COLLINS & AIKMAN FLOOR COVERINGS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended October 26, 2002

¨ Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Commission File Number 333-88212

COLLINS & AIKMAN FLOORCOVERINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		58-2151061
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

311 Smith Industrial Boulevard, Dalton, Georgia		30721
(Address of principal executive offices)		(Zip Code)

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

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

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

Yes ¨ No x

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

INDEX

				Page No.
Part I. Financial Information

Item 1. Financial Statements

Consolidated Statements of Operations – Thirteen Weeks and Thirty-Nine Weeks Ended October 27, 2001 and October 26, 2002				3

Consolidated Balance Sheets – As of January 26, 2002 and October 26, 2002				4

Consolidated Statements of Stockholder’s Equity – Thirty-Nine Weeks Ended October 26, 2002				5

Consolidated Statements of Cash Flows – Thirteen Weeks and Thirty-Nine Weeks Ended October 27, 2001 and October 26, 2002				6

Notes to Consolidated Financial Statements				7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations				24

Item 3. Quantitative and Qualitative Disclosures and Market Risk				31

Item 4. Controls and Procedures				32

Part II. Other Information

Item 1. Legal Proceedings				32

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

Signature				33

Certifications				34

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and In Thousands)

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 27, 2001			October 26, 2002			October 27, 2001		October 26, 2002
NET SALES	$	82,433		$	84,282		$	260,291	$	250,597

COST OF GOODS SOLD		54,997			57,425			167,096		162,644
SELLING, GENERAL & ADMINISTRATIVE EXPENSES		17,415			17,913			58,173		54,231

		72,412			75,338			225,269		216,875

OPERATING INCOME		10,021			8,944			35,022		33,722
MINORITY INTEREST IN INCOME (LOSS) OF SUBSIDIARY		(23	)		(1	)		45		5
EQUITY IN EARNINGS OF AFFILIATE		367			484			1,314		1,493
NET INTEREST EXPENSE		8,598			5,464			20,403		18,751

INCOME BEFORE INCOME TAXES		1,813			3,965			15,888		16,459
INCOME TAX EXPENSE		738			1,775			7,041		6,585

INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE		1,075			2,190			8,847		9,874
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX		—			—			—		(2,009	)

NET INCOME	$	1,075		$	2,190		$	8,847	$	7,865

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands)

	January 26, 2002			October 26, 2002
ASSETS				(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	6,234		$	10,681
Accounts receivable, net of allowance of $745 and $737 in fiscal 2001 and 2002, respectively		33,524			44,475
Inventories		31,834			37,827
Deferred tax assets		3,955			2,104
Prepaid expenses and other		1,667			2,282

Total current assets		77,214			97,369

PROPERTY, PLANT, AND EQUIPMENT, net		45,390			65,369
DEFERRED TAX ASSETS		3,876			3,116
GOODWILL		95,987			106,341
OTHER INTANGIBLE ASSETS, net		40,560			37,615
OTHER ASSETS		7,406			10,464

TOTAL ASSETS	$	270,433		$	320,274

LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	11,416		$	13,850
Accrued expenses		19,150			20,315
Current portion of long-term debt		4,787			1,194

Total current liabilities		35,353			35,359

OTHER LIABILITIES, including post-retirement benefit obligation		3,991			3,985
LONG-TERM DEBT, net of current portion		185,197			230,026
MINORITY INTEREST		310			315
COMMITMENTS AND CONTINGENCIES

STOCKHOLDER’S EQUITY:
Common stock; $.01 par value per share, 1,000 shares authorized, issued, and outstanding in fiscal 2001 and 2002		—			—
Paid-in capital		72,648			72,648
Retained deficit		(26,108	)		(20,836	)
Accumulated other comprehensive loss		(958	)		(1,223	)

		45,582			50,589

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	270,433		$	320,274

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 26, 2002

(Unaudited and In Thousands, Except Share Amounts)

	Common Stock								Accumulated Other Comprehensive Income (Loss)
	Shares	Amount		Paid-in Capital		Retained Earnings (Deficit)			Foreign Currency Translation Adjustment			Minimum Pension Liability			Total
BALANCE, January 26, 2002	1,000	$	—	$	72,648	$	(26,108	)	$	(519	)	$	(439	)	$	45,582
Net income	—		—		—		7,865			—			—			7,865
Dividend to parent	—		—		—		(2,593	)		—			—			(2,593	)
Foreign currency translation adjustment	—		—		—		—			(265	)		—			(265	)

