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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



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



For the quarterly period ended May 1, 2004



| ̈ | 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



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



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



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



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



The Registrant had 1,000 shares of Common Stock, par value $.01 per share, issued and
outstanding as of June 14, 2004.



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES



INDEX



|               |  |                                                                                               |  |         
|-------------- |  | --------------------------------------------------------------------------------------------- |  | --------
|               |  |                                                                                               |  | Page No.
|Part I.        |  | Financial Information                                                                         |  |         
|               |  |                                                                                              
|               |  | Item 1. Financial Statements                                                                  |  |         
|               |  |                                                                                              
|               |  | Consolidated Balance Sheets  As of January 31, 2004 and May 1, 2004                          |  | 3       
|               |  |                                                                                              
|               |  | Consolidated Statements of Operations  Thirteen Weeks Ended May 1, 2004 and April 26, 2003   |  | 4       
|               |  |                                                                                              
|               |  | Consolidated Statements of Stockholders Equity  Thirteen Weeks Ended May 1, 2004            |  | 5       
|               |  |                                                                                              
|               |  | Consolidated Statements of Cash Flows  Thirteen Weeks Ended May 1, 2004 and April 26, 2003   |  | 6       
|               |  |                                                                                              
|               |  | Notes to Consolidated Financial Statements                                                    |  | 7       
|               |  |                                                                                              
|               |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 23      
|               |  |                                                                                              
|               |  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 29      
|               |  |                                                                                              
|               |  | Item 4. Controls and Procedures                                                               |  | 30      
|               |  |                                                                                              
|Part II.       |  | Other Information                                                                             |  |         
|               |  |                                                                                              
|               |  | Item 1. Legal Proceedings                                                                     |  | 30      
|               |  |                                                                                              
|               |  | Item 6. Exhibits and Reports on Form 8-K                                                      |  | 31      
|               | 
|Signature      |  | 32                                                                                           
|               | 
|Certifications |  |                                                                                              



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PART 1  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands)



|                                                                                                                 |  |                 |         |   |             |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ----------- | - | ------- | -
|                                                                                                                 |  | January 31,2004 |         |   | May 1,2004  |  
|                                                                                                                 |  |                 |         |   | (Unaudited) |  
|ASSETS                                                                                                           |  |                 |         |   |             |   |         |  
|CURRENT ASSETS:                                                                                                  |  |                 |         |   |             |   |         |  
|Cash and cash equivalents                                                                                        |  | $               | 11,041  |   |             | $ | 4,044   |  
|Accounts receivable, net of allowance of $918 and $918 in fiscal 2003 and 2004, respectively                     |  |                 | 36,019  |   |             |   | 41,199  |  
|Inventories                                                                                                      |  |                 | 35,463  |   |             |   | 44,953  |  
|Deferred tax assets                                                                                              |  |                 | 4,013   |   |             |   | 4,275   |  
|Prepaid expenses and other                                                                                       |  |                 | 4,961   |   |             |   | 5,440   |  
|                                                                                                                 |  |                 |         |   |             |   |         |  
|Total current assets                                                                                             |  |                 | 91,497  |   |             |   | 99,911  |  
|PROPERTY, PLANT AND EQUIPMENT, net                                                                               |  |                 | 66,062  |   |             |   | 64,283  |  
|GOODWILL                                                                                                         |  |                 | 98,378  |   |             |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                                                                                     |  |                 | 34,255  |   |             |   | 33,489  |  
|OTHER ASSETS                                                                                                     |  |                 | 8,956   |   |             |   | 8,532   |  
|                                                                                                                 |  |                 |         |   |             |   |         |  
|TOTAL ASSETS                                                                                                     |  | $               | 299,148 |   |             | $ | 304,593 |  
|                                                                                                                 |  |                 |         |   |             |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                             |  |                 |         |   |             |   |         |  
|CURRENT LIABILITIES:                                                                                             |  |                 |         |   |             |   |         |  
|Accounts payable                                                                                                 |  | $               | 17,722  |   |             | $ | 21,277  |  
|Accrued expenses                                                                                                 |  |                 | 20,298  |   |             |   | 17,708  |  
|Current portion of long-term debt                                                                                |  |                 | 1,791   |   |             |   | 1,519   |  
|                                                                                                                 |  |                 |         |   |             |   |         |  
|Total current liabilities                                                                                        |  |                 | 39,811  |   |             |   | 40,504  |  
|OTHER LIABILITIES, including post-retirement benefit obligation                                                  |  |                 | 4,768   |   |             |   | 4,757   |  
|DEFERRED TAX LIABILITIES                                                                                         |  |                 | 19      |   |             |   | 1,370   |  
|LONG-TERM DEBT, net of current portion                                                                           |  |                 | 207,516 |   |             |   | 211,771 |  
|MINORITY INTEREST                                                                                                |  |                 | 342     |   |             |   | 306     |  
|COMMITMENTS AND CONTINGENCIES (Note 15)                                                                          |  |                 |         |   |             |   |         |  
|STOCKHOLDERS EQUITY:                                                                                            |  |                 |         |   |             |   |         |  
|Common stock: $.01 par value per share, 1,000 shares authorized, issued, and outstanding in
fiscal 2003 and 2004 |  |                 |        |   |             |   |        |  
|Paid-in capital                                                                                                  |  |                 | 72,648  |   |             |   | 72,648  |  
|Retained deficit                                                                                                 |  |                 | (24,509 | ) |             |   | (25,264 | )
|Accumulated other comprehensive loss :                                                                           |  |                 |         |   |             |   |         |  
|Foreign currency translation adjustment                                                                          |  |                 | (493    | ) |             |   | (545    | )
|Minimum pension liability adjustment, net of tax                                                                 |  |                 | (954    | ) |             |   | (954    | )
|                                                                                                                 |  |                 |         |   |             |   |         |  
|                                                                                                                 |  |                 | 46,692  |   |             |   | 45,885  |  
|                                                                                                                 |  |                 |         |   |             |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |  | $               | 299,148 |   |             | $ | 304,593 |  
|                                                                                                                 |  |                 |         |   |             |   |         |  



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 |       
|                                           |  | April 26, 2003       |        |   | May 1, 2004 |  
|Net Sales                                  |  | $                    | 71,569 |   |             | $ | 77,685 |  
|                                           |  |                      |        |   |             |   |        |  
|Cost of Goods Sold                         |  |                      | 48,332 |   |             |   | 51,416 |  
|Selling, General & Administrative Expenses |  |                      | 17,458 |   |             |   | 21,004 |  
|Amortization                               |  |                      | 1,528  |   |             |   | 766    |  
|                                           |  |                      |        |   |             |   |        |  
|Operating Expenses                         |  |                      | 67,318 |   |             |   | 73,186 |  
|                                           |  |                      |        |   |             |   |        |  
|Operating Income                           |  |                      | 4,251  |   |             |   | 4,499  |  
|                                           |  |                     
|Minority Interest in Loss of Subsidiary    |  |                      | (16    | ) |             |   | (36    | )
|Equity in Earnings of Affiliate            |  |                      | 361    |   |             |   | 411    |  
|Net Interest Expense                       |  |                      | 5,406  |   |             |   | 5,123  |  
|                                           |  |                      |        |   |             |   |        |  
|Loss Before Income Taxes                   |  |                      | (778   | ) |             |   | (177   | )
|Income Tax Expense (Benefit)               |  |                      | (681   | ) |             |   | 578    |  
|                                           |  |                      |        |   |             |   |        |  
|Net Loss                                   |  | $                    | (97    | ) |             | $ | (755   | )
|                                           |  |                      |        |   |             |   |        |  



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 THIRTEEN WEEKS ENDED MAY 1, 2004

(Unaudited and In Thousands, Except Share Amounts)



|                                        |  |              |  |        |   |                   |   |                            |  |   |                                        |   |  |                          |      |   |       |   |      |   |  |   |        |  
|--------------------------------------- |  | ------------ |  | ------ | - | ----------------- | - | -------------------------- |  | - | -------------------------------------- | - |  | ------------------------ | ---- | - | ----- | - | ---- | - |  | - | ------ | -
|                                        |  | Common Stock |  |        |   |                   |   |                            |  |   |                                        |   |  |                          |      |  
|                                        |  | Shares       |  | Amount |   | Paid - in Capital |   | Retained Earnings(Deficit) |  |   | Foreign CurrencyTranslation Adjustment |   |  | Minimum PensionLiability |      |   | Total |  
|BALANCE, January 31, 2004               |  | 1,000        |  | $      |  |                   | $ | 72,648                     |  | $ | (24,509                                | ) |  | $                        | (493 | ) |       | $ | (954 | ) |  | $ | 46,692 |  
|                                        |  |              |  |        |   |                   |   |                            |  |   |                                        |   |  |                          |      |   |       |   |      |   |  |   |        |  
|Net Loss                                |  |             |  |        |  |                   |   |                           |  |   | (755                                   | ) |  |                          |     |   |       |   |     |   |  |   | (755   | )
|Foreign currency translation adjustment |  |             |  |        |  |                   |   |                           |  |   |                                       |   |  |                          | (52  | ) |       |   |     |   |  |   | (52    | )
|                                        |  |              |  |        |   |                   |   |                            |  |   |                                        |   |  |                          |      |   |       |   |      |   |  |   |        |  
|Total Comprehensive Loss                |  |             |  |        |  |                   |   |                           |  |   | (755                                   | ) |  |                          | (52  | ) |       |   |     |   |  |   | (807   | )
|                                        |  |              |  |        |   |                   |   |                            |  |   |                                        |   |  |                          |      |   |       |   |      |   |  |   |        |  
|BALANCE, May 1, 2004                    |  | 1,000        |  | $      |  |                   | $ | 72,648                     |  | $ | (25,264                                | ) |  | $                        | (545 | ) |       | $ | (954 | ) |  | $ | 45,885 |  
|                                        |  |              |  |        |   |                   |   |                            |  |   |                                        |   |  |                          |      |   |       |   |      |   |  |   |        |  



