##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION


Washington D.C. 20549





---




FORM 10-Q





xQuarterly Report Pursuant to Section 13 or 15(d)


of the Securities Exchange Act
of 1934





For the quarterly period ended October 26, 2002





 ̈ Transition Report Pursuant to Section 13 or 15(d)


of the Securities Exchange Act of 1934





Commission File Number 333-88212





COLLINS & AIKMAN FLOORCOVERINGS, INC.


(Exact name of registrant as specified in its charter)





Delaware

58-2151061(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)





311 Smith Industrial Boulevard, Dalton, Georgia

30721(Address of principal executive offices)

(Zip Code)





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





Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No  ̈





Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


Yes  ̈ No x





The
Registrant has 1,000 shares of Common Stock, par value $.01 per share, issued and outstanding as of December 6, 2002.





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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES





INDEX








Page No.Part I.    Financial InformationItem 1.    Financial StatementsConsolidated Statements of Operations  Thirteen Weeks and Thirty-Nine Weeks Ended October 27, 2001 and October 26, 2002

3Consolidated Balance Sheets  As of January 26, 2002 and October 26, 2002

4Consolidated Statements of Stockholders Equity  Thirty-Nine Weeks Ended October 26, 2002

5Consolidated Statements of Cash Flows  Thirteen Weeks and Thirty-Nine Weeks Ended October 27, 2001 and October 26, 2002

6Notes to Consolidated Financial Statements

7Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations

24Item 3.    Quantitative and Qualitative Disclosures and Market Risk

31Item 4.    Controls and Procedures

32Part II.  Other InformationItem 1.    Legal Proceedings

32Item 6.    Exhibits and Reports on Form 8-K

32Signature

33Certifications

34







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##### Table of Contents




PART 1  FINANCIAL INFORMATION


Item 1.    Financial Statements





COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited and In Thousands)





Thirteen Weeks Ended


Thirty-Nine Weeks EndedOctober 27, 2001


October 26, 2002


October 27, 2001

October 26, 2002NET SALES

$
82,433


$
84,282


$
260,291

$
250,597COST OF GOODS SOLD


54,997



57,425



167,096


162,644SELLING, GENERAL & ADMINISTRATIVE EXPENSES


17,415



17,913



58,173


54,23172,412



75,338



225,269


216,875OPERATING INCOME


10,021



8,944



35,022


33,722MINORITY INTEREST IN INCOME (LOSS) OF SUBSIDIARY


(23
)


(1
)


45


5EQUITY IN EARNINGS OF AFFILIATE


367



484



1,314


1,493NET INTEREST EXPENSE


8,598



5,464



20,403


18,751INCOME BEFORE INCOME TAXES


1,813



3,965



15,888


16,459INCOME TAX EXPENSE


738



1,775



7,041


6,585INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE


1,075



2,190



8,847


9,874CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX













(2,009
)NET INCOME

$
1,075


$
2,190


$
8,847

$
7,865





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




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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(In Thousands)





January 26, 2002


October 26, 2002ASSETS




(Unaudited)CURRENT ASSETS:Cash and cash equivalents

$
6,234


$
10,681Accounts receivable, net of allowance of $745 and $737 in fiscal 2001 and 2002, respectively


33,524



44,475Inventories


31,834



37,827Deferred tax assets


3,955



2,104Prepaid expenses and other


1,667



2,282Total current assets


77,214



97,369PROPERTY, PLANT, AND EQUIPMENT, net


45,390



65,369DEFERRED TAX ASSETS


3,876



3,116GOODWILL


95,987



106,341OTHER INTANGIBLE ASSETS, net


40,560



37,615OTHER ASSETS


7,406



10,464TOTAL ASSETS

$
270,433


$
320,274LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable

$
11,416


$
13,850Accrued expenses


19,150



20,315Current portion of long-term debt


4,787



1,194Total current liabilities


35,353



35,359OTHER LIABILITIES, including post-retirement benefit obligation


3,991



3,985LONG-TERM DEBT, net of current portion


185,197



230,026MINORITY INTEREST


310



315COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock; $.01 par value per share, 1,000 shares authorized, issued, and outstanding in fiscal 2001 and
2002






Paid-in capital


72,648



72,648Retained deficit


(26,108
)


(20,836
)Accumulated other comprehensive loss


(958
)


(1,223
)45,582



50,589TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
270,433


$
320,274





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 26, 2002


(Unaudited and In Thousands,
Except Share Amounts)





Common Stock






Accumulated Other Comprehensive Income (Loss)Shares

Amount

Paid-in Capital

Retained Earnings (Deficit)


Foreign Currency Translation Adjustment


Minimum Pension Liability


TotalBALANCE, January 26, 2002

1,000

$


$
72,648

$
(26,108
)

$
(519
)

$
(439
)

$
45,582Net income










7,865











7,865Dividend to parent










(2,593
)










(2,593
)Foreign currency translation adjustment














(265
)






(265
)BALANCE, October 26, 2002

1,000

$


$
72,648

$
(20,836
)

$
(784
)

$
(439
)

$
50,589





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 EndedOctober 27, 2001


October 26, 2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
8,847


$
7,865Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and leasehold amortization


7,521



6,543Amortization of other intangible assets


5,891



2,946Amortization of deferred financing fees


819



3,757Deferred income tax expense


1,958



3,842Equity in earnings of affiliate


(1,314
)


(1,493
)Minority interest in income of subsidiary


45



5Cumulative effect of change in accounting principle, net of tax






2,009Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable


3,734



(10,951
)Inventories


(1,089
)


(4,562
)Accounts payable


(4,225
)


2,434Accrued expenses


5,326



1,165Other, net


(1,052
)


(1,336
)Total adjustments


17,614



4,359Net cash provided by operating activities


26,461



12,224CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of business






(35,132
)Equity distribution from affiliate


1,137



1,678Additions to property, plant, and equipment


(7,712
)


(5,965
)Net cash used in investing activities


(6,575
)


(39,419
)CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from revolving credit facilities


(3,000
)


Proceeds from issuance of long-term debt


76



175,000Repayments of long-term debt


(11,781
)


(133,957
)Cash dividends to parent






(2,593
)Financing costs






(6,808
)Net cash (used in) provided by financing activities


(14,705
)


31,642NET CHANGE IN CASH AND CASH EQUIVALENTS


5,181



4,447CASH AND CASH EQUIVALENTS, beginning of period


5,751



6,234CASH AND CASH EQUIVALENTS, end of period

$
10,932


$
10,681





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







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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


|1. |  | General
|-- |  | -------




The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and related notes thereto included in the Companys Form S-4 and amendments which was initially filed with the Securities and Exchange Commission on May 14, 2002 and made effective on August 12,
2002. The accompanying unaudited consolidated financial statements, in the opinion of management, include all adjustments necessary for fair presentation. All such adjustments are of a normal and recurring nature.





|2. |  | Organization
|-- |  | ------------




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





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





|3. |  | Reclassifications
|-- |  | -----------------




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





|4. |  | Cash and Cash Equivalents
|-- |  | -------------------------




The Company considers all short-term deposits and investments with original maturities of three months or less to be cash equivalents.




