10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended January 27, 2007

¨ 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)

(706) 259-9711

(Registrant’s telephone number, including area code)

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

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

* The Issuer filed a registration statement on Form S-4 (Registration No. 333-88212) effective pursuant to the Securities Act of 1933, as amended, on August 12, 2002. Accordingly, the Issuer files this report pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended, and Rule 15(d)-1 of the regulations thereunder.

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined by Rule 12b-2 of the Act). Large accelerated filer  ¨    Accelerated filer  ¨    Non-Accelerated filer  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 9, 2007, 1,000 shares of the Registrant’s common stock, par value $.01 per share, were outstanding and held entirely by Tandus Group, Inc. None of the Registrant’s common stock was held by non-affiliates.

Documents incorporated by reference: None.

TABLE OF CONTENTS

			Page
Cautionary Statement Regarding Forward-Looking Statements
Part I.
	Item 1.	Business	1
	Item 1A.	Risk Factors	8
	Item 1B.	Unresolved Staff Comments	9
	Item 2.	Properties	9
	Item 3.	Legal Proceedings	10
	Item 4.	Submission of Matters to a Vote of Security Holders	10
Part II.
	Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	11
	Item 6.	Selected Financial Data	12
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	24
	Item 8.	Financial Statements and Supplementary Data	25
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	63
	Item 9A.	Controls and Procedures	63
	Item 9B.	Other Information	63
Part III.
	Item 10.	Directors, Executive Officers and Corporate Governance	64
	Item 11.	Executive Compensation	67
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	74
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	76
	Item 14.	Principal Accountant Fees and Services	78
Part IV.
	Item 15.	Exhibits and Financial Statement Schedules	79
Signatures

Cautionary Statement Regarding Forward-Looking Statements

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

PART I

Item 1. Business

All references in this Form 10-K to the “Company” refer to Collins & Aikman Floorcoverings, Inc. and its subsidiaries.

General

Collins & Aikman Floorcoverings, Inc., a Delaware Corporation formed in 1995, is a manufacturer of floorcovering products principally for the North American specified commercial carpet market. It 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”), specifically OCM Principal Opportunities Fund II, L.P. (the “Oaktree Fund”) and BancAmerica Capital Investors II, L.P. (the “B of A Fund”), respectively, control a majority of the outstanding capital stock of Tandus Group.

The fiscal year of the Company ends on the last Saturday of January. Fiscal years are identified according to the calendar year in which the majority of the months fall. Fiscal years 2006, 2005 and 2004 were 52-week years which ended on January 27, 2007, January 28, 2006 and January 29, 2005, respectively.

The Company’s floorcovering products include (i) six-foot roll carpet and modular carpet tile and (ii) high-style tufted and woven broadloom carpets. 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. The Company is headquartered in Georgia, with additional manufacturing locations in Canada and China.

The Company’s C&A brand products, six-foot roll carpet and modular carpet tile, are highly regarded as a result of their long-term performance, comfort under foot, installation ease, long useful life and advanced backing technology, which includes our RS “peel & stick” adhesive system for structure-backed product installation, and our ER3 carpet recycling technology.

The Company’s Monterey brand is a known design leader in the high-style, fashion-oriented sector of the commercial broadloom carpet market due to its creative designs and intricate patterns in a wide variety of colors, textures, pile heights and densities. The brand has been acknowledged on numerous occasions with various awards for its design leadership.

The Company’s Crossley brand is a recognized design leader in Canada in the tufted and woven broadloom commercial carpet markets. The Crossley brand uses crossweave looms and state of the art tufting technology to produce high-quality woven and tufted products in a wide variety of patterns and prices to meet the needs of interior design professionals, flooring contractors and end users.

The U.S. commercial carpet market is comprised of the specified and non-specified segments. The Company focuses on the specified commercial carpet market, which makes up the majority of the total U.S. commercial carpet market. In the specified commercial carpet market, products are manufactured to the specifications of architects, designers and owners, as compared to the non-specified market in which products are purchased off-the-shelf. The key competitive factors in the specified carpet market are product durability, long-term performance, product design, service and price. The Company believes it is well-positioned to capitalize on trends within the specified commercial carpet market, including (1) six-foot roll carpet continuing to gain market share from other floorcoverings in end markets in which it has distinct performance advantages, such as ease of maintenance, long-term performance and longer useful life; (2) modular carpet tile increasingly being used instead of other flooring surfaces due to increased raised flooring applications, the continuing trend toward modular furniture systems, greater use of modular tile as a design tool, and acceptance of tile in new markets; and (3) increasing customer demand for high-style broadloom carpet with complex patterns and textures.

During the fourth quarter of fiscal 2006, the Company announced its intent to exit manufacturing in the United Kingdom. The Company subsequently entered into a definitive agreement to sell its wholly-owned United Kingdom subsidiary, Tandus Europe Ltd., to Interior Projects Solutions Limited. The transaction closed during the first quarter of fiscal 2007. The subsidiary is accounted for as an asset held for sale at January 27, 2007 and is reported as discontinued operations in the consolidated financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Notes to Consolidated Financial Statements” contained herein in Items 7 and 8 for further discussion relative to discontinued operations.

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Products

The Company designs, manufactures and markets a comprehensive package of complementary products under the C&A, Monterey and Crossley brands, including six-foot roll carpet, modular carpet tile and woven and tufted broadloom carpets. With a portfolio of products available in a wide variety of colors, textures, pile heights, densities and prices, the Company is able to market itself as a one-stop solution for specified commercial carpet. The Company believes that each of its products offers distinctive characteristics for use and application. The Company believes its ability to offer a complete package of product offerings is an advantage since each product provides distinct features and benefits to each application.

Six-Foot Roll Carpet. The Company’s C&A brand holds a leading market position in structure-backed, six-foot roll carpet. Six-foot roll carpet provides performance advantages over twelve-foot broadloom carpet and hard surface flooring and is used primarily in applications that require (i) long-term appearance retention, (ii) ease of maintenance and (iii) comfort under foot. The Company’s six-foot roll carpet utilizes the Powerbond and ethos backing technologies and the patented RS “peel and stick” installation system.

Modular Carpet Tile. The Company believes it was the first manufacturer in North America to introduce modular carpet tile technology and is among the leading brands within the domestic modular carpet tile market. The Company’s modular carpet tile products are offered in a variety of sizes to accommodate a range of domestic and international requirements. The Company’s C&A brand carpet tile is being made with ER3, a patented recycled content backing.

Broadloom Carpet. The Monterey and Crossley brands are recognized design leaders in the high-style, fashion-oriented sector of the commercial broadloom carpet market. Sold in twelve-foot rolls, Monterey broadloom is tufted, while Crossley provides both tufted and woven broadloom. In woven broadloom carpet, yarn is woven together to form a single integrated fabric and is distinguishable from tufted broadloom in which yarn is sewn into a primary backing with the later addition of a second backing. Broadloom is particularly suited for fashionable designs and stylish interiors as its width provides a broad area upon which creative designs and intricate patterns can be displayed in a wide variety of colors, textures, pile heights and densities. Specified broadloom carpet is primarily used in end markets where aesthetics and style are the drivers rather than durability or long-term appearance retention. In general, broadloom carpet is more frequently replaced than six-foot roll goods or carpet tile because of its prevalence in spaces which are regularly renovated in order to reflect current fashion trends and styles. The Company’s broadloom carpet utilizes the LifeLONG high-performance, recycled content backing.

Product Features

Powerbond. In 1967, the Company’s C&A brand introduced Powerbond, the industry’s first vinyl cushioned backing system. This closed-cell backing technology exhibits superior durability and cleaning characteristics and reduced seam visibility. Powerbond combines the best attributes of hard surfaces (longer useful life and ease of maintenance) and carpet floorcoverings (comfort, acoustics and aesthetics). It eliminates problems associated with traditional broadloom carpet, including delamination (separation of carpet backing), zippering and unraveling. In addition, these products are installed using chemically welded seams rather than conventional glued seams to provide a homogeneous, impermeable moisture barrier. Other Powerbond features include its ease of repair, long-term appearance retention, a 50% to 100% longer useful life than conventional broadloom carpet and 15 to 25 year non-prorated warranty against delamination, loss of cushion resiliency and watermarking.

RS. In 1988, the Company introduced its RS technology, a patented releasable “peel & stick” adhesive system for Powerbond product installation, which dramatically simplifies installation. The RS technology enables products to be bonded to a surface without the use of wet adhesives thus minimizing disruption to customers during the installation process. Conventional installations with wet adhesives normally require significant downtime for the adhesive to cure prior to installation. The RS technology also addresses carpet-related indoor air quality concerns by eliminating the fumes typically associated with wet adhesives. The RS technology minimizes disruption to usable space, which is critical in each of the Company’s end markets.

ER3. Introduced in 1994, ER3 is a patented 100% recycled content backing for modular carpet tile produced from both post-consumer and post-industrial carpet waste. This closed-loop system (waste-to-product) allows the Company to take used carpet tile (including tile manufactured by other carpet producers) from its customers and use it as raw material for producing new carpet tile. This system eliminates our customers’ disposal costs and keeps waste out of landfills. The 100% recycled content backing results in an overall 34% to 51% total recycled content carpet, when adding in the face fiber weight.

ethos. In 2004, the Company introduced ethos, an evolutionary, recycled-content carpet backing, which is a non-chlorinated, high-performance backing for commercial carpet that provides all of the durability attributes of polyvinyl chloride, or PVC. It is made

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from the polyvinyl butyral film reclaimed from recycled laminated safety glass. There was no previous commercial use for this used material that accounts for millions of pounds of landfill waste. The ethos backing represents an alternative to PVC, ethylene vinyl acetate, polyurethane, and polyolefin carpet backings. Additional features are extremely low volatile organic compound emissions, permanent closed cell cushion for durability and lifelong resilience, molecularly bonded seams and repairs, better comfort under foot than conventional cushion or non-cushion backings, better rollability than alternative cushion backings, and better flexibility for ease of installation and positive conformity to the floor. The ethos backing is 100% recyclable into new carpeting.

LifeLONG. In 2006, the Company introduced LifeLONG, a cost-effective, high-performance, recycled content carpet backing for broadloom products. LifeLONG backings contain from 22% to 37% recycled content, depending on style. As a complement to LifeLONG, the Company also introduced Greenbond B-19 during 2006. Greenbond B-19 is a fast-grabbing commercial carpet adhesive that contains 20% post-consumer recycled content.

Crossley Weaving Heritage. Weaving continues to be an important differentiation for the Company in high-end markets. Woven fabrics are unique in construction and valued by professional designers as a result of their more refined styling capability and pattern flexibility. Woven carpets are a single, integrated fabric that offer strength, stability and locked-in-yarns to prevent zippering or pulling. Today, the Company is one of only a few manufacturers in North America with weaving capability.

End Markets

Corporate. The Company offers a complete package of product offerings that addresses virtually every carpeting need of the corporate facility manager and their interior designers and architects, including six-foot roll carpet, modular carpet tile and tufted and woven broadloom carpets. The Company has a dedicated sales force that focuses exclusively on marketing its brands to corporate end use markets. This group works with the individual brands to develop flooring solutions for corporate facility managers, architects and designers. The Company has focused on projects where it tends to excel on the basis of product durability, appearance retention, production design and service rather than pricing. As part of its strategy to increase penetration of this market, the Company has a national accounts program that targets the country’s largest corporations. This group focuses on Fortune 1000 corporations by developing relationships at the senior levels in facility management and purchasing.

Education. The education market has been a primary focus for the C&A brand since the development of Powerbond in 1967. Powerbond’s long-term appearance retention characteristics have been the principal factor behind its success in this market, as customers tend to be particularly sensitive to longer useful life, comfort, acoustics and ease of maintenance. The Powerbond product in many of these installations has been in use for more than 20 years. The Company’s education market includes primary and secondary school markets in addition to the college and university market.

Healthcare. We believe that Powerbond RS is particularly well suited to the healthcare market because of its moisture impermeability and quick, safe installation. Powerbond RS, which is installed without wet adhesives, facilitates use immediately following installation, a critical concern within the healthcare market, and its moisture impermeability and welded seams make it easy to maintain. Long-term care is the fastest growing segment within the healthcare market due to the compelling demographics of an aging U.S. population. These facilities strive to create a home-like environment for residents, which provides an opportunity for the Company to promote all its products, including the broadloom brands.

Government. The Company markets and sells to federal, state and local governments. The Company is a supplier to the U.S. General Services Administration, which establishes product categories and related minimum product specifications for various budget levels and aesthetic requirements. State and local governments purchase floorcovering products independently through contracts with approved suppliers. The Company is currently an approved supplier to several states and municipalities. The Company believes that its success in the government market is due in part to its environmental initiatives, including both the Powerbond RS “peel & stick” backing system and its ER3, ethos and LifeLONG recycled content product offerings.

Retail Stores. The Company focuses on major retail chains, which have the potential for large, nationwide volumes. This segment requires a diverse product offering, as needs vary from high-end boutiques to mass merchandisers. The Company believes that its products are particularly suited to fulfill these needs and provide the added advantage of reducing potential “slip and fall” liability. A significant portion of these sales is managed by the Company’s Source One department, which arranges turnkey product installation for its customers. These installation services and comprehensive project management capabilities are critical to meeting tight construction schedules inherent in the retail market.

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International Markets. The Company participates in the Asian market through its production facility located outside Shanghai in Suzhou, China. The Company maintains sales personnel and distributor relationships that allow the Company to distribute products around the world and strengthen its relationships with the U.S.-based multinational corporate accounts. The Company intends to continue to grow its distributors and sales personnel in strategic international geographic locations to increase its worldwide sales of its products.

The Company exited its manufacturing operations in the United Kingdom through the sale of its subsidiary, Tandus Europe Ltd., at the beginning of fiscal 2007. As part of the sale agreement, the purchaser became the exclusive distributor of the Company’s products in several European countries provided that certain minimum performance and other requirements are satisfied. Management believes this distribution arrangement will allow the Company to reach significantly more of the European market than was possible with its internal sales force.

Sales and Segmentation Strategy

The Company utilizes a segmented sales and marketing strategy to target the specific needs of the customers in each of its end markets. This segmented marketing strategy requires each sales person to develop an expertise in a specific end market, which generally results in greater customer-focused service, comprehensive market coverage and increased sales productivity.

The Company’s C&A, Monterey and Crossley brands provide custom designed products and promotional materials for each end market that highlight the advantages of its products in several key performance categories. Each end market is sensitive to different issues and places value on different product characteristics. The Company has developed its proprietary products and technical innovations in response to the needs of its target customers and segments. While the Company will assist a distributor in order to arrange for delivery and sale, the Company’s primary contact with the customer or customer representative is through its sales force and not through an intermediary. This enables the Company to continue to customize its products and services to respond to the specific needs of the customer. The Company has an in-house design team for each brand that is dedicated to developing new, innovative designs for each primary end market.

Across the brands, the majority of sales are specified by the facility owner or a professional architect or designer. Because each market has distinct performance, design and installation requirements, the Company’s account managers focus on educating the facility owners and architect and design professionals on (i) the technical specifications and proprietary advantages of each product, (ii) unique design capabilities for specific market segments, (iii) environmental initiatives and (iv) available unique, value-added services. The Company believes this end market-oriented strategy has resulted in greater visibility for its brands.

Distribution

The Company sells and distributes its products through three primary channels: direct to the end customer, Source One and dealers. Although a majority of invoicing is through floorcovering dealers, the Company’s primary marketing efforts are focused on the end customer and professional designers and architects who create specifications for the Company’s products. By focusing on the needs of the end customer, the Company’s distribution strategy enables the sales and marketing personnel to establish multiple relationships within specific segments and regions. This flexible distribution philosophy allows the needs of the customer to be the priority rather than mandating from whom the customers can purchase products. The distribution channels are outlined below.

Direct. Direct distribution allows customers to purchase floorcovering products directly from the Company. Account managers work directly with the customer to advise, educate and make recommendations for the selection and specification of the right product for the particular application. The customer is responsible for sub-contracting the project management and installation.

Source One. Source One, an in-house project management department, was the first single-source coordination and turnkey project management service offered by a floorcoverings manufacturer. The department was established to provide a “one phone call,” “single-source” project management service to meet the specific needs of the customer base. The service includes facility measurement, project coordination, order entry, delivery and installation of a wide range of interior finishes from the Company’s broad product offerings. A network of over 300 certified installers and strategic dealer partnerships throughout the United States provides installation.

Dealers. The carpet industry has traditionally sold products to customers through the use of local dealers, who typically broker products from manufacturers and subcontract installation through local installers. Many customers request that the product be

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delivered through a local dealer who provides a range of project management services, including carpet removal, staging and installation services.

Backlog

The backlog of unshipped orders as of January 27, 2007 was approximately $16.2 million. Historically, backlog is subject to significant fluctuations due to the timing of orders for individual large projects.

Product Development and Design

Leadership in product development and design is important in the commercial floorcovering marketplace as designers and customers seek up-to-date product aesthetics. Unlike many competitors, which manufacture standard products that serve a wide cross-section of markets, the Company develops products tailored to the requirements of specific market segments. This process begins with feedback from leading designers and customers in each segment relating to product features such as color, texture and pattern. This marketplace input is vital as the product/styling needs vary for each end market. The product development group is integrated with the sales organization and customer base, which increases the effectiveness of the product development process.

A portion of the Company’s sales involve custom colors or designs requiring accurate interpretation of customer needs and timely conversion into a sample fabric. Each manufacturing facility has dedicated sample equipment that facilitates quick turnaround of custom design requests.

Competition

The commercial floorcovering industry is highly competitive. The C&A brand competes with other brands of structure-backed carpet, as well as twelve-foot broadloom carpet and other types of commercial floorcoverings. The major competitors to the C&A brand are Interface, Inc., Mohawk Industries, Inc. and Shaw Industries, Inc. in six-foot roll goods, and FLOR Commercial (owned by Interface, Inc.), Milliken, Mohawk Industries, Inc. and Shaw Industries, Inc. in modular carpet tile products. The Monterey and Crossley brands compete with other broadloom manufacturers. The major competitors to the Monterey and Crossley brands are Bentley Prince Street (owned by Interface, Inc.), Mohawk Industries, Inc., Atlas Carpets, Masland Carpets and Shaw Industries, Inc. Although the industry recently has experienced consolidation, a large number of manufacturers remain. In North America, the Company maintains that it is the largest manufacturer of six-foot roll carpet, a leading manufacturer of modular carpet tile and a design leader in the high-style specified commercial broadloom carpet market. There are a number of domestic competitors that manufacture these products and certain of these competitors have greater financial resources than the Company.

The Company believes the key competitive factors in its primary floorcovering markets are product durability, product design and color, appearance retention, service and price. In the specified commercial market, six-foot roll carpet and modular carpet tiles compete with various floorcoverings, of which broadloom carpet has the largest market share. The Company’s six-foot roll carpet has gained market share from traditional broadloom carpet in end markets in which it has distinct performance advantages, such as ease of maintenance, appearance retention and longer useful life. Modular carpet tile has also increasingly been used in place of other flooring surfaces due to raised flooring applications, which enable under-the-floor cable management and air delivery systems, and the continuing trend toward modular furniture systems, which require the functionality of tile. Ease of maintenance (replacement) and flexibility of design are also emerging trends for tile. In the high-style specified commercial broadloom carpet market, Monterey and Crossley primarily compete based upon aesthetics, service, quality, and price.

Manufacturing and Facilities

The Company currently operates four manufacturing facilities in Dalton, Georgia including (i) a yarn processing plant with carpet dyeing capabilities, (ii) a carpet tufting plant, (iii) a carpet finishing and tile cutting plant, which includes tile printing and recycling operations and (iv) a customer service center and distribution warehouse. CAF Extrusion, Inc. (“Extrusion”), a yarn extrusion facility, operates in Calhoun, Georgia. The Company also operates a manufacturing, administrative and warehouse facility in Truro, Nova Scotia. On August 10, 2004, the Company and its parent announced plans to consolidate its broadloom operations by closing its Santa Ana, California production facility and moving equipment and production to its manufacturing facility in Truro (the “Facility Maximization”). The Facility Maximization was approved by the Company’s Board of Directors on August 9, 2004, and was completed during fiscal year 2005. The Company operates a tufting and finishing operation outside Shanghai in Suzhou, China which began production in July 2005. The Company operated two manufacturing facilities in the United Kingdom, in addition to leasing one sales and service facility, until the sale of that subsidiary on February 5, 2007. The Company believes its manufacturing capacity is

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sufficient to meet its requirements for the foreseeable future. In addition to these facilities, the Company leases a number of sales and service facilities and one warehouse in the United States.