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)



|                                                                            |  |                      |         |   |            |   |         |  
|--------------------------------------------------------------------------- |  | -------------------- | ------- | - | ---------- | - | ------- | -
|                                                                            |  | Thirteen Weeks Ended |        
|                                                                            |  | April 26,2003        |         |   | May 1,2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |  |                      |         |   |            |   |         |  
|Net loss                                                                    |  | $                    | (97     | ) |            | $ | (755    | )
|                                                                            |  |                      |         |   |            |   |         |  
|Adjustments to reconcile net loss to net cash used by operating activities: |  |                      |         |   |            |   |         |  
|Depreciation and leasehold amortization                                     |  |                      | 2,512   |   |            |   | 2,586   |  
|Amortization of other intangible assets                                     |  |                      | 1,528   |   |            |   | 766     |  
|Amortization and write-off of deferred financing fees                       |  |                      | 315     |   |            |   | 420     |  
|Deferred income tax expense                                                 |  |                      | 276     |   |            |   | 1,089   |  
|Equity in earnings of affiliate                                             |  |                      | (361    | ) |            |   | (411    | )
|Minority interest in loss of subsidiary                                     |  |                      | (16     | ) |            |   | (36     | )
|Changes in operating assets and liabilities:                                |  |                      |         |   |            |   |         |  
|Accounts receivable                                                         |  |                      | (3,539  | ) |            |   | (5,180  | )
|Inventories                                                                 |  |                      | (8,161  | ) |            |   | (9,490  | )
|Accounts payable                                                            |  |                      | 3,969   |   |            |   | 3,555   |  
|Accrued expenses                                                            |  |                      | (3,824  | ) |            |   | (2,590  | )
|Other, net                                                                  |  |                      | (1,035  | ) |            |   | (337    | )
|                                                                            |  |                      |         |   |            |   |         |  
|Total adjustments                                                           |  |                      | (8,336  | ) |            |   | (9,628  | )
|                                                                            |  |                      |         |   |            |   |         |  
|Net cash used by operating activities                                       |  |                      | (8,433  | ) |            |   | (10,383 | )
|                                                                            |  |                      |         |   |            |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                      |         |   |            |   |         |  
|Equity distribution from affiliate                                          |  |                      | 1,878   |   |            |   | 278     |  
|Additions to property, plant, and equipment                                 |  |                      | (2,046  | ) |            |   | (1,214  | )
|                                                                            |  |                      |         |   |            |   |         |  
|Net cash used in investing activities                                       |  |                      | (168    | ) |            |   | (936    | )
|                                                                            |  |                      |         |   |            |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                      |         |   |            |   |         |  
|Proceeds from revolving credit facility                                     |  |                      | 1,500   |   |            |   | 10,104  |  
|Repayments of revolving credit facility                                     |  |                      | (1,500  | ) |            |   | (4,500  | )
|Repayments of long-term debt                                                |  |                      | (11,079 | ) |            |   | (1,567  | )
|Cash dividends to Tandus Group, Inc.                                        |  |                      | (586    | ) |            |   |        |  
|Financing costs                                                             |  |                      | (11     | ) |            |   | (17     | )
|                                                                            |  |                      |         |   |            |   |         |  
|Net cash provided by (used in) financing activities                         |  |                      | (11,676 | ) |            |   | 4,020   |  
|                                                                            |  |                      |         |   |            |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                |  |                      | 309     |   |            |   | 302     |  
|                                                                            |  |                      |         |   |            |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                     |  |                      | (19,968 | ) |            |   | (6,997  | )
|CASH AND CASH EQUIVALENTS, beginning of period                              |  |                      | 20,907  |   |            |   | 11,041  |  
|                                                                            |  |                      |         |   |            |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                                    |  | $                    | 939     |   |            | $ | 4,044   |  
|                                                                            |  |                      |         |   |            |   |         |  



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



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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



The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Companys Form 10-K, which was filed
with the Securities and Exchange Commission. 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. 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, Singapore and China.



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



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



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



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



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



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



Net inventory balances are summarized below (in thousands):



|                |  |                 |        |             |   |       
|--------------- |  | --------------- | ------ | ----------- | - | ------
|                |  | January 31,2004 |        | May 1, 2004
|                |  |                 |        | (Unaudited)
|Raw materials   |  | $               | 16,074 |             | $ | 20,948
|Work in process |  |                 | 5,153  |             |   | 7,975 
|Finished goods  |  |                 | 14,236 |             |   | 16,030
|                |  |                 |        |             |   |       
|                |  | $               | 35,463 |             | $ | 44,953
|                |  |                 |        |             |   |       



|6. | 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 $2.6 million and $2.4 million for the thirteen weeks ended May 1, 2004 and April 26, 2003, respectively.



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



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



Accrued expenses are summarized below (in thousands):



|                              |  |                 |        |             |   |       
|----------------------------- |  | --------------- | ------ | ----------- | - | ------
|                              |  | January 31,2004 |        | May 1,2004 
|                              |  |                 |        | (Unaudited)
|Payroll and employee benefits |  | $               | 5,952  |             | $ | 6,901 
|Customer claims               |  |                 | 2,206  |             |   | 2,099 
|Accrued interest              |  |                 | 8,145  |             |   | 3,882 
|Accrued professional fees     |  |                 | 2,862  |             |   | 3,215 
|Other                         |  |                 | 1,133  |             |   | 1,611 
|                              |  |                 |        |             |   |       
|                              |  | $               | 20,298 |             | $ | 17,708
|                              |  |                 |        |             |   |       



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



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



The gross carrying amount and
accumulated amortization of the intangible assets subject to amortization as of May 1, 2004 are as follows:



|                             |  |                      |        |                         |   |         |  
|---------------------------- |  | -------------------- | ------ | ----------------------- | - | ------- | -
|                             |  | May 1, 2004          |       
|                             |  | Gross CarryingAmount |        | AccumulatedAmortization |  
|Amortized intangible assets: |  |                      |        |                         |   |         |  
|Non-compete                  |  | $                    | 12,000 |                         | $ | (12,000 | )
|Patent                       |  |                      | 27,000 |                         |   | (17,780 | )
|Supply Agreement             |  |                      | 8,000  |                         |   | (7,344  | )
|                             |  |                      |        |                         |   |         |  
|Total                        |  | $                    | 47,000 |                         | $ | (37,124 | )
|                             |  |                      |        |                         |   |         |  



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



|                                |  |                     |        |            |   |     |  |  |  |  |  |  |  | 
|------------------------------- |  | ------------------- | ------ | ---------- | - | --- |  |  |  |  |  |  |  | 
|Unamortized intangible assets:  |  |                     |        |            |   |     |  |  |  |  |  |  |  | 
|Trade name                      |  | $                   | 23,613 |            |   |     |  |  |  |  |  |  |  | 
|                                |  |                     |        |            |   |     |  |  |  |  |  |  |  | 
|                                |  |                     |        |            |  
|                                |  | Thirteen WeeksEnded |        |            |   |     |  |  |  | 
|                                |  | April 26,2003       |        | May 1,2004 |   |     |  |  |  |  |  | 
|Aggregate amortization expense  |  | $                   | 1,528  |            | $ | 766 |  |  |  |  |  |  |  | 
|                                |  |                     |        |            |   |     |  |  |  |  |  |  |  | 
|                                |  |                     |        |            |   |    
|Estimated amortization expense: |  |                     |        |            |   |     |  |  |  |  |  |  |  | 
|Fiscal 2004                     |  | $                   | 3,091  |            |   |     |  |  |  |  |  |  |  | 
|Fiscal 2005                     |  | $                   | 2,639  |            |   |     |  |  |  |  |  |  |  | 
|Fiscal 2006                     |  | $                   | 2,455  |            |   |     |  |  |  |  |  |  |  | 
|Fiscal 2007                     |  | $                   | 2,455  |            |   |     |  |  |  |  |  |  |  | 
|Fiscal 2008                     |  | $                   |       |            |   |     |  |  |  |  |  |  |  | 



For the period ended
May 1, 2004, there were no changes to the carrying value of goodwill.



