10-Q

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 30, 2004

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

Commission File Number 000-22791

COLLINS & AIKMAN FLOORCOVERINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	58-2151061
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
311 Smith Industrial Boulevard, Dalton, Georgia	30721
(Address of principal executive offices)	(Zip Code)

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

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

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

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

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

The Registrant has 1,000 shares of Common Stock, par value $.01 per share, issued and outstanding as of December 10, 2004.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

INDEX

		Page No.
Part I.	Financial Information
	Item 1.      Financial Statements
	Consolidated Balance Sheets – As of January 31, 2004 and October 30, 2004	3
	Consolidated Statements of Income – Thirteen Weeks and Thirty-Nine Weeks Ended October 25, 2003 and October 30, 2004	4
	Consolidated Statements of Stockholder’s Equity – Thirty-Nine Weeks Ended October 30, 2004	5
	Consolidated Statements of Cash Flows – Thirty-Nine Weeks Ended October 25, 2003 and October 30, 2004	6
	Notes to Consolidated Financial Statements	7
	Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 3.      Quantitative and Qualitative Disclosures About Market Risk	34
	Item 4.      Controls and Procedures	34
Part II.	Other Information
	Item 1.      Legal Proceedings	35
	Item 6.      Exhibits	35
Signature		36

2

PART 1 – FINANCIAL INFORMATION

Item 1.     Financial Statements

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands)

	January 31, 2004			October 30, 2004
				(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	11,041		$	17,558
Accounts receivable, net of allowances of $918 and $843 in fiscal 2003 and 2004, respectively		36,019			40,464
Inventories		35,463			45,322
Deferred tax assets		4,013			3,976
Prepaid expenses and other		4,961			2,201
Total current assets		91,497			109,521
PROPERTY, PLANT AND EQUIPMENT, net		66,062			65,418
GOODWILL		98,378			98,378
OTHER INTANGIBLE ASSETS, net		34,255			31,956
OTHER ASSETS		8,956			8,334
TOTAL ASSETS	$	299,148		$	313,607
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	17,722		$	15,979
Accrued expenses		20,298			23,425
Current portion of long-term debt		1,791			477
Total current liabilities		39,811			39,881
OTHER LIABILITIES, including post-retirement benefit obligation		4,768			4,310
DEFERRED TAX LIABILITIES		19			5,607
LONG-TERM DEBT, net of current portion		207,516			207,280
MINORITY INTEREST		342			323
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER’S EQUITY:
Common stock; $.01 par value per share, 1,000 shares authorized, issued, and outstanding in fiscal 2003 and 2004		—			—
Paid-in capital		72,648			72,648
Retained deficit		(24,509	)		(15,486	)
Accumulated other comprehensive loss:
Foreign currency translation adjustment		(493	)		(2	)
Minimum pension liability adjustment, net of tax		(954	)		(954	)
Total stockholder’s equity		46,692			56,206
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	299,148		$	313,607

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

3

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited and In Thousands)

	Thirteen Weeks Ended					Thirty-Nine Weeks Ended
	October 25, 2003			October 30, 2004		October 25, 2003		October 30, 2004
NET SALES	$	74,139		$	82,501	$	239,639	$	259,788
COST OF GOODS SOLD		51,851			55,014		159,352		166,997
SELLING, GENERAL & ADMINISTRATIVE EXPENSES		17,066			17,548		53,976		58,682
AMORTIZATION		1,528			768		4,584		2,299
OPERATING EXPENSES		70,445			73,330		217,912		227,978
OPERATING INCOME		3,694			9,171		21,727		31,810
NET INTEREST EXPENSE		5,381			4,876		15,986		15,149
MINORITY INTEREST IN INCOME (LOSS) OF SUBSIDIARY		10			2		26		(20	)
EQUITY IN EARNINGS OF AFFILIATE		387			117		1,074		893
OTHER EXPENSE		—			133		—		133
INCOME (LOSS) BEFORE INCOME TAXES		(1,310	)		4,277		6,789		17,441
INCOME TAX EXPENSE (BENEFIT)		(1,345	)		2,450		1,773		8,418
NET INCOME	$	35		$	1,827	$	5,016	$	9,023

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

4

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 30, 2004

(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 31, 2004	1,000	$	—	$	72,648	$	(24,509	)	$	(493	)	$	(954	)	$	46,692
Net Income	—		—		—		9,023			—			—			9,023
Foreign Currency Translation Adjustment	—		—		—		—			491			—			491
Total Comprehensive Income	—		—		—		9,023			491			—			9,514
BALANCE, October 30, 2004	1,000	$	—	$	72,648	$	(15,486	)	$	(2	)	$	(954	)	$	56,206

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

5

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and In Thousands)

	Thirty-Nine Weeks Ended
	October 25, 2003			October 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,016		$	9,023
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and leasehold amortization		7,689			7,688
Amortization of other intangible assets		4,584			2,299
Amortization and write-off of deferred financing fees		1,381			1,259
Change in deferred income tax		310			5,625
Equity in earnings of affiliate		(1,074	)		(893	)
Minority interest in income (loss) of subsidiary		26			(20	)
Changes in operating assets and liabilities:
Accounts receivable		1,728			(4,445	)
Inventories		(4,527	)		(9,859	)
Accounts payable		(3,219	)		(1,743	)
Accrued expenses		(2,691	)		3,127
Other, net		(426	)		2,016
Total adjustments		3,781			5,054
Net cash provided by operating activities		8,797			14,077
CASH FLOWS FROM INVESTING ACTIVITIES:
Equity distribution from affiliate		3,023			922
Additions to property, plant, and equipment		(7,220	)		(6,647	)
Net cash used in investing activities		(4,197	)		(5,725	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility		3,500			15,280
Repayments of revolving credit facility		(3,500	)		(15,280	)
Repayments of long-term debt		(21,912	)		(1,618	)
Cash dividends to Tandus Group, Inc.		(2,263	)		—
Financing costs		(18	)		(380	)
Net cash used in financing activities		(24,193	)		(1,998	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		36			163
NET CHANGE IN CASH AND CASH EQUIVALENTS		(19,557	)		6,517
CASH AND CASH EQUIVALENTS, beginning of period		20,907			11,041
CASH AND CASH EQUIVALENTS, end of period	$	1,350		$	17,558

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

6

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. 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 U.S. 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 10-K for the year ended January 31, 2004, which was filed in May 2004 with the Securities and Exchange Commission. The accompanying unaudited consolidated financial statements, in the opinion of management, include all adjustments necessary for fair presentation. All such adjustments are of a normal and recurring nature.

2. Organization

Collins & Aikman Floorcoverings, Inc. (the “Company”), a Delaware corporation, is a manufacturer of floorcovering products for the North American specified commercial carpet market. The Company’s floorcovering products include (i) vinyl-backed six-foot roll carpet and modular carpet tile, and (ii) high style tufted and woven broadloom carpet. The Company designs, manufactures and markets its C&A, Monterey and Crossley brands for a wide variety of end markets, including corporate offices, education, healthcare, government facilities and retail stores. The ability to provide a “package of product offerings” in various forms, coupled with flexible distribution channels, allows the Company to provide a wide array of floorcovering solutions tailored for each of its customers. The Company is headquartered in Georgia, with additional locations in California, Canada, the United Kingdom, Singapore and China.

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

3. Reclassifications

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

4. Cash and Cash Equivalents

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

7

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Inventories

Net inventory balances are summarized below (in thousands):

	January 31, 2004		October 30, 2004
			(Unaudited)
Raw materials	$	16,074	$	22,843
Work in process		5,153		7,395
Finished goods		14,236		15,084
	$	35,463	$	45,322

6. Revenue Recognition

Revenue is recognized when goods are shipped, which is when legal title passes to the customer. For product installations subject to customer approval, revenue is recognized upon acceptance by the customer. The Company provides certain installation services to customers utilizing independent third-party contractors. The billings and expenses for these services are included in net sales and cost of goods sold, respectively. These billings and expenses were $11.2 million and $9.5 million for the thirty-nine weeks ended October 30, 2004 and October 25, 2003, respectively, and $5.0 million and $3.8 million for the thirteen weeks ended October 30, 2004 and October 25, 2003, respectively.

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

7. Accrued Expenses

Accrued expenses are summarized below (in thousands):

	January 31, 2004		October 30, 2004
			(Unaudited)
Payroll and employee benefits	$	5,952	$	10,039
Accrued taxes		—		1,331
Customer claims		2,206		2,825
Accrued interest		8,145		3,835
Accrued professional fees		2,862		3,257
Other		1,133		2,138
	$	20,298	$	23,425

8

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8. Goodwill and Other Intangible Assets

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

The gross carrying amount and accumulated amortization of the intangible assets subject to amortization as of October 30, 2004 are as follows:

	October 30, 2004
	Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Non-compete	$	12,000	$	(12,000	)
Patent		27,000		(18,985	)
Supply Agreement		8,000		(7,672	)
Total	$	47,000	$	(38,657	)

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

Unamortized intangible assets:
Trade name	$	23,613

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 25, 2003		October 30, 2004		October 25, 2003		October 30, 2004
Aggregate amortization expense	$	1,528	$	768	$	4,584	$	2,299

Estimated amortization expense:
Fiscal 2004	$	3,091
Fiscal 2005		2,639
Fiscal 2006		2,455
Fiscal 2007		2,455
Fiscal 2008		—

For the period ended October 30, 2004, there were no changes to the carrying value of goodwill.

9

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9. Stock Based Compensation

As of October 30, 2004, the Company had one stock-based employee compensation plan, which is described more fully in Note 13 of the audited consolidated financial statements included in the Company’s Form 10-K for the year ended January 31, 2004, which was filed in May 2004 with the Securities and Exchange Commission. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company accounts for these options as variable options and records expense based on increases and decreases in the fair market value of the Company’s common stock at the end of each reporting period. These options vest only upon the achievement of certain earnings targets, as defined. As of October 30, 2004 and October 25, 2003, the Company had not recorded any expense related to this plan as the Company had not achieved its earnings targets, and the fair market value of the Company’s common stock has not increased from the date of grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation,” to the stock-based employee compensation (in thousands).

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 25, 2003			October 30, 2004			October 25, 2003			October 30, 2004
Net income as reported	$	35		$	1,827		$	5,016		$	9,023
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax		(16	)		(6	)		(31	)		(24	)
Proforma net income	$	19		$	1,821		$	4,985		$	8,999

10. Recent Accounting Pronouncements

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

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

11. Long-Term Debt

On August 18, 2004, the Company executed Amendment No. 3 (the “Amendment”) to its Senior Credit Facility. The amendment provides for, among other things, 1) the transfer of certain of the broadloom manufacturing fixed assets located in Santa Ana, California to the facility located in Truro, Nova Scotia, 2) the disposal of and/or transfer to the Company of substantially all of the remaining Santa Ana, California fixed assets and transfer of all or substantially all of the accounts receivable, inventory and other liquid current assets from Monterey Carpets, Inc. (“Monterey”), a wholly-owned subsidiary of

10

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the Company, to the Company, 3) the release of Monterey as a subsidiary guarantor under the subsidiary guarantee agreement and the security agreement and any other loan documents to which it is a party, 4) the exclusion from the financial covenants calculation of up to $10.0 million of costs related to the move and relocation to the Truro, Nova Scotia plant (“the Crossley transfer”) and 5) the reduction of the credit spread to LIBOR plus 2.75 on the Term B Loan. The Amendment further authorizes the collateral agent to release any and all liens held by the collateral agent in or on the assets forming part of the Crossley transfer.

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

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

The Company’s fixed charge coverage ratio and interest coverage ratio were 1.73:1.00 and 2.54:1.00, respectively, at October 30, 2004. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Senior Credit Facility, the Company will also be subject to the provisions of a cross-default for the 9.75% Senior Subordinated Notes. The Company was in compliance with all covenants as of October 30, 2004 and expects to remain in compliance throughout fiscal 2004, although no assurances to that effect can be given.