BALANCE, October 26, 2002	1,000	$	—	$	72,648	$	(20,836	)	$	(784	)	$	(439	)	$	50,589

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and In Thousands)

	Thirty-Nine Weeks Ended
	October 27, 2001			October 26, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,847		$	7,865

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and leasehold amortization		7,521			6,543
Amortization of other intangible assets		5,891			2,946
Amortization of deferred financing fees		819			3,757
Deferred income tax expense		1,958			3,842
Equity in earnings of affiliate		(1,314	)		(1,493	)
Minority interest in income of subsidiary		45			5
Cumulative effect of change in accounting principle, net of tax		—			2,009
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		3,734			(10,951	)
Inventories		(1,089	)		(4,562	)
Accounts payable		(4,225	)		2,434
Accrued expenses		5,326			1,165
Other, net		(1,052	)		(1,336	)

Total adjustments		17,614			4,359

Net cash provided by operating activities		26,461			12,224

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business		—			(35,132	)
Equity distribution from affiliate		1,137			1,678
Additions to property, plant, and equipment		(7,712	)		(5,965	)

Net cash used in investing activities		(6,575	)		(39,419	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit facilities		(3,000	)		—
Proceeds from issuance of long-term debt		76			175,000
Repayments of long-term debt		(11,781	)		(133,957	)
Cash dividends to parent		—			(2,593	)
Financing costs		—			(6,808	)

Net cash (used in) provided by financing activities		(14,705	)		31,642

NET CHANGE IN CASH AND CASH EQUIVALENTS		5,181			4,447
CASH AND CASH EQUIVALENTS, beginning of period		5,751			6,234

CASH AND CASH EQUIVALENTS, end of period	$	10,932		$	10,681

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

General

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

Organization

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

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

Reclassifications

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

Cash and Cash Equivalents

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

Inventories

Net inventory balances are summarized below (in thousands):

	January 26, 2002		October 26, 2002
			(Unaudited)
Raw materials	$	12,121	$	17,691
Work in process		4,693		6,463
Finished goods		15,020		13,673

	$	31,834	$	37,827

Revenue Recognition

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

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

Accrued Expenses

Accrued expenses are summarized below (in thousands):

	January 26, 2002		October 26, 2002
			(Unaudited)
Payroll and employee benefits	$	5,192	$	7,027
Accrued taxes		2,517		3,443
Customer claims		1,475		1,972
Fair value of derivative instruments		5,162		—
Accrued interest		1,796		3,903
Customer deposits		615		633
Accrued professional fees		765		1,285
Other		1,628		2,052

	$	19,150	$	20,315

Goodwill and Other Intangible Assets

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

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

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

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

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

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

	Thirteen Weeks Ended April 27, 2002			Twenty-Six Weeks Ended July 27, 2002
Net Income (Loss):
As reported	$	(1,348	)	$	7,686
Cumulative effect of change in accounting principle, net of tax		(2,009	)		(2,009	)

As adjusted	$	(3,357	)	$	5,677

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

	Thirteen Weeks Ended October 27, 2001		Thirty-Nine Weeks Ended October 27, 2001
Net income	$	1,756	$	10,914


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

	Thirteen Weeks Ended October 27, 2001		Thirty-Nine Weeks Ended October 27, 2001
Net income as reported	$	1,075	$	8,847
Plus: Goodwill amortization		520		1,534
Plus: Trade name amortization		161		533

Adjusted net income	$	1,756	$	10,914


	October 26, 2002
	Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Non-compete	$	12,000	$	(10,889	)
Patent		27,000		(14,109	)

Total	$	39,000	$	(24,998	)


The patent is being amortized over an eleven-year period using the straight-line method. The non-compete is being amortized over a seven-year period using a double-declining balance method.

