<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


(Mark One)
  [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
      For the fiscal year ended January 3, 1998

                                       OR

  [  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE  ACT OF 1934  [NO FEE REQUIRED]
      For the transition period from _________________ to ______________________

                         Commission File Number 33-67854

                              CMI INDUSTRIES, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


<TABLE>
                 <S>                                             <C>
                 Delaware                                                      57-0836097
------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation                     (I.R.S. Employer Identification No.)


1301 Gervais Street, Suite 700, Columbia, South Carolina                       29201
------------------------------------------------------------------------------------------------------
(Address of principal executive office)                                      (Zip Code)
</TABLE>


Registrant's telephone number including area code:     (803) 771-4434

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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

                             ----------------------

No shares of the voting securities of the Registrant are held by nonaffiliates;
the aggregate market value of shares of voting securities held by nonaffiliates
as of March 1, 1998 is zero.

As of March 1, 1998, there were 1,695,318 shares of $1 Par Value Common Stock
outstanding.
===============================================================================


<PAGE>   2




         This Report contains statements which to the extent they are not
recitations of historical fact, may constitute "forward looking statements"
within the meaning of applicable federal securities laws. All forward looking
statements in this Report are intended to be subject to the safe harbor
protection provided by the Private Securities Litigation Reform Act of 1995 and
Section 21E of the Securities Exchange Act of 1934, as amended. For a discussion
identifying some important factors that could cause actual results to vary
materially from those anticipated in the forward looking statements made by the
Company, see "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."

                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

         CMI Industries, Inc. ("CMI" or the "Company") and its subsidiaries
manufacture textile products that serve a variety of markets, including the home
furnishings, woven apparel, elasticized knit apparel, furniture upholstery,
transportation upholstery, consumer products and industrial/medical markets. The
Company operates through three divisions: the Greige Fabrics Division, the
Elastic Fabrics Division and the Chatham Division. The Company had net sales of
$422.7 million in 1997. The Greige Fabrics Division accounted for 41% of 1997
net sales, the Elastic Fabrics Division accounted for 22% of 1997 net sales, and
the Chatham Division accounted for 37% of 1997 net sales.

         The Greige Fabrics Division is one of the largest domestic
manufacturers of light to midweight greige (unfinished) fabrics for sale to
third parties. The division's product line includes printcloths, broadcloths,
twills, crepes and other fabrics of 100% cotton and blends of polyester and
combed or carded cotton, and synthetic yarns. The division sells its fabrics
primarily to integrated manufacturers and converters for use in a wide variety
of home furnishings, woven apparel and industrial products. The Greige Fabrics
Division also targets selected niches in markets where value-added services can
differentiate its fabrics from imported fabrics. In addition, this division
works closely with certain manufacturers to customize fabrics, packaging and
services to their specific requirements.

         The Elastic Fabrics Division manufactures fabrics and products for sale
to the elasticized apparel fabric markets. The Elastic Fabrics Division is a
leading manufacturer of dyed and finished elasticized fabrics primarily for use
in intimate apparel and foundation garments and also for use in stretch fabric
activewear and industrial and medical products. The division's vertically
integrated manufacturing operations produce woven and knit fabrics using a
variety of spandex, polyester, rayon, nylon and cotton yarns. Various dyeing and
finishing technologies are utilized which enable the division to finish and dye
its fabrics to achieve consistent specifications and color matching for its
products.

         The Chatham Division manufactures fabrics and products for sale to the
furniture upholstery, transportation upholstery and consumer products markets.
Furniture upholstery is


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<PAGE>   3


supplied for use in residential applications, office and public seating and wall
panels for open-plan office systems. Customers include contract and residential
furniture manufacturers. Furniture upholstery is also sold through an extensive
distributor network. Transportation upholstery is supplied for use in automobile
and light truck seating and interior component applications to domestic
automobile manufacturers and to Japanese manufacturers with domestic production
facilities. Consumer products such as blankets, mattress pads and afghans are
manufactured for sale to major retailers.

         The Company was formed in 1986 at the direction of Merrill Lynch
Capital Partners, Inc. ("ML Capital Partners"), a wholly owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), together with certain members of present
or former management for the purpose of acquiring Clinton Mills, Inc., a South
Carolina corporation, a predecessor in interest to the Greige Fabrics Division.
Affiliates of ML Capital Partners and certain members of management of the
Company who acquired shares of the Company's common stock (the "Common Stock")
in 1986 and thereafter and their affiliates (the "Management Investors")
currently own 58.9% and 41.1% respectively, of the outstanding Common Stock.


SALES SUMMARY

         The following table presents, for the last three fiscal years, the
dollar sales and the percentages of the Company's sales contributed by each
division.

<TABLE>
<CAPTION>
                                                                 SALES BY DIVISION
                                     -----------------------------------------------------------------------------
                                                                (Dollars in thousands)
                                              1995                        1996                        1997
                                     ---------------------       -------------------         ---------------------
<S>                                  <C>             <C>         <C>             <C>         <C>             <C>
Greige Fabrics Division              $182,923         45%        $156,793         42%        $171,010         41%
Elastic Fabrics Division              103,029         25%          90,266         24%          93,931         22%
Chatham Division                      122,684         30%         126,985         34%         157,781         37%
                                     --------        ---         --------        ---         --------        ---
         Total                       $408,636        100%        $374,044        100%        $422,722        100%
                                     ========        ===         ========        ===         ========        ===
</TABLE>


         The following table presents, for the last five fiscal years, the
percentages of the Company's sales to the home furnishings, woven apparel,
furniture upholstery, elasticized fabric, transportation upholstery, consumer
products and industrial/medical/other markets, as estimated by the Company.

<TABLE>
<CAPTION>
                                                                           PERCENTAGE OF DOLLAR SALES
                                                          ------------------------------------------------------
                                                          1993         1994         1995         1996       1997
                                                          ------------------------------------------------------
<S>                                                       <C>          <C>          <C>          <C>         <C>
Home furnishings market                                    25%          28%          28%          28%         26%
Woven apparel market                                       18%          15%          11%          11%         11%
Furniture upholstery market                                19%          18%          14%          15%         13%
Elasticized fabric market                                  15%          16%          25%          24%         22%
Transportation upholstery market                           10%          11%           8%          11%         16%
Consumer products market                                    8%           9%           8%           7%          6%
Industrial/medical/other markets                            5%           3%           6%           4%          6%
                                                          ---          ---          ---          ---         ---
         Total                                            100%         100%         100%         100%        100%
                                                          ===          ===          ===          ===         ===
</TABLE>



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<PAGE>   4

GREIGE FABRICS DIVISION

         Products. The Greige Fabrics Division manufactures light to midweight
greige (unfinished) fabrics, including printcloths, broadcloths, twills, crepes
and other fabrics of 100% cotton and blends of polyester and combed or carded
cotton, and 100% synthetic yarns. The division can manufacture fabric in a broad
range of styles, which are determined by the fibers used, the number and size of
the yarns and the width of the fabric, but concentrates on a limited number of
styles and blends. The division currently produces fabric in widths ranging from
43 to 135 inches and typically produces between 60 and 100 styles at any one
time. The division's production flexibility enables it to be a cost effective
manufacturer of traditional fabric styles available from a large number of
domestic and foreign producers and gives it the ability to respond to changes in
demand in its markets. The division works closely with major integrated
manufacturers to satisfy their specific requirements.

         The fabrics sold by the Greige Fabrics Division are ultimately made
into a variety of home furnishings, woven apparel and industrial products. In
the home furnishings market, fabrics are used in comforters, bedspreads, sheets
and coordinating accessories, as well as curtains and other home furnishing
products. In the woven apparel markets, fabrics are used in a wide range of
items, including women's apparel, men's boxer shorts, trousers, and uniforms and
similar career apparel. Combed blends and 100% cotton fabrics are also used in
bolts of finished cloth sold at retail for home sewing and crafts. The principal
industrial uses for the division's fabrics are medical and athletic tapes.

          Manufacturing and Capacity. The Greige Fabrics Division's manufacture
of woven fabrics involves two principal operations: spinning cotton and blends
of cotton and polyester into yarn, and weaving yarn into fabric.

                  Spinning. The division either spins or purchases the yarn it
         uses to produce woven fabrics. Two types of spinning equipment are
         used: air-jet spinning equipment, which combines spinning and winding
         into one process, and traditional ring spinning equipment.
         Approximately 35% of the division's current spinning capacity is
         air-jet spinning.

                  Weaving. The division employs only shuttleless weaving
         machines. The division's shuttleless machines are more versatile than
         shuttle weaving machines and are capable of weaving multiple fabrics of
         different widths simultaneously on the same machine, with some machines
         capable of producing fabrics as wide as 147 inches. The shuttleless
         machines require a lower labor complement and weave fabric at higher
         speeds and with higher quality levels than shuttle machines. The
         flexibility of the shuttleless machines permits production to be
         shifted among fabric widths to meet changing market requirements and
         demand levels.

         The division currently operates six manufacturing plants. All of its
plants are equipped with projectile and air-jet shuttleless machines and
supporting equipment including carding,


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<PAGE>   5

spinning and yarn preparation equipment. The division plans to make further
capital expenditures of $8 million during fiscal 1998. These expenditures will
include additional air-jet spinning equipment. Capital expenditures have been
designed to expand production capabilities, reduce production costs and increase
quality.

         All of the division's six plants are currently operating on a 24-hour,
seven-day week. As in the past, if market conditions soften, the Company has the
ability to curtail these operating schedules.

         Marketing and Sales. The Greige Fabrics Division's fabrics are sold
primarily through the Company's New York sales office. Fabrics are sold to
integrated manufacturers and converters for use in various home furnishings
products, woven apparel and a variety of industrial applications. None of the
division's customers accounts for more than 10% of Company sales. Fabrics are
typically manufactured to order. The division's sales are generally not
seasonal.


ELASTIC FABRICS DIVISION

         Products. The Elastic Fabrics Division manufactures a variety of dyed
and finished elasticized knit and woven fabrics for use in intimate apparel and
foundation garments. It also has a significant presence in the stretch fabric
activewear market, including swimwear fabrics, and produces fabrics for use in
industrial and medical products. The vertically integrated manufacturing
operations produce warp knit, circular knit and woven fabrics using a variety of
spandex, polyester, rayon, nylon, cotton and blends of cotton yarns. The
division dyes and finishes the majority of its elasticized fabrics as well as
lace products manufactured by others.

         Manufacturing and Capacity. Manufacturing warp knit, circular knit and
woven fabrics with elastomeric fibers is a more difficult and complicated
process than that required for other fabrics. Customers who purchase elasticized
fabrics typically require that the fabrics meet precise specifications related
to physical characteristics, shades, shrinkage and the like.

                  Knitting. Several types of warp knitting machines are used.
         These machines are versatile with the capability of knitting high
         quality fabric in many different styles at high speeds and low defect
         levels. For circular knitting, the Company uses both single and double
         knit machines, some of which have mini-jacquard capability.

                  Weaving. Several types of looms are used. These looms are
         versatile with the capability of weaving high quality narrow elastic
         fabric up to twelve inches in width. Certain looms have jacquard
         capabilities, and can weave logo designs into the fabric.

                  Finishing and Dyeing. Various dyeing and finishing
         technologies are utilized which allow the division to dye and finish
         its fabrics on-site to achieve consistent specifications and color
         matching for its products. The processes used depend upon the type and
         style of fabrics being produced. The division scours and dyes most of
         its fabric


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<PAGE>   6


          in either pressurized or non-pressurized dyeing vessels. Fabrics of
          regular warp construction are normally steamed in preparation for
          other finishing processes. Fabrics are sent through finishing frames
          that stretch and set the fabric at a desired width. Computerized color
          matching equipment enables the division to meet the stringent
          requirements of the markets it serves. For certain fabrics and shades,
          it uses dyed yarn for both knitting and weaving.

         The division manufactures its elasticized knit fabrics at a plant
located in Greensboro, North Carolina, which operates on a 24-hour, five or
six-day week. Since the acquisition of the former United Elastic Corporation
operations in January 1995, the division manufactures narrow elasticized woven
fabrics in Stuart, Virginia. This plant operates on a 24-hour, five day week.

         Marketing and Sales. The Elastic Fabrics Division sells its elasticized
fabrics through the Company's New York and Los Angeles sales offices, and sales
representatives located in Greensboro, North Carolina and Stuart, Virginia.
These fabrics are manufactured only to order.


CHATHAM DIVISION

          Products. The Chatham Division manufactures a variety of dyed and
finished fabrics for use in diverse markets.

                  Furniture Upholstery. The division produces furniture
         upholstery for residential applications, office and public seating as
         well as wall panels for open office systems. The division's customers
         include contract and residential furniture manufacturers. Furniture
         upholstery is also sold through an extensive distributor network.
         Furniture upholstery fabrics are offered in both wool and a broad range
         of manmade fibers and in a variety of constructions, from jacquard and
         dobby wovens to knitted and tufted piles. These various fabric
         constructions primarily utilize internally produced woolen spun,
         filament and novelty type yarns. A wide variety of dyeing methods,
         including raw stock, yarn and piece dyeing, are used.

                  Transportation Upholstery. The division supplies upholstery
         fabrics for automobile and light truck seating and interior component
         applications as well as for a variety of other transportation uses such
         as heavy truck interiors, van conversions and after-market uses.
         Primary automotive customers include domestic automobile manufacturers
         and Japanese automobile manufacturers with United States manufacturing
         facilities. To a limited extent, the division also exports its
         automotive fabrics to Japan for overseas production. The Company has
         developed a strategic alliance with Tatsumura Textile Company, Ltd., a
         leading supplier of automotive fabrics to Toyota, Mazda and Mitsubishi,
         to help to increase its business with the Japanese automakers. A wide
         variety of upholstery fabrics are produced for the transportation
         market primarily from spun and filament polyester. For the
         transportation upholstery market, the division supplies flat and
         jacquard wovens, jacquard and dobby woven velours, jacquard circular
         knits and double needle bar knits, and employs stock, yarn, and piece
         dyeing technologies.



                                       6
<PAGE>   7

                  Consumer Products. The division produces blankets, mattress
         pads, electric mattress pads, fringed throws, cotton jacquard afghans
         and infant bedding for sale to the retail, institutional and health
         care markets. Its consumer products are manufactured through either a
         loom woven process or a non-woven Fiberwoven(R) process. In addition to
         domestic sales, market placements have been made in Mexico, Canada,
         Western Europe, Australia and the Far East.

         Manufacturing and Capacity. The division operates a manufacturing
complex in Elkin, North Carolina, containing approximately 1.7 million square
feet in 11 buildings and a plant in Boonville, North Carolina. At the Elkin
complex, manufacturing is vertically integrated from fiber to finished fabric.
The Boonville plant produces yarn from fiber, which is then transferred to the
Elkin facility for weaving. Manufacturing processes include garnetting waste
fiber, extruding nylon and dyeing raw stock, yarn and fabric. The product of
these processes may flow through other processes such as carding, spinning,
weaving, knitting, the nonwoven Fiberwoven(R) process and finishing. The
division employs computer systems that allow for the design of fabrics without
the production cost associated with sampling, shorten fabric development time
and promote faster response to customer inquiries.


         Marketing and Sales. Sales and marketing functions are conducted at the
product level. Furniture upholstery is sold by sales personnel in Elkin and High
Point, North Carolina (including a showroom), New York, Chicago, Los Angeles,
and Grand Rapids, Michigan, and sales agents in the Far East, Australia and
South America. Transportation upholstery has sales and marketing offices in
Elkin, North Carolina and Detroit, Michigan. Consumer products are sold and
marketed through offices in Elkin, North Carolina and New York and sales
associates located throughout the United States. Foreign bedding sales are
handled through agents or distributors in Mexico, Canada, England, Western
Europe, Australia and the Far East.

RAW MATERIALS

         The principal raw materials the Company uses are cotton and man-made
fibers and yarns. In 1997, raw materials accounted for approximately 54% of cost
of sales. The Company uses many types of fibers, both natural (cotton and wool)
and man-made (polyester, nylon, olefin, rayon and acrylic) as well as yarns
including Lycra(R), a spandex elastomeric yarn produced by DuPont (E.I.) de
Nemours & Company, in the manufacture of its textile products. The Company
believes that availability and future price levels for fibers and yarns will
depend primarily upon supply and demand conditions, crop conditions, general
inflation, government agricultural programs and prices of petroleum-based raw
materials.

         Generally, the Company has had no difficulty in obtaining raw
materials. Cotton is available from a large number of suppliers. The Company
maintains a limited supply of cotton in inventory; its usual procedure is to
purchase cotton only when firm orders have been obtained for the goods in which
it will be used. When management concludes that a certain grade of cotton may be
in short supply or that prices may be substantially higher in the near term,



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<PAGE>   8

however, the Company may deviate from this procedure and buy additional cotton
for inventory. Historically, the Company has not purchased significant amounts
of cotton for inventory and continues to purchase cotton for future delivery
when orders are received.

         The principal man-made fibers and yarns purchased by the Company are
polyester and nylon. The Company maintains a limited supply of man-made fibers
and yarns in inventory. The Company currently purchases man-made fibers for its
Greige Fabrics Division from two suppliers, although other suppliers are
available. The Company also purchases yarns of texturized filament polyester
primarily from a limited number of suppliers for use in its woven and knit
fabrics, although other suppliers are available. Currently, most of the
elastomeric yarn used in the production of elasticized fabrics is Lycra(R).

PATENTS AND TRADEMARKS

         The Company has registered a stylized "Clinton," "EFA" and "Chatham" as
trademarks. The Company does not own or use any other patents, licenses or
trademarks that are currently material in the conduct of its business.

BACKLOG

         At January 3, 1998, the Company had aggregate unfilled orders of $108
million, as compared to $120 million at December 28, 1996. As of January 3,
1998, the Greige Fabrics Division had approximately $68 million of unfilled
customer orders for woven fabrics, as compared to $87 million at December 28,
1996. The decrease in the Greige Fabrics Division's order backlog from 1996 to
1997 is indicative of the market conditions for greige fabrics as certain
customers have reduced their forward order positions to backlog levels more
representative of historical levels. The division expects to fill substantially
all of these orders in 1998. At January 3, 1998, the Elastic Fabrics Division
had unfilled orders totaling $16 million, as compared to $15 million at December
28, 1996. At January 3, 1998, the Chatham Division had unfilled orders totaling
$24 million, as compared to $18 million at December 28, 1996. The increase in
the Chatham Division's order backlog from 1996 to 1997 is indicative of the
increase in placements for the Company's transportation upholstery fabrics. The
division expects to fill all of these orders in 1998. These backlogs consist of
orders that are not generally subject to cancellation prior to shipment,
although the Company has in the past accommodated customer requests for order
deferments due to unusual circumstances. See "Item 7--Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview".