The following table summarizes our manufacturing, distribution and sales facilities:

Location		Operation	Segment	Owned/Leased	Approximate Square Feet
United States	Dalton, Georgia	Yarn Processing	Floorcovering	Owned	161,500
		Carpet Dyeing
	Dalton, Georgia	Tufting	Floorcovering	Owned	154,900
		Corporate Offices
	Dalton, Georgia	Six-Foot Finishing	Floorcovering	Owned	245,800
		Tile Finishing
		Tile Printing
		Recycling
	Dalton, Georgia	Environmental Center	Floorcovering	Leased	198,850
		Warehouse
	Dalton, Georgia	Distribution Warehouse	Floorcovering	Owned	133,200
		Sales Service Office
		Finance & Administration
	Dalton, Georgia	Sample Warehouse	Floorcovering	Leased	105,000
	Chicago, Illinois	Sales / Showroom	Floorcovering	Leased	3,819
	Dallas, Texas	Sales / Showroom	Floorcovering	Leased	1,725
	Denver, Colorado	Sales / Showroom	Floorcovering	Leased	3,214
	Marietta, Georgia	Sales / Showroom	Floorcovering	Leased	2,129
	New York, New York	Sales / Showroom	Floorcovering	Leased	5,821
	Los Angeles, California	Sales / Showroom	Floorcovering	Leased	5,300
	San Francisco, California	Sales / Showroom	Floorcovering	Leased	4,858
	Santa Ana, California	Sales / Showroom	Floorcovering	Leased	3,959
	Atlanta, Georgia	Sales / Showroom	Floorcovering	Leased	4,200
	Chicago, Illinois	Sales / Showroom	Floorcovering	Leased	2,914
	Houston, Texas	Sales / Showroom	Floorcovering	Leased	1,015
	Reston, Virginia	Sales / Showroom	Floorcovering	Leased	3,405
	Calhoun, Georgia	Yarn Extrusion	Extrusion	Owned	125,400
Canada	Truro, Nova Scotia	Administration	Floorcovering	Owned	367,000
		Manufacturing
		Warehouse
	Mississauga, Ontario	Sales / Showroom	Floorcovering	Leased	4,027
United Kingdom*	Blaina, Gwent Wales	Six Foot and Tile	Floorcovering	Owned	32,000
	Blaina, Gwent Wales	Finishing
	Blaina, Gwent Wales	Warehousing	Floorcovering	Owned	14,000
	Blaina, Gwent Wales	Sales / Warehouse	Floorcovering	Leased	4,860
	Blaina, Gwent Wales	Chemical Mixing	Floorcovering	Leased	4,000
		Sales / Showroom	Floorcovering	Leased	5,500
Other	Singapore	Sales / Showroom	Floorcovering	Leased	2,106
	Singapore	Sales / Showroom	Floorcovering	Leased	2,153
	Malaysia	Office	Floorcovering	Leased	926
	Shanghai, China	Office	Floorcovering	Leased	915
	Suzhou, China	Office / Manufacturing	Floorcovering	Leased	63,669
	Duiven, The Netherlands*	Sales / Office	Floorcovering	Leased	3,000

* Represent discontinued operations as of January 27, 2007.

Raw Materials

The Company’s raw materials, including yarn, nylon and polypropylene chip, primary backing, coater materials, and dye chemicals, represent the single largest component of its carpet production costs. Yarn comprises approximately one-third of the total carpet cost structure and in excess of one-half of total raw material costs.

Invista, Inc. (“Invista”) currently supplies a majority of the Company’s requirements for nylon yarn, the primary raw material used in the Company’s floorcovering products. The unanticipated termination or interruption of the supply arrangement with Invista could

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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 that it will not experience interruption in supply in the future.

While Invista is an important vendor, it is believed that there are adequate alternative sources of supply from which the synthetic fiber requirement could be fulfilled including, but not limited to, nylon yarn produced by Extrusion. In addition to Invista, there are at least three major third party suppliers to the commercial carpet industry from whom the Company acquires yarn.

The other significant raw materials used by the Company in its carpet manufacturing process include coater materials, such as vinyl resins and primary backing.

The Company has not experienced a problem sourcing nylon, processed yarn or any other raw material used in the manufacture of carpet from suppliers and does not anticipate any difficulties in sourcing these raw materials in the future, although no assurances can be given.

At the Company’s yarn extrusion facility, the significant raw materials are nylon and polypropylene polymer and dye pigments. The chips purchased are used to manufacture the nylon and polypropylene yarn. The dye and pigments give the yarn color for solution dyed yarns.

Patents, Copyrights and Trademarks

The Company owns numerous copyrights and patents in the United States and certain other countries, including the Powerbond RS patent, which expires in 2008, and patents (process and product) for the ER3 backing, which expire in 2014. The Company also owns numerous registered trademarks in the United States, including Powerbond, Powerbond RS, ethos, LifeLONG and Greenbond. Industry knowledge and technology are considered more important to the current business than patents, copyrights or trademarks and, accordingly, the expiration of existing patents or loss of a copyright or trademark is not expected to have a material adverse effect on operations, although no assurances can be given. However, the patents, trademarks, copyrights and trade secrets are actively maintained and enforced.

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 sales in the education end market during the summer months while schools generally are closed and floorcovering can be installed.

Financial Information About Operating Segments and Geographic Areas

The Company operates in two industry segments: Floorcoverings and Extrusion. Information relating to the Company’s two operating segments can be found in Note 14 to the Company’s consolidated financial statements for the year ended January 27, 2007, contained herein in Part II, Item 8. Certain information concerning net sales and long-lived assets by geographic areas can also be found in Note 14.

Customers

No single customer represented 10% or more of the Floorcovering segment’s sales for any year presented in the accompanying financial statements. In the Extrusion segment, the Company had two external customers in each of fiscal years 2006, 2005 and 2004 that exceeded 10% of the segment’s total net sales. For 2006, these customers represented 18.9% and 16.1%. For 2005, these customers represented 22.9% and 12.8%. For 2004, these customers represented 35.4% and 14.0%.

International Sales

International net sales of the Company, excluding those reported as discontinued operations, were $43.6 million, or 12.4%, $28.4 million, or 9.0%, and $32.8 million, or 9.9%, of the Company’s total net sales for fiscal years 2006, 2005 and 2004, respectively. Canadian customers comprised $34.2 million, or 9.7%, $25.9 million, or 8.2%, and $31.0 million, or 9.3%, of total net sales for fiscal years 2006, 2005 and 2004, respectively, while the remaining international sales, primarily to customers in Southeast Asia and South

7

America, were $9.4 million, or 2.7%, $2.5 million, or 0.8%, and $1.8 million, or 0.5% in fiscal years 2006, 2005 and 2004, respectively.

Employees

At January 27, 2007, the Company had a total of 1,579 employees of which 1,029 were paid hourly and 550 were salaried. The Company has experienced no work stoppages and it is believed that employee relations are good. All employees are non-union with the exception of approximately 352 manufacturing workers in Canada who are subject to a collective bargaining agreement. The collective bargaining agreement that represents this union expires on June 30, 2009.

Environmental Matters

The Company’s operations are subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. The costs of complying with environmental protection laws and regulations have not had a material adverse impact on the financial condition or results of operations in the past and are not expected to have a material adverse impact in the future. The environmental management systems of the floorcovering manufacturing facilities are certified under ISO 14001.

Available Information

The Company electronically files periodic reports (Forms 10-K, 10-Q and 8-K) with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company also makes its filings available, free of charge, through its website, www.tandus.com, as soon as reasonably practical after the electronic filing of such material with the SEC.

Reports to Security Holders

The Company provides its stockholder with audited annual financial information that has been examined and reported on with an opinion expressed by the Company’s independent auditor, as well as unaudited interim financial information.

Item 1A. Risk Factors

The revolver and the indenture governing the Company’s 9.75% notes impose limitations on how the Company conducts its business; as a result, it may not be able to pursue strategies that could be in the best interests of holders of the notes.

The revolver and the indenture governing the 9.75% notes contain restrictions on the Company that could increase its vulnerability to general adverse economic and industry conditions by limiting its flexibility in planning for and reacting to changes in its business and industry. Specifically, these restrictions limit the Company’s ability, to:

• incur additional debt;

• pay dividends and make other distributions;

• make investments and other restricted payments;

• create liens;

• sell assets; and

• enter into transactions with affiliates.

As a result of these restrictions, the Company may not be able to pursue business strategies that could be in the best interests of holders of the notes.

The Company is controlled by two principal shareholders and they may require it to take actions, such as increasing the Company’s indebtedness, which may not be in the best interests of holders of the 9.75% notes.

The Company is a wholly-owned subsidiary of Tandus Group. The Oaktree Fund and the B of A Fund, together with members of

8

management, own approximately 65% of the issued and outstanding voting stock of Tandus Group. Consequently, these owners have the ability to control the Company’s business and affairs by virtue of their ability to elect a majority of Tandus Group’s and the Company’s board of directors. The directors have the authority to make decisions affecting the Company’s capital structure, including the issuance of additional indebtedness. The Company cannot make any assurances that the interests of the Oaktree Fund and the B of A Fund do not or will not conflict with the interests of the holders of the 9.75% notes.

Raw materials price increases may reduce results of operations.

The cost of raw materials represents the single largest component of the Company’s manufacturing costs. Of the raw materials used, yarn constitutes in excess of one half of total raw materials costs. Increases in the costs of raw materials could adversely affect profitability. Although pricing may be increased in an effort to offset increases in raw material costs, such adjustments may not be sufficient to, or occur in a timely manner such as to, prevent a materially adverse effect on results of operations and cash flows.

The commercial floorcovering industry is highly competitive.

The floorcovering industry is highly competitive. The Company faces competition from a number of domestic manufacturers and independent distributors of floorcovering products and, in certain product areas, foreign manufacturers. There has been significant consolidation within the floorcovering industry during recent years that has caused a number of the Company’s existing and potential competitors to be larger and have greater resources and access to capital. Competitive pressures may result in decreased demand for the Company’s products and in the loss of market share. In addition, the Company faces, and will continue to face, pressure on sales prices of its products from competitors.

The floorcovering industry is cyclical and prolonged declines in commercial construction activity or corporate remodeling and refurbishment could have a material adverse effect on the Company’s business.

The U.S. floorcovering industry is cyclical and is influenced by a number of general economic factors including commercial construction activity in new construction as well as remodeling. New construction is cyclical in nature. To a somewhat lesser degree, this also is true with commercial remodeling. A prolonged decline in any of these industries could have a material adverse effect on the Company’s business, financial condition and results of operations.

Fuel and energy price increases may reduce results of operations.

The Company’s manufacturing operations and shipping needs require the use of substantial amounts of electricity, natural gas, and petroleum based products, which are subject to price fluctuations due to changes in supply and demand. Significant increases in the cost of these commodities may have adverse effects on the Company’s results of operations and cash flows should the Company be unable to pass these increases to its customers through means of price increases in a timely manner.

The Company is subject to federal, state and local laws and regulations relating to environmental matters.

While the costs of complying with environmental protection laws and regulations have not had a material adverse impact on the financial condition or results of operations of the Company in the past, changes in laws and regulations or the discovery of new information could have a potential future adverse effect.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

For information concerning the principal physical properties of the Company, see “Item 1. Business – Manufacturing and Facilities” contained herein.

9

Item 3. Legal Proceedings

On September 18, 1998, James Bradley Thomason (“Thomason”) filed an action in the District Court, 285^th Judicial District, Bexar County, Texas (the “Court”) against Linda Gomez Whitener, Steve Whitener, and Gomez Floor Covering (the “Gomez Defendants”), the Company, and Mannington Commercial. Thomason alleged that the Gomez Defendants had breached a contract with Thomason to pay him certain commissions and had conspired with the Company and Mannington to cut Thomason out of several carpet installation transactions stemming from a carpet-buying contract held by the Texas General Services Commission for State of Texas agencies (the “Contract”). Thomason settled his claims against the Gomez Defendants and Mannington Commercial. The Court granted the Company’s motion for summary judgment and as a result, all of Thomason’s claims against the Company were dismissed. The Texas Court of Appeals, Fourth Court of Appeals District, San Antonio, Texas (the “Appellate Court”) affirmed the lower court ruling on all points, except for a claim of quantum meruit (value of services where no contract exists) related to having C&A products listed on the Contract. That claim was tried before a jury and on February 10, 2006, the jury entered a verdict in favor of the plaintiff in the amount of $1,050,000. Under Texas law, the plaintiff made a claim for attorneys’ fees and prejudgment interest, and on May 19, 2006, the Appellate Court entered judgment on the jury verdict in the amount of $1,053,418, awarding attorneys’ fees in the amount of $351,136 and prejudgment interest in the amount of $605,189.

Because the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, the Company filed a Notice of Appeal on August 17, 2006, has filed its brief as Appellant, and the Company intends to vigorously prosecute its appeal of the jury verdict and the award of attorneys’ fees and prejudgment interest. The prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys’ fees or prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as entered by the Appellate Court. The Company has recorded an accrued liability, including post judgment interest of approximately $2,069,000 related to this case in its accompanying statements of financial condition.

On June 21, 2005, the Company filed in the United States District Court for the Northern District of Georgia, Rome, Georgia, Division (the “Court”) a joint lawsuit with Shaw Industries Group, Inc. (“Shaw”) and Mohawk Industries, Inc. (“Mohawk”) against Interface, Inc. (“Interface”), regarding a patent on a particular pattern of carpet tile that Interface recently received (the “Rome Action”). The Rome Action asks the Court to declare that the Interface patent is invalid, unenforceable and not infringed. Interface and certain of its affiliated companies, on the same day, filed separate suits in Atlanta, Georgia against the Company and other carpet manufacturers asserting infringement of the aforementioned patent. In response to motions filed both in the Rome Action and with the court in Atlanta, Interface’s suits against the Company, Shaw and Mohawk were transferred to Rome, Georgia and consolidated with the Rome Action. The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. On December 19, 2006, the Court conducted what is known as a “Markman Hearing” regarding interpretation of four disputed terms used in Interface’s patent. To date, the Court has not yet issued its order regarding the disputed terms and no substantive issues have been resolved by the Court. The Company denies liability and intends to vigorously defend this matter.

The Company is involved in litigation from time to time. When litigation arises, the Company may create a litigation accrual in order to pay for damages for which it might be liable. In some circumstances, it may settle litigation without going to trial. During fiscal 2005, the Company released a litigation accrual of $0.8 million related to a suit with Employers Mutual Insurance Companies and settled a suit for $0.4 million brought by Enron Energy Services.

From time to time the Company is also subject to claims and suits arising in the ordinary course of business, including workers’ compensation and product liability claims, which may or may not be covered by insurance. Management believes that the various asserted claims and litigation in which the Company is currently involved will not have a material adverse effect on its financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

As of April 9, 2007, there was one holder of record of the Company’s common stock. There is no public trading market for the Company’s common stock, and the Company did not repurchase any of its stock in the fourth quarter of fiscal 2006.

For information relating to compensation plans under which equity securities are authorized for issuance, see Item 12 contained herein.

Dividends

The declaration and payment of dividends is at the discretion of the Board of Directors and depends upon, among other things, investment policy and opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant by the Board at the time of its determination. Such other factors include certain limitations in covenants contained in the Company’s credit facilities and in the indentures governing the public indebtedness. The Company paid dividends of $16.1 million to its parent, Tandus Group, Inc., in fiscal 2006. No dividends were paid during fiscal years 2005 and 2004.

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Item 6. Selected Financial Data

The following data is qualified in its entirety by the consolidated financial statements of the Company and other information contained elsewhere in this Annual Report on Form 10-K. The financial data as of and for the years ended January 27, 2007, January 28, 2006, January 29, 2005, January 31, 2004 and January 25, 2003 have been derived from the audited financial statements of the Company. The following financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto contained in Item 8 herein.

	Fiscal Year Ended (1)
	January 27, 2007 (Fiscal 2006)			January 28, 2006 (Fiscal 2005)			January 29, 2005 (Fiscal 2004)			January 31, 2004 (3) (Fiscal 2003)			January 25, 2003 (2) (Fiscal 2002)
	(Dollars in thousands)
Operating Data:
Net Sales	$	350,365		$	316,213		$	331,946		$	302,016		$	315,072
Cost of Goods Sold		231,891			221,039			219,496			201,588			205,573
Gross Profit		118,474			95,174			112,450			100,428			109,499
Selling, General and Administrative Expenses		78,523			76,654			75,943			71,993			66,503
Other Intangible Asset Amortization (4)		2,455			2,620			3,112			8,846			5,461
Operating Income (Loss)		37,496			15,900			33,395			19,589			37,535
Equity in Earnings of Affiliate		—			—			893			1,386			1,733
Net Interest Expense		20,650			20,082			20,443			21,304			23,883
Gain (Loss) from Discontinued Operations (5)		979			(1,720	)		(912	)		(571	)		(126	)
Net Income (Loss) (6)		10,205			(4,629	)		6,703			1,234			5,781
Other Financial Data:
Adjusted EBITDA (7)	$	50,819		$	37,952		$	51,438		$	42,622		$	53,342
Depreciation and Amortization		13,315			12,641			13,135			15,926			13,875
Capital Expenditures		7,213			10,461			11,862			8,830			9,027
Dividend to Parent (8)		16,053			—			—			2,263			3,153
Cash Flow Data:
Net Cash Provided By (Used In) Operating Activities	$	28,156		$	(4,646	)	$	27,245		$	20,019		$	27,482
Net Cash Used In Investing Activities		(7,086	)		(10,023	)		(11,047	)		(5,191	)		(42,274	)
Net Cash Provided By (Used In) Financing Activities		(19,895	)		(5,184	)		(1,523	)		(24,253	)		31,240
Balance Sheet Data:
Total Assets	$	299,136		$	302,528		$	318,610		$	299,148		$	319,015
Long-Term Debt		197,805			197,673			207,536			207,516			218,666

(1) The Company’s results of operations for years prior to acquisitions may not be comparable to the Company’s results of operations for subsequent years.

(2) The Company acquired Extrusion in May 2002. The results of the acquired business have been included in the Company’s consolidated financial statements since the date of acquisition.

(3) The fiscal year ended January 31, 2004 included 53 weeks.

(4) In the fourth quarter of fiscal 2003, Extrusion recorded a non-cash impairment charge of $2.6 million related to a supply agreement. The impairment charge was to reduce the net carrying value of the supply agreement to its fair value.

(5) In conjunction with the fourth quarter 2006 classification of Tandus Europe Ltd. as an asset held for sale, the Company recognized a loss of $2.3 million before tax to write down the investment to its net realizable value and incurred disposal-related charges of $0.4 million before tax. These charges resulted in an after-tax gain of $3.0 million and are included in the fiscal 2006 gain discontinued operations.

(6) Included in net income for fiscal 2002 is a non-cash charge of $3.2 million for the cumulative effect of a change in accounting principle related to goodwill.

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(7) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, cumulative effect of change in accounting principle, Chroma cash dividends, non-cash charges or expenses (other than the write-down of current assets), loss from discontinued operations, minority interest in income (loss) of subsidiary, costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, equity in earnings of Chroma and gain on forgiveness of debt. 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 benchmark for its annual budget and long range plan and as a valuation method for potential acquisitions. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) 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 (loss) to Adjusted EBITDA is presented in the following table:

	Fiscal 2006			Fiscal 2005			Fiscal 2004			Fiscal 2003			Fiscal 2002
Net Income (Loss)	$	10,205		$	(4,629	)	$	6,703		$	1,234		$	5,781
Cumulative Effect of Change in Accounting Principle		—			—			—			—			3,240
(Gain) Loss from Discontinued Operations		(979	)		1,720			912			571			126
Intangible Asset Impairment Charge		—			—			—			2,616			—
Income Tax Expense (Benefit)		7,162			(358	)		5,961			(2,147	)		6,788
Net Interest Expense		20,650			20,082			20,443			21,304			23,883
Gain on Forgiveness of Debt		(228	)		—			—			—			(570	)
Depreciation		10,860			10,021			10,023			9,696			8,414
Amortization		2,455			2,620			3,112			6,230			5,461
Chroma Cash Dividends		—			—			922			3,522			1,932
Equity in Earnings of Chroma		—			—			(893	)		(1,386	)		(1,733	)
Minority Interest in Income (Loss) of Subsidiary		—			(24	)		97			13			20
Facility Maximization Costs		—			8,158			3,986			—			—
Non-Recurring Costs Associated With Successful Acquisition		—			—			—			969			—
Other		694			362			172			—			—
Adjusted EBITDA	$	50,819		$	37,952		$	51,438		$	42,622		$	53,342

(8) Dividend to parent in fiscal years 2003 and 2002 represents payments of certain expenses attributable to and paid by the Company on behalf of its parent, Tandus Group.

Financial results previously reported were revised in the preceding tables for the classification of the Company’s wholly-owned United Kingdom subsidiary, Tandus Europe Ltd., as a discontinued operation, as discussed in Note 3 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.

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

GENERAL

The following management assessment should be read in conjunction with the consolidated financial statements and notes thereto contained herein in Item 8. With the exception of historical information, the discussions in this section contain forward-looking statements that involve certain risks and uncertainties that could cause future results to differ materially from those discussed below.

Overview

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) six-foot roll carpet and modular carpet tile and (ii) high-style tufted and woven broadloom carpets. 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” coupled with flexible distribution channels, allows the Company to provide a wide array of floorcovering solutions. The Company is headquartered in Georgia, with additional manufacturing locations in Canada and China. See “Acquisitions and Dispositions” contained herein for information regarding the Company’s United Kingdom manufacturing location.

The Company is a wholly-owned subsidiary of Tandus Group, Inc. (“Tandus Group”). As a result of a recapitalization transaction on January 25, 2001, investment funds managed by Oaktree and BACI, specifically the Oaktree Fund and the B of A Fund, respectively, control a majority of the outstanding capital stock of Tandus Group.

On February 2, 2007, the Company hired Glen A. Hussmann as its new President and Chief Executive Officer, replacing Edgar M. Bridger who resigned effective November 30, 2006.

Acquisitions and Dispositions

During the fourth quarter of fiscal 2006, the Company announced its intent to exit manufacturing in the United Kingdom. The Company entered into a definitive agreement to sell its United Kingdom subsidiary, Tandus Europe Ltd., to Interior Projects Solutions Limited. The transaction closed during the first quarter of fiscal 2007. The subsidiary is accounted for as an asset held for sale at January 27, 2007 and is reported as discontinued operations in the consolidated financial statements. See Note 3 of the “Notes to Consolidated Financial Statements” contained herein in Item 8 for further discussion relative to discontinued operations.

In August 1998, the Company acquired a 51.0% interest in Collins & Aikman Floorcoverings Asia Pte. Ltd. (“C&A Asia”), a start-up commercial carpet distribution venture in Singapore. On December 30, 2005, the Company purchased the remaining 49.0% of C&A Asia for approximately $0.3 million. Prior to that, the results had been reported on a consolidated basis with the 49.0% reflected as minority interest.

Results of Operations

As noted previously, the Company’s United Kingdom subsidiary is accounted for as an asset held for sale at January 27, 2007 and is reported as discontinued operations in each of the years for which results are presented. Accordingly, the discussions below, with the exception of net income (loss), do not include information related to the United Kingdom subsidiary unless otherwise stated.