Total net interest expense was $4.9 million and $5.4 million for the thirteen weeks ended October 30, 2004 and October 25, 2003, respectively, which includes minimal interest income. Total net interest expense was $15.1 and $16.0 million for the thirty-nine weeks ended October 30, 2004 and October 25, 2003, respectively, which includes minimal interest income.

12. Segment Information

Based on the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”) which addresses reporting of operating segment information and disclosures about products, services, geographic areas, and major customers, management believes that the Company has two reportable segments: Floorcoverings and Extrusion. Accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance of the segments is evaluated on Adjusted EBITDA, which represents earnings before interest, taxes, depreciation and amortization, noncash charges or expenses (other than the write-down of current assets), costs related to board-approved acquisitions and attempted acquisitions, expenses related to the facility maximization project, plus Chroma cash dividends and minority interest in income (loss) of subsidiary, less equity in earnings of Chroma.

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

No single customer amounted to or exceeded 10.0% of the Floorcovering segment’s sales for any period presented. The Extrusion segment’s four largest external customers accounted for 25.5%, 25.1%, 14.3% and 10.3% of sales in the thirteen weeks ended October 30, 2004. The Extrusion segment’s largest external customer accounted for 40.5% and its second largest external customer accounted for 14.1% of sales in the thirty-nine weeks ended October 30, 2004.

11

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 25, 2003		October 30, 2004		October 25, 2003		October 30, 2004
Net Sales to External Customers
Floorcoverings	$	67,546	$	76,835	$	218,086	$	241,762
Extrusion		6,593		5,666		21,553		18,026
Total Sales to External Customers	$	74,139	$	82,501	$	239,639	$	259,788

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 25, 2003		October 30, 2004		October 25, 2003		October 30, 2004
Adjusted EBITDA
Floorcoverings	$	8,183	$	12,710	$	33,846	$	40,843
Extrusion		1,236		816		3,969		2,894
Total Adjusted EBITDA	$	9,419	$	13,526	$	37,815	$	43,737

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 25, 2003			October 30, 2004			October 25, 2003			October 30, 2004
Net income	$	35		$	1,827		$	5,016		$	9,023
Income tax expense (benefit)		(1,345	)		2,450			1,773			8,418
Net interest expense		5,381			4,876			15,986			15,149
Depreciation		2,665			2,569			7,689			7,688
Amortization		1,528			768			4,584			2,299
Chroma cash dividends		740			—			3,023			922
Equity in earnings in Chroma		(387	)		(117	)		(1,074	)		(893	)
Minority interest in income (loss) of subsidiary		10			2			26			(20	)
Other Noncash Expense		—			133			—			133
Expenses associated with facility maximization project		—			1,018			—			1,018
Costs associated with unsuccessful acquisition		792			—			792			—
Adjusted EBITDA	$	9,419		$	13,526		$	37,815		$	43,737

	As of January 31, 2004		As of October 30, 2004
Consolidated Assets
Floorcoverings	$	267,090	$	285,068
Extrusion		32,058		28,539
Total Consolidated Assets	$	299,148	$	313,607

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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

13. Investment in Equity Affiliate

Subsequent to October 30, 2004, the Company successfully negotiated its exit from the Chroma partnership and entered into the Chroma Transition Agreement with Dixie Group, Inc. (“Dixie”) to allow for the transition of dyeing and finishing services needed until the Santa Ana, California manufacturing facility has been closed. Prior to the execution of this Agreement, Monterey Color Systems, Inc. (“Monterey Color Systems”) had a fifty percent (50%) ownership interest in Chroma, which operates a carpet dyeing and finishing plant. Because the Company did not exercise control over Chroma, the Company accounted for its interest in Chroma under the equity method of accounting. The unaudited condensed financial information of Chroma for the thirty-nine weeks ended October 30, 2004 and October 25, 2003, and as of October 30, 2004 and January 31, 2004 are summarized below:

	As of January 31, 2004		As of October 30, 2004
Current Assets	$	2,203	$	2,274
Non-current Assets		7,925		7,750
Total Assets	$	10,128	$	10,024
Current Liabilities	$	1,517	$	1,254
Long Term Debt		8,513		8,371
Partners’ Capital		98		399
Total Liabilities and Partners’ Capital	$	10,128	$	10,024

	Thirty-Nine Weeks Ended
	October 26, 2003		October 30, 2004
Net Sales	$	13,801	$	14,887
Cost of Goods Sold		10,847		11,895
Gross Profit		2,954		2,992
Income From Operations		2,252		2,254
Net Income		2,124		2,112

On August 11, 2004, Monterey gave notice to Dixie that it had elected to terminate its supply arrangement with Chroma effective August, 2005. Chroma has historically dyed and finished substantially all of Monterey’s carpet production and Dixie’s Fabrica Division’s carpet production and performs dyeing and finishing operations for other carpet mills. The Chroma Transition Agreement provides for the Company’s withdrawal from the partnership and for the transition of the continued dyeing and finishing needs of Monterey, until the closing of the Santa Ana, California facility is completed. A charge of $0.2 million has been recorded as of October 30, 2004 to reflect the negotiated settlement related to Monterey’s early termination of its Dyeing and Finishing Agreement with Chroma and withdrawal from the Chroma Partnership. It is anticipated that the closure of the Santa Ana, California facility will be complete by the end of the Company’s first fiscal quarter in 2005.

13

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

14. Comprehensive Income

Comprehensive income is as follows (in thousands):

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	October 25, 2003		October 30, 2004		October 25, 2003		October 30, 2004
Net Income	$	35	$	1,827	$	5,016	$	9,023
Other Comprehensive Income:
Foreign Currency Translation Adjustments		127		522		787		491
Comprehensive Income	$	162	$	2,349	$	5,803	$	9,514

15. Commitments and Contingencies

During March 2004, a jury found in favor of Employers Mutual Insurance Companies (“EMC”) related to alleged violations of express oral warranty and implied warranty of fitness for particular purpose and awarded damages to EMC totaling $0.8 million. The Company accrued the full judgment amount of $0.8 million as of January 31, 2004. During the thirteen and thirty-nine weeks ended October 30, 2004, the Company incurred approximately $0.1 million and $0.6 million, respectively, of legal expenses related to this lawsuit. The Company requested a new trial. The judge granted the Company’s motion for a new trial but allowed EMC to reduce the judgment by $0.2 million to avoid a new trail. EMC agreed to the reduction of the judgment by $0.2 million. The Company has appealed the $0.2 million reduction of the judgment and EMC has counter appealed. If the Company is unsuccessful, it will be required to pay the judgment amount and related legal and professional fees. The amount accrued in the consolidated balance sheet for the judgment was reduced to $0.6 million during the thirteen weeks ended October 30, 2004.

On August 10, 2004, the Company and its parent announced its intent to close its manufacturing facility in Santa Ana, California, and transfer the production to its existing Truro, Nova Scotia, Canada, facility (the “facility maximization project”). The plan to close the facility was approved by the Company’s Board of Directors on August 9, 2004, and is expected to be complete by the end of the Company’s first fiscal quarter in 2005. It is anticipated that the costs incurred will be less than the $6.4 million previously disclosed by the Company in its Form 8-K filed on August 10, 2004. It is currently estimated that the remaining costs will be approximately $3.9 million and consist of severance, lease termination, moving, reinstallation, professional fees and other costs. As part of the facility maximization project, the Company negotiated with the Nova Scotia government the forgiveness of the remaining $1.3 million of Crossley’s sinking fund bonds debt outstanding. The forgiveness will be over the remaining five-year term of the current note and is based upon certain employee hours worked during the year and will commence in fiscal 2005. The debt will also be non-interest bearing. During the thirteen weeks ended October 30, 2004, the Company incurred approximately $1.0 million in costs associated with the facility maximization project, which consist of professional fees, severance and other related costs. Costs of Goods Sold included $0.4 million and Selling, General and Administrative Expenses included $0.6 million of these expenses in the accompanying Consolidated Statement of Income. In addition the Company anticipates capital expenditures of approximately $3.0 million related to the move.

The costs incurred and the anticipated expenditures remaining are as follows:

(Amounts in millions)	Anticipated Total Expenditures as of August 10, 2004		Change in Estimate of Expenditures as of October 30, 2004			Amounts Incurred as of October 30, 2004		Anticipated Remaining Expenditures
Severance Costs	$	1.8	$	0.3		$	0.4	$	1.7
Contractual Obligations and Professional Fees		3.1		(1.8	)		0.1		1.2
Other Project Costs		1.5		—			0.5		1.0
Gross Project Expenditures	$	6.4	$	(1.5	)	$	1.0	$	3.9

The accrued facility maximization costs at October 30, 2004 amounted to $0.6 million, which consisted of severance and other costs. These costs are included in Accrued Expenses in the accompanying Consolidated Balance Sheets.

14

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On November 8, 2004, the Company executed the Chroma Transition Agreement (the “Agreement”). As part of the Agreement and California Partnership Law, the Company retains its share of the third party claims that may be asserted for the period prior to the Company’s exit from the partnership.

16. Employee Benefit Plans

The Company maintains a defined benefit program for its domestic employees, which was frozen during fiscal 2002. Accordingly, no new benefits are being accrued under the plan. Participant accounts are credited with interest at the federally mandated rates. Company contributions are based on computations by independent actuaries, although the Company may decide to make additional contributions to the plan beyond minimum funding requirements as is deemed appropriate by management. Plan assets at October 30, 2004 and October 25, 2003 were invested primarily in mutual funds and money market funds.

Net periodic pension cost for the thirteen weeks and thirty-nine weeks ended October 30, 2004 and October 25, 2003 was comprised of the following components:

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 25, 2003			October 30, 2004			October 25, 2003			October 30, 2004
Service cost – benefits earned during the period	$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation		72			69			217			206
Expected return on plan assets		(66	)		(2	)		(196	)		(183	)
Recognized net actuarial losses		36			25			109			74
Net periodic pension cost	$	42		$	92		$	130		$	97

Employer contributions of $0.2 million and $0.3 million were made for the thirteen weeks ended October 30, 2004 and October 25, 2003, and $0.7 million and $0.8 million were made for the thirty-nine weeks ended October 30, 2004 and October 25, 2003, respectively. There is no additional minimum employer contribution required for the remainder of fiscal 2004.

Canadian Defined Benefit Plan

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

15

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Net periodic pension cost for the thirteen weeks and thirty-nine weeks ended October 30, 2004 and October 25, 2003 was comprised of the following components:

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 25, 2003			October 30, 2004			October 25, 2003			October 30, 2004
Service cost – benefits earned during the period	$	99		$	140		$	298		$	419
Interest cost on projected benefit obligation		91			101			273			303
Expected return on plan assets		(93	)		(110	)		(278	)		(330	)
Recognized net actuarial losses		(1	)		—			2			1
Net periodic pension cost	$	96		$	131		$	295		$	393

Employer contributions for fiscal 2004 are dependent upon the amounts contributed by employees and were $0.1 million and $0.2 million for the thirteen weeks and thirty-nine weeks ended October 30, 2004 and October 25, 2003, respectively. Company contributions are expected to be approximately $0.1 million during the fourth quarter of fiscal 2004.

Postretirement Benefit Plan

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

Net periodic pension costs for the thirteen weeks and thirty-nine weeks ended October 30, 2004 and October 25, 2003 was comprised of the following components:

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 25, 2003		October 30, 2004		October 25, 2003		October 30, 2004
Service cost – benefits earned during the period	$	44	$	59	$	124	$	142
Interest cost on projected benefit obligation		33		45		93		107
Net periodic pension cost	$	77	$	104	$	217	$	249

17. Condensed Consolidating Financial Statements

The 9.75% Notes of the Company are guaranteed by the Company’s domestic subsidiaries. Effective August 18, 2004, Monterey was released as a guarantor. The guarantee of the guarantor subsidiaries is full and unconditional and joint and several and arose in conjunction with the Company’s issuance of the 9.75% Notes on February 20, 2002 and the $109.0 million Senior Credit Facility, which was amended by the Company on February 20, 2002, May 1, 2004 and August 18, 2004. The guarantees’ terms match the terms of the 9.75% Notes and the Senior Credit Facility. The maximum amount of future payments the guarantors would be required to make under the guarantees as of October 30, 2004 is $209.8 million. This represents the principal amount outstanding of the Company’s Senior Credit Facility, the 9.75% Notes and accrued interest on both obligations. As discussed in Note 11, on August 18, 2004, the Company executed the Amendment to its Senior Credit Facility. The condensed consolidating financial information of the Company and its subsidiaries as of October 30, 2004 reflect the changes in the guarantor subsidiaries as discussed above.