COMPETITION AND INTERNATIONAL TRADE POLICY

         The domestic textile industry is highly competitive with no one firm
dominating the United States market. Many companies compete only in limited
segments of the textile market. In recent years, there has been a trend toward
consolidation in the United States textile industry. Textile competition is
based in varying degrees on price, product styling and differentiation, quality
and customer service. The importance of each of these factors depends upon the
needs of particular markets and customers.



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<PAGE>   9

         The domestic textile industry has been fundamentally affected by
competition from imports. The level of import protection for domestic producers
of textiles has been and will continue to be subject to domestic political and
foreign policy considerations. Under the import tariff and quota framework
developed under the Arrangement Regarding International Trade in Textiles and
commonly known as the Multifiber Arrangement (the "MFA"), most significant
exporters of fabrics were subject to annual quotas. However, the MFA expired on
December 31, 1994, and was replaced by The Uruguay Round Agreement (the "Uruguay
Agreement") on textiles and clothing which contains a schedule for the gradual
phase-out of quotas established pursuant to the MFA over a ten year transition
period. After the transition period, textile and clothing trade will be fully
integrated into the World Trade Organization and subject to the same
restrictions as other sectors. The Uruguay Agreement contains a provision for
reducing tariffs on textiles and clothing products imposed by the United States
by approximately 12% overall, with the reductions phased in over a ten year
period. The reduction in the import protection accorded domestic fabric and
apparel manufacturers could adversely affect the Company.

         The Company believes that the North American Free Trade Agreement
("NAFTA") has and will continue to affect competition in the domestic textile
manufacturing market by phasing out substantially all trade restrictions among
Canada, Mexico and the United States while maintaining such restrictions on
products imported from outside North America, subject to the Uruguay Agreement.
While the Company believes that as a result of NAFTA some labor-intensive
apparel production has and will continue to move to Mexico due to Mexico's lower
labor costs, the Company expects to compete for sales of fabric to these apparel
producers in what may become a larger market for the Company's products. To the
extent that U.S. apparel manufacturers move production to Mexico and thus gain a
competitive advantage over Asian producers facing continuing import
restrictions, the Company believes that it would benefit from a resulting
increase in North American production, as neither Mexico nor Canada are
currently competitive producers of the fabrics used in the manufacture of
apparel.

         The impact of import competition varies among the Company's divisions.
The Greige Fabrics Division sells its fabrics in markets where imports are a
significant competitive factor--estimated by the Company at 25% of the
division's United States markets. In addition, the division's fabrics are used
in apparel products which compete with imported garments. In response to the
increasing effect of imports, the division has engaged in an extensive
modernization program which has added flexibility to its manufacturing process
and increased its fabric offerings. This modernization program has resulted in
increases in productivity and lower unit costs, net of depreciation. In
addition, marketing has been redirected in an effort to reduce its dependence on
commodity fabrics and has focused on developing long-term customer relationships
where value added services can differentiate its fabrics from imports. To
implement this strategy, the division has generally endeavored to decrease its
sales to the apparel market and shift more of its sales to home furnishing
markets where competition from imports is less severe. However, depending on
market conditions, the division may from time to time redirect its sales from
home furnishings to apparel to avoid market weakness or to obtain a benefit from
opportunistic selling. The Greige Fabrics Division's principal competitors
include Greenwood Mills and Alice Manufacturing.



                                       9
<PAGE>   10

         The Elastic Fabrics Division and other United States manufacturers of
elasticized fabrics and garments, including intimate apparel, swimwear and
activewear, have not been subject to the same pressure from imports experienced
by many other sportswear apparel manufacturers. Customers place significant
emphasis on product design, component shade-matching and other quality-related
criteria. Customers establish strict specifications that place a premium on
customer service, which places foreign manufacturers at a disadvantage. The
Company also believes that the swimwear market is less susceptible to import
competition because sales in the U. S. retail market are generally made within a
four-month period, and therefore close proximity of the swimwear manufacturer
and the fabric producer is advantageous for initial orders and reorders. The
division's principal elasticized fabrics competitors include Liberty Fabrics,
Darlington and Worldtex.

         The Chatham Division's furniture upholstery, transportation upholstery
and consumer products compete in domestic markets that to date have experienced
little competition from imports. In these markets, product styling and
differentiation, quality and customer service are more significant
considerations as compared to more commodity-oriented markets that are more
susceptible to import competition. Principal competitors include Guilford of
Maine (furniture upholstery), Milliken (furniture and transportation
upholstery), Collins and Aikman (furniture and transportation upholstery) and
Pillowtex (consumer products).

EMPLOYEES

         On January 3, 1998 the Company had 4,066 employees, none of whom were
covered by a collective bargaining agreement. Of these employees, 3,550 were
employed as hourly associates while 516 were employed as salaried associates.
All of the Company's employees are full-time. The Company believes that its
employee relations are good.

IMPACT OF YEAR 2000

         Management has initiated a plan to prepare the Company's computer
systems and applications for the year 2000. At January 3, 1998, the Company had
made substantial progress in programming its business systems for year 2000
compliance. Management estimates that all business critical computer systems and
applications will be year 2000 compliant prior to that date. The Company expects
to incur primarily internal staff costs related to enhancements necessary to
prepare the systems for the year 2000. Testing and conversion of system
applications is expected to cost approximately $2.0 million over the next two
years. This estimate includes the cost to purchase and install certain software
systems to replace systems which are currently not year 2000 compliant.

ENVIRONMENTAL, HEALTH AND SAFETY, AND OTHER REGULATORY MATTERS

         The Company's operations are subject to federal, state and local laws
and regulations relating to the environment, health and safety, and other
regulatory matters. Certain of the Company's operations may from time to time
involve the use of substances that are classified as toxic or hazardous
substances within the meaning of these laws and regulations. Environmental



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<PAGE>   11

operating permits are, or may be required, for certain of the Company's
operations and such permits are subject to modification, renewal and revocation.
The Company monitors and reviews its operations, procedures and policies for
compliance with these laws and regulations. Despite these compliance efforts,
risk of environmental liability is inherent in the operation of the Company's
businesses, as it is with other companies engaged in similar businesses, and
there can be no assurance that environmental liabilities will not have a
material adverse effect on the Company in the future.

         The Company has identified certain groundwater and soil contamination
which will require remediation and asbestos which may require abatement at its
Elkin facility. The Company has accrued for the costs it expects to incur in
connection with this remediation and abatement. See "Item 7--Management
Discussion and Analysis of Financial Condition and Results of
Operations--Environmental" and Notes 7 and 8 to Financial Statements.

         In May 1993, the Greige Fabrics Division received a notice of potential
liability and an information request from the EPA with respect to the AquaTech
site in Greer, South Carolina. The Company has been designated by the EPA as a
potentially responsible party ("PRP") at the site. The Company entered into a
buyout agreement with a group of approximately 719 PRPs who funded a surface
removal of hazardous substances from this site at a cost in excess of $14.0
million. The Company's allocated share of the costs of the surface cleanup under
the buyout agreement was less than $1,000. The buyout agreement does not commit
the Company to any additional expenditures nor protect it from liability for any
additional costs. The Company has joined the AquaTech PRP Group for Subsurface
Remediation which is awaiting the completion of soil and groundwater testing by
the EPA at the AquaTech site. At this time neither the extent of further cleanup
nor the Company's share of any additional remediation costs is known.

         The Company has approval from the North Carolina Department of
Environment, Health and Natural Resources and from Guilford County Environmental
Health to begin cleanup of groundwater at its Greensboro facility resulting from
previously removed leaking underground storage tanks. The Company estimates that
remaining costs associated with the cleanup will be approximately $200,000.
Partial reimbursement has been approved from the North Carolina Underground
Storage Tank Trust Fund. Equipment has been delivered to begin the cleanup as
approved in the corrective action plan.


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<PAGE>   12


ITEM 2.  PROPERTIES

         The following table sets forth certain information relating to the
Company's principal facilities as of January 3, 1998. All of these facilities
are owned by the Company, except for the New York sales office and the Columbia
executive office. The Company's New York sales office is leased for a term
expiring in 2005. The Columbia executive office is leased for a term expiring in
2000. The Company believes all of its facilities are in good repair and are in
suitable condition for the purposes for which they are used.

<TABLE>
<CAPTION>
     LOCATION                                 SQ. FOOTAGE                           USE
     --------                                 -----------                           ---
<S>                                           <C>             <C>

GREIGE FABRICS DIVISION
-----------------------

  Vance No. 1...................................263,100       Manufacturing (191,000 sq. ft.)
  Clinton, SC                                                 Warehouse and Office (72,000 sq. ft.)

  Vance No. 2...................................544,900       Manufacturing (303,900 sq. ft.)
  Clinton, SC                                                 Warehouse and Office (241,000 sq. ft.)

  Lydia  .......................................472,100       Warehouse and Office (472,100 sq. ft.)
  Clinton, SC

  Bailey .......................................277,200       Manufacturing (224,100 sq. ft.)
  Clinton, SC                                                 Warehouse  and Office (53,100 sq. ft.)

  Office-Clinton, SC.............................37,700       Office

  Geneva No. 1..................................151,500       Manufacturing (128,300 sq. ft.)
  Geneva, AL                                                  Warehouse and Office (23,200 sq. ft.)

  Geneva No. 2..................................258,200       Manufacturing (211,900 sq. ft.)
  Geneva, AL                                                  Warehouse and Office (46,300 sq. ft.)

  Office-Geneva, AL...............................7,500       Office

  Clarkesville, GA..............................268,800       Manufacturing (170,100 sq. ft.)
                                                              Warehouse and Office (98,700 sq. ft.)

ELASTIC FABRICS DIVISION
------------------------

  Greensboro, NC................................175,300       Manufacturing (138,800 sq. ft.)
                                                              Warehouse and Office (36,500 sq. ft.)

  Stuart, VA....................................415,340       Manufacturing (328,900 sq. ft.)
                                                              Warehouse and Office (86,440 sq. ft.)

</TABLE>


                                       12
<PAGE>   13


<TABLE>
<CAPTION>
     LOCATION                                 SQ. FOOTAGE                           USE
     --------                                 -----------                           ---
<S>                                           <C>             <C>

CHATHAM DIVISION
----------------

   Elkin, NC..................................1,697,600        Manufacturing (1,270,500 sq. ft.)
                                                               Warehouse and Office (427,100 sq. ft.)

   Boonville, NC................................128,500        Manufacturing (99,200 sq. ft.)
                                                               Warehouse and Office (29,300 sq. ft.)

OTHER
-----

   CMI Sales Office
   New York, NY..................................16,332        Office

   CMI Executive Office
   Columbia, SC...................................9,330        Office
</TABLE>


ITEM 3.   LEGAL PROCEEDINGS

         The Company is from time to time involved in routine litigation
incidental to its business operations, as well as product liability litigation.
In the opinion of the Company's management, none of the litigation in which it
is currently involved is material.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 1997.




                                       13
<PAGE>   14


                                     PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
          MATTERS

         None of the issued shares of the Common Stock is publicly held and
there is no established published trading market for the Common Stock.

         During the two fiscal years ended January 3, 1998, the Company did not
pay any dividends. The Company's ability to pay dividends was subject to
limitations in its bank credit agreement and in the indenture pursuant to which
its $125 million principal amount 9-1/2% Senior Subordinated Notes due 2003 were
issued (the "Indenture"). Capitalized terms used in this Item 5 that are not
defined in this Report have the same meaning as set forth in the Indenture.

         The Indenture prohibits the Company from paying cash dividends or
making other Restricted Payments if an Event of Default exists under the
Indenture or the Company cannot incur additional Indebtedness (other than
Permitted Indebtedness) because of an inadequate Fixed Charge Coverage Ratio.
The Indenture limits the aggregate amount of cash dividends and other Restricted
Payments that may be made subsequent to October 28, 1993 to an amount no greater
than the sum of (i) 50% of the Company's Consolidated Adjusted Net Income
accrued on a cumulative basis since October 1, 1993 (less 100% of any loss) plus
(ii) the aggregate net proceeds received by the Company after October 28, 1993
from certain issues or sales of the Company's capital stock and from capital
contributions. Notwithstanding the foregoing, so long as an Event of Default
does not exist, the Indenture permits the Company to (i) repurchase its capital
stock from Management Investors under certain circumstances in an aggregate
amount of up to $2.0 million per year, with the right to carry forward into the
immediately following year the aggregate amount of the unused portion, and (ii)
pay cash dividends and make other Restricted Payments in an aggregate amount not
to exceed $10.0 million.

         Under a $65 million secured revolving credit facility from The First
National Bank of Boston, which serves as the agent bank, NationsBank, N.A. and
The Wachovia Bank of South Carolina, N.A. entered into in March 1996 and amended
in February 1997 (the "Credit Agreement"), the Company is permitted to pay
dividends of up to $3 million in any fiscal year. At January 3, 1998, under the
terms of the Indenture the Company could acquire capital stock in an amount of
$4.0 million from Management Investors and could pay cash dividends or make
other Restricted Payments in an aggregate amount of $10.0 million. However, the
limitation on restricted payments contained in the Credit Agreement as then in
effect was more restrictive than the limitation contained in the Indenture, so
that at January 3, 1998 the Company was able to only pay dividends or make
restricted payments of up to $3 million.


                                       14
<PAGE>   15


ITEM 6.   SELECTED FINANCIAL DATA


         The following table sets forth selected historical financial
information for the Company for fiscal years 1993 through 1997, which has been
derived from the audited financial statements of the Company for such periods.
The information contained in the following table reflects the results of
operations of the Clarkesville plant from May 9, 1994, and the former United
Elastic Corporation operations from January 3, 1995, the respective dates of
acquisition. The selected financial data should be read in conjunction with
"Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the audited financial statements of the Company, together
with the related notes and independent accountant's report. The Company's
consolidated balance sheet as of December 28, 1996, and January 3, 1998, and
financial statements for each of the fiscal years in the three-year period ended
January 3, 1998, and the independent accountant's report thereon, are included
elsewhere in this Report. See "Index to Financial Statements."

<TABLE>
<CAPTION>
                                                                                   FISCAL YEAR
                                                 -----------------------------------------------------------------
                                                   1993          1994          1995         1996           1997
                                                   ----          ----          ----         ----           ----
STATEMENT OF INCOME DATA                                                     (Dollars in thousands)
<S>                                             <C>             <C>          <C>          <C>            <C>
Net sales                                       $370,396        $390,067     $ 408,636    $ 374,044      $ 422,722
Depreciation                                      17,226          19,879        22,660       21,968         16,702
Other cost of sales                              301,698         323,564       345,265      323,920        349,769
                                                 -------        --------     ---------    ---------      ---------
    Gross profit                                  51,472          46,624        40,711       28,156         56,251
Selling, general and administrative expense       29,360          31,433        32,704       31,097         32,914
Restructuring and other nonrecurring charges (1)      --              --        17,682           --             --
                                                --------        --------     ---------    ---------      ---------
    Operating income (loss)                       22,112          15,191        (9,675)      (2,941)        23,337

Other income (expense)
    Interest expense                             (10,558)        (14,430)      (17,174)     (15,425)       (14,499)
    Other income (expense), net                     (419)          1,397         1,406        1,588          3,148
                                                --------        --------     ---------    ---------      ---------
    Total other income (expense)                 (10,977)        (13,033)      (15,768)     (13,837)       (11,351)
                                                 -------        --------     ---------    ---------      ---------
    Income (loss) before income taxes and
         extraordinary items                      11,135           2,158       (25,443)     (16,778)        11,986
Income taxes (benefit)                             4,343             789        (9,500)      (6,115)         4,800
                                                --------        --------     ---------    ---------      ---------
    Income (loss) before extraordinary items       6,792           1,369       (15,943)     (10,663)         7,186
Extraordinary item-loss on refinancing
  senior subordinated debentures, net of
  tax benefit of $1,368                            2,139              --            --           --             --
                                                --------        --------     ---------    ---------      ---------
     Net income (loss)                          $  4,653        $  1,369     $ (15,943)   $ (10,663)     $   7,186
                                                ========        ========     =========    =========      =========
Ratio of earnings to fixed charges (2)              2.02x           1.15x        (0.48)x      (0.09)x         1.83x

BALANCE SHEET DATA (AT END OF YEAR)
Current assets                                  $122,300        $137,582     $ 123,281    $ 112,623      $ 104,349
Property, plant and equipment, net               120,411         135,800       125,774      112,545        103,592
Other assets                                       6,864           8,567         8,053        8,366          8,599
Total assets                                     249,575         281,949       257,108      233,534        216,540
Current liabilities                               39,377          43,443        42,739       44,117         38,541
Long-term debt, less current portion             124,052         153,962       154,245      143,749        124,528
Other liabilities and deferred items              25,744          22,773        17,616       13,823         14,427
Stockholders' equity                              60,402          61,771        42,508       31,845         39,044
</TABLE>





                                       15
<PAGE>   16

<TABLE>
<CAPTION>
                                                                          FISCAL YEAR
                                                ----------------------------------------------------------------
                                                 1993              1994          1995         1996          1997
                                                 ----              ----          ----         ----          ----
<S>                                             <C>             <C>          <C>            <C>            <C>
OTHER DATA AND OTHER FINANCIAL RATIOS
EBITDA (3)                                      $ 41,430        $ 36,790     $  14,361      $21,293        $43,749
Depreciation and amortization (4)                 19,773          20,294        22,670       22,646         17,264
Capital expenditures                              25,179          28,390         8,850        9,288          8,292
Ratio of EBITDA to interest expense (5)            4.18x            2.67x         1.03x        1.43x          3.15x
Ratio of total debt (at end of year) to EBITDA     3.07x            4.25x        10.80x        6.94x          2.90x
------------------------
</TABLE>


(1)  Represents $4,782 of executive severance charges recorded in the third
     quarter related to the retirement of Mr. G. T. Williams, the Company's
     former President and Chief Executive Officer and $12,900 of charges
     recorded in the fourth quarter related to the Company's restructuring plan.
     See "Item 7. Management's Discussion and Analysis of Financial Condition
     and Results of Operations--Overview."