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

	Fiscal Year Ended
	January 27, 2007 (Fiscal 2006)		January 28, 2006 (Fiscal 2005)		January 29, 2005 (Fiscal 2004)
	(Percentage of net sales)
Net Sales	100.0	%	100.0	%	100.0	%
Cost of Goods Sold	66.2	%	69.9	%	66.1	%
Gross Profit	33.8	%	30.1	%	33.9	%
Selling, General and Administrative Expenses	22.4	%	24.2	%	22.9	%
Amortization	0.7	%	0.9	%	0.9	%
Operating Income	10.7	%	5.0	%	10.1	%
Net Interest Expense	5.9	%	6.4	%	6.2	%
Net Income (Loss)	2.9	%	-1.5	%	2.0	%

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Fiscal Year Ended January 27, 2007 (“fiscal 2006”)

Compared with Fiscal Year Ended January 28, 2006 (“fiscal 2005”)

Net Sales. Net sales for fiscal 2006 were $350.4 million, an increase of 10.8% from $316.2 million in fiscal 2005. Net sales of the Company’s Floorcoverings segment were $325.9 million for fiscal 2006 as compared to $289.4 million for fiscal 2005, an increase of $36.5 million or 12.6%, primarily attributable to the North American operations. Within these operations, the increase in the Floorcoverings segment’s net sales was primarily attributable to an 8.8% increase in broadloom sales combined with a 10.9% increase in sales of structure-back carpets (six foot and carpet tile). The increase in overall net sales was primarily volume driven across all of its markets coupled with increases in average selling prices. In addition, in fiscal year 2005, the Floorcoverings segment experienced lower sales largely due to complications related to the Facility Maximization, as discussed more fully herein and in Note 11 of the “Notes to Consolidated Financials Statements” contained herein in Item 8. The current year results reflect an increase in both Institutional sales (Healthcare, Education and Government) and Corporate sales, including Retail, of 9.0% and 12.8%, respectively. Net sales of the Extrusion segment were $24.5 million for fiscal 2006 as compared to $26.8 million for fiscal 2005, a decrease of $2.3 million or 8.6%. The decline in sales for the Extrusion segment was due to lower sales volume, which occurs as internal utilization of production increases.

Cost of Goods Sold. Cost of goods sold was $231.9 million, or 66.2% of sales, in fiscal 2006 as compared to $221.0 million, or 69.9% of sales, in fiscal 2005. The increase was primarily due to increased sales as wells as higher raw material costs. Included in the fiscal 2005 expenses is $6.2 million related to the Facility Maximization. (See further discussion in “Liquidity and Capital Resources” contained herein and Note 11 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.) Excluding the Facility Maximization costs, cost of goods sold for fiscal year 2005 was $214.8 million, or 67.9% of sales. Cost of sales in the prior year was also impacted by a $0.5 million write-down related to inventory that was not transferred from the Santa Ana, California facility to the Truro, Nova Scotia facility. As a percentage of sales, the decrease in cost of goods sold was primarily due to changes in product mix and manufacturing efficiencies inclusive of the benefits of the completion of the Facility Maximization. Partially offsetting these cost improvements, the Company has experienced a general increase in the prices of certain raw materials.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2006 were $78.5 million, an increase of 2.3% from $76.7 million in fiscal 2005. As a percentage of sales, these expenses decreased to 22.4% from 24.2% in the prior year. During fiscal 2006, the Company incurred increased professional services expense of $3.6 million primarily due to litigation charges related to the Company’s legal matters, as more fully explained in “Liquidity and Capital Resources” contained herein, and certain exit costs related to the departure of the Company’s former president and chief executive officer. In addition, the Company incurred higher commissions expense of $2.3 million related to the fiscal year’s increased sales and incurred an increased loss in foreign currency transaction of $0.3 million. Partially offsetting these expenses was a decrease in salaries, taxes and benefits of $1.7 million. Included in the fiscal 2005 expenses are Facility Maximization costs of $2.0 million and supplementary administration costs of $1.1 million related to the delayed exit from the Santa Ana, California facility.

Amortization. Intangible asset amortization decreased to $2.5 million for fiscal 2006 as compared to $2.6 million for fiscal 2005.

Gain (Loss) on Early Extinguishment and Forgiveness of Debt. During fiscal 2006, the Company recorded a gain of $0.2 million related to the forgiveness of a portion of its outstanding sinking fund bonds with the Nova Scotia government (see “Liquidity and Capital Resources” contained herein and Note 11 of the “Notes to Financial Statements” contained herein in Item 8). In addition, the Company recorded a loss of $0.4 million in fiscal 2006 due to the write-off of deferred financing fees related to the refinancing of its senior credit facility (see “Liquidity and Capital Resources” contained herein and Note 9 of the “Notes to Consolidated Financial Statements” contained herein in Item 8). During fiscal 2005, the Company purchased its own senior subordinated notes in the open market with a face value of $10.0 million for an aggregate price of $9.0 million. These notes have been classified as defeased. The Company realized a $1.0 million gain on the purchase, which was partially offset by a write-off of a portion of the deferred financing fees related to these issuances in the amount of $0.2 million.

Interest Expense. Net interest expense for fiscal years 2006 and 2005 was $20.7 million and $20.1 million, respectively, which included interest income of $0.4 million and $0.3 million, respectively.

Income Taxes. The Company incurred income tax expense of $7.2 million for fiscal 2006 as compared to a benefit of $0.4 million for fiscal 2005. During fiscal 2006 the Company reported net income from its continuing operations, compared to a net loss from continuing operations during fiscal 2005. During fiscal 2005, net losses were incurred in the Company’s foreign operations, against which no tax benefit could be recognized.

Discontinued Operations. The Company reported a loss of $4.7 million before tax and a gain of $1.0 million after tax during fiscal 2006 related to its United Kingdom subsidiary, Tandus Europe Ltd., as compared to a loss of $1.7 million, before and after tax, during fiscal 2005.

15

Included in the fiscal 2006 loss is a charge of $2.3 million before tax to write down the subsidiary’s assets to their net realizable value and a charge of $0.4 million before tax to record certain disposal related expenses. These charges resulted in an after-tax gain of $3.0 million.

Net Income (Loss). The Company reported net income of $10.2 million for fiscal 2006 compared to net loss of $4.6 million for fiscal 2005. The primary contributor to the increase in fiscal 2006 was an increase in net sales, as more fully discussed above.

Adjusted EBITDA. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, cumulative effect of change in accounting principle, Chroma cash dividends, non-cash charges or expenses (other than the write-down of current assets), loss from discontinued operations, minority interest in income (loss) of subsidiary, costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, equity in earnings of Chroma and gain on forgiveness of debt. Adjusted EBITDA for fiscal 2006 increased to $50.8 million from $38.0 million in fiscal 2005. As a percentage of sales, Adjusted EBITDA was 14.5% in fiscal 2006 compared to 12.0% in fiscal 2005. The increase in fiscal 2006 was principally due to higher sales volume in the Floorcoverings segment and other items as more fully discussed above. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) 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 (loss) to Adjusted EBITDA is as follows (in thousands):

	Fiscal Year Ended
	January 27, 2007			January 28, 2006
Net Income (Loss)	$	10,205		$	(4,629	)
Income Tax Expense (Benefit)		7,162			(358	)
Net Interest Expense		20,650			20,082
Depreciation		10,860			10,021
Amortization		(979	)		2,620
(Gain) Loss from Discontinued Operations		4,692			1,720
Minority Interest in Loss of Subsidiary		—			(24	)
Facility Maximization Costs		—			8,158
Gain on Forgiveness of Debt		(228	)		—
Other		694			362
Adjusted EBITDA	$	50,819		$	37,952

Fiscal Year Ended January 28, 2006 (“fiscal 2005”)

Compared with Fiscal Year Ended January 29, 2005 (“fiscal 2004”)

Net Sales. Net sales for fiscal 2005 were $316.2 million, a decrease of 4.7% from $331.9 million in fiscal 2004. Net sales of the Company’s Floorcoverings segment were $289.4 million for fiscal 2005 as compared to $308.7 million for fiscal 2004, a decrease of $19.3 million or 6.3%, primarily attributable to the North American operations. Within these operations, the decrease in the Floorcoverings segment’s net sales was primarily attributable to complications associated with the Facility Maximization, as discussed more fully herein and in Note 11 of the “Notes to Consolidated Financials Statements” contained herein in Item 8, which resulted in delays in delivering customer orders. These complications contributed to reduced order activity across all of the Company’s product types and end use categories, with the greatest impact on broadloom sales, which declined 17.6% in fiscal 2005, and on sales to the Corporate segment. Also contributing to the decline in net sales was federal budget pressures which impacted federal government spending. Net sales of the Extrusion segment were $26.8 million for fiscal 2005 as compared to $23.2 million for fiscal 2004, an increase of $3.6 million, or 15.5%. The increase in sales for the Extrusion segment was due to overall higher demand.

Cost of Goods Sold. Cost of goods sold was $221.0 million, or 69.9% of sales, for fiscal 2005 as compared to $219.4 million, or 66.1% of sales, in fiscal 2004. The increase was primarily due to the inclusion in the fiscal 2005 expenses of $6.2 million related to the Facility Maximization, as compared to 2004 expenses of $2.6 million. (See further discussion in “Liquidity and Capital Resources” contained herein and Note 11 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.) Excluding the Facility Maximization costs, cost of goods sold for fiscal years 2005 and 2004 were $214.8 million, or 67.9% of sales, and $216.8 million, or 65.3% of sales, respectively. Cost of sales during fiscal 2005 was also impacted by a $0.5 million write-down related to inventory that was not transferred from the Santa Ana, California facility to the Truro, Nova Scotia facility. In addition, the Company also

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experienced increases in the prices of several raw materials, including yarns, resins, and other agents and chemicals. As a percentage of sales, the increase in costs of goods sold was primarily attributable to lower overall sales volume in addition to the impact of rising raw material prices.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2005 were $76.7 million, an increase of 0.9% from $76.0 million in fiscal 2004. As a percentage of sales, these expenses increased to 24.2% from 22.9% in the prior year. During fiscal 2005, the Company incurred $1.1 million of supplementary administrative costs related to the delayed exit from the Santa Ana, California facility, $0.9 million in severance charges related to specific staffing reductions and recorded a $0.4 million litigation settlement related to the Company’s previous ownership interest in Chroma Systems Partners due to an alleged claim by Enron Energy Services, Inc. The Company also recorded a charge of $1.1 million related to a February 10, 2006 jury verdict in a litigation matter in Texas regarding a certain carpet-buying contract. (See further discussion in Note 16 of the “Notes to Consolidated Financial Statements” contained herein in Item 8 and Legal Proceedings in Part I, Item 3.) The Company incurred Facility Maximization costs of $2.0 million during fiscal 2005 as compared to the prior year of $1.4 million. In addition, the Company experienced a decrease in the foreign currency transaction gain of $0.9 million and higher samples expense of approximately $1.0 million. These increases were partially offset by lower salaries, taxes and benefits of $2.8 million.

Amortization. Intangible asset amortization decreased to $2.6 million for fiscal 2005 as compared to $3.1 million for fiscal 2004. The decrease was due to the Company’s extrusion supply agreement being fully amortized as of April 30, 2005.

Gain on Early Extinguishment of Debt. During fiscal 2005, the Company purchased in the open market subordinated notes with a face value of $10.0 million for an aggregate price of $9.0 million. These notes have been classified as defeased. The Company realized a $1.0 million gain on the purchase, which was partially offset by a write-off of a portion of the deferred financing fees related to these issuances in the amount of $0.2 million.

Interest Expense. Net interest expense for fiscal years 2005 and 2004 was $20.1 million and $20.4 million, respectively, which included interest income of $0.3 million and $0.2 million, respectively.

Income Taxes. The Company had an income tax benefit of $0.4 million for fiscal 2005 as compared to expense of $6.0 million for fiscal 2004. During fiscal 2005, the Company experienced a net loss in its domestic operations against which a tax benefit was recorded. During fiscal 2004, the Company experienced net profitability in its domestic operations against which tax expense was recorded. During both fiscal years 2005 and 2004, net losses were incurred in the Company’s foreign operations, against which no tax benefit can be recognized. In addition, a $0.9 million valuation allowance was recorded in fiscal 2004 against certain state income tax credits related to the closure of the Company’s Santa Ana, California facility (see further discussion in Note 10 of the “Notes to Consolidated Financial Statements” contained herein in Item 8).

Discontinued Operations. The Company reported a loss of $1.7 million, before and after tax, during fiscal 2005 related to its United Kingdom subsidiary, Tandus Europe Ltd., as compared to a loss of $0.9 million, before and after tax, during fiscal 2004.

Net Income (Loss). The Company incurred a net loss of $4.6 million for fiscal 2005 compared to net income of $7.6 million for fiscal 2004. The primary contributors were a decrease in net sales coupled with higher Facility Maximization charges, as discussed above.

Adjusted EBITDA. Adjusted EBITDA for fiscal 2005 decreased to $38.0 million from $51.4 million in fiscal 2004. As a percentage of sales, Adjusted EBITDA was 12.0% in fiscal 2005 compared to 15.5% in fiscal 2004. The decrease in fiscal 2005 was principally due to lower sales volume in the Floorcoverings segment and other items as more fully discussed above. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) 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.

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A reconciliation from net income (loss) to Adjusted EBITDA is a follows:

	Fiscal Year Ended
	January 28, 2006			January 29, 2005
Net Income	$	(4,629	)	$	6,703
Income Tax Expense (Benefit)		(358	)		5,961
Net Interest Expense		20,082			20,443
Depreciation		10,021			10,023
Amortization		2,620			3,112
Loss from Discontinued Operations		1,720			912
Chroma Cash Dividends		—			922
Equity in Earnings of Chroma		—			(893	)
Minority Interest (Loss) in Income of Subsidiary		(24	)		97
Facility Maximization Costs		8,158			3,986
Other Non-Cash Items		362			172
Adjusted EBITDA	$	37,952		$	51,438

Liquidity and Capital Resources

Cash

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 fiscal 2006 was $28.2 million compared to net cash used in operating activities of $4.6 million in fiscal 2005. The change was primarily due to the generation of net income for the fiscal year coupled with a positive change to working capital of $17.2 million.

Net cash used in investing activities in fiscal 2006 and 2005 was $7.1 million and $10.1 million, respectively. Capital expenditures for fiscal 2006 were $7.2 million compared to $10.5 million for fiscal 2005. Included in capital expenditures for fiscal year 2005 is $2.7 million related to the Facility Maximization. The Company anticipates capital expenditures for fiscal 2007 to be approximately $6 million to $10 million.

Net cash used in financing activities in fiscal 2006 and 2005 was $19.9 million and $5.2 million, respectively. The cash used in financing for fiscal 2006 related primarily to the payment of dividends to the Company’s parent of $16.1 million. The cash used in fiscal 2005 related to repayments of long-term debt.

Debt

The Company has significant indebtedness which, as of January 27, 2007, consisted of $175.0 million aggregate principal amount of 9.75% senior subordinated notes due 2010 (the “9.75% Notes”) of which $165.0 million aggregate principal amount is outstanding, an $80.0 million senior secured revolving credit facility which had an outstanding balance of $30.9 million in borrowings (the “Revolver”), $1.2 million in purchase money and other indebtedness, and $1.1 million in sinking fund bonds under Crossley Carpet Mills, Ltd., a wholly-owned subsidiary. The sinking fund bonds are subject to forgiveness which began in fiscal 2006 given certain requirements are met. See further discussion contained herein and Notes 9 and 11 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.

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 interest amount due on each date is $8.0 million. The 9.75% Notes mature on February 15, 2010.

On January 18, 2007, the Company entered into a senior secured revolving credit facility agreement which provides for an $80.0 million senior secured revolving credit facility (the “Revolver”) including a $20.0 million sub-limit for letters of credit. The facility is apportioned between a U.S. revolving credit facility and a Canadian revolving credit facility. All obligations of the Company are secured by a first priority, perfected security interest in, and lien upon, substantially all tangible and intangible assets of the Company, a pledge of the stock of all domestic subsidiaries, and a pledge of 65% of the stock of any first tier material foreign

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subsidiaries. The proceeds of the Revolver have been and/or will be used for, among other purposes, (i) the refinancing of the Company’s previous credit facility, (ii) ongoing working capital needs of the Company, (iii) the payment of a dividend to the Company’s sole stockholder, Tandus Group, which Tandus Group in turn dividended to its shareholders, (iv) the payment of accrued management fees owed to two principal shareholders of Tandus Group and (v) the payment of other fees and expenses.

Interest on amounts borrowed under the Revolver is payable either at the base rate, Canadian Prime Rate, LIBOR, or the Canadian BA Rate, plus an applicable margin, depending on the nature of the loan, and mandatory costs, if any. The applicable margin may range from 0% to 1.75% and will vary based on the Company’s fixed charge coverage ratio. The Revolver matures on January 18, 2012.

The Revolver is subject to certain representations, warranties, affirmative and negative covenants, and financial conditions customary for similar senior secured revolving credit facilities. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Revolver, the Company will also be subject to the cross default provisions of the indenture governing the 9.75% Notes, and vice versa. The Company was in compliance with all covenants as of January 27, 2007, and expects to remain in compliance throughout fiscal 2007, although no assurances to that effect can be given.

The Company’s ability to make scheduled payments of principal, interest, or to refinance its indebtedness, depends on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, and other factors beyond its control. However, there can be no assurance that the Company’s business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable the Company to service its indebtedness or to make necessary capital expenditures. Potential acquisitions of businesses that complement existing operations are periodically evaluated. 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.

Management believes that cash generated by its operations and availability under its $80.0 million Revolver will be sufficient to fund the Company’s current commitments and planned requirements, although no assurances can be given.

On March 22, 2007, the Company entered into a commitment letter with Bank of America, N.A. (“BofA”), Wachovia Bank and certain of their affiliates (collectively, the “Lenders”), pursuant to which the Lenders have agreed to enter into a Credit Facility with the Company, the proceeds from which would be used (i) to redeem all of the Company’s 9.75% senior subordinated notes due 2010 (including the principal, accrued interest and premium thereon), (ii) to repay a portion of the Company’s Revolver, (iii) to pay transaction-related fees and expenses and (iv) for other lawful purposes, including a dividend. The commitment, which expires on June 30, 2007 unless definitive documentation for the Credit Facility is entered into prior to such date, is subject to the satisfaction of certain conditions precedent including, but not limited to, the following: (a) the accuracy and completeness of the Company’s representations to the Lenders and (b) the amendment of the Revolver to reduce the commitment thereunder to not more than $60 million at closing and to permit the Credit Facility. BofA is an affiliate of the B of A Fund, the second largest shareholder of Tandus Group. No assurance can be given that the foregoing transactions will be consummated.

Litigation Obligations

On September 18, 1998, James Bradley Thomason (“Thomason”) filed an action in the District Court, 285^th Judicial District, Bexar County, Texas (the “Court”) against Linda Gomez Whitener, Steve Whitener, and Gomez Floor Covering (the “Gomez Defendants”), the Company, and Mannington Commercial. Thomason alleged that the Gomez Defendants had breached a contract with Thomason to pay him certain commissions and had conspired with the Company and Mannington to cut Thomason out of several carpet installation transactions stemming from a carpet-buying contract held by the Texas General Services Commission for State of Texas agencies (the “Contract”). Thomason settled his claims against the Gomez Defendants and Mannington Commercial. The Court granted the Company’s motion for summary judgment and as a result, all of Thomason’s claims against the Company were dismissed. The Texas Court of Appeals, Fourth Court of Appeals District, San Antonio, Texas (the “Appellate Court”) affirmed the lower court ruling on all points, except for a claim of quantum meruit (value of services where no contract exists) related to having C&A products listed on the Contract. That claim was tried before a jury and on February 10, 2006, the jury entered a verdict in favor of the plaintiff in the amount of $1,050,000. Under Texas law, the plaintiff made a claim for attorneys’ fees and prejudgment interest, and on May 19, 2006, the Appellate Court entered judgment on the jury verdict in the amount of $1,053,418, awarding attorneys’ fees in the amount of $351,136 and prejudgment interest in the amount of $605,189.

Because the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, the Company filed a Notice of Appeal on August 17, 2006, has filed its brief as Appellant, and the Company intends to vigorously prosecute its appeal of the jury verdict and the award of attorneys’ fees and prejudgment interest. The prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys’ fees or prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as

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entered by the Appellate Court. The Company has recorded an accrued liability, including post judgment interest of approximately $2,069,000 related to this case in its accompanying statements of financial condition.

On June 21, 2005, the Company filed in the United States District Court for the Northern District of Georgia, Rome, Georgia, Division (the “Court”) a joint lawsuit with Shaw Industries Group, Inc. (“Shaw”) and Mohawk Industries, Inc. (“Mohawk”) against Interface, Inc. (“Interface”), regarding a patent on a particular pattern of carpet tile that Interface recently received (the “Rome Action”). The Rome Action asks the Court to declare that the Interface patent is invalid, unenforceable and not infringed. Interface and certain of its affiliated companies, on the same day, filed separate suits in Atlanta, Georgia against the Company and other carpet manufacturers asserting infringement of the aforementioned patent. In response to motions filed both in the Rome Action and with the court in Atlanta, Interface’s suits against the Company, Shaw and Mohawk were transferred to Rome, Georgia and consolidated with the Rome Action. The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. On December 19, 2006, the Court conducted what is known as a “Markman Hearing” regarding interpretation of four disputed terms used in Interface’s patent. To date, the Court has not yet issued its order regarding the disputed terms and no substantive issues have been resolved by the Court. The Company denies liability and intends to vigorously defend this matter.

The Company is involved in litigation from time to time. When litigation arises, the Company may create a litigation accrual in order to pay for damages for which it might be liable. In some circumstances, it may settle litigation without going to trial. During fiscal 2005, the Company released a litigation accrual of $0.8 million related to a suit with Employers Mutual Insurance Companies and settled a suit for $0.4 million brought by Enron Energy Services.

From time to time the Company is also subject to claims and suits arising in the ordinary course of business, including workers’ compensation and product liability claims, which may or may not be covered by insurance. Management believes that the various asserted claims and litigation in which the Company is currently involved will not have a material adverse effect on its financial position or results of operations.