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|5. |  | Inventories
|-- |  | -----------




Net inventory balances are summarized below (in thousands):





January 26, 2002

October 26, 2002(Unaudited)Raw materials

$
12,121

$
17,691Work in process


4,693


6,463Finished goods


15,020


13,673$
31,834

$
37,827





|6. |  | Revenue Recognition
|-- |  | -------------------




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





The Company provides installation services to customers utilizing
independent third-party contractors. The billings and expenses for these services are included in net sales and cost of goods sold, respectively, in the accompanying consolidated statements of operations. These billings and expenses were $10.0
million and $11.1 million for the thirty-nine weeks ended October 26, 2002 and October 27, 2001, respectively, and $5.1 million and $5.3 million for the thirteen weeks ended October 26, 2002 and October 27, 2001, respectively.





|7. |  | Accrued Expenses
|-- |  | ----------------




Accrued expenses are summarized below (in thousands):





January 26, 2002

October 26, 2002(Unaudited)Payroll and employee benefits

$
5,192

$
7,027Accrued taxes


2,517


3,443Customer claims


1,475


1,972Fair value of derivative instruments


5,162


Accrued interest


1,796


3,903Customer deposits


615


633Accrued professional fees


765


1,285Other


1,628


2,052$
19,150

$
20,315





|8. |  | Goodwill and Other Intangible Assets
|-- |  | ------------------------------------




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




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SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires companies to identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS No. 142.
SFAS No. 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires a
transitional test for potential impairment of goodwill within six months of adoption, while a second test, if needed, measures the amount of impairment, if any. Any impairment charge resulting from the transitional impairment tests will be reflected
as the cumulative effect of a change in accounting principle. The Company expects to evaluate goodwill for impairment during the fourth quarter of each year.





In connection with the adoption of SFAS No. 142, the Company obtained independent appraisals to determine the fair values of these intangible assets as of January 27, 2002
and compared their fair values with their carrying values. The Company has determined that the goodwill associated with Crossley Carpet Mills Limited (Crossley) is impaired based upon the fair values compared to the carrying value.





The impact of recent economic conditions and industry specific conditions affecting Crossleys business
resulted in reduced fair values and gave rise to a non-cash goodwill impairment charge of $3.2 million pre-tax or $2.0 million, net of tax. The goodwill impairment charge was recorded retroactively to January 27, 2002 as a cumulative effect of a
change in accounting principle for goodwill impairment in accordance with SFAS No. 142.





This non-cash goodwill
impairment charge does not impact the Companys liquidity, cash flow or its compliance with financial or other covenants under its credit agreement or other contractual arrangements.





As noted above, the non-cash goodwill impairment charge is to be recorded as a cumulative effect of a change in accounting principle retroactive to January 27, 2002. The
table below reflects the impact of this accounting change on the consolidated statement of operations of the Company for the following periods.





Thirteen Weeks Ended April 27, 2002


Twenty-Six Weeks Ended July 27, 2002Net Income (Loss):As reported

$
(1,348
)

$
7,686Cumulative effect of change in accounting principle, net of tax


(2,009
)


(2,009
)As adjusted

$
(3,357
)

$
5,677




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SFAS No. 142 requires disclosure of the income (loss) before extraordinary items
after being adjusted to reflect the results for the respective periods as if SFAS No. 142 had been in effect for all periods presented. The impact of these items is shown net of tax.





Thirteen Weeks Ended October 27, 2001

Thirty-Nine Weeks Ended October 27, 2001Net income

$
1,756

$
10,914A reconciliation from the previously reported results to the adjusted results for the thirteen weeks and thirty-nine weeks
ended October 27, 2001 is as follows:Thirteen Weeks Ended October 27, 2001

Thirty-Nine Weeks Ended October 27, 2001Net income as reported

$
1,075

$
8,847Plus: Goodwill amortization


520


1,534Plus: Trade name amortization


161


533Adjusted net income

$
1,756

$
10,914October 26, 2002Gross Carrying Amount

Accumulated AmortizationAmortized intangible assets:Non-compete

$
12,000

$
(10,889
)Patent


27,000


(14,109
)Total

$
39,000

$
(24,998
)The patent is being amortized over an eleven-year period using the straight-line method. The non-compete is being
amortized over a seven-year period using a double-declining balance method.Unamortized intangible assets:Trade name

$
23,613Thirteen Weeks Ended October 26, 2002

Thirty-Nine Weeks     Ended October 26, 2002Aggregate amortization expense

$
988

$
2,946Estimated amortization expense:Fiscal 2002

$
3,932Fiscal 2003

$
3,193Fiscal 2004

$
2,455Fiscal 2005

$
2,455Fiscal 2006

$
2,455




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The changes in the carrying amount of goodwill for the period ended October 26,
2002 is as follows:





FLOORCOVERINGS SEGMENT


EXTRUSION SEGMENT

TOTALBalance as of January 26, 2002

$
95,987


$


$
95,987Goodwill acquired during the year






13,594


13,594Impairment loss


(3,240
)





(3,240
)Balance as of October 26, 2002

$
92,747


$
13,594

$
106,341





|9. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------




In June 2001, the FASB approved the issuance of SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 establishes accounting standards for the recognition and measurement
of legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 will become effective for the Company January 26, 2003 and requires recognition of a liability for an asset retirement obligation in the period in which
it is incurred. SFAS No. 143 is not expected to materially impact the Companys financial statements.





In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers, FASB Statement No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements, and amends FASB Statement No. 13, Accounting for Leases. SFAS No. 145 addresses the treatment of gains and losses related to debt extinguishments and should only be classified as extraordinary items if they meet
certain criteria. The provisions of this Statement are effective beginning May 15, 2002. The financial statements included herein reflect the adoption of SFAS No. 145 as of the beginning of the Companys fiscal year. Prior year financial
statements have also been restated to reflect the adoption of SFAS No. 145.





In June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated With Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies emerging issues task force issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). This statement requires that a liability for a cost associated with an exit
or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early
application encouraged. We are in the process of evaluating the impact this standard will have on our financial statements.