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|9. | Stock Based Compensation
|-- | ------------------------



As of May 1, 2004, the Company had one stock-based employee compensation plan, which is described more fully in Note 13 of the audited consolidated
financial statements included in the Companys Form 10-K which was filed with the Securities and Exchange Commission. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. The Company accounts for these options as variable options and records expense based on increases and decreases in the fair market value of the Companys common stock at the end
of each reporting period. These options vest only upon the achievement of certain earnings targets, as defined. As of May 1, 2004 and April 26, 2003, the Company had not recorded any expense related to this plan as the Company had not achieved its
earnings targets, and the fair market value of the Companys common stock has not increased from the date of grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, to the stock-based employee compensation (in thousands).



|                                                                                                                                |  |                      |      |   |             |   |      |  
|------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ---- | - | ----------- | - | ---- | -
|                                                                                                                                |  | Thirteen Weeks Ended |     
|                                                                                                                                |  | April 26, 2003       |      |   | May 1, 2004 |  
|Net loss as reported                                                                                                            |  | $                    | (97  | ) |             | $ | (755 | )
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of
tax |  |                      | (8   | ) |             |   | (8   | )
|                                                                                                                                |  |                      |      |   |             |   |      |  
|Proforma net loss                                                                                                               |  | $                    | (105 | ) |             | $ | (763 | )
|                                                                                                                                |  |                      |      |   |             |   |      |  



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|10. | Recent Accounting Pronouncements
|--- | --------------------------------



In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51 (FIN 46). Generally, a variable interest entity (VIE) is any legal structure used for business purposes that either (1) does not have equity investors with voting rights or (2)
has equity investors that do not provide sufficient financial resources for the entity to support its operations. FIN 46 requires a VIE to be consolidated by the company if it is subject to a majority of the risk of loss from the variable interest
entitys operations or entitled to receive a majority of the entitys residual returns. FIN 46 requires consolidation of a VIE created after January 31, 2003 and initially applied to existing variable interest entities in the first year or
interim period beginning after June 15, 2003. In October 2003, a FASB Staff position, No. FIN 46-6, was issued, which deferred the implementation of FIN 46 until the end of the first interim or annual period ending after December 15, 2003 when an
interest in a VIE was created before February 1, 2003. The Company adopted the provisions of FIN 46 effective October 26, 2003, which did not have an impact on our financial position, results of operations or cash flows.



The Companys wholly owned subsidiary Monterey Carpets, Inc.
(Monterey Carpets) holds a variable interest in a partnership, Chroma Systems Partners (Chroma), described in further detail in Note 13 to the consolidated financial statements included herein. The Company currently accounts
for the partnership under the equity method of accounting. Although the partnership qualifies as a VIE, the Company does not qualify as a primary beneficiary and is not required to consolidate the partnership. Consolidated net income for the period
and the Companys partnership equity at the end of the period are the same whether the investment in the partnership is accounted for under the equity method or the partnership is consolidated. Any change in disclosure or presentation has no
impact on the Companys debt covenants. The Companys maximum exposure to loss as a result of its involvement with the partnership is limited primarily to its initial investment in the partnership and its undistributed share of the
partnerships earnings. The partners have historically financed the operation of the partnership by utilizing the initial capital contributions of the partners, internally generated funds and proceeds from the third party loans. To the extent
that the operations of the partnership cannot be financed in this manner, the partnership agreement allows for a call for additional capital contributions, which is obligatory to the partners. Historical and current results of the partnerships
operations indicate that current sources of funds will continue to be adequate, and that no such call for an additional capital contribution should be required.



In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 modifies the accounting for certain financial instruments that, under previous guidance could be accounted for as either a liability or equity, to
require liability treatment for those instruments in a companys statement of financial position. This statement is effective for our interim periods beginning after December 15, 2003. The adoption of SFAS 150 did not have an impact on
our financial position, results of operations or cash flows.



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



11



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|11. | Long-Term Debt
|--- | --------------



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



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



The Companys fixed charge
coverage ratio and interest coverage ratio were 1.3:1.0 and 2.08:1.0, respectively, at May 1, 2004. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Senior Credit Facility, the Company will
also be subject to the provisions of a cross-default for the 9.75% Senior Subordinated Notes. The Company was in compliance with all covenants as of May 1, 2004 and, with the amendment, expects to remain in compliance throughout fiscal 2004,
although no assurances to that effect can be given.



Total net
interest expense was $5.1 million and $5.4 million for the thirteen weeks ended May 1, 2004 and April 26, 2003, respectively, which included minimal interest income.



|12. | Segment Information
|--- | -------------------



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



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



The Floorcoverings segment represents all 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 and polypropylene extruded yarn.



No single customer amounted to or exceeded 10% of the Floorcovering
segments sales for any period presented. The Extrusion segments largest customer accounted for 62.8% and its second largest customer 12.3% of external sales in the thirteen weeks ended May 1, 2004.



12



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



|                                  |  |                      |        |            |   |       
|--------------------------------- |  | -------------------- | ------ | ---------- | - | ------
|                                  |  | Thirteen Weeks Ended
|                                  |  | April 26,2003        |        | May 1,2004
|Net Sales to External Customers   |  |                      |        |            |   |       
|Floorcoverings                    |  | $                    | 63,797 |            | $ | 70,010
|Extrusion                         |  |                      | 7,772  |            |   | 7,675 
|                                  |  |                      |        |            |   |       
|Total Sales to External Customers |  | $                    | 71,569 |            | $ | 77,685
|                                  |  |                      |        |            |   |       



|                      |  |                      |        |            |   |      
|--------------------- |  | -------------------- | ------ | ---------- | - | -----
|                      |  | Thirteen Weeks Ended
|                      |  | April 26,2003        |        | May 1,2004
|Adjusted EBITDA       |  |                      |        |            |   |      
|Floorcoverings        |  | $                    | 8,782  |            | $ | 6,649
|Extrusion             |  |                      | 1,387  |            |   | 1,480
|                      |  |                      |        |            |   |      
|Total Adjusted EBITDA |  | $                    | 10,169 |            | $ | 8,129
|                      |  |                      |        |            |   |      



|                                        |  |                      |        |   |            |   |       |  
|--------------------------------------- |  | -------------------- | ------ | - | ---------- | - | ----- | -
|                                        |  | Thirteen Weeks Ended |       
|                                        |  | April 26,2003        |        |   | May 1,2004 |  
|Net loss                                |  | $                    | (97    | ) |            | $ | (755  | )
|Income tax expense (benefit)            |  |                      | (681   | ) |            |   | 578   |  
|Net interest expense                    |  |                      | 5,406  |   |            |   | 5,123 |  
|Depreciation                            |  |                      | 2,512  |   |            |   | 2,586 |  
|Amortization                            |  |                      | 1,528  |   |            |   | 766   |  
|Chroma cash dividends                   |  |                      | 1,878  |   |            |   | 278   |  
|Equity in earnings in Chroma            |  |                      | (361   | ) |            |   | (411  | )
|Minority interest in loss of subsidiary |  |                      | (16    | ) |            |   | (36   | )
|                                        |  |                      |        |   |            |   |       |  
|Adjusted EBITDA                         |  | $                    | 10,169 |   |            | $ | 8,129 |  
|                                        |  |                      |        |   |            |   |       |  



|                          |  |                      |         |                  |   |        
|------------------------- |  | -------------------- | ------- | ---------------- | - | -------
|                          |  | As ofJanuary 31,2004 |         | As of May 1,2004
|Consolidated Assets       |  |                      |         |                  |   |        
|Floorcoverings            |  | $                    | 267,090 |                  | $ | 272,410
|Extrusion                 |  |                      | 32,058  |                  |   | 32,183 
|                          |  |                      |         |                  |   |        
|Total Consolidated Assets |  | $                    | 299,148 |                  | $ | 304,593
|                          |  |                      |         |                  |   |        



13



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##### Table of Contents

|13. | Investment in Equity Affiliate
|--- | ------------------------------



Monterey Carpets has a fifty percent (50%) ownership interest in Chroma, which operates a carpet dyeing and finishing plant. Because the Company does not
exercise control over Chroma, the Company accounts for its interest in Chroma under the equity method of accounting. The unaudited condensed financial information of Chroma for the thirteen weeks ended May 1, 2004 and April 26, 2003 and as of May 1,
2004 and January 31, 2004, are summarized below (in thousands):



|                                                          |  |                       |        |   |                  |   |       |  
|--------------------------------------------------------- |  | --------------------- | ------ | - | ---------------- | - | ----- | -
|                                                          |  | As ofJanuary 31, 2004 |        |   | As ofMay 1, 2004 |  
|Current Assets                                            |  | $                     | 2,203  |   |                  | $ | 1,945 |  
|Non-current Assets                                        |  |                       | 7,925  |   |                  |   | 7,900 |  
|                                                          |  |                       |        |   |                  |   |       |  
|Total Assets                                              |  | $                     | 10,128 |   |                  | $ | 9,845 |  
|                                                          |  |                       |        |   |                  |   |       |  
|Current Liabilities                                       |  | $                     | 1,517  |   |                  | $ | 1,069 |  
|Long Term Debt                                            |  |                       | 8,513  |   |                  |   | 8,468 |  
|Partners Capital                                         |  |                       | 98     |   |                  |   | 308   |  
|                                                          |  |                       |        |   |                  |   |       |  
|Total Liabilities and Partners Capital                   |  | $                     | 10,128 |   |                  | $ | 9,845 |  
|                                                          |  |                       |        |   |                  |   |       |  
|                                                          | 
|                                                          |  | Thirteen Weeks Ended  |       
|                                                          |  | April 26, 2003        |        |   | May 1, 2004      |  
|Net Sales                                                 |  | $                     | 4,227  |   |                  | $ | 5,079 |  
|Cost of Goods Sold                                        |  |                       | 3,311  |   |                  |   | 4,003 |  
|                                                          |  |                       |        |   |                  |   |       |  
|Gross Profit                                              |  |                       | 916    |   |                  |   | 1,076 |  
|                                                          |  |                       |        |   |                  |   |       |  
|Income from Operations                                    |  |                       | 696    |   |                  |   | 814   |  
|                                                          |  |                       |        |   |                  |   |       |  
|Net Income                                                |  |                       | 674    |   |                  |   | 766   |  
|                                                          |  |                       |        |   |                  |   |       |  
|                                                          |  |                      
|14.    Comprehensive Income                               |  |                       |        |   |                  |   |       |  
|                                                          |  |                      
|Comprehensive income (loss) is as follows (in thousands): |  |                       |        |   |                  |   |       |  
|                                                          | 
|                                                          |  | Thirteen Weeks Ended  |       
|                                                          |  | April 26, 2003        |        |   | May 1, 2004      |  
|Net Loss                                                  |  | $                     | (97    | ) |                  | $ | (755  | )
|Other Comprehensive Income:                               |  |                       |        |   |                  |   |       |  
|Foreign Currency Translation Adjustments                  |  |                       | 415    |   |                  |   | (52   | )
|                                                          |  |                       |        |   |                  |   |       |  
|Comprehensive Income (Loss)                               |  | $                     | 318    |   |                  | $ | (807  | )
|                                                          |  |                       |        |   |                  |   |       |  