Facility Maximization

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 plan to close the facility was approved by the Board of Directors on August 9, 2004, and the transition was completed during the Company’s fourth fiscal quarter in 2005. The Company had previously expected that the consolidation of the facilities would be completed by the end of the Company’s first fiscal quarter in 2005. However, the transfer of production was slowed to accommodate the training of associates and the completion of certain manufacturing system enhancements. During the delayed transition the Company experienced production inefficiencies that resulted in delayed deliveries to its customers and additional costs.

As part of the Facility Maximization, the Company negotiated with the Nova Scotia government the forgiveness of debt consisting of Crossley’s outstanding sinking fund bonds. The forgiveness, which commenced in fiscal 2006, is over the remaining term of the note, and is based upon maintaining a defined level of full-time equivalent employees. The debt is also non-interest bearing.

The original anticipated total expenditures and actual costs incurred for the Facility Maximization are as follows (in millions):

	Anticipated Total Expenditures as of August 10, 2004		Amounts Incurred During Fiscal Year Ended January 29, 2005		Amounts Incurred During Fiscal Year Ended January 28, 2006		Total Amounts Incurred
Severance Costs	$	1.8	$	1.5	$	0.6	$	2.1
Contractual Obligations and Professional Fees		3.1		0.4		0.8		1.2
Other Project Costs		1.5		2.1		6.8		8.9
Gross Project Expenditures	$	6.4	$	4.0	$	8.2	$	12.2

There were minimal remaining Facility Maximization costs accrued as of January 28, 2006. No costs were accumulated as of January 27, 2007.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements as of January 27, 2007 and January 28, 2006.

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Contractual Obligations

The following table contains a summary of the Company’s future minimum payments under contractual obligations as of January 27, 2007:

	2007		2008		2009		2010		2011		Thereafter		Total
Long-Term Debt	$	0.4	$	0.4	$	0.4	$	165.4	$	31.3	$	0.3	$	198.2
Interest Related to Debt (1)		18.2		18.2		18.2		10.2		2.1		0.1		67.0
Operating Leases		3.0		1.8		1.0		0.7		0.3		—		6.8
Total	$	21.6	$	20.4	$	19.6	$	176.3	$	33.7	$	0.4	$	272.0

(1) Assumes interest rates on floating rate debt equates to the interest rates as of January 27, 2007.

Purchase orders or contracts for the purchase of inventory and other goods and services are not included in the table above. The Company is not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. The Company’s purchase orders are based on its current distribution needs and are fulfilled by its vendors within short time horizons. There are no significant long-term agreements for the purchase of inventory or other goods specifying minimum quantities or set prices that exceed the Company’s expected requirements for three months.

Critical Accounting Policies

The Company’s significant accounting policies are more fully described in Note 2 of the “Notes to Consolidated Financial Statements” contained herein in Item 8. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based on our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate. The Company’s significant accounting policies include:

Basis of Consolidation. The accompanying consolidated financial statements include the accounts of Collins & Aikman Floorcoverings, Inc. and its wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles. All significant intercompany transactions and balances have been eliminated.

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. Additionally, freight charged to customers is included in net sales.

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 management believes that the customer claims reserve and allowance for product returns is adequate and that 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.

Foreign Currency Translation. Effective July 31, 2005, the Company’s Canadian subsidiary adopted the U.S. dollar as its functional currency. Prior to this date, the Canadian dollar had served as the subsidiary’s functional currency. The transition to the U.S. dollar as the functional currency was primarily due to the high volume of this subsidiary’s transactions that are denominated in U.S. dollars, the high volume of intercompany transactions, and the extensive interrelationship between the Company’s U.S. operations and those of the Canadian subsidiary. The financial information of the Company’s Canadian subsidiary for the quarter ended July 30, 2005 and prior periods have been presented in U.S. dollars in accordance with a translation of convenience method using the exchange rate at July 30, 2005 of US$1.00 being equal to CDN$1.2241, the Bank of Canada closing buying rate at July 30, 2005. For periods subsequent to July 30, 2005, the Canadian dollar amounts are remeasured into the U.S. dollar reporting currency using the temporal method. When the temporal method is used to translate the local currency of a foreign entity into its functional currency, the resulting translation adjustment is reported in the current period’s statement of operations.

Assets and liabilities of the U.K. and Asian subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as a separate component of shareholders’ equity. Foreign currency gains (losses) are recognized in the statement of operations.

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

Accounts Receivable Allowances. The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical experience and periodic evaluation of the financial condition of the Company’s customers and collectability of the Company’s accounts receivable. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to pay their debts, allowances recorded in the Company’s financial statements may not be adequate.

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

Pension Benefits. Net pension expense recorded is based on, among other things, assumptions regarding discount rate, estimated return on plan assets and salary increases. While the Company believes these assumptions are reasonable, changes in these and other factors and differences between actual and assumed changes in the present value of liabilities or assets of our plans above certain thresholds could cause net annual expense to increase or decrease significantly from year to year. The actuarial assumptions used in reporting for the Company’s defined benefit plans are reviewed periodically and compared with external benchmarks to ensure that they appropriately account for the Company’s future pension benefit obligation. The expected long-term rate of return on plan assets assumption is based on expected returns for each target asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views of the financial markets, and include input from actuaries and plan administrators.

Income Taxes. The provision for income taxes includes federal, state, local and foreign taxes. The Company accounts for income taxes under an asset and liability approach pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of changes in tax rates will be recognized as income or expense in the period that includes the enactment date. Future tax benefits are recognized to the extent that realization of those benefits is considered to be more likely than not. A valuation allowance is established for deferred tax assets for which realization is not assured.

Effects of Inflation

Petroleum-based products comprise a predominant portion of raw materials the Company uses in manufacturing. While the Company attempts to match cost increases with corresponding price increases, large increases in the cost of petroleum-based raw materials has adversely affected and could adversely affect the future financial results of the Company if it is unable to pass through such price increases in raw material costs to customers.

The impact of inflation on the Company’s operations has not been significant in recent years with the exception of petroleum-based products noted above which have risen in price. 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 if the Company is unable to pass through the cost increases to its customers.

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 sales in the education end market during the summer months while schools generally are closed and floorcovering can be installed.

Reliance on Primary Third-Party Supplier of Nylon Yarn

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

While Invista is an important vendor, it is believed that there are adequate alternative sources of supply from which the synthetic fiber requirement could be fulfilled including, but not limited to, nylon yarn produced by Extrusion. In addition to Invista, there are at least three major third party suppliers to the commercial carpet industry from whom the Company acquires yarn.

The other significant raw materials used by the Company in its carpet manufacturing process include coater materials, such as vinyl resins and primary backing.

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The Company has not experienced a problem sourcing nylon, processed yarn or any other raw material used in the manufacture of carpet from suppliers and does not anticipate any difficulties in sourcing these raw materials in the future, although no assurances can be given.

At the Company’s yarn extrusion facility, the significant raw materials are nylon and polypropylene polymer and dye pigments. The chips purchased are used to manufacture the nylon and polypropylene yarn. The dye and pigments give the yarn color for solution dyed yarns.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - - Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value and revises provisions of FASB Statement No. 115 that apply to available-for-sale and trading securities. This statement is effective for fiscal years beginning after November 15, 2007. The Company is current evaluating the impact, if any, of the adoption of SFAS No. 159 on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 will not have a material effect on the Company’s financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income. In addition, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end. The provisions of SFAS No. 158 are effective for employers without publicly traded equity securities as of the end of the fiscal year ending after June 15, 2007. While the effect of the adoption of SFAS No. 158 on the Company’s financial position has not yet been determined, the adoption will have no effect on the Company’s results of operations.

In September 2006, the Securities & Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides additional guidance on determining the materiality of cumulative unadjusted misstatements in both current and future financial statements. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The guidance in SAB No. 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The Company has adopted SAB No. 108 which did not result in a material impact to its consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109” (“FIN 48”). FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes” and defines the confidence level that an income tax position must meet in order to be recognized in the financial statements. The interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date. If a tax position is not considered “more-likely-than-not” to be sustained, no benefits of the position are to be recognized. FIN 48 requires additional annual disclosures and is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company will adopt FIN 48 on January 28, 2007 and is currently evaluating the effect that the adoption will have on its consolidated financial statements, although it is anticipated that the impact will not be material.

In June 2006, the Emerging Issues Task Force released Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-03”). EITF 06-03 concludes that this issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and the presentation of those taxes on either a gross or a net basis is an accounting policy decision that should be disclosed. In addition, EITF 06-03 states that the amounts for taxes that are reported on a gross basis should be disclosed in interim and annual financial statements. EITF 06-03 is effective for periods beginning after December 15, 2006. The adoption is not expected to have a material impact on the Company’s financial statements.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of Statement of Financial Accounting Standards Nos. 133 (“SFAS No. 133”) and 140” (“SFAS No. 155”). SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, eliminates restrictions on a qualifying special-purpose entity’s ability to hold passive derivative financial instruments that pertain to beneficial interests that are, or contain, a derivative financial instrument. The guidance is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 will not have a material effect on the Company’s financial position or results of operations.

23

Item 7A. 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. The Company is exposed to changes in interest rates and foreign currency.

Interest Rate Risk

The Company’s Revolver has variable interest rates. 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 the Company’s 9.75% fixed rate senior subordinated notes, 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 January 27, 2007, the Company had variable rate debt of $30.9 million and fixed rate debt of $172.2 million, which includes approximately $0.1 million of capitalized leases. The interest rate per annum applicable to borrowings under the Revolver is equal to the base rate, Canadian prime rate, LIBOR or the Canadian BA rate, plus an applicable margin, depending on the nature of the loan, and mandatory costs, if any. The applicable margin may range from 0% to 1.75% and varies based on the Company’s fixed charge coverage rate. See Note 9 of the “Notes to Consolidated Financial Statements” contained herein in Item 8. Had the outstanding Revolver balance as of the end of the fiscal year been outstanding for the full year, the impact on the Company’s results of operations of an increase of 100 basis points in the interest rate would have been approximately $0.2 million, net of tax.

Foreign Currency Exchange Rate Risk

If on January 27, 2007, currency exchange rates were to decline by 10% against the U.S. dollar and that decline remained in place for 2007, we estimate, based on our year-end 2006 investments in financial instruments and holding everything else constant, that the effect on our fiscal 2007 results of operations would be immaterial.

24

Item 8. Financial Statements and Supplemental Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Stockholder and Board of Directors

Collins & Aikman Floorcoverings, Inc.

We have audited the accompanying consolidated balance sheets of Collins & Aikman Floorcoverings, Inc. and Subsidiaries (a Delaware corporation) as of January 27, 2007 and January 28, 2006, and the related consolidated statements of operations, stockholder’s equity and cash flows for each of the three fiscal years in the period ended January 27, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Crossley Carpet Mills Limited, a wholly-owned subsidiary, as of and for the fiscal year ended January 29, 2005, which statements reflect total assets of 9 percent of consolidated total assets as of January 29, 2005 and total revenues of 13 percent of consolidated revenues for the year then ended. Those statements were audited by other auditors, whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for Crossley Carpet Mills Limited, is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Collins & Aikman Floorcoverings, Inc. and Subsidiaries as of January 27, 2007 and January 28, 2006, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 27, 2007 in conformity with accounting principles generally accepted in the United States of America.

Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The Schedule II, as listed in the Index, is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.

/s/ GRANT THORNTON, LLP

Atlanta, Georgia

April 27, 2007

25

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of

Crossley Carpet Mills Limited

We have audited the consolidated statements of loss and retained earnings and cash flow (not presented separately herein) of Crossley Carpet Mills Limited (a wholly-owned subsidiary of Collins & Aikman Floorcoverings, Inc.) for the period ended January 29, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of its operations and cash flows for the period ended January 29, 2005 in accordance with Canadian generally accepted accounting principles.

/s/ Ernst & Young LLP (Canada)

Chartered Accountants

Halifax, Canada

March 11, 2005

26

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands, Except Share Amounts)

	January 27, 2007			January 28, 2006
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents	$	6,754		$	5,545
Accounts Receivable, net of allowances of $464 and $440 in fiscal 2006 and 2005, respectively		46,794			45,179
Inventories		37,870			38,331
Deferred Tax Assets		11,504			4,863
Prepaid Expenses and Other		687			3,292
Total Current Assets		103,609			97,210
PROPERTY, PLANT AND EQUIPMENT, net		60,074			64,267
GOODWILL		98,378			98,378
OTHER INTANGIBLE ASSETS, net		26,195			28,650
OTHER ASSETS		5,950			6,929
OTHER ASSETS - DISCONTINUED OPERATIONS (Note 3)		4,930			7,094
TOTAL ASSETS	$	299,136		$	302,528
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts Payable	$	16,832		$	14,692
Accrued Expenses		25,787			24,772
Current Portion of Long-Term Debt		434			4,648
Total Current Liabilities		43,053			44,112
OTHER LIABILITIES, including post-retirement benefit obligation		3,431			5,364
OTHER LIABILITIES - DISCONTINUED OPERATIONS (Note 3)		2,263			2,487
DEFERRED TAX LIABILITIES		8,519			4,441
LONG-TERM DEBT, net of current portion		197,805			197,673
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDER’S EQUITY:
Common Stock ($0.01 par value per share, 1,000 shares authorized, issued and outstanding in fiscal 2006 and fiscal 2005)		—			—
Paid-in Capital		72,648			72,648
Retained Deficit		(28,283	)		(22,435	)
Accumulated Other Comprehensive Loss:
Foreign Currency Translation Adjustment		(300	)		(553	)
Minimum Pension Liability Adjustment, net of tax		—			(1,209	)
Total Stockholder’s Equity		44,065			48,451
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	299,136		$	302,528

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

27

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In Thousands)

	Fiscal Year Ended
	January 27, 2007 (52 Weeks)			January 28, 2006 (52 Weeks)			January 29, 2005 (52 Weeks)
Net Sales	$	350,365		$	316,213		$	331,946
Cost of Goods Sold		231,891			221,039			219,496
Selling, General & Administrative Expenses		78,523			76,654			75,943
Amortization		2,455			2,620			3,112
Operating Expenses		312,869			300,313			298,551
Operating Income		37,496			15,900			33,395
Minority Interest in (Income) Loss of Subsidiary		—			24			(97	)
Equity in Earnings of Affiliate		—			—			893
Gain (Loss) on Early Extinguishment/Forgiveness of Debt		(213	)		795			—
Net Interest Expense		20,650			20,082			20,443
Other Income (Expense)		(245	)		96			(172	)
Income (Loss) from Continuing Operations Before Income Taxes		16,388			(3,267	)		13,576
Income Tax Expense (Benefit)		7,162			(358	)		5,961
Income (Loss) from Continuing Operations		9,226			(2,909	)		7,615
Gain (Loss) from Discontinued Operations, net of tax (Note 3)		979			(1,720	)		(912	)
Net Income (Loss)	$	10,205		$	(4,629	)	$	6,703

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

28

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholder’s Equity

(In Thousands, Except Share Amounts)

							Accumulated Other Comprehensive Income (Loss)
	Common Stock (Shares)	Paid-in Capital		Retained Earnings (Deficit)			Foreign Currency Translation			Minimum Pension Liability			Total
BALANCE, January 31, 2004	1,000	$	72,648	$	(24,509	)	$	(493	)	$	(954	)	$	46,692
Net income	—		—		6,703			—			—			6,703
Change in foreign currency translation adjustment, net of tax	—		—		—			222			—			222
Total Comprehensive Income														6,925
BALANCE, January 29, 2005	1,000	$	72,648	$	(17,806	)	$	(271	)	$	(954	)	$	53,617
Net loss	—		—		(4,629	)		—			—			(4,629	)
Change in foreign currency translation adjustment, net of tax	—		—		—			(282	)		—			(282	)
Change in minimum pension liability adjustment, net of tax	—		—		—			—			(255	)		(255	)
Total Comprehensive Loss														(5,166	)
BALANCE, January 28, 2006	1,000	$	72,648	$	(22,435	)	$	(553	)	$	(1,209	)	$	48,451
Net income	—		—		10,205			—			—			10,205
Change in foreign currency translation adjustment, net of tax	—		—		—			253			—			253
Change in minimum pension liability adjustment, net of tax	—		—		—			—			1,209			1,209
Total Comprehensive Income														11,667
Dividend to parent	—		—		(16,053	)		—			—			(16,053	)
BALANCE, January 27, 2007	1,000	$	72,648	$	(28,283	)	$	(300	)	$	—		$	44,065

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

29

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In Thousands)

	Fiscal Year Ended
	January 27, 2007			January 28, 2006			January 29, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	10,205		$	(4,629	)	$	6,703
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and leasehold amortization		11,173			10,307			10,470
Amortization of intangible assets		2,455			2,620			3,112
Amortization and write-off of deferred financing fees		1,194			1,158			1,259
Change in deferred income tax		(1,873	)		(679	)		3,561
Equity in earnings of affiliate		—			—			(893	)
Minority interest in income (loss) of subsidiary		—			(24	)		97
(Gain) loss on early extinguishment/forgiveness of debt		213			(795	)		—
Loss on disposal of fixed assets		220			36			172
Non-cash impairment charge from discontinued operations		2,237			—			—
Changes in operating assets and liabilities:
Accounts receivable		(1,437	)		(4,828	)		(5,844	)
Inventories		1,048			(1,015	)		(3,515	)
Accounts payable		1,792			(1,410	)		491
Accrued expenses		1,141			(3,080	)		7,930
Other, net		(212	)		(2,307	)		3,702
Total adjustments		17,951			(17	)		20,542
Net cash provided by (used in) operating activities		28,156			(4,646	)		27,245
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of capital assets		37			370			92
Equity distribution from affiliate		—			—			922
Additions to property, plant, and equipment		(7,213	)		(10,461	)		(11,862	)
Other		90			68			(199	)
Net cash used in investing activities		(7,086	)		(10,023	)		(11,047	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities		21,815			19,530			15,280
Repayments of revolving credit facilities		(25,457	)		(15,888	)		(15,280	)
Repayment of 10% senior subordinated notes		(250	)		—			—
Proceeds from issuance of long-term debt		30,909			752			641
Repayments of long-term debt		(30,813	)		(9,322	)		(1,784	)
Dividends to Tandus Group, Inc.		(16,053	)		—			—
Financing costs		(46	)		(256	)		(380	)
Net cash used in financing activities		(19,895	)		(5,184	)		(1,523	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		34			(2	)		(189	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		1,209			(19,855	)		14,486
CASH AND CASH EQUIVALENTS, Beginning of Year		5,545			25,400			10,914
CASH AND CASH EQUIVALENTS, End of Year	$	6,754		$	5,545		$	25,400

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

30

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. 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) six-foot roll carpet and modular carpet tile, and (ii) high style tufted and woven broadloom carpets. 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. The Company is headquartered in Georgia, with additional manufacturing locations in Canada and China. In addition, the Company operated a manufacturing facility in the United Kingdom until its sale in February 2007. See Note 3 contained herein for further information.

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”), specifically OCM Principal Opportunities Fund II, L.P. (the “Oaktree Fund”) and BancAmerica Capital Investors II, L.P. (the “B of A Fund”), respectively, control a majority of the outstanding capital stock of Tandus Group.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements of Collins & Aikman Floorcoverings, Inc., its subsidiaries, joint venture and its equity investment have been prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany items have been eliminated in consolidation.

During the fourth quarter of fiscal 2006, the Company announced its intent to exit manufacturing in the United Kingdom. The Company subsequently entered into a definitive agreement to sell its wholly-owned United Kingdom subsidiary, Tandus Europe Ltd. The financial results of Tandus Europe Ltd. are reported as discontinued operations in the consolidated financial statements for each year presented. Except where noted, the information presented in these notes to the consolidated financial statements excludes the Company’s discontinued operations. See Note 3 contained herein for further information.

Reclassifications

Certain reclassifications have been made to the prior year amounts to conform with current year classifications.

Fiscal Year

The fiscal year of the Company ends on the last Saturday of January. Fiscal years are identified according to the calendar year in which the majority of the months fall. Fiscal years 2006, 2005 and 2004 were 52-week years which ended on January 27, 2007, January 28, 2006 and January 29, 2005, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.

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 $17.1 million, $14.6 million and $15.0 million for fiscal 2006, 2005 and 2004, respectively. Freight charged to customers is included in net sales. Freight fees included in net sales were $6.2 million, $6.1 million and $5.5 million in fiscal 2006, 2005 and 2004, respectively.

A customer claims reserve and allowance for product returns is established based upon historical claims experience as a percent of gross sales as of the balance sheet date. The allowance for customer claims is recorded upon shipment of goods and is recorded as a

31

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

reduction of sales. While the Company believes that the customer claims reserve and allowance for product returns is adequate and that 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.

Cost of Goods Sold

Cost of goods sold includes raw materials, labor, manufacturing overhead, freight costs, depreciation and the cost of installation services provided to our customers through independent third-party contractors.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include compensation and related expenses, selling and marketing expenses, travel expenses, professional services, depreciation and amortization.

Foreign Currency Translation

Effective July 31, 2005, the Company’s Canadian subsidiary adopted the U.S. dollar as its functional currency. Prior to this date, the Canadian dollar had served as the subsidiary’s functional currency. The transition to the U.S. dollar as the functional currency is primarily due to the high volume of this subsidiary’s transactions that are denominated in U.S. dollars, the high volume of intercompany transactions, and the extensive interrelationship between the Company’s U.S. operations and those of the Canadian subsidiary. The financial information of the Company’s Canadian subsidiary for the quarter ended July 30, 2005 and prior periods have been presented in U.S. dollars in accordance with a translation of convenience method using the exchange rate at July 30, 2005 of US$1.00 being equal to CDN$1.2241, the Bank of Canada closing buying rate at July 30, 2005. For periods subsequent to July 30, 2005, the Canadian dollar amounts are remeasured into the U.S. dollar reporting currency using the temporal method. When the temporal method is used to translate the local currency of a foreign entity into its functional currency, the resulting translation adjustment is reported in the current period’s statement of operations.

Assets and liabilities of the U.K. and Asian subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as a separate component of stockholder’s equity. Foreign currency gains (losses) are recognized in the statement of operations.