(2)  For purposes of computing this ratio, earnings consist of income before
     income taxes and extraordinary items, plus fixed charges. Fixed charges
     consist of interest expense on debt, amortization of deferred debt cost and
     debt discount cost and the estimated interest component of rent expense.

(3)  Represents income before interest, income taxes, extraordinary items,
     depreciation and amortization. The Company has included information
     concerning EBITDA as a measure of the Company's ability to service its
     debt. EBITDA should not be considered as an alternative to, or more
     meaningful than, operating income or cash flow as an indicator of the
     Company's operating performance. See the Statements of Cash Flows included
     in the Financial Statements.

(4)  Excludes amortization of deferred debt cost and debt discount cost.
     Includes amortization of a $5.0 million noncompetition agreement obtained
     in the Chatham acquisition, which was amortized over a two-year period from
     February 14, 1992 to February 14, 1994. Amortization expense includes
     approximately $2.5 million and $0.3 million for the years ended January 1,
     1994 and December 31, 1994, respectively, with respect to this agreement.

(5)  Interest expense excludes amortization of deferred debt cost and debt
     discount cost.




                                       16
<PAGE>   17


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS OVERVIEW

         A number of factors influence the operating results for the Company
including general economic conditions, competition, raw material prices and
capital expenditures. Significant factors impacting the Company's operating
results over the past several years are as follows:

                  History. In 1992, the Company began implementing a strategic
         plan with the primary goal of becoming the low-cost provider of greige
         fabrics while achieving greater market diversification through
         acquisitions. Important elements of this new business strategy included
         the continued modernization of the Company's manufacturing facilities
         and the acquisition of certain strategic companies in order to reduce
         the Company's reliance upon sales of greige fabrics. In February 1992,
         the Company acquired the assets of Chatham Manufacturing Company (the
         Chatham Division). In addition to increased product diversification,
         the acquisition provided the Company with access to markets with
         greater barriers to entry than the markets of the Company's other
         businesses. Continuing with its acquisition strategy, the Company
         acquired the Clarkesville Plant in 1994 and the former United Elastic
         Corporation operations in 1995. These acquisitions allowed the Company
         to further diversify its product offerings and provide its existing
         customer base with more value-added products and services. Throughout
         this time period, the Company continued to upgrade its manufacturing
         capacity by investing in new equipment capable of producing better
         quality fabrics more efficiently.

                  Although the Clarkesville Plant and United Elastic Corporation
         acquisitions added incremental sales with margin opportunities
         potentially above those of the Company's other businesses and the
         modernization efforts resulted in more flexible and cost-effective
         production capacity, the Company's financial performance deteriorated
         from 1992 through 1995. In 1993 and 1994, the Company experienced
         significant operating disruptions at the Chatham Division which
         negatively impacted operating margins and its ability to service
         certain customers. To address these issues, the Company initiated
         management changes and a reorganization of its divisional structure in
         1994. During 1995, operating margins in the Chatham Division remained
         substantially below those of the Company's other businesses as the
         division worked to improve its product mix, complete the development of
         its information systems and correct certain quality and manufacturing
         inefficiencies. In 1995, the Company's financial performance also was
         negatively impacted by poor retail sales, excess supply and
         unprecedented increases in raw material costs.

                  Restructuring. The disappointing performance, coupled with
         declining asset utilization rates and the inability to service certain
         business segments, forced the Company to refocus its overall business
         strategy in late 1995. At that time, the Company initiated a
         restructuring plan to improve operating performance, reduce costs and
         realign certain resources in order to better serve its customers (the
         "Restructuring"). The


                                       17
<PAGE>   18

          Restructuring consisted of: (1) changes in the senior management of
          the Company; (2) the closing of the Greige Fabrics Division's Lydia
          Plant in Clinton, South Carolina; (3) the consolidation of the Chatham
          Division's weaving operations in Elkin, North Carolina from three
          buildings to two buildings; (4) the downsizing of the Company's
          corporate offices in Columbia, South Carolina and relocation of
          certain resources back to the operating divisions; (5) the write-off
          and proposed sale of certain idle and impaired assets; (6) the
          increased emphasis on customer service and product development
          investments, particularly with systems and design resources; (7) the
          sale of excess inventories; and (8) other process improvement
          initiatives designed to reduce costs, improve customer service levels
          and maximize returns on current investments. As a result of the
          Restructuring the Company recorded severance, retirement, and other
          nonrecurring charges relating to the facility closures and overhead
          reductions. Each of the restructuring initiatives had been completed
          by the end of 1996. In total, the Company now estimates that
          approximately 900 manufacturing and administrative positions out of
          approximately 5,000 were permanently eliminated.

                  The Restructuring implemented by management allowed the
         Company to downsize its corporate offices, eliminate inefficient
         capacity and reorganize its resources to emphasize customer service and
         product development. These initiatives have helped position the Company
         to better utilize its investments while responding more quickly and
         cost effectively to market changes and customer demands. The
         initiatives to reduce inventories and to correct supply levels relative
         to market demand, particularly in the Greige Fabrics Division, have
         resulted in better internal operating disciplines and a better ability
         to market the Company's fabrics in certain segments. In 1996 and 1997,
         operating margins improved significantly in response to the business
         improvement initiatives and strategic investments in new equipment at
         Elkin. The Company intends to continue to invest in new equipment at
         its Elkin facility, and believes that current performance in quality,
         on-time delivery, product development and order backlog levels will
         allow the Chatham Division to better realize its earnings potential.

                  Although the turnaround of the Company's Stuart facility
         within the Elastic Fabrics Division has been slower than that of its
         other operations, the Company has been proactive with changes in this
         business segment more recently. As a result of these changes, the
         Company believes that its turnaround is forthcoming. The Company
         expects to continue to invest in all three of its divisions going
         forward in an effort to meet customer demands and market requirements,
         while continuing to emphasize improved returns by being well-positioned
         to operate a diversified, more value-added product mix and reducing its
         dependency on the sales of greige fabrics.

                  General Economic Conditions. The Company's past operating
         results have been affected by the general condition of the United
         States' economy. The ability of the Company to maintain its operating
         margins during downturns in the general economy is adversely affected
         by the capital intensive nature of its business. In 1997, the Company
         benefited from its restructuring initiatives and the correction of
         supply levels relative to



                                       18
<PAGE>   19

          market demand. Consequently, operating margins in 1997 improved to
          more acceptable levels and were more indicative of the positive
          condition of the United States' economy. Although order backlog levels
          were down for the Greige Fabrics Division at January 3, 1998 as
          compared to the same time in 1997, the Company believes that current
          backlog levels are more representative of historical levels. See "Item
          1--Business-Backlog." The Company does not believe that concerns over
          the Asian financial situation will have a significant negative impact
          on the Company's results of operations in 1998.


RESULTS OF OPERATIONS

         The following table sets forth for the periods indicated the
percentages that certain income and expense items bear to sales for such
periods. All years refer to the Company's fiscal years.

<TABLE>
<CAPTION>
                                                                                FISCAL YEAR
                                                                     ----------------------------------
                                                                      1995         1996           1997
                                                                     -----         -----          ----
         <S>                                                         <C>           <C>           <C>
         Net sales...............................................    100.0%        100.0%        100.0%
         Depreciation............................................      5.5           5.8           4.0
         Other cost of sales.....................................     84.5          86.6          82.7
                                                                     -----         -----         -----
         Gross profit............................................     10.0           7.6          13.3
         Selling, general and administrative expenses............      8.0           8.3           7.8
         Restructuring and other nonrecurring charges............      4.3            --            --
                                                                     -----         -----         -----
         Operating income (loss).................................     (2.3)         (0.7)          5.5
         Other income (expense)
            Interest expense.....................................     (4.2)         (4.1)         (3.4)
            Other, net...........................................      0.3           0.4           0.7
                                                                     -----         -----         -----
         Income (loss) before income taxes ......................     (6.2)         (4.4)          2.8
         Income taxes (benefit)..................................     (2.3)         (1.6)          1.1
                                                                     -----         -----         -----
         Net income (loss) ......................................     (3.9)%        (2.8)%         1.7%
                                                                     =====         =====         =====
</TABLE>


   Fiscal Year 1997 Compared to Fiscal Year 1996

         The Company's net sales increased $48.7 million or 13.0% from $374.0
million in 1996 to $422.7 million in 1997. Sales of the Greige Fabrics Division
increased $14.2 million or 9.1%, sales of the Elastic Fabrics Division increased
$3.7 million or 4.1% while sales of the Chatham Division increased $30.8 million
or 24.3%. The increase in sales for the Greige Fabrics Division was primarily
attributable to the restructuring initiatives implemented by the Company in 1995
and 1996 to reduce inventory and capacity levels relative to market demand and
the related improvement in market conditions for greige fabrics in 1997. These
factors resulted in increased sales due to a 9.3% increase in average selling
prices without a corresponding change in sales volume. The increase in sales for
the Elastic Fabrics Division was principally attributable to stronger demand for
warp knit fabrics and the Company's decision to resume shipments to a
significant customer following the resolution of issues which arose in 1996
involving the customer's creditworthiness. Together, these factors helped to
offset the continued



                                       19
<PAGE>   20

weakness in sales of narrow woven elasticized fabrics. The increase in sales for
the Chatham Division consisted primarily of a $27.3 million increase in
automotive upholstery sales due to the Company's success in securing new product
placements and increasing market share. Sales of furniture fabrics and consumer
products have remained relatively unchanged from prior year levels. Sales in
1997 were also favorably impacted compared to 1996 due to an additional week of
sales and production as 1997 was a 53-week year.

         In conjunction with the Company's increased sales, gross profit
increased $28.1 million or 99.8% from $28.2 million to $56.3 million, and
resulted in a gross margin increase from 7.6% to 13.3%. Additionally, the
Company's depreciation expense declined by $5.3 million in 1997 as a majority of
the fixed assets acquired when the Company was formed in 1986 became fully
depreciated. The increase in gross profits was directly attributable to improved
market conditions for greige fabrics which resulted in significantly higher
selling prices and allowed the Company to operate its greige manufacturing
facilities at full capacity. Gross profit in the Elastic Fabrics Division
increased due to higher sales while gross margins also improved despite the weak
performance of its Stuart facility. Gross profit in the Chatham Division
increased due to higher sales while gross margins increased marginally as a
result of the continued operating improvements.

         Selling, general and administrative expenses increased $1.8 million or
5.8% from $31.1 million in 1996 to $32.9 million in 1997. The increase in
selling, general and administrative expenses was principally due to the
increased sales and the associated mix of commission based revenues.
Additionally, the Company paid approximately $1.5 million in incentive
compensation in 1997 as compared to only $0.4 million in 1996. The Company
continued to realize benefits from its restructuring and downsizing initiatives
from prior years and, consequently, selling, general and administrative expenses
were down from 8.3% of sales in 1996 to 7.8% of sales in 1997.

         Interest expense decreased $0.9 million or 6.0% from $15.4 million in
1996 to $14.5 million in 1997. This decrease was due to lower debt balances in
1997 which may be attributed to the Company's increased earnings, reduced
capital spending and working capital reduction initiatives.

         Income taxes (benefit) as a percent of income (loss) before taxes
changed from 37% in 1996 to 40% in 1997.

         As a result of the foregoing factors, the Company reported net income
of $7.2 million in 1997 as compared to a net loss of $10.7 million in 1996.


   Fiscal Year 1996 Compared to Fiscal Year 1995

         The Company's net sales decreased $34.6 million or 8.5% from $408.6
million in 1995 to $374.0 million in 1996. Sales of the Greige Fabrics Division
decreased $26.1 million or 14.3% and sales of the Elastic Fabrics Division
decreased $12.8 million or 12.4%, while sales of the Chatham Division increased
$4.3 million or 3.5%. The reduction in sales for the Greige Fabrics


                                       20
<PAGE>   21

Division was primarily attributable to the weak market conditions which led to
an excess supply of lightweight greige printcloth fabrics and resulted in the
Company's permanent closing of the Lydia Plant in May. These weak market
conditions had the effect of reducing the average selling price for printcloth
fabrics by 8.4%, and caused, together with the closing of the Lydia Plant, a
volume decline of 8.6% in sales for these fabrics. The sales decrease for the
Elastic Fabrics Division was primarily a result of weak market demand for the
Company's woven elasticized fabrics and the Company's strategic decision to
limit shipments to a specific customer because of the Company's concerns
relating to the creditworthiness of the customer. The sales increase for the
Chatham Division was principally due to an increase in the number of placements
for its fabrics by automotive customers.

         In conjunction with the Company's lower sales, gross profit decreased
$12.6 million or 30.8% from $40.7 million to $28.1 million, as the gross margin
declined from 10.0% to 7.6%. The decline in gross profits was directly
attributable to the weak market conditions for lightweight greige fabrics,
resulting in reduced volumes and lower selling prices. In response to these
conditions, the Company curtailed its operating schedule at certain locations
during the first half of 1996 and incurred unabsorbed fixed overhead costs in
order to decrease inventories and production to levels more consistent with
market demand. Although 1996 earnings for the Chatham Division were improved
over 1995 levels, they only partially offset the significant reduction in the
Greige Fabrics Division's gross profits and margins and the decline in earnings
associated with the 12.4% reduction in sales of the Elastic Fabrics Division.

         Selling, general and administrative expenses decreased $1.6 million or
4.9% from $32.7 million in 1995 to $31.1 million in 1996; however as a
percentage of sales, expenses were up 0.3% from 8.0% to 8.3%. The reduction in
selling, general and administrative expenses was related to the Company's
downsizing of its Corporate offices. As a percentage of sales, costs were higher
because of an increase in the mix of commission based sales.

         Interest expense decreased $1.7 million or 10.2% from $17.2 million in
1995 to $15.4 million in 1996. This decrease was due to lower debt balances in
1996 and was attributed to the Company's reduced capital spending and inventory
reduction initiatives.

         Income taxes (benefit) as a percent of income (loss) before taxes
remained unchanged at 37%.

         As a result of the foregoing factors and the absence of any
restructuring or other nonrecurring charges in 1996, the Company reported a net
loss of $10.7 million in 1996 as compared to a net loss of $15.9 million in 1995


THE NOTES AND FINANCING AGREEMENTS

         In October 1993, the Company consummated an underwritten public
offering (the "Offering") of $125 million principal amount of 9-1/2% Senior
Subordinated Notes due 2003 (the "Notes"). Immediately upon the issuance of the
Notes, the Company's then principal



                                       21
<PAGE>   22

operating subsidiaries were merged with and into the Company. The net proceeds
of the Offering, together with initial borrowings under a new $70 million
revolving credit facility from The First National Bank of Boston, which served
as the agent bank (the "Agent Bank"), NationsBank, N.A. and The Wachovia Bank of
South Carolina, N.A. and a $5 million uncommitted line of credit from The
Wachovia Bank of South Carolina, N.A., were used to refinance $118.7 million of
outstanding debt, comprised of $40.9 million in term loans and $46.7 million in
revolving credit loans under then-existing loan agreements with the Company's
subsidiaries, and $31.1 million of 12% Senior Subordinated Debentures due 1999
issued by Clinton Mills, Inc. (the "Clinton Debentures"). In December 1994 the
revolving credit facility was increased to $92 million and the Wachovia line of
credit was increased to $8 million. In June 1995, the Wachovia line of credit
was reduced to $4 million.

         In March 1996, the Company replaced the $92 million unsecured revolving
credit facility with the Credit Agreement and renewed the Wachovia line of
credit at $4 million (the "Wachovia Credit Facility" and, together with the
Credit Agreement constitute the "Bank Credit Facilities"). The Company and the
lenders amended the Credit Agreement in February 1997 to reduce the borrowing
limit to $65 million, to contemplate the realignment of the Company's assets
into separate operating entities, which were completed during 1997, and to
extend the maturity of the Credit Agreement by two years to January 2000.

          The Credit Agreement provides for a revolving credit facility of up to
$65.0 million, including a letter of credit facility of up to $5.0 million. The
borrowings under the Credit Agreement are secured by certain inventories, all
receivables and certain intangibles. The amount available under the revolving
credit facility is limited to a percentage of the collateral pledged by the
Company, as evidenced by a monthly borrowing base certificate to be delivered by
the Company, and is reduced by any outstanding letters of credit issued under
the letter of credit facility. The maximum and average amounts outstanding
during 1997 were $30.6 million and $20.9 million, respectively; at January 3,
1998, $0.1 million was outstanding and the per annum interest rate was 8.5%.

          Interest Rates and Fees. Interest under the Credit Agreement is
payable at one of two specified rates, as selected by the Company, as follows:
(i) the rate announced as the base rate of the Agent Bank and (ii) a Eurodollar
rate plus 1.5%. The Company pays a commitment fee of 0.375% per annum on the
unused portion of the revolving credit facility, payable quarterly in arrears.
The Company also pays a quarterly agency fee of $12,500 to the Agent Bank. In
addition, the Company will pay a fee on the date any letter of credit is issued
under the Credit Agreement and each anniversary date thereafter in an amount
equal to (i) 1.0% of the stated amount of any standby letter of credit and (ii)
0.375% of the stated amount of any documentary letter of credit.

          Restrictive Covenants. The Credit Agreement contains covenants
customary for a secured revolving credit facility including, among others,
covenants restricting the incurrence of indebtedness, the creation or existence
of liens, the declaration or the payment of dividends, the repurchase or
redemption of debt and equity securities of the Company, certain transactions
with related parties, and certain corporate transactions such as sales and
purchases of assets, mergers



                                       22
<PAGE>   23

or consolidations. Under the Credit Agreement, the Company may incur additional
senior indebtedness in an aggregate principal amount of up to $18.0 million,
which amount includes borrowings under the Wachovia Credit Facility, without
obtaining the consent of the lenders. Up to $10.0 million of such additional
senior indebtedness may be secured by purchase money liens. The Credit Agreement
also contains affirmative covenants relating to compliance with laws,
preservation of corporate existence, maintenance of insurance, payment of taxes,
maintenance of properties, delivery of financial and other information to the
lenders under the Credit Agreement and other matters.