Unamortized intangible assets:
Trade name	$	23,613


	Thirteen Weeks Ended October 26, 2002		Thirty-Nine Weeks Ended October 26, 2002
Aggregate amortization expense	$	988	$	2,946


Estimated amortization expense:
Fiscal 2002	$	3,932
Fiscal 2003	$	3,193
Fiscal 2004	$	2,455
Fiscal 2005	$	2,455
Fiscal 2006	$	2,455

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

	FLOORCOVERINGS SEGMENT			EXTRUSION SEGMENT		TOTAL
Balance as of January 26, 2002	$	95,987		$	—	$	95,987
Goodwill acquired during the year		—			13,594		13,594
Impairment loss		(3,240	)		—		(3,240	)

Balance as of October 26, 2002	$	92,747		$	13,594	$	106,341

Recent Accounting Pronouncements

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

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

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

10.

Long-Term Debt

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

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

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

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

Period		Redemption Price
2006		104.875%
2007		102.438%
2008 and Thereafter		100.000%

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

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

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

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

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

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

11. Segment Information

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

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

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

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

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

The table below provides certain financial information by segment:

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 27, 2001		October 26, 2002		October 27, 2001		October 26, 2002
Net Sales to External Customers
Floorcoverings	$	82,433	$	75,985	$	260,291	$	234,667
Extrusion		—		8,297		—		15,930

Total Sales to External Customers	$	82,433	$	84,282	$	260,291	$	250,597

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 27, 2001		October 26, 2002		October 27, 2001		October 26, 2002
Adjusted EBITDA
Floorcoverings	$	14,857	$	11,867	$	49,571	$	42,347
Extrusion		—		1,193		—		2,542

Total Adjusted EBITDA	$	14,857	$	13,060	$	49,571	$	44,889

	January 26, 2002		October 26, 2002
Consolidated Assets
Floorcoverings	$	270,433	$	278,453
Extrusion		—		41,821

Total Consolidated Assets	$	270,433	$	320,274

12. Investment in Equity Affiliate

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

	As of October 27, 2001		As of October 26, 2002
Current Assets	$	2,182	$	2,105
Non-current Assets		9,005		8,552

Total Assets	$	11,187	$	10,657


Current Liabilities	$	1,337	$	1,156
Long Term Debt		5,236		5,102
Partners’ Capital		4,614		4,399

Total Liabilities and Partners’ Capital	$	11,187	$	10,657

	Thirty-Nine Weeks Ended
	October 27, 2001		October 26, 2002
Net Sales	$	14,292	$	13,109
Cost of Goods Sold		10,909		9,491

Gross Profit		3,383		3,618
Income From Operations		2,709		2,999
Net Income		2,675		2,970

13. Comprehensive Income

Comprehensive income is as follows:

	Thirteen Weeks Ended					Thirty-Nine Weeks Ended
	October 27, 2001			October 26, 2002		October 27, 2001			October 26, 2002
NET INCOME	$	1,075		$	2,190	$	8,847		$	7,865
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign Currency Translation Adjustments		(233	)		65		(377	)		(265	)

COMPREHENSIVE INCOME	$	842		$	2,255	$	8,470		$	7,600

14. Acquisition

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

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

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

15.

Condensed Consolidating Financial Statements

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

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended October 26, 2002

(Unaudited and In Thousands)

	Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
Net Sales	$	51,352	$	24,850	$	10,779		$	(2,699	)	$	84,282

Cost of Goods Sold		32,748		18,353		9,023			(2,699	)		57,425
Selling, General & Administrative Expenses		11,719		4,133		2,061			—			17,913

		44,467		22,486		11,084			(2,699	)		75,338

Operating Income		6,885		2,364		(305	)		—			8,944
Minority Interest in Loss of Subsidiary		—		—		(1	)		—			(1	)
Equity in Earnings of Affiliate		—		484		—			—			484
Net Interest Expense		5,456		—		8			—			5,464

Income (Loss) Before Income Taxes		1,429		2,848		(312	)		—			3,965
Income Tax Expense		591		1,151		33			—			1,775

Net Income (Loss)	$	838	$	1,697	$	(345	)	$	—		$	2,190

Guarantor Financial Statements

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended October 27, 2001

(Unaudited and In Thousands)

	Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
Net Sales	$	53,863		$	18,948	$	12,924		$	(3,302	)	$	82,433

Cost of Goods Sold		34,973			12,206		11,120			(3,302	)		54,997
Selling, General & Administrative Expenses		10,978			4,705		1,732			—			17,415