14



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##### Table of Contents

|15. | Commitments and Contingencies
|--- | -----------------------------



During March 2004, a jury found in favor of Employers Mutual Insurance Companies (EMC) related to alleged violations of express oral warranty
and implied warranty of fitness for particular purpose and awarded damages totaling $0.8 million. The Company has accrued the full judgment of $0.8 million as of January 31, 2004. During the thirteen weeks ended May 1, 2004, the Company paid
approximately $0.7 million of legal expenses related to this lawsuit. The Company continues to deny liability and is evaluating its options, which include a motion for a new trial. If the Company pursues those options and is unsuccessful, it will be
required to pay the $0.8 million judgment and related legal and professional fees.



|16. | Employee Benefit Plans
|--- | ----------------------



Substantially all domestic employees of the Company who meet eligibility requirements can participate in the Company administered defined benefit plan.
Plan benefits are generally based on years of service and employees compensation during their years of employment. Our contributions are based on computations by independent actuaries, although the Company may decide to make additional
contributions to the plan beyond minimum funding requirements as is deemed appropriate by management. Plan assets at May 1, 2004 and January 31, 2004 were invested primarily in mutual funds and money market funds. During fiscal 2002, the Company
elected to freeze the plan.



Net periodic pension cost for the
thirteen weeks ended May 1, 2004 and April 26, 2003 comprised the following components:



|                                                 |  |                      |      |   |            |   |      |  
|------------------------------------------------ |  | -------------------- | ---- | - | ---------- | - | ---- | -
|                                                 |  | Thirteen Weeks Ended |     
|                                                 |  | April 26,2003        |      |   | May 1,2004 |  
|Service cost  benefits earned during the period |  | $                    |     |   |            | $ |     |  
|Interest cost on projected benefit obligation    |  |                      | 170  |   |            |   | 273  |  
|Expected return on plan assets                   |  |                      | (153 | ) |            |   | (246 | )
|Recognized net actuarial losses                  |  |                      | 85   |   |            |   | 137  |  
|                                                 |  |                      |      |   |            |   |      |  
|Net periodic pension cost for the quarter        |  | $                    | 102  |   |            | $ | 164  |  
|                                                 |  |                      |      |   |            |   |      |  



Employer contributions
of $0.3 million and $0.2 million were made for the thirteen weeks ended May 1, 2004 and April 26, 2003, respectively. Required minimum employer contributions of approximately $0.3 million are projected for the remainder of fiscal 2004. The Company
also expects to contribute up to an additional $0.9 million above the required minimum contributions during fiscal 2004 as deemed appropriate by management.



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.



15



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##### Table of Contents

Net periodic pension cost for the thirteen weeks ended May 1, 2004 and April 26, 2003 comprised the
following components:



|                                               |  |                      |     |   |            |   |     |  
|---------------------------------------------- |  | -------------------- | --- | - | ---------- | - | --- | -
|                                               |  | Thirteen Weeks Ended |    
|                                               |  | April 26,2003        |     |   | May 1,2004 |  
|Service costbenefits earned during the period |  | $                    | 33  |   |            | $ | 81  |  
|Interest cost on projected benefit obligation  |  |                      | 30  |   |            |   | 74  |  
|Expected return on plan assets                 |  |                      | (31 | ) |            |   | (75 | )
|Recognized net actuarial losses                |  |                      | 1   |   |            |   |    |  
|                                               |  |                      |     |   |            |   |     |  
|Net periodic pension cost for the quarter      |  | $                    | 33  |   |            | $ | 80  |  
|                                               |  |                      |     |   |            |   |     |  



Employer contributions
for fiscal 2004 are dependent upon the amounts contributed by employees and were $0.1 million for the thirteen weeks ended May 1, 2004. Company contributions are expected to be approximately $0.3 million in fiscal 2004.



Postretirement 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 pension costs for the thirteen weeks ended May 1, 2004 and April 26, 2003 comprised the following components:



|                                               |  |                      |    |            |   |   
|---------------------------------------------- |  | -------------------- | -- | ---------- | - | --
|                                               |  | Thirteen Weeks Ended
|                                               |  | April 26,2003        |    | May 1,2004
|Service costbenefits earned during the period |  | $                    | 24 |            | $ | 46
|Interest cost on projected benefit obligation  |  |                      | 17 |            |   | 34
|                                               |  |                      |    |            |   |   
|Net periodic pension cost for the quarter      |  | $                    | 41 |            | $ | 80
|                                               |  |                      |    |            |   |   



|17. | Condensed Consolidating Financial Statements
|--- | --------------------------------------------



The 9.75% Notes of the Company are guaranteed by the Companys domestic subsidiaries. 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 and May 1,
2004. The guarantees terms match the terms of the 9.75% Notes and the Senior Credit Facility. The maximum amount of future payments the guarantors would be required to make under the guarantees as of May 1, 2004 is $215.6 million. This
represents the principal amount outstanding of the Companys Senior Credit Facility, the 9.75% Notes and accrued interest on both obligations. The condensed consolidating financial information of the Company and its subsidiaries as of May 1,
2004 and January 31, 2004 and for the thirteen weeks ended May 1, 2004 and April 26, 2003 are as follows:



16



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##### Table of Contents

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

May 1, 2004



(Unaudited and In Thousands)