          The Company is required to maintain certain financial ratios,
including a minimum tangible net worth of $30.0 million in fiscal 1997, with
minimum increases each year thereafter by 50% of the consolidated net income of
the Company and certain of its subsidiaries for the previous fiscal year. The
Company is required to maintain a minimum interest coverage ratio (EBITDA to
interest) of not less than 1.5 to 1 for any four consecutive quarters. The
Company must also maintain a fixed charge coverage ratio of 1.0 to 1, meaning
that (i) consolidated EBITDA less cash used to pay for taxes and capital
expenditures must exceed (ii) all interest plus principal due on long term
indebtedness of the Company and its consolidated subsidiaries for the nine
months ended September 30, 1997 and for any four consecutive fiscal quarters
thereafter. As of January 3, 1998, the Company was in compliance with all of the
covenants under the Credit Agreement.

          Security. Borrowings under the Credit Agreement are secured by the
Company's receivables, certain inventories and certain intangibles. The Credit
Agreement contains a negative covenant limiting the Company's right to grant
security interests or other liens in its other assets. However, up to $10.0
million of any additional senior indebtedness permitted under the Credit
Agreement, excluding borrowings under the Wachovia Credit Facility, may be
secured by assets of the Company other than inventory or receivables.

          Events of Default. The Credit Agreement contains certain events of
default customary for this type of credit facility, including, among others,
payment events of default, covenant defaults, an event of default based on a
change of control of the Company, and a cross-default to other indebtedness of,
and bankruptcy and judgment defaults to, the Company.

Wachovia Credit Facility

          Under the Wachovia Credit Facility, loan amounts, interest rates and
maturities are offered by the bank in its discretion and are accepted by the
Company at the time of borrowing, subject to the execution of a note and
supporting loan documentation satisfactory to the bank. Borrowings under the
Wachovia Credit Facility constitute additional senior indebtedness under the
Credit Agreement and are unsecured. The maximum and average amounts outstanding
during 1997 were $4 million and $3.1 million respectively; at January 3, 1998,
$2.2 million was outstanding and the per annum interest rate was 7.9%.

                                       23
<PAGE>   24

LIQUIDITY AND CAPITAL RESOURCES

         In 1997, net cash provided by operations increased $10.1 million from
$18.8 million in 1996 to $28.9 million in 1997, primarily as a result of
increased earnings in 1997 as compared to the prior year.

         Net cash used in investing activities decreased $1.0 million from $9.3
million in 1996 to $8.3 million in 1997.

         Net cash used in financing activities increased $13.7 million from 1996
to 1997. The decline in investment activities noted above coupled with increased
cash flow from operations enabled the Company to make net repayments of $21.1
million on the revolving credit facilities in 1997.

         Working capital (excluding cash, marketable securities and the current
portion of long-term debt) decreased $4 million from $70.3 million at December
28, 1996 to $66.3 million at January 3, 1998. The decrease in working capital
resulted from a reduction in the Company's inventory levels.

         The Company's primary ongoing cash requirements will be to cover debt
service, facilitate capital expenditures and position the Company to respond to
better business conditions. The Company currently intends to make capital
expenditures of approximately $24.8 million during 1998, of which a portion may
be financed with operating lease facilities. The Company's ability to make
scheduled payments or to refinance its indebtedness or to fund planned capital
expenditures will depend on its future performance, which to a certain extent is
subject to general economic, financial, competitive, regulatory and other
factors that are beyond its control. Based upon the current level of operations,
management believes that cash flow from operations and available cash, together
with availability under the Bank Credit Facilities, will be adequate to meet the
Company's future liquidity needs, meet its debt service requirements and fund
capital expenditures. There can be no assurance that the Company's business will
generate sufficient cash flow from operations or that future borrowings will be
available under the Bank Credit Facilities in amounts sufficient to enable the
Company to service its indebtedness or to fund its other liquidity needs.

ENVIRONMENTAL

         Federal and state laws and regulations relating to the discharge of
materials into the environment are continually changing; therefore it is
difficult to gauge the total future impact of such regulations on the Company.
In connection with the acquisition of the Elkin facility, environmental site
evaluations were performed by the Company which concluded that some form of
groundwater and soil remediation will be required and that some asbestos
abatement may be required at the Elkin facility. The Company believes that
sufficient amounts are accrued as of January 3, 1998 for the cost of these
expenditures. In the future, the Company may also construct facilities to
control flyash disposal and runoff from a coal pile at the Elkin facility. The
Company may also have remediation obligations with respect to contamination at
an off-site



                                       24
<PAGE>   25

treatment facility and a previously removed leaking underground storage tank.
See "Item 1--Business -- Environmental, Health and Safety, and Other Regulatory
Matters." The Company believes that based on all currently available
information, the resolution of environmental matters will not have a material
adverse effect on the Company. However, future events, such as changes in or
modified interpretations of existing laws and regulations or enforcement
policies, or further investigation or evaluation of potential health hazards of
certain business activities, may give rise to additional compliance and other
costs that could have a material adverse effect on the Company.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements filed as a part of this Annual Report on Form
10-K are listed in the Index to Consolidated Financial Statements and Schedules.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not Applicable




                                       25
<PAGE>   26


                                    PART III


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth certain information concerning the
current executive officers and directors of the Company:

<TABLE>
<CAPTION>
NAME                                        AGE      POSITION
----                                        ---      --------

<S>                                         <C>      <C>
Joseph L. Gorga                             45       Director; President and Chief Executive Officer
James A.  Ovenden                           35       Director; Chief Financial Officer, Executive Vice
                                                         President and Secretary
Joshua T.  Hamilton                         46       Executive Vice President and President, Greige
                                                         Fabrics Division
James F. Robbins                            44       Executive Vice President and President, Elastic
                                                         Fabrics Division
W. James Raleigh                            70       Director
Rupinder S. Sidhu                           41       Director
Stephen M. McLean                           40       Director
Michael H. deHavenon                        57       Director
</TABLE>

----------------------

         Each member of the Board of Directors holds office until the next
annual meeting of the stockholders and until his successor is elected and
qualified. Officers are appointed by the Board of Directors and serve at the
discretion of the Board.

         Joseph L. Gorga was named President and Chief Executive Officer and
appointed as a director of the Company in November 1995. Mr. Gorga joined a
predecessor of the Elastic Fabrics Division as its President in 1991. He was
employed by Milliken & Co., an integrated textile manufacturer, from 1975
through 1991 and served as General Manager of the Automotive & Elastic Fabrics
Division from 1987 until his employment with the Company.

         James A. Ovenden joined the Company in 1987 as Assistant Treasurer and
became Treasurer in 1988. He was appointed to the newly-created office of Chief
Financial Officer in 1993 and was elected Executive Vice President and Assistant
Secretary in 1993. He became a director of the Company in 1990 and has served as
Secretary since 1995.

         Joshua T. Hamilton, Executive Vice President of the Company and
President of the Greige Fabrics Division, joined a predecessor of the Greige
Fabrics Division in 1983 and served as Vice President of Operations from 1989
until becoming President in 1992.

         James F. Robbins joined the Company in 1992 as Executive Vice President
for Marketing, Elastic Fabrics. In 1996, he was elected Executive Vice President
and President in charge of the Elastic Fabrics Division.



                                       26
<PAGE>   27

         W. James Raleigh was elected as a director of the Company on April 2,
1996. Mr. Raleigh previously served as President of the Greige Division's sales
organization until his retirement in September 1995.

         Rupinder S. Sidhu has served as a director of the Company since 1986.
Mr. Sidhu is the President of Merion Capital Management LLC, a private
investment company, a position he has held since 1994. He was also a Special
Limited partner of Stonington Partners, Inc., a private investment firm, from
1993 through 1994. He has been a member of the Board of Directors of ML Capital
Partners, a private investment firm affiliated with ML & Co., since 1987. From
1993 to July 1994, he was a Senior Vice President of MLCP from 1987 to 1994. Mr.
Sidhu was also a Managing Director of the Investment Banking Division of ML &
Co. from 1989 to 1994 and a Director of the Investment Banking Division of
Merrill Lynch, Pierce, Fenner & Smith Incorporated from 1989 to 1994 and a
Director of the Investment Banking Division of Merrill, Lynch, Pierce, Fenner &
Smith from 1987 to 1989. Mr. Sidhu is a director of Paymentech Inc.

         Stephen M. McLean has served as a director of the Company since 1992.
Mr. McLean is a Partner and a Director of Stonington Partners, Inc., a private
investment firm, a position that he has held since 1993 and is a Partner and a
Director of Stonington Partners, Inc. II. He has also been a member of the Board
of Directors of ML Capital Partners since 1987. Mr. McLean was a Senior Vice
President of MLCP from 1987 to 1993. Mr. McLean was also a Managing Director of
the Investment Banking Division of Merrill Lynch, Pierce, Fenner & Smith,
Incorporated, from 1987 to 1994. Mr. McLean is a director of Dictaphone
Corporation, Merisel, Inc., Packard BioScience Company, Pathmark Stores, Inc.
and Supermarkets General Holding Corporation, as well as several privately held
companies.

         Michael H. deHavenon was first elected as a director of the Company in
1986 and served until 1994 when he did not stand for reelection. Mr. deHavenon
was appointed to the Board on October 24, 1995. Since January 1997, Mr.
deHavenon has been President of Kulen Capital Corp., a firm engaged primarily in
making private investments. Prior thereto, Mr. deHavenon served as President of
Merrill Lynch Capital Corporation and its predecessor, a wholly-owned subsidiary
of ML & Co., which structured and managed leveraged private investments.




                                       27
<PAGE>   28


ITEM 11.   EXECUTIVE COMPENSATION

         Compensation Summary. The following table shows, for the last three
fiscal years of the Company, annual compensation paid by the Company to Joseph
L. Gorga, the President and Chief Executive Officer and the three other
executive officers of the Company serving at the end of the 1997 fiscal year
(collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>
                                                      Summary Compensation
====================================================================================================================
                                                                                      Table(1)
                                                                                       Long Term
                                                                                     Compensation
                                             Annual Compensation                        Awards
                                 -----------------------------------------------     ------------
                                                                    Other Annual      Securities      All Other
                                            Salary        Bonus     Compensation      Underlying      Compensation
Name and Principal Position      Year          ($)        ($)(2)        ($)(3)        Options (#)          ($)
--------------------------------------------------------------------------------------------------------------------
<S>                              <C>        <C>          <C>        <C>              <C>              <C>
Joseph L. Gorga                  1997       354,737      325,000        20,550                --            --
  President and Chief            1996       325,000      185,000        15,400            40,000            --
  Executive Officer              1995       262,861      160,000         4,620            15,000            --

James A. Ovenden                 1997       242,770      150,000        14,750                --            --
  Executive Vice President       1996       225,000       75,000        10,740            15,000            --
  and Chief Financial Officer    1995       184,981       40,000         3,764                --            --

Joshua T. Hamilton               1997       208,987       75,000        13,230                --            --
  President, Greige Fabrics      1996       200,000           --        11,600                --            --
                                 1995       191,113       20,000         3,864                --            --

James F. Robbins                 1997       220,000       80,000        13,200            10,000            --
  President, Elastic Fabrics     1996       200,000       20,000        11,400                --            --
                                 1995       185,000       60,000         3,697                --            --
</TABLE>

---------------------------

(1)      The Company does not maintain a "long-term incentive plan," as that
         term is defined by applicable rules of the Securities and Exchange
         Commission (the "Commission"), and has not made any awards of
         restricted stock or stock appreciation rights.

(2)      Bonus amounts for Messrs. Gorga, Ovenden, Hamilton and Robbins
         represent amounts paid under the Company's Incentive Compensation
         Program, which provides for discretionary awards and for cash bonuses
         in years in which returns and earnings before interest, taxes and
         depreciation exceed predetermined levels. Bonuses for Messrs. Gorga and
         Ovenden are based on the performance of the Company and bonuses for Mr.
         Hamilton and Mr. Robbins are based on the performance of the Greige
         Fabrics Division and the Company's Elastic Fabrics Division,
         respectively. See "--Employment and Severance Agreements."

(3)      Represents the Company's contribution on behalf of the Named Executive
         Officer to the Company's 401(k) Plan for Associates of CMI Industries,
         Inc. and the Company's 401(n) Deferred Compensation Plan.



                                       28
<PAGE>   29

         Grants of Stock Options and Stock Appreciation Rights. The following
table sets forth information with respect to options to purchase Common Stock
granted to the Named Executive Officers in the 1997 fiscal year.



                      OPTION GRANTS IN LAST FISCAL YEAR (1)
                      -------------------------------------
<TABLE>
<CAPTION>

                                  Individual Grants                                         Potential Realizable
                                  -----------------                                        Value of Assumed Annual
                             Number of   Percent of Total                                   Rates of Stock Price
                        Securities Under Options Granted                                   Appreciation for Option
                         -lying Options  to Employees in   Exercise or Base  Expiration              Term
         Name           Granted (#)(2)   Fiscal Year (3)   Price ($/Share)     Date           5%($)         10%($)
         ----           ---------------  ---------------   ----------------  -----------   -----------    ----------
<S>                     <C>              <C>               <C>               <C>           <C>            <C>
Joseph L. Gorga                  --               --                 --             --           --             --
James A. Ovenden                 --               --                 --             --           --             --
Joshua T. Hamilton               --               --                 --             --           --             --
James F. Robbins             10,000               50%            $27.50      1/31/2007     $172,946       $438,279
</TABLE>

-------------------------

(1)  The Company does not maintain a plan that authorizes the issuance of stock
     appreciation rights.
(2)  The options granted are non-qualified options, were granted at estimated
     fair market value on the date of grant, have a term of 10 years and are
     exercisable pro-rata over the first three years.
(3)  Based on options for 20,000 shares of Common Stock granted to all employees
     during 1997.

         Stock Option Exercises. The following table sets forth information with
respect to unexercised stock options held by the Named Executive Officers as of
January 3, 1998. None of the Named Executive Officers exercised any options
during the Company's 1997 fiscal year.

<TABLE>
<CAPTION>
                                         Aggregated Fiscal Year End Option Values
                                         ----------------------------------------
                                                    Number of Unexercised                 Value of Unexercised
                                                 Options at Fiscal Year End              In-the-Money Options at
                                                          (#)                         Fiscal Year End ($)(1)
                 Name                             Exercisable/Unexercisable            Exercisable/Unexercisable
         --------------------            ----------------------------------------    ----------------------------
         <S>                             <C>                                         <C>
         Joseph L. Gorga                                     75,000/0                              $0/$0
         James A. Ovenden                                    45,000/0                              $0/$0
         Joshua T. Hamilton                                        --                                 --
         James F. Robbins                                 3,333/6,667                              $0/$0
</TABLE>

--------------------

(1)      Calculated based on the difference between the estimated value of the
         Common Stock underlying the options at January 3, 1998 and the exercise
         price.  Because the Common Stock is privately held and not listed on
         any securities  exchange, the fair market value of the Common Stock is
         not readily ascertainable.  Management's estimate of the value of the
         Common Stock underlying  the options includes a discount to reflect the
         lack of a public market for the Common Stock and the restrictions
         applicable to the Common Stock held by  Management Investors pursuant
         to the  terms of the Management Subscription Agreements and the
         Restated Stockholders Agreement.  See "--Management Subscription
         Agreements" and "Item 12. Security  Ownership of Certain Beneficial
         Owners and Management."

         Awards Under Long-Term Incentive Plans. The Company does not maintain a
"long-term incentive plan" as that term is defined by applicable rules of the
Commission.



                                       29
<PAGE>   30

         The 401(k) Plan. Effective January 1, 1995, the Company established The
401(k) Plan for Associates of CMI Industries, Inc., which covers substantially
all of the Company's employees. Under the 401(k) plan, the Company matches 50%
of employee contributions, not to exceed 2% of pay, for all eligible and
participating employees. Messrs. Gorga, Ovenden, Hamilton and Robbins
participate in the 401(k) plan.

         The 401(n) Plan. Effective January 1, 1995, the Company established The
401(n) Deferred Compensation Plan for CMI Industries, Inc., which covers a
select group of highly compensated associates. The 401(n) Plan is a
non-qualified plan established to provide retirement benefits for CMI's
executives whose retirement benefits were limited due to the freezing of the
accrued benefits under the Company's defined benefit retirement plans, and the
restrictions on benefits in the 401(k) Plan. The Board in its discretion may
authorize a supplemental match for select executives. Messrs. Gorga, Ovenden,
Hamilton and Robbins participate in the 401(n) Deferred Compensation Plan.

         Defined Benefit Retirement Plans. Effective December 31, 1994, the
Company merged its two defined benefit plans, the Chatham Manufacturing, Inc.
Pension Plan and the Clinton Retirement Income Program and curtailed future
benefits.

         Clinton Retirement Income Program. In 1991, the Company's former
Clinton Mills subsidiary combined its Pension Plan for salaried employees, its
Retirement Plan for hourly employees and its frozen Profit Sharing Plan to form
the Clinton Retirement Income Program ("CRIP"). The CRIP is a noncontributory
plan providing retirement benefits to all salaried and hourly employees who meet
certain age and service requirements. Retirement benefits to salaried employees
generally equal the greater of (i) 1 1/2% of the average total cash compensation
for the five highest consecutive years before retirement, multiplied by the
number of years of service as a salaried employee and reduced by 50% of the
employee's primary Social Security benefit payable at normal retirement date and
(ii) 1% of the aggregate of the participant's total cash compensation for all
years of service as a salaried employee after December 31, 1980. Benefits can be
paid under the CRIP through one of several annuity options selected by the
participant, including joint and survivor annuity options.

         The following table sets forth estimated annual benefits payable upon
retirement in the Company's last fiscal year to CRIP participants at normal
retirement age in the compensation and service classifications specified.