		45,951			16,911		12,852			(3,302	)		72,412

Operating Income		7,912			2,037		72			—			10,021
Minority Interest in Loss of Subsidiary		—			—		(23	)		—			(23	)
Equity in Earnings of Affiliate		—			367		—			—			367
Net Interest Expense		8,570			—		28			—			8,598

(Loss) Income Before Income Taxes		(658	)		2,404		67			—			1,813
Income Tax Expense		706			—		32			—			738

Net (Loss) Income	$	(1,364	)	$	2,404	$	35		$	—		$	1,075

Guarantor Financial Statements

Condensed Consolidating Statement of Operations

For the Thirty-Nine Weeks Ended October 26, 2002

(Unaudited and In Thousands)

	Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
Net Sales	$	161,567	$	64,486	$	33,589		$	(9,045	)	$	250,597

Cost of Goods Sold		97,625		46,000		28,064			(9,045	)		162,644
Selling, General & Administrative Expenses		36,263		12,969		4,999			—			54,231

		133,888		58,969		33,063			(9,045	)		216,875

Operating Income		27,679		5,517		526			—			33,722
Minority Interest in Income of Subsidiary		—		—		5			—			5
Equity in Earnings of Affiliate		—		1,493		—			—			1,493
Net Interest Expense		18,728		—		23			—			18,751

Income Before Income Taxes		8,951		7,010		498			—			16,459
Income Tax Expense		3,631		2,854		100			—			6,585

Income Before Change in Accounting Principle		5,320		4,156		398			—			9,874
Cumulative Effect of Change in Accounting Principle, Net of Tax		—		—		(2,009	)		—			(2,009	)

Net Income (Loss)	$	5,320	$	4,156	$	(1,611	)	$	—		$	7,865

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirty-Nine Weeks Ended October 27, 2001

(Unaudited and In Thousands)

	Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated Total
Net Sales	$	174,192	$	58,973	$	38,542	$	(11,416	)	$	260,291

Cost of Goods Sold		108,361		38,280		31,871		(11,416	)		167,096
Selling, General & Administrative Expenses		37,352		14,749		6,072		—			58,173

		145,713		53,029		37,943		(11,416	)		225,269

Operating Income		28,479		5,944		599		—			35,022
Minority Interest in Income of Subsidiary		—		—		45		—			45
Equity in Earnings of Affiliate		—		1,314		—		—			1,314
Net Interest Expense		20,277		18		108		—			20,403

Income Before Income Taxes		8,202		7,240		446		—			15,888
Income Tax Expense		6,918		24		99		—			7,041

Net Income	$	1,284	$	7,216	$	347	$	—		$	8,847

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

October 26, 2002

(Unaudited and In Thousands)

	Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	8,735		$	—	$	1,946		$	—		$	10,681
Accounts receivable, net		22,255			14,665		7,555			—			44,475
Inventories		18,009			10,179		9,639			—			37,827
Deferred tax assets		1,212			704		188			—			2,104
Prepaid expenses and other		1,314			245		723			—			2,282

Total current assets		51,525			25,793		20,051			—			97,369

PROPERTY, PLANT AND EQUIPMENT, net		32,260			24,824		8,285			—			65,369
DEFERRED TAX ASSETS		163			27		2,955			(29	)		3,116
GOODWILL		62,386			43,955		—			—			106,341
OTHER INTANGIBLE ASSETS, net		37,615			—		—			—			37,615
INVESTMENT IN SUBSIDIARIES		60,171			—		—			(60,171	)		—
OTHER ASSETS		8,127			2,311		26			—			10,464

TOTAL ASSETS	$	252,247		$	96,910	$	31,317		$	(60,200	)	$	320,274


LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,756		$	4,528	$	3,556		$	10		$	13,850
Accrued expenses		9,273			8,901		2,141			—			20,315
Current portion of long-term debt		1,104			—		90			—			1,194

Total current liabilities		16,133			13,429		5,787			10			35,359

INTERCOMPANY (RECEIVABLE) PAYABLE		(33,141	)		15,669		17,482			(10	)		—
OTHER LIABILITIES, including post-retirement obligation		3,816			22		176			(29	)		3,985
LONG-TERM DEBT, net of current portion		225,725			—		4,301			—			230,026
MINORITY INTEREST		—			—		—			315			315