|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------------------------- |  | - | ------------ | - |  | ----------------- | ------- | - |  | - | ------- | -
|                                                        |  | Issuer |         |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotal |        
|ASSETS                                                  |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|CURRENT ASSETS:                                         |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|Cash and cash equivalents                               |  | $      | 390     |   |                       | $ | 56                        |  | $ | 3,598        |   |  | $                 |        |   |  | $ | 4,044   |  
|Accounts receivable, net                                |  |        | 21,560  |   |                       |   | 13,234                    |  |   | 6,405        |   |  |                   |        |   |  |   | 41,199  |  
|Inventories                                             |  |        | 23,967  |   |                       |   | 11,996                    |  |   | 8,990        |   |  |                   |        |   |  |   | 44,953  |  
|Deferred tax assets                                     |  |        | 2,872   |   |                       |   | 724                       |  |   | 679          |   |  |                   |        |   |  |   | 4,275   |  
|Prepaid expenses and other                              |  |        | 1,013   |   |                       |   | 229                       |  |   | 1,067        |   |  |                   | 3,131   |   |  |   | 5,440   |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|Total current assets                                    |  |        | 49,802  |   |                       |   | 26,239                    |  |   | 20,739       |   |  |                   | 3,131   |   |  |   | 99,911  |  
|                                                        |  |        |         |   |                      
|PROPERTY, PLANT AND EQUIPMENT, net                      |  |        | 34,054  |   |                       |   | 20,565                    |  |   | 9,664        |   |  |                   |        |   |  |   | 64,283  |  
|DEFERRED TAX ASSETS                                     |  |        |        |   |                       |   | 1,751                     |  |   | 1,813        |   |  |                   | (3,564  | ) |  |   |        |  
|GOODWILL                                                |  |        | 62,386  |   |                       |   | 35,992                    |  |   |             |   |  |                   |        |   |  |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                            |  |        | 32,833  |   |                       |   | 656                       |  |   |             |   |  |                   |        |   |  |   | 33,489  |  
|INVESTMENT IN SUBSIDIARIES                              |  |        | 70,548  |   |                       |   |                          |  |   |             |   |  |                   | (70,548 | ) |  |   |        |  
|OTHER ASSETS                                            |  |        | 8,133   |   |                       |   | 310                       |  |   | 89           |   |  |                   |        |   |  |   | 8,532   |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|TOTAL ASSETS                                            |  | $      | 257,756 |   |                       | $ | 85,513                    |  | $ | 32,305       |   |  | $                 | (70,981 | ) |  | $ | 304,593 |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                    |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|CURRENT LIABILITIES:                                    |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|Accounts payable                                        |  | $      | 10,382  |   |                       | $ | 7,182                     |  | $ | 3,713        |   |  | $                 |        |   |  | $ | 21,277  |  
|Accrued expenses                                        |  |        | 5,333   |   |                       |   | 6,598                     |  |   | 2,646        |   |  |                   | 3,131   |   |  |   | 17,708  |  
|Current portion of long-term debt                       |  |        | 161     |   |                       |   |                          |  |   | 1,358        |   |  |                   |        |   |  |   | 1,519   |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|Total current liabilities                               |  |        | 15,876  |   |                       |   | 13,780                    |  |   | 7,717        |   |  |                   | 3,131   |   |  |   | 40,504  |  
|                                                        |  |        |         |   |                      
|INTERCOMPANY (RECEIVABLE) PAYABLE                       |  |        | (25,186 | ) |                       |   | 3,791                     |  |   | 21,395       |   |  |                   |        |   |  |   |        |  
|OTHER LIABILITIES, including post-retirement obligation |  |        | 4,667   |   |                       |   |                          |  |   | 90           |   |  |                   |        |   |  |   | 4,757   |  
|DEFERRED TAX LIABILITIES                                |  |        | 4,925   |   |                       |   |                          |  |   | 9            |   |  |                   | (3,564  | ) |  |   | 1,370   |  
|LONG-TERM DEBT, net of current portion                  |  |        | 211,589 |   |                       |   |                          |  |   | 182          |   |  |                   |        |   |  |   | 211,771 |  
|MINORITY INTEREST                                       |  |        |        |   |                       |   |                          |  |   |             |   |  |                   | 306     |   |  |   | 306     |  
|                                                        |  |        |         |   |                      
|STOCKHOLDERS EQUITY                                    |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|Preferred stock                                         |  |        |        |   |                       |   |                          |  |   | 133          |   |  |                   | (133    | ) |  |   |        |  
|Common stock                                            |  |        |        |   |                       |   | 2,056                     |  |   | 9,061        |   |  |                   | (11,117 | ) |  |   |        |  
|Paid-in capital                                         |  |        | 72,648  |   |                       |   | 49,699                    |  |   | 2,365        |   |  |                   | (52,064 | ) |  |   | 72,648  |  
|Retained earnings (deficit)                             |  |        | (25,264 | ) |                       |   | 16,187                    |  |   | (8,200       | ) |  |                   | (7,987  | ) |  |   | (25,264 | )
|Accumulated other comprehensive loss                    |  |        | (1,499  | ) |                       |   |                          |  |   | (447         | ) |  |                   | 447     |   |  |   | (1,499  | )
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|                                                        |  |        | 45,885  |   |                       |   | 67,942                    |  |   | 2,912        |   |  |                   | (70,854 | ) |  |   | 45,885  |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY              |  | $      | 257,756 |   |                       | $ | 85,513                    |  | $ | 32,305       |   |  | $                 | (70,981 | ) |  | $ | 304,593 |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  



17



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##### Table of Contents

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

January 31, 2004



(In Thousands)



|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------------------------- |  | - | ------------ | - |  | ----------------- | ------- | - |  | - | ------- | -
|                                                        |  | Issuer |         |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotal |        
|ASSETS                                                  |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|CURRENT ASSETS:                                         |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|Cash and cash equivalents                               |  | $      | 6,667   |   |                       | $ | 106                       |  | $ | 4,268        |   |  | $                 |        |   |  | $ | 11,041  |  
|Accounts receivable, net                                |  |        | 18,443  |   |                       |   | 10,882                    |  |   | 6,694        |   |  |                   |        |   |  |   | 36,019  |  
|Inventories                                             |  |        | 15,586  |   |                       |   | 11,124                    |  |   | 8,753        |   |  |                   |        |   |  |   | 35,463  |  
|Deferred tax assets                                     |  |        | 2,677   |   |                       |   | 633                       |  |   | 703          |   |  |                   |        |   |  |   | 4,013   |  
|Prepaid expenses and other                              |  |        | 524     |   |                       |   | 105                       |  |   | 1,138        |   |  |                   | 3,194   |   |  |   | 4,961   |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|Total current assets                                    |  |        | 43,897  |   |                       |   | 22,850                    |  |   | 21,556       |   |  |                   | 3,194   |   |  |   | 91,497  |  
|                                                        |  |        |         |   |                      
|PROPERTY, PLANT AND EQUIPMENT, net                      |  |        | 34,232  |   |                       |   | 21,607                    |  |   | 10,223       |   |  |                   |        |   |  |   | 66,062  |  
|DEFERRED TAX ASSETS                                     |  |        |        |   |                       |   | 2,250                     |  |   | 1,876        |   |  |                   | (4,126  | ) |  |   |        |  
|GOODWILL                                                |  |        | 62,386  |   |                       |   | 35,992                    |  |   |             |   |  |                   |        |   |  |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                            |  |        | 33,435  |   |                       |   | 820                       |  |   |             |   |  |                   |        |   |  |   | 34,255  |  
|INVESTMENT IN SUBSIDIARIES                              |  |        | 71,335  |   |                       |   |                          |  |   |             |   |  |                   | (71,335 | ) |  |   |        |  
|OTHER ASSETS                                            |  |        | 8,687   |   |                       |   | 177                       |  |   | 92           |   |  |                   |        |   |  |   | 8,956   |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|TOTAL ASSETS                                            |  | $      | 253,972 |   |                       | $ | 83,696                    |  | $ | 33,747       |   |  | $                 | (72,267 | ) |  | $ | 299,148 |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|                                                        |  |        |         |   |                      
|LIABILITIES AND STOCKHOLDERS EQUITY                    |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|CURRENT LIABILITIES:                                    |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|Accounts payable                                        |  | $      | 8,487   |   |                       | $ | 5,751                     |  | $ | 3,484        |   |  | $                 |        |   |  | $ | 17,722  |  
|Accrued expenses                                        |  |        | 8,260   |   |                       |   | 6,096                     |  |   | 2,748        |   |  |                   | 3,194   |   |  |   | 20,298  |  
|Current portion of long-term debt                       |  |        | 80      |   |                       |   |                          |  |   | 1,711        |   |  |                   |        |   |  |   | 1,791   |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|Total current liabilities                               |  |        | 16,827  |   |                       |   | 11,847                    |  |   | 7,943        |   |  |                   | 3,194   |   |  |   | 39,811  |  
|                                                        |  |        |         |   |                      
|INTERCOMPANY (RECEIVABLE) PAYABLE                       |  |        | (24,520 | ) |                       |   | 4,585                     |  |   | 19,935       |   |  |                   |        |   |  |   |        |  
|OTHER LIABILITIES, including post-retirement obligation |  |        | 4,667   |   |                       |   |                          |  |   | 101          |   |  |                   |        |   |  |   | 4,768   |  
|DEFERRED TAX LIABILITIES                                |  |        | 4,136   |   |                       |   |                           |  |   | 9            |   |  |                   | (4,126  | ) |  |   | 19      |  
|LONG-TERM DEBT, net of current portion                  |  |        | 206,170 |   |                       |   |                          |  |   | 1,346        |   |  |                   |        |   |  |   | 207,516 |  
|MINORITY INTEREST                                       |  |        |        |   |                       |   |                          |  |   |             |   |  |                   | 342     |   |  |   | 342     |  
|                                                        |  |        |         |   |                      
|STOCKHOLDERS EQUITY:                                   |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|Preferred stock                                         |  |        |        |   |                       |   |                          |  |   | 133          |   |  |                   | (133    | ) |  |   |        |  
|Common stock                                            |  |        |        |   |                       |   | 2,056                     |  |   | 9,061        |   |  |                   | (11,117 | ) |  |   |        |  
|Paid-in capital                                         |  |        | 72,648  |   |                       |   | 49,699                    |  |   | 2,365        |   |  |                   | (52,064 | ) |  |   | 72,648  |  
|Retained earnings (deficit)                             |  |        | (24,509 | ) |                       |   | 15,509                    |  |   | (6,751       | ) |  |                   | (8,758  | ) |  |   | (24,509 | )
|Accumulated other comprehensive loss                    |  |        | (1,447  | ) |                       |   |                          |  |   | (395         | ) |  |                   | 395     |   |  |   | (1,447  | )
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|                                                        |  |        | 46,692  |   |                       |   | 67,264                    |  |   | 4,413        |   |  |                   | (71,677 | ) |  |   | 46,692  |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY              |  | $      | 253,972 |   |                       | $ | 83,696                    |  | $ | 33,747       |   |  | $                 | (72,267 | ) |  | $ | 299,148 |  
|                                                        |  |        |         |   |                       |   |                           |  |   |              |   |  |                   |         |   |  |   |         |  



