       |              |  |   |                            |   |  |                           | 321     |   |              |   | 3,506  |                   |  |   |        |   |  |   | 3,827   |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current liabilities                               |  |        | 19,254  |   |                       |   | 2,105  |              |  |   |                            |   |  |                           | 21,359  |   |              |   | 19,274 |                   |  |   |        |   |  |   | 40,633  |  
|                                                        |  |        |         |   |                       |   |       
|INTERCOMPANY (RECEIVABLE) PAYABLE                       |  |        | (35,385 | ) |                       |   | 33,047 |              |  |   |                            |   |  |                           | (2,338  | ) |              |   | 4,461  |                   |  |   | (2,123  | ) |  |   |        |  
|OTHER LIABILITIES, including post-retirement obligation |  |        | 4,620   |   |                       |   |       |              |  |   |                            |   |  |                           | 4,620   |   |              |   |       |                   |  |   |        |   |  |   | 4,620   |  
|DEFERRED TAX LIABILITIES                                |  |        | 9,081   |   |                       |   | 1,367  |              |  |   |                            |   |  |                           | 10,448  |   |              |   |       |                   |  |   | (2,869  | ) |  |   | 7,579   |  
|LONG-TERM DEBT, net of current portion                  |  |        | 212,607 |   |                       |   |       |              |  |   |                            |   |  |                           | 212,607 |   |              |   | 2,376  |                   |  |   |        |   |  |   | 214,983 |  
|MINORITY INTEREST                                       |  |        |        |   |                       |   |       |              |  |   |                            |   |  |                           |        |   |              |   | (24    | )                 |  |   | 440     |   |  |   | 416     |  
|                                                        |  |        |         |   |                       |   |       
|STOCKHOLDERS EQUITY:                                   |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Preferred stock                                         |  |        |        |   |                       |   |       |              |  |   |                            |   |  |                           |        |   |              |   | 133    |                   |  |   | (133    | ) |  |   |        |  
|Commons tock                                            |  |        |        |   |                       |   |       |              |  |   |                            |   |  |                           |        |   |              |   | 11,117 |                   |  |   | (11,117 | ) |  |   |        |  
|Paid-in capital                                         |  |        | 72,648  |   |                       |   |       |              |  |   |                            |   |  |                           | 72,648  |   |              |   | 52,064 |                   |  |   | (52,064 | ) |  |   | 72,648  |  
|Retained earnings (deficit)                             |  |        | (23,589 | ) |                       |   | 20,744 |              |  |   | (17,224                     | ) |  |                           | (20,069 | ) |              |   | (2,767 | )                 |  |   | (199    | ) |  |   | (23,035 | )
|Accumulated other comprehensive income (loss)           |  |        | (954    | ) |                       |   |       |              |  |   |                            |   |  |                           | (954    | ) |              |   | 1,055  |                   |  |   | (247    | ) |  |   | (146    | )
|                                                        |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total stockholders equity                              |  |        | 48,105  |   |                       |   | 20,744 |              |  |   | (17,224                     | ) |  |                           | 51,625  |   |              |   | 61,602 |                   |  |   | (63,760 | ) |  |   | 49,467  |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY              |  | $      | 258,282 |   |                       | $ | 57,263 |              |  | $ | (17,224                     | ) |  | $                         | 298,321 |   |              | $ | 87,689 |                   |  | $ | (68,312 | ) |  | $ | 317,698 |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  



18



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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Balance Sheets

January 29, 2005



(In Thousands)



|                                                        |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------ | ------------ |  | --------------------------- | --- |  | ------------------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Issuer |         |   | GuarantorSubsidiaries |   |        | Eliminations |  | Subtotal Issuer& Guarantors |     |  | Non-GuarantorSubsidiaries |         |   | Eliminations |   |        | ConsolidatedTotal | 
|ASSETS                                                  |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|CURRENT ASSETS:                                         |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Cash and cash equivalents                               |  | $      | 23,110  |   |                       | $ |       |              |  | $                           |    |  | $                         | 23,110  |   |              | $ | 2,616  |                   |  | $ |        |   |  | $ | 25,726  |  
|Accounts receivable, net                                |  |        | 23,959  |   |                       |   | 2,899  |              |  |                             |    |  |                           | 26,858  |   |              |   | 15,005 |                   |  |   |        |   |  |   | 41,863  |  
|Inventories                                             |  |        | 18,741  |   |                       |   | 3,491  |              |  |                             |    |  |                           | 22,232  |   |              |   | 16,746 |                   |  |   |        |   |  |   | 38,978  |  
|Deferred tax assets                                     |  |        | 2,985   |   |                       |   | 68     |              |  |                             |    |  |                           | 3,053   |   |              |   | 2,359  |                   |  |   |        |   |  |   | 5,412   |  
|Prepaid expenses and other                              |  |        | 464     |   |                       |   |       |              |  |                             |    |  |                           | 464     |   |              |   | 975    |                   |  |   | 374     |   |  |   | 1,813   |  
|                                                        |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current assets                                    |  |        | 69,259  |   |                       |   | 6,458  |              |  |                             |    |  |                           | 75,717  |   |              |   | 37,701 |                   |  |   | 374     |   |  |   | 113,792 |  
|                                                        |  |        |         |   |                       |   |       
|PROPERTY, PLANT AND EQUIPMENT, net                      |  |        | 32,344  |   |                       |   | 14,739 |              |  |                             |    |  |                           | 47,083  |   |              |   | 20,604 |                   |  |   |        |   |  |   | 67,687  |  
|DEFERRED TAX ASSETS                                     |  |        |        |   |                       |   |       |              |  |                             |    |  |                           |        |   |              |   | 2,868  |                   |  |   | (2,868  | ) |  |   |        |  
|GOODWILL                                                |  |        | 62,386  |   |                       |   | 5,631  |              |  |                             |    |  |                           | 68,017  |   |              |   | 30,361 |                   |  |   |        |   |  |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                            |  |        | 30,979  |   |                       |   | 164    |              |  |                             |    |  |                           | 31,143  |   |              |   |       |                   |  |   |        |   |  |   | 31,143  |  
|INVESTMENT IN SUBSIDIARIES                              |  |        | 69,640  |   |                       |   |       |              |  |                             | 749 |  |                           | 70,389  |   |              |   |       |                   |  |   | (70,389 | ) |  |   |        |  
|OTHER ASSETS                                            |  |        | 7,327   |   |                       |   | 93     |              |  |                             |    |  |                           | 7,420   |   |              |   | 190    |                   |  |   |        |   |  |   | 7,610   |  
|                                                        |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL ASSETS                                            |  | $      | 271,935 |   |                       | $ | 27,085 |              |  | $                           | 749 |  | $                         | 299,769 |   |              | $ | 91,724 |                   |  | $ | (72,883 | ) |  | $ | 318,610 |  
|                                                        |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                    |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|CURRENT LIABILITIES:                                    |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Accounts payable                                        |  | $      | 8,145   |   |                       | $ | 2,052  |              |  | $                           |    |  | $                         | 10,197  |   |              | $ | 8,016  |                   |  | $ |        |   |  | $ | 18,213  |  
|Accrued expenses                                        |  |        | 17,519  |   |                       |   | (528   | )            |  |                             |    |  |                           | 16,991  |   |              |   | 10,863 |                   |  |   | 374     |   |  |   | 28,228  |  
|Current portion of long-term debt                       |  |        | 321     |   |                       |   |       |              |  |                             |    |  |                           | 321     |   |              |   | 392    |                   |  |   |        |   |  |   | 713     |  
|                                                        |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current liabilities                               |  |        | 25,985  |   |                       |   | 1,524  |              |  |                             |    |  |                           | 27,509  |   |              |   | 19,271 |                   |  |   | 374     |   |  |   | 47,154  |  
|                                                        |  |        |         |   |                       |   |       
|INTERCOMPANY (RECEIVABLE) PAYABLE                       |  |        | (25,217 | ) |                       |   | 25,706 |              |  |                             |    |  |                           | 489     |   |              |   | (489   | )                 |  |   |        |   |  |   |        |  
|OTHER LIABILITIES, including post-retirement obligation |  |        | 4,468   |   |                       |   |       |              |  |                             |    |  |                           | 4,468   |   |              |   | 416    |                   |  |   |        |   |  |   | 4,884   |  
|DEFERRED TAX LIABILITIES                                |  |        | 7,234   |   |                       |   | 604    |              |  |                             |    |  |                           | 7,838   |   |              |   | 9      |                   |  |   | (2,868  | ) |  |   | 4,979   |  
|LONG-TERM DEBT, net of current portion                  |  |        | 205,848 |   |                       |   |       |              |  |                             |    |  |                           | 205,848 |   |              |   | 1,688  |                   |  |   |        |   |  |   | 207,536 |  
|MINORITY INTEREST                                       |  |        |        |   |                       |   |       |              |  |                             |    |  |                           |        |   |              |   |       |                   |  |   | 440     |   |  |   | 440     |  
|                                                        |  |        |         |   |                       |   |       
|STOCKHOLDERS EQUITY:                                   |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Preferred stock                                         |  |        |        |   |                       |   |       |              |  |                             |    |  |                           |        |   |              |   | 133    |                   |  |   | (133    | ) |  |   |        |  
|Commons tock                                            |  |        |        |   |                       |   |       |              |  |                             |    |  |                           |        |   |              |   | 11,117 |                   |  |   | (11,117 | ) |  |   |        |  
|Paid-in capital                                         |  |        | 72,648  |   |                       |   |       |              |  |                             |    |  |                           | 72,648  |   |              |   | 52,064 |                   |  |   | (52,064 | ) |  |   | 72,648  |  
|Retained earnings (deficit)                             |  |        | (17,806 | ) |                       |   | (749   | )            |  |                             | 749 |  |                           | (17,806 | ) |              |   | 7,688  |                   |  |   | (7,688  | ) |  |   | (17,806 | )
|Accumulated other comprehensive Income (loss)           |  |        | (1,225  | ) |                       |   |       |              |  |                             |    |  |                           | (1,225  | ) |              |   | (173   | )                 |  |   | 173     |   |  |   | (1,225  | )
|                                                        |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total stockholders equity                              |  |        | 53,617  |   |                       |   | (749   | )            |  |                             | 749 |  |                           | 53,617  |   |              |   | 70,829 |                   |  |   | (70,829 | ) |  |   | 53,617  |  
|                                                        |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY              |  | $      | 271,935 |   |                       | $ | 27,085 |              |  | $                           | 749 |  | $                         | 299,769 |   |              | $ | 91,724 |                   |  | $ | (72,883 | ) |  | $ | 318,610 |  
|                                                        |  |        |         |   |                       |   |        |              |  |                             |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  