16

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The condensed consolidating financial information of the Company and its subsidiaries as of October 30, 2004 and January 31, 2004, and for each of the thirteen weeks and thirty-nine weeks ended October 30, 2004 and October 25, 2003 are as follows:

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

October 30, 2004

(Unaudited and In Thousands)

	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	14,449		$	—		$	3,109		$	—		$	17,558
Accounts receivable, net		29,775			3,357			7,332			—			40,464
Inventories		31,251			3,845			10,226			—			45,322
Deferred tax assets		3,125			86			765			—			3,976
Prepaid expenses and other		798			—			1,403			—			2,201
Total current assets		79,398			7,288			22,835			—			109,521
PROPERTY, PLANT AND EQUIPMENT, net		32,161			15,199			18,058			—			65,418
DEFERRED TAX ASSETS		—			—			2,341			(2,341	)		—
GOODWILL		62,386			5,631			30,361			—			98,378
OTHER INTANGIBLE ASSETS, net		31,628			328			—			—			31,956
INVESTMENT IN SUBSIDIARIES		71,416			—			—			(71,416	)		—
OTHER ASSETS		8,144			93			97			—			8,334
TOTAL ASSETS	$	285,133		$	28,539		$	73,692		$	(73,757	)	$	313,607
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,040		$	3,587		$	7,352		$	—		$	15,979
Accrued expenses		12,266			227			10,932			—			23,425
Current portion of long-term debt		321			—			156			—			477
Total current liabilities		17,627			3,814			18,440			—			39,881
INTERCOMPANY (RECEIVABLE) PAYABLE		(6,695	)		25,074			(18,379	)		—			—
OTHER LIABILITES, including post-retirement obligation		4,234			—			76			—			4,310
DEFERRED TAX LIABILITES		7,832			107			9			(2,341	)		5,607
LONG-TERM DEBT, net of current portion		205,929			—			1,351			—			207,280
MINORITY INTEREST		—			—			—			323			323
STOCKHOLDER’S EQUITY
Preferred stock		—			—			133			(133	)		—
Common stock		—			—			11,117			(11,117	)		—
Paid-in capital		72,648			—			52,064			(52,064	)		72,648
Retained earnings (deficit)		(15,486	)		(456	)		8,785			(8,329	)		(15,486	)
Accumulated other comprehensive loss		(956	)		—			96			(96	)		(956	)
Total stockholders’ equity		56,206			(456	)		72,195			(71,739	)		56,206
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	285,133		$	28,539		$	73,692		$	(73,757	)	$	313,607

17

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

January 31, 2004

(In Thousands)

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

18

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Income

For the Thirteen Weeks Ended October 30, 2004

(Unaudited and In Thousands)

	Issuer			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Consolidated Total
Net Sales	$	54,445		$	7,308	$	33,232		$	(12,484	)	$	82,501
Cost of Goods Sold		34,715			7,008		25,775			(12,484	)		55,014
Selling, General & Administrative Expenses		10,999			—		6,549			—			17,548
Amortization		603			165		—			—			768
Operating Expenses		46,317			7,173		32,324			(12,484	)		73,330
Operating Income		8,128			135		908			—			9,171
Net Interest Expense		4,855			—		21			—			4,876
Minority Interest in Income of Subsidiary		—			—		2			—			2
Equity in Earnings of Affiliate		—			—		117			—			117
Equity in Earnings of Subsidiaries		(164	)		—		—			164			—
Other Expense		—			133		—						133
Income Before Income Taxes		3,109			2		1,002			164			4,277
Income Tax Expense		1,282			2		1,166			—			2,450
Net Income (Loss)	$	1,827		$	—	$	(164	)	$	164		$	1,827

19

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statement of Income

For the Thirteen Weeks Ended October 25, 2003

(Unaudited and In Thousands)

	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
Net Sales	$	45,410		$	23,519		$	12,113		$	(6,903	)	$	74,139
Cost of Goods Sold		29,966			17,941			10,847			(6,903	)		51,851
Selling, General & Administrative Expenses		10,691			5,181			1,194			—			17,066
Amortization		874			654			—			—			1,528
Operating Expenses		41,531			23,776			12,041			(6,903	)		70,445
Operating Income (Loss)		3,879			(257	)		72			—			3,694
Net Interest Expense		5,334			—			47			—			5,381
Minority Interest in Income of Subsidiary		—			—			10			—			10
Equity in Earnings of Affiliate		—			387			—			—			387
Equity in Earnings of Subsidiaries		799			—			—			(799	)		—
Income (Loss) Before Income Taxes		(656	)		130			15			(799	)		(1,310	)
Income Tax Expense (Benefit)		(691	)		(691	)		37			—			(1,345	)
Net Income (Loss)	$	35		$	821		$	(22	)	$	(799	)	$	35

20

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statement of Income

For the Thirty-Nine Weeks Ended October 30, 2004

(Unaudited and In Thousands)

	Issuer			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Consolidated Total
Net Sales	$	176,051		$	23,185	$	93,695		$	(33,143	)	$	259,788
Cost of Goods Sold		106,822			21,846		71,472			(33,143	)		166,997
Selling, General & Administrative Expenses		36,635			—		22,047			—			58,682
Amortization		1,807			492		—			—			2,299
Operating Expenses		145,264			22,338		93,519			(33,143	)		227,978
Operating Income		30,787			847		176			—			31,810
Net Interest Expense		15,074			—		75			—			15,149
Minority Interest in Loss of Subsidiary		—			—		(20	)		—			(20	)
Equity in Earnings of Affiliate		—			—		893			—			893
Equity in Earnings of Subsidiaries		(410	)		—		—			410			—
Other Expense		—			133		—			—			133
Income Before Income Taxes		15,303			714		1,014			410			17,441
Income Tax Expense		6,280			290		1,848			—			8,418
Net Income (Loss)	$	9,023		$	424	$	(834	)	$	410		$	9,023

21

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Income

For the Thirty-Nine Weeks Ended October 25, 2003

(Unaudited and In Thousands)

	Issuer		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated Total
Net Sales	$	154,059	$	68,281		$	35,150		$	(17,851	)	$	239,639
Cost of Goods Sold		94,536		52,075			30,592			(17,851	)		159,352
Selling, General & Administrative Expenses		35,078		13,921			4,977			—			53,976
Amortization		2,622		1,962			—			—			4,584
Operating Expenses		132,236		67,958			35,569			(17,851	)		217,912
Operating Income (Loss)		21,823		323			(419	)		—			21,727
Net Interest Expense		15,859		—			127			—			15,986
Minority Interest in Income of Subsidiary		—		—			26			—			26
Equity in Earnings of Affiliate		—		1,074			—			—			1,074
Equity in Earnings of Subsidiaries		1,475		—			—			(1,475	)		—
Income (Loss) Before Income Taxes		7,439		1,397			(572	)		(1,475	)		6,789
Income Tax Expense (Benefit)		2,423		(757	)		107			—			1,773
Net Income (Loss)	$	5,016	$	2,154		$	(679	)	$	(1,475	)	$	5,016

22

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Thirty-Nine Weeks Ended October 30, 2004

(Unaudited and In Thousands)

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

23

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statement of Cash Flows

For the Thirty-Nine Weeks Ended October 25, 2003

(Unaudited and In Thousands)

	Issuer			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidated Total
CASH FLOWS FROM OPERATING ACTIVITIES	$	8,316		$	(1,598	)	$	2,079		$	8,797
CASH FLOWS FROM INVESTING ACTIVITIES:
Equity distribution from affiliate		—			3,023			—			3,023
Additions to property, plant and equipment		(4,826	)		(1,365	)		(1,029	)		(7,220	)
Net cash provided by (used in) investing activities		(4,826	)		1,658			(1,029	)		(4,197	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities		3,500			—			—			3,500
Repayments of revolving credit facilities		(3,500	)		—			—			(3,500	)
Repayments of long-term debt		(20,000	)		—			(1,912	)		(21,912	)
Dividends to Tandus Group, Inc.		(2,263	)		—			—			(2,263	)
Financing Costs		(18	)		—			—			(18	)
Net cash used in financing activities		(22,281	)		—			(1,912	)		(24,193	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		—			—			36			36
NET CHANGE IN CASH AND CASH EQUIVALENTS		(18,791	)		60			(826	)		(19,557	)
CASH AND CASH EQUIVALENTS, beginning of period		19,047			—			1,860			20,907
CASH AND CASH EQUIVALENTS, end of period	$	256		$	60		$	1,034		$	1,350

18. Income Taxes

The Company’s effective tax rate was 48.3% and 26.1% for the thirty-nine weeks ended October 30, 2004 and October 25, 2003, respectively. The higher rate for the thirty-nine weeks ended October 30, 2004 was primarily due to the recognition of a $0.9 million valuation allowance against certain state income tax credits carried forward from prior periods that may not be utilized in future periods. These credits were produced by Monterey and management believes it is more likely than not that their use may be limited after the closure of the Santa Ana, California facility. The tax benefit for the thirty-nine weeks ended October 25, 2003 was primarily due to the initial qualification for these credits, which included a component related to prior years and was recorded during the thirteen weeks ended October 25, 2003.

19. Subsequent Events

Subsequent to October 30, 2004, the Company successfully negotiated its exit from the Chroma partnership and entered into the Chroma Transition Agreement (“Agreement”) with Dixie to allow for the transition of dyeing and finishing services needed until the Santa Ana, California manufacturing facility has been closed. It is anticipated to be complete by the end of the Company’s first fiscal quarter in 2005.

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

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with and is qualified in its entirety by reference to 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

Collins & Aikman Floorcoverings, Inc. (the “Company”), a Delaware corporation, is a manufacturer of floorcovering products for the North American specified commercial carpet market. The Company’s floorcovering products include (i) vinyl-backed six-foot roll carpet and modular carpet tile and (ii) high style tufted and woven broadloom carpet. The Company designs, manufactures and markets its C&A, Monterey and Crossley brands under the Tandus name for a wide variety of end markets, including corporate offices, education, healthcare, government facilities and retail stores. The ability to provide a “package of product offerings” in various forms, coupled with flexible distribution channels, allows the Company to provide a wide array of floorcovering solutions tailored for each of its customers. The Company is headquartered in Georgia, with additional locations in California, Canada, the United Kingdom, Singapore and China.

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

RESULTS OF OPERATIONS

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

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 25, 2003		October 30, 2004		October 25, 2003		October 30, 2004
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Goods Sold	70.0		66.7		66.5		64.3
Gross Profit	30.0		33.3		33.5		35.7
Selling, General & Administrative Expenses	19.2		21.3		22.5		22.6
Amortization	2.1		0.9		1.9		0.9
Operating Income	4.9		11.1		9.1		12.2
Net Interest Expense	7.3		5.9		6.7		5.8
Net Income	0.0		2.2		2.1		3.5
Adjusted EBITDA	12.7		16.4		15.8		16.8

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Thirteen Weeks Ended October 30, 2004 As Compared with the Thirteen Weeks Ended October 25, 2003

Net Sales. Net sales for the thirteen weeks ended October 30, 2004 were $82.5 million, an increase of 11.3% from the $74.1 million for the thirteen weeks ended October 25, 2003. Net sales of the Company’s Floorcovering segment were $76.8 million for the thirteen weeks ended October 30, 2004 as compared to $67.5 million for the thirteen weeks ended October 25, 2003, an increase of $9.3 million or 13.8%. The increase in the Floorcovering segment’s net sales was due to improved demand throughout the specified commercial market in North America. Net sales of the Extrusion segment were $5.7 million for the thirteen weeks ended October 30, 2004 as compared to $6.6 million for the thirteen weeks ended October 25, 2003, a decrease of $0.9 million or 13.6%. The reduction in sales for the Extrusion segment was due to lower sales this quarter to the former owner than in the prior year period and significantly increased usage by the Company’s Floorcovering segment. The reduction was partially offset by increased sales to new external customers.