                                       30
<PAGE>   31


                               PENSION PLAN TABLE
                                YEARS OF SERVICE

<TABLE>
<CAPTION>
  REMUNERATION                                15              20             25               30             35
  ------------                                --              --             --               --             --
  <S>                                      <C>            <C>             <C>             <C>             <C>
   $125,000                                $ 20,541       $ 29,916        $ 39,291        $ 48,666        $ 58,041
    150,000                                  26,166         37,416          48,666          59,916          71,166
    175,000                                  31,791         44,916          58,041          71,166          84,291
    200,000                                  37,416         52,416          67,416          82,416          97,416
    225,000                                  43,041         59,916          76,791          93,666         110,541
    250,000                                  48,666         67,416          86,166         104,916         118,800
    300,000                                  59,916         82,416         104,916         118,800         118,800
    400,000                                  82,416        112,416         118,800         118,800         118,800
    450,000                                  93,666        120,000         120,000         120,000         120,000
    500,000                                 104,916        120,000         120,000         120,000         120,000
    550,000                                 116,166        120,000         120,000         120,000         120,000
    600,000                                 120,000        120,000         120,000         120,000         120,000
    650,000                                 120,000        120,000         120,000         120,000         120,000
    700,000                                 120,000        120,000         120,000         120,000         120,000
    750,000                                 120,000        120,000         120,000         120,000         120,000
</TABLE>

          Beginning in 1994, recognizable pay in tax qualified plans was limited
to $150,000 per year. Because of the grandfather treatment of prior accruals in
the CRIP, the above table recognizes accrued benefits on compensation in excess
of $150,000. The credited years of service for each of the Named Executive
Officers who participate in the CRIP are: Joseph L. Gorga, 4 years; James A.
Ovenden, 8 years; Joshua T. Hamilton, 12 years; and James F. Robbins, 3 years.

          Chatham Pension Plan. On February 14, 1992, the Company's former
Chatham subsidiary became the sponsor of a pension plan that was originally
established in 1969 by Chatham's predecessor. The plan is a noncontributory plan
and covers all Chatham employees as of the first day of the first plan year
after the employee's date of employment. Participants accrue benefits as of
January 1 of each year of eighty-five hundredths of one percent (.0085) of total
compensation for each plan year plus sixty-five hundredths of one percent
(.0065) of compensation which is in excess of $12,200. The plan is a career
average plan and has provision for accredited service prior to January 1, 1989.
Benefits can be paid under the Chatham Pension Plan through one of several
annuity options. A lump-sum payment option is also offered with spousal consent.
The following table sets forth estimates of annual benefits payable upon
retirement in the Company's last fiscal year at normal retirement age in the
compensation and service classifications specified. The assumptions used
indicate the remuneration as career average compensation.

          The following table sets forth estimated annual benefits payable upon
retirement in the Company's last fiscal year to plan participants at normal
retirement age in the compensation and service classifications specified.


                                       31
<PAGE>   32


                               PENSION PLAN TABLE
                                YEARS OF SERVICE


<TABLE>
<CAPTION>
   REMUNERATION                               15             20              25             30              35
   ------------                               --             --              --             --              --
   <S>                                      <C>            <C>             <C>             <C>             <C>
    $125,000                               $ 26,935       $ 35,914        $ 44,892        $ 53,871        $ 62,849
     150,000                                 32,560         43,414          54,267          65,121          75,974
     175,000                                 38,185         50,914          63,642          76,371          89,099
     200,000                                 43,810         58,414          73,017          87,621         102,224
     225,000                                 49,435         65,914          82,392          98,871         115,349
     235,840                                 51,875         69,166          86,458         103,749         118,800
</TABLE>


         The above table limits remuneration to $235,840 since the Chatham
Pension Plan has no participants with grandfathered compensation in excess of
the 1993 maximum recognizable compensation limit for tax qualified plans. None
of the Named Executive Officers participate in the Chatham Pension Plan.

         Compensation Committee Interlocks and Insider Participation. During the
1997 fiscal year, the Compensation Committee of the Company's Board of Directors
was composed of Messrs. Rupinder S. Sidhu, Stephen H. McLean, Michael H.
deHavenon and Joseph L. Gorga. Mr. Gorga is the President and Chief Executive
Officer of the Company. Messrs. Sidhu, McLean and deHavenon are not, and have
not been at any time, either officers or employees of the Company. Messrs. Sidhu
and McLean are affiliated with ML Capital Partners or ML & Co. ML Capital
Partners, through various affiliates, beneficially owns 58.7% of the outstanding
shares of Common Stock.

COMPENSATION OF DIRECTORS

          The Company pays $2,000 per quarter and $1,000 per meeting to its
outside directors (Messrs. deHavenon and Raleigh) for serving as a Director.

EMPLOYMENT AND SEVERANCE AGREEMENTS

          Mr. Gorga. Effective January 1, 1996, the Company and Mr. Gorga
entered into an amended and restated employment agreement providing for the
employment of Mr. Gorga as the President and Chief Executive Officer of the
Company. The agreement had a term of two years, subject to annual renewals
unless either party objected. In September 1997, the parties agreed to an
amendment to the amended and restated employment agreement whereby the term of
the agreement was extended for another two year period. Under the amendment, Mr.
Gorga is entitled to an annual salary of $395,000, subject to increase by the
Board's Compensation Committee. He is entitled to participate in Company benefit
plans, including the Incentive Compensation Plan; so long as the current
Incentive Compensation Plan is in effect, the maximum amount payable under the
plan to Mr. Gorga would be the greater of 75% of his base salary or the amount
specified in the plan.



                                       32
<PAGE>   33

          In the event Mr. Gorga is terminated without cause during the term of
the agreement or within six months after its expiration, the agreement provides
for the payment to him of the greater of the base salary which would accrue over
the remaining term of the agreement or one year's base salary, together with
continued health and life insurance benefits during the period in which the
payments are made. If Mr. Gorga is terminated or resigns under specified
circumstances following a change of control (as defined) that occurs during the
term of the agreement or within six months after its expiration, Mr. Gorga will
be entitled to two years' base salary from the termination or resignation and
continued health and life insurance coverage for two years. In addition, with
respect to certain change of control situations, the bonus payable to Mr. Gorga
under any incentive compensation plan then in effect, rather than being
calculated on a pro rata basis as of the termination date, would be double the
maximum amount to which Mr. Gorga otherwise would be entitled for the entire
year, regardless of the actual performance of the Company. In the event of a
change of control, Mr. Gorga may also be entitled to receive special
compensation (as defined) based upon the transaction value realized by the
Company. Under certain circumstances with respect to change of control, the
severance and special compensation amounts payable, including funding for the
continued benefits, would be payable contemporaneously with the occurrence of
the change of control. Payments that result in the imposition of an excise tax
penalty under section 4999 of the Internal Revenue Code of 1986, as amended,
would result in a reimbursement payment so that Mr. Gorga's after tax situation
is not affected by the additional tax. The agreement also contains certain
agreements of Mr. Gorga relating to noncompetition with the Company.

          Mr. Ovenden. Effective January 1, 1996, the Company and Mr. Ovenden
entered into an amended and restated employment agreement providing for the
employment of Mr. Ovenden as the Executive Vice President and Chief Financial
Officer of the Company. The agreement had a term of two years, subject to annual
renewals unless either party objected. In September 1997, the parties agreed to
an amendment to the amended and restated employment agreement whereby the term
of the agreement was extended for another two year period. Under the amendment,
Mr. Ovenden is entitled to an annual salary of $250,000, subject to increase by
the Board's compensation committee. He is entitled to participate in Company
benefit plans, including the Incentive Compensation Plan; so long as the current
Incentive Compensation Plan is in effect, the maximum amount payable under the
plan to Mr. Ovenden would be the greater of 50% of his base salary or the amount
specified in the plan.

          In the event Mr. Ovenden is terminated without cause during the term
of the agreement or within six months after its expiration, the agreement
provides for the payment to him of the greater of the base salary which would
accrue over the remaining term of the agreement or one year's base salary,
together with continued health and life insurance benefits during the period in
which the payments are made. If Mr. Ovenden is terminated or resigns under
specified circumstances following a change of control (as defined) that occurs
during the term of the agreement or within six months after its expiration, Mr.
Ovenden will be entitled to two years' base salary from the termination or
resignation and continued health and life insurance coverage for two years. In
addition, with respect to certain change of control situations, the bonus
payable to Mr. Ovenden under any incentive compensation plan then in effect,
rather than being calculated on a pro rata basis as of the termination date,
would be double the maximum amount


                                       33
<PAGE>   34

to which Mr. Ovenden otherwise would be entitled for the entire year, regardless
of the actual performance of the Company. In the event of a change of control,
Mr. Ovenden may also be entitled to receive special compensation (as defined)
based upon the transaction value realized by the Company. Under certain
circumstances with respect to change of control, the severance and special
compensation amounts payable, including funding for the continued benefits,
would be payable contemporaneously with the occurrence of the change of control.
Payments that result in the imposition of an excise tax penalty under section
4999 of the Internal Revenue Code of 1986, as amended, would result in a
reimbursement payment so that Mr. Ovenden's after tax situation is not affected
by the additional tax. The agreement also contains certain agreements of Mr.
Ovenden relating to noncompetition with the Company.

          Mr. G. Thaddeus Williams. Until his retirement from the Company in
August 1995, Mr. Williams was employed as President and Chief Executive Officer
of the Company pursuant to an employment agreement effective as of January 1,
1991, which was amended as of July 1, 1993. Pursuant to the terms of a severance
and consulting agreement (the "Consulting Agreement") entered into upon Mr.
Williams' retirement, the rights and obligations of Mr. Williams and the Company
under the employment agreement have been terminated, except as expressly
provided by the Consulting Agreement.

          Pursuant to the Consulting Agreement, Mr. Williams received severance
payments at the annual rate of $275,000 until August 1997. Following the
expiration of the severance payment period, Mr. Williams will provide consulting
services to the Board of Directors and to the Chief Executive Officer of the
Company for a period of up to three years and shall receive an annual consulting
fee of $175,000. During the term of the severance payment period and the
consulting period, Mr. Williams has agreed that he will not compete or interfere
with any business conducted by the Company or its affiliates. Mr. Williams and
his dependents are also entitled to continued participation in the Company's
group medical insurance plan and the Company will pay the required premiums
until Mr. Williams attains age 62.


MANAGEMENT SUBSCRIPTION AGREEMENTS

          Pursuant to a management subscription agreement (the "Management
Subscription Agreement"), certain of the Company's officers and employees,
including Mr. Hamilton, acquired shares of Common Stock in December 1986. Mr.
Ovenden, who acquired shares of Common Stock in 1987, is subject to a
subscription agreement substantially identical to the Management Subscription
Agreement, and is a Management Investor. The Management Subscription Agreement
and Mr. Ovenden's separate subscription agreement grant the Company an option to
purchase and each of the Management Investors an option under certain
circumstances to sell at fair market value the shares of Common Stock owned by
such Management Investor in the event of his death, incapacity or termination of
employment.

         Under the Consulting Agreement with Mr. Williams, Mr. Williams waived
his rights under the Management Subscription Agreement to require the Company to
purchase his shares upon his retirement. The Consulting Agreement grants Mr.
Williams the option to sell all or a


                                       34
<PAGE>   35

portion of the shares of Common Stock directly owned by him to the Company in
the event of an initial public offering of Common Stock, at the same price as
shares of Common Stock are being offered to the public. In addition, the
Consulting Agreement also provides Mr. Williams with the right to participate,
at any time on or prior to January 1, 1999, with ML Capital Partners in any sale
by ML Capital Partners to a third party of securities representing more than 15%
of the then-outstanding shares of Common Stock on a fully diluted basis. If Mr.
Williams exercises this right, he will be entitled to sell shares of Common
Stock in the same proportion as the shares of Common Stock ML Capital Partners
proposes to sell bear to the total number of outstanding shares of Common Stock
on a fully diluted basis at the same price and on the same terms as ML Capital
Partners sells its shares of Common Stock.


                                       35
<PAGE>   36

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The following table sets forth information with respect to the
beneficial ownership of shares of Common Stock as of January 3, 1998 of all
stockholders known by the Company to be the beneficial owners of more than five
percent of its outstanding Common Stock, of each director of the Company, each
Named Executive Officer named in the Summary Compensation Table, and of all
directors and executive officers as a group.

<TABLE>
<CAPTION>

                                                                                     SHARES BENEFICIALLY OWNED
                                                                                    --------------------------
                                                                                     NUMBER            PERCENT
                                                                                    OF SHARES         OF TOTAL

<S>                                                                                 <C>               <C>
Merrill Lynch Capital Partners, Inc.(1)(2).......................................     994,387           58.7%
  767 Fifth Avenue
  48th Floor
  New York, NY 10153
G. Thaddeus Williams(3)..........................................................     142,000            8.2%
  333 Spring Lake Road
  Columbia, SC 29206
Steve F.  Warren(4)..............................................................     120,000            7.1%
  2 Baywater Lane
  Greensboro, NC  27408
Joseph L.  Gorga(5)..............................................................      80,000            4.5%
W. James Raleigh(6)..............................................................      60,000            3.5%
James A.  Ovenden(7).............................................................      55,000            3.2%
Joshua T.  Hamilton(8)...........................................................      16,000              *
James F. Robbins (9).............................................................       6,667              *
Michael H. deHavenon.............................................................       4,081              *
Rupinder S.  Sidhu...............................................................          --             --
Stephen M.  McLean...............................................................          --             --
M. S.  Bailey and Son Bankers, as Trustee........................................     126,698            7.5%
  211 North Broad Street
  Clinton, SC 29325

All directors and executive officers as a group
  (8  persons)(5)(6)(7)(8)(9)....................................................     221,748           12.2%
</TABLE>

*Less than 1%

(1)  Ten limited partnerships, each of which is an affiliate of ML Capital
     Partners and Merrill Lynch, are record owners of 894,986 of the presently
     outstanding shares: Merrill Lynch Capital Appreciation Partnership No. VII,
     L.P., Merrill Lynch Capital Appreciation Partnership No. B-XVI, L.P., ML
     Offshore LBO Partnership No. VII, ML Offshore LBO Partnership No. B-XVI, ML
     Employees LBO Partnership No. I, L.P., ML Capital Partners Associates L.P.
     No. II, Merrill Lynch Kecalp L.P. 1986, Merrill Lynch Kecalp L.P. 1989,
     Merrill Lynch Kecalp L.P. 1991, and Merchant Banking L.P. No. 1. Merrill


                                       36
<PAGE>   37


     Lynch LBO Partners No. II, L.P. ("LBO Partners II") is the general partner
     of Merrill Lynch Capital Appreciation Partnership No. VII, L.P. and the
     investment general partner of ML Offshore LBO Partnership No. VII. Merrill
     Lynch LBO Partners No. B-III ("LBO Partners III") is the general partner of
     Merrill Lynch Capital Appreciation Partnership No. B-XVI, L.P. and ML
     Offshore LBO Partnership No. B-XVI. ML Capital Partners is in turn the
     general partner of LBO Partners II and LBO Partners III. ML Employees LBO
     Managers, Inc., a wholly-owned subsidiary of ML Capital Partners, is the
     managing general partner of ML Employees LBO Partnership No. 1, L.P. ML
     Capital Partners is the general partner of ML Capital Partners Associates
     L.P. No. II. Kecalp, Inc., an indirect wholly-owned subsidiary of ML&Co.,
     is the general partner of Merrill Lynch Kecalp L.P. 1986, Merrill Lynch
     Kecalp L.P. 1989 and Merrill Lynch Kecalp L.P. 1991. Merrill Lynch MBP,
     Inc., an indirect wholly-owned subsidiary of ML&Co., is the general partner
     of Merchant Banking L.P. No. 1. The remaining 99,401 outstanding shares
     deemed beneficially owned by ML Capital Partners are owned of record by ML
     IBK Positions, Inc., an indirect wholly-owned subsidiary of ML&Co. and an
     affiliate of ML Capital Partners and Merrill Lynch.

(2)  Rupinder S. Sidhu and Stephen M. McLean, directors of the Company, are
     members of the Board of Directors of ML Capital Partners. By virtue of
     their status as directors of ML Capital Partners, Messrs. Sidhu and McLean
     may be deemed under the rules of the Commission to be beneficial owners of
     856,165 shares of Common Stock owned of record by limited partnerships that
     are wholly owned by ML Capital Partners. Messrs. Sidhu and McLean disclaim
     beneficial ownership of these shares of Common Stock.

(3)  Amounts for Mr. Williams include 45,000 shares of Common Stock issuable to
     Mr. Williams pursuant to presently exercisable options.

(4)  Amounts for Mr. Warren include 60,000 shares of Common Stock held by a
     limited partnership in which Mr. Warren is a general partner.

(5)  Amounts for Mr. Gorga include 75,000 shares issuable upon exercise of
     presently exercisable options to acquire Common Stock.

(6)  Amounts for Mr. Raleigh do not include 60,000 shares of Common Stock held
     by a trust for the benefit of Mr. Raleigh's children, as to which Mr.
     Raleigh disclaims beneficial ownership.

(7)  Amounts for Mr. Ovenden include 45,000 shares issuable upon exercise of
     presently exercisable options to acquire Common Stock.

(8)  Amounts for Mr. Hamilton do not include 4,000 shares of Common Stock held
     by a trust for the benefit of Mr. Hamilton's children, as to which Mr.
     Hamilton disclaims beneficial ownership.

(9)  Amounts for Mr. Robbins represent shares issuable upon exercise of
     presently exercisable options to acquire common stock.



                                       37
<PAGE>   38

RESTATED STOCKHOLDERS AGREEMENT

          In connection with the original issuance of Common Stock to the ML
Capital Partners affiliates, certain of the Management Investors and others upon
the organization of the Company in 1986, all stockholders entered into a
stockholders agreement with the Company, which was amended and restated in its
entirety in February 1992 (the "Restated Stockholders Agreement"). The Restated
Stockholders Agreement provides that the ML Capital Partners affiliates are
entitled to designate four of the Company's seven directors and the Management
Investors are entitled to designate three of the Company's directors. The Board
of Directors is currently comprised of six members, three of whom (Messrs.
Sidhu, McLean and deHavenon) have been designated by ML Capital Partners.
Certain significant transactions between the Company and unrelated parties
require the approval of the Board of Directors and the holders of more than
two-thirds of the outstanding shares of Common Stock. Since the ML Capital
Partners affiliates have the right to elect the majority of the Board of
Directors, the approval of the directors elected by the ML Capital Partners
affiliates and Management Investors holding approximately 8% of the outstanding
Common Stock (in addition to the ML Capital Partners affiliated stockholders)
will be required to approve significant transactions. The Restated Stockholders
Agreement also provides for certain restrictions on the transfer of shares of
Common Stock by the current stockholders and rights of first refusal in
connection with certain proposed transfers of Common Stock. Pursuant to the
Consulting Agreement, Mr. Williams' shares of Common Stock will not be subject
to these transfer restrictions if the ML Capital Partners affiliated
stockholders sell their shares of Common Stock to an unaffiliated person or
distribute their shares of Common Stock to their respective partners or
investors.