STOCKHOLDER’S EQUITY
Preferred stock		—			—		133			(133	)		—
Common stock		—			2,056		6,061			(8,117	)		—
Paid-in capital		72,648			49,699		2,365			(52,064	)		72,648
Retained earnings (deficit)		(32,495	)		16,035		(4,302	)		(74	)		(20,836	)
Accumulated other comprehensive loss		(439	)		—		(686	)		(98	)		(1,223	)

		39,714			67,790		3,571			(60,486	)		50,589

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	252,247		$	96,910	$	31,317		$	(60,200	)	$	320,274

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

January 26, 2002

(In Thousands)

	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,271		$	49		$	3,914		$	—		$	6,234
Accounts receivable, net		21,754			5,791			5,979			—			33,524
Inventories		15,246			8,363			8,225			—			31,834
Deferred tax assets		3,213			559			183			—			3,955
Prepaid expenses and other		888			107			672			—			1,667

Total current assets		43,372			14,869			18,973			—			77,214

PROPERTY, PLANT AND EQUIPMENT, net		31,458			6,305			7,627			—			45,390
DEFERRED TAX ASSETS		2,150			55			1,678			(7	)		3,876
GOODWILL		62,386			30,361			3,240			—			95,987
OTHER INTANGIBLE ASSETS, net		40,560			—			—			—			40,560
INVESTMENT IN SUBSIDIARIES		60,171			—			—			(60,171	)		—
OTHER ASSETS		4,987			2,393			26			—			7,406

TOTAL ASSETS	$	245,084		$	53,983		$	31,544		$	(60,178	)	$	270,433


LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,461		$	3,165		$	2,790		$	—		$	11,416
Accrued expenses		12,201			5,006			1,943			—			19,150
Current portion of long-term debt		4,418			—			369			—			4,787

Total current liabilities		22,080			8,171			5,102			—			35,353

INTERCOMPANY (RECEIVABLE) PAYABLE		1,231			(17,821	)		16,590			—			—
OTHER LIABILITIES, including post- retirement obligation		3,816			—			182			(7	)		3,991
LONG-TERM DEBT, net of current portion		180,972			—			4,225			—			185,197
MINORITY INTEREST		—			—			—			310			310

STOCKHOLDER’S EQUITY:
Preferred stock		—			—			133			(133	)		—
Common stock		—			2,056			6,061			(8,117	)		—
Paid-in capital		72,648			49,699			2,365			(52,064	)		72,648
Retained earnings (deficit)		(35,224	)		11,878			(2,693	)		(69	)		(26,108	)
Accumulated other comprehensive loss		(439	)		—			(421	)		(98	)		(958	)

		36,985			63,633			5,445			(60,481	)		45,582

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	245,084		$	53,983		$	31,544		$	(60,178	)	$	270,433

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Thirty-Nine Weeks Ended October 26, 2002

(Unaudited and In Thousands)

	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
CASH FLOWS FROM OPERATING ACTIVITIES	$	13,723		$	(1,075	)	$	(424	)	$	12,224

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business		(35,132	)		—			—			(35,132	)
Equity distribution from affiliate		—			1,678			—			1,678
Additions to property, plant, and equipment		(4,107	)		(652	)		(1,206	)		(5,965	)

Net cash (used in) provided by investing activities		(39,239	)		1,026			(1,206	)		(39,419	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		175,000			—			—			175,000
Repayments of long-term debt		(133,619	)		—			(338	)		(133,957	)
Dividends to parent		(2,593	)		—			—			(2,593	)
Financing costs		(6,808	)		—			—			(6,808	)

Net cash provided by (used in) financing activities		31,980			—			(338	)		31,642

NET CHANGE IN CASH AND CASH EQUIVALENTS		6,464			(49	)		(1,968	)		4,447
CASH AND CASH EQUIVALENTS, beginning of period		2,271			49			3,914			6,234

CASH AND CASH EQUIVALENTS, end of period	$	8,735		$	—		$	1,946		$	10,681

Guarantor Financial Statements

Condensed Consolidating Statement of Cash Flows

For the Thirty-Nine Weeks Ended October 27, 2001

(Unaudited and In Thousands)