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|10. |  | Long-Term Debt
|--- |  | --------------




On February 20, 2002, the Company (the Issuer) issued at par value $175.0 million of 9.75% Senior Subordinated Notes due 2010 (the 9.75% Notes). Interest is payable semiannually in arrears on February 15 and
August 15, commencing August 15, 2002. The 9.75% Notes are unsecured obligations of the Issuer and are subordinated in right of payment to all existing and future senior debt of the Issuer. The indenture governing the 9.75% Notes contains certain
restrictive covenants that limit the ability of the Issuer among other things, to incur additional indebtedness, to pay dividends or make certain other restricted payments, and to put limitations on the incurrence of indebtedness, asset
dispositions, and transactions with affiliates. The 9.75% Notes are guaranteed on a senior subordinated basis by the Issuers existing domestic subsidiaries.





The proceeds of the offering were used to retire $125.0 million of term bank debt plus accrued interest of $0.7 million, pay fees and offering expenses of $6.3 million, and
terminate existing interest rate hedging agreements for $5.5 million. The remaining proceeds of $37.5 million were used for general working capital purposes and to fund the Companys acquisition of an extrusion manufacturing facility on May 8,
2002. In connection with this term debt prepayment, the Company recorded the write-off of a pro-rata share of deferred financing costs associated with the term debt. The amount of these expenses were $2.6 million and are reflected in interest
expense in the consolidated statement of operations.





Upon the occurrence of certain events, as set forth in the
indenture, the Issuer is required to repurchase the 9.75% Notes at a purchase price in cash equal to 101.0% of the principal amount, plus accrued and unpaid interest at the date of repurchase. Prior to February 15, 2005, the Issuer can redeem up to
35.0% of the original principal amount of the 9.75% Notes with the proceeds of an equity offering at a price of 109.75% of the principal amount, plus accrued and unpaid interest at the date of repurchase.





On or after February 15, 2006, the Issuer can redeem all or a portion of the 9.75% Notes at the redemption prices listed below, plus
accrued and unpaid interest at the date of repurchase if redeemed during the twelve month period commencing February 15 th of the years set forth below.





Period

Redemption Price2006

104.875%2007

102.438%2008 and Thereafter

100.000%





In connection with the 9.75% Notes offering, the Company amended
its Senior Credit Facility (Senior Credit Facility). The amended Senior Credit Facility consists of $59.0 million in term loan borrowings and a $50.0 million revolving credit line, which includes a letter-of-credit sublimit of $15.0
million. In addition, the amended Senior Credit Facility allows for up to $75.0 million of additional term loans to be made under the existing facility, subject to one or more lenders committing to provide such loans and other specific requirements,
including compliance with financial covenants.





The amended Senior Credit Facility bears interest at a per annum
rate equal to the Companys choice of (a) an adjusted rate based on LIBOR plus a Eurodollar margin or (b) an alternative base rate, as defined by the Senior Credit Facility, plus a base rate margin. With respect to the revolving facility, the
Eurodollar margin and the base rate margin adjust quarterly on a sliding scale based on our leverage ratio for the immediately preceding four consecutive fiscal quarters. With respect to the term loan, the Eurodollar margin is 3.5% and the base rate
margin is 2.5%.





The term loan matures on January 25, 2008. Approximately 0.25% of the principal amount is payable
each quarter commencing March 31, 2003 through March 31, 2007, with the remaining approximately 95.0% of the principal amount payable in four installments on June 30, September 30 and December 31, 2007, and January 25, 2008. Borrowings under the
revolving Senior Credit Facility are due January 25, 2007 and may be repaid and reborrowed from time to time prior to maturity.




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The amended Senior Credit Facility contains covenants, representations and warranties that are customary in credit
agreements and security instruments relating to financing of this type. Obligations under the Senior Credit Facility are secured by a pledge of all the Companys capital stock, substantially all tangible and intangible assets and 65.0% of the
capital stock of, or equity interest in, each of the foreign subsidiaries. All obligations under the Senior Credit Facility are guaranteed by all present and future domestic subsidiaries.





During the thirteen weeks ended October 26, 2002, the Company prepaid $1.5 million of the term loan. In connection with these term debt prepayments, the Company recorded
the write-off of a pro-rata share of deferred financing costs associated with the term debt. The amounts of these expenses were $0.1 million and are reflected in interest expense in the consolidated statement of operations.





Total net interest expense was $5.5 million and $8.6 million for the thirteen weeks ended October 26, 2002 and October 27, 2001,
respectively, which included minimal interest income. Total net interest expense was $18.8 million and $20.4 million for the thirty-nine weeks ended October 26, 2002 and October 27, 2001, respectively, which included interest income of $0.2 million
and $0.1 million, respectively.





11.    Segment Information





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





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





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





No single customer amounted to or exceeded 10.0% of the Floorcovering segments sales for any period presented. The Extrusion segments largest customer accounted
for 78% and 73% of sales in the thirteen weeks and thirty-nine weeks ended October 26, 2002, respectively, as a result of a supply agreement with the seller.





As discussed in Note 8, a non-cash goodwill impairment charge of $3.2 million pre-tax or $2.0 million net of tax, was recorded in the Floorcoverings segment. The charge was recorded retroactively
to January 27, 2002 as a cumulative effect of change in accounting principle.







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The table below provides certain financial information by segment:





Thirteen Weeks Ended

Thirty-Nine Weeks EndedOctober 27, 2001

October 26, 2002

October 27, 2001

October 26, 2002Net Sales to External CustomersFloorcoverings

$
82,433

$
75,985

$
260,291

$
234,667Extrusion





8,297





15,930Total Sales to External Customers

$
82,433

$
84,282

$
260,291

$
250,597





Thirteen Weeks Ended

Thirty-Nine Weeks EndedOctober 27, 2001

October 26, 2002

October 27, 2001

October 26, 2002Adjusted EBITDAFloorcoverings

$
14,857

$
11,867

$
49,571

$
42,347Extrusion





1,193





2,542Total Adjusted EBITDA

$
14,857

$
13,060

$
49,571

$
44,889





January 26, 2002

October 26, 2002Consolidated AssetsFloorcoverings

$
270,433

$
278,453Extrusion





41,821Total Consolidated Assets

$
270,433

$
320,274





12.    Investment in Equity Affiliate





Monterey Carpets, Inc. has a one-half ownership interest in Chroma Systems Partners (Chroma), which operates a carpet
dyeing and finishing plant. Because the Company does not exercise control over the partnership, the Company accounts for the partnership under the equity method of accounting. The condensed financial information of Chroma for the thirty-nine weeks
ended October 27, 2001 and October 26, 2002 and as of October 27, 2001 and October 26, 2002, are summarized below:





As of October 27, 2001

As of October 26, 2002Current Assets

$
2,182

$
2,105Non-current Assets


9,005


8,552Total Assets

$
11,187

$
10,657Current Liabilities

$
1,337

$
1,156Long Term Debt


5,236


5,102Partners Capital


4,614


4,399Total Liabilities and Partners Capital

$
11,187

$
10,657







14




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##### Table of Contents

Thirty-Nine Weeks EndedOctober 27,2001

October 26, 2002Net Sales

$
14,292

$
13,109Cost of Goods Sold


10,909


9,491Gross Profit


3,383


3,618Income From Operations


2,709


2,999Net Income


2,675


2,970





13.    Comprehensive Income





Comprehensive income is as follows:





Thirteen Weeks Ended

Thirty-Nine Weeks EndedOctober 27,2001


October 26, 2002

October 27,2001


October 26, 2002NET INCOME

$
1,075


$
2,190

$
8,847


$
7,865OTHER COMPREHENSIVE INCOME (LOSS):Foreign Currency Translation Adjustments


(233
)


65


(377
)


(265
)COMPREHENSIVE INCOME

$
842


$
2,255

$
8,470


$
7,600





14.    Acquisition





On May 8, 2002, CAF Extrusion, Inc., a wholly-owned subsidiary, acquired a yarn extrusion manufacturing plant located in Calhoun, Georgia.
In addition, CAF Extrusion, Inc. purchased the real property on which the plant is located from a third party. The acquisition was funded from cash on hand. The cash purchase price was $34.8 million plus $0.3 million for acquisition related expenses
and consisted of $2.4 million for the land and building, $1.4 million for inventory, $17.7 million for machinery and equipment and $13.6 million for goodwill which was assigned an indefinite life. This is a preliminary allocation, which will be
revised upon completion of the valuation of the assets. The acquisition has been accounted for by the purchase method and, accordingly, the results of operations of CAF Extrusion, Inc. have been included in the Companys consolidated financial
statements from May 8, 2002.





In connection with the transaction, CAF Extrusion, Inc. entered into a three-year
supply agreement with the seller of the manufacturing plant. CAF Extrusion, Inc. will be a non-exclusive supplier to the seller, and is to make available certain quantities of product at predetermined prices defined in the supply agreement, which is
adjusted quarterly to reflect changes in the actual manufacturing costs.





Through this acquisition, the Company
will have a portion of its primary raw material internally produced at significantly lower costs than the Company has historically procured from the open market. In addition, the lower cost raw material will allow each operating brand to expand its
focus into additional markets.







15




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##### Table of Contents




|15. |  | Condensed Consolidating Financial Statements
|--- |  | --------------------------------------------




The 9.75% Notes of the Company are guaranteed by certain of the Companys domestic subsidiaries. Separate consolidated financial statements of the guarantor
subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information as of October 26, 2002 and January 26, 2002, and for each of the
thirteen weeks and thirty-nine weeks ended October 26, 2002 and October 27, 2001 are presented. The condensed consolidating financial information of the Company and its subsidiaries are as follows:





Guarantor Financial Statements


Condensed
Consolidating Statements of Operations


For the Thirteen Weeks Ended October 26, 2002





(Unaudited and In Thousands)





Issuer

Guarantor Subsidiaries

Non-Guarantor Subsidiaries


Eliminations


Consolidated TotalNet Sales

$
51,352

$
24,850

$
10,779


$
(2,699
)

$
84,282Cost of Goods Sold


32,748


18,353


9,023



(2,699
)


57,425Selling, General & Administrative Expenses


11,719


4,133


2,061







17,91344,467


22,486


11,084



(2,699
)


75,338Operating Income


6,885


2,364


(305
)






8,944Minority Interest in Loss of Subsidiary








(1
)






(1
)Equity in Earnings of Affiliate





484










484Net Interest Expense


5,456





8







5,464Income (Loss) Before Income Taxes


1,429


2,848


(312
)






3,965Income Tax Expense


591


1,151


33







1,775Net Income (Loss)

$
838

$
1,697

$
(345
)

$



$
2,190







16




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##### Table of Contents




Guarantor Financial Statements


Condensed Consolidating Statement of Operations


For the Thirteen Weeks Ended October 27, 2001





(Unaudited and In Thousands)





Issuer


Guarantor Subsidiaries

Non-Guarantor Subsidiaries


Eliminations


Consolidated TotalNet Sales

$
53,863


$
18,948

$
12,924


$
(3,302
)

$
82,433Cost of Goods Sold


34,973



12,206


11,120



(3,302
)


54,997Selling, General & Administrative Expenses


10,978



4,705


1,732







17,41545,951



16,911


12,852



(3,302
)


72,412Operating Income


7,912



2,037


72







10,021Minority Interest in Loss of Subsidiary









(23
)






(23
)Equity in Earnings of Affiliate






367










367Net Interest Expense


8,570






28







8,598(Loss) Income Before Income Taxes


(658
)


2,404


67







1,813Income Tax Expense


706






32







738Net (Loss) Income

$
(1,364
)

$
2,404

$
35


$



$
1,075







17




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##### Table of Contents

Guarantor Financial Statements


Condensed Consolidating Statement of Operations


For the Thirty-Nine Weeks Ended October 26, 2002





(Unaudited and In Thousands)





Issuer

Guarantor Subsidiaries

Non-Guarantor Subsidiaries


Eliminations


Consolidated TotalNet Sales

$
161,567

$
64,486

$
33,589


$
(9,045
)

$
250,597Cost of Goods Sold


97,625


46,000


28,064



(9,045
)


162,644Selling, General & Administrative Expenses


36,263


12,969


4,999







54,231133,888


58,969


33,063



(9,045
)


216,875Operating Income


27,679


5,517


526







33,722Minority Interest in Income of Subsidiary








5







5Equity in Earnings of Affiliate





1,493










1,493Net Interest Expense


18,728





23







18,751Income Before Income Taxes


8,951


7,010


498







16,459Income Tax Expense


3,631


2,854


100







6,585Income Before Change in Accounting Principle


5,320


4,156


398







9,874Cumulative Effect of Change in AccountingPrinciple, Net of Tax








(2,009
)






(2,009
)Net Income (Loss)

$
5,320

$
4,156

$
(1,611
)

$



$
7,865







18




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##### Table of Contents




Guarantor Financial Statements


Condensed Consolidating Statements of Operations


For the Thirty-Nine Weeks Ended October 27, 2001





(Unaudited and In Thousands)





Issuer

Guarantor Subsidiaries

Non-Guarantor Subsidiaries

Eliminations


Consolidated TotalNet Sales

$
174,192

$
58,973

$
38,542

$
(11,416
)