          Under the Restated Stockholders Agreement, all the stockholders of the
Company have certain registration rights with respect to their Common Stock.
These rights include demand and "piggyback" registration rights. The Company is
obligated to register shares of Common Stock under the demand registration
rights if holders of more than two-thirds of the outstanding shares request
registration. The registration rights extend until February 14, 2002 or
terminate sooner upon (i) the merger or consolidation of the Company with an
unaffiliated corporation in which the Management Investors and affiliates of ML
Capital Partners own less than 65% of the surviving or resulting corporation or
(ii) the sale of substantially all the assets of the Company to an unaffiliated
person. The remaining provisions of the Restated Stockholders Agreement would
terminate under the foregoing circumstances or sooner in the event of (i) a
public offering of Common Stock at the conclusion of which at least 30% of the
outstanding shares shall have been sold to the public or (ii) the sale of 60% or
more of the shares of Common Stock owned by either the Management Investors as a
group or the ML Capital Partners affiliates as a group (as fully diluted by
shares to be issued upon exercise of options).



                                       38
<PAGE>   39



ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          Purchase of Common Stock. Pursuant to the terms of the Consulting
Agreement with Mr. Williams and the Management Subscription Agreement, the
Company in August 1995, purchased 83,000 shares of Common Stock owned by certain
trusts for the benefit of Mr. Williams' descendants (the "Trusts") at a price of
$40 per share or a total of $3.3 million. In addition, the Consulting Agreement
provides that the Trusts will have the right under certain circumstances to
receive an additional amount with respect to such shares if, on or before
January 1, 1999 (i) the Company undertakes an initial public offering of Common
Stock, (ii) the Company enters into a fundamental transaction such as a merger,
recapitalization or similar transaction, or (iii) the ML Capital Partners
affiliated stockholders agree to sell their shares of Common Stock to the
Company or a party not affiliated with ML Capital Partners and in connection
with any such transaction the shares of Common Stock are valued at a price
higher than $40 per share. If such a transaction is consummated, the Trusts will
be entitled to receive from the Company a payment equal to the difference
between the per share value of Common Stock in such transaction and $40
multiplied by 83,000 shares.

          In October 1997, Mr. Gorga, a director and the President and Chief
Executive Officer of the Company, purchased 5,000 shares of Common Stock for a
purchase price of $27.50. Mr. Gorga delivered a non-recourse promissory note to
the Company in payment of 90% of the purchase price for these shares of Common
Stock and paid the balance in cash. Mr. Gorga's note bears interest at a per
annum rate of 6.55% and is payable in ten years. Mr. Gorga pledged the
purchased shares as security for payment of his promissory note.

          Market Making Activities. In October 1993, ML & Co. underwrote a
public offering of the Notes. The Company used the proceeds of the Offering,
together with initial borrowings under a credit agreement, to refinance the
indebtedness outstanding under certain subsidiary loan agreements and to call
the Clinton Debentures for redemption. ML & Co. received an underwriting
discount of $3,046,875 in connection with the Offering. The Company has agreed
to maintain the effectiveness of the registration statement pursuant to which
the Notes were registered with the Commission to enable ML & Co. to make a
market in the Notes. The Company also agreed to indemnify ML & Co. against
certain liabilities, including liabilities under the federal securities laws.
For a discussion of the relationship between each of ML & Co. and its affiliates
and the Company, see "Item 12--Security Ownership of Certain Beneficial Owners
and Management."

         Registration Rights. All current stockholders of the Company have
certain registration rights with respect to their Common Stock. See "Item
12--Security Ownership of Certain Beneficial Owners and Management."



                                       39
<PAGE>   40
                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

     (a) The following documents are filed as a part of this Report:

           1.     The financial statements filed as a part of this Report are
                  listed in the attached index to consolidated financial
                  statements and schedules.

           2.     The financial statement schedules filed as a part of this
                  Report are listed in the attached index to consolidated
                  financial statements and schedules.

           3.     Exhibits

<TABLE>
           <S>             <C>
           3.1  --         Certificate of Incorporation of CMI Industries, Inc., as amended (1)

           3.2  --         Bylaws of CMI Industries, Inc. (1)

           4.1  --         Indenture dated as of October 28, 1993 between CMI Industries, Inc. and Chemical Bank, Trustee
                           (including the form of Note) (2)

           4.2  --         Letter dated September 24, 1993 from the South Carolina National Bank to CMI Industries, Inc.
                           (1)

           4.3--           Form of ISDA Master Agreement dated as of January 14, 1994 between the First National Bank of Boston and
                           CMI Industries, Inc., including memorandum of Swap Transaction dated January 14, 1994 (3)

           4.4  --         Interest Rate Collar Transaction letter agreement dated February 5, 1996 between the First
                           National Bank of Boston and CMI Industries, Inc. (7)

           4.5  --         Credit Agreement dated as of March 19, 1996 among CMI Industries, Inc., The First National Bank
                           of Boston, individually and as Agents, NationsBank of North Carolina, N.A., and the Wachovia
                           Bank of South Carolina, N.A. (7)

           4.6  --         Waiver Letter dated October 11, 1996, among CMI Industries, Inc., and The First National Bank
                           of Boston, As Agent, NationsBank of North Carolina, and Wachovia Bank of South Carolina, as
                           Lenders. (8)

           4.7  --         Amendment No. 1 and Consent and Waiver dated as of February 28, 1997 to Loan and Security
                           Agreement dated as of March 19, 1996 among CMI  Industries, Inc., The First National Bank of
                           Boston, as Agent and Lender, NationsBank, N.A. and The Wachovia Bank of South Carolina, N.A.,
                           as Lenders (9)
</TABLE>


                                       40
<PAGE>   41

<TABLE>
          <S>              <C>
          10.1  --         Management Subscription Agreement dated as of December 23, 1986 among CMI Industries, Inc. and
                           the persons listed on Schedule I thereto (1)

          10.2  --         Subscription Agreement dated as of June 1, 1987 between CMI Industries, Inc. and James A.
                           Ovenden (1)

          10.3 --          Subscription  Agreement dated as of November 9, 1988 between CMI Industries, Inc. and Michael
                           H. deHavenon (1)

          10.4  --         Amendment No. 1 to Management Subscription Agreement dated as of April 14, 1989 among CMI
                           Industries, Inc. and the persons listed on Schedule 1 thereto (1)

          10.5  --         Amendment No. 1 to Subscription Agreement dated as of April 14, 1989 between CMI Industries,
                           Inc. and James A. Ovenden (1)

          10.6  --         Description of CMI Industries, Inc. Incentive Compensation Program (1)*

          10.7  --         CMI Holdings, Inc. 1989 (now known as CMI Industries, Inc.) Non-Qualified Stock Option Plan (1)*

          10.8  --         CMI Industries, Inc. 1992 Non-Qualified Stock Option Plan dated February 14, 1992 (1)*

          10.9  --         Option Agreement dated January 14, 1991 between CMI Industries, Inc. and Joseph L. Gorga.(1)*

          10.10 --         Amended and Restated Stockholders Agreement dated February 14, 1992 among CMI Industries, Inc.
                           and its Stockholders.(1)

          10.11 --         Amended and Restated Employment Agreement dated as of January  1, 1991 between Clinton Mills,
                           Inc. and G. Thaddeus Williams as amended effective as of July  1, 1993 by Amendment  No. 1 to
                           Amended and Restated Employment Agreement dated August 24, 1993 between Clinton Mills,  Inc.
                           and G. Thaddeus Williams.(1)*

          10.12 --         Amendment No. 1 to Amended and Restated Stockholders Agreement dated March 31, 1994 (4)

          10.13 --         CMI Industries, Inc. 1994 Non-Qualified Stock Option Plan (4)


</TABLE>

                                       41
<PAGE>   42

<TABLE>
          <S>              <C>
          10.14--          Option Agreement between CMI Industries, Inc. and Joseph L. Gorga dated January 2, 1994
                           pursuant to the CMI Industries, Inc. 1992 Stock Option Plan (5)*

          10.15--          Option Agreement between CMI Industries, Inc. and Joseph L. Gorga dated January 2, 1994
                           pursuant to the CMI Industries, Inc. 1994 Stock Option Plan (5)*

          10.16--          Severance and Consulting Agreement dated August 23, 1995, by and between CMI Industries, Inc.
                           and G. Thaddeus Williams (6)

          10.17--          Option Agreement between CMI Industries, Inc. and Joseph L. Gorga dated January 23, 1995,
                           pursuant to the CMI Industries, Inc. 1994 Stock Option Plan (7)*

          10.18--          Amended and Restated Employment Agreement dated January 1, 1996 between CMI Industries, Inc.
                           and Joseph L. Gorga (7)*

          10.19--          Amended and Restated Employment Agreement dated January 1, 1996, between CMI Industries, Inc.
                           and James A. Ovenden (7)*

          10.20--          Amendment No. 1 to Option Agreement between CMI Industries, Inc. and Joseph L. Gorga dated
                           January 31, 1996 (7)*

          10.21--          Option Agreement between CMI Industries, Inc. and Joseph L. Gorga dated January 31, 1996,
                           pursuant to the CMI Industries, Inc. 1992 Stock Option Plan (7)*

          10.22--          Option Agreement between CMI Industries, Inc. and Joseph L. Gorga dated January 31, 1996,
                           pursuant to the CMI Industries, Inc. 1994 Stock Option Plan (7)*

          10.23--          Option Agreement between CMI Industries, Inc. and James A. Ovenden dated January 31, 1996,
                           pursuant to the CMI Industries, Inc. 1994 Stock Option Plan (7)*

          10.24--          Option Agreement between CMI Industries, Inc. and James F. Robbins dated January 31, 1997,
                           pursuant to the CMI Industries, Inc. 1992 Stock Option Plan (9)*

          10.25--          Amendment No. 1 to Amended and Restated Employment Agreement between CMI Industries, Inc., and
                           Joseph L. Gorga dated September 30, 1997 (10)*
</TABLE>


                                       42
<PAGE>   43

<TABLE>

          <S>              <C>
          10.26--          Amendment No. 1 to Amended and Restated Employment Agreement between CMI Industries, Inc., and
                           James A. Ovenden dated September 30, 1997 (10)*

          10.27--          Agreement Regarding Restriction of Shares of CMI Industries, Inc. Common Stock between CMI
                           Industries, Inc. and Joseph L. Gorga dated October 21, 1997 (10)*

          12   --          Computation of Ratio of Earnings to Fixed Charges (filed with this Report)

          21   --          Subsidiaries of CMI Industries, Inc. (filed with this Report)

          23.1 --          Consent on Financial Statement Schedules of Arthur Andersen & Co. (filed with this Report)

          27.1 --          Financial Data Schedule (for SEC use only) (filed with this Report)
</TABLE>
----------------------

          (1)     Filed as an exhibit to the Registration Statement on Form -1
                  (Commission File No. 33-67854) filed by CMI Industries, Inc.
                  with respect to its $125,000,000 principal amount 9-1/2%
                  Senior Subordinated Notes due 2003 and declared effective
                  October 22, 1993.

          (2)     Filed as an exhibit to the Company's Quarterly Report on Form
                  10-Q on December 6, 1993 and incorporated herein by this
                  reference.

          (3)     Filed as an exhibit to the Company's Annual Report on Form
                  10-K on March 29, 1994 and incorporated herein by this
                  reference.

          (4)     Filed as an exhibit to the Company's Quarterly Report on Form
                  10-Q on May 16, 1994 and incorporated herein by this
                  reference.

          (5)     Filed as an exhibit to the Company's Annual Report on Form
                  10-K on March 31, 1995 and incorporated herein by this
                  reference.

          (6)     Filed as an exhibit to the Company's Quarterly Report on Form
                  10-Q on November 14, 1995 and incorporated herein by this
                  reference.

          (7)     Filed as an exhibit to the Company's Annual Report on Form
                  10-K on March 29, 1996 and incorporated herein by this
                  reference.

          (8)     Filed as an exhibit to the Company's Quarterly Report on Form
                  10-Q on November 12, 1996 and incorporated herein by this
                  reference.



                                       43
<PAGE>   44

<TABLE>
          <S>     <C>
          (9)     Filed as an exhibit to the Company's Annual Report on Form 10-K on March 27, 1997 and incorporated
                  herein by this reference.

          (10)    Filed as an exhibit to the Company's Quarterly Report on Form 10-Q on November 18, 1997 and
                  incorporated herein by this reference.

</TABLE>
          *       Identifies a management contract or compensatory plan or
                  arrangement required to be filed pursuant to Item 14(c) of
                  Form 10-K.

     (b) The Company did not file any Current Reports on Form 8-K during the
         last quarter of the Company's 1997 fiscal year.


                                       44

<PAGE>   45


                            SUPPLEMENTAL INFORMATION

         The Company has not provided its security holders with an annual report
covering the Company's last fiscal year, or a proxy statement, a form of proxy
or other proxy soliciting material. After the filing of this Annual Report on
Form 10-K, the Company will send to the holders of its 9 1/2% Senior
Subordinated Notes an annual report containing audited financial statements of
the Company, together with an opinion thereon expressed by the Company's
independent auditors. The Company will furnish to the Securities and Exchange
Commission four copies of such annual report when it is sent to such holders.



                                       45
<PAGE>   46



                                   SIGNATURES

          Pursuant to the requirements of the Section 13 or 15(d) 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.

                                            CMI INDUSTRIES, INC.

Date:  March 23, 1998                       /s/ JOSEPH L. GORGA
                                            ---------------------------
                                            Joseph L. Gorga, President
                                            and Chief Executive Officer

          Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                   TITLE                               DATE
---------                                   -----                               ----
<S>                                   <C>                                       <C>
/s/ JOSEPH L. GORGA                   President, Chief Executive                March 23, 1998
-----------------------------------   Officer, and Director
Joseph L. Gorga


/s/ JAMES A OVENDEN                   Principal Financial and                   March 23, 1998
-----------------------------------   Accounting Officer, and Director
James A. Ovenden


/s/ W. JAMES RALEIGH                  Director                                  March 23, 1998
-----------------------------------
W. James Raleigh


/s/ RUPINDER S. SIDHU                 Director                                  March 23, 1998
-----------------------------------
Rupinder S. Sidhu


/s/ STEPHEN M. MCLEAN                 Director                                  March 23, 1998
-----------------------------------
Stephen M. McLean


/s/ MICHAEL H. DEHAVENON              Director                                  March 23, 1998
----------------------------------
Michael H. deHavenon
</TABLE>



                                       46
<PAGE>   47


                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


<TABLE>
<S>                                                                                                          <C>
CMI INDUSTRIES, INC. AND SUBSIDIARIES

          Financial Statements:

Report of Independent Public Accountants.....................................................................48

Consolidated Balance Sheets as of December 28, 1996 and January 3, 1998......................................49

Consolidated Statements of Operations for the years ended December 30, 1995,
          December 28, 1996, and January 3, 1998.............................................................50

Consolidated Statements of Changes in Stockholders' Equity for the years
          ended December 30, 1995, December 28, 1996 and January 3, 1998.....................................51

Consolidated Statements of Cash Flows for the years ended December 30, 1995,
          December 28, 1996 and January 3, 1998..............................................................52

Notes to the Consolidated Financial Statements ..............................................................53


          Schedules:

Schedule V - Property, Plant and Equipment for the years ended December 30, 1995,
          December 28, 1996 and January 3, 1998..............................................................65

Schedule  VI - Accumulated Depreciation and Amortization of Property, Plant and
          Equipment for the years ended December 30, 1995, December 28, 1996
          and January 3, 1998................................................................................66

Schedule VIII - Valuation and Qualifying Accounts for the years ended
          December 30, 1995, December 28, 1996 and January 3, 1998...........................................67
</TABLE>




                                       47
<PAGE>   48


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To The Board of Directors of
CMI Industries, Inc.:

We have audited the accompanying consolidated balance sheets of CMI Industries,
Inc. (a Delaware corporation) and subsidiaries as of January 3, 1998 and
December 28, 1996, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CMI Industries, Inc. and
subsidiaries as of January 3, 1998 and December 28, 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended January 3, 1998, in conformity with generally accepted accounting
principles.


                                                     /s/ ARTHUR ANDERSEN LLP


Columbia, South Carolina
March 13, 1998.