18



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##### Table of Contents

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended May 1,
2004



(Unaudited and In Thousands)



|                                           |  |        |        |   |                       |   |                           |  |   |              |   |  |                   |        |   |  |   |        |  
|------------------------------------------ |  | ------ | ------ | - | --------------------- | - | ------------------------- |  | - | ------------ | - |  | ----------------- | ------ | - |  | - | ------ | -
|                                           |  | Issuer |        |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotal |       
|Net Sales                                  |  | $      | 49,445 |   |                       | $ | 25,853                    |  | $ | 11,575       |   |  | $                 | (9,188 | ) |  | $ | 77,685 |  
|                                           |  |        |        |   |                       |   |                           |  |   |              |   |  |                   |        |   |  |   |        |  
|Cost of Goods Sold                         |  |        | 31,108 |   |                       |   | 20,160                    |  |   | 9,336        |   |  |                   | (9,188 | ) |  |   | 51,416 |  
|Selling, General & Administrative Expenses |  |        | 12,576 |   |                       |   | 4,785                     |  |   | 3,643        |   |  |                   |       |   |  |   | 21,004 |  
|Amortization                               |  |        | 602    |   |                       |   | 164                       |  |   |             |   |  |                   |       |   |  |   | 766    |  
|                                           |  |        |        |   |                       |   |                           |  |   |              |   |  |                   |        |   |  |   |        |  
|Operating Expenses                         |  |        | 44,286 |   |                       |   | 25,109                    |  |   | 12,979       |   |  |                   | (9,188 | ) |  |   | 73,186 |  
|                                           |  |        |        |   |                       |   |                           |  |   |              |   |  |                   |        |   |  |   |        |  
|Operating Income (Loss)                    |  |        | 5,159  |   |                       |   | 744                       |  |   | (1,404       | ) |  |                   |       |   |  |   | 4,499  |  
|                                           |  |        |        |   |                      
|Minority Interest in Loss of Subsidiary    |  |        |       |   |                       |   |                          |  |   | (36          | ) |  |                   |       |   |  |   | (36    | )
|Equity in Earnings of Affiliate            |  |        |       |   |                       |   | 411                       |  |   |             |   |  |                   |       |   |  |   | 411    |  
|Equity in Earnings of Subsidiaries         |  |        | (736   | ) |                       |   |                          |  |   |             |   |  |                   | 736    |   |  |   |       |  
|Net Interest Expense                       |  |        | 5,096  |   |                       |   |                          |  |   | 27           |   |  |                   |       |   |  |   | 5,123  |  
|                                           |  |        |        |   |                       |   |                           |  |   |              |   |  |                   |        |   |  |   |        |  
|Income (Loss) Before Income Taxes          |  |        | (673   | ) |                       |   | 1,155                     |  |   | (1,395       | ) |  |                   | 736    |   |  |   | (177   | )
|Income Tax Expense                         |  |        | 82     |   |                       |   | 477                       |  |   | 19           |   |  |                   |       |   |  |   | 578    |  
|                                           |  |        |        |   |                       |   |                           |  |   |              |   |  |                   |        |   |  |   |        |  
|Net Income (Loss)                          |  | $      | (755   | ) |                       | $ | 678                       |  | $ | (1,414       | ) |  | $                 | 736    |   |  | $ | (755   | )
|                                           |  |        |        |   |                       |   |                           |  |   |              |   |  |                   |        |   |  |   |        |  



19



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##### Table of Contents

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended April 26,
2003



(Unaudited and In Thousands)



|                                           |  |        |        |   |                        |   |        |                             |  |   |              |   |  |                    |        |   |  |   |        |  
|------------------------------------------ |  | ------ | ------ | - | ---------------------- | - | ------ | --------------------------- |  | - | ------------ | - |  | ------------------ | ------ | - |  | - | ------ | -
|                                           |  | Issuer |        |   | Guarantor Subsidiaries |   |        | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Consolidated Total |       
|Net Sales                                  |  | $      | 43,687 |   |                        | $ | 21,324 |                             |  | $ | 11,206       |   |  | $                  | (4,648 | ) |  | $ | 71,569 |  
|                                           |  |        |        |   |                        |   |        |                             |  |   |              |   |  |                    |        |   |  |   |        |  
|Cost of Goods Sold                         |  |        | 27,043 |   |                        |   | 16,391 |                             |  |   | 9,546        |   |  |                    | (4.648 | ) |  |   | 48,332 |  
|Selling, General & Administrative Expenses |  |        | 11,321 |   |                        |   | 4,059  |                             |  |   | 2,078        |   |  |                    |       |   |  |   | 17,458 |  
|Amortization                               |  |        | 874    |   |                        |   | 654    |                             |  |   |             |   |  |                    |       |   |  |   | 1,528  |  
|                                           |  |        |        |   |                        |   |        |                             |  |   |              |   |  |                    |        |   |  |   |        |  
|Operating Expenses                         |  |        | 39,238 |   |                        |   | 21,104 |                             |  |   | 11,624       |   |  |                    | (4.648 | ) |  |   | 67,318 |  
|                                           |  |        |        |   |                        |   |        |                             |  |   |              |   |  |                    |        |   |  |   |        |  
|Operating Income (Loss)                    |  |        | 4,449  |   |                        |   | 220    |                             |  |   | (418         | ) |  |                    |       |   |  |   | 4,251  |  
|                                           |  |        |        |   |                       
|Minority Interest in Loss of Subsidiary    |  |        |       |   |                        |   |       |                             |  |   | (16          | ) |  |                    |       |   |  |   | (16    | )
|Equity in Earnings of Affiliate            |  |        |       |   |                        |   | 361    |                             |  |   |             |   |  |                    |       |   |  |   | 361    |  
|Equity in Earnings of Subsidiaries         |  |        | 461    |   |                        |   |       |                             |  |   |             |   |  |                    | (461   | ) |  |   |       |  
|Net Interest Expense                       |  |        | 5,374  |   |                        |   |       |                             |  |   | 32           |   |  |                    |       |   |  |   | 5,406  |  
|                                           |  |        |        |   |                        |   |        |                             |  |   |              |   |  |                    |        |   |  |   |        |  
|Income (Loss) Before Income Taxes          |  |        | (464   | ) |                        |   | 581    |                             |  |   | (434         | ) |  |                    | (461   | ) |  |   | (778   | )
|Income Tax Expense (Benefit)               |  |        | (367   | ) |                        |   | (348   | )                           |  |   | 34           |   |  |                    |       |   |  |   | (681   | )
|                                           |  |        |        |   |                        |   |        |                             |  |   |              |   |  |                    |        |   |  |   |        |  
|Net Income (Loss)                          |  | $      | (97    | ) |                        | $ | 929    |                             |  | $ | (468         | ) |  | $                  | (461   | ) |  | $ | (97    | )
|                                           |  |        |        |   |                        |   |        |                             |  |   |              |   |  |                    |        |   |  |   |        |  



20



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##### Table of Contents

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Thirteen Weeks Ended May 1,
2004



(Unaudited and In Thousands)



|                                                             |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  
|------------------------------------------------------------ |  | ------ | ------- | - | ---------------------- | - | ---- | --------------------------- |  | - | ------------------ | - |  | - | ------- | -
|                                                             |  | Issuer |         |   | Guarantor Subsidiaries |   |      | Non- Guarantor Subsidiaries |  |   | Consolidated Total |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  | $      | (10,673 | ) |                        | $ | (370 | )                           |  | $ | 660                |   |  | $ | (10,383 | )
|                                                             |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  
|Equity distribution from affiliate                           |  |        |        |   |                        |   | 278  |                             |  |   |                   |   |  |   | 278     |  
|Additions to property, plant, and equipment                  |  |        | (1,087  | ) |                        |   | 42   |                             |  |   | (169               | ) |  |   | (1,214  | )
|                                                             |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  
|Net cash provided by (used in) investing activities          |  |        | (1,087  | ) |                        |   | 320  |                             |  |   | (169               | ) |  |   | (936    | )
|                                                             |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  
|Proceeds from revolving credit facilities                    |  |        | 10,000  |   |                        |   |     |                             |  |   | 104                |   |  |   | 10,104  |  
|Repayments of revolving credit facilities                    |  |        | (4,500  | ) |                        |   |     |                             |  |   |                   |   |  |   | (4,500  | )
|Repayments of long-term debt                                 |  |        |        |   |                        |   |     |                             |  |   | (1,567             | ) |  |   | (1,567  | )
|Financing costs                                              |  |        | (17     | ) |                        |   |     |                             |  |   |                   |   |  |   | (17     | )
|                                                             |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  
|Net cash provided by (used in) financing activities          |  |        | 5,483   |   |                        |   |     |                             |  |   | (1,463             | ) |  |   | 4,020   |  
|                                                             |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |  |        |        |   |                        |   |     |                             |  |   | 302                |   |  |   | 302     |  
|                                                             |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                      |  |        | (6,277  | ) |                        |   | (50  | )                           |  |   | (670               | ) |  |   | (6,997  | )
|CASH AND CASH EQUIVALENTS, beginning of period               |  |        | 6,667   |   |                        |   | 106  |                             |  |   | 4,268              |   |  |   | 11,041  |  
|                                                             |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                     |  | $      | 390     |   |                        | $ | 56   |                             |  | $ | 3,598              |   |  | $ | 4,044   |  
|                                                             |  |        |         |   |                        |   |      |                             |  |   |                    |   |  |   |         |  



21



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##### Table of Contents

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Thirteen Weeks Ended April 26,
2003