	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
CASH FLOWS FROM OPERATING ACTIVITIES	$	20,847		$	1,350		$	4,264		$	26,461

CASH FLOWS FROM INVESTING ACTIVITIES:
Equity distribution from affiliate		—			1,137			—			1,137
Additions to property, plant and equipment		(3,554	)		(2,474	)		(1,684	)		(7,712	)

Net cash used in investing activities		(3,554	)		(1,337	)		(1,684	)		(6,575	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit facilities		(3,000	)		—			—			(3,000	)
Proceeds from issuance of long-term debt		—			—			76			76
Repayments of long-term debt		(11,419	)		—			(362	)		(11,781	)

Net cash used in financing activities		(14,419	)		—			(286	)		(14,705	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		2,874			13			2,294			5,181
CASH AND CASH EQUIVALENTS, beginning of period		5,142			51			558			5,751

CASH AND CASH EQUIVALENTS, end of period	$	8,016		$	64		$	2,852		$	10,932

16.

Exchange Offer

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

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

GENERAL

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

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

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

RESULTS OF OPERATIONS

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

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 27, 2001		October 26, 2002		October 27, 2001		October 26, 2002
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Goods Sold	66.7		68.1		64.2		64.9

Gross Profit	33.3		31.9		35.8		35.1
Selling, General & Administrative Expenses	21.1		21.3		22.3		21.6

Operating Income	12.2		10.6		13.5		13.5
Net Interest Expense	10.4		6.5		7.8		7.5
Net Income	1.3		2.6		3.4		3.1

RESULTS OF OPERATIONS

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

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

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

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

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

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

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

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

	Thirteen Weeks Ended
	October 27, 2001			October 26, 2002
Net income	$	1,075		$	2,190
Income taxes		738			1,775
Net interest expense		8,598			5,464
Depreciation and amortization		4,487			3,409
Chroma cash dividends		349			707
Equity in earnings in Chroma		(367	)		(484	)
Minority interest in loss of subsidiary		(23	)		(1	)

Adjusted EBITDA	$	14,857		$	13,060

RESULTS OF OPERATIONS

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

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

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

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

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

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

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

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

	Thirty-Nine Weeks Ended
	October 27, 2001			October 26, 2002
Net income	$	8,847		$	7,865
Cumulative effect of change in accounting principle		—			2,009
Income taxes		7,041			6,585
Net interest expense		20,403			18,751
Depreciation and amortization		13,412			9,489
Chroma cash dividends		1,137			1,678
Equity in earnings in Chroma		(1,314	)		(1,493	)
Minority interest in income of subsidiary		45			5

Adjusted EBITDA	$	49,571		$	44,889

LIQUIDITY AND CAPITAL RESOURCES

The Company’s principal uses of cash have historically been for operating expenses, working capital, capital expenditures and debt repayment. The Company has financed its cash requirements through internally generated cash flows, borrowings and the offering of the senior subordinated notes.

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

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

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

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

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

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

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

EFFECTS OF INFLATION

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

SEASONALITY

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

RELIANCE ON PRIMARY THIRD-PARTY SUPPLIER OF NYLON YARN

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

FORWARD-LOOKING STATEMENT

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item

4. Controls and Procedures

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

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

PART II Other Information

Item 1. Legal Proceedings

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

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

Item 6.	Exhibits and Reports on Form 8-K

(a)	Exhibits

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

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


(b)		Reports on Form 8-K

		None

SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CERTIFICATION

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

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

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

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

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

(a)

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

(b)

evaluated the effectiveness of this registrant’s disclosure controls and procedures as of a date with 90 days prior to the filing of this quarterly report (the “Evaluation Date”); and

(c)

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

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

(a)

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

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

Date: December 10, 2002



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

CERTIFICATION

I, Darrel V. McCay, certify that:

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

(a)

(b)

evaluated the effectiveness of this registrant’s disclosure controls and procedures as of a date with 90 days prior to the filing of this quarterly report (the “Evaluation Date”); and

(c)

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

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: December 10, 2002



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

COLLINS & AIKMAN FLOORCOVERINGS, INC.

(Registrant)

/S/ DARREL V. MCCAY

Darrel V. McCay

Chief Financial Officer and Vice President

(duly authorized officer and principal

financial and accounting officer)