                                       48
<PAGE>   49


                      CMI INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                      DECEMBER 28, 1996 AND JANUARY 3, 1998
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                  1996             1997
                                                                               ---------         --------
<S>                                                                            <C>               <C>
ASSETS
Current Assets:
    Cash and cash equivalents                                                   $  2,244         $   1,729
    Receivables, net                                                              47,509            47,762
    Inventories, net                                                              58,143            53,927
    Deferred income taxes                                                          3,139                --
    Other current assets                                                           1,588               931
                                                                                --------         ---------
         Total current assets                                                    112,623           104,349

Property, plant and equipment, net                                               112,545           103,592
Intangible and other assets, net                                                   8,366             8,599
                                                                                --------         ---------

                                                                                $233,534         $ 216,540
                                                                                ========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Book overdraft                                                              $ 11,500         $   6,023
    Current portion of long-term debt                                              4,000             2,204
    Accounts payable                                                              15,528            15,685
    Accrued expenses, including restructuring charges                             13,089            14,488
    Income taxes payable                                                              --               141
                                                                                --------         ---------
         Total current liabilities                                                44,117            38,541

Long-term debt                                                                   143,749           124,528
Deferred income taxes                                                                 --             1,245
Other liabilities                                                                 13,823            13,182
                                                                                --------         ---------
                                                                                 157,572           138,955

Commitments and contingencies

Stockholders' Equity:
    Common stock of $1 par value per share; 2,100,000 shares authorized,
       1,690,318 shares issued and outstanding in
       1996; 1,695,318 shares issued and outstanding in 1997                       1,690             1,695
    Paid-in capital                                                               11,350            11,358
    Retained earnings                                                             18,805            25,991
                                                                                --------          --------
         Total stockholders' equity                                               31,845            39,044
                                                                                --------          --------

                                                                                $233,534          $216,540
                                                                                ========          ========
</TABLE>

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



                                       49
<PAGE>   50

                      CMI INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
            FOR THE YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996
                               AND JANUARY 3, 1998
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>

                                                                       1995              1996             1997
                                                                       ----              ----             ----
<S>                                                                 <C>               <C>              <C>
Net sales                                                           $ 408,636         $ 374,044        $ 422,722
Cost of sales                                                         367,925           345,888          366,471
                                                                    ---------         ---------        ---------
Gross profit                                                           40,711            28,156           56,251
Selling, general and administrative expenses                           32,704            31,097           32,914
Executive severance charges                                             4,782                --               --
Provision for restructuring and other nonrecurring
   asset write-offs                                                    12,900                --               --
                                                                    ---------         ---------        ---------
         Operating income (loss)                                       (9,675)           (2,941)          23,337
                                                                    ---------         ---------        ---------

Other income (expenses):
    Interest expense                                                  (17,174)          (15,425)         (14,499)
    Other, net                                                          1,406             1,588            3,148
                                                                    ---------         ---------        ---------
         Total other expenses, net                                    (15,768)          (13,837)         (11,351)

     Income (loss) before income taxes                                (25,443)          (16,778)          11,986

Income tax provision (benefit)                                         (9,500)           (6,115)           4,800
                                                                    ---------         ---------        ---------


     Net income (loss)                                              $ (15,943)        $ (10,663)       $   7,186
                                                                    =========         =========        =========
</TABLE>











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


                                       50
<PAGE>   51



                      CMI INDUSTRIES, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
  FOR THE YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND JANUARY 3, 1998
                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                                                         TOTAL
                                               COMMON STOCK         PAID-IN          RETAINED         STOCKHOLDERS'
                                            SHARES      AMOUNT      CAPITAL          EARNINGS            EQUITY
                                            ------      ------      -------          --------         -------------
<S>                                      <C>          <C>          <C>               <C>              <C>
Balance as of December 31, 1994              1,773    $    1,773   $    14,587       $  45,411         $ 61,771
  Retirement of common stock                   (83)          (83)       (3,237)             --           (3,320)
  Net loss                                      --            --            --         (15,943)         (15,943)
                                         ---------    ----------   -----------       ---------         --------

Balance as of December 30, 1995              1,690    $    1,690   $    11,350       $  29,468         $ 42,508
  Net loss                                      --            --            --         (10,663)         (10,663)
                                         ---------    ----------   -----------       ---------         --------

Balance as of December 28, 1996              1,690    $    1,690   $    11,350       $  18,805         $ 31,845
  Sale of common stock                           5             5             8              --               13
  Net income                                    --            --            --           7,186            7,186
                                         ---------    ----------   -----------       ---------         --------

Balance as of January 3, 1998                1,695    $   $1,695   $    11,358       $  25,991         $ 39,044
                                         =========    ==========   ===========       =========         ========
</TABLE>


















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


                                       51
<PAGE>   52



                      CMI INDUSTRIES, INC. AND SUBSIDIARIES

  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 30, 1995,
                      DECEMBER 28, 1996 AND JANUARY 3, 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                              1995          1996             1997
                                                                           ---------      --------         -------
<S>                                                                        <C>           <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                          $ (15,943)    $ (10,663)       $  7,186
Adjustments to reconcile net income (loss) to net cash
provided  by operating activities:
    Depreciation and amortization                                             23,241        23,226          17,868
    (Gain) loss on disposal of equipment                                         195          (109)           (678)
    Nonrecurring asset write-offs                                              7,852            --              --
    Changes in assets and liabilities:
      Receivables                                                              8,855         3,175            (253)
      Inventories                                                             11,516         8,908           4,216
      Other current assets                                                        40         3,731             657
      Intangible and other assets                                                 40          (817)           (758)
      Book overdraft                                                           2,956        (1,726)         (5,477)
      Accounts payable                                                        (4,877)        2,057             157
      Accrued expenses, including restructuring charges                        2,070        (2,100)          1,399
      Income taxes payable                                                        --            --             141
      Deferred income taxes                                                   (9,736)       (6,491)          4,384
      Other liabilities                                                        4,579          (441)           (641)
                                                                           ---------     ---------        --------
               Net cash provided by operating activities                      30,788        18,750          28,201
                                                                           ---------     ---------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of United Elastic acquisition, net of Chesterfield disposal
         and cash acquired                                                   (20,062)           --              --
Purchases of property, plant and equipment, net                               (8,850)       (9,288)         (7,614)
                                                                           ---------     ---------        --------
               Net cash used in investing activities                         (28,912)       (9,288)         (7,614)
                                                                           ---------     ---------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on revolving credit facilities                                 (1,474)       (7,445)        (21,115)
Sale of common stock to management                                                --            --              13
Purchase of common stock from management                                      (3,320)           --              --
                                                                           ---------     ---------        --------
               Net cash used in financing activities                          (4,794)       (7,445)        (21,102)
                                                                           ---------     ---------        --------

Net increase (decrease) in cash and cash equivalents                          (2,918)        2,017            (515)
Cash and cash equivalents, beginning of period                                 3,145           227           2,244
                                                                           ---------     ---------        --------
Cash and cash equivalents, end of period                                   $     227     $   2,244        $  1,729
                                                                           =========     =========        ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 Cash paid during the period  for:
       Interest                                                            $  16,466      $ 15,211        $ 14,035
                                                                           =========     =========        ========
       Income taxes                                                        $     932      $     --        $     --
                                                                           =========     =========        ========

</TABLE>

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



                                       52
<PAGE>   53


                      CMI INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND JANUARY 3, 1998
                        (IN THOUSANDS, EXCEPT SHARE DATA)


1.  DESCRIPTION OF COMPANY

CMI Industries, Inc. ("CMI," a Delaware corporation and subsequently referred to
as the "Company") is a diversified manufacturer of textile products serving a
variety of markets. On October 28, 1993, the Company merged its two primary
operating subsidiaries, Clinton Mills, Inc. and Chatham Manufacturing, Inc.
("Chatham"), with and into the Company upon the closing of the Offering (see
note 3). The Company currently operates through three divisions: the Greige
Fabrics Division, the Elastic Fabrics Division and the Chatham Division.


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. The Company uses a 52-53 week fiscal year. There were
53 weeks in the Company's accompanying statements of operations for the year
ended January 3, 1998, and 52 weeks for the years ended December 28, 1996 and
December 30, 1995. All significant intercompany balances and transactions have
been eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.


CASH AND CASH EQUIVALENTS

The Company includes cash, demand deposits and highly liquid investments with
maturities of less than three months in cash and cash equivalents in its
consolidated financial statements. The book overdraft consists of outstanding
checks that had not been presented to a bank for payment.



                                       53
<PAGE>   54


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or
market and include the costs of raw materials, direct labor and manufacturing
overhead.

PROPERTY, PLANT AND EQUIPMENT

Additions to property, plant and equipment are stated at cost. Depreciation of
property, plant and equipment is calculated for financial reporting purposes
using the straight-line method over the estimated useful lives of the assets.
For income tax purposes, depreciation is calculated principally by accelerated
methods. Estimated useful lives are as follows:

<TABLE>
                   <S>                              <C>
                   Buildings                          20 years
                   Land improvements                  20 years
                   Machinery and equipment          3-10 years
</TABLE>

LONG-LIVED ASSETS

During fiscal year 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement
requires impairment losses to be recorded on long-lived assets used in
operations when indicators are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
effect of adoption did not have a material impact on the Company's results of
operation.

INTANGIBLE AND OTHER ASSETS

Capitalized debt issuance costs are amortized over the remaining terms of the
respective debt using the straight-line method.

REVENUE RECOGNITION

The Company recognizes revenue when goods are shipped or when ownership is
assumed by the customers.

LINE OF BUSINESS AND CREDIT RISK

The Company's line of business is the manufacturing and selling of fabrics and
other textile products for the home furnishings, apparel, furniture upholstery,
transportation upholstery, bedding and industrial markets. Export sales are
insignificant. Substantially all of the Company's accounts receivable are due
from companies in the above markets located throughout the United States. The
Company generally does not require collateral for its accounts receivable.



                                       54
<PAGE>   55



2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company performs ongoing credit evaluations of its customers' financial
condition and carries credit insurance on a majority of its outstanding trade
receivables. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information, including the amount of credit insurance on
specific accounts.

INCOME TAXES

The Company follows Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes," which requires deferred income taxes to be
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.

PRIOR-YEAR RECLASSIFICATIONS

Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation.


3.  LONG-TERM DEBT

In October 1993, the Company completed a public offering ("the Offering") of
$125,000 in aggregate principal amount of 9 1/2% Senior Subordinated Notes
("Notes") due October 1, 2003. The Offering was completed through an underwriter
which is affiliated with the Company's principal shareholders. The Notes are
general unsecured obligations of the Company and are due October 1, 2003. The
Notes' interest is payable semiannually, and are redeemable at the option of the
Company at any time after October 1, 1998. Redemption prices commence at
104-3/4% of the principal amount, declining annually to 100% of the principal
amount in October 2000, plus accrued interest. The recorded balance of $124,440
at January 3, 1998, is presented net of $560 of unamortized bond issue discount
that is being amortized over the period to maturity. The latest information
available indicates the fair value of the Company's Notes was $125,000 at
January 3, 1998. The fair value presented herein is not necessarily indicative
of the amounts that the Company would realize in a current market exchange.

The Company had credit agreements at January 3, 1998 which provided a secured
revolving credit facility of $65,000, including a letter of credit facility of
up to $5,000, and a Wachovia Bank of South Carolina credit facility, which
provided an unsecured, uncommitted line of credit of $4,000. The borrowings
under the secured revolving credit facility are secured by all inventories, all
receivables, and certain intangibles. The secured revolving credit facility
matures on January 15, 2000.



                                       55
<PAGE>   56


3.  LONG-TERM DEBT (CONTINUED)

Long-term debt at December 28, 1996 and January 3, 1998 consisted of:

<TABLE>
<CAPTION>
                                                                                     1996         1997
                                                                                  ------------------------
<S>                                                                               <C>            <C>
Borrowings under credit agreements:
       Secured revolving credit facility                                          $ 19,408       $      88
       Unsecured Wachovia Bank credit facility                                       4,000           2,204
Senior subordinated notes, net                                                     124,341         124,440
                                                                                  --------       ---------
                                                                                   147,749         126,732

Less current portion                                                                (4,000)         (2,204)
                                                                                  --------       ---------

         Long-term debt                                                           $143,749       $ 124,528
                                                                                  ========       ==========

</TABLE>

The secured revolving credit facility requires a commitment fee of 3/8 of 1% per
annum on all unused amounts and as of January 3, 1998, the Company could have
borrowed an additional $49,229 under the facility. Interest on the secured
revolving credit facility is based on a floating prime rate or an eurodollar
rate plus 1 1/2%. At January 3, 1998, the average interest rate on the secured
revolving credit facility was 8.5%. The Wachovia Bank of South Carolina facility
is unsecured, requires no commitment fee and may be terminated by the bank with
100 days notice. Interest on the Wachovia Bank of South Carolina facility
accrues at an amount based on the daily Federal Funds rate, which was 7.9% at
January 3, 1998.

The credit agreements and indenture contain various restrictive covenants and
conditions requiring, among other things, minimum levels of net worth, certain
interest coverage ratios, prohibitions against certain borrowings and advances,
and a negative covenant limiting the Company's right to grant security interests
or other liens on its assets. In addition, the credit agreements and the
indenture pursuant to which the Notes were issued contain restrictions on the
Company's ability to pay cash dividends or purchase its capital stock. Under the
most restrictive covenant, as of January 3, 1998, the Company was authorized to
pay up to $3,000 in cash dividends or capital stock repurchases. At January 3,
1998, the Company was in compliance with all covenants under all credit
agreements.

As part of the Company's workers' compensation insurance agreements in South
Carolina, Alabama, Georgia and Virginia, the Company has obtained letters of
credit for $750, $200, $250 and $75, respectively. The letters of credit expire
on February 10, 1998, June 30, 1998, January 11, 1998 and April 10, 1998,
respectively. At January 3, 1998, the Company owed no amount under these letters
of credit.



                                       56
<PAGE>   57

4.   INCOME TAXES

Components of income tax expense (benefit) for the years ended December 30,
1995, December 28, 1996 and January 3, 1998, consisted of the following:

<TABLE>
<CAPTION>
                                                               FEDERAL          STATE          TOTAL
                                                               -------          -----          -----
      <S>                                                      <C>             <C>            <C>
      1995:
         Current                                                $    --        $     --       $    --
         Deferred                                                (8,650)           (850)        (9,500)
                                                                -------        --------       --------
                                                                $(8,650)       $   (850)      $ (9,500)
                                                                =======        ========       ========
      1996:
         Current                                                $    --        $     --       $     --
         Deferred                                                (5,705)           (410)        (6,115)
                                                                -------        --------       --------
                                                                $(5,705)       $   (410)      $ (6,115)
                                                                =======        ========       ========
      1997:
         Current                                                $   141        $     --       $    141
         Deferred                                                 3,934             725          4,659
                                                                -------        --------       --------
                                                                $ 4,075        $    725       $  4,800
                                                                =======        ========       ========
</TABLE>

Alternative minimum taxes that have been paid as of January 3, 1998 and are
available indefinitely as carryforward credits for future federal income taxes
aggregated approximately $5,403. Such carryforward credits have been considered
in the determination of the net deferred income tax liability at January 3,
1998.

Total income tax expense (benefit) differed from the amounts computed by
applying the U.S. federal income tax rate of 34 percent in 1995, 1996 and 1997
to income (loss) before income taxes as a result of the following:


<TABLE>
<CAPTION>
                                                                            1995          1996       1997
                                                                          -----------------------------------
<S>                                                                       <C>           <C>          <C>
Computed "expected" tax expense (benefit)                                 $(8,650)      $(5,705)     $4,075
Increase in income taxes resulting from:
      State income taxes, net of federal income tax benefit                  (840)         (554)        396
      Other, net                                                              (10)          144         329
                                                                          -------       -------      ------
Total income tax expense (benefit)                                        $(9,500)      $(6,115)     $4,800
                                                                          =======       =======      ======
</TABLE>

Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to the net deferred income tax
liability (asset) at December 28, 1996, and January 3, 1998 relate to the
following:

<TABLE>
<CAPTION>
                                                                                       1996             1997
                                                                                     --------          -------
<S>                                                                                   <C>              <C>
Plant & equipment, principally due to difference in depreciation
      methods                                                                        $ 16,646          $16,709
Benefit of net operating loss for tax purposes                                        (10,531)          (6,307)
Alternative minimum tax credits                                                        (5,270)          (5,403)
Accrued expenses not currently deductible and other, net                               (3,984)          (3,754)
                                                                                     --------          -------
Net deferred income tax liability (asset)                                            $ (3,139)         $ 1,245
                                                                                     ========          =======
</TABLE>



                                       57
<PAGE>   58

5.  BENEFIT PLANS

Effective December 31, 1994, the Company curtailed future benefits and merged
its two defined benefit plans, the Clinton Retirement Income Program (the
"CRIP") and the Pension Plan of Chatham Manufacturing, Inc. into the CRIP, which
covers substantially all of its associates who qualify as to age and service. In
general, the pension benefits are based on either years of service and
percentages of the average of the five highest years of compensation or total
compensation earned through December 31, 1994. The Company's funding policy is
to contribute the amounts recommended by its independent actuary, which are
determined after considering the funding status of the Company's plans, ERISA
guidelines and tax deductibility. The curtailment of these plans did not reduce
either plan assets or vested benefits of the participants.

Effective December 30, 1995, the Company provided an early retirement window to
certain associates who were participants in the CRIP. In general, associates
offered the window were provided their age 65 benefit plus a social security
supplement until age 62, if applicable. The Company reported this $1,202 charge
as part of its provision for restructuring in 1995.

The following table sets forth the funded status of the plans and amounts
recognized in the accompanying consolidated balance sheets at December 30, 1995,
December 28, 1996, and January 3, 1998:


<TABLE>
<CAPTION>
                                                             1995         1996           1997
                                                           -----------------------------------
<S>                                                        <C>          <C>            <C>
Actuarial present value of benefit obligations:
      Vested benefit obligation                            $ 36,659     $ 31,217       $ 34,308
      Non-vested benefit obligation                             618        1,827          1,515
                                                           --------     --------       --------
Total accumulated benefit obligation                       $ 37,277     $ 33,044       $ 35,823
                                                           ========     ========       ========

Projected benefit obligation                               $(37,277)    $(33,044)      $(35,823)
Plan assets at fair value                                    37,305       38,155         40,325
                                                           --------     --------       --------
Plan assets more than projected benefit obligation               28        5,111          4,502
Unrecognized net (gain) loss from past experience
      different from that assumed and unrecognized
      effects of changes in assumptions                       1,847       (3,807)        (2,352)
Additional cost due to early retirement window               (1,202)          --             --
                                                           --------     --------       --------
Prepaid pension cost                                       $    673     $  1,304       $  2,150
                                                           ========     ========       ========
</TABLE>



                                       58
<PAGE>   59

5.  BENEFIT PLANS (CONTINUED)

Net pension expense (income) consists of the following components:

<TABLE>
<CAPTION>
                                                                                1995           1996        1997
                                                                           --------------------------------------
<S>                                                                        <C>               <C>          <C>
Service cost - benefits earned during the period                              $    --        $    --      $    --
Interest cost on projected benefit obligation                                   2,828          2,650        2,394
Actual return on plan assets                                                   (3,788)        (6,318)      (8,166)
Additional expense due to early retirement window                               1,202             --           --
Net amortization                                                                  645          3,037        4,926
                                                                              -------        -------      -------
Net pension expense (income)                                                  $   887        $  (631)     $  (846)
                                                                              =======        =======      =======
</TABLE>


The assumptions used in determining the actuarial present value of benefit
obligations and the net periodic pension costs are as follows:

<TABLE>
<CAPTION>
                                                                                  1995        1996          1997
                                                                                 -----       -------      -------
   <S>                                                                           <C>         <C>          <C>
   Expected long-term return on assets - both plans                               9.0%           9.0%         9.0%
   Weighted average discount rate                                                 7.5%          7.75%        7.25%
</TABLE>

The plans' assets include marketable equity securities, guaranteed interest
contracts, and corporate and government debt securities.