19



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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended October 29, 2005



(Unaudited and In Thousands)



|                                           |  |        |        |   |                       |   |              |  |   |                             |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |        |  
|------------------------------------------ |  | ------ | ------ | - | --------------------- | - | ------------ |  | - | --------------------------- | - | ------------------------- | - | ------ | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------ | -
|                                           |  | Issuer |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | Subtotal Issuer& Guarantors |   | Non-GuarantorSubsidiaries |   |        | Eliminations |   |        | ConsolidatedTotal | 
|Net Sales                                  |  | $      | 37,960 |   |                       | $ | 66,579       |  | $ | (30,455                     | ) |                           | $ | 74,084 |              | $ | 21,873 |                   |  | $ | (14,211 | ) |  | $ | 81,746 |  
|Cost of Goods Sold                         |  |        | 35,339 |   |                       |   | 47,626       |  |   | (30,455                     | ) |                           |   | 52,510 |              |   | 20,523 |                   |  |   | (14,211 | ) |  |   | 58,822 |  
|Selling, General & Administrative Expenses |  |        | 7,387  |   |                       |   | 7,729        |  |   |                            |   |                           |   | 15,116 |              |   | 5,413  |                   |  |   |        |   |  |   | 20,529 |  
|Amortization                               |  |        | 614    |   |                       |   |             |  |   |                            |   |                           |   | 614    |              |   |       |                   |  |   |        |   |  |   | 614    |  
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |        |  
|Operating Expenses                         |  |        | 43,340 |   |                       |   | 55,355       |  |   | (30,455                     | ) |                           |   | 68,240 |              |   | 25,936 |                   |  |   | (14,211 | ) |  |   | 79,965 |  
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |        |  
|Operating Income (Loss)                    |  |        | (5,380 | ) |                       |   | 11,224       |  |   |                            |   |                           |   | 5,844  |              |   | (4,063 | )                 |  |   |        |   |  |   | 1,781  |  
|Minority Interest in Income of Subsidiary  |  |        |       |   |                       |   |             |  |   |                            |   |                           |   |       |              |   | (15    | )                 |  |   |        |   |  |   | (15    | )
|Equity in Earnings of Subsidiaries         |  |        | 3,101  |   |                       |   |             |  |   |                            |   |                           |   | 3,101  |              |   |       |                   |  |   | (3,101  | ) |  |   |       |  
|Loss on Disposal of Fixed Assets           |  |        | 26     |   |                       |   |             |  |   |                            |   |                           |   | 26     |              |   | 5      |                   |  |   |        |   |  |   | 31     |  
|Net Interest Expense                       |  |        | 5,316  |   |                       |   |             |  |   |                            |   |                           |   | 5,316  |              |   | 41     |                   |  |   |        |   |  |   | 5,357  |  
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |        |  
|Income (Loss) Before Income Taxes          |  |        | (7,621 | ) |                       |   | 11,224       |  |   |                            |   |                           |   | 3,603  |              |   | (4,124 | )                 |  |   | (3,101  | ) |  |   | (3,622 | )
|Income Tax Expense (Benefit)               |  |        | (3,366 | ) |                       |   | 4,456        |  |   |                            |   |                           |   | 1,090  |              |   | (892   | )                 |  |   |        |   |  |   | 198    |  
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |        |  
|Net Income (Loss)                          |  | $      | (4,255 | ) |                       | $ | 6,768        |  | $ |                            |   |                           | $ | 2,513  |              | $ | (3,232 | )                 |  | $ | (3,101  | ) |  | $ | (3,820 | )
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |        |  



20



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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended October 30, 2004



(Unaudited and In Thousands)



|                                           |  |        |        |   |                       |   |              |  |   |                             |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        |  
|------------------------------------------ |  | ------ | ------ | - | --------------------- | - | ------------ |  | - | --------------------------- | - |  | ------------------------- | ------ | - | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------ | -
|                                           |  | Issuer |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | Subtotal Issuer& Guarantors |   |  | Non-GuarantorSubsidiaries |        |   | Eliminations |   |        | ConsolidatedTotal | 
|Net Sales                                  |  | $      | 54,445 |   |                       | $ | 7,308        |  | $ | (1,642                      | ) |  | $                         | 60,111 |   |              | $ | 33,232 |                   |  | $ | (10,842 | ) |  | $ | 82,501 |  
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        |  
|Cost of Goods Sold                         |  |        | 34,715 |   |                       |   | 7,008        |  |   | (1,642                      | ) |  |                           | 40,081 |   |              |   | 25,775 |                   |  |   | (10,842 | ) |  |   | 55,014 |  
|Selling, General & Administrative Expenses |  |        | 10,999 |   |                       |   |             |  |   |                            |   |  |                           | 10,999 |   |              |   | 6,549  |                   |  |   |        |   |  |   | 17,548 |  
|Amortization                               |  |        | 603    |   |                       |   | 165          |  |   |                            |   |  |                           | 768    |   |              |   |       |                   |  |   |        |   |  |   | 768    |  
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        |  
|Operating Expenses                         |  |        | 46,317 |   |                       |   | 7,173        |  |   | (1,642                      | ) |  |                           | 51,848 |   |              |   | 32,324 |                   |  |   | (10,842 | ) |  |   | 73,330 |  
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        |  
|Operating Income                           |  |        | 8,128  |   |                       |   | 135          |  |   |                            |   |  |                           | 8,263  |   |              |   | 908    |                   |  |   |        |   |  |   | 9,171  |  
|Minority Interest in Income of Subsidiary  |  |        |       |   |                       |   |             |  |   |                            |   |  |                           |       |   |              |   | (2     | )                 |  |   |        |   |  |   | (2     | )
|Equity in Earnings of Affiliate            |  |        |       |   |                       |   |             |  |   |                            |   |  |                           |       |   |              |   | 117    |                   |  |   |        |   |  |   | 117    |  
|Equity in Loss of Subsidiaries             |  |        | (164   | ) |                       |   |             |  |   |                            |   |  |                           | (164   | ) |              |   |       |                   |  |   | 164     |   |  |   |       |  
|Net Interest Expense                       |  |        | 4,855  |   |                       |   |             |  |   |                            |   |  |                           | 4,855  |   |              |   | 21     |                   |  |   |        |   |  |   | 4,876  |  
|Other Expense                              |  |        |       |   |                       |   | 133          |  |   |                            |   |  |                           | 133    |   |              |   |       |                   |  |   |        |   |  |   | 133    |  
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        |  
|Income Before Income Taxes                 |  |        | 3,109  |   |                       |   | 2            |  |   |                            |   |  |                           | 3,111  |   |              |   | 1,002  |                   |  |   | 164     |   |  |   | 4,277  |  
|Income Tax Expense                         |  |        | 1,282  |   |                       |   | 2            |  |   |                            |   |  |                           | 1,284  |   |              |   | 1,166  |                   |  |   |        |   |  |   | 2,450  |  
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        |  
|Net Income (Loss)                          |  | $      | 1,827  |   |                       | $ |             |  | $ |                            |   |  | $                         | 1,827  |   |              | $ | (164   | )                 |  | $ | 164     |   |  | $ | 1,827  |  
|                                           |  |        |        |   |                       |   |              |  |   |                             |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        |  