Net foreign currency gain (loss) recognized in the consolidated statements of operations was approximately $(0.3) million, $0.0 million and $0.9 million for fiscal years 2006, 2005 and 2004, respectively.

Financial Instruments

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, trade accounts receivable, and long-term debt. Because of the short-term maturity of cash and cash equivalents and trade accounts receivable, carrying value approximates fair value.

The carrying value of the senior secured revolving credit facility portion of the Company’s long-term debt approximates the fair value as the facility is subject to variable interest rates. As of January 27, 2007, the estimated fair value of the 9.75% Senior Subordinated Notes exceeded their carrying value by approximately $4.0 million. Fair value of the 9.75% Senior Subordinated Notes is determined by market sources. See Note 9 for further information.

Cash and Cash Equivalents

Cash and cash equivalents include all cash balances and investments with an original maturity of three months or less. The Company invests its excess cash in short-term investments and has not experienced any losses on those investments. Cash held by the Company’s foreign subsidiaries totaled $3.3 million and $2.9 million as of January 27, 2007 and January 28, 2006, respectively.

Accounts Receivable and 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. The Company’s trade accounts receivable are non-interest bearing and are recorded at the invoiced amounts. Allowances are provided for expected cash discounts, returns, 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

32

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

potential credit losses. Accounts receivable balances are aged according to invoice date 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 (determined on a first-in, first-out basis) or market value. Market value is determined based on replacement cost for raw materials and net realizable value for work in process and finished goods. Reserves are established based on percentage markdowns applied to inventories aged for certain time periods and size of lot.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Provisions for depreciation are primarily computed on a straight-line basis over the estimated useful lives of the assets, presently ranging from three to 40 years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements. Repairs and maintenance are charged to operations as incurred.

Long-Lived, Goodwill and Other Intangible Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the guidance in Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset.

Goodwill and other intangible assets with an indefinite useful life are tested for impairment annually in accordance with the guidance in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The Company’s annual impairment testing is performed as of the end of each third fiscal quarter. An intangible asset with a finite life is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the guidance in SFAS No. 144.

Income Taxes

The provision for income taxes includes federal, state, local and foreign taxes. The Company accounts for income taxes under an asset and liability approach pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of changes in tax rates will be recognized as income or expense in the period that includes the enactment date. Future tax benefits are recognized to the extent that realization of those benefits is considered to be more likely than not. A valuation allowance is established for deferred tax assets for which realization is not assured.

Stock Based Compensation

Effective January 29, 2006, the Company adopted the fair value recognition provision of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), using the prospective transition method. This method allows the application of the provisions of SFAS No. 123(R) to share-based awards granted subsequent to adoption. There were no grants of stock-based compensation during the fiscal year ended January 27, 2007. For stock-based compensation issued prior to January 29, 2006, the Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”).

In August 2001, Tandus Group adopted the 2001 Tandus Group, Inc. Executive and Management Stock Option Plan (the “2001 Plan”) which provides for the issuance of options to purchase 57,061.64 shares of Tandus Group common stock (the “Old Options”). The plan allows the issuance of non-qualified stock options at an exercise price determined by Tandus Group’s Board of Directors or its Compensation Committee. The Old Options become exercisable over five years, expire ten years from the date of grant and vest only upon the achievement of certain earnings targets; however, accelerated vesting could occur due to a change in control. The Company accounts for the Old Options as variable options and will record expenses based upon increases and decreases in the fair market value of the common stock at the end of each reporting period. As of January 27, 2007, the Company has not recorded any stock-based compensation cost in net income (loss) as the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

targets established under the program have not been achieved and all Old Options outstanding had an exercise price equal to the market value of the underlying common stock on the date of grant. During the fourth quarter of fiscal 2006, the Company purchased a portion of the Old Options outstanding for a nominal flat fee per employee. At January 27, 2007, no shares are exercisable and the weighted average contractual life of the outstanding Old Options is 4.5 years.

The Company has historically recorded these options under the minimum value method. Upon the adoption of SFAS No. 123(R), the Company is no longer required to provide proforma disclosures.

On December 6, 2006, Tandus Group adopted the 2001 Tandus Group, Inc. Amended and Restated Management Stock Option Plan (the “2001 Amended Plan”) which provides for the issuance of options to purchase 500,000 shares of Tandus Group common stock (the “New Options”). The 2001 Amended Plan allows the issuance of non-qualified stock options at an exercise price determined by Tandus Group’s Board of Directors or its Compensation Committee. No New Options had been granted as of January 27, 2007; however, New Options were granted on January 31, 2007, at which time all Old Options were cancelled. SFAS No. 123(R) will be effective for all awards granted or modified after January 29, 2006.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value and revises provisions of FASB Statement No. 115 that apply to available-for-sale and trading securities. This statement is effective for fiscal years beginning after November 15, 2007. The Company is current evaluating the impact, if any, of the adoption of SFAS No. 159 on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 will not have a material effect on the Company’s financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income. In addition, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end. The provisions of SFAS No. 158 are effective for employers without publicly traded equity securities as of the end of the fiscal year ending after June 15, 2007. While the effect of the adoption of SFAS No. 158 on the Company’s financial position has not yet been determined, the adoption will have no effect on the Company’s results of operations.

In September 2006, the Securities & Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides additional guidance on determining the materiality of cumulative unadjusted misstatements in both current and future financial statements. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The guidance in SAB No. 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The Company has adopted SAB No. 108 which did not result in a material impact to its consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109” (“FIN 48”). FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes” and defines the confidence level that an income tax position must meet in order to be recognized in the financial statements. The interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date. If a tax position is not considered “more-likely-than-not” to be sustained, no benefits of the position are to be recognized. FIN 48 requires additional annual disclosures and is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company will adopt FIN 48 on January 28, 2007 and is currently evaluating the effect that the adoption will have on its consolidated financial statements, although it is anticipated that the impact will not be material.

In June 2006, the Emerging Issues Task Force released Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-03”). EITF 06-03 concludes that this issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and the presentation of those taxes on either a gross or a net basis is an accounting policy decision that should be disclosed. In addition, EITF 06-03 states that the amounts for taxes that are reported on a gross basis should be disclosed in interim and annual financial statements. EITF 06-03 is effective for periods beginning after December 15, 2006. The adoption is not expected to have a material impact on the Company’s financial statements.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of Statement of Financial Accounting Standards Nos. 133 (“SFAS No. 133”) and 140” (“SFAS No. 155”).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, eliminates restrictions on a qualifying special-purpose entity’s ability to hold passive derivative financial instruments that pertain to beneficial interests that are, or contain, a derivative financial instrument. The guidance is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 will not have a material effect on the Company’s financial position or results of operations.

3. DISCONTINUED OPERATIONS

In December 2006, the Company announced its intent to exit manufacturing in the United Kingdom. On February 5, 2007, the Company completed the sale of its subsidiary, Tandus Europe Ltd., to Interior Projects Solutions Limited (the “Purchaser”) in exchange for a note with a face value of $4.0 million. The discounted value of the note is $2.6 million reflecting the net present value of the future anticipated cash flows at a market rate for similar instruments of 18%. The Purchaser will continue to manufacture carpet products for distribution throughout Europe and, under a separate agreement, will be the exclusive distributor of the Company’s products in several European countries provided that certain minimum performance and other requirements are satisfied.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Additionally, certain products manufactured by the Purchaser will continue to bear the Company’s C&A brand.

In conjunction with the classification of Tandus Europe Ltd. as an asset held for sale, the Company recognized a loss of $2.3 million before tax to write down the value of its net assets to the fair value to be received and recorded an additional loss of $0.4 million before tax related to the accrual of certain severance and legal expenses related to the disposition. Included in the $2.3 million loss is recognition of $0.2 million of foreign currency translation adjustment loss previously reported in Accumulated Other Comprehensive Loss. The Company recorded an income tax benefit of $5.7 million principally related to the write-off of intercompany receivables due from the subsidiary to be sold. The net impact of this activity resulted in an after-tax gain of $3.0 million.

Selected results for the United Kingdom subsidiary are as follows (in thousands):

	Fiscal Year Ended
	January 27, 2007			January 28, 2006			January 29, 2005
Net Sales	$	8,903		$	8,843		$	8,528
Loss from Operations Before Income Taxes	$	(2,006	)	$	(1,720	)	$	(912	)
Income Taxes		—			—			—
Loss from Operations, net of tax		(2,006	)		(1,720	)		(912	)
Loss on Disposal Before Income Tax Benefit		(2,686	)		—			—
Income Tax Benefit		(5,671	)		—			—
Gain (Loss) from Discontinued Operations	$	979		$	(1,720	)	$	(912	)

Assets and liabilities for discontinued operations as reported in the accompanying consolidated balance sheets are comprised of the following (in thousands):

	January 27, 2007		January 28, 2006
Other Assets
Cash and Cash Equivalents	$	168	$	258
Accounts Receivable		959		1,512
Inventories		1,076		1,662
Prepaid Expenses and Other		115		232
Property, Plant, and Equipment, net		2,612		3,430
Other Assets - Discontinued Operations	$	4,930	$	7,094
Other Liabilities
Accounts Payable	$	1,763	$	2,111
Accrued Expenses		500		376
Other Liabilities - Discontinued Operations	$	2,263	$	2,487

4. INVENTORIES

Net inventory balances are summarized below (in thousands):

	January 27, 2007		January 28, 2006
Raw materials	$	18,928	$	17,427
Work in process		7,022		6,296
Finished goods		11,920		14,608
	$	37,870	$	38,331

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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net, are summarized below (in thousands):

	Depreciable Lives	January 27, 2007			January 28, 2006
Land improvements	15 years	$	2,140		$	2,121
Buildings	35 years		20,804			20,735
Machinery and equipment	3-9 years		110,169			106,549
Leasehold improvements	Lease term or 10 years		5,148			4,687
Construction in progress	—		937			1,074
			139,198			135,166
Less accumulated depreciation			(79,124	)		(70,899	)
		$	60,074		$	64,267

Depreciation expense and leasehold amortization of property, plant and equipment was $10.9 million for fiscal 2006, $10.0 million for fiscal 2005 and $10.0 million for fiscal 2004.

6. OTHER INTANGIBLE ASSETS

The Company holds a patent that is being amortized over an eleven-year period using the straight-line method. The gross carrying amount and accumulated amortization of the patent were $27.0 million and $24.5 million, respectively, as of January 27, 2007, and $27.0 million and $22.2 million, respectively, as of January 28, 2006.

The Company has indefinite lived intangible assets for trade names with a carrying value of $23.6 million as of January 27, 2007 and January 28, 2006. Additionally, the Company has an unamortized intangible asset related to its defined benefit plans in the amount of $0.1 million as of January 27, 2007 and January 28, 2006.

Amortization expense was $2.5 million for fiscal year 2006, $2.6 million for fiscal year 2005, and $3.1 million for fiscal year 2004. Amortization expense of $2.5 million is estimated for fiscal year 2007. No amortization expense is anticipated for fiscal years thereafter.

7. ACCRUED EXPENSES

Accrued expenses are summarized below (in thousands):

	January 27, 2007		January 28, 2006
Payroll and employee benefits	$	7,808	$	6,495
Customer claims		3,219		1,798
Accrued interest		7,443		7,796
Accrued professional fees		2,913		3,323
Other		4,404		5,360
	$	25,787	$	24,772

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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

8. EMPLOYEE BENEFIT PLANS

Defined Contribution Plan

Substantially all U.S. employees of the Company who meet eligibility requirements are covered under a defined contribution plan, which is administered by the Company. Eligible participants can contribute up to 10% of their annual compensation and receive Company matching contributions based on formulas as specified in the plan document. The Company contributed approximately $1.2 million, $1.0 million and $0.8 million in fiscal years 2006, 2005 and 2004, respectively, to the plan.

U.S. Defined Benefit Plan

The Company maintains a defined benefit program (“the U.S. Plan”) for its domestic employees, which was frozen during fiscal 2002. Accordingly, no new benefits are being accrued under the U.S. 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 U.S. Plan beyond minimum funding requirements as is deemed appropriate by management.

The following tables provide a reconciliation of the projected benefit obligation, a reconciliation of plan assets, the funded status of the plan, and amounts recognized in the Company’s consolidated financial statements as of January 27, 2007 and January 28, 2006 using December 31 as a measurement date for all actuarial calculations of asset and liability values and significant actuarial assumptions.

	Fiscal Year Ended
(in thousands)	January 27, 2007			January 28, 2006
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	4,668		$	4,702
Service cost		—			—
Interest cost		233			232
Change in assumptions		14			—
Actuarial (gain) loss		(336	)		203
Benefits paid		(371	)		(476	)
Settlement loss		5			7
Benefit obligation at end of year	$	4,213		$	4,668
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	4,339		$	4,776
Company contributions		—			—
Actual return on plan assets		473			39
Benefits paid		(371	)		(476	)
Fair value of plan assets at end of year	$	4,441		$	4,339
Funded Status of the Plan:
Funded status at end of year	$	228		$	(329	)
Unamortized net actuarial loss		1,235			1,943
Prepaid benefit cost		1,463			1,614
Additional minimum liability		—			(1,943	)
(Accrued) Prepaid benefit cost after additional minimum liability	$	1,463		$	(329	)

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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

	Fiscal Year Ended
(in thousands)	January 27, 2007			January 28, 2006			January 29, 2005
Net Pension Cost Includes the Following Components:
Service cost - benefits earned during the period	$	—		$	—		$	—
Interest cost on projected benefit obligations		233			232			274
Expected return on plan assets		(321	)		(319	)		(363	)
Recognized net actuarial losses		109			127			99
Settlement losses		129			187			177
Net periodic pension expense for year	$	150		$	227		$	187

	January 27, 2007		January 28, 2006
Weighted-average assumptions used to determine benefit obligations:
Discount rate	5.75	%	5.50	%
Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate	5.75	%	5.50	%
Expected long-term rate of return on assets	7.75	%	7.75	%

As previously disclosed, the U.S. plan was frozen during fiscal 2002. Accordingly, there is no assumed rate of compensation increase associated with current and future plan calculations.

The accumulated benefit obligation for each of the years ended January 27, 2007 and January 28, 2006 is $4.2 million and $4.7 million, respectively.

The investment strategy for the Company’s U.S. Plan is determined by a committee composed of senior management of the Company, two members from Human Resources and one member from Finance. This committee reports to the Compensation Committee of the Board of Directors. The funds in the U.S. Plan are to be invested effectively and prudently for the exclusive benefit of U.S. Plan participants and beneficiaries. In order to accomplish this strategy, the U.S. Plan’s current asset allocation strategy contains a defined mix of both debt and equity securities, to maximize growth at a conservative risk level. The committee reviews the U.S. Plan’s asset mix on a regular basis. When the exposure in either asset category reaches either a minimum or maximum level, an asset allocation review process is initiated and the portfolio will be rebalanced backed to target allocation levels. In developing a strategic asset allocation policy, the Company examined certain factors that affect the risk tolerance of the U.S. Plan such as the demographics of employees, the actuarial and funding characteristics of the U.S. Plan and the Company’s business and financial characteristics.

The U.S. Plan’s weighted-average asset allocations at January 27, 2007 and January 28, 2006, by asset category are as follows:

Asset Category	Fiscal 2006 Target Allocation		January 27, 2007		January 28, 2006
Equity Securities	70	%	70	%	62	%
Fixed Income Debt Securities	30	%	30	%	38	%
Total	100	%	100	%	100	%

The expected return on asset assumption was developed through analysis of historical market returns, current market conditions and a comparison of expectations on potential future market returns. The assumption represents a long-term average view of the performance of the U.S. Plan; therefore, the return may or may not be achieved during any one fiscal year.

A new mortality table assumption was adopted by the Company for the measurement of the January 28, 2006 benefit obligations, moving from the 1983 GAM mortality table to the RP-2000 CH table. This change in mortality table increased pension liabilities by approximately 5%.

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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

The following benefit payments are expected to be paid (in thousands):

Plan Year	Payout Projection
2007	$	195
2008		236
2009		178
2010		265
2011		380
2012 – 2016		976

No employer contributions are expected to be required in fiscal 2007.

Canadian Defined Benefit Plan

Substantially all Canadian employees of Crossley who meet eligibility requirements can participate in a defined benefit plan (the “Canadian Plan”) administered by the Company. Canadian Plan benefits are generally based on years of service and employees’ compensation during their years of employment. The Company contributes annually an amount that is based on the recommendations of its actuary and is deductible for income tax purposes. Assets of the Canadian plan are held in a trust invested primarily in mutual funds.

The following tables provide a reconciliation of the projected benefit obligation, plan assets, the funded status of the plans and amounts recognized in the Company’s consolidated financial statements at January 27, 2007 and January 28, 2006 using December 31 as a measurement date for all actuarial calculations of asset and liability values and significant actuarial assumptions.

	Fiscal Year Ended
(in thousands)	January 27, 2007			January 28, 2006
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	10,082		$	7,876
Service cost		1,065			925
Interest cost		517			480
Benefits paid		(599	)		(1,035	)
Foreign currency adjustment		(92	)		643
Actuarial gain		(106	)		—
Plan amendments		376			—
Change in assumptions		—			1,193
Benefit Obligation at end of year	$	11,243		$	10,082
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	8,750		$	7,301
Company contributions		1,164			882
Foreign currency adjustment		(79	)		597
Actual return on plan assets		1,146			1,005
Benefits paid		(599	)		(1,035	)
Fair value of plan assets at end of year	$	10,382		$	8,750
Funded Status of the Plan:
Funded status at end of year	$	(861	)	$	(1,332	)
Unamortized net actuarial loss		1,106			1,394
Prepaid benefit cost		245			62
Additional minimum liability (Intangible pension asset)		(130	)		(189	)
(Accrued) prepaid benefit cost after additional minimum liability	$	115		$	(127	)

40

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

	Fiscal Year Ended
(in thousands)	January 27, 2007			January 28, 2006			January 29, 2005
Net Pension Cost Includes the Following Components:
Service cost —benefits earned during the period	$	1,074		$	915		$	609
Interest cost on projected benefit obligations		521			475			432
Expected return on plan assets		(632	)		(541	)		(472	)
Recognized net actuarial loss		26			2			3
Net periodic pension expense for year	$	989		$	851		$	572

	January 27, 2007		January 28, 2006
Weighted-average assumptions used to determine benefit obligations:
Discount rate	5.25	%	5.25	%
Rate of Compensation Increase	4.00	%	4.00	%
Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate	5.25	%	6.00	%
Expected long-term rate of return on assets	7.00	%	7.00	%
Rate of Compensation Increase	4.00	%	4.00	%

The accumulated benefit obligation for the years ended January 27, 2007 and January 28, 2006 is $10.1 million and $8.9 million, respectively.

The Company’s Canadian Plan weighted-average asset allocations at December 31, 2006 and December 31, 2005 by asset category are as follows:

	Target Allocation		December 31, 2006		December 31, 2005
Core Canadian Equity	32.5	%	35.6	%	36.9	%
U.S. Equity	10.0	%	14.4	%	12.2	%
Real Estate	5.0	%	4.0	%	4.2	%
Bond	32.5	%	34.0	%	31.4	%
Mortgage	5.0	%	2.4	%	4.0	%
International Equity	10.0	%	9.6	%	8.5	%
Money Market	5.0	%	0.0	%	2.8	%
Total	100.0	%	100.0	%	100.0	%

The investment strategy for the Company’s Canadian plan is determined by a Committee composed of senior management, with representation from the Executive, Finance and Human Resources groups. This Committee reports to the Compensation Committee of the Board of Directors. The funds in the Canadian Plan are to be invested effectively and prudently for the exclusive benefit of Canadian Plan participants and beneficiaries with a strategy to maintain a conservative growth mix. In order to accomplish this strategy, the Canadian Plan’s asset allocation strategy contains investments in mutual funds, three focused on equity securities to maximize growth, and three focused on debt instruments to maintain a minimum level of stability. The Committee reviews the Canadian Plan’s asset mix on a regular basis. When the exposure in any of the funds reaches either a minimum or maximum level, an asset allocation review process is initiated and the independent pension plan administrator will automatically rebalance the portfolio back to target allocation levels. In developing a strategic asset allocation policy for the Canadian Plan, the Company examined certain factors that affect the risk tolerance of the Canadian Plan such as the demographics of employees, the actuarial and funding characteristics of the Canadian Plan and the Company’s business and financial characteristics.

The expected return on asset assumption was developed through analysis of historical market returns, current market conditions, and a comparison of expectations on potential future market returns. The assumption represents a long-term average view of the performance of the Canadian Plan, therefore the return may or may not be achieved during any one fiscal year.

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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

The following benefit payments are expected to be paid (in thousands):

Plan Year	Payout Projection
2007	$	293
2008		223
2009		597
2010		645
2011		816
2012 – 2016		8,371

The employer contributions expected to be paid in fiscal 2007 are $0.8 million.

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 postretirement benefit plan (the “Postretirement Plan”) currently in effect.

The following tables provide a reconciliation of the projected benefit obligation, the funded status and amounts recognized in the Company’s financial statements at January 27, 2007 and January 28, 2006 (in thousands):

	Fiscal Year Ended
	January 27, 2007			January 28, 2006
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	2,457		$	2,400
Service cost		175			169
Interest cost		127			122
Change in assumptions		—			77
Actuarial gain		(96	)		(182	)
Benefits paid		(57	)		(52	)
Curtailment gain		—			(77	)
Benefit Obligation at end of year	$	2,606		$	2,457
Funded Status of the Plan:
Funded status at end of year	$	(2,606	)	$	(2,457	)
Unamortized net actuarial (gain) loss		(90	)		5
Accrued benefit cost	$	(2,696	)	$	(2,452	)

	Fiscal Year Ended
	January 27, 2007		January 28, 2006			January 29, 2005
Net Pension Cost Includes the Following Components:
Service cost—benefits earned during the period	$	175	$	169		$	165
Interest cost on projected benefit obligations		127		122			125
Curtailment gain		—		(77	)		—
Net periodic pension expense for year	$	302	$	214		$	290

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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

The weighted-average discount rate used in determining the postretirement benefit obligations was 5.50% at January 27, 2007 and January 28, 2006. The weighted-average discount rate used in determining the net periodic pension expense was 5.50% for the year ended January 27, 2007 and 5.75% for the year ended January 28, 2006. The Postretirement Plan is unfunded. The Postretirement Plan does not allow for increases in employer-paid costs for participants who retired after 1998; therefore, the health care cost trend rate assumption has no material impact on the obligation of the Company.