Cost of Goods Sold. Cost of goods sold was $55.0 million for the thirteen weeks ended October 30, 2004 as compared to $51.9 million in the thirteen weeks ended October 25, 2003. As a percentage of sales, costs of goods sold were 66.7% and 70.0% for the thirteen weeks ended October 30, 2004 and October 25, 2003, respectively. The percentage decrease was primarily due to the increased absorption of fixed manufacturing costs as a result of improved sales volume, increased usage of yarn from the Company’s Extrusion facility and cost manufacturing improvements. Included in cost of goods sold for the 2004 period are expenses of $0.4 million related to the Company’s planned closure of its manufacturing facility in Santa Ana, California and transfer of production to its existing Truro, Nova Scotia facility. (See further discussion in Liquidity and Capital Resources.)

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $17.5 million for the thirteen weeks ended October 30, 2004, an increase of 2.8% from $17.1 million in the thirteen weeks ended October 25, 2003. This increase was primarily due to increased salaries, taxes and benefits of $1.9 million, partially offset by lower legal and professional expenses of $1.0 million, lower advertising and other expenses of $0.1 million and lower sampling expenses of $0.4 million. As a percentage of sales, these expenses decreased to 20.1% from 23.1% in the prior year. Included in the selling, general and administrative expenses for the 2004 period is $0.6 million of expenses related to the Company’s planned closure and relocation of assets from the Santa Ana, California facility.

Amortization. Intangible asset amortization decreased to $0.8 million for the thirteen weeks ended October 30, 2004 as compared to $1.5 million for the thirteen weeks ended October 25, 2003. The decrease was due to the Company’s non-compete with its former parent being fully amortized as of January 31, 2004, and lower amortization of the extrusion supply agreement due to the non-cash impairment charge during the fourth quarter of fiscal 2003.

Interest Expense. Net interest expense was $4.9 million and $5.4 million for the thirteen weeks ended October 30, 2004 and October 25, 2003, respectively, which included minimal interest income. The reduction was principally due to lower interest rates and lower levels of debt outstanding during the 2004 period.

Income Taxes. The Company had income tax expense of $2.5 million for the thirteen weeks ended October 30, 2004 as compared to a tax benefit of $1.3 million for the thirteen weeks ended October 25, 2003. The Company’s effective tax rate for the thirteen weeks ended October 30, 2004 was 57.3% and was primarily due to 1) higher profitability of the Company and its subsidiaries in the United States, 2) combined net loss of its foreign subsidiaries against which no tax benefit can be recognized and, 3) the recognition of a $0.9 million valuation allowance against certain state income tax credits carried forward from prior periods that may not be utilized in future periods. These credits were produced by Monterey and management believes it is more likely than not that their use may by limited after the closure of the Santa Ana, California facility. The tax benefit for the thirteen weeks ended October 25, 2003 was primarily due to the initial qualification for these credits, which included a component related to prior years and was recorded during the thirteen weeks ended October 25, 2003.

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Net Income. Net income for the thirteen weeks ended October 30, 2004 increased to $1.8 million compared to $0.04 million in the thirteen weeks ended October 25, 2003. This was due to the combined result of the factors described above.

Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, noncash charges or expenses (other than the write-down of current assets), costs related to board-approved acquisitions and attempted acquisitions, expenses related to the facility maximization project, plus Chroma cash dividends and minority interest in income of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the thirteen weeks ended October 30, 2004 increased to $13.5 million from $9.4 million in the thirteen weeks ended October 25, 2003. As a percentage of sales, Adjusted EBITDA was 16.4% in the thirteen weeks ended October 25, 2004 compared to 12.7% in the thirteen weeks ended October 25, 2003. The increase was principally due to the increased sales volume, partially offset by the reduction of Chroma dividends due to the facility maximization project. 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 U.S. 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 25, 2003			October 30, 2004
Net income	$	35		$	1,827
Income taxes		(1,345	)		2,450
Net interest expense		5,381			4,876
Depreciation		2,665			2,569
Amortization		1,528			768
Chroma cash dividends		740			—
Equity in earnings of Chroma		(387	)		(117	)
Minority interest of income of subsidiary		10			2
Other Noncash Expense		—			133
Expenses associated with facility maximization project		—			1,018
Costs associated with unsuccessful acquisition		792			—
Adjusted EBITDA	$	9,419		$	13,526

RESULTS OF OPERATIONS

Thirty-Nine Weeks Ended October 30, 2004 As Compared with the Thirty-Nine Weeks Ended October 25, 2003

Net Sales. Net sales for the thirty-nine weeks ended October 30, 2004 were $259.8 million, an increase of 8.4% from the $239.6 million for the thirty-nine weeks ended October 25, 2003. Net sales of the Company’s Floorcovering segment were $241.8 million for the thirty-nine weeks ended October 30, 2004 as compared to $218.1 million for the thirty-nine weeks ended October 25, 2003, an increase of $23.7 million or 10.9%. The increase in the Floorcovering segment’s net sales was due to improved demand throughout the specified commercial market in North America. Net sales of the Extrusion segment were $18.0 million for the thirty-nine weeks ended October 30, 2004 as compared to $21.6 million for the thirty-nine weeks ended October 25, 2003, a decrease of $3.6 million or 16.4%. The reduction in sales for the Extrusion segment was due to lower sales to the former owner and successor of the supply agreement and significantly increased usage by the Company’s Floorcovering segment. The reduction in sales was partially offset by increased sales to new and existing external customers.

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Cost of Goods Sold. Cost of goods sold was $167.0 million for the thirty-nine weeks ended October 30, 2004 as compared to $159.4 million in the thirty-nine weeks ended October 25, 2003. As a percentage of sales, cost of goods sold were 64.3% and 66.5%, respectively. The percentage decrease was primarily due to the increased absorption of fixed manufacturing costs as a result of improved sales volume, increased usage of the yarn from the Company’s Extrusion facility and manufacturing cost improvements. Included in cost of goods sold for the 2004 period are expenses of $0.4 million related to the Company’s planned closure and transfer of assets from its Santa Ana, California facility. (See further discussion in Liquidity and Capital Resources.)

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the thirty-nine weeks ended October 30, 2004 were $58.7 million, an increase of 8.7% from $54.0 million in the thirty-nine weeks ended October 25, 2003. The increase was primarily due to increased salaries, taxes and benefits of $3.7 million, sampling and related costs of $0.4 million, commissions of $0.5 million, advertising and other costs of $0.5 million and foreign currency expense of $1.2 million, partially offset by lower legal and professional expenses of $1.3 million. As a percentage of sales, these expenses were 22.5% for the thirty-nine weeks ended October 30, 2004 and 22.5% for the thirty-nine weeks ended October 25, 2003. Included in the selling, general and administrative expenses for the 2004 period is $0.6 million of expenses related to the Company’s planned closure and relocation of assets from the Santa Ana, California facility.

Amortization. Intangible asset amortization decreased to $2.3 million for the thirty-nine weeks ended October 30, 2004 as compared to $4.6 million for the thirty-nine weeks ended October 25, 2003. The decrease was due to the Company’s non-compete with its former parent being fully amortized as of January 31, 2004 and lower amortization of the extrusion supply agreement due to the non-cash impairment charge during the fourth quarter of fiscal 2003.

Interest Expense. Net interest expense for the thirty-nine weeks ended October 30, 2004 and the thirty-nine weeks ended October 25, 2003 was $15.1 million and $16.0 million, respectively, which included interest income of $0.1 million in both periods. The thirty-nine weeks ended October 25, 2003 included a charge to interest expense of $0.4 million to reflect the write-off of a pro-rata share of deferred financing costs associated with the prepayment of term debt from cash generated by operations. The reduction was principally due to lower interest rates and lower levels of debt outstanding during the 2004 period.

Income Taxes. The Company has income tax expense of $8.4 million for the thirty-nine weeks ended October 30, 2004 as compared to $1.8 million for the thirty-nine weeks ended October 25, 2003. The Company’s effective tax rate for the thirty-nine weeks ended October 30, 2004 was 48.3%, and was primarily due to 1) higher profitability of the Company and its subsidiaries in the United States, 2) combined net loss of its foreign subsidiaries against which no tax benefit can be recognized and, 3) the recognition of a $0.9 million valuation allowance against certain state income tax credits carried forward from prior periods that may not be utilized in future periods. These credits were produced by Monterey and management believes it is more likely than not that their use may be limited after the closure of the Santa Ana, California facility. The Company’s effective tax rate for the thirty-nine weeks ended October 25, 2003 was 41.5%. The lower effective tax rate in fiscal 2003 was primarily due to the initial qualification for the credits, which included a component related to prior years and was recorded during the thirteen weeks ended October 25, 2003.

Net Income. Net income for the thirty-nine weeks ended October 30, 2004 increased to $9.0 million from $5.0 million in the thirty-nine weeks ended October 25, 2003. This was due to the combined result of the factors described above.

Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, noncash charges or expenses (other than the write-down of current assets), costs related to board-approved acquisitions and attempted acquisitions, expenses related to the facility maximization project, plus Chroma cash dividends and minority interest in income

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(loss) of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the thirty-nine weeks ended October 30, 2004 increased to $43.7 million from $37.8 million in the thirty-nine weeks ended October 25, 2003. As a percentage of sales, Adjusted EBITDA was 16.8% in the thirty-nine weeks ended October 30, 2004 compared to 15.8% in the thirty-nine weeks ended October 25, 2003. The increase was principally due to the increased sales volume in the thirty-nine weeks ended October 30, 2004, although it was partially offset by a special dividend of $1.8 million distributed by Chroma in the thirty-nine weeks ended October 25, 2003. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. The 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 accounting principles generally accepted in the United States and should not be considered an alternative to operating income or net income as a measure of operating performance or to net cash provided by operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies.

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

	Thirty-Nine Weeks Ended
	October 25, 2003			October 30, 2004
Net income	$	5,016		$	9,023
Income taxes		1,773			8,418
Net interest expense		15,986			15,149
Depreciation		7,689			7,688
Amortization		4,584			2,299
Chroma cash dividends		3,023			922
Equity in earnings of Chroma		(1,074	)		(893	)
Minority interest in income (loss) of subsidiary		26			(22	)
Other Noncash Expense		—			133
Expenses associated with facility maximization project		—			1,018
Costs associated with unsuccessful acquisition		792			—
Adjusted EBITDA	$	37,815		$	43,737

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 30, 2004 was $14.1 million compared to $8.8 million in the thirty-nine weeks ended October 25, 2003. The change was primarily due to the increased profitability of $4.0 million.

Net cash used in investing activities in the thirty-nine weeks ended October 30, 2004 was $5.7 million compared to $4.2 million in the thirty-nine weeks ended October 25, 2003. The increase in cash used in investing activities in the current year was primarily due to a special dividend having been declared from Chroma Systems in the thirty-nine weeks ended October 25, 2003, and no such special dividend in the thirty-nine weeks ended October 30, 2004. Capital expenditures for the thirty-nine weeks ended October 30, 2004 were $6.6 million compared to $7.2 million for the thirty-nine weeks ended October 25, 2003. The Company anticipates capital expenditures for the remainder of the year to be approximately $3.0 to $4.0 million.

Net cash used in financing activities for the thirty-nine weeks ended October 30, 2004 was $2.0 million compared to $24.2 million in the thirty-nine weeks ended October 25, 2003. The decrease in cash used by financing activities was due primarily to lower prepayment amounts of the Senior Credit Facility and reduced dividends to the Company’s parent during the thirty-nine weeks ended October 30, 2004 as compared to the thirty-nine weeks ended October 25, 2003.

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The Company has significant indebtedness which, as of October 30, 2004, consists of $175.0 million of 9.75% senior subordinated notes due 2010, $31.0 million of senior term debt, $0.5 million in purchase money and other indebtedness and $1.3 million in sinking fund bonds under Crossley. As of October 30, 2004, the Company’s $50.0 million revolving line of credit had no borrowings outstanding and $3.0 million of letters of credit outstanding leaving total availability of $47.0 million.