21



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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirty-Nine Weeks Ended October 29, 2005



(Unaudited and In Thousands)



|                                           |  |        |         |   |                       |   |              |  |   |                             |   |                           |   |         |              |   |         |                   |  |   |         |   |  |   |         |  
|------------------------------------------ |  | ------ | ------- | - | --------------------- | - | ------------ |  | - | --------------------------- | - | ------------------------- | - | ------- | ------------ | - | ------- | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                           |  | Issuer |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | Subtotal Issuer& Guarantors |   | Non-GuarantorSubsidiaries |   |         | Eliminations |   |         | ConsolidatedTotal | 
|Net Sales                                  |  | $      | 112,079 |   |                       | $ | 208,858      |  | $ | (97,084                     | ) |                           | $ | 223,853 |              | $ | 61,304  |                   |  | $ | (40,023 | ) |  | $ | 245,134 |  
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |                           |   |         |              |   |         |                   |  |   |         |   |  |   |         |  
|Cost of Goods Sold                         |  |        | 100,582 |   |                       |   | 148,404      |  |   | (97,084                     | ) |                           |   | 151,902 |              |   | 59,953  |                   |  |   | (40,023 | ) |  |   | 171,832 |  
|Selling, General & Administrative Expenses |  |        | 22,522  |   |                       |   | 24,518       |  |   |                            |   |                           |   | 47,040  |              |   | 13,433  |                   |  |   |        |   |  |   | 60,473  |  
|Amortization                               |  |        | 1,842   |   |                       |   | 164          |  |   |                            |   |                           |   | 2,006   |              |   |        |                   |  |   |        |   |  |   | 2,006   |  
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |                           |   |         |              |   |         |                   |  |   |         |   |  |   |         |  
|Operating Expenses                         |  |        | 124,946 |   |                       |   | 173,086      |  |   | (97,084                     | ) |                           |   | 200,948 |              |   | 73,386  |                   |  |   | (40,023 | ) |  |   | 234,311 |  
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |                           |   |         |              |   |         |                   |  |   |         |   |  |   |         |  
|Operating Income (Loss)                    |  |        | (12,867 | ) |                       |   | 35,772       |  |   |                            |   |                           |   | 22,905  |              |   | (12,082 | )                 |  |   |        |   |  |   | 10,823  |  
|Minority Interest in Loss of Subsidiary    |  |        |        |   |                       |   |             |  |   |                            |   |                           |   |        |              |   | 24      |                   |  |   |        |   |  |   | 24      |  
|Equity in Earnings of Subsidiaries         |  |        | 10,604  |   |                       |   |             |  |   |                            |   |                           |   | 10,604  |              |   |        |                   |  |   | (10,604 | ) |  |   |        |  
|Loss on Disposal of Fixed Assets           |  |        | 3       |   |                       |   |             |  |   |                            |   |                           |   | 3       |              |   | 122     |                   |  |   |        |   |  |   | 125     |  
|Net Interest Expense                       |  |        | 15,214  |   |                       |   |             |  |   |                            |   |                           |   | 15,214  |              |   | 136     |                   |  |   |        |   |  |   | 15,350  |  
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |                           |   |         |              |   |         |                   |  |   |         |   |  |   |         |  
|Income (Loss) Before Income Taxes          |  |        | (17,480 | ) |                       |   | 35,772       |  |   |                            |   |                           |   | 18,292  |              |   | (12,316 | )                 |  |   | (10,604 | ) |  |   | (4,628  | )
|Income Tax Expense (Benefit)               |  |        | (11,816 | ) |                       |   | 14,278       |  |   |                            |   |                           |   | 2,462   |              |   | (1,861  | )                 |  |   |        |   |  |   | 601     |  
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |                           |   |         |              |   |         |                   |  |   |         |   |  |   |         |  
|Net Income (Loss)                          |  | $      | (5,664  | ) |                       | $ | 21,494       |  | $ |                            |   |                           | $ | 15,830  |              | $ | (10,455 | )                 |  | $ | (10,604 | ) |  | $ | (5,229  | )
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |                           |   |         |              |   |         |                   |  |   |         |   |  |   |         |  



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirty-Nine Weeks Ended October 30, 2004



(Unaudited and In Thousands)



|                                           |  |        |         |   |                       |   |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |        
|------------------------------------------ |  | ------ | ------- | - | --------------------- | - | ------------ |  | - | --------------------------- | - |  | ------------------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | -------
|                                           |  | Issuer |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | Subtotal Issuer& Guarantors |   |  | Non-GuarantorSubsidiaries |         |   | Eliminations |   |        | ConsolidatedTotal
|Net Sales                                  |  | $      | 176,051 |   |                       | $ | 23,185       |  | $ | (5,160                      | ) |  | $                         | 194,076 |   |              | $ | 93,695 |                   |  | $ | (27,983 | ) |  | $ | 259,788
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |        
|Cost of Goods Sold                         |  |        | 106,822 |   |                       |   | 21,846       |  |   | (5,160                      | ) |  |                           | 123,508 |   |              |   | 71,472 |                   |  |   | (27,983 | ) |  |   | 166,997
|Selling, General & Administrative Expenses |  |        | 36,635  |   |                       |   |             |  |   |                            |   |  |                           | 36,635  |   |              |   | 22,047 |                   |  |   |        |   |  |   | 58,682 
|Amortization                               |  |        | 1,807   |   |                       |   | 492          |  |   |                            |   |  |                           | 2,299   |   |              |   |       |                   |  |   |        |   |  |   | 2,299  
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |        
|Operating Expenses                         |  |        | 145,264 |   |                       |   | 22,338       |  |   | (5,160                      | ) |  |                           | 162,442 |   |              |   | 93,519 |                   |  |   | (27,983 | ) |  |   | 227,978
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |        
|Operating Income                           |  |        | 30,787  |   |                       |   | 847          |  |   |                            |   |  |                           | 31,634  |   |              |   | 176    |                   |  |   |        |   |  |   | 31,810 
|Minority Interest in Loss of Subsidiary    |  |        |        |   |                       |   |             |  |   |                            |   |  |                           |        |   |              |   | 20     |                   |  |   |        |   |  |   | 20     
|Equity in Earnings of Affiliate            |  |        |        |   |                       |   |             |  |   |                            |   |  |                           |        |   |              |   | 893    |                   |  |   |        |   |  |   | 893    
|Equity in Loss of Subsidiaries             |  |        | (410    | ) |                       |   |             |  |   |                            |   |  |                           | (410    | ) |              |   |       |                   |  |   | 410     |   |  |   |       
|Net Interest Expense                       |  |        | 15,074  |   |                       |   |             |  |   |                            |   |  |                           | 15,074  |   |              |   | 75     |                   |  |   |        |   |  |   | 15,149 
|Other Expense                              |  |        |        |   |                       |   | 133          |  |   |                            |   |  |                           | 133     |   |              |   |       |                   |  |   |        |   |  |   | 133    
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |        
|Income Before Income Taxes                 |  |        | 15,303  |   |                       |   | 714          |  |   |                            |   |  |                           | 16,017  |   |              |   | 1,014  |                   |  |   | 410     |   |  |   | 17,441 
|Income Tax Expense                         |  |        | 6,280   |   |                       |   | 290          |  |   |                            |   |  |                           | 6,570   |   |              |   | 1,848  |                   |  |   |        |   |  |   | 8,418  
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |        
|Net Income (Loss)                          |  | $      | 9,023   |   |                       | $ | 424          |  | $ |                            |   |  | $                         | 9,447   |   |              | $ | (834   | )                 |  | $ | 410     |   |  | $ | 9,023  
|                                           |  |        |         |   |                       |   |              |  |   |                             |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |        



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Thirty-Nine Weeks Ended October 29, 2005