The following benefit payments are expected to be paid (in thousands):

Plan Year	Payout Projection
2007	$	106
2008		118
2009		130
2010		148
2011		161
2012 – 2016		994

The employer contributions expected to be paid in fiscal 2007 are $0.1 million.

9. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

	January 27, 2007		January 28, 2006
10% Senior Subordinated Notes, due 2006	$	—	$	250
9.75% Senior Subordinated Notes, due 2010		165,000		165,000
Senior Secured Revolving Credit Facility		30,909		—
Senior Secured Credit Facility		—		30,598
Sinking Fund Bonds		866		1,335
Revolving Line of Credit		—		3,642
Other Debt		1,464		1,496
Total Debt		198,239		202,321
Less Current Maturities		434		4,648
	$	197,805	$	197,673

Senior Subordinated Notes

On February 20, 2002 the Company issued at par value $175.0 million of 9.75% Senior Subordinated Notes due in 2010 (the “9.75% Notes”). Interest is payable semiannually in arrears on February 15 and August 15. The 9.75% Notes are unsecured obligations of the Company and are subordinated in right of payment to all existing and future senior debt of the Company. The indenture governing the 9.75% Notes contains certain other restricted covenants that limit the ability of the Company among other things, to incur additional indebtedness, to pay dividends or make certain other restricted payments, and to put limitations on the incurrence of indebtedness, asset dispositions, and transactions with affiliates. The 9.75% Notes are guaranteed on a senior subordinated basis by the Company’s existing domestic subsidiaries. The indenture does not prohibit open market purchases of the 9.75% Notes.

Upon the occurrence of certain events, as set forth in the indenture, the Company is required to repurchase the 9.75% Notes at a purchase price in cash equal to 101% of the principal amount, plus accrued and unpaid interest at the date of purchase. On or after February 15, 2006, the Company can redeem all or a portion of the 9.75% Notes at the redemption prices listed below, plus accrued and unpaid interest at the date of repurchase if redeemed during the twelve month period commencing February 15 of the years set forth below.

Period	Redemption Price
2007	102.438	%
2008 and Thereafter	100.000	%

43

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

During fiscal 2005, the Company purchased in the open market subordinated notes with a face value of $10.0 million for an aggregate price of $9.0 million. These notes have been classified as defeased. The Company realized a $1.0 million gain on the purchase, which was partially offset by a write-off of a portion of the deferred financing fees related to these issuances in the amount of $0.2 million.

As of January 27, 2007 the estimated fair value of the 9.75% Notes exceeded their carrying value by approximately $4.0 million. Fair value of the 9.75% Notes is obtained from market sources.

Senior Secured Revolving Credit Facility

On January 18, 2007, the Company entered into a senior secured revolving credit facility agreement which provides for an $80.0 million senior secured revolving credit facility (the “Revolver”) including a $20.0 million sub-limit for letters of credit. The facility is apportioned between a U.S. revolving credit facility and a Canadian revolving credit facility. All obligations of the Company are secured by a first priority, perfected security interest in, and lien upon, substantially all tangible and intangible assets of the Company, a pledge of the stock of all domestic subsidiaries, and a pledge of 65% of the stock of any first tier material foreign subsidiaries. The proceeds of the Revolver have been and/or will be used for, among other purposes, (i) the refinancing of the Company’s previous credit facility, (ii) ongoing working capital needs of the Company, (iii) the payment of a dividend to the Company’s sole stockholder, Tandus Group, which Tandus Group in turn dividended to its shareholders, (iv) the payment of accrued management fees owed to two principal shareholders of Tandus Group and (v) the payment of other fees and expenses.

Interest on amounts outstanding under the Revolver is payable either at the base rate, Canadian Prime Rate, LIBOR, or the Canadian BA Rate, plus an applicable margin, depending on the nature of the loan, and mandatory costs, if any. The applicable margin may range from 0% to 1.75% and will vary based on the Company’s fixed charge coverage ratio. The weighted average interest rate on the Revolver for fiscal 2006 was 6.89%. The Revolver matures on January 18, 2012.

The Revolver is subject to certain representations, warranties, affirmative and negative covenants, and financial conditions customary for similar senior secured revolving credit facilities. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the revolver, the Company will also be subject to the cross default provisions of the indenture governing the 9.75% notes, and vice versa. The Company was in compliance with all covenants as of January 27, 2007, and expects to remain in compliance throughout fiscal 2007, although no assurances to that effect can be given.

As of January 27, 2007, the Revolver had $30.9 million of borrowings outstanding and $4.2 million of letters of credit outstanding leaving total availability of $44.9 million.

Senior Credit Facility

In conjunction with a recapitalization in fiscal 2001, the Company entered into the 2001 Senior Secured Credit Facility (the “Senior Credit Facility”) with a group of banks consisting of a $50.0 million term loan facility (“Tranche A Term Loan Facility”), a $156.0 million term loan facility (“Tranche B Term Loan Facility”), and a $50.0 million revolving credit facility, which included a letter-of-credit sublimit of $15.0 million.

The Tranche A Term Loan Facility was repaid in full with proceeds of the 9.75% Notes in February 2002. The Tranche B Term Loan Facility and the revolving credit portion of the 2001 Credit Facility were repaid in full with proceeds of the Revolver in January 2007.

The Senior Credit Facility’s interest was calculated at a per annum rate equal to the Company’s choice of (a) an adjusted rate based on LIBOR plus a Eurodollar margin or (b) an alternative base rate, as defined by the Senior Credit Facility, plus a base rate margin. With respect to the revolving credit facility, the Eurodollar margin and the base rate margin adjusted quarterly on a sliding scale based on the net senior leverage ratio for the immediately preceding four consecutive quarters. The weighted average interest rate of the Senior Credit Facility for the fiscal year ended January 27, 2007 was 8.22%.

In August 2004, the Senior Credit Facility was amended to provide for activities related to the Facility Maximization. As part of the provisions, among other things, Monterey was released as a subsidiary guarantor, the Company was allowed to exclude up to $10.0 million of Facility Maximization costs from the financial covenant calculations and the credit spread was reduced.

Effective October 29, 2005, the Company amended its Senior Credit Facility to modify certain financial covenants. The amendment eliminated the interest coverage ratio requirement and modified the minimum fixed charge coverage ratio (as defined) for third quarter of fiscal 2005 and all future measurement periods to be 1.0 to 1.0. The amendment also provided for the exclusion from the financial covenants calculations of additional costs related to the Company’s broadloom consolidation project, in addition to other specified charges, totaling $3.0 million.

44

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Sinking Fund Bonds

Approximately $0.9 million of long-term debt consisting of sinking fund bonds held and issued by the Nova Scotia Business Development Corporation was outstanding as of January 27, 2007. The debt is non-interest bearing. The Company negotiated with the Nova Scotia government the forgiveness of these sinking fund bonds as part of the Facility Maximization (see Note 11 contained herein). The forgiveness commenced in fiscal 2006, will continue over the remaining term of the note, and is based upon maintaining a defined level of full-time equivalent employees at the Company’s Nova Scotia facilities. The Company recognized a gain on forgiveness of debt related to these bonds of $0.2 million during fiscal 2006.

At January 27, 2007, the scheduled annual maturities of long-term debt are as follows (in thousands):

Fiscal Year:	Amount
2007	$	434
2008		425
2009		427
2010		165,429
2011		31,313
Thereafter		211
	$	198,239

Total interest paid by the Company on all indebtedness was $20.4 million, $19.3 million and $18.6 million for fiscal 2006, 2005 and 2004, respectively.

Deferred Financing Costs

Financing costs of $3.8 million and $4.1 million associated with the issuance of the Revolver, Senior Credit Facility and the 9.75% Notes are included in other assets on the accompanying balance sheets as of January 27, 2007 and January 28, 2006, respectively. The Company recorded deferred financing costs of $1.3 million during fiscal 2006 related to the Revolver. A write-off of $0.4 million was recorded in fiscal 2006 in connection with the extinguishment of the Senior Credit Facility. Financing costs are amortized on the straight-line method over the term of the respective debt agreements. Amortization expense charged to interest expense was $1.2 million in fiscal 2006, $0.7 million in fiscal 2005 and $1.7 million in fiscal 2004.

Net Interest Expense

Total net interest expense was $20.7 million, $20.1 million and $20.4 million for fiscal 2006, fiscal 2005 and fiscal 2004, respectively, which includes interest income of $0.4 million in fiscal 2006, $0.3 million in fiscal 2005 and $0.2 million in fiscal 2004.

10. INCOME TAXES

Domestic and foreign components of income (loss) from continuing operations before income taxes are summarized as follows (in thousands):

	Fiscal Year Ended
	January 27, 2007			January 28, 2006			January 29, 2005
Domestic	$	16,735		$	(3,229	)	$	16,548
Foreign		(347	)		(38	)		(2,972	)
	$	16,388		$	(3,267	)	$	13,576

45

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Components of the income tax provision for fiscal years 2006, 2005 and 2004 are summarized as follows (in thousands):

	Fiscal Year Ended
	January 27, 2007			January 28, 2006			January 29, 2005
Current:
Federal	$	3,839		$	(1,288	)	$	3,560
State and local		1,279			(252	)		283
Foreign		(108	)		—			—
		5,010			(1,540	)		3,843
Deferred:
Federal		1,843			140			3,189
State and local		309			(75	)		333
Foreign		—			1,117			(1,404	)
		2,152			1,182			2,118
Income tax expense (benefit)	$	7,162		$	(358	)	$	5,961

The reconciliation between income taxes computed at the U.S. Federal income statutory rate of 34% and the provision for income taxes as included in the consolidated statements of operations is as follows (in thousands):

	Fiscal Year Ended
	January 27, 2007			January 28, 2006			January 29, 2005
Amount at U.S. Federal income tax rate	$	5,572		$	(1,111	)	$	4,616
State and local income taxes, net of federal income taxes		1,048			(216	)		400
Nondeductible expenses		800			220			259
Reduction in tax contingencies		—			(272	)		—
Tax effect of foreign operations		50			1,117			(45	)
Tax refunds from prior year amended returns		—			(318	)		—
Rate change on prior year gross deferred items		(112	)		(167	)		(22	)
Change in valuation allowance		2			738			692
Other		(198	)		(349	)		61
Income tax expense (benefit)	$	7,162		$	(358	)	$	5,961

Amounts recognized in the consolidated balance sheets consist of (in thousands):

	January 27, 2007		January 28, 2006
Deferred tax assets - current	$	11,504	$	4,863
Deferred tax assets - non-current		—		690
Deferred tax liabilities - non-current		8,519		4,441
Net deferred tax assets	$	2,985	$	1,112

The Company had federal and state tax net operating loss carryforwards totaling $5.6 million as of January 28, 2006. Such loss carryforwards expire in accordance with provisions of applicable tax laws and have remaining lives ranging from five to twenty years. A federal net operating loss carryforward of $5.6 million is carried into the fiscal year ended January 27, 2007. Gross state net operating loss carryforwards totaling $42.7 million are carried over into the fiscal year ended January 27, 2007.

Foreign tax net operating loss carryforwards totaled $5.2 million and $8.2 million as of January 27, 2007 and January 28, 2006, respectively. Such loss carryforwards expire in accordance with provisions of applicable tax laws and have remaining lives ranging from nine years to an indefinite expiration. A valuation allowance of $3.7 million was established at January 28, 2006 for certain of these losses for which realization, in management’s assessment, is considered more likely than not to be unutilized in future years.

46

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

The Company previously generated tax credits in the state of California totaling $1.4 million, for which a full valuation allowance was established at January 28, 2006 as management has assessed that these state tax credits are likely to never be realized.

The components of the net deferred tax assets as of January 27, 2007 and January 28, 2006 were as follows (in thousands):

	January 27, 2007			January 28, 2006
Deferred tax assets:
Warranty & customer claims accruals	$	492		$	539
Employee benefits		—			1,337
Inventory reserves		1,113			1,123
Accrued taxes		—			35
Other liabilities and reserves		2,229			2,354
AMT credits		104			680
Deferred compensation		8,275			7,186
State credits		1,385			943
Federal and state net operating loss carryforwards		4,019			2,144
Other		245			—
Foreign tax credits		6,598			2,208
Foreign net operating loss carryforwards		2,774			2,394
Valuation allowance		(1,713	)		(1,271	)
Total deferred tax assets		25,521			19,672
Deferred tax liabilities:
Tax depreciation in excess of book		8,421			7,733
Goodwill and intangible amortization		13,874			10,827
Other		241			—
Total deferred tax liabilities		22,536			18,560
Net deferred tax assets	$	2,985		$	1,112

Payments (refunds) for income taxes by the Company were $2.4 million, $1.5 million and $(1.1) million for fiscal 2006, 2005 and 2004, respectively.

11. FACILITY MAXIMIZATION PROJECT

On August 10, 2004, the Company and its parent announced plans to consolidate its broadloom operations by closing its Santa Ana, California production facility and moving equipment and production to its manufacturing facility in Truro, Nova Scotia (the “Facility Maximization”). The Facility Maximization was approved by the Company’s Board of Directors on August 9, 2004, and was completed during fiscal year 2005. The Facility Maximization has increased utilization in the Truro, Nova Scotia facility.

During fiscal 2005 and 2004, the Company incurred costs associated with the Facility Maximization, which consisted of temporary production inefficiencies, equipment movement and installation costs, professional fees, severance and other related costs. These costs are reflected in cost of goods sold and selling, general and administrative expenses in the accompanying consolidated statements of operations.

The Facility Maximization costs incurred are reported as follows (in millions):

	Fiscal Year Ended
	January 28, 2006		January 29, 2005
Cost of Goods Sold	$	6.2	$	2.6
Selling, General and Administrative Expenses		2.0		1.4
Total Facility Maximization Project Costs	$	8.2	$	4.0

47

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

The original anticipated total expenditures and actual costs incurred for the Facility Maximization are as follows (in millions):

	Anticipated Total Expenditures as of August 10, 2004		Amounts Incurred During Fiscal Year Ended January 29, 2005		Amounts Incurred During Fiscal Year Ended January 28, 2006		Total Amounts Incurred
Severance Costs	$	1.8	$	1.5	$	0.6	$	2.1
Contractual Obligations and Professional Fees		3.1		0.4		0.8		1.2
Other Project Costs		1.5		2.1		6.8		8.9
Gross Project Expenditures	$	6.4	$	4.0	$	8.2	$	12.2

Capital expenditure costs related to the project were $2.7 million and $2.0 million during fiscal 2005 and 2004, respectively.

As part of the Facility Maximization, the Company negotiated with the Nova Scotia government the forgiveness of debt consisting of Crossley’s outstanding sinking fund bonds. See Note 9 contained herein for further discussion.

There were minimal remaining costs related to the Facility Maximization accrued as of January 28, 2006. No costs were accrued as of January 27, 2007.

12. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is as follows (in thousands):

	Fiscal Year Ended
	January 27, 2007			January 28, 2006			January 29, 2005
Net Income (Loss)	$	10,205		$	(4,629	)	$	6,703
Other Comprehensive Income (Loss):
Foreign currency translation adjustment		253			(282	)		222
Minimum pension liability adjustment		2,015			(424	)		—
Income tax benefit (expense)		(806	)		169			—
Total Comprehensive Income (Loss)	$	11,667		$	(5,166	)	$	6,925

13. STOCK OPTIONS

In August 2001, Tandus Group adopted the 2001 Tandus Group, Inc. Executive and Management Stock Option Plan (the “2001 Plan”) which provides for the issuance of options to purchase 57,061.64 shares of Tandus Group common stock (the “Old Options”). The plan allows the issuance of non-qualified stock options at an exercise price determined by Tandus Group’s Board of Directors or its Compensation Committee. The Old Options become exercisable over five years, expire ten years from the date of grant and vest only upon the achievement of certain earnings targets; however, accelerated vesting could occur due to a change in control. The Company accounts for the Old Options as variable options and will record expenses based upon increases and decreases in the fair market value of the common stock at the end of each reporting period. As of January 27, 2007, the Company has not recorded any expense as the targets established under the program have not been achieved. During the fourth quarter of fiscal 2006, the Company purchased a portion of the Old Options outstanding for a nominal flat fee per employee. At January 27, 2007, no shares are exercisable and the weighted average contractual life of the outstanding Old Options is 4.5 years.

48

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

The following table summarizes the activity in the plans for fiscal years 2006, 2005, and 2004:

	Number of Shares		Average Exercise Price
Outstanding at January 31, 2004	50,357		$	35.70
Granted in fiscal 2004	—			35.70
Canceled in fiscal 2004	(7,675	)		35.70
Outstanding at January 29, 2005	42,682			35.70
Granted in fiscal 2005	—			35.70
Canceled in fiscal 2005	(8,673	)		35.70
Outstanding at January 28, 2006	34,009			35.70
Granted in fiscal 2006	—			35.70
Canceled in fiscal 2006	(14,665	)		35.70
Outstanding at January 27, 2007	19,344			35.70

On December 6, 2006, Tandus Group adopted the 2001 Tandus Group, Inc. Amended and Restated Management Stock Option Plan (the “2001 Amended Plan”) which provides for the issuance of options to purchase 500,000 shares of Tandus Group common stock (the “New Options”). The 2001 Amended Plan allows the issuance of non-qualified stock options at an exercise price determined by Tandus Group’s Board of Directors or its Compensation Committee. No New Options had been granted as of January 27, 2007; however, New Options were granted on January 31, 2007, at which time all Old Options were cancelled.

14. SEGMENT INFORMATION

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

Accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2 contained herein. Performance of the segments is evaluated on Adjusted EBITDA, which represents earnings before interest, taxes, depreciation, amortization, cumulative effect of change in accounting principle, Chroma cash dividends, non-cash charges or expenses (other than the write-down of current assets), loss from discontinued operations, minority interest in income (loss) of subsidiary, costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, equity in earnings of Chroma and gain on forgiveness of debt.

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

No single customer represented 10% or more of the Floorcovering segment’s sales for any year presented in the accompanying financial statements. In the Extrusion segment, the Company had two external customers in each of fiscal years 2006, 2005 and 2004 that exceeded 10% of the segment’s total net sales. For 2006, these customers represented 18.9% and 16.1%. For 2005, these

49

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

customers represented 22.9% and 12.8%. For 2004, these customers represented 35.4% and 14.0%. No other Extrusion segment customers represented 10% or more of sales for any year presented in the accompanying financial statements.

The tables below provide certain financial information by segment (in thousands):

	Fiscal Year Ended
	January 27, 2007		January 28, 2006		January 29, 2005
Net Sales to External Customers:
Floorcoverings	$	325,892	$	289,377	$	308,689
Extrusion		24,473		26,836		23,257
Total Sales to External Customers	$	350,365	$	316,213	$	331,946
	Fiscal Year Ended
	January 27, 2007		January 28, 2006		January 29, 2005
Adjusted EBITDA:
Floorcoverings	$	44,634	$	32,749	$	48,353
Extrusion		6,185		5,203		3,085
Total Adjusted EBITDA	$	50,819	$	37,952	$	51,438

	January 27, 2007		January 28, 2006
Consolidated Assets:
Floorcoverings	$	271,986	$	269,256
Extrusion		22,220		26,178
Discontinued Operations		4,930		7,094
Total Consolidated Assets	$	299,136	$	302,528

Included in the asset amounts above is goodwill for the Floorcoverings segment in the amount of $92.7 million as of January 27, 2007 and January 28, 2006, and for the Extrusion segment in the amount of $5.6 million as of January 27, 2007 and January 28, 2006.

A reconciliation of net income (loss) as reported in the consolidated statements of operations to Adjusted EBITDA as shown above is as follows (in thousands):

	Fiscal Year Ended
	January 27, 2007			January 28, 2006			January 29, 2005
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
Net income (loss)	$	10,205		$	(4,629	)	$	6,703
Income tax expense (benefit)		7,162			(358	)		5,961
Net interest expense		20,650			20,082			20,443
Depreciation		10,860			10,021			10,023
Amortization		2,455			2,620			3,112
(Gain) Loss from discontinued operations		(979	)		1,720			912
Gain of forgiveness of debt		(228	)		—			—
Chroma cash dividends		—			—			922
Equity in earnings of Chroma		—			—			(893	)
Minority interest in income (loss) of subsidiary		—			(24	)		97
Facility maximization costs		—			8,158			3,986
Other		694			362			172
Adjusted EBITDA	$	50,819		$	37,952		$	51,438

50

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Information relative to sales and long-lived assets for the United States and other countries is summarized in the following tables (in thousands). Sales are attributed to countries/regions based upon the plant location from which products are shipped. Long-lived assets include all assets associated with operations in the indicated geographic area excluding intercompany receivables and investments.

	Fiscal Year Ended
	January 27, 2007		January 28, 2006		January 29, 2005
Net Sales:
Domestic	$	306,848	$	287,857	$	299,169
Canada		34,179		25,901		31,014
Other International		9,374		2,455		1,763
Total	$	350,401	$	316,213	$	331,946

	January 27, 2007		January 28, 2006
Long-lived Assets (1):
Domestic	$	168,897	$	173,770
Canada		11,217		12,847
Other International		4,533		4,678
Total	$	184,647	$	191,295

(1) Consists of the net book value of property, plant and equipment, goodwill and other intangible assets.