$
260,291Cost of Goods Sold


108,361


38,280


31,871


(11,416
)


167,096Selling, General & Administrative Expenses


37,352


14,749


6,072






58,173145,713


53,029


37,943


(11,416
)


225,269Operating Income


28,479


5,944


599






35,022Minority Interest in Income of Subsidiary








45






45Equity in Earnings of Affiliate





1,314









1,314Net Interest Expense


20,277


18


108






20,403Income Before Income Taxes


8,202


7,240


446






15,888Income Tax Expense


6,918


24


99






7,041Net Income

$
1,284

$
7,216

$
347

$



$
8,847







19




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##### Table of Contents




Guarantor Financial Statements


Condensed Consolidating Balance Sheets


October 26, 2002





(Unaudited and In Thousands)





Issuer


Guarantor Subsidiaries

Non-Guarantor Subsidiaries


Eliminations


Consolidated TotalASSETSCURRENT ASSETS:Cash and cash equivalents

$
8,735


$


$
1,946


$



$
10,681Accounts receivable, net


22,255



14,665


7,555







44,475Inventories


18,009



10,179


9,639







37,827Deferred tax assets


1,212



704


188







2,104Prepaid expenses and other


1,314



245


723







2,282Total current assets


51,525



25,793


20,051







97,369PROPERTY, PLANT AND EQUIPMENT, net


32,260



24,824


8,285







65,369DEFERRED TAX ASSETS


163



27


2,955



(29
)


3,116GOODWILL


62,386



43,955










106,341OTHER INTANGIBLE ASSETS, net


37,615














37,615INVESTMENT IN SUBSIDIARIES


60,171










(60,171
)


OTHER ASSETS


8,127



2,311


26







10,464TOTAL ASSETS

$
252,247


$
96,910

$
31,317


$
(60,200
)

$
320,274LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable

$
5,756


$
4,528

$
3,556


$
10


$
13,850Accrued expenses


9,273



8,901


2,141







20,315Current portion of long-term debt


1,104






90







1,194Total current liabilities


16,133



13,429


5,787



10



35,359INTERCOMPANY (RECEIVABLE) PAYABLE


(33,141
)


15,669


17,482



(10
)


OTHER LIABILITIES, including post-retirement obligation


3,816



22


176



(29
)


3,985LONG-TERM DEBT, net of current portion


225,725






4,301







230,026MINORITY INTEREST













315



315STOCKHOLDERS EQUITYPreferred stock









133



(133
)


Common stock






2,056


6,061



(8,117
)


Paid-in capital


72,648



49,699


2,365



(52,064
)


72,648Retained earnings (deficit)


(32,495
)


16,035


(4,302
)


(74
)


(20,836
)Accumulated other comprehensive loss


(439
)





(686
)


(98
)


(1,223
)39,714



67,790


3,571



(60,486
)


50,589TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
252,247


$
96,910

$
31,317


$
(60,200
)

$
320,274










20




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##### Table of Contents




Guarantor Financial Statements


Condensed Consolidating Balance Sheets


January 26, 2002





(In Thousands)





Issuer


Guarantor Subsidiaries


Non-Guarantor Subsidiaries


Eliminations


Consolidated TotalASSETSCURRENT ASSETS:Cash and cash equivalents

$
2,271


$
49


$
3,914


$



$
6,234Accounts receivable, net


21,754



5,791



5,979







33,524Inventories


15,246



8,363



8,225







31,834Deferred tax assets


3,213



559



183







3,955Prepaid expenses and other


888



107



672







1,667Total current assets


43,372



14,869



18,973







77,214PROPERTY, PLANT AND EQUIPMENT, net


31,458



6,305



7,627







45,390DEFERRED TAX ASSETS


2,150



55



1,678



(7
)


3,876GOODWILL


62,386



30,361



3,240







95,987OTHER INTANGIBLE ASSETS, net


40,560















40,560INVESTMENT IN SUBSIDIARIES


60,171











(60,171
)


OTHER ASSETS


4,987



2,393



26







7,406TOTAL ASSETS

$
245,084


$
53,983


$
31,544


$
(60,178
)

$
270,433LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable

$
5,461


$
3,165


$
2,790


$



$
11,416Accrued expenses


12,201



5,006



1,943







19,150Current portion of long-term debt


4,418







369







4,787Total current liabilities


22,080



8,171



5,102







35,353INTERCOMPANY (RECEIVABLE) PAYABLE


1,231



(17,821
)


16,590







OTHER LIABILITIES, including post- retirement obligation


3,816







182



(7
)


3,991LONG-TERM DEBT, net of current portion


180,972







4,225







185,197MINORITY INTEREST














310



310STOCKHOLDERS EQUITY:Preferred stock










133



(133
)


Common stock






2,056



6,061



(8,117
)


Paid-in capital


72,648



49,699



2,365



(52,064
)


72,648Retained earnings (deficit)


(35,224
)


11,878



(2,693
)


(69
)


(26,108
)Accumulated other comprehensive loss


(439
)






(421
)


(98
)


(958
)36,985



63,633



5,445



(60,481
)


45,582TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
245,084


$
53,983


$
31,544


$
(60,178
)

$
270,433







21




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##### Table of Contents




Guarantor Financial Statements


Condensed Consolidating Statements of Cash Flows


For the Thirty-Nine Weeks Ended October 26, 2002





(Unaudited and In Thousands)





Issuer


Guarantor Subsidiaries


Non-Guarantor Subsidiaries


Consolidated TotalCASH FLOWS FROM OPERATING ACTIVITIES

$
13,723


$
(1,075
)

$
(424
)

$
12,224CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of business


(35,132
)










(35,132
)Equity distribution from affiliate






1,678







1,678Additions to property, plant, and equipment


(4,107
)


(652
)


(1,206
)


(5,965
)Net cash (used in) provided by investing activities


(39,239
)


1,026



(1,206
)


(39,419
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of long-term debt


175,000











175,000Repayments of long-term debt


(133,619
)






(338
)


(133,957
)Dividends to parent


(2,593
)










(2,593
)Financing costs


(6,808
)










(6,808
)Net cash provided by (used in) financing activities


31,980







(338
)


31,642NET CHANGE IN CASH AND CASH EQUIVALENTS


6,464



(49
)


(1,968
)


4,447CASH AND CASH EQUIVALENTS, beginning of period


2,271



49



3,914



6,234CASH AND CASH EQUIVALENTS, end of period

$
8,735


$



$
1,946


$
10,681










22




---

##### Table of Contents




Guarantor Financial Statements


Condensed Consolidating Statement of Cash Flows


For the Thirty-Nine Weeks Ended October 27, 2001





(Unaudited and In Thousands)