The Company’s ability to make scheduled payments of principal, interest, or to refinance its indebtedness, depends on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, and other factors beyond its control. 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. The Company periodically evaluates potential acquisitions of businesses that would complement its existing operations. Depending on various factors, including, among others, the cash consideration required in such potential acquisitions, the Company may determine to finance any such transaction with existing sources of liquidity.

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

During the first quarter of fiscal 2004, the Company leased a facility to be used for a carpet tile production facility in Suzhou, China. Products manufactured at this facility will be sold into mainland China and throughout southeast Asia. Funding of $3.0 million was provided during fiscal 2003 with additional $2.0 million provided on August 6, 2004. Additional funding of up to $1.0 million may be required during the remainder of the year. The Company expects production to begin at this facility during the first quarter of fiscal 2005.

During March 2004, a jury found in favor of Employers Mutual Insurance Companies (“EMC”) related to alleged violations of express oral warranty and implied warranty of fitness for particular purpose and awarded damages to EMC totaling $0.8 million. The Company accrued the full judgment amount of $0.8 million as of January 31, 2004. During the thirteen and thirty-nine weeks ended October 30, 2004, the Company incurred approximately $0.1 million and $0.6 million, respectively, of legal expenses related to this lawsuit. The Company requested a new trial. The judge granted the Company’s motion for a new trial but allowed EMC to reduce the judgment by $0.2 million to avoid a new trial. EMC agreed to the reduction of the judgment by $0.2 million. The Company has appealed the $0.2 million reduction of the judgment and EMC has counter appealed. The amount accrued in the consolidated balance sheet for the judgment was reduced to $0.6 million during the thirteen weeks ended October 30, 2004.

On August 18, 2004, the Company executed Amendment No. 3 (the “Amendment”) to its Senior Credit Facility. The Amendment provides for, among other things, 1) the transfer of certain of the broadloom manufacturing fixed assets located in Santa Ana, California to its facility located in Truro, Nova Scotia, 2) the disposal of and/or transfer to the Company of substantially all of the remaining Santa Ana, California fixed assets and transfer all or substantially all of the accounts receivable, inventory and other liquid current assets from Monterey Carpets, Inc. (“Monterey”), a wholly-owned subsidiary of the Company, to the Company, 3) the release of Monterey as a subsidiary guarantor under the subsidiary guarantee agreement and the security agreement and any other loan documents to which it is a party, 4) the exclusion from the financial covenants calculation of up to $10.0 million of costs related to the move and relocation to the Truro, Nova Scotia plant (the Crossley transfer”), and 5) the reduction of the credit spread to LIBOR plus 2.75 on the Term B Loan. The Amendment further authorizes the collateral agent to release any and all liens held by the collateral agent in or on the assets forming part of the Crossley transfer.

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

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

The Company’s fixed charge coverage ratio and interest coverage ratio were 1.73:1.00 and 2.54:1.00, respectively, at October 30, 2004. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Senior Credit Facility, the Company will also be subject to the provisions of a cross-default for the 9.75% Senior Subordinated Notes. The Company was in compliance with all covenants as of October 30, 2004, and expects to remain in compliance throughout fiscal 2004, although no assurances to that effect can be given.

On August 10, 2004, the Company and its parent announced its intent to close its manufacturing facility in Santa Ana, California, and transfer the production to its existing Truro, Nova Scotia, Canada, facility (the “facility maximization project”). The plan to close the facility was approved by the Company’s Board of Directors on August 9, 2004, and is expected to be complete by the end of the Company’s first fiscal quarter in 2005. It is anticipated that the costs incurred will be less than the $6.4 million previously disclosed by the Company in its Form 8-K filed on August 10, 2004. It is currently estimated that the remaining costs will be approximately $3.9 million and consist of severance, lease termination, moving, reinstallation, professional fees and other costs. As part of the facility maximization project, the Company negotiated with the Nova Scotia government the forgiveness of the remaining $1.3 million of Crossley’s sinking fund bonds debt outstanding. The forgiveness will be over the remaining five-year term of the current note and is based upon certain employee hours worked during the year and will commence in fiscal 2005. The debt will also be non-interest bearing. During the thirteen weeks ended October 30, 2004, the Company incurred approximately $1.0 million in costs associated with the facility maximization project, which consist of professional fees, severance and other related costs. Costs of Goods Sold included $0.4 million and Selling, General and Administrative Expenses included $0.6 million of these expenses in the accompanying Consolidated Statements of Income. In addition the Company anticipates capital expenditures of approximately $3.0 million related to the move. The costs incurred and the anticipated expenditures remaining are as follows:

(Amounts in millions)	Anticipated Total Expenditures as of August 10, 2004		Change in Estimate of Expenditures as of October 30, 2004			Amounts Incurred as of October 30, 2004		Anticipated Remaining Expenditures
Severance Costs	$	1.8	$	0.3		$	0.4	$	1.7
Contractual Obligations and Professional Fees		3.1		(1.8	)		0.1		1.2
Other Project Costs		1.5		—			0.5		1.0
Gross Project Expenditures	$	6.4	$	(1.5	)	$	1.0	$	3.9

The accrued facility maximization costs at October 30, 2004 amounted to $0.6 million, which consisted of severance and other costs. These costs are included in Accrued Expenses in the accompanying Consolidated Balance Sheets.

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.

As discussed in Note 13, subsequent to the end of the quarter, the Company terminated its partnership interest in Chroma. The Company will receive no future cash dividends from Chroma.

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EFFECTS OF INFLATION

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

SEASONALITY

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

RELIANCE ON PRIMARY THIRD-PARTY SUPPLIER OF NYLON YARN

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are more fully described in Note 3 to the audited consolidated financial statements included in the Company’s Form 10-K for the year ended January 31, 2004, which was filed with the Securities and Exchange Commission in May 2004. Certain of the Company’s 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 the Company’s 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.

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

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

Accounts Receivable Allowances. The Company sells floorcovering products to a wide variety of manufacturers and retailers located primarily throughout the United States and generally does not require collateral. Allowances are provided for expected cash discounts, return, claims and doubtful accounts based upon historical experience and periodic evaluations of the financial condition of the Company’s customers and collectability of the Company’s accounts receivable. These allowances are maintained at a level which management believes is sufficient to cover potential credit losses. Accounts receivable balances are aged according to invoice and applicable terms, and are written off as uncollectible only after all reasonable collection efforts have been made.

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

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

FORWARD-LOOKING STATEMENTS

The Company 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;

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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 generally do not affect the fair market value of such debt but do impact future earnings and cash flows, assuming other factors are held constant. Conversely, for fixed rate debt, interest rate changes do not impact future cash flows and earnings, but do impact the fair market value of such debt, assuming other factors are held constant. At October 30, 2004, we had variable rate debt of $31.3 million and fixed rate debt of $176.5 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. The impact on our results of operations of a one-point change on the outstanding balance of our term loan as of the thirty-nine weeks ended October 30, 2004 would be approximately $0.2 million annually, net of tax.

Item 4. Controls and Procedures

As of October 30, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. The Chief Executive Officer and Chief Financial Officer also concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. In connection with the new rules, the Company is in the process of further reviewing and documenting its disclosure controls and procedures, including its internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that the Company’s systems evolve with its business.

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

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PART II Other Information

Item 1. Legal Proceedings

During March 2004, a jury found in favor of Employers Mutual Insurance Companies (“EMC”) related to alleged violations of express oral warranty and implied warranty of fitness for particular purpose and awarded damages to EMC totaling $0.8 million. The Company accrued the full judgment amount of $0.8 million as of January 31, 2004. During the thirteen and thirty-nine weeks ended October 30, 2004, the Company incurred approximately $0.1 million and $0.6 million, respectively, of legal expenses related to this lawsuit. The Company requested a new trial. The judge granted the Company’s motion for a new trial but allowed EMC to reduce the judgment by $0.2 million to avoid a new trail. EMC agreed to the reduction of the judgment by $0.2 million. The Company has appealed the $0.2 million reduction of the judgment and EMC has counter appealed. If the Company is unsuccessful, it will be required to pay the judgment amount and related legal and professional fees. The amount accrued in the consolidated balance sheet for the judgment was reduced to $0.6 million during the thirteen weeks ended October 30, 2004.

On November 8, 2004, the Company executed the Chroma Transition Agreement (the “Agreement”). As part of the Agreement and California Partnership Law, the Company retains its share of the third party claims that may be asserted for the period prior to the Company’s exit from the partnership.

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

Exhibits
10.1	Chroma Transition Agreement, dated November 8, 2004
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on December 10, 2004.

COLLINS & AIKMAN FLOORCOVERINGS, INC.
(Registrant)
By:	/s/ Leonard F. Ferro
	Leonard F. Ferro
	Chief Financial Officer and Vice President
	(duly authorized officer and principal
	financial and accounting officer)

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EX-10.1

EXHIBIT 10.1

CHROMA TRANSITION AGREEMENT

THIS CHROMA TRANSITION AGREEMENT (this “Agreement”), dated as of the 8th day of November, 2004, among Collins & Aikman Floorcoverings, Inc., a Delaware corporation (“C&A”), as guarantor of the obligations of Monterey Carpets, Inc., a California corporation and a wholly-owned subsidiary of C&A (“Monterey Carpets”), Monterey Carpets, Monterey Color Systems, Inc., a California corporation and a wholly-owned subsidiary of Monterey Carpets (“MSCI”), Chroma Technologies, Inc., a California corporation (“CTI”), and a wholly-owned subsidiary of The Dixie Group, Inc., a Tennessee corporation (“Dixie”), Dixie, as guarantor of the obligations of CTI, and Chroma Systems Partners, a California general partnership (“Chroma”).

W I T N E S S E T H :

WHEREAS, MCSI holds a one-third general partnership interest in Chroma; and

WHEREAS, CTI holds a one-third general partnership interest in Chroma; and

WHEREAS, Chroma Holdings, LLC, a California limited liability company (“Chroma Holdings”) holds a one-third general partnership interest in Chroma; and

WHEREAS, Chroma holds all of the membership interests in Chroma Holdings; and

WHEREAS, CTI, MCSI and Chroma Holdings are the sole general partners in Chroma; and

WHEREAS, Monterey Carpets is a party to that certain “Monterey Dyeing and Finishing Agreement” dated as of February 11, 1993, by and between Monterey Carpets and Chroma (the “Dyeing and Finishing Agreement”); and

WHEREAS, Monterey Carpets has notified Chroma of its intention to terminate the Dyeing and Finishing Agreement effective August 9, 2005, and to immediately begin to reduce the amount of dyeing and finishing services of Chroma utilized by Monterey Carpets; and

WHEREAS, MCSI has offered to sell its general partnership interest in Chroma to Chroma, in accordance with the terms of the Dyeing and Finishing Agreement and the Chroma Partnership Agreement dated as of December 17, 1992; and

WHEREAS, the Chroma Partnership Agreement and the Dyeing and Finishing Agreement provide that, on early termination of the Dyeing and Finishing Agreement, Chroma shall have the right and option to purchase the Partnership Interest for the sum of $1.00; and

WHEREAS, Monterey Carpets and CTI desire to provide for an orderly termination of the dyeing and finishing services heretofore provided to Monterey Carpets by Chroma, and to minimize the disruption and expense to Chroma and Dixie caused by such termination; and

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WHEREAS, Chroma desires to acquire MCSI’s one-third partnership interest in Chroma on the terms and subject to the conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements, and upon the terms and subject to the conditions hereinafter set forth, the parties do hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1 Definitions. The following capitalized terms used herein and in the agreements and other documents collateral hereto which incorporate the terms set forth below by reference shall have the meanings set forth opposite such term below:

“C&A” has the meaning set forth in the preamble.

“Chroma” has the meaning set forth in the preamble.

“Closing” has the meaning set forth in Section 10.1.

“Closing Date” has the meaning set forth in Section 10.1.

“Chroma Holdings” has the meaning set forth in the recitals.

“Chroma Partnership Agreement” means the Partnership Agreement of Chroma currently in effect.

“CTI” has the meaning set forth in the recitals.