The Company had a contributory Profit Sharing and Retirement Savings Plan for
the employees of Chatham. The Plan provided for contributions to the Plan by the
Company as designated by the Board of Directors and voluntary contributions by
the employees from 1% to 10% of their compensation. Effective January 1, 1995,
this plan was amended and restated, converting it into The 401(k) Plan for
Associates of CMI Industries, Inc., which covers substantially all of the
Company's associates. Under the 401(k) Plan, the Company matches 50% of employee
contributions, not to exceed 2% of pay, for all eligible and participating
associates. Additionally, the Company can make additional contributions at the
discretion of the Board of Directors. The Company's matching contributions
totaled $1,314 for 1995, $1,105 for 1996, and $1,156 for 1997.

The Company is substantially self-insured for employee health and workers'
compensation benefits. Provision for claims under these self-insured programs is
recorded based upon actuarially determined estimates of the aggregate liability
for claims incurred. The Company has accrued $3,800 and $3,320 for payments
under these plans at December 28, 1996 and January 3, 1998, respectively.



                                       59
<PAGE>   60

5.  BENEFIT PLANS (CONTINUED)

In connection with the acquisition of Chatham, the Company assumed obligations
under a Supplemental Executive Retirement Plan ("SERP"), which is a
non-qualified plan that provides certain current and former Chatham officers
defined pension benefits in excess of limits imposed by federal tax law. At
December 28, 1996, and January 3, 1998, the accrued SERP liability was $3,359
and $3,360, respectively, which equals the projected benefit obligation and is
included in other liabilities in the accompanying balance sheets. The expense
was $287, $291 and $246 for the periods ended December 30, 1995, December 28,
1996, and January 3, 1998, respectively. An irrevocable trust has been
established to hold certain assets of the Company (life insurance contracts with
a net cash value of $1,695 at January 3, 1998) as a reserve for the discharge of
liabilities under the plan.

The 1989 CMI Industries, Inc. Non-Qualified Stock Option Plan provided for the
grant of up to 35,000 shares of common stock for $25 per share. All of the
options granted under this plan are fully vested. In 1992, Chatham's Board of
Directors adopted the Chatham Manufacturing, Inc. 1992 Non-Qualified Stock
Option Plan which provided for the grant of up to 140,000 shares of Chatham
common stock. Options for 9,000 shares vest upon the attainment of levels of
earnings as defined in the agreement or at the end of 10 years, whichever occurs
first, while 60,000 shares vested immediately, 26,000 shares were vested in
1993, and 8,000 shares were vested in 1994. Options to purchase Chatham common
stock were converted to options to purchase the Company's stock. In 1996, the
Company granted the remaining 37,000 shares from the 1992 Plan and vested the
recipients' interest in these shares immediately. In 1994, the Company adopted
the 1994 CMI Industries, Inc. Stock Option Plan which provided for the grant of
up to 50,000 shares of the Company's stock. Options for 2,000 shares were
granted and vested immediately in 1994 pursuant to the 1994 Plan. In 1995,
options for 30,000 shares were granted pursuant to the 1994 Plan, with vesting
upon the attainment of certain earnings levels as defined in the agreement or at
the end of ten years, whichever comes first. In 1996, the Company granted the
remaining 18,000 shares from the 1994 Plan and vested the recipients' interest
in these shares immediately. As of January 3, 1998, options to acquire 225,000
shares of the Company's common stock were outstanding. Exercise prices of the
options range from $25 to $45 per share. Management has determined that no
compensation expense should be recorded based on these options. Since the
inception of these plans, no options have been exercised. The Company accounts
for stock option plans under APB Opinion No. 25, under which no compensation
cost has been recognized. Had compensation cost for these plans been determined
in accordance with FASB Statement No. 123, there would not have been a material
impact on the Company's net income.



                                       60
<PAGE>   61

6.   RECEIVABLES, INVENTORIES, PROPERTY, PLANT AND EQUIPMENT, AND INTANGIBLE AND
     OTHER ASSETS

Receivables, inventories, property, plant and equipment, and intangible and
other assets at December 28, 1996 and January 3, 1998 consisted of the
following:

<TABLE>
<CAPTION>
                                                                                 1996            1997
                                                                               ---------      ---------
<S>                                                                            <C>            <C>
Receivables:
      Trade                                                                    $  49,074      $  48,240
      Other                                                                          435            722
                                                                               ---------      ---------
                                                                                  49,509         48,962
Less allowance for doubtful accounts                                              (2,000)        (1,200)
                                                                               ---------      ---------
                                                                               $  47,509      $  47,762
                                                                               =========      =========
Inventories:
      Raw materials                                                            $  10,484      $  11,474
      Work-in-progress                                                            21,234         19,312
      Finished goods                                                              21,576         18,729
      Supplies                                                                     4,849          4,412
                                                                               ---------      ---------
                                                                               $  58,143      $  53,927
                                                                               =========      =========
Property, plant and equipment:
      Land and land improvements                                               $   3,521      $   3,332
      Buildings and leasehold improvements                                        38,039         38,725
      Machinery and equipment                                                    199,811        202,199
      Construction in progress                                                     1,277          3,500
                                                                               ---------      ---------
                                                                                 242,648        247,756
      Less accumulated depreciation and amortization                            (130,103)      (144,164)
                                                                               ---------      ---------
                                                                               $ 112,545      $ 103,592
                                                                               =========      =========
Intangible and other assets:
      Debt issuance costs                                                      $   2,872      $   2,365
      Cash value of life insurance, net of policy loans of $3,922
        at December 28, 1996 and $3,665 at January 3, 1998                         1,991          1,695
      Prepaid pension cost                                                         1,304          2,150
      Other                                                                        2,199          2,389
                                                                               ---------      ---------
                                                                               $   8,366      $   8,599
                                                                               =========      =========

</TABLE>


                                       61
<PAGE>   62


7.   ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities at December 28, 1996, and January 3, 1998
consisted of the following:

<TABLE>
<CAPTION>
                                                                                  1996           1997
                                                                               ---------      ---------
<S>                                                                            <C>            <C>
Accrued interest                                                               $   3,281      $   3,139
Accrued compensation                                                               1,302          2,937
Environmental cleanup accrual                                                        291            251
Reserve for self insurance                                                         3,800          3,320
Accrued restructuring charges                                                      1,292            905
Other                                                                              3,123          3,936
                                                                               ---------      ---------
    Total accrued expenses                                                     $  13,089      $  14,488
                                                                               =========      =========

Accrued SERP, deferred compensation and other                                  $   7,850      $   8,101
Accrued severance liability                                                        2,890          1,998
Environmental cleanup accrual                                                      3,083          3,083
                                                                               ---------      ---------
    Total noncurrent other liabilities                                         $  13,823      $  13,182
                                                                               =========      =========
</TABLE>


8.  COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

The Company leases certain office facilities and equipment under various
operating leases expiring at various dates through 2005. Future minimum lease
payments under noncancelable operating leases are as follows at January 3, 1998:

<TABLE>
                           <S>                                                 <C>
                           1998                                                $  3,374
                           1999                                                   2,586
                           2000                                                   1,926
                           2001                                                   1,734
                           2002                                                   1,074
                           Thereafter                                             1,199
                                                                                -------

                           Total minimum lease payments                        $ 11,893
                                                                               ========
</TABLE>

Rental expense was $1,621 for 1995, $1,581 for 1996, and $2,152 for 1997. The
majority of these leases require the Company to pay taxes, maintenance,
insurance, and certain other operating expenses applicable to the leased
property.

Environmental site evaluations have been performed which concluded that some
form of groundwater and soil remediation will be required by the Company. In the
future, the Company may also construct facilities to control flyash disposal and
runoff from a coal pile, and may perform asbestos abatement. The Company
believes that sufficient amounts are accrued as of January 3, 1998 for the cost
of these expenditures.



                                       62
<PAGE>   63

8.  COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)

The Company is involved in various legal proceedings arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's financial
condition or results of operations.

As of January 3, 1998 the Company was committed to future capital expenditures
of $3,248.

The Company purchases significant amounts of cotton, one of its primary raw
materials, through commodity contracts. At January 3, 1998, all fixed contracts
were at prices which approximated or were below current market prices, or were
purchased to hedge firm sales orders from customers in which the Company
believes it has maintained margins at, or above, historical levels. The
Company's financial results are impacted by the variability of cotton and other
raw material prices.

Under the stockholders agreement, all of the stockholders of the Company have
certain registration rights with respect to their common stock. These rights
include demand and "piggyback" registration rights. The Company is obligated to
register shares of common stock under the demand registration rights if holders
of more than two-thirds of the outstanding shares request registration. The
registration rights extend until February 14, 2002 or terminate sooner upon (i)
the merger or consolidation of the Company with an unaffiliated corporation in
which the management investors and affiliates of Merrill Lynch Capital Partners,
Inc. own less than 65% of the surviving or resulting corporation or (ii) the
sale of substantially all the assets of the company to an unaffiliated person.
The remaining provisions of the stockholders agreement would terminate under the
foregoing circumstances or sooner in the event of (i) a public offering of
common stock at the conclusion of which at least 30% of the outstanding shares
shall have been sold to the public or (ii) the sale of 60% or more of the shares
of common stock owned by either the management investors as a group or the
Merrill Lynch Capital Partners, Inc. affiliates as a group (as fully diluted by
shares to be issued upon exercise of options). Under the management subscription
agreement, the Company has an option to purchase, and each of the management
investors have an option under certain circumstances to sell, at fair market
value the shares of common stock owned by such management investor in the event
of his death, incapacity or termination of employment.



                                       63
<PAGE>   64
9.  RESTRUCTURING CHARGES AND ACCRUED SEVERANCE LIABILITY

In December 1995, the Company approved a plan to pursue restructuring
initiatives in all divisions. These initiatives were completed by December 1996.
In the Greige Fabrics Division, the Company closed one of its manufacturing
facilities and is disposing of idle equipment and inventories. In the Finished
Fabrics Division, the Company consolidated certain operations and is disposing
of idle equipment and inventories. The Company also downsized its corporate
operations. The restructuring charges also consist of costs for the severance
and retirement of approximately 700 associates, including the termination of
consulting contracts, insurance, vacation, and related expenses. Related to this
decision, the Company reported a $12,900 charge to earnings in 1995 and has
reserved for the following items:

<TABLE>
<CAPTION>
                                                                             December 28, 1996          January 3, 1998
                                                                             -----------------        -----------------
<S>                                                                          <C>                      <C>
Restructuring items:
         CRIP early retirement window                                             $ 1,202                   $ 1,202
         Termination of consulting contracts and
            other items                                                               497                       296
         Severance and related benefit costs                                          795                       609
                                                                                  -------                   -------
                                                                                    2,494                     2,107
Other nonrecurring asset write-offs related to the restructuring:
         Inventory write-offs                                                         657                       284
         Property, plant and equipment write-offs                                   2,092                       116
                                                                                  -------                   -------
                                                                                  $ 5,243                   $ 2,507
                                                                                  =======                   =======
</TABLE>


Included in the $12,900 of restructuring and related nonrecurring amounts in
1995 were approximately $5,048 of incremental cash expenditures, of which
$2,494 had not been paid as of December 28, 1996. The Company expects to fund
the early retirement amount from assets in the Company's defined benefit plan
and the balance from operations or amounts available under the credit
agreements. During 1997, the Company funded $387 of cash related restructuring
items and disposed of $2,349 of assets related to the restructuring.

In August 1995, the former President and Chief Executive Officer retired from
the Company. In connection with the retirement, the Company repurchased the
common stock of the former officer at a cost of $3,320. The repurchase price is
subject to future adjustment based on the occurrence of certain equity
transactions. The executive severance charges reported in the Company's
accompanying 1995 statement of operations of $4,782 includes retirement
benefits, salary, life insurance, consulting fees and other items.



                                       64
<PAGE>   65


                      CMI INDUSTRIES, INC. AND SUBSIDIARIES

                   SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT

         For the Three Years Ended December 30, 1995, December 28, 1996
                              and January 3, 1998


<TABLE>
<CAPTION>
                                                               Balance at                                              Balance at
                                                               Beginning    Additions at                  Other          End of
                                                               of Period       Cost(1)    Retirements     Changes        Period
                                                               ---------    ------------  -----------    --------      -----------
<S>                                                            <C>           <C>          <C>            <C>            <C>
1995
Land and land improvements                                      $  3,636     $    126     $      --      $      51      $  3,813
Buildings                                                         30,389        5,974            --          1,562        37,925
Machinery and equipment                                          194,320        3,117        (1,327)         7,538       203,648
Leasehold improvements                                             1,489           --          (271)           312         1,530
Construction in progress                                           1,260        9,549            --         (9,463)        1,346
                                                                --------     --------      --------      ---------      --------
                                                                $231,094     $ 18,766      $ (1,598)     $      --      $248,262
                                                                ========     ========      ========      =========      ========

1996
Land and land improvements                                      $  3,813     $     --      $   (308)     $      16      $  3,521
Buildings                                                         37,925           --        (1,592)           758        37,091
Machinery and equipment                                          203,648           --       (12,980)         9,143       199,811
Leasehold improvements                                             1,530           --          (582)            --           948
Construction in progress                                           1,346        9,848            --         (9,917)        1,277
                                                                --------     --------      --------      ---------      --------
                                                                $248,262     $  9,848      $(15,462)     $      --      $242,648
                                                                ========     ========      ========      =========      ========

1997
Land and land improvements                                      $  3,521     $     48      $   (237)     $      --      $  3,332
Buildings                                                         37,091           --            --            267        37,358
Machinery and equipment                                          199,811           --        (3,043)         5,431       202,199
Leasehold improvements                                               948           --            --            419         1,367
Construction in progress                                           1,277        8,340            --         (6,117)        3,500
                                                                --------     --------      --------      ---------      --------
                                                                $242,648     $  8,388      $ (3,280)     $      --      $247,756
                                                                ========     ========      ========      =========      ========
</TABLE>



                                       65
<PAGE>   66



                      CMI INDUSTRIES, INC. AND SUBSIDIARIES

             SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION
                        OF PROPERTY, PLANT AND EQUIPMENT

        For the Three Years Ended December 30, 1995, December 28, 1996,
                              and January 3, 1998
                                (in   thousands)
<TABLE>
<CAPTION>
                                        Balance at                                           Balance at
                                        Beginning   Additions at                  Other        End of
                                        of Period      Cost(1)     Retirements  Changes(2)     Period
                                        ---------   ------------   -----------  ----------   ----------
<S>                                    <C>           <C>           <C>         <C>           <C>
1995
Land and land improvements             $      7      $      4      $     --    $     193     $    204
Buildings                                 9,108         1,847            --          794       11,749
Machinery and equipment                  86,087        20,618          (330)       3,423      109,798
Leasehold improvements                       92           191           (73)         527          737
                                       --------      --------      --------    ---------     --------
                                       $ 95,294      $ 22,660      $   (403)   $   4,937     $122,488
                                       ========      ========      ========    =========     ========

1996
Land and land improvements             $    204      $      5      $     --    $    (193)    $     16
Buildings                                11,749         1,880          (684)        (768)      12,177
Machinery and equipment                 109,798        20,714       (11,434)      (1,474)     117,604
Leasehold improvements                      737           216          (236)        (411)         306
                                       --------      --------      --------    ---------     --------
                                       $122,488      $ 22,815      $(12,354)   $  (2,846)    $130,103
                                       ========      ========      ========    =========     ========

1997
Land and land improvements             $     16      $      5      $     (3)   $      --     $     18
Buildings                                12,177         1,893            --          (25)      14,044
Machinery and equipment                 117,604        15,611        (1,574)      (2,009)     129,632
Leasehold improvements                      306           164            --           --          470
                                       --------      --------      --------    ---------     --------
                                       $130,103      $ 17,672      $ (1,577)   $  (2,034)    $144,164
                                       ========      ========      ========    =========     ========
</TABLE>


(1) Depreciation is provided for financial reporting purposes on the
straight-line method over the following estimated useful lives for the periods
indicated.

<TABLE>
<CAPTION>
                                        1995            1996             1997
                                    -----------      -----------     -----------
         <S>                        <C>              <C>              <C>
         Buildings                  20 years         20 years         20 years
         Land improvements          20 years         20 years         20 years
         Machinery and equipment    3-10 years       3-10 years       3-10 years
</TABLE>

(2) The Company has recorded the 1995 nonrecurring write-off of property, plant
and equipment in other changes to accumulated depreciation and amortization.


                                       66
<PAGE>   67



                      CMI INDUSTRIES, INC. AND SUBSIDIARIES

                SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS

         FOR THE THREE YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996
                               AND JANUARY 3, 1998
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                Balance at                                  Balance at
                                                Beginning       Additions                     End of
Description                                     of Period        at Cost    Deductions       Period
                                                ---------       ---------   ----------      ----------
<S>                                             <C>             <C>         <C>             <C>
Year ended December 30, 1995:
         Allowance for doubtful accounts         $1,230          $1,399      $  (900)         $1,729
                                                 ======          ======      =======          ======

Year ended December 28, 1996:
         Allowance for doubtful accounts         $1,729          $  760      $  (489)         $2,000
                                                 ======          ======      =======          ======

Year ended January 3, 1998:
         Allowance for doubtful accounts         $2,000          $  528      $(1,328)         $1,200
                                                 ======          ======      =======          ======

</TABLE>








                                       67
<PAGE>   68

Report of Independent Public Accountants


To The Board of Directors of
CMI Industries, Inc.:

We have audited in accordance with generally accepted auditing standards, the
financial statements of CMI Industries, Inc. and subsidiaries included in this
annual report and have issued our report thereon dated March 13, 1998. Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedules listed in the index are the responsibility of
the Company's management and are presented for the purposes of complying with
the Securities and Exchange Commission's rules and are not a required part of
the basic financial statements. These schedules have been subjected to the
auditing procedures applied in our audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.



                                                     /s/ ARTHUR ANDERSEN LLP


Columbia, South Carolina
March 13, 1998.



                                       68
<PAGE>   69
                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>

Exhibit No.                       Description                                              Page No.
-----------                       -----------                                              --------


<S>               <C>                                                                      <C>
    12            Computation of Ratio of Earnings to Fixed Charges

    21            Subsidiaries of CMI Industries, Inc.

    23.1          Consent and Report on Financial Statement Schedules of
                  Arthur Andersen LLP

    27.1          Financial Data Schedule (for SEC use only)


</TABLE>






                                       69