(Unaudited and In Thousands)



|                                                             |  |        |        |   |                       |   |     |                           |  |   |                   |   |  |   |        |  
|------------------------------------------------------------ |  | ------ | ------ | - | --------------------- | - | --- | ------------------------- |  | - | ----------------- | - |  | - | ------ | -
|                                                             |  | Issuer |        |   | GuarantorSubsidiaries |   |     | Non-GuarantorSubsidiaries |  |   | ConsolidatedTotal |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  | $      | (9,374 | ) |                       | $ | 80  |                           |  | $ | (550              | ) |  | $ | (9,844 | )
|                                                             |  |        |        |   |                       |   |     |                           |  |   |                   |   |  |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |  |        |        |   |                       |   |     |                           |  |   |                   |   |  |   |        |  
|Additions to property, plant and equipment                   |  |        | (5,734 | ) |                       |   | (79 | )                         |  |   | (3,784            | ) |  |   | (9,597 | )
|                                                             |  |        |        |   |                       |   |     |                           |  |   |                   |   |  |   |        |  
|Net cash used in investing activities                        |  |        | (5,734 | ) |                       |   | (79 | )                         |  |   | (3,784            | ) |  |   | (9,597 | )
|                                                             |  |        |        |   |                       |   |     |                           |  |   |                   |   |  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |  |        |        |   |                       |   |     |                           |  |   |                   |   |  |   |        |  
|Proceeds from revolving credit facility                      |  |        | 15,000 |   |                       |   |    |                           |  |   | 3,960             |   |  |   | 18,960 |  
|Repayments of revolving credit facility                      |  |        | (8,000 | ) |                       |   |    |                           |  |   | (888              | ) |  |   | (8,888 | )
|Proceeds from long-term debt                                 |  |        |       |   |                       |   |    |                           |  |   | 749               |   |  |   | 749    |  
|Repayments of long-term debt                                 |  |        | (241   | ) |                       |   |    |                           |  |   | (19               | ) |  |   | (260   | )
|Financing costs                                              |  |        | (97    | ) |                       |   |    |                           |  |   |                  |   |  |   | (97    | )
|                                                             |  |        |        |   |                       |   |     |                           |  |   |                   |   |  |   |        |  
|Net cash provided by financing activities                    |  |        | 6,662  |   |                       |   |    |                           |  |   | 3,802             |   |  |   | 10,464 |  
|                                                             |  |        |        |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |  |        |       |   |                       |   |    |                           |  |   | (117              | ) |  |   | (117   | )
|                                                             |  |        |        |   |                       |   |     |                           |  |   |                   |   |  |   |        |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                      |  |        | (8,446 | ) |                       |   | 1   |                           |  |   | (649              | ) |  |   | (9,094 | )
|                                                             |  |        |        |  
|CASH AND CASH EQUIVALENTS, beginning of period               |  |        | 23,110 |   |                       |   |    |                           |  |   | 2,616             |   |  |   | 25,726 |  
|                                                             |  |        |        |   |                       |   |     |                           |  |   |                   |   |  |   |        |  
|CASH AND CASH EQUIVALENTS, end of period                     |  | $      | 14,664 |   |                       | $ | 1   |                           |  | $ | 1,967             |   |  | $ | 16,632 |  
|                                                             |  |        |        |   |                       |   |     |                           |  |   |                   |   |  |   |        |  



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statement of Cash Flows

For the Thirty-Nine Weeks Ended October 30, 2004



(Unaudited and In Thousands)



|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|------------------------------------------------------------ |  | ------ | ------- | - | --------------------- | - | ---- | ------------------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                             |  | Issuer |         |   | GuarantorSubsidiaries |   |      | Non-GuarantorSubsidiaries |  |   | ConsolidatedTotal |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  | $      | 9,843   |   |                       | $ | 135  |                           |  | $ | 4,099             |   |  | $ | 14,077  |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Equity distribution from affiliate                           |  |        |        |   |                       |   |     |                           |  |   | 922               |   |  |   | 922     |  
|Additions to property, plant and equipment                   |  |        | (1,681  | ) |                       |   | (135 | )                         |  |   | (4,831            | ) |  |   | (6,647  | )
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Net cash used in investing activities                        |  |        | (1,681  | ) |                       |   | (135 | )                         |  |   | (3,909            | ) |  |   | (5,725  | )
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Proceeds from revolving credit facilities                    |  |        | 15,280  |   |                       |   |     |                           |  |   |                  |   |  |   | 15,280  |  
|Repayments of revolving credit facilities                    |  |        | (15,280 | ) |                       |   |     |                           |  |   |                  |   |  |   | (15,280 | )
|Repayments of long-term debt                                 |  |        |        |   |                       |   |     |                           |  |   | (1,618            | ) |  |   | (1,618  | )
|Financing costs                                              |  |        | (380    | ) |                       |   |     |                           |  |   |                  |   |  |   | (380    | )
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Net cash used in financing activities                        |  |        | (380    | ) |                       |   |     |                           |  |   | (1,618            | ) |  |   | (1,998  | )
|                                                             |  |        |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |  |        |        |   |                       |   |     |                           |  |   | 163               |   |  |   | 163     |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                      |  |        | 7,782   |   |                       |   |     |                           |  |   | (1,265            | ) |  |   | 6,517   |  
|                                                             |  |        |         |  
|CASH AND CASH EQUIVALENTS, beginning of period               |  |        | 6,667   |   |                       |   |     |                           |  |   | 4,374             |   |  |   | 11,041  |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                     |  | $      | 14,449  |   |                       | $ |     |                           |  | $ | 3,109             |   |  | $ | 17,558  |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  



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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 the Companys 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 those discussed below as a result of a number of factors. See Forward-Looking Statements contained herein.



GENERAL



Collins & Aikman Floorcoverings, Inc. is a manufacturer of floorcovering products principally 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 name for a wide variety of end markets, including corporate offices, education, healthcare, government facilities and retail stores. 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. The Company is headquartered in Georgia, with additional manufacturing locations in Canada, the United Kingdom (U.K.),
and China.



The Company is a wholly owned subsidiary of Tandus Group, Inc.
Subsequent to a recapitalization transaction on January 25, 2001, investment funds managed by Oaktree Capital Management, LLC and Banc of America Capital Investors control a majority of the outstanding capital stock of Tandus Group, Inc.



RESULTS OF OPERATIONS



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



|                                           |  |                      |   |  |                         |   |  |                 |   |  |                  |  
|------------------------------------------ |  | -------------------- | - |  | ----------------------- | - |  | --------------- | - |  | ---------------- | -
|                                           |  | Thirteen Weeks Ended |   |  | Thirty-Nine Weeks Ended |  
|                                           |  | October 29,2005      |   |  | October 30,2004         |   |  | October 29,2005 |   |  | October 30, 2004 |  
|Net Sales                                  |  | 100.0                | % |  | 100.0                   | % |  | 100.0           | % |  | 100.0            | %
|Cost of Goods Sold                         |  | 72.0                 |   |  | 66.7                    |   |  | 70.1            |   |  | 64.3             |  
|                                           |  |                      |   |  |                         |   |  |                 |   |  |                  |  
|Gross Profit                               |  | 28.0                 |   |  | 33.3                    |   |  | 29.9            |   |  | 35.7             |  
|Selling, General & Administrative Expenses |  | 25.1                 |   |  | 21.3                    |   |  | 24.7            |   |  | 22.6             |  
|Amortization                               |  | 0.7                  |   |  | 0.9                     |   |  | 0.8             |   |  | 0.9              |  
|                                           |  |                      |   |  |                         |   |  |                 |   |  |                  |  
|Operating Income                           |  | 2.2                  |   |  | 11.1                    |   |  | 4.4             |   |  | 12.2             |  
|                                           |  |                      |   |  |                         |   |  |                 |   |  |                  |  
|Net Interest Expense                       |  | 6.6                  |   |  | 5.9                     |   |  | 6.3             |   |  | 5.8              |  
|                                           |  |                      |   |  |                         |   |  |                 |   |  |                  |  
|Net Income (Loss)                          |  | (4.7                 | ) |  | 2.2                     |   |  | (2.1            | ) |  | 3.5              |  
|                                           |  |                      |   |  |                         |   |  |                 |   |  |                  |  
|Adjusted EBITDA                            |  | 8.3                  |   |  | 16.4                    |   |  | 11.5            |   |  | 16.8             |  
|                                           |  |                      |   |  |                         |   |  |                 |   |  |                  |  



Thirteen Weeks Ended
October 29, 2005 As Compared with the Thirteen Weeks Ended October 30, 2004



Net Sales. Net sales for the thirteen weeks ended October 29, 2005 were $81.7 million, a decrease of 1.0% from the $82.5 million for the thirteen weeks ended October 30, 2004. Net sales of the
Companys Floorcoverings segment were $75.3 million for the thirteen weeks ended October 29, 2005 as compared to $76.8 million for the thirteen weeks ended October 30, 2004, a decrease of $1.5 million or 2.0%, primarily attributable
to the North American operations. Within these operations, the decrease in the Floorcoverings segments net sales was primarily attributable to a 16.4% decrease in broadloom sales combined with a 6.1% decrease in sales of 6-foot roll goods.
Partially offsetting these declines was a 19.8% increase in the sales of carpet tiles. The decrease in overall net sales was partially driven by customers budget constraints which resulted in those customers trading down on product brands
and/or types. The Company had also entered into certain price agreements, and had provided transactional quotes for certain products, prior to increases in the prices of raw materials used by the Company in the manufacturing of its products. In
addition, contributing to the decline in broadloom sales were operational complications associated with the facility maximization project, as discussed more fully herein and in Note 15 of the Notes to Consolidated Financial Statements
contained herein in Item 1. From an end use perspective, the current quarter results reflect a 5.6% decrease in Institutional sales and a 0.1% decrease in Corporate sales, including Retail. Net sales of the Extrusion segment were $6.4 million
for the thirteen weeks ended October 29, 2005 as compared to $5.7 million for the thirteen weeks ended October 30, 2004, an increase of $0.7 million or 12.3%. The increase in sales for the Extrusion segment was due to higher sales to seven
of the Extrusion segments ten largest customers during the current quarter.