“CTI Obligations” has the meaning set forth in Election 13.2.

“Discounted Partnership Pricing” has the meaning set forth in Section 7.3.

“Dixie” has the meaning set forth in the preamble.

“Dyeing and Finishing Agreement” has the meaning set forth in the recitals.

“Effective Time” means 1:00 p.m. Eastern Standard Time on the Closing Date.

“Enron” has the meaning set forth in Section 6.4,

“Enron Claim” has the meaning set forth in Section 6.4.

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“Fabrica” means Fabrica International, Inc., a California corporation and a wholly-owned subsidiary of Dixie.

“Losses” has the meaning set forth in Section 12.1.

“MCSI” has the meaning set forth in the recitals.

“Monterey Carpets” has the meaning set forth in the preamble.

“Monterey Carpets Obligations” has the meaning set forth in Section 13.1.

“Partnership Agreement” has the meaning set forth in the recitals.

“Partnership Interest” means the one-third interest in Chroma held by MCSI.

“Pre-Closing Partnership Obligations” has the meaning set forth in Section 2.2.

“Skein Dyeing Associates” has the meaning set forth in Section 7.2.

“Skein Dyeing Equipment” has the meaning set forth in Section 7.3.

“Transition Period” has the meaning set forth in Section 7.8.

“WARN Act” has the meaning set forth in Secticn 7.3.

ARTICLE II

SALE OF PARTNERSHIP INTEREST

2.1 Purchase by Chroma. Upon the terms and subject to the conditions of this Agreement, Chroma shall purchase the Partnership Interest at Closing.

2.2 Effect of Purchase. Upon purchase of the Partnership Interest by Chroma pursuant to Section 2.1, any and all obligations thereafter arising under the Chroma Partnership Agreement shall be the sole obligation of the holders of the partnership interests in Chroma, and MCSI shall have no liability therefor, except as otherwise expressly provided in this Agreement. Notwithstanding the foregoing, MCSI shall remain obligated to perform and satisfy all the terms and conditions of this Agreement following such purchase and sale, (including, but not limited to, the obligation to indemnify Chroma for 50% of any amount paid to satisfy the Enron Claim as provided by Section 6.4) and, notwithstanding anything to the contrary that may be contained in the Partnership Agreement or the Uniform Partnership Act, as in effect in California, MCSI shall not be released from any liability or responsibility with respect to partnership obligations to third parties other than CTI, Fabrica, Dixie and their affiliates relating to any period prior to the Closing Date (the “Pre-Closing Partnership Obligations”). For purposes of this Agreement, Pre-Closing Partnership Obligations shall include contingent as well as fixed obligations and unknown as well as known obligations related to Chroma, but Pre-Closing Partnership

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Obligations shall be limited solely to obligations to third parties unaffiliated with Chroma, CTI, Fabrica and Dixie (such as the Enron Claim) that are asserted after Closing but that arise from events or circumstances that existed or occurred prior to Closing with respect to such Pre-Closing Partnership Obligations. MCSI shall be liable for a share of the Pre-Closing Partnership Obligations equal to 50% thereof, its pre-Closing beneficial interest. Chroma, CTI, and Dixie represent and warrant to Monterey Carpets and MCSI that, to their knowledge, there are no pending or threatened claims against Chroma, CTI, Fabrica or Dixie arising under the Partnership Agreement, other than the Enron Claim. Notwithstanding the foregoing, Monterey Carpets and MCSI acknowledge that Chroma’s representation and warranty expressly does not cover any matter of which Monterey Carpets or MCSI has or would reasonably be deemed to have any knowledge Monterey Carpets and MCSI represent and warrant to Chroma, CTI and Dixie that, to their knowledge, there are no pending or threatened claims against Monterey Carpets or MCSI arising under the Partnership Agreement, other than the Enron Claim.

ARTICLE III

PURCHASE PRICE

3.1 Purchase Price for the Partnership Interest. The purchase price for the Partnership Interest shall be One Dollar ($1.00), as provided in the Partnership Agreement and the Dyeing and Finishing Agreement, and shall be payable at Closing.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF MONTEREY CARPETS AND MCSI

4.1 Representations and Warranties Concerning Monterey Carpets. As a material inducement to Chroma, CTI and Dixie to enter into this Agreement and consummate the transactions contemplated hereby, Monterey Carpets makes the following representations and warranties to Chroma, CTI and Dixie as of the date hereof:

4.1.1 Organization of Monterey Carpets. Monterey Carpets is duly organized, validly existing and in good standing under the laws of its state of organization, the State of California.

4.1.2 Authorization of Transaction. Monterey Carpets has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of Monterey Carpets, enforceable in accordance with its terms and conditions. Monterey Carpets is not required to give any notice to, make any filing with or obtain any authorization, consent or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement.

4.1.3 Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (A) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any government, governmental agency or court to which Monterey Carpets is subject or any provision of the charter or bylaws of Monterey Carpets or (B) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to

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accelerate, terminate, modify or cancel or require any notice under any agreement, contract, lease, license, instrument or other arrangement to which Monterey Carpets is a party or by which it is bound or to which any of its assets is subject.

4.1.4 No Brokers’ or Finders’ Fees. Monterey Carpets has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Dixie, Fabrica, Chroma or CTI could become liable or obligated.

4.2 Representations and Warranties Concerning MCSI. As a material inducement to Chroma, CTI and Dixie to enter into this Agreement and consummate the transactions contemplated hereby, Monterey Carpets makes the following representations and warranties to Chroma, CTI and Dixie as of the date hereof:

4.2.1 Organization of MCSI.

(a) MCSI is a corporation duly organized, validly existing and in good standing under the laws of California.

(b) MCSI has no subsidiaries.

4.2.2 No Conflict. The execution and delivery of this Agreement, the consummation of the transactions contemplated herein, and the performance of the covenants and agreements contained herein will not, with or without the giving of notice or the lapse of time, or both, (i) violate or conflict with any of the provisions of any charter document or bylaw of MCSI, (ii) violate, conflict with or result in a breach or default under or cause the termination or acceleration of any term or condition of any mortgage, indenture, contract, license, permit, instrument, trust document, or other agreement, document or instrument to which MCSI is a party or by which MCSI or its properties may be bound, (iii) violate any material provision of law, statute, rule or regulation by which MCSI is a party or by which it or its properties may be bound, (iv) violate or conflict with any material order, judgment, decree or ruling of any governmental authority applicable to MCSI or its assets, or (v) result in the creation or imposition of any lien, claim, charge, restriction, security interest or encumbrance of any kind whatsoever upon any asset of MCSI.

4.2.3 No Required Consents and Approvals. Other than consents and approvals which have been obtained, no consent or approval is required by virtue of the execution hereof or the consummation of any of the transactions contemplated herein to avoid the violation or breach of, or the default under, or the creation of a lien on assets of MCSI pursuant to the terms of, any regulation, order, decree or award of any court or governmental agency or any lease, contract, mortgage, note, license to manufacture and distribute products, or any other instrument to which MCSI is a party or to which its property or any of the Shares is subject.

4.2.4 No Brokers’ and Finders’ Fees. MCSI has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Dixie, Fabrica, Chroma or CTI could become liable or obligated.

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4.3 Representations and Warranties Concerning the Partnership Interest. As a material inducement to Chroma, CTI and Dixie to enter into this Agreement and consummate the transactions contemplated hereby, Monterey Carpets and MCSI make the following representations and warranties to Chroma, CTI and Dixie as of the date hereof:

4.3.1 Ownership. MCSI owns good and marketable record and beneficial title to the Partnership Interest; the Partnership Interest is free and clear of any lien, restriction, claim, equity, charge, option, right of first refusal, or encumbrance, with no defects of title whatsoever. Neither Monterey Carpets nor MCSI owns, directly or indirectly, any other interest in Chroma or Chroma Holdings, other than the Partnership Interest, nor does either of them have any right of any kind to have any such interest issued to them in Chroma or Chroma Holdings. MCSI is the sole beneficial and record owner of the Partnership interest. Except for the sale to Chroma as contemplated herein, neither Monterey Carpets nor MCSI has sold, transferred or otherwise disposed of the Partnership Interest or any right or interest therein, nor are Monterey Carpets or MCSI a party to any agreement obligating any of them to do so, other than the Partnership Agreement and this Agreement. Neither Monterey Carpets nor MCSI has granted, and no person or entity has any right or option to purchase the Partnership Interest or any right therein, except for the rights of Chroma under the Chroma Partnership Agreement and this Agreement.

ARTICLE V

REPRESENTATIONS, WARRANTIES AND COVENANTS OF CTI, CHROMA AND DIXIE

As a material inducement to Monterey Carpets, MCSI and C&A to enter into this Agreement and consummate the transactions contemplated hereby, CTI hereby makes the following representations and warranties to Monterey Carpets and C&A as of the date hereof:

5.1 Authorization. This Agreement has been duly executed and delivered by CTI, Chroma and Dixie and constitutes the legal, valid and binding agreement of CTI, Chroma and Dixie enforceable in accordance with its terms.

5.2 No Conflict. Neither the execution and delivery of this Agreement nor the performance of the transactions contemplated herein by CTI, Chroma and Dixie will violate or conflict with or constitute a default under any mortgage, indenture, contract, agreement, license, permit, instrument or trust or any order or ruling of any governmental authority to which CTI, Chroma and Dixie is a party or by which CTI is bound, or violate any provision of law, statute, rule or regulation to which CTI is subject.

5.3 No Brokers’ and Finders’ Fees. Neither CTI, Chroma and Dixie nor anyone acting on behalf of CTI has done anything to cause or incur any liability to any party for any brokers’ or finders’ fees or the like in connection with this Agreement or any transaction contemplated hereby.

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5.4 No Conflict. The execution and delivery of this Agreement, the consummation of the transactions contemplated herein, and the performance of the covenants and agreements contained herein will not, with or without the giving of notice or the lapse of time, or both, (i) violate or conflict with any of the provisions of any charter document or bylaw of CTI, Chroma and Dixie (ii) violate, conflict with or result in a breach or default under or cause the termination or acceleration of any term or condition of any mortgage, indenture, contract, license, permit, instrument, trust document, or other agreement, document or instrument to which CTI, Chroma or Dixie is a party or by which CTI, Chroma or Dixie or its or their properties may be bound, (iii) violate any material provision of law, statute, rule or regulation by which CTI, Chroma and Dixie is a party or by which it or its or their properties may be bound, (iv) violate or conflict with any material order, judgment, decree or ruling of any governmental authority applicable to CTI, Chroma and Dixie or its or their assets, or (v) result in the creation or imposition of any lien, claim, charge, restriction, security interest or encumbrance of any kind whatsoever upon any asset of CTI, Chroma or Dixie.

5.5 No Required Consents and Approvals. No consent or approval is required by virtue of the execution hereof or the consummation of any of the transactions contemplated herein.

5.6 Approvals of Third Parties; Satisfaction of Conditions to Closing. CTI will use its reasonable, good faith efforts, and will cooperate with Monterey Carpets, to secure all necessary consents, approvals, authorizations and exemptions from governmental agencies and other third parties. CTI will use its reasonable, good faith efforts, to obtain the satisfaction of the conditions specified in Articles VIII, as shall be required in order to enable Monterey Carpets to cause the Closing to occur on the Closing Date.

Notwithstanding the foregoing, Chroma’s representations and warranties shall not be deemed to be breached by any matter with respect to which Monterey Carpets and MCSI have knowledge or reasonably would be deemed to have knowledge.

ARTICLE VI

COVENANTS OF MONTEREY CARPETS

6.1 Pre-Closing Operations. Monterey Carpets hereby covenants and agrees, except as contemplated hereunder, or as consented to in writing by CTI, pending the Closing, that it shall cause the business of MCSI to be operated and conducted in the ordinary course in accordance with prior practices and cause the business of MCSI to be carried on diligently and substantially in the manner as heretofore conducted in the ordinary course of business. Notwithstanding the foregoing, the parties acknowledge that Chroma shall not be obligated to, and shall not, make any distribution of partnership profits whatsoever.