15. RELATED-PARTY TRANSACTIONS

Effective January 2001, the Company entered into Professional Services Agreements with each of Oaktree Fund and B of A Fund (collectively, the “Funds”). The terms of both agreements are substantially the same. The Funds will provide management and financial consulting services to the Company from time to time. These services will include consulting on business strategy, future investments, future acquisitions and divestitures, and debt and equity financing. For these services, the Company has agreed to pay each of the Funds quarterly fees of $62,500 and to reimburse them for reasonable travel and other out-of-pocket fees and expenses incurred by them in providing services to the Company (including, but not limited to, fees and expenses incurred in attending Company-related meetings). The Company has also agreed to indemnify each of the Funds against any losses the Funds may suffer arising out of the services they provide to us in connection with these agreements, such as losses arising from third party suits. The agreements terminate on the first of (1) the date on which either of the Funds, as the case may be, owns less than 25% of the capital stock in Tandus Group, (2) the date on which Tandus Group is either sold to a party who does not currently own more than 5% of Tandus Group’s common stock or (3) substantially all the assets of Tandus Group are sold. Included in the Company’s consolidated balance sheets as of January 28, 2006 are accrued liabilities of $2.5 million related to services provided to the Company by the Funds. No amounts were accrued as of January 27, 2007.

As previously discussed, on January 18, 2007, the Company entered into a $80 million senior secured revolving credit facility. The lender in the facility is Bank of America N.A. which is an affiliate of the B of A Fund, the second largest shareholder of Tandus Group.

One of the Company’s directors, Daniel G. MacFarlan, is currently providing operational advisory services to the Company. The initial term of his advisory services was six months, which commenced in January 2006. The amount received by Mr. MacFarlan was $350,000 for that initial term. The term was extended for an additional six months for additional compensation of $350,000. The Company has extended Mr. MacFarlan’s advisory services arrangement throughout 2007 for compensation totaling $350,000 for the year.

Prior to and during fiscal 2004, the Company and another partner each held a one-half interest in Chroma Systems Partners (“Chroma”), a general partnership, which provided carpet dyeing and finishing services to the partners and outside third parties. During fiscal 2004, the Company was charged $9.8 million for these services. Under the terms of its agreement, the Company leased a portion of its carpet manufacturing and administrative space from the partnership in addition to sharing certain executive and other costs. During fiscal 2004, the Company paid the partnership approximately $0.6 million for the specified services. In fiscal 2004, the Company successfully negotiated its exit from the Chroma partnership with a resulting charge of $0.2 million for the negotiated settlement and the early termination of its Dyeing and Finishing Agreement.

51

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

16. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CERTAIN RISKS

Lease Commitments

The Company is obligated under various leases for office space, machinery and equipment. At January 27, 2007 future minimum lease payments under operating leases are as follows (in thousands):

Fiscal Year	Future Minimum Lease Payments
2007	$	3,027
2008		1,783
2009		1,037
2010		750
2011		273
Thereafter		—
	$	6,870

Rental expense under operating leases was approximately $2.9 million, $3.6 million and $3.9 million in fiscal 2006, fiscal 2005 and fiscal 2004, respectively.

Environmental

The Company is subject to federal, state, and local laws and regulations concerning the environment. At January 27, 2007, management concluded that no environmental reserves were required. 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.

Litigation

On September 18, 1998, James Bradley Thomason (“Thomason”) filed an action in the District Court, 285^th Judicial District, Bexar County, Texas (the “Court”) against Linda Gomez Whitener, Steve Whitener, and Gomez Floor Covering (the “Gomez Defendants”), the Company, and Mannington Commercial. Thomason alleged that the Gomez Defendants had breached a contract with Thomason to pay him certain commissions and had conspired with the Company and Mannington to cut Thomason out of several carpet installation transactions stemming from a carpet-buying contract held by the Texas General Services Commission for State of Texas agencies (the “Contract”). Thomason settled his claims against the Gomez Defendants and Mannington Commercial. The Court granted the Company’s motion for summary judgment and as a result, all of Thomason’s claims against the Company were dismissed. The Texas Court of Appeals, Fourth Court of Appeals District, San Antonio, Texas (the “Appellate Court”) affirmed the lower court ruling on all points, except for a claim of quantum meruit (value of services where no contract exists) related to having C&A products listed on the Contract. That claim was tried before a jury and on February 10, 2006, the jury entered a verdict in favor of the plaintiff in the amount of $1,050,000. Under Texas law, the plaintiff made a claim for attorneys’ fees and prejudgment interest, and on May 19, 2006, the Appellate Court entered judgment on the jury verdict in the amount of $1,053,418, awarding attorneys’ fees in the amount of $351,136 and prejudgment interest in the amount of $605,189.

Because the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, the Company filed a Notice of Appeal on August 17, 2006, has filed its brief as Appellant, and the Company intends to vigorously prosecute its appeal of the jury verdict and the award of attorneys’ fees and prejudgment interest. The prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys’ fees or prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as entered by the Appellate Court. The Company has recorded an accrued liability, including post judgment interest of approximately $2,069,000 related to this case in its accompanying statements of financial condition.

On June 21, 2005, the Company filed in the United States District Court for the Northern District of Georgia, Rome, Georgia, Division (the “Court”) a joint lawsuit with Shaw Industries Group, Inc. (“Shaw”) and Mohawk Industries, Inc. (“Mohawk”) against Interface, Inc. (“Interface”), regarding a patent on a particular pattern of carpet tile that Interface recently received (the “Rome Action”). The Rome Action asks the Court to declare that the Interface patent is invalid, unenforceable and not infringed. Interface and certain of its affiliated companies, on the same day, filed separate suits in Atlanta, Georgia against the Company and other carpet manufacturers

52

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

asserting infringement of the aforementioned patent. In response to motions filed both in the Rome Action and with the court in Atlanta, Interface’s suits against the Company, Shaw and Mohawk were transferred to Rome, Georgia and consolidated with the Rome Action. The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. On December 19, 2006, the Court conducted what is known as a “Markman Hearing” regarding interpretation of four disputed terms used in Interface’s patent. To date, the Court has not yet issued its order regarding the disputed terms and no substantive issues have been resolved by the Court. The Company denies liability and intends to vigorously defend this matter.

The Company is involved in litigation from time to time. When litigation arises, the Company may create a litigation accrual in order to pay for damages for which it might be liable. In some circumstances, it may settle litigation without going to trial. During fiscal 2005, the Company released a litigation accrual of $0.8 million related to a suit with Employers Mutual Insurance Companies and settled a suit for $0.4 million brought by Enron Energy Services.

From time to time the Company is also subject to claims and suits arising in the ordinary course of business, including workers’ compensation and product liability claims, which may or may not be covered by insurance. Management believes that the various asserted claims and litigation in which the Company is currently involved will not have a material adverse effect on its financial position or results of operations.

Other Commitments

In connection with certain product installation contracts, the Company issues performance bonds. No liability for these bonds is reflected in the accompanying balance sheets because, in management’s opinion, based on the facts presently known to it, all product installation contracts have been and will be fulfilled in accordance with their terms.

Reliance on Principal Supplier

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

While Invista is an important vendor, it is believed that there are adequate alternative sources of supply from which the synthetic fiber requirement could be fulfilled including, but not limited to, nylon yarn produced by Extrusion. In addition to Invista, there are at least three major third party suppliers to the commercial carpet industry from whom the Company acquires yarn.

The other significant raw materials used by the Company in its carpet manufacturing process include coater materials, such as vinyl resins and primary backing.

Concentrations of Labor

As of January 27, 2007, the Company employed 1,579 persons on a full-time or full-time equivalent basis of which approximately 352 manufacturing workers in Canada are represented by a labor union. The collective bargaining agreements, which represent this union, expire on June 30, 2009.

Workers’ Compensation

The Company is self-insured for workers’ compensation claims up to specified stop-loss limits. In the opinion of management, adequate provision has been made for all incurred claims.

53

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

17. QUARTERLY FINANCIAL DATA (Unaudited)

The quarterly financial data below is based on the Company’s fiscal periods (in thousands):

FISCAL 2006	First Quarter			Second Quarter		Third Quarter			Fourth Quarter
Net Sales	$	78,160		$	105,875	$	83,126		$	83,204
Gross Profit		24,066			38,347		28,468			27,593
Net Income (Loss)		(1,614	)		7,006		2,535			2,278
FISCAL 2005	First Quarter			Second Quarter		Third Quarter			Fourth Quarter
Net Sales	$	66,120		$	93,065	$	79,331		$	77,697
Gross Profit		18,480			30,962		22,321			23,411
Net Income (Loss)		(5,783	)		4,374		(3,820	)		600

18. OTHER ITEMS

On February 2, 2007, the Company hired Glen A. Hussmann as its new President and Chief Executive Officer, replacing Edgar M. Bridger who resigned effective November 30, 2006.

On March 22, 2007, the Company entered into a commitment letter with Bank of America, N.A. (“BofA”), Wachovia Bank and certain of their affiliates (collectively, the “Lenders”), pursuant to which the Lenders have agreed to enter into a Credit Facility with the Company, the proceeds from which would be used (i) to redeem all of the Company’s 9.75% Notes due 2010 (including the principal, accrued interest and premium thereon), (ii) to repay a portion of the Company’s Revolver, (iii) to pay transaction-related fees and expenses and (iv) for other lawful purposes, including a dividend. The commitment, which expires on June 30, 2007 unless definitive documentation for the Credit Facility is entered into prior to such date, is subject to the satisfaction of certain conditions precedent including, but not limited to, the following: (a) the accuracy and completeness of the Company’s representations to the Lenders and (b) the amendment of the Revolver to reduce the commitment thereunder to not more than $60 million at closing and to permit the Credit Facility. BofA is an affiliate of the B of A Fund, the second largest shareholder of Tandus Group. No assurance can be given that the foregoing transactions will be consummated.

In August 1998, the Company acquired a 51.0% interest in Collins & Aikman Floorcoverings Asia Pte. Ltd. (“C&A Asia”), a commercial carpet distribution venture in Singapore. On December 30, 2005, the Company purchased the remaining 49.0% of C&A Asia for approximately $0.3 million. Prior to that, the results had been reported on a consolidated basis, with the 49.0% reflected as minority interest. Accordingly, the impact on the consolidated financial statements is immaterial.

19. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The 9.75% Notes of the Company (the “Issuer”) are guaranteed by certain of the Company’s domestic subsidiaries (the “guarantor 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, August 18, 2004 and October 29, 2005. 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 January 27, 2007 is $172.4 million. This amount represents the principal amount outstanding of the Company’s 9.75% Notes and accrued interest. Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information as of January 28, 2006 and January 27, 2007 and for each of the three years in the period ended January 27, 2007 is presented. The condensed consolidating financial information of the Company and its subsidiaries is as follows:

54

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

January 27, 2007

(In Thousands)

	Issuer			Guarantor Subsidiaries		Eliminations			Subtotal Issuer & Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	3,427		$	1	$	—		$	3,428		$	3,326		$	—		$	6,754
Accounts receivable, net		147			39,990		—			40,137			6,657			—			46,794
Inventories		21,325			2,547		—			23,872			13,998			—			37,870
Deferred tax assets		6,895			30		—			6,925			4,579			—			11,504
Prepaid expenses and other		589			—		—			589			98			—			687
Total current assets		32,383			42,568		—			74,951			28,658			—			103,609
PROPERTY, PLANT AND EQUIPMENT, net		33,647			10,808		—			44,455			15,619			—			60,074
GOODWILL		62,386			5,631		—			68,017			30,361			—			98,378
OTHER INTANGIBLE ASSETS, net		26,069			—		—			26,069			126			—			26,195
INVESTMENT IN SUBSIDIARIES		126,268			—		(52,913	)		73,355			—			(73,355	)		—
OTHER ASSETS		5,612			93		—			5,705			2,511			(2,266	)		5,950
OTHER ASSETS - DISCONTINUED OPERATIONS		—			—		—			—			4,930			—			4,930
TOTAL ASSETS	$	286,365		$	59,100	$	(52,913	)	$	292,552		$	82,205		$	(75,621	)	$	299,136
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	11,528		$	2,406	$	—		$	13,934		$	2,898		$	—		$	16,832
Accrued expenses		20,030			2,211		—			22,241			3,546			—			25,787
Current portion of long-term debt		—			—		—			—			434			—			434
Total current liabilities		31,558			4,617		—			36,175			6,878			—			43,053
INTERCOMPANY (RECEIVABLE) PAYABLE		11,153			571		—			11,724			(11,755	)		31			—
OTHER LIABILITIES, including post-retirement obligation		3,309			—		—			3,309			122			—			3,431
OTHER LIABILITIES - DISCONTINUED OPERATIONS		—			—		—			—			2,263			—			2,263
DEFERRED TAX LIABILITIES		9,456			999		—			10,455			61			(1,997	)		8,519
LONG-TERM DEBT, net of current portion		186,524			—		—			186,524			11,281			—			197,805
STOCKHOLDER’S EQUITY:
Preferred stock		—			—		—			—			133			(133	)		—
Common stock		—			—		—			—			11,117			(11,117	)		—
Paid-in capital		72,648			—		—			72,648			52,064			(52,064	)		72,648
Retained earnings (deficit)		(28,283	)		52,913		(52,913	)		(28,283	)		10,384			(10,384	)		(28,828	)
Accumulated other comprehensive income		—			—		—			—			(343	)		43			(300	)
Total stockholder’s equity		44,365			52,913		(52,913	)		44,365			73,355			(73,655	)		44,065
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	286,365		$	59,100	$	(52,913	)	$	292,552		$	82,205		$	(75,621	)	$	299,136

55

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

January 28, 2006

(In Thousands)

	Issuer			Guarantor Subsidiaries		Eliminations			Subtotal Issuer & Guarantors			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,655		$	1	$	—		$	2,656		$	2,889		$	—		$	5,545
Accounts receivable, net		37			38,508		—			38,545			6,634			—			45,179
Inventories		20,251			2,906		—			23,157			15,174			—			38,331
Deferred tax assets		5,451			76		—			5,527			—			(664	)		4,863
Prepaid expenses and other		2,573			—		—			2,573			719			—			3,292
Total current assets		30,967			41,491		—			72,458			25,416			(664	)		97,210
PROPERTY, PLANT AND EQUIPMENT, net		34,124			12,744		—			46,868			17,399			—			64,267
GOODWILL		62,386			5,631		—			68,017			30,361			—			98,378
OTHER INTANGIBLE ASSETS, net		28,524			—		—			28,524			126			—			28,650
INVESTMENT IN SUBSIDIARIES		91,994			—		(27,540	)		64,454			—			(64,454	)		—
OTHER ASSETS		6,471			93		—			6,564			3,382			(3,017	)		6,929
OTHER ASSETS - DISCONTINUED OPERATIONS		—			—		—			—			7,094			—			7,094
TOTAL ASSETS	$	254,466		$	59,959	$	(27,540	)	$	286,885		$	83,778		$	(68,135	)	$	302,528
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	8,485		$	2,349	$	—		$	10,834		$	3,858		$	—		$	14,692
Accrued expenses		19,077			1,777		—			20,854			3,918			—			24,772
Current portion of long-term debt		571			—		—			571			4,077			—			4,648
Total current liabilities		28,133			4,126		—			32,259			11,853			—			44,112
INTERCOMPANY (RECEIVABLE) PAYABLE		(18,513	)		27,237		—			8,724			(9,314	)		590			—
OTHER LIABILITIES, including post-retirement obligation		5,301			—		—			5,301			63			—			5,364
OTHER LIABILITIES - DISCONTINUED OPERATIONS		(11,839	)		—		—			(11,839	)		14,326			—			2,487
DEFERRED TAX LIABILITIES		7,066			1,056		—			8,122			—			(3,681	)		4,441
LONG-TERM DEBT, net of current portion		195,277			—		—			195,277			2,396			—			197,673
STOCKHOLDER’S EQUITY:
Preferred stock		—			—		—			—			133			(133	)		—
Common stock		—			—		—			—			11,117			(11,117	)		—
Paid-in capital		72,648			—		—			72,648			52,064			(52,064	)		72,648
Retained earnings (deficit)		(22,435	)		27,540		(27,540	)		(22,435	)		1,483			(1,483	)		(22,435	)
Accumulated other comprehensive income		(1,172	)		—		—			(1,172	)		(343	)		(247	)		(1,762	)
Total stockholder’s equity		49,041			27,540		(27,540	)		49,041			64,454			(65,044	)		48,451
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	254,466		$	59,959	$	(27,540	)	$	286,885		$	83,778		$	(68,135	)	$	302,528

56

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Year Ended January 27, 2007

(In Thousands)

	Issuer			Guarantor Subsidiaries		Eliminations			Subtotal Issuer & Guarantors			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
Net Sales	$	183,918		$	303,052	$	(160,024	)	$	326,946		$	84,155		$	(60,736	)	$	350,365
Cost of Goods Sold		150,649			228,050		(160,024	)		218,675			73,952			(60,736	)		231,891
Selling, General & Administrative Expenses		34,747			32,782		—			67,529			10,994			—			78,523
Amortization		2,455			—		—			2,455			—			—			2,455
Operating Expenses		187,851			260,832		(160,024	)		288,659			84,946			(60,736	)		312,869
Operating Income (Loss)		(3,933	)		42,220		—			38,287			(791	)		—			37,496
Equity in Earnings of Subsidiaries		35,255			—		(25,373	)		9,882			—			(9,882	)		—
Other Income (Expense)		2			—		—			2			(247	)		—			(245	)
Gain (Loss) on Early Extinguishment/Forgiveness of Debt		(438	)		—		—			(438	)		225			—			(213	)
Net Interest Expense		20,495			—		—			20,495			155			—			20,650
Income (Loss) from Continuing Operations Before Income Taxes		10,391			42,220		(25,373	)		27,238			(968	)		(9,882	)		16,388
Income Tax Expense (Benefit)		(9,887	)		16,847		—			6,960			202			—			7,162
Income (Loss) from Continuing Operations		20,278			25,373		(25,373	)		20,278			(1,170	)		(9,882	)		9,226
Loss from Discontinued Operations, net of tax		(10,073	)		—		—			(10,073	)		10,071			981			979
Net Income (Loss)	$	10,205		$	25,373	$	(25,373	)	$	10,205		$	8,901		$	(8,901	)	$	10,205

57

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Year Ended January 28, 2006

(In Thousands)

	Issuer			Guarantor Subsidiaries		Eliminations			Subtotal Issuer & Guarantors		Non- Guarantor Subsidiaries			Eliminations			Consolidated Total
Net Sales	$	147,729		$	277,782	$	(128,158	)	$	297,353	$	72,258		$	(53,398	)	$	316,213
Cost of Goods Sold		138,335			199,841		(128,158	)		210,018		64,419			(53,398	)		221,039
Selling, General & Administrative Expenses		31,379			32,544		—			63,923		12,731			—			76,654
Amortization		2,456			164		—			2,620		—			—			2,620
Operating Expenses		172,170			232,549		(128,158	)		276,561		77,150			(53,398	)		300,313
Operating Income (Loss)		(24,441	)		45,233		—			20,792		(4,892	)		—			15,900
Minority Interest in Loss of Subsidiary		—			—		—			—		24			—			24
Equity in Earnings of Subsidiaries		22,086			—		—			22,086		—			(22,086	)		—
Other Income (Expense)		60			—		—			60		36			—			96
Gain on Early Extinguishment of Debt		795			—		—			795		—			—			795
Net Interest Expense		19,951			—		—			19,951		131			—			20,082
Income (Loss) from Continuing Operations Before Income Taxes		(21,451	)		45,233		—			23,782		(4,963	)		(22,086	)		(3,267	)
Income Tax Expense (Benefit)		(16,822	)		16,944		—			122		(480	)		—			(358	)
Income (Loss) from Continuing Operations		(4,629	)		28,289		—			23,660		(4,483	)		(22,086	)		(2,909	)
Loss from Discontinued Operations, net of tax		—			—		—			—		(1,720	)		—			(1,720	)
Net Income (Loss)	$	(4,629	)	$	28,289	$	—		$	23,660	$	(6,203	)	$	(22,086	)	$	(4,629	)

58

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Year Ended January 27, 2005

(In Thousands)

	Issuer		Guarantor Subsidiaries			Eliminations		Subtotal Issuer & Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated Total
Net Sales	$	228,156	$	29,160		$	—	$	257,316		$	119,710		$	(45,080	)	$	331,946
Cost of Goods Sold		142,685		28,146			—		170,831			93,745			(45,080	)		219,496
Selling, General & Administrative Expenses		48,609		—			—		48,609			27,334			—			75,943
Amortization		2,456		656			—		3,112			—			—			3,112
Operating Expenses		193,750		28,802			—		222,552			121,079			(45,080	)		298,551
Operating Income (Loss)		34,406		358			—		34,764			(1,369	)		—			33,395
Minority Interest in Income of Subsidiary		—		—			—		—			(97	)		—			(97	)
Equity in Earnings of Affiliate		—		—			—		—			893			—			893
Equity in Loss of Subsidiaries		1,918		—			—		1,918			—			(1,918	)		—
Other Expense		—		(133	)		—		(133	)		(39	)		—			(172	)
Net Interest Expense		20,387		—			—		20,387			56			—			20,443
Income (Loss) from Continuing Operations Before Income Taxes		12,101		225			—		12,326			(668	)		1,918			13,576
Income Tax Expense		5,398		93			—		5,491			470			—			5,961
Income (Loss) from Continuing Operations		6,703		132			—		6,835			(1,138	)		1,918			7,615
Loss from Discontinued Operations, net of tax		—		—			—		—			(912	)		—			(912	)
Net Income (Loss)	$	6,703	$	132		$	—	$	6,835		$	(2,050	)	$	1,918		$	6,703

59

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Year Ended January 27, 2007

(In Thousands)

	Issuer			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidated Total
CASH FLOWS FROM OPERATING ACTIVITIES	$	31,838		$	228		$	(3,910	)	$	28,156
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property, plant and equipment		36			—			1			37
Additions to property, plant and equipment		(5,679	)		(228	)		(1,306	)		(7,213	)
Other		—			—			90			90
Net cash used in investing activities		(5,643	)		(228	)		(1,215	)		(7,086	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities		20,000			—			1,815			21,815
Repayments of revolving credit facilities		(20,000	)		—			(5,457	)		(25,457	)
Repayment of 10% senior subordinated notes		(250	)		—			—			(250	)
Proceeds from issuance of long-term debt		21,524			—			9,385			30,909
Repayments of long-term debt		(30,598	)		—			(215	)		(30,813	)
Divends to Tandus Group, Inc.		(16,053	)					—			(16,053	)
Financing costs		(46	)		—			—			(46	)
Net cash provided by (used in) financing activities		(25,423	)		—			5,528			(19,895	)
Effect of exchange rate changes on cash and cash equivalents		—			—			34			34
NET CHANGE IN CASH AND CASH EQUIVALENTS		772			—			437			1,209
CASH AND CASH EQUIVALENTS, beginning of period		2,655			1			2,889			5,545
CASH AND CASH EQUIVALENTS, end of period	$	3,427		$	1		$	3,326		$	6,754

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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Year Ended January 28, 2006

(In Thousands)

	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
CASH FLOWS FROM OPERATING ACTIVITIES	$	(3,883	)	$	83		$	(846	)	$	(4,646	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property, plant and equipment		193			—			177			370
Additions to property, plant and equipment		(7,206	)		(82	)		(3,173	)		(10,461	)
Other		—			—			68			68
Net cash used in investing activities		(7,013	)		(82	)		(2,928	)		(10,023	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities		15,000			—			4,530			19,530
Repayments of revolving credit facilities		(15,000	)		—			(888	)		(15,888	)
Proceeds from issuance of long-term debt		—			—			752			752
Repayments of long-term debt		(9,303	)		—			(19	)		(9,322	)
Financing costs		(256	)		—			—			(256	)
Net cash (used in) provided by financing activities		(9,559	)		—			4,375			(5,184	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(2	)		(2	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(20,455	)		1			599			(19,855	)
CASH AND CASH EQUIVALENTS, beginning of period		23,110			—			2,290			25,400
CASH AND CASH EQUIVALENTS, end of period	$	2,655		$	1		$	2,889		$	5,545

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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Year Ended January 29, 2005

(In Thousands)

	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
CASH FLOWS FROM OPERATING ACTIVITIES	$	19,904		$	98		$	7,243		$	27,245
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property, plant & equipment		—			92			—			92
Equity distribution from affiliate		—			—			922			922
Additions to property, plant, and equipment		(3,081	)		(190	)		(8,591	)		(11,862	)
Other		—			—			(199	)		(199	)
Net cash (used in) provided by investing activities		(3,081	)		(98	)		(7,868	)		(11,047	)
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		—			—			641			641
Dividends to parent		—			—			(1,784	)		(1,784	)
Financing costs		(380	)		—			—			(380	)
Net cash used in financing activities		(380	)		—			(1,143	)		(1,523	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(189	)		(189	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		16,443			—			(1,957	)		14,486
CASH AND CASH EQUIVALENTS, beginning of period		6,667			—			4,247			10,914
CASH AND CASH EQUIVALENTS, end of period	$	23,110		$	—		$	2,290		$	25,400

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Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

As of January 27, 2007, the Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officers, 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 principal executive officers 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 principal executive officers 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. 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 were no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that have materially affected or that are reasonably likely to materially affect the Company’s internal controls over financial reporting, except as noted below.