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##### Table of Contents

Cost of Goods Sold. Cost of goods sold was $58.8 million for the thirteen weeks ended October 29, 2005 as
compared to $55.0 million in the thirteen weeks ended October 30, 2004. The increase was partially due to increases in the prices of several raw materials, including yarns, resins, and other agents and chemicals. The Company also incurred
facility maximization costs of $0.8 million for the thirteen weeks ended October 29, 2005 as compared to the prior year period of $0.4 million related to the Companys planned closure of its manufacturing facility in Santa Ana, California
and transfer of production to its existing Truro, Nova Scotia facility. (See further discussion in Liquidity and Capital Resources contained herein and Note 15 of the Notes to Consolidated Financial Statements contained
herein in Item 1.) In addition, in the current quarter cost of sales was impacted by a $0.5 million write-down related to inventory that will not be transferred from the Santa Ana, California facility to the Truro, Nova Scotia facility. As a
percentage of sales, cost of goods sold were 72.0% and 66.7% for the thirteen weeks ended October 29, 2005 and October 30, 2004, respectively. The percentage increase is primarily attributable to lower overall sales volume in addition to the impact
of rising raw material prices.



Selling, General and Administrative
Expenses.Selling, general and administrative expenses increased to $20.5 million for the thirteen weeks ended October 29, 2005, an increase of 17.1% from $17.5 million in the thirteen weeks ended October 30, 2004. This increase was
primarily due to higher marketing-related expenses of $0.7 million, higher professional services expenses of $0.5 million, increased commissions of $0.3 million, and a decrease in the foreign currency transaction gain of $0.8 million. During the
period the Company also incurred $0.2 million of supplementary administrative costs related to the delayed exit from the Santa Ana, California facility, $0.5 million in severance charges related to specific staffing reductions, and recorded a $0.4
million litigation settlement related to the Companys previous ownership interest in Chroma Systems Partners due to an alleged claim by Enron Energy Services, Inc. (See further discussion in Note 14 of the Notes to Consolidated Financial
Statements contained herein in Item 1 and Legal Proceedings in Part II, Item 1.) In addition, the Company incurred facility maximization costs of $1.1 million for the thirteen weeks ended October 29, 2005, as compared to the prior
year period of $0.6 million. As a percentage of sales, these expenses increased to 25.1% from 21.3% in the prior year.



Amortization.Intangible asset amortization decreased to $0.6 million for the thirteen weeks ended October 29, 2005 as compared to $0.8 million for the
thirteen weeks ended October 30, 2004. The decrease was due to the Companys supply agreement being fully amortized as of April 30, 2005.



Interest Expense. Net interest expense increased to $5.3 million for the thirteen weeks ended October 29, 2005 as compared to $4.9 million for the thirteen
weeks ended October 30, 2004, which included minimal interest income.



Income Taxes. The Company had income tax expense of $0.2 million for the thirteen weeks ended October 29, 2005 as compared to $2.5 million for the thirteen weeks ended October 30, 2004. During the thirteen weeks ended
October 29, 2005, the Company experienced net profitability in its domestic operations against which an income tax provision was recorded. Larger losses were incurred in the Companys foreign operations, against which no tax benefit can be
recognized. The tax expense for the thirteen weeks ended October 30, 2004 was primarily due to profitability in the Companys domestic operations, loss in the Companys foreign operations against which no tax benefit can be
recognized, and the recognition of a $0.9 million valuation allowance against certain state income tax credits due to the closure of the Santa Ana, California facility (see Note 15  Facility Maximization Project).



Net Income (Loss). The Company incurred a net loss for the thirteen weeks ended
October 29, 2005 of $3.8 million compared to net income of $1.8 million in the thirteen weeks ended October 30, 2004. This was primarily due to the combined result of lower net sales and higher cost of goods sold, as discussed above.



Adjusted EBITDA.Adjusted EBITDA represents earnings before
interest, taxes, depreciation, amortization, non-cash charges or expenses (other than write-down of current assets), costs related to board approved acquisitions and attempted acquisitions, expenses related to the facility maximization project plus
minority interest in income (loss) of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the thirteen weeks ended October 29, 2005 decreased to $6.8 million from $13.5 million in the thirteen weeks ended October 30, 2004. As
a percentage of sales, Adjusted EBITDA was 8.3% in the thirteen weeks ended October 29, 2005 compared to 16.4% in the thirteen weeks ended October 30, 2004. The decrease was principally due to the lower sales volume in the Floorcoverings
segment, coupled with higher cost of goods sold and selling, general and administrative expenses. 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 benchmark for its annual budget and long range plan and as a valuation method for potential acquisitions. Consolidated EBITDA as defined under the Companys Senior Credit Facility provides for additional
adjustments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America 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.



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A reconciliation of net income (loss) to Adjusted EBITDA is as follows (in thousands):



|                                          |  |                      |        |   |                 |   |        |  
|----------------------------------------- |  | -------------------- | ------ | - | --------------- | - | ------ | -
|                                          |  | Thirteen Weeks Ended |       
|                                          |  | October 29,2005      |        |   | October 30,2004 |  
|Net income (loss)                         |  | $                    | (3,820 | ) |                 | $ | 1,827  |  
|Income tax expense                        |  |                      | 198    |   |                 |   | 2,450  |  
|Net interest expense                      |  |                      | 5,357  |   |                 |   | 4,876  |  
|Depreciation                              |  |                      | 2,532  |   |                 |   | 2,569  |  
|Amortization                              |  |                      | 614    |   |                 |   | 768    |  
|Equity in earnings of Chroma              |  |                      |       |   |                 |   | (117   | )
|Facility maximization costs               |  |                      | 1,865  |   |                 |   | 1,018  |  
|Loss on disposal of fixed assets          |  |                      | 31     |   |                 |   |       |  
|Minority interest in income of subsidiary |  |                      | 15     |   |                 |   | 2      |  
|Other noncash expense                     |  |                      |       |   |                 |   | 133    |  
|                                          |  |                      |        |   |                 |   |        |  
|Adjusted EBITDA                           |  | $                    | 6,792  |   |                 | $ | 13,526 |  
|                                          |  |                      |        |   |                 |   |        |  



Thirty-Nine Weeks Ended
October 29, 2005 As Compared with the Thirty-Nine Weeks Ended October 30, 2004



Net Sales.Net sales for the thirty-nine weeks ended October 29, 2005 were $245.1 million, a decrease of 5.7% from the $259.8 million for the thirty-nine weeks ended October 30, 2004. Net sales of the
Companys Floorcoverings segment were $225.7 million for the thirty-nine weeks ended October 29, 2005 as compared to $241.8 million for the thirty-nine weeks ended October 30, 2004, a decrease of $16.1 million or 6.7%, primarily
attributable to the North American operations. Within these operations, the decrease in the Floorcoverings segments net sales was primarily attributable to a 17.7% decrease in broadloom sales combined with a 9.4% decrease in sales of 6-foot
roll goods. Partially offsetting these declines was a 10.7% increase in the sales of carpet tiles. The decrease in overall net sales was partially driven by customers budget constraints which resulted in those customers trading down on product
brands and/or types. The Company had also entered into certain price agreements, and had provided transactional quotes for certain products, prior to increases in the prices of raw materials used by the Company in the manufacturing of its products.
In addition, contributing to the decline in broadloom sales were operational complications associated with the facility maximization project, as discussed more fully herein and in Note 15 of the Notes to Consolidated Financial Statements
contained herein in Item 1. From an end use perspective, the current thirty-nine weeks results reflect a 7.1% decrease in Institutional sales. In addition, Corporate sales, including Retail, experienced an 8.1% decline. Net sales of the
Extrusion segment were $19.4 million for the thirty-nine weeks ended October 29, 2005 as compared to $18.0 million for the thirty-nine weeks ended October 30, 2004, an increase of $1.4 million or 7.8%. The increase in sales for the
Extrusion segment was due to overall higher sales to the Extrusion segments external customers during the thirty-nine weeks ended October 29, 2005.



Cost of Goods Sold. Cost of goods sold was $171.8 million for the thirty-nine weeks ended October 29, 2005 as compared to $167.0 million in the thirty-nine
weeks ended October 30, 2004. The increase was primarily due to the inclusion in the 2005 period expenses of $5.8 million related to the Companys planned closure of its manufacturing facility in Santa Ana, California and transfer of
production to its existing Truro, Nova Scotia facility, as compared to 2004 period expenses of $0.4 million. (See further discussion in Liquidity and Capital Resources contained herein and Note 15 of the Notes to Consolidated
Financial Statements contained herein in Item 1.) Excluding the facility maximization costs, cost of goods sold for the thirty-nine weeks ended October 29, 2005 and October 30, 2004 were $166.0 million, or 67.7%, and $166.6
million, or 64.1%, respectively. Cost of sales in the current year to date period was also impacted by a $0.5 million write-down related to inventory that will not be transferred from the Santa Ana, California facility to the Truro, Nova Scotia
facility. In addition, the Company has also experienced increases in the prices of several raw materials, including yarns, resins, and other agents and chemicals.As a percentage of sales, costs of goods sold were 70.1% and 64.3%,
respectively. The percentage increase is primarily attributable to lower overall sales volume in addition to the impact of rising raw material prices.