6.2 Access. From the date of this Agreement to the Closing Date, Monterey Carpets shall cause MCSI to (i) provide CTI and its designees with such information as CTI may from time to time reasonably request with respect to MCSI and the transactions contemplated by this

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Agreement, (ii) provide CTI and its designees, officers, counsel, accountants, actuaries and other authorized representatives access during regular business hours and upon reasonable notice to the books, records, offices, personnel, counsel, accountants and actuaries of MCSI as CTI or its designees may from time to time reasonably request, and (iii) permit CTI and its designees to make such inspections thereof as CTI may reasonably request.

6.3 Approvals of Third Parties; Satisfaction of Conditions to Closing. Monterey Carpets will use its reasonable, good faith efforts, and will cooperate with CTI, to secure all necessary consents, approvals, authorizations and exemptions from governmental agencies and other third parties. Monterey Carpets will use its reasonable, good faith efforts to obtain the satisfaction of the conditions specified in Articles IX, as shall be required in order to enable CTI to cause the Closing to occur on the Closing Date.

6.4 Enron Claim. Monterey Carpets agrees to indemnify Chroma for 50% of any final judgment against Chroma arising out of the Enron Claim (as defined below), or 50% of any payment made in any final settlement of the Enron Claim plus 50% of any expense or cost associated with defense of the Enron Claim. As of the date hereof, Enron Energy Services, Inc. (“Enron”) has asserted a claim for amounts asserted to be due under that certain Master Firm Natural Gas Sales Agreement dated September 1, 1999, including Transaction Agreement No. 2, by and between Enron and Chroma but no litigation has been filed asserting such claim (the “Enron Claim”); such claim has been asserted in a letter dated March 21, 2003, addressed to Mr. James Harley, President of Chroma. CTI and Monterey Carpets agree to jointly determine how to proceed in response to the claim, including whether and when to settle the claim, if the parties should agree to do so. During the pendency of the claim, Monterey Carpets agrees to pay to Chroma, monthly, one-half of all fees and expenses of counsel incurred by Chroma.

ARTICLE VII

COVENANTS OF THE PARTIES – TRANSITION OF BUSINESS

Monterey Carpets, MCSI and CTI, respectively, hereby covenant to and agree with one another as follows:

7.1 Pre-Closing Operations of Chroma. MCSI and CTI each hereby covenant and agree, except as contemplated hereunder, or as consented to in writing by the other, pending the Closing, that they shall operate and conduct Chroma’s business only in the ordinary course in accordance with prior practices and carry on Chroma’s business diligently and substantially in the manner as heretofore conducted and not make or institute any methods of sale, lease, management, accounting or operation except in the ordinary course of business consistent with past practice. Notwithstanding the foregoing, the parties acknowledge that Chroma shall not be obligated to, and shall not, make any distribution of partnership profits whatsoever.

7.2 Employment of Skein Dyeing Associates. As of the Effective Time, Monterey Carpets will offer at-will, full-time employment to all associates of Chroma set forth on Schedule 7.2, attached hereto (the “Skein Dyeing Associates”). Such employment shall be offered to each such associate on the same terms and conditions, including (but not limited to)

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hourly wage-rates and employee benefits, as such associates are currently employed by Chroma. Furthermore, Monterey Carpets shall be responsible for any worker’s compensation benefits to which the Skein Dyeing Associates shall be entitled. Such employment, if accepted, shall commence immediately upon the Effective Time. Monterey Carpets will give those employees the notice required by the Worker Adjustment and Retraining Notification Act (the “WARN Act”) as a consequence of any act of the parties contemplated by this Agreement, or otherwise. Monterey Carpets shall indemnify and hold harmless CTI, Dixie, Chroma and Fabrica from any expense, claim or liability resulting from giving the WARN Act Notice or from a failure to give any such notice and any failure to employ any such Skein Dyeing Associate as required by this Agreement. Additionally, Monterey Carpets shall be responsible for any severance cost resulting from Chroma’s termination of the Skein Dyeing Associates pursuant to this Agreement, and any such severance cost resulting from the termination of any such Skein Dyeing Associate by Monterey Carpets subsequent to the employment of such associates by Monterey Carpets, pursuant to this Agreement.

7.3 Lease of Skein Dyeing Equipment. As of the Effective Time, Monterey Carpets shall ease all skein dyeing equipment owned by Chroma and used in its skein dyeing operations (the “Skein Dyeing Equipment”) from Chroma. A list of such Skein Dyeing Equipment is set forth on Schedule 7.3.1. In consideration of such lease, Monterey Carpets shall pay to Chroma an amount per pound equal to the Discounted Partnership Pricing (as defined below) for each pound of yarn skein dyed by Monterey Carpets utilizing such Skein Dyeing Equipment. Calculation of the per pound Discounted Partnership Pricing shall be completed monthly and paid by Monterey Carpets to Chroma as soon as reasonably practicable following such calculation. The term of such lease shall be for a period of six (6) months from the Effective Time. At the end of such term, or at any time during the term, at the election of Monterey Carpets, Monterey Carpets may purchase the Skein Dyeing Equipment at a price to be mutually agreed upon by Chroma and Monterey Carpets. Monterey Carpets may purchase some or all of the Skein Dyeing Equipment pursuant to this election, but upon electing to purchase such equipment Monterey Carpets shall be obligated to remove it at its sole cost and expense as soon as reasonably practicable. For the purposes of this Agreement, “Discounted Partnership Pricing” shall mean an amount equal to the customary per pound Chroma partnership pricing as set forth on Schedule 7.3.2 less a discount equal to the total per pound labor charge for such skein dyed yarn as set forth on Schedule 7.3.2. Chroma, at its expense, shall continue to supply dyes, chemicals and other materials used in the yarn conversion process, consistent with past practices. All yarn that is skein dyed by Monterey Carpets utilizing the Skein Dyed Equipment shall be the sole responsibility of Monterey Carpets, and none of Dixie, Chroma, CTI or Fabrica makes, shall make or shall be deemed to have made any representation or warranty with respect thereto, nor shall any of Dixie, Chroma, CTI, or Fabrica have any liability to Monterey Carpets for the condition, quality or merchantability of such skein dyed yarn to Monterey Carpets or to any purchaser or user of product incorporating such skein dyed yarn. Monterey Carpets agrees to indemnify and hold harmless Dixie, Chroma, CTI, and Fabrica from any cost, damage, expense, liability or claim whatsoever resulting from any claim asserted or based upon the condition, quality, merchantability or use of such skein dyed yam. Upon termination of Chroma’s skein dyeing services, Monterey Carpets will purchase all remaining supplies, dyes, chemicals and other such materials supplied by Chroma pursuant to this Agreement, at their fair market value.

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7.4 Agreement. The parties hereto agree to cooperate with one another to the extent necessary to move or relocate equipment, including sample racks, cutting tables and other equipment, in order to facilitate the orderly transition of business contemplated by this Agreement. The parties hereto agree that Royce Renfroe and Ralph Grogan shall be responsible for negotiating the details of all such matters. Each party shall be responsible for the expense of moving or relocating its own equipment to the extent any such movement or relocation is necessitated by the parties’ agreement.

7.5 Intentionally Omitted.

7.6 Participation of Harley in Benefit Plans. Chroma agrees to permit Jim Harley to participate in all benefit plans maintained and continued by Chroma until December 31, 2004, so long as Mr. Harley is employed by Chroma. In addition, Chroma agrees to be responsible for the determination and payment of any bonus to Mr. Harley for the fiscal year ending in 2004.

7.7 Adherence to Chroma Safety Standards. The Skein Dyeing Associates and any other associates employed by Monterey Carpets will be working in close proximity to Chroma employees. Accordingly, to provide a safe working environment with consistent safety rules, Monterey Carpets agrees that all associates employed by Monterey Carpets and working in the Chroma facilities shall adhere to and follow all safety standards established by Chroma. Monterey Carpets agrees to enforce these safety standards in the same manner and to the same degree as Chroma enforces such standards with its associates.

7.8 Administrative Services and IT Equipment. Monterey Carpets agrees to leave all phone, voicemail, networking and server based equipment in place for a period of one year from the Effective Time (the “Transition Period”); provided, however, Monterey Carpets and CTI may jointly agree to the earlier or phased-out removal of such equipment to the extent practicable. During the Transition Period, IT personnel of CTI, Fabrica and Monterey Carpets shall work jointly to move data and e-mail services for the Chroma business to IT Systems maintained by Dixie. Monterey Carpets agrees to provide personnel and payroll services, shipping services and other miscellaneous services and supplies to Chroma during the Transition Period, in addition to IT services, as such services have heretofore been provided, until Monterey Carpets terminates such functions. Monterey Carpets shall continue to charge Chroma for such services at the rates set forth on Schedule 7.8, and, to the extent such services are phased-out by agreement of the parties, the charge for such services shall be proportionately reduced. At Closing, CTI or its designee may hire Gene Farnell. Thereafter, for so long as Mr. Farnell is employed by CTI or its designee, and, in addition to any other pro-rated cost provided for hereunder, Monterey Carpets agrees that it shall reimburse CTI or its designee monthly in an amount to be determined by multiplying Mr. Farnell’s salary cost plus benefits ($8,442/month) times a percentage equal to the percentage of time Mr. Farnell devotes attention to the skein dyeing and other services continued by Monterey Carpets. CTI may agree with Monterey Carpets to purchase some of the IT equipment (including phone, voicemail, servers and other data processing and communications equipment) utilized during the Transition Period, such agreement to include pricing and other terms of purchase. At the election of CTI, Monterey Carpets shall assign to CTI any contracts to which it is a party (to the extent such contracts are assignable) which CTI deems necessary to the continued provision of the services to be provided by it hereunder.

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7.9 Payment to CTI. At the Effective Time, Monterey Carpets will pay CTI Two Hundred Thousand Dollars ($200,000) to assist it in meeting the expenses and costs resulting from the termination of the Dyeing and Finishing Agreement. It is acknowledged and agreed by the parties that Monterey Carpets shall be continually reducing the amount of dyeing and finishing business with Chroma during the Transition Period, and that it is estimated that all of Monterey Carpets’ dyeing and finishing volume will be moved from Chroma by early 2005. It is agreed that the Dyeing and Finishing Agreement shall be terminated effective as of the date hereof and that all of Monterey Carpets’ obligations under the Dyeing and Finishing Agreement shall be superseded and satisfied by fulfillment of the terms and conditions of this Agreement.

7.10 Pricing for Monterey Carpets. From the date hereof and until January 31, 2005, Chroma will offer partner pricing to Monterey for all dyeing and finishing services performed by Chroma for Monterey Carpets, in accordance with the pricing schedule attached hereto as Schedule 710. After January 31, 2005, Chroma shall provide dyeing and finishing services to Monterey Carpets until completion of the Transition Period, at commercially reasonable prices mutually agreed to by and between the parties. All such dyeing and finishing services, other than the skein dyeing services shall be provided by Chroma to Monterey Carpets on the terms and subject to the conditions set forth in Sections 1.2, 3.1, 4, 5, 7 and 8 of the Dyeing and Finishing Agreement, although the Dyeing and Finishing Agreement is deemed fulfilled and superseded by this Agreement.

ARTICLE VIII

CONDITIONS TO MONTEREY CARPETS’ OBLIGATIONS

Each of the obligations of Monterey Carpets to be performed hereunder shall be subject to the satisfaction at or prior to the Closing Date of each of the following conditions:

8.1 Purchase Price. Chroma shall have tendered payment of the purchase price in accordance with Section 3.1 at the Closing.

8.2 Accuracy of Representations and Warranties. The representations and warranties of Dixie, CTI and Chroma set forth in Article V shall have been true and correct in all material respects on the date made, and shall be true and correct on the Closing Date.

8.3 Performance of Covenants. CTI shall have performed and complied with all covenants, obligations, and conditions required to be performed or complied with by CTI on or before the Closing Date pursuant to this Agreement.

8.4 Opinion of Counsel to CTI. Monterey Carpets shall have received from counsel for CTI an opinion, dated the Closing Date, in the form of Exhibit A.