Issuer


Guarantor Subsidiaries


Non-Guarantor Subsidiaries


Consolidated TotalCASH FLOWS FROM OPERATING ACTIVITIES

$
20,847


$
1,350


$
4,264


$
26,461CASH FLOWS FROM INVESTING ACTIVITIES:Equity distribution from affiliate






1,137







1,137Additions to property, plant and equipment


(3,554
)


(2,474
)


(1,684
)


(7,712
)Net cash used in investing activities


(3,554
)


(1,337
)


(1,684
)


(6,575
)CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from revolving credit facilities


(3,000
)










(3,000
)Proceeds from issuance of long-term debt










76



76Repayments of long-term debt


(11,419
)






(362
)


(11,781
)Net cash used in financing activities


(14,419
)






(286
)


(14,705
)NET CHANGE IN CASH AND CASH EQUIVALENTS


2,874



13



2,294



5,181CASH AND CASH EQUIVALENTS, beginning of period


5,142



51



558



5,751CASH AND CASH EQUIVALENTS, end of period

$
8,016


$
64


$
2,852


$
10,932





|16. |  | Exchange Offer
|--- |  | --------------




In May 2002, the Company filed a registration statement under the Securities Act of 1933 pursuant to a registration rights agreement entered into in connection with the 9.75% Notes offering. Under the registration rights
agreement, the Company was required to register for exchange under the Securities Act of 1933 identical 9.75% senior subordinated notes due 2010 to replace the outstanding 9.75% senior subordinated notes, which were issued in February 2002 without
registration under the Securities Act of 1933 pursuant to an exemption from registration thereunder. The Securities and Exchange Commission declared the registration statement relating to the exchange offer effective on August 12, 2002, and the
exchange of the registered 9.75% senior subordinated notes due 2010 for the unregistered 9.75% senior subordinated notes due 2010 on September 13, 2002. The Company did not receive any proceeds from the exchange offer transaction.







23




---

##### Table of Contents




|Item  2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|-------- |  | -------------------------------------------------------------------------------------




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





GENERAL





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





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





On May 8, 2002, CAF Extrusion, Inc., a wholly-owned subsidiary,
acquired a yarn extrusion manufacturing plant located in Calhoun, Georgia. In addition, CAF Extrusion, Inc. purchased the real property on which the plant is located from a third party. The acquisition was funded from cash on hand. The cash purchase
price was $34.8 million plus $0.3 million for acquisition related expenses and consisted of $2.4 million for the land and building, $1.4 million for inventory, $17.7 million for machinery and equipment and $13.6 million for goodwill which was
assigned an indefinite life. This is a preliminary allocation and will be revised upon completion of the valuation of the assets. In connection with the transaction, CAF Extrusion, Inc. entered into a three-year supply agreement with the seller of
the manufacturing plant. The acquisition has been accounted for by the purchase method and, accordingly, the results of operations of CAF Extrusion, Inc. have been included in the Companys consolidated financial statements from May 8, 2002.





During the thirteen weeks ended October 26, 2002, the Company prepaid $1.5 million of the term loan. In
connection with the term debt prepayments, the Company recorded the write-off of a pro-rata share of deferred financing costs associated with the term debt. The amount of these expenses was $0.1 million and are reflected in interest expense in the
consolidated statement of operations.







24




---

##### Table of Contents




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 EndedOctober 27, 2001


October 26, 2002


October 27, 2001


October 26, 2002Net Sales

100.0
%

100.0
%

100.0
%

100.0
%Cost of Goods Sold

66.7


68.1


64.2


64.9Gross Profit

33.3


31.9


35.8


35.1Selling, General & Administrative Expenses

21.1


21.3


22.3


21.6Operating Income

12.2


10.6


13.5


13.5Net Interest Expense

10.4


6.5


7.8


7.5Net Income

1.3


2.6


3.4


3.1





RESULTS OF OPERATIONS





Thirteen Weeks Ended October 26, 2002 As Compared with Thirteen Weeks Ended October 27, 2001





Net Sales.    Net sales for the thirteen weeks ended October 26, 2002 were $84.3 million, an increase of 2.2% from the $82.4 million for the
thirteen weeks ended October 27, 2001. The increase in net sales in the thirteen weeks ended October 26, 2002 was due to net sales of $8.3 million generated by the extrusion operation acquired May 8, 2002, partially offset by the slow demand
throughout the specified commercial market in the United States. In particular, demand in the corporate office market has been slow since 2001, and was severely impacted by the events of September 11, 2001. For the thirteen weeks ended October 26,
2002, the Companys sales to the corporate office market decreased by 15.3% as compared to the prior year.





Cost of Goods Sold.    Cost of goods sold was $57.4 million for the thirteen weeks ended October 26, 2002 as compared to $55.0 million in the thirteen weeks ended October 27, 2001. This increase resulted
from the inclusion of the recently acquired extrusion operation and the underutilization of the Companys plants offset in part by management cost reduction initiatives. As a percentage of sales, these costs were 68.1% for 2002 and 66.7% for
2001.





Selling, General and Administrative Expenses.    Selling, general and
administrative expenses increased to $16.9 million, excluding other intangible assets amortization of $1.0 million, for the thirteen weeks ended October 26, 2002, an increase of 9.5% from $15.4 million in the thirteen weeks ended October 27, 2001,
which excluded goodwill and other intangible assets amortization of $2.0 million. This increase was primarily due to increased sampling costs of $0.4 million, foreign exchange losses of $0.2 million, and outside services of $0.8 million. As a
percentage of sales, these expenses, excluding amortization, increased to 20.1% from 18.7% in the prior year.





Interest Expense.    Net interest expense for the thirteen weeks ended October 26, 2002 and thirteen weeks ended October 27, 2001 was $5.5 million and $8.6 million, respectively, which included minimal
interest income. Debt levels during the thirteen weeks ended October 26, 2002 were higher than the thirteen weeks ended October 27, 2001 due to the completion of the offering of the $175.0 million senior subordinated notes during the thirteen weeks
ended April 27, 2002. Additionally, the thirteen weeks ended October 27, 2001 included a charge to interest expense of $4.2 million to reflect the fair value of the Companys interest rate hedging agreements.







25




---

##### Table of Contents




Net Income.    Net income for the thirteen weeks ended
October 26, 2002 increased to net income of $2.2 million from $1.1 million of net income in the thirteen weeks ended October 27, 2001. This was due to the combined result of the factors described above.