Selling, General and Administrative Expenses.Selling, general and administrative expenses for the thirty-nine weeks ended October 29, 2005 were $60.5
million, an increase of 3.1% from $58.7 million in the thirty-nine weeks ended October 30, 2004. The increase was primarily due to higher samples expense of $0.8 million, and a decrease in the foreign currency transaction gain of $0.7 million,
partially offset by lower salaries, taxes and benefits of $2.2 million and lower professional services expenses of $1.0 million. During the period the Company also incurred $1.1 million of supplementary administrative costs related to the delayed
exit from the Santa Ana, California facility, $0.5 million in severance charges related to specific staffing reductions, and recorded a $0.4 million litigation settlement related to the Companys previous ownership interest in Chroma Systems
Partners due to an alleged claim by Enron Energy Services, Inc. (See further discussion in Note 14 of the Notes to Consolidated Financial Statements contained herein in Item 1 and Legal Proceedings in Part II, Item 1.) In
addition, the Company incurred facility maximization costs of $1.9 million for the thirty-nine weeks ended October 29, 2005, as compared to the prior year period of $0.6 million. As a percentage of sales, these expenses increased to 24.7% from 22.5%
in the prior year.



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Amortization.Intangible asset amortization decreased to $2.0 million for the thirty-nine weeks ended
October 29, 2005 as compared to $2.3 million for the thirty-nine weeks ended October 30, 2004. The decrease was due to the Companys supply agreement being fully amortized as of April 30, 2005.



Interest Expense. Net interest expense for the thirty-nine weeks ended
October 29, 2005 and October 30, 2004 was $15.3 million and $15.1 million, respectively, which included interest income of $0.2 million and $0.1 million for the thirty-nine weeks ended October 29, 2005 and October 30, 2004,
respectively.



Income Taxes. The Company had income taxes of $0.6
million for the thirty-nine weeks ended October 29, 2005 as compared to expense of $8.4 million for the thirty-nine weeks ended October 30, 2004. During the thirty-nine weeks ended October 29, 2005, the Company experienced net
profitability in its domestic operations against which tax expense was recorded. Larger losses were incurred in the Companys foreign operations, against which no tax benefit can be recognized. The tax expense for the thirty-nine weeks ended
October 30, 2004 is a result of profitability in the Companys domestic operations, a loss in the Companys foreign operations against which no tax benefit can be recognized, and a $0.9 million valuation allowance in the third quarter
of fiscal year 2004 against certain state income tax credits related to the closure of the Companys Santa Ana, California facility (see Note 15  Facility Maximization Project).



Net Income (Loss). The Company incurred a net loss of $5.2 million for the thirty-nine
weeks ended October 29, 2005 compared to net income of $9.0 million for the thirty-nine weeks ended October 30, 2004. The primary contributors were a decrease in net sales coupled with higher facility maximization charges, as discussed
above.



Adjusted EBITDA.Adjusted EBITDA represents earnings before
interest, taxes, depreciation, amortization, non-cash charges or expenses (other than the write-down of current assets), costs related to board approved acquisitions and attempted acquisitions, expenses related to the facility maximization project
plus Chroma cash dividends and minority interest in income (loss) of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the thirty-nine weeks ended October 29, 2005 decreased to $28.1 million from $43.7 million in the thirty-nine
weeks ended October 30, 2004. As a percentage of sales, Adjusted EBITDA was 11.5% in the thirty-nine weeks ended October 29, 2005 compared to 16.8% in the thirty-nine weeks ended October 30, 2004. The decrease in the thirty-nine weeks
ended October 29, 2005 was principally due to lower sales volume in the Floorcoverings segment. In addition, due to the Companys withdrawal from the Chroma partnership as discussed in Note 12 of the Notes to Consolidated Financial
Statements contained herein in Item 1, the Companys Adjusted EBITDA decreased due to the termination of receipt of Chroma dividends. 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 benchmark for its annual budget and long range plan and as a valuation method for potential acquisitions. Consolidated EBITDA as defined under the
Companys Senior Credit Facility provides for additional adjustments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an
alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) 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 (loss) to Adjusted EBITDA is as follows (in thousands):



|                                        |  |                         |        |   |                 |   |        |  
|--------------------------------------- |  | ----------------------- | ------ | - | --------------- | - | ------ | -
|                                        |  | Thirty-Nine Weeks Ended |       
|                                        |  | October 29,2005         |        |   | October 30,2004 |  
|Net income (loss)                       |  | $                       | (5,229 | ) |                 | $ | 9,023  |  
|Income taxe expense                     |  |                         | 601    |   |                 |   | 8,418  |  
|Net interest expense                    |  |                         | 15,350 |   |                 |   | 15,149 |  
|Depreciation                            |  |                         | 7,567  |   |                 |   | 7,688  |  
|Amortization                            |  |                         | 2,006  |   |                 |   | 2,299  |  
|Chroma cash dividends                   |  |                         |       |   |                 |   | 922    |  
|Equity in earnings of Chroma            |  |                         |       |   |                 |   | (893   | )
|Facility maximization costs             |  |                         | 7,691  |   |                 |   | 1,018  |  
|Loss on disposal of fixed assets        |  |                         | 125    |   |                 |   |       |  
|Minority interest in loss of subsidiary |  |                         | (24    | ) |                 |   | (20    | )
|Other noncash expense                   |  |                         |       |   |                 |   | 133    |  
|                                        |  |                         |        |   |                 |   |        |  
|Adjusted EBITDA                         |  | $                       | 28,087 |   |                 | $ | 43,737 |  
|                                        |  |                         |        |   |                 |   |        |  



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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 funded its cash requirements through internally generated cash flows, borrowings and the offering of the senior subordinated notes.



Net cash used in operating activities for the thirty-nine weeks ended October 29, 2005 was $9.8 million compared to net cash provided by operating activities of
$14.1 million for the thirty-nine weeks ended October 30, 2004. The change was primarily due to the increased net loss of $14.2 million, coupled with higher working capital requirements of $9.7 million.



Net cash used in investing activities in the thirty-nine weeks ended October 29, 2005
was $9.6 million compared to $5.7 million in the thirty-nine weeks ended October 30, 2004. The increase in cash used in investing activities in the current year was due to increased capital expenditures. Capital expenditures for the thirty-nine
weeks ended October 29, 2005 were $9.6 million compared to $6.6 million for the thirty-nine weeks ended October 30, 2004. Included in capital expenditures for the 2005 period is $2.1 million related to the facility maximization project.
The Company anticipates capital expenditures for the remainder of the year to be approximately $1.2 million, including $0.6 million related to the completion of the facility maximization project.



Net cash provided by financing activities for the thirty-nine weeks ended October 29,
2005 was $10.5 million compared to net cash used in financing activities of $2.0 million in the thirty-nine weeks ended October 30, 2004. The cash provided by financing activities was due primarily to net cash borrowings in fiscal 2005. The
cash used in financing for the 2004 period related to repayments of long-term debt.



The Company has significant indebtedness which, as of October 29, 2005, consists of $175.0 million of 9.75% senior subordinated notes due 2010 (the 9.75% Notes), a $109.0 million credit facility which had an outstanding
balance of $30.7 million in term loan borrowings (the Senior Credit Facility), $4.9 million in purchase money and other indebtedness, and $1.2 million in sinking fund bonds under Crossley. As of October 29, 2005, the Companys
$50.0 million revolving line of credit had $7.0 million in borrowings outstanding and $4.3 million of letters of credit outstanding leaving total availability of $38.7 million.



The Companys semi-annual interest payments of the 9.75% Notes are due on each February 15 and August 15 through
February 15, 2010. The amount due on each date during fiscal 2005 is $8.5 million.



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. Potential acquisitions of businesses that complement existing operations are periodically evaluated. Depending on various factors, including, among others, the cash consideration required
in such potential acquisitions, the Company may determine to finance any such transaction with existing sources of liquidity.



On August 10, 2004, the Company and its parent announced its intent to close its manufacturing facility in Santa Ana, California, and transfer the production to its
existing Truro, Nova Scotia, Canada facility. The plan to close the facility was approved on August 9, 2004, and the transition of all production processes was completed by the end of the Companys third fiscal quarter in 2005. The Company
had previously expected that the consolidation of the facilities would be completed by the end of the Companys first fiscal quarter in 2005. However, the transfer of production was slowed to accommodate the training of associates and the
completion of certain manufacturing system enhancements. During the delayed transition the Company experienced production inefficiencies which resulted in delayed deliveries to its customers. It is currently estimated that the remaining costs
associated with the project will be approximately $0.3 million and consist primarily of contingency-related expenses. The Company also expects additional capital expenditures of approximately $0.6 million related to the project.