(Unaudited and In Thousands)



|                                                             |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  
|------------------------------------------------------------ |  | ------ | ------- | - | ---------------------- | - | ------ | ---------------------------- |  | - | ------------------ | - |  | - | ------- | -
|                                                             |  | Issuer |         |   | Guarantor Subsidiaries |   |        | Non - Guarantor Subsidiaries |  |   | Consolidated Total |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  | $      | (6,500  | ) |                        | $ | (1,508 | )                            |  | $ | (425               | ) |  | $ | (8,433  | )
|                                                             |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  
|Equity distribution from affiliate                           |  |        |        |   |                        |   | 1,878  |                              |  |   |                   |   |  |   | 1,878   |  
|Additions to property, plant, and equipment                  |  |        | (1,581  | ) |                        |   | (370   | )                            |  |   | (95                | ) |  |   | (2,046  | )
|                                                             |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  
|Net cash provided by (used in) investing activities          |  |        | (1,581  | ) |                        |   | 1,508  |                              |  |   | (95                | ) |  |   | (168    | )
|                                                             |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  
|Proceeds from revolving credit facilities                    |  |        | 1,500   |   |                        |   |       |                              |  |   |                   |   |  |   | 1,500   |  
|Repayments of revolving credit facilities                    |  |        | (1,500  | ) |                        |   |       |                              |  |   |                   |   |  |   | (1,500  | )
|Repayments of long-term debt                                 |  |        | (10,000 | ) |                        |   |       |                              |  |   | (1,079             | ) |  |   | (11,079 | )
|Dividends to Tandus Group, Inc.                              |  |        | (586    | ) |                        |   |       |                              |  |   |                   |   |  |   | (586    | )
|Financing costs                                              |  |        | (11     | ) |                        |   |       |                              |  |   |                   |   |  |   | (11     | )
|                                                             |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  
|Net cash used in financing activities                        |  |        | (10,597 | ) |                        |   |       |                              |  |   | (1,079             | ) |  |   | (11,676 | )
|                                                             |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |  |        |        |   |                        |   |       |                              |  |   | 309                |   |  |   | 309     |  
|                                                             |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                      |  |        | (18,678 | ) |                        |   |       |                              |  |   | (1,290             | ) |  |   | (19,968 | )
|CASH AND CASH EQUIVALENTS, beginning of period               |  |        | 19,047  |   |                        |   |       |                              |  |   | 1,860              |   |  |   | 20,907  |  
|                                                             |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                     |  | $      | 369     |   |                        | $ |       |                              |  | $ | 570                |   |  | $ | 939     |  
|                                                             |  |        |         |   |                        |   |        |                              |  |   |                    |   |  |   |         |  



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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.



GENERAL



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



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



RESULTS OF
OPERATIONS



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



|                                           |  |                      |   |  |            |  
|------------------------------------------ |  | -------------------- | - |  | ---------- | -
|                                           |  | Thirteen Weeks Ended |  
|                                           |  | April 26,2003        |   |  | May 1,2004 |  
|                                           |  | (unaudited)          |  
|Net Sales                                  |  | 100.0                | % |  | 100.0      | %
|Cost of Goods Sold                         |  | 67.5                 |   |  | 66.2       |  
|                                           |  |                      |   |  |            |  
|Gross Profit                               |  | 32.5                 |   |  | 33.8       |  
|Selling, General & Administrative Expenses |  | 24.4                 |   |  | 27.0       |  
|Amortization                               |  | 2.1                  |   |  | 1.0        |  
|                                           |  |                      |   |  |            |  
|Operating Income                           |  | 6.0                  |   |  | 5.8        |  
|Net Interest Expense                       |  | 7.6                  |   |  | 6.6        |  
|Net Loss                                   |  | (0.1                 | ) |  | (1.0       | )



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Thirteen Weeks Ended May 1, 2004 As Compared with the Thirteen Weeks Ended April 26, 2003



Net Sales.Net sales for the thirteen weeks ended May 1, 2004 were
$77.7 million, an increase of $6.1 million or 8.5%, from the $71.6 million for the thirteen weeks ended April 26, 2003. Net sales of the Companys Floorcovering segment were $70.0 million for the thirteen weeks ended May 1, 2004 as compared to
$63.8 million for the thirteen weeks ended April 26, 2003, an increase of $6.2 million or 9.7%. The increase in the Floorcovering segments net sales was due to improved demand throughout the specified commercial market in the United States.
Net sales of the Extrusion segment were $7.7 million for the thirteen weeks ended May 1, 2004 as compared to $7.8 million for the thirteen weeks ended April 26, 2003, a decrease of $0.1 million or 1.2%.



Cost of Goods Sold. Cost of goods sold was $51.4 million for the
thirteen weeks ended May 1, 2004 as compared to $48.3 million in the thirteen weeks ended April 26, 2003. As a percentage of sales, these costs were 66.2% and 67.5% for the thirteen weeks ended May 1, 2004 and April 26, 2003, respectively. The
percentage decrease was primarily due to the increased absorption of fixed manufacturing costs as a result of improved sales volume.



Selling, General and Administrative Expenses.Selling, general and administrative expenses increased to $21.0 million for the thirteen weeks ended
May 1, 2004, an increase of $3.5 million or 20.0% from $17.5 million in the thirteen weeks ended April 26, 2003. This increase was primarily due to increased salaries, taxes and benefits of $1.0 million, sampling and related costs of $0.3 million,
commission of $0.4 million, advertising and other of $0.3 million, currency exchange costs of $0.9 million and legal expenses of $0.6 million. The increased legal and professional fees relate primarily to costs associated with the Employers Mutual
Insurance Companies (EMC) lawsuit and trial. As a percentage of sales, these expenses, excluding amortization, increased to 27.0% from 24.4% in the prior year.



Amortization. Intangible asset amortization decreased to $0.8 million for the thirteen weeks ended May 1, 2004 as
compared to $1.5 million for the thirteen weeks ended April 26, 2003. The decrease was due to the non-compete being fully amortized as of January 31, 2004 and lower amortization of the supply agreement due to the non-cash impairment change during
the fourth quarter of fiscal 2003.



Interest Expense.
Net interest expense for the thirteen weeks ended May 1, 2004 and April 26, 2003 was $5.1 million and $5.4 million, respectively. Included in net interest expense are charges of $0.2 million, to reflect the write-off of a pro-rata share of deferred
financing costs associated with the prepayment of term debt during the thirteen weeks ended April 26, 2003.



Income Taxes.The Company has income tax expense of $0.6 million for the thirteen weeks ended May 1, 2004 versus a tax benefit of $0.8 million for
the thirteen weeks ended April 26, 2003. The tax expense is a result of profitability in the Companys domestic operations during the thirteen weeks ended May 1, 2004 and a loss in the Companys foreign operations, against which no tax
benefit was recognized. A tax benefit was recorded in the thirteen weeks ended April 26, 2003, attributable to a loss in the Companys domestic operations and to certain state income tax credits obtained during fiscal 2003.



Net Loss. Net loss for the thirteen weeks ended May 1, 2004
increased to a net loss of $0.8 million from a net loss of $0.1 million in the thirteen weeks ended April 26, 2003. This was due to the combined result of the factors described above.



Adjusted EBITDA.Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization, plus
Chroma cash dividends, minority interest in income (loss) of subsidiary, less equity in earnings of Chroma. Adjusted EBITDA for the thirteen weeks ended May 1, 2004 decreased to $8.1 million from $10.2 million in the thirteen weeks ended April 26,
2003. The decrease in adjusted EBITDA was primarily due to the $1.6 million dollar reduction in Chroma cash dividends. During the thirteen weeks ended April 26, 2003, Chroma distributed a special cash dividend related to the refinancing of its debt.
As a percentage of sales, Adjusted EBITDA was 10.5% in the thirteen weeks ended May 1, 2004 compared to 14.2% in the thirteen weeks ended April 26, 2003. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to
analyze a companys ability to service debt. The



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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 certain senior credit facility debt covenants. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and should not be considered an
alternative to operating income or net income as a measure of operating performance or to net cash provided by operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation
in these statements may not be comparable to those disclosed by other companies.



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



|                                        |  |                      |        |   |            |   |       |  
|--------------------------------------- |  | -------------------- | ------ | - | ---------- | - | ----- | -
|                                        |  | Thirteen Weeks Ended |       
|                                        |  | April 26,2003        |        |   | May 1,2004 |  
|Net loss                                |  | $                    | (97    | ) |            | $ | (755  | )
|Income tax expense (benefit)            |  |                      | (681   | ) |            |   | 578   |  
|Net interest expense                    |  |                      | 5,406  |   |            |   | 5,123 |  
|Depreciation                            |  |                      | 2,512  |   |            |   | 2,586 |  
|Amortization                            |  |                      | 1,528  |   |            |   | 766   |  
|Chroma cash dividends                   |  |                      | 1,878  |   |            |   | 278   |  
|Equity in earnings in Chroma            |  |                      | (361   | ) |            |   | (411  | )
|Minority interest in loss of subsidiary |  |                      | (16    | ) |            |   | (36   | )
|                                        |  |                      |        |   |            |   |       |  
|Adjusted EBITDA                         |  | $                    | 10,169 |   |            | $ | 8,129 |  
|                                        |  |                      |        |   |            |   |       |  



LIQUIDITY AND CAPITAL
RESOURCES



The Companys principal cash needs
have historically been for operating expenses, working capital, debt repayment and capital expenditures. The Company has financed its cash requirements through internally generated cash flow, borrowings and the offering of the 9.75% Notes.



Net cash used by operating activities in the thirteen weeks
ended May 1, 2004 was $10.4 million compared to net cash used of $8.4 million in the thirteen weeks ended April 26, 2003. The change is due primarily to increased working capital requirements of $1.5 million and increased net operating expenses of
$0.5 million.