8.5 Documents Satisfactory in Form and Substance. All agreements, certificates, opinions and other documents delivered by CTI to Monterey Carpets hereunder shall be in form

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and substance reasonably satisfactory to counsel for Monterey Carpets, in the exercise of such counsel’s reasonable judgment.

ARTICLE IX

CONDITIONS TO CTI’S OBLIGATIONS

The obligations of CTI be performed hereunder shall be subject to the satisfaction on or before the Closing Date of each of the following conditions:

9.1 Accuracy of Representations and Warranties. The representations and warranties of Monterey Carpets and MCSI set forth in Article IV shall have been true and correct in all material respects on the date made and shall be true and correct on the Closing Date.

9.2 Performance of Covenants. Monterey Carpets and MCSI shall have performed and complied with all covenants, obligations, and conditions required to be performed or complied with by Monterey Carpets and MCSI on or before the Closing Date pursuant to this Agreement.

9.3 Opinion of Counsel to Monterey Carpets. CTI shall have received from Womble Carlyle Sandridge & Rice, PLLC, counsel to Monterey Carpets, an opinion, dated the Closing Date, in the form of Exhibit B.

9.4 Documents Satisfactory in Form and Substance. All agreements, certificates, opinions and other documents delivered by Monterey Carpets and MCSI to CTI hereunder shall be in form and substance reasonably satisfactory to counsel for CTI, in the exercise of such counsel’s reasonable judgment.

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ARTICLE X

CLOSING

10.1 Closing Date. Subject to the satisfaction or waiver of the conditions set forth herein, the closing of the purchase and sale of the Shares (the “Closing”) shall take place at 1:00 p.m. Eastern Standard Time on November 8, 2004, at the offices of Shumacker Witt Gaither & Whitaker, P.C., 1100 SunTrust Bank Building, 736 Market Street, Chattanooga, Tennessee 34702, or at such other date, time and place as the parties shall agree. The date of the Closing is referred to herein as the “Closing Date.”

10.2 Closing Requirements. At the Closing the following shall occur:

(a) The parties hereto shall exchange and deliver the certificates and other evidence as to the accuracy of the representations and warranties contained herein, and the compliance with the covenants and agreements contained herein, which are required to be delivered by such party as herein provided.

(b) MCSI shall have delivered the Assignment of Partnership Interest in the form attached hereto as Exhibit C.

(c) Counsel for Monterey Carpets shall deliver to CTI the opinions specified in Section 9.3 and counsel for CTI shall deliver to Monterey Carpets the opinion specified in Section 8.4.

(d) All other documents, instruments; and writings required to be delivered by a party at or prior to the Closing Date pursuant to this Agreement will be delivered to the party entitled thereto.

ARTICLE XI

TERMINATION PRIOR TO CLOSING

11.1 Termination of Agreement. This Agreement may be terminated at any time prior to the Closing:

(a) At the election of CTI, at or prior to Closing, if any of the conditions precedent set forth in Article IX have not been fulfilled on or before the Closing Date; or

(b) At the election of Monterey Carpets, at or prior to Closing, if any of the conditions precedent set forth in Article VIII have not been fulfilled on the Closing Date; or

(c) By the mutual written consent of CTI and Monterey Carpets.

11.2 Termination of Obligations. Termination of this Agreement pursuant to this Article XI shall terminate all obligations of the parties hereunder.

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ARTICLE XII

INDEMNIFICATION

12.1 Mutual Indemnification Obligation. In addition to any other specific requirement for indemnification set forth herein, Monterey Carpets and MCSI hereby agree to indemnify and hold harmless Chroma and CTI, and Chroma and CTI hereby agree to indemnify and hold harmless Monterey Carpets, against any and all liability, claims, damages, losses, costs or expenses, including reasonable attorneys’ fees (“Losses”), relating to any breach of, noncompliance with or misrepresentation by such indemnifying party contained in any representation, warranty or covenant contained herein.

ARTICLE XIII

GUARANTIES

13.1 C&A Guaranty. C&A hereby irrevocably and unconditionally guarantees to Chroria and CTI all obligations and agreements to be performed by Monterey Carpets or MCSI hereunder, including, but not limited to, any obligation of indemnification (the “Monterey Carpets Obligations”). The guaranty provided by C&A pursuant to this Section 13.1 is a guaranty of payment and performance, not merely of collection. If Monterey Carpets or MCSI shall fail timely to perform or to pay any Monterey Carpets Obligation hereunder, C&A shall pay or perform such obligation as and when due. C&A hereby waives (i) promptness, diligence, notice, disclosure, demand for payment, presentment, protest and dishonor, and (ii) any right to force CTI to proceed first, concurrently or jointly against Monterey Carpets, MCSI, any other guarantor, surety or other co-obligor.

13.2 Dixie Guaranty. Dixie hereby irrevocably and unconditionally guarantees to Monterey Carpets all obligations and agreements to be performed by CTI hereunder, including, but not limited to, any obligation of indemnification (the “CTI Obligations”). The guaranty provided by Dixie pursuant to this Section 13.2 is a guaranty of payment and performance, not merely of collection. If CTI shall fail timely to perform or to pay any CTI Obligation hereunder, Dixie shall pay or perform such obligation as and when due. Dixie hereby waives (i) promptness, diligence, notice, disclosure, demand for payment, presentment, protest and dishonor, and (ii) any right to force Monterey Carpets to proceed first, concurrently or jointly against CTI, any other guarantor, surety or other co-obligor.

ARTICLE XIV

MISCELLANEOUS

14.1 Survival of Representations and Warranties. The representations and warranties in this Agreement, or in any exhibit, list, instrument or document delivered in connection herewith or therewith shall survive the Closing.

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14.2 Entire Agreement. This Agreement (including the Schedules and Exhibits and their underlying executed agreements), constitutes the sole understanding of the parties with respect to the subject matter hereof. No amendment, modification or alteration of the terms or provisions of this Agreement shall be binding unless the same shall be in writing and duly executed by the parties hereto.

14.3 Parties Bound by Agreement; Successors and Assigns. The terms, conditions and obligations of this Agreement shall inure to the benefit of and be binding upon the parties hereto and the respective successors and assigns thereof.

14.4 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument.

14.5 Modification and Waiver. Any of the terms or conditions of this Agreement may be waived in writing at any time by the party which is entitled to the benefits thereof. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provision hereof (whether or not similar).

14.6 Expenses. Except as otherwise provided herein, Monterey Carpets and CTI shall each pay all costs and expenses incurred by them or it or on their or its behalf in connection with this Agreement and the transactions contemplated hereby, including fees and expenses of their or its own financial consultants, accountants and counsel.

14.7 Notices. Any notice, request, instruction or other document to be given hereunder by any party hereto to any other party hereto shall be in writing and delivered by telecopy transmission or personally by any overnight delivery service, fees prepaid,

if to Monterey Carpets to :

Leonard F. Ferro

Chief Financial Officer

311 Smith Industrial Boulevard

Dalton, Georgia 30722

Fax: 706-259-2125

with a copy to:

G. Donald Johnson Esq.

Womble Carlyle Sandrige & Rice, PLLC

One Atlantic Center, Suite 3500

1201 W. Peachtree St.

Atlanta, GA 30309

Telecopy Number: 404.870-4878

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if to CTI to:

CTI

c/o The Dixie Group, Inc.

2208 South Hamilton Street

Dalton, GA 30721-4974

Attn: Mr. Gary A. Harmon

Telecopy Number: 706-876-5896

with a copy to:

John F. Henry, Jr., Esq.

Shumacker Witt Gaither & Whitaker, P.C.

1100 SunTrust Bank Building

736 Market Street

Chattanooga, TN 37402

Telecopy Number: 423-266-4138

or at such other address or number for a party as shall be specified by like notice. Any notice which is delivered personally or by telecopy transmission in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon the business day following the date delivery is made.

14.8 Further Cooperation. From and after the Closing Date, the parties will each take all such action and deliver all such documents as shall be reasonably necessary or appropriate to confirm and vest title to the Shares in CTI.

14.9 Governing Law; Construction. This Agreement is executed by the parties in, and shall be construed in accordance with and governed by the laws, of the State of Georgia without giving effect to the principles of conflicts of law thereof. No provision of this Agreement or any related document shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party’s having or being deemed to have structured or drafted such provision.

14.10 Submission to Jurisdiction. For purposes of disputes arising under this Agreement, the parties hereto submit themselves to the jurisdiction of the state and federal courts located in the Northern District of Georgia, provided however, that nothing contained herein shall be deemed a waiver by either party of any right it may have to remove a cause of action brought in state court to a federal court Each of the parties hereby consents to the service of process by registered mail at its address set forth above and agrees that its submission to jurisdiction and its consent to service of process by mail is made for the express benefit of the other party.

14.11 Public Announcements. Except as otherwise required by law, no public announcement shall be made with regard to the transactions contemplated by this Agreement without the prior written consent (as to form and content and timing) of Monterey Carpets, MCSI and CTI, which consent shall not be unreasonably withheld.

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14.12 No Third-Party Beneficiaries. With the exception of the parties to this Agreement, there shall exist no right of any person to claim a beneficial interest in this Agreement or any rights occurring by virtue of this Agreement.

14.13 References. Whenever reference is made in this Agreement to any Article, Section, Schedule or Exhibit, such reference shall be deemed to apply to the specified Article or Section of this Agreement or the specified Schedule or Exhibit to this Agreement.

[The remainder of this page was intentionally left blank.]

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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed on its behalf on the date indicated.

DIXIE:
THE DIXIE GROUP, INC.
By:	/s/ Gary A. Harmon
	Gary A. Harmon, Chief Financial Officer and Vice President

MONTEREY CARPETS:

MONTEREY CARPETS, INC.

By:

Name:

Title:

MCSI:

MONTEREY COLOR SYSTEMS, INC.

By:

Name:

Title:

C&A:

COLLINS & AIKMAN FLOORCOVERINGS, INC.

By:

Name:

Title:

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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed on its behalf on the date indicated.

DIXIE:
THE DIXIE GROUP, INC.
By:
	Gary A. Harmon Chief Financial Officer and Vice President

MONTEREY CARPETS:
MONTEREY CARPETS, INC.
By:	/s/ Leonard F. Ferro
Name:	Leonard F. Ferro
Title:	Vice President and Chief Financial Officer

MCSI:
MONTEREY COLOR SYSTEMS, INC.
By:	/s/ Leonard F. Ferro
Name:	Leonard F. Ferro
Title:	Vice President and Chief Financial Officer

C&A:
COLLINS & AIKMAN FLOORCOVERINGS, INC.
By:	/s/ Leonard F. Ferro
Name:	Leonard F. Ferro
Title:	Vice President and Chief Financial Officer

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CHROMA:
CHROMA SYSTEMS PARTNERS
By:	/s/ Jim Harley
Name:	Jim Harley
Title:	President

CTI:

CHROMA TECHNOLOGIES, INC.

By:

Name:

Title:

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CHROMA:

CHROMA SYSTEMS PARTNERS

By:

Name:

Title:

CTI:
CHROMA TECHNOLOGIES, INC.
By:	/s/ Gary A. Harmon
Name:	Gary A. Harmon
Title:	President

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EX-31.1

Exhibit 31.1

CERTIFICATION

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

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

2. Based on my knowledge, this 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 period covered by this report;

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

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Edgar M. (Mac) Bridger

Edgar M. (Mac) Bridger, Chief Executive Officer

(Principal Executive Officer)

December 10, 2004

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Leonard F. Ferro, Vice President and Chief Financial Officer, certify that:

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

2. Based on my knowledge, this 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 period covered by this report;

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

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

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Leonard F. Ferro

Leonard F. Ferro, Vice President and Chief Financial Officer

(Principal Financial Officer)

December 10, 2004

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the Quarterly Report on Form 10-Q of Collins & Aikman Floorcoverings, Inc. (the “Corporation”) for the quarterly period ended October 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, the Chief Executive Officer and Chief Financial Officer of the Corporation, certify that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Edgar M. (Mac) Bridger

Edgar M. (Mac) Bridger

Chief Executive Officer

/s/ Leonard F. Ferro

Leonard F. Ferro

Vice-President and

Chief Financial Officer