As part of the facility maximization project, the Company negotiated with the Nova Scotia
government the forgiveness of debt consisting of the remaining $1.2 million of Crossleys outstanding sinking fund bonds. The forgiveness will commence in the fourth quarter of fiscal 2005, will be over the remaining five-year term of the
current note, and is based upon maintaining a defined level of full-time equivalent employees. The debt is also non-interest bearing.



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The costs incurred and the anticipated expenditures remaining are as follows (in
millions):



|                                              |  |                                                     |     |                                                          |   |      |                                         |  |                                  |      |  |   |    
|--------------------------------------------- |  | --------------------------------------------------- | --- | -------------------------------------------------------- | - | ---- | --------------------------------------- |  | -------------------------------- | ---- |  | - | ---
|                                              |  | Anticipated TotalExpenditures As of August 20, 2004 |     | Change in Estimate ofExpenditures As of October 29,
2005 |   |      | Amounts Incurred As of October 29, 2005 |  | AnticipatedRemainingExpenditures
|Severance Costs                               |  | $                                                   | 1.8 |                                                          | $ | 0.3  |                                         |  | $                                | 2.1  |  | $ |   
|Contractual Obligations and Professional Fees |  |                                                     | 3.1 |                                                          |   | (1.9 | )                                       |  |                                  | 1.2  |  |   |   
|Other Project Costs                           |  |                                                     | 1.5 |                                                          |   | 7.2  |                                         |  |                                  | 8.4  |  |   | 0.3
|                                              |  |                                                     |     |                                                          |   |      |                                         |  |                                  |      |  |   |    
|Gross Project Expenditures                    |  | $                                                   | 6.4 |                                                          | $ | 5.6  |                                         |  | $                                | 11.7 |  | $ | 0.3
|                                              |  |                                                     |     |                                                          |   |      |                                         |  |                                  |      |  |   |    



The accrued facility maximization
costs at January 29, 2005 and October 29, 2005 amounted to $0.8 million and $0.1 million, respectively, which consisted of severance and other projected related costs. These costs are included in accrued expenses in the accompanying
consolidated balance sheets.



Effective October 29, 2005,
the Company amended its Senior Credit Facility to modify certain financial covenants. The amendment eliminated the interest coverage ratio requirement and modified the fixed charge coverage ratio (as defined) for third quarter of fiscal 2005 and all
future measurement periods to be 1.0 to 1.0. The amendment also provides for the incurrence of additional costs related to the Companys broadloom consolidation project. There was no modification to the senior leverage ratio covenant. The
Company was in compliance with all covenants as of October 29, 2005 and currently expects to remain in compliance throughout fiscal 2005, although no assurances to that effect can be given. In addition to the modification to the covenants, the
amendment reset the Companys $5 million investment basket and provides the Company the ability to purchase its Subordinated Notes subject to a minimum senior leverage ratio and minimum liquidity requirements. As is customary in debt
agreements, in the event the Company is not in compliance with the covenants of the Senior Credit Facility, the Company will also be subject to the provisions of a cross-default for the 9.75% Senior Subordinated Notes (the 9.75% Notes).



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



Petroleum-based products comprise a predominant portion of raw materials the Company uses in manufacturing. While the Company attempts to match these increases with
corresponding price increases, large increases in the cost of petroleum-based raw materials has and could adversely affect the future financial results of the Company if it is unable to pass through such price increases in raw material costs to
customers.



The impact of inflation on the Companys operations has not
been significant in recent years with the exception of petroleum-based products noted above which have risen due to demand. 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 if the Company is unable to pass through the cost increases to its customers.



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 while schools generally are closed and floorcoverings can be installed.



RELIANCE ON PRIMARY THIRD-PARTY SUPPLIER OF NYLON YARN



Invista, Inc. (Invista) currently supplies a majority of the Companys
requirements for nylon yarn, the primary raw material used in the Companys floorcovering products. The unanticipated termination or interruption of the supply arrangement with Invista could have a material adverse effect on the Company because
of the cost and delay associated with shifting this business to another supplier. Historically, the Company has not experienced significant interruptions in the supply of nylon yarn from Invista, although no assurances can be given.



RECENT ACCOUNTING PRONOUNCEMENTS



In October 2005, the FASB issued FASB Staff Position FAS 123(R)-2,
Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R) (FSP FAS 123(R)-2). FSP FAS 123(R)-2 provides an exception to the application of the concept of mutual
understanding as expressed in FASB Statement No. 123(R), Share-Based Payment (SFAS No.



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123(R)), regarding the determination of whether a grant date or measurement date, as applicable, has occurred. The exception permits companies to
measure compensation cost for equity awards to employees on the Board approval date if certain conditions are met, provided that the communication to the employees occurs within a relatively short period of time from the approval date.
The guidance in FSP FAS 123(R)-2 is to be applied upon initial adoption of SFAS No, 123(R), or to the first reporting period after October 18, 2005, for which financial statements or interim reports have not been issued should an entity have
previously adopted the provisions of SFAS No. 123(R). The Company does not expect the adoption of FSP FAS 123(R)-2 to have a material impact on its consolidated financial statements.



In October 2005, the FASB issued FASB Staff Position FAS 13-1, Accounting for Rental Costs Incurred during a
Construction Period (FSP FAS 13-1). FSP FAS 13-1 states that rental costs associated with ground or building operating leases that are incurred during a construction period should be recognized as rental expense and included in
income from continuing operations. The

guidance is to be applied to the first reporting period beginning after December 15, 2005. Early adoption and
retrospective application are permitted but not required. The Company does not expect the adoption of the provisions of FSP FAS 13-1 to have a material impact on its consolidated financial statements.



In August 2005, the FASB issued FASB Staff Position FAS 123(R)-1,
Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R) (FSP FAS 123(R)-1). FSP FAS 123(R)-1 defers indefinitely the
requirement of SFAS No. 123(R) that a share-based payment to an employee subject to SFAS No. 123(R) becomes subject to the recognition and measurement requirements of other applicable GAAP when the rights conveyed by the instrument are no
longer dependent on the holder being an employee. A freestanding instrument issued to an employee in exchange for past or future employee services that is subject to SFAS No. 123(R) or was subject to SFAS No. 123 (R) upon initial
adoption shall continue to be subject to the recognition and measurement provisions of SFAS No. 123(R) throughout the life of the instrument, unless its terms are modified when the holder is no longer an employee. The deferral excludes awards
exchanged for nonemployee services or a combination of employee and nonemployee services. The deferral does not have a material impact on the Companys consolidated financial statements.



In July 2005, the FASB issued FASB Staff Position APB 18-1, Accounting
by an Investor for its Proportionate Share of Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, upon a Loss of
Significant Influence (FSP APB 18-1). FSP APB 18-1 requires that if an investor loses significant influence over an investee, the investors proportionate share of the investees equity adjustments for Other Comprehensive
Income should be offset against the carrying value of the investment at the time significant influence is lost by the investor. To the extent that the offset results in a negative carrying value of the investment, an investor should reduce the
carrying value of the investment to zero and record the remaining balance in income. FSP APB 18-1 is effective as of the first reporting period beginning after July 12, 2005. Comparative financial statements shall be retrospectively adjusted to
reflect application of these provisions. The adoption of FSP APB 18-1 did not have an impact on the Companys consolidated financial statements.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement
No. 3 (SFAS No. 154). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS
No. 154 requires retrospective application to prior periods financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS
No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that the adoption of SFAS No. 154 will have a material impact on the Companys consolidated
financial statements.



In March 2005, the FASB issued FASB
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (FIN 47), which requires an entity to recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the liabilitys fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not expect the
adoption of FIN 47 to have a material impact on its consolidated financial statements.



In December 2004, the FASB issued FASB Staff Position 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109) to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004 (FSP 109-1). The American Jobs Creation Act of 2004 (the Jobs Act), enacted October 22, 2004, introduces a special tax deduction of up to 9.0
percent when fully phased in, of the lesser of qualified production activities income or taxable income. FSP 109-1 clarifies that this deduction should be accounted for as a special tax deduction in accordance with SFAS No. 109. The
Company is currently evaluating the benefit, if any, that FSP No. 109-1 will have on its consolidated financial statements, and expects to complete the evaluation within the fourth quarter of fiscal year 2005.



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In December 2004, the FASB issued FASB Staff Position 109-2, Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2), which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of
the Jobs Act on enterprises income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment for purposes of applying FASB Statement No. 109. The Company
has not yet completed evaluating the impact of the repatriation provisions and has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.