Net cash used in investing activities in the
thirteen weeks ended May 1, 2004 was $0.9 million compared to $0.2 million in the thirteen weeks ended April 26, 2003. The increase in cash used in investing activities was due to reduced capital expenditures and lower distributions received from
the investment in Chroma. Capital expenditures for the thirteen weeks ended May 1, 2004 were $1.2 million compared to $2.0 million for the thirteen weeks ended April 26, 2003. Capital expenditures during the remainder of fiscal 2004 are expected to
range from $8.0 million to $10.0 million.



Net cash provided by
financing activities in the thirteen weeks ended May 1, 2004 was $4.0 million compared to net cash used of $11.7 million in the thirteen weeks ended April 26, 2003. The increase in cash provided by financing activities was due primarily to increased
net borrowings of $10.0 million and lower voluntary debt repayments during the thirteen weeks ended May 1, 2004.



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 May 1, 2004 had an outstanding balance of $31.0 million in term loan borrowings and $5.6 million in revolving line of credit borrowings; $0.3 million in purchase money indebtedness and $1.1 million in sinking funds bonds under Crossley. As of May
1, 2004, the Companys $50.0 million revolving line of credit had borrowings of $5.5 million and $1.1 million letters of credit outstanding leaving total availability of $43.4 million. The Company was in compliance with all covenants as of May
1, 2004.



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During the first quarter of fiscal 2004, the Company leased a facility to be used for a carpet tile
production facility in Suzhou, China. Products manufactured at this facility will be sold into mainland China and throughout southeast Asia. Although no funding was required beyond the initial investment made of $3.0 million during fiscal 2003,
additional funding of approximately $2.0 million is anticipated, primarily during the remainder of fiscal 2004.



The Companys semi-annual interest payments of the 9.75% Notes are due on each February 15 and August 15 through February 15, 2010. The amount due on
each date during fiscal 2004 is $8.5 million.



During March
2004, a jury found in favor of EMC related to alleged violations of express oral warranty and implied warranty of fitness for particular purpose and awarded damages totaling $0.8 million. The Company has accrued the full judgment of $0.8 million.
During the thirteen weeks ended May 1, 2004, the Company paid approximately $0.7 million of legal expenses related to this lawsuit. The Company continues to deny liability and is evaluating its options, which include a motion for a new trial. If the
Company pursues those options and is unsuccessful, it will be required to pay the $0.8 million judgment, and related legal and professional fees.



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. The Companys business may not generate sufficient cash flow from operations, and future borrowings may not be available in an
amount sufficient to enable the Company to service its indebtedness or to make necessary capital expenditures. The Company periodically evaluates potential acquisitions of businesses, which complement its existing operations. 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.



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



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



The Companys fixed charge
coverage ratio and interest coverage ratio were 1.3:1.0 and 2.08:1.0, respectively, at May 1, 2004. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Senior Credit Facility, the Company will
also be subject to the provisions of a cross-default for the 9.75% Senior Subordinated Notes. The Company was in compliance with all covenants for the thirteen weeks ended May 1, 2004 and, with the amendment, expects to remain in compliance
throughout fiscal 2004, although no assurances can be given.



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



EFFECTS OF INFLATION



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



SEASONALITY



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



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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.



On April 30, 2004, Koch Industries, Inc. finalized its
acquisition of Invista Inc. The Companys management anticipates little or no disruption in shipments that are currently supplied by Invista.



RECENT ACCOUNTING PRONOUNCEMENTS



In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51 (FIN 46). Generally, a variable interest entity (VIE) is any legal structure used for business purposes that either (1) does not have equity investors with voting rights or (2)
has equity investors that do not provide sufficient financial resources for the entity to support its operations. FIN 46 requires a VIE to be consolidated by the company if it is subject to a majority of the risk of loss from the variable interest
entitys operations or entitled to receive a majority of the entitys residual returns. FIN 46 requires consolidation of a VIE created after January 31, 2003 and initially applied to existing variable interest entities in the first year or
interim period beginning after June 15, 2003. In October 2003, a FASB Staff position, No. FIN 46-6, was issued, which deferred the implementation of FIN 46 until the end of the first interim or annual period ending after December 15, 2003 when an
interest in a VIE was created before February 1, 2003. The Company adopted the provisions of FIN 46 effective October 26, 2003, which did not have an impact on our financial position, results of operations or cash flows.



The Companys wholly owned subsidiary Monterey Carpets, Inc.
(Monterey Carpets) holds a variable interest in a partnership, Chroma Systems Partners (Chroma), described in further detail in Note 13 to the consolidated financial statements included herein. The Company currently accounts
for the partnership under the equity method of accounting. Although the partnership qualifies as a VIE, the Company does not qualify as a primary beneficiary and is not required to consolidate the partnership. Consolidated net income for the period
and the Companys partnership equity at the end of the period are the same whether the investment in the partnership is accounted for under the equity method or the partnership is consolidated. Any change in disclosure or presentation has no
impact on the Companys debt covenants. The Companys maximum exposure to loss as a result of its involvement with the partnership is limited primarily to its initial investment in the partnership and its undistributed share of the
partnerships earnings. The partners have historically financed the operation of the partnership by utilizing the initial capital contributions of the partners, internally generated funds and proceeds from the third party loans. To the extent
that the operations of the partnership cannot be financed in this manner, the partnership agreement allows for a call for additional capital contributions, which is obligatory to the partners. Historical and current results of the partnerships
operations indicate that current sources of funds will continue to be adequate, and that no such call for an additional capital contribution should be required.



In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 modifies the accounting for certain financial instruments that, under previous guidance could be accounted for as either a liability or equity, to
require liability treatment for those instruments in a companys statement of financial position. This statement is effective for our interim periods beginning after December 15, 2003. The adoption of SFAS 150 did not have an impact on our
financial position, results of operations or cash flows.



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



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 10-K which was filed with the Securities and Exchange
Commission. 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. Our 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 we believe that our customer claims reserve
and allowance for product returns is adequate and that the judgment applied is appropriate based upon our historical experience for these items, actual amounts determined to be due and payable could differ and additional allowances may be required.



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



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



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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 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; 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; 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
the Company is not subject to material foreign currency exchange risk, it is exposed to changes in interest rates. Other than the 9.75% Notes, substantially all of our debt is variable rate debt. Therefore, interest rate changes generally do not
affect the fair market value of such debt but do impact future earnings and cash flows, assuming other factors are held constant. Conversely, for fixed rate debt, interest rate changes do not impact future cash flow and earnings, but do impact the
fair market value of such debt, assuming other factors are held constant. As of May 1, 2004, the Company had variable rate debt of $36.5 million and fixed rate debt of $176.8 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 11 to the accompanying consolidated financial statements. The impact on our
results of operations of a one-point rate change on the outstanding balance of our term loan as of the thirteen weeks ended May 1, 2004 would be approximately $0.2 million, net of tax.



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



As of May 1, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Companys Chief Executive Officer
and the Chief Financial Officer, of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-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 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
|------- | -----------------



In 1996 and 1997, the Company sold approximately $0.6 million of carpet tile product to Employers Mutual Insurance Companies (EMC). EMC
subsequently filed suit in the United States District Court for the Southern District of Iowa on August 6, 2002, alleging the carpet experienced premature wearing and discoloration, and asserted that the Company should pay damages based upon
theories of violation of warranties, negligence and fraud. The Company examined EMCs claim prior to commencement of the action and determined that EMC had not properly maintained the carpet, resulting in irreversible damage to the carpet. The
Company filed a motion for summary judgment and the United States District Court for the Southern District of Iowa ruled in favor of the Company on the negligence, written warranty claims and implied warranty of merchantability. Other claims
included express oral warranty, implied warranty of fitness for particular purpose, fraudulent misrepresentation and fraudulent nondisclosure were tried to a jury. 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. The jury awarded EMC $0.8 million in damages for full replacement of the
carpet.



The Company believes substantial errors were committed
in the trial, including the failure of the trial court to render judgment as a matter of law that the Company did not owe EMC a fiduciary duty, and in the erroneous application by the jury of its instructions on the measure of damages. The Company
continues to deny liability and is evaluating its options, which include filing a motion for judgment as a matter of law pursuant to Rule 50 of the Federal Rules of Civil Procedure and a motion for a new trial. The judgment award of $0.8 million has
been recorded as an accrued liability in the January 31, 2004 consolidated balance sheet. The Company incurred legal expenses during the thirteen weeks ended May 1, 2004 related to the EMC lawsuit of approximately $0.7 million. These expenses are
included in the Companys consolidated statement of operations.



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



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



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



| | (a) | Exhibits
| | --- | --------



|     |  |                                                                                                                                                      
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Second Amendment to Senior Credit Facility, dated May 1, 2004                                                                                        
|     | 
|31.1 |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended                        
|     | 
|31.2 |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended                        
|     | 
|32.1 |  | Certification of the Chief Executive Officer 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



| | (b) | Reports on Form 8-K
| | --- | -------------------



Current Report on Form 8-K: Disclosure of filing delay of Form 10-K, dated April 30, 2004



Current Report on Form 8-K: Fourth quarter and year-end earnings press release, dated April 30, 2004



Current Report on Form 8-K: Press Release regarding resignation of Darrel
McCay, Chief Financial Officer, dated     February 6, 2004



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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 June 15, 2004.



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

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




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