Adjusted EBITDA.    Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization and
the cumulative effect of change in accounting principle, plus Chroma cash dividends and the minority interest in income of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the thirteen weeks ended October 26, 2002 decreased 12.1% to
$13.1 million from $14.9 million in the thirteen weeks ended October 27, 2001. As a percentage of sales, Adjusted EBITDA was 15.5% in the thirteen weeks ended October 26, 2002 compared to 18.0% in the thirteen weeks ended October 27, 2001. Adjusted
EBITDA is presented because it is commonly used by certain investors and analysts to analyze a companys ability to service debt. The Company utilizes Adjusted EBITDA as (a) a benchmark for its annual budget and long range plan, (b) a valuation
method for potential acquisitions, and (c) a measure to determine compliance with senior credit facility debt covenants. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be
considered an alternative to operating income or net income as a measure of operating performance or to net cash provided by operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the
presentation in these statements may not be comparable to those disclosed by other companies.





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





Thirteen Weeks EndedOctober 27, 2001


October 26, 2002Net income

$
1,075


$
2,190Income taxes


738



1,775Net interest expense


8,598



5,464Depreciation and amortization


4,487



3,409Chroma cash dividends


349



707Equity in earnings in Chroma


(367
)


(484
)Minority interest in loss of subsidiary


(23
)


(1
)Adjusted EBITDA

$
14,857


$
13,060





RESULTS OF OPERATIONS





Thirty-Nine Weeks Ended October 26, 2002 As Compared with Thirty-Nine Weeks Ended October 27, 2001





Net Sales.    Net sales for the thirty-nine weeks ended October 26, 2002 were $250.6 million, a decrease of 3.7% from the $260.3 million for the
thirty-nine weeks ended October 27, 2001. The decrease in net sales in the thirty-nine weeks ended October 26, 2002 was due to the continued slow demand throughout the specified commercial market in the United States. In particular, demand in the
corporate office market has been slow since 2001, and was severely impacted by the events of September 11, 2001. For the thirty-nine weeks ended October 26, 2002, the Companys sales to the corporate office market decreased by 22.4% as compared
to the prior year. This decrease was partially offset by $15.9 million of net sales generated by the extrusion operation acquired May 8, 2002.





Cost of Goods Sold.    Cost of goods sold was $162.6 million for the thirty-nine weeks ended October 26, 2002 as compared to $167.1 million in the thirty-nine weeks ended
October 27, 2001. This decrease resulted from lower net sales and management cost reduction initiatives partially offset by the inclusion of the newly acquired extrusion operation and underutilization of the Companys plants. As a percentage of
sales, these costs were 64.9% and 64.2%, respectively.







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Selling, General and Administrative
Expenses.    Selling, general and administrative expenses, excluding other intangible assets amortization of $2.9 million for the thirty-nine weeks ended October 26, 2002, decreased to $51.3 million, a decrease of 1.9% from
$52.3 million in the thirty-nine weeks ended October 27, 2001, which excluded goodwill and other intangible assets amortization of $5.9 million. This decrease was primarily due to lower compensation expense of $0.7 million and foreign exchange gains
of $0.8 million, which were partially offset by higher professional services of $0.4 million and depreciation expense of $0.2 million. As a percentage of sales, these expenses, excluding amortization, were flat at 20.1% for 2001 and 20.5% for 2002.





Interest Expense.    Net interest expense for the thirty-nine weeks ended October 26,
2002 and thirty-nine weeks ended October 27, 2001 was $18.8 million and $20.4 million, respectively, which included interest income of $0.2 million and $0.1 million, respectively. Debt levels during the thirty-nine weeks ended October 26, 2002 were
higher than the thirty-nine weeks ended October 27, 2001 due to the completion of the offering of the $175.0 million senior subordinated notes during the thirty-nine weeks ended October 26, 2002. The thirty-nine weeks ended October 26, 2002 include
a charge to interest expense of $2.7 million to reflect the write-off of a pro-rata share of deferred financing costs associated with the prepayment of term debt from proceeds of the 9.75% Notes offering and from cash generated by operations.
However, the thirty-nine weeks ended October 27, 2001 included a charge to interest expense of $6.3 million to reflect the fair value of the Companys interest rate hedging agreements.





Net Income.    Net income before the cumulative effect of the change in accounting principle, for the thirty-nine weeks ended October 26, 2002
increased to $9.9 million from $8.8 million in the thirty-nine weeks ended October 27, 2001. This was due to the combined result of the factors described above.





Adjusted EBITDA.    Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization and the cumulative effect of change in accounting principle, plus
Chroma cash dividends and minority interest in income of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the thirty-nine weeks ended October 26, 2002 decreased to $44.9 million from $49.6 million in the thirty-nine weeks ended
October 27, 2001, a decrease of 9.4%. As a percentage of sales, Adjusted EBITDA was 17.9% in the thirty-nine weeks ended October 26, 2002 compared to 19.0% in the thirty-nine weeks ended October 27, 2001. Adjusted EBITDA is presented because it is
commonly used by certain investors and analysts to analyze a companys ability to service debt. The Company utilizes Adjusted EBITDA as (a) a benchmark for its annual budget and long range plan, (b) a valuation method for potential
acquisitions, and (c) a measure to determine compliance with senior credit facility debt covenants. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative
to operating income or net income as a measure of operating performance or to net cash provided by operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these
statements may not be comparable to those disclosed by other companies.





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





Thirty-Nine Weeks EndedOctober 27, 2001


October 26, 2002Net income

$
8,847


$
7,865Cumulative effect of change in accounting principle






2,009Income taxes


7,041



6,585Net interest expense


20,403



18,751Depreciation and amortization


13,412



9,489Chroma cash dividends


1,137



1,678Equity in earnings in Chroma


(1,314
)


(1,493
)Minority interest in income of subsidiary


45



5Adjusted EBITDA

$
49,571


$
44,889







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





Net cash provided by operating activities in the thirty-nine weeks ended October 26, 2002 was $12.2 million compared to net cash provided of $26.5 million in the thirty-nine weeks ended October 27, 2001. The change is due to a
negative impact of $15.9 million in net working capital. A negative impact to net working capital of $5.1 million was attributable to the May 2002 acquisition of the yarn extrusion plant. The Company invested in working capital initially for the
extrusion facility and expects more level working capital requirements going forward.





Net cash used in investing
activities in the thirty-nine weeks ended October 26, 2002 was $39.4 million compared to $6.6 million in the thirty-nine weeks ended October 27, 2001. The increase in cash used in investing activities was primarily due to the acquisition of the yarn
extrusion manufacturing plant and the real property on which the plant is located. Capital expenditures for the thirty-nine weeks ended October 26, 2002 were $6.0 million compared to $7.7 million for the thirty-nine weeks ended October 27, 2001.