In December 2004, the FASB issued SFAS No. 123R, Share-Based
Payment (SFAS No. 123R). This statement is a revision to SFAS No. 123 and supersedes APB Opinion No. 25. This statement establishes standards for the accounting for

transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains
employee services in share-based payment transactions. Companies will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share
options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the modification. SFAS No. 123R will be effective for fiscal years beginning after June 15, 2005, due to the Securities and Exchange Commissions Rule 2005-57, which
amended the effective date of SFAS No. 123R. Accordingly the Company will adopt SFAS No. 123R on January 29, 2006. The Company does not expect that the adoption of SFAS No. 123R will have a material impact on the Companys
consolidated financial statements.



In November 2004, the FASB
issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs-An Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility
expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of so abnormal as stated in ARB No. 43. Additionally, SFAS No. 151
requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company is
currently evaluating SFAS No. 151 and does not expect it to have a material impact on the Companys consolidated financial statements.



CRITICAL ACCOUNTING POLICIES



Significant accounting policies are more fully described in Note 2 to the audited consolidated financial statements included in the Companys Form 10-K for the year
ended January 29, 2005. Certain of the accounting policies require the application of significant judgments 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 historical experience, terms of existing contracts, current economic trends in the industry, information provided by customers,
and information available from outside sources, as appropriate. The Companys significant accounting policies include:



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



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



Foreign Currency
Translation.Effective July 31, 2005, the Companys Canadian subsidiary adopted the U.S. dollar as its functional currency. Prior to this date, the Canadian dollar had served as the subsidiarys functional currency. The transition
to the U.S. dollar as the functional currency is primarily due to the high volume of this subsidiarys transactions that are denominated in U.S. dollars, the high volume of intercompany transactions, and the extensive interrelationship between
the Companys U.S. operations and those of the Canadian subsidiary. The financial information of the Companys Canadian subsidiary for the quarter ended July 30, 2005 and prior periods have been presented in U.S. dollars in accordance
with a translation of convenience method using the exchange rate at July 30, 2005 of US$1.00 - CDN$1.2241, the Bank of Canada closing buying rate at July 30, 2005. For periods subsequent to July 30,



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2005, the Canadian dollar amounts are remeasured into the U.S. dollar reporting currency using the temporal method. When the temporal method is used to
translate the local currency of a foreign entity into its functional currency, the resulting translation adjustment is reported in the current periods statement of operations.



Assets and liabilities of the Companys U.K. and Asian subsidiaries are translated to U.S. dollars at period end exchange rates. Income
and expense items are translated at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of stockholders equity. Foreign currency gains (losses) are recognized in the current
periods statement of operations.



Foreign currency gains recognized in
the consolidated statements of operations were $0.1 million and $0.8 million for the thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively, and $0.8 million for the thirteen weeks ended October 30, 2004. There
was minimal foreign currency loss for the thirteen-week period ended October 29, 2005.



Impairment of Goodwill and Indefinite Lived Intangible Assets. In addition to the annual impairment tests required by SFAS No. 142, the Company may periodically evaluate the carrying value of its goodwill and indefinite lived
intangible asset for potential impairment. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance. Future events could cause the Company to conclude that impairment
indicators exist and that goodwill and indefinite lived intangible asset associated with acquired businesses is impaired. Any resulting impairment loss could have a material adverse impact on the Companys financial condition and results of
operations.



Accounts Receivable Allowances. 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.



Inventories. 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.



Income Taxes. The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded
for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements using statutory rates. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the results of operations in the period that includes the rate change.



FORWARD-LOOKING STATEMENTS



The Company has made in
this Form 10-Q and from time to time may 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 investors.
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, intends, 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 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; continued compliance with the covenants under the Companys Senior Credit
Facility; 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; and environmental matters.



In addition, these forward-looking statements may not be realized due to the Companys
failure to complete the transition to a single broadloom manufacturing facility by the end of the third quarter of this year as a result of, among other things, unanticipated training and machinery installation delays, additional increases in costs
for this project due to additional training and infrastructure requirements, any delay in the expected timing of the anticipated positive impact of the facility maximization on the Companys income statement as a result of unforeseen
fluctuations in orders and/or related expenses, and other risks and factors identified in the



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Companys filings with the Securities and Exchange Commission. The Company undertakes no obligation to revise these statements following the date of the
filing of this Form 10-Q for any reason. All written or oral forward-looking statements that are made or are attributable to the Company with respect to the facility maximization project are expressly qualified by this cautionary notice.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



There was no material change during the thirty-nine weeks ended October 29, 2005 in the information provided in response to Part I, Item 7A of the Companys annual report on Form 10-K for the fiscal year
ended January 29, 2005.



Item 4. Controls and Procedures



As of
October 29, 2005, 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-15. 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 were no changes in the Companys internal controls over financial reporting that
occurred during the period covered by this report that have materially affected or that are reasonably likely to materially affect the Companys internal controls over financial reporting.



The Companys management has confidence in the Companys internal controls and
procedures. Nevertheless, management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the disclosure procedures and controls or internal controls will prevent all errors or intentional fraud. An internal
control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company has been detected.



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PART II  OTHER INFORMATION



Item 1. Legal Proceedings



On June 21, 2005, the Company filed in Rome, Georgia a joint lawsuit with Shaw Industries Group, Inc. (Shaw) and Mohawk Industries, Inc. (Mohawk) against Interface Corporation, regarding a patent on a particular
pattern of carpet tile that Interface recently received (the Rome Action). The Rome Action asks the court to declare that the Interface patent is invalid, unenforceable and not infringed. Interface, on the same day, filed separate suits
in Atlanta, Georgia against the Company and other carpet manufacturers asserting infringement of the aforementioned patent. In response to motions filed both in the Rome Action and with the court in Atlanta, Interfaces suits against the
Company, Shaw and Mohawk were transferred to Rome, Georgia and consolidated with the Rome Action. The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. The parties are preparing a joint preliminary report and discovery plan that will
be filed with the court on December 21, 2005.



As previously
reported, Employers Mutual Insurance Companies (EMC) filed suit in the United States District Court for the Southern District of Iowa on August 6, 2002 alleging that carpet tile sold by the Company to EMC in 1996 and 1997 experienced
premature wearing and discoloration, and asserted that the Company should pay damages based upon theories of violation of warranties, negligence and fraud. On March 18, 2004, the jury entered a verdict in favor of the Company on the fraudulent
misrepresentation and fraudulent nondisclosure claims and in favor of EMC on the express oral warranty and implied warranty of fitness for particular purpose and awarded EMC $0.8 million in damages for full replacement of this carpet. The Company
appealed and on August 16, 2005, the appellate court granted the Companys appeal. Subsequently, on September 12, 2005, EMC agreed to terminate its suit, releasing the Company of all liability for damages. Accordingly, the Company released the
litigation accrual related to this suit in full in the third quarter of fiscal 2005.



Monterey Carpets, Inc., (Monterey) in connection with its previous 50% ownership interest in Chroma Systems Partners (Chroma), is a co-defendant in an alleged claim by Enron Energy Services,
Inc. (Enron) that Chroma and its partners are liable for amounts related to certain energy contracts which existed between Chroma and Enron prior to the filing of Enrons Chapter 11 proceedings. The Company has agreed to enter into
a $0.4 million settlement agreement, pending approval by the bankruptcy court. During fiscal 2004, Monterey terminated its partnership interest in Chroma as part of the facility maximization project.



From time to time the Company is subject to claims and suits arising in the
ordinary course of business, including workers compensation and product liability claims, which may or may not be covered by insurance. Management believes that the various asserted claims and litigation in which the Company is currently
involved will not have a material adverse effect on its financial position or results of operations.



Item 5. Other Information



Effective October 29, 2005, the Company amended its Senior Credit Facility to modify certain financial covenants. The amendment eliminated the interest coverage ratio requirement and modified the fixed charge coverage ratio (as
defined) for third quarter of fiscal 2005 and all future measurement periods to be 1.0 to 1.0. The amendment also provides for the incurrence of additional costs related to the Companys broadloom consolidation project. There was no
modification to the senior leverage ratio covenant. The Company was in compliance with all covenants as of October 29, 2005. In addition to the modification to the covenants, the amendment reset the Companys $5 million investment basket
and provides the Company the ability to purchase its Subordinated Notes subject to a minimum senior leverage ratio and minimum liquidity requirements.



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Item 6. Exhibits



|      |  |                                                                                                                                                                                                                  
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)   |  | Exhibits                                                                                                                                                                                                         
|      | 
|10.16 |  | Amendment No. 4 to Credit Agreement, dated October 29, 2005, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Lenders (as defined therein) and Credit Suisse, as
Administrative Agent.
|      | 
|31.1  |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                          
|      | 
|31.2  |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                          
|      | 
|32.1  |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                           
|      | 
|32.2  |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                           



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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 December 13, 2005.



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

/s/ Leonard F. FerroLeonard F. FerroVice President and Chief Financial Officer(duly authorized officer and principal financial and accounting officer)




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