Net cash provided by financing activities in the thirty-nine weeks ended October 26, 2002 was $31.6 million
compared to net cash used of $14.7 million in the thirty-nine weeks ended October 27, 2001. The increase in cash provided by financing activities was due primarily to the issuance of the 9.75% Notes and repayment of the Senior Credit Facility with a
portion of the proceeds.





The Company has significant indebtedness which consists of $175.0 million in senior
subordinated notes due 2010; a $109.0 million credit facility which, at October 26, 2002 had an outstanding balance of $51.0 million in term loan borrowings; $0.6 million in sellers notes from the Companys July 1999 acquisition of
Crossley; $0.6 million in purchase money indebtedness; $0.0 million in revolving line of credit borrowings and $3.8 million in sinking funds bonds under Crossley.





During the thirteen weeks ended October 26, 2002, the Company prepaid $1.5 million of term debt with cash generated from operations. In connection with these term debt
prepayments, the Company recorded the write-off of a pro-rata share of deferred financing costs associated with the term debt. The amount of these expenses were $0.1 million and are reflected in interest expense in the consolidated statement of
operations.





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





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




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EFFECTS OF INFLATION





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





SEASONALITY





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





RELIANCE ON PRIMARY THIRD-PARTY SUPPLIER OF NYLON YARN





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





RECENT ACCOUNTING
PRONOUNCEMENTS





In June 2001, the FASB approved the issuance of SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 will become effective for the Company on January
26, 2003 and requires recognition of a liability for an asset retirement obligation in the period in which it is incurred. SFAS No. 143 is not expected to materially impact the Companys financial statements.





In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS No. 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers, FASB Statement
No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements, and amends FASB Statement No. 13, Accounting for Leases. SFAS No. 145 addresses the treatment of gains and losses related to debt extinguishments and
should only be classified as extraordinary items if they meet certain criteria. The provisions of this Statement are effective beginning May 15, 2002. The financial statements included herein reflect the adoption of SFAS No. 145 as of the beginning
of the Companys fiscal year. Prior year financial statements have also been restated to reflect the impact of SFAS No. 145.





In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated With Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities
and nullifies emerging issues task force issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). This statement requires
that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. We are in the process of evaluating the impact this standard will have on our financial statements.







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CRITICAL ACCOUNTING POLICIES





Our significant accounting policies are more fully described in Note 3 to the audited consolidated financial statements included in the Companys Form S-4 which was
initially filed with the Securities and Exchange Commission on May 14, 2002 and made effective on August 12, 2002. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based on our historical experience, terms of
existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate. The Companys significant accounting policies include:





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





Impairment of
Goodwill.    The Company periodically evaluates acquired businesses for potential impairment indicators. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational
performance of our acquired businesses. Future events could cause the Company to conclude that impairment indicators exist and that goodwill associated with acquired businesses is impaired. Any resulting impairment loss could have a material adverse
impact on the Companys financial condition and results of operations.





Allowance and/or reserve for
product warranty and returns.    Warranty reserve and allowance for product returns is established based upon best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance
sheet date. While we believe that our warranty reserve and allowance for product returns is adequate and that the judgment applied is appropriate based upon our historical experience for these items, actual amounts determined to be due and payable
would differ and additional allowances may be required.







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FORWARD-LOOKING STATEMENT





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





Item 3.    Quantitative and Qualitative Disclosures About Market Risk





Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. Although we are not subject to material foreign currency exchange risk, we are exposed
to changes in interest rates. Other than the 9.75% Notes, substantially all of our debt is variable rate debt. Therefore, interest rate changes therefore generally do not affect the fair market value of such debt but do impact future earnings and
cash flows, assuming other factors are held constant. Conversely, for fixed rate debt, interest changes do not impact future cash flow and earnings, but do impact the fair market value of such debt, assuming other factors are held constant. At
October 26 2002, we had variable rate debt of $51.0 million and fixed rate debt of $180.2 million. The variable interest rate per annum applicable to borrowings under the Senior Credit Facility is equal to the Companys choice of (a) an
adjusted rate based upon LIBOR plus a Eurodollar margin or (b) an alternative base rate, as defined by the Senior Credit Facility, plus a base rate margin. The Eurodollar margin and the base rate margin adjust quarterly on a sliding scale based on
our leverage ratio for the immediately preceding four fiscal quarters. See Note 10 Long-Term Debt in the accompanying financial statements.







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##### Table of Contents




|Item |  | 4.         Controls and Procedures
|---- |  | ----------------------------------




Within 90 days prior to the date of filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the
Companys Chief Executive Officer and the Chief Financial Officer, of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on this evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files
under the Securities Exchange Act of 1934, within the time periods specified in the SECs rules and forms. The Chief Executive Officer and Chief Financial Officer also concluded that the Companys disclosure controls and procedures are
effective in timely alerting them to material information relating to the Company required to be included in the Companys periodic SEC filings. In connection with the new rules, the Company is in the process of further reviewing and
documenting its disclosure controls and procedures, including its internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that the Companys systems
evolve with its business.





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





PART II      Other Information





Item 1.         Legal Proceedings





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





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





Item 6.

Exhibits and Reports on Form 8-K(a)

Exhibits99.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(b)

Reports on Form 8-KNone







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##### Table of Contents

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.





|
|

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

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




33




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##### Table of Contents

CERTIFICATION





I, Edgar M. (Mac) Bridger, certify that:





1.    I have reviewed this quarterly report on Form 10-Q of Collins & Aikman Floorcoverings, Inc.;





2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this quarterly report;





3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the quarterly report;





4.    The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-4) for the registrant and we have;





| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | evaluated the effectiveness of this registrants disclosure controls and procedures as of a date with 90 days prior to the filing of this quarterly report
(the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




5.    The registrants other certifying officers and
I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors;





| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




6.    The registrants other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.





Date:    December 10, 2002


/s/    EDGAR M. (MAC) BRIDGER Edgar M. (Mac) Bridger Chief Executive Officer




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##### Table of Contents




CERTIFICATION





I, Darrel V. McCay, certify that:





1.    I
have reviewed this quarterly report on Form 10-Q of Collins & Aikman Floorcoverings, Inc.;





2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the periods covered by this quarterly report;





3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.    The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-4) for the
registrant and we have;





| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | evaluated the effectiveness of this registrants disclosure controls and procedures as of a date with 90 days prior to the filing of this quarterly report
(the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




5.    The registrants other certifying officers and
I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors;





| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




6.    The registrants other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.





Date:    December 10, 2002





/s/    DARREL V. MCCAY Darrel V. McCay Chief Financial Officer




35