During the disclosure controls and procedures and internal controls evaluations performed under the supervision and with the participation of the Company’s management as of the end of the fiscal year ended January 28, 2006, it was concluded that the Company’s disclosure controls and procedures were not effective due to a material weakness in the area of income tax accounting and that a significant change had occurred in the internal controls over income tax reporting and disclosure. No other material weaknesses or significant changes were noted during the evaluation. Management believes there were no material misstatements in the consolidated financial statements and the Company’s independent registered public accountants issued and unqualified opinion on the consolidated balance sheets as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, changes in stockholder’s equity and cash flows for each of the years in the three year period ended January 28, 2006.

During the first quarter of fiscal 2006, the Company addressed the material weakness in the area of income tax accounting as it pertains to the Company’s disclosure controls and procedures and internal controls over financial reporting. The Company has retained the services of certain outside providers to assist in the preparation, documentation and review of the Company’s income tax provision and related taxation disclosures and believes that the material weakness has been remediated.

The Company’s management has confidence in the Company’s internal controls and procedures. Nevertheless, management, including the principal executive officers, does not expect that the disclosure procedures and controls or internal controls over financial reporting will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The following table sets forth the names and ages for each of the directors of Tandus Group, Inc. and each of the Company’s directors and executive officers and the positions they hold:

NAME		TITLE
Glen A. Hussmann	47	President and Chief Executive Officer of the Company
Ralph H. Grogan	49	Senior Vice President of the Company
Leslie (Lee) H. Schilling	66	Senior Vice President of Marketing of the Company
Leonard F. Ferro	47	Vice President, Secretary, Treasurer & CFO of the Company and Director of Tandus Group, Inc.
Jeffrey M. Raabe	45	Senior Vice President of Sales of the Company
Henry L. Millsaps, Jr.	51	Vice President of Human Resources of the Company
James T. Harley	48	Vice President of Manufacturing of the Company
Richard J. Goldstein	41	Chairman of the Board of Directors of Tandus Group, Inc. and Director of the Company
Stephen M. Burns	45	Director of Tandus Group, Inc.
Caleb S. Kramer	37	Director of Tandus Group, Inc.
Jeffrey M. Mann	42	Director of Tandus Group, Inc. and Director of the Company
Jason A. Mehring	35	Director of Tandus Group, Inc.
Daniel G. MacFarlan	56	Director of Tandus Group, Inc.

Set forth is a brief description of the business experience of each of our directors and executive officers.

Glen A. Hussmann has served as President and Chief Executive Officer of the Company since February 2007. From March 2002, he had served as the President, Chief Executive Officer and Chairman of the Board of Reeves Brothers, Inc., a specialty material company that sells coated fabric products for a variety of industries.

Ralph H. Grogan has served as Senior Vice President of the Company since February 2005. He joined the Company as President of Monterey Carpets in December 2002. Prior to that time, Mr. Grogan was with Burlington Industries, Inc. for 22 years. While with Burlington Industries, Inc., he served most recently as President of Burlington House Floor Accent Division from 1999 to 2002 and as Vice President and General Manager of Lees Carpet from 1994 until 1999.

Leslie (Lee) H. Schilling has served as Senior Vice President of Marketing of the Company since June 2004. Prior to that time, he served as Vice President of Marketing and Sales from July 1987 to June 1994. From January 1985 to July 1987, Mr. Schilling served as National Sales Manager.

Leonard F. Ferro has served as Vice President, Secretary, Treasurer and Chief Financial Officer of the Company since June 2004 and as a director of Tandus Group, Inc. (“Tandus Group”) since August 2005. Mr. Ferro was employed by Galey & Lord, Inc. in various financial capacities from September 1998 to June 2004, most recently as Chief Financial Officer, Secretary and Treasurer. Mr. Ferro was employed by Collins & Aikman Corporation, a former owner of Tandus’ Collins & Aikman Floorcoverings, Inc. from February 1994 to September 1998, most recently as Corporate Controller. He is a CPA and practiced in public accounting for 13 years.

Jeffrey M. Raabe has served as Senior Vice President of Sales of the Company since February 2005. Prior to that time, he served as Vice President of Sales and he has also served as the Southeast Direct Sales Manager and Director of North American Sales of the Company from October 1990 to February 1996. Mr. Raabe joined the Company in January 1989 as a Contract Specialist in Atlanta, Georgia.

Henry L. Millsaps, Jr. has served as Vice President of Human Resources of the Company since April 1995. Mr. Millsaps joined the Company in 1980 and served as Human Resource Director from March 1988 until April 1995.

James T. Harley has served as Vice President of Manufacturing for the Company since January 2006. He joined the Company as Vice President of Manufacturing for Monterey Carpets in March of 2000. Prior to that time, Mr. Harley was President of Chroma Systems from 1998 to 2000. Mr. Harley was employed by Bentley Mills from 1983 to 1998, most recently as General Manager.

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Richard J. Goldstein has been a director of Tandus Group and a director of the Company since May 2005 and was named Chairman in November 2005. He has been a Managing Director and, before that, a Senior Vice President and Vice President of Oaktree Capital Management, LLC (“Oaktree”) since 1995. Oaktree is the investment manager for OCM Principal Opportunities Fund II, L.P., Tandus Group’s largest shareholder.

Stephen M. Burns has been a director of Tandus Group since November 1996. He has been a Vice President of Quad-C Management, Inc. since 1992. Prior to joining Quad-C Management, Mr. Burns was Vice President of Paribas North American and Paribas.

Caleb S. Kramer has been a director of Tandus Group since January 2001. He has been a Managing Director, and before that a Senior Vice President, of Oaktree since May 2000. Prior thereto, Mr. Kramer co-founded Seneca Capital Partners, LLC, a private equity investment firm. From 1994 to 1996, Mr. Kramer was employed by Archon Capital Partners, an investment firm.

Jeffrey M. Mann has been a director of Tandus Group and a director of the Company since August 2005. He has been a Managing Director of Silver Oak Services Partners since 2006 and was previously a Managing Director of Banc of America Capital Investors (“BACI”), which he joined in 1993. Prior to joining BACI, he worked as a Certified Public Accountant for Arthur Andersen & Co.

Jason A. Mehring has been a director of Tandus Group since January 2001. He has been a Managing Director of BlackRock Kelso Capital since 2005, and was previously a Principal with BACI, which he joined in 1994.

Daniel G. MacFarlan has been a director of Tandus Group since November 2005. Since 2002 he has been a consultant to Oaktree and provides services to its portfolio companies. Prior to his involvement with Oaktree, Mr. MacFarlan was employed by VF Corporation in various capacities since 1978, most recently as Chairman of VF Intimate Apparel and Luggage, Knitwear, Children’s Playwear and its Retail operations. Mr. MacFarlan also serves on the board of CFG Furniture. See “Director Compensation” contained herein in Item 11 for additional information.

Term

Our directors serve a term of one year and until their successors are duly elected and qualified. Our officers serve at the pleasure of the Board of Directors.

Committees of the Board of Directors of Tandus Group

Tandus Group’s Board of Directors (“the board”) currently has three standing committees. The Executive Committee possesses certain of the powers and authority of the board with respect to the management and direction of business and affairs. This committee is composed of Mr. Goldstein, who is the chairman, and Messrs. MacFarlan and Mehring. The Compensation Committee is responsible for supervising executive compensation policies, administering employee incentive plans, reviewing officer salaries, approving changes in executive employee benefits and making recommendations regarding other forms of remuneration as deemed appropriate. This committee is composed of Mr. MacFarlan, who is the chairman, and Messrs. Goldstein and Mehring. The Audit Committee reviews the annual audit reports, reviews the fees paid to external auditors and recommends independent public accountants to the board. This committee is charged with the responsibility of reporting its audit findings and recommendations to the board, as necessary. The Audit Committee is composed of Mr. Mann, who is the chairman, and Mr. Goldstein. The board has determined that Mr. Mann is an audit committee financial expert and that Mr. Mann is independent as such term is used in Item 7(d)3(iv) of Schedule 14A under the Exchange Act using the definition of independence under the rules of NASDAQ. Mr. Goldstein is not considered to be independent under this definition.

Committees of the Board of Directors of the Company

The Company’s Board of Directors does not have any standing committees. The committees of the Board of Directors of Tandus Group serve as the committees of the Board of Directors of the Company.

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Code of Ethics

The Company has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, controller, and persons performing similar functions. The Code of Ethics is available on the Company’s investor relations website at www.tandus.com. The Company intends to post amendments to this Code of Ethics and waivers to the extent applicable at this location of this website. In addition, the Company will provide a copy of the Code of Ethics without charge to any person submitting a written request for the same to Investor Relations, 311 Smith Industrial Boulevard, Dalton, Georgia 30721.

Compliance with Section 16(a) of the Exchange Act

The Company does not have a class of equity securities registered pursuant to Section 12 of the Exchange Act; thus, the Company’s stockholders are not required to comply with Section 16(a) of the Exchange Act.

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Item 11. Executive Compensation

Compensation Discussion and Analysis

Overview of Compensation Programs

The Compensation Committee is appointed by the Board of Directors to approve and evaluate all compensation programs, policies and plans of the Company, as they affect the executive officers. The Compensation Committee consists of three outside, non-employee directors, one of whom is considered to be independent under the rules of NASDAQ.

Throughout this section, the Company’s Chief Executive Officer, Chief Financial Officer and other individuals included in the Summary Compensation Table are referred to as the “Named Executive Officers” (NEOs). The Compensation Committee is directly responsible for the evaluation of the performance of the Chief Executive Officer (CEO) and the associated adjustments to the elements of compensation, discussed below. The CEO does not participate in any process related to the establishment of his own pay. In determining each element of compensation for the other NEOs, the Compensation Committee receives a performance assessment and compensation recommendation from the CEO and also exercises its judgment based on the board’s interactions with the NEOs.

Compensation Philosophy

The Compensation Committee’s current philosophy is that the predominate portion of an executive’s compensation should be based directly upon the value of incentive compensation in the form of cash bonuses. The Compensation Committee believes that providing executives with the opportunity to obtain cash bonuses, while maintaining base salaries at competitive levels, will enable the Company to attract and retain executives with the outstanding management abilities and entrepreneurial spirit who are essential to the Company’s success.

Furthermore, the Compensation Committee believes that this approach to compensation, as well as the opportunity to receive cash bonuses based on the Company’s financial performance, motivates executives to perform to their fullest potential.

The Company’s compensation policies are designed to align the financial interests of its management with those of its shareholders, and to take into account the operating environment and expectations for continued growth and enhanced profitability. Compensation for each executive officer generally consists of a base salary and the opportunity to receive an annual bonus.

Elements of Compensation and Benchmarking

The elements of compensation for the Company’s executive officers are: (1) an annual base salary; (2) an annual incentive, paid in cash; (3) long-term incentive awards granted under the 2001 Tandus Group, Inc. Executive and Management Stock Option Plan; (4) a benefits package and (5) certain perquisites.

The Company provides a competitive salary and benefits package that management and the Compensation Committee believe is consistent with market practice for the industry and allows the Company to attract and retain executives and employees. The annual incentive provides a focus on short-term performance while the long-term incentive is designed to encourage the achievement of corporate goals and growth of stockholder value over the longer term. The perquisites that the Company provides are the result of negotiation with respect to employment, providing conveniences to the executive that allow the executive to focus more time on the Company’s business, and business needs.

The Compensation Committee performs local benchmarking and analysis with regards to executive compensation for competitive purposes, occasionally engages outside compensation consulting firms.

Base Salary

At least annually, the Compensation Committee reviews salary recommendations for the Company’s executives and then approves such recommendations, with any modifications it considers appropriate. The annual salary recommendations for the executives are made under the ultimate direction of the Chief Executive Officer, based on total compensation packages

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for comparable companies in our industry, as well as evaluations of the individual executive’s past and expected future performance.

For fiscal 2006, after considering business and performance indicators, the Compensation Committee did not approve an increase to the annual base salary of Mr. Bridger, the Company’s former President and CEO. In addition, the Compensation Committee did not approve any increases to the base salaries for the remaining NEOs.

For fiscal 2007, the Compensation Committee approved a base salary of $350,000 for the Company’s current Chief Executive Officer, Glen A. Hussmann. For the remaining NEOs, the Compensation Committee approved the following base salaries for 2007: Mr. Schilling $212,000; Mr. Grogan $284,000; Mr. Raabe $200,000; Mr. Ferro $250,000; and Mr. Harley $218,000.

Annual Incentive Compensation

The Management Incentive Compensation Plan (“MICP”) is the primary plan the Company uses for annual incentive compensation.

The Compensation Committee sets annual incentive targets as a percentage of each NEOs base salary. The target is generally established based on the executive officer’s position and the responsibilities that accompany that position. For 2006, the annual incentive targets (as a percentage of base salary) for the NEOs were 40% for Messrs. Schilling, Ferro, Raabe, and Harley, and 50% for Mr. Grogan. The annual incentive target for the Company’s chief executive officer is 100% of base salary.

Each year, the Compensation Committee establishes the EBITDA threshold that must be achieved as a condition to any payouts under the MICP. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, cumulative effect of change in accounting principle, Chroma cash dividends, non-cash charges or expenses (other than the write-off of current assets), loss from discontinued operations, minority interest in income (loss) of subsidiary, costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, equity in earnings of Chroma and gain on forgiveness of debt. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) operating activities as a measure of liquidity. Payment of awards under the MICP is based upon the achievement of the EBITDA threshold for the applicable year.

The Company exceeded its EBITDA threshold for fiscal 2006. In measuring the EBITDA threshold for fiscal 2006, the Compensation Committee excluded the negative effects of several unusual items, including, among other things, the effect of the sale of the Company’s United Kingdom subsidiary, expenses incurred with the legal matters discussed elsewhere in this Annual Report on Form 10-K, and expenses related to the Company’s search for and hiring of a new chief executive officer.

Long-Term Incentive Compensation

2001 Tandus Group, Inc. Executive and Management Stock Option Plan

Tandus Group initially adopted the 2001 Tandus Group, Inc. Executive and Management Stock Option Plan in August 2001. All options granted at that time were tied on a performance-based vesting schedule based on internal rate of return or cumulative EBITDA. The targets in the vesting schedule were never met and, the Company came to realize, never would be met. As a result, it created a new equity incentive plan that would provide long-term incentives to management. The new incentive structure was adopted by the board of directors of Tandus Group in the fourth quarter of fiscal 2006 as the 2001 Tandus Group, Inc. Amended and Restated Management Stock Option Plan (the “2001 Amended Plan”). A portion of the options granted under the original plan were repurchased in the fourth quarter of fiscal 2006 for a nominal flat fee per employee. The options that remained outstanding at the end of fiscal 2006 were replaced with new options in February 2007 that were issued under the 2001 Amended Plan.

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2001 Amended Plan

Under Tandus Group’s 2001 Amended Plan, adopted December 6, 2006, Tandus Group may issue non-qualified options to eligible employees, directors, officers, consultants and advisors of the Company, any of its subsidiaries or Tandus Group. Five hundred thousand shares of common stock of Tandus Group are reserved for issuance under the plan. Options granted under this plan expire ten years from their grant date. Twenty percent of the shares underlying the options vest, for so long as the recipient is employed by any Tandus Group subsidiary, upon each anniversary of the grant date thereof. If an option holder’s employment is terminated for cause, all of the unvested portion of such holder’s options shall terminate on the date the employment ends. If an option holder’s employment is terminated in any other circumstances, the portion of such holder’s options that have not vested as of the termination date shall expire on the earlier of the scheduled expiration date or 45 days following the termination date (except in the event of termination due to death or disability, in which case any unvested options shall expire six months after the termination date).

If an option holder’s employment is terminated by the company without cause, because of death or disability or because of resignation, then Tandus Group may elect to repurchase all or any portion of (a) the shares underlying such holder’s unexercised options at a price equal to the fair market value of such shares minus the exercise price thereof, or (b) the shares previously issued upon exercise of such options at the fair market value of such shares. If an option holder’s employment is terminated by the company with cause, Tandus Group may elect to repurchase all or any portion of the shares underlying the holder’s unexercised options or the shares previously issued upon exercise of such options at the lesser of the fair market value of the shares and the exercise price thereof. Tandus Group’s repurchase rights shall terminate upon an initial public offering of Tandus Group common stock.

Upon the occurrence of an “Approved Sale” of Tandus Group, all shares underlying the options not vested as of the date of the Approved Sale shall vest on that date, so long as the holder of the options has been continuously employed by the company to that date. An Approved Sale is a sale approved by the Oaktree Fund and B of A Fund of all, or substantially all, of Tandus Group’s assets to a third party who is not a major shareholder of Tandus Group, or a sale of Tandus Group stock of such an amount to a third party who is not a major shareholder of Tandus Group stock to allow that third party to choose a majority of the members of the board of directors of Tandus Group.

The 2001 Amended Plan may be amended by action of the board of directors of Tandus Group, subject to certain exceptions.

Benefits and Retirement

The Company provides a benefits package for its employees and their dependents, portions of which are paid by the employee. Benefits include, among other things, life insurance, health insurance, dental insurance, vision insurance, income protection insurance, 401(k) participation and matching, dependent and healthcare reimbursement accounts, tuition reimbursement, vacation time and holidays. The Company maintains a defined benefit plan for its domestic employees, which was frozen in 2002.

Perquisites and Other Personal Benefits

The Company provides NEOs with certain perquisites and other personal benefits that it and the Compensation Committee believe are reasonable and consistent with its overall compensation program. The perquisites and personal benefits allow the Company to compete more effectively for executive talent. These perquisites are not a significant portion of each NEOs total compensation package. A detailed table of our perquisites is included as a footnote to the Summary Compensation Table.

Accounting and Tax Treatment

A complete discussion of the assumptions made in the valuation of stock-based compensation and the financial impact can be found in Notes 1 and 15 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally limits amounts that can be deducted for compensation paid to certain executives to $1.0 million unless certain requirements are met. No executive officer receives compensation in excess of $1.0 million and therefore all compensation amounts are deductible at present. The Compensation Committee will continue to monitor the applicability of Section 162(m) to our compensation program.

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Executive Compensation

The following table sets forth certain information concerning compensation of the Company’s NEOs during the fiscal years presented.

Summary Compensation Table

Name and Principal Position	Year	Salary		Bonus			All Other Compensation			Total
Edgar M. Bridger	2006	$	380,000	$	222,870		$	23,374	(2)	$	403,374
President and Chief Executive Officer*	2005	$	380,000	$	—		$	23,130	(2)	$	403,130
	2004	$	360,000	$	442,440		$	22,180	(2)	$	824,620
Leslie (Lee) H. Schilling	2006	$	208,000	$	97,594		$	22,443	(2)	$	328,037
Senior Vice President of Marketing	2005	$	208,000	$	—		$	16,045	(2)	$	224,045
	2004	$	198,750	$	199,640		$	15,969	(2)	$	414,359
Ralph H. Grogan	2006	$	275,600	$	186,639	(1)	$	25,056	(2)	$	487,295
Senior Vice President	2005	$	275,600	$	—		$	20,176	(2)	$	295,776
	2004	$	265,000	$	—		$	13,323	(2)	$	278,323
Jeffrey M. Raabe	2006	$	195,000	$	91,494		$	20,686	(2)	$	307,180
Senior Vice President of Sales	2005	$	195,000	$	—		$	17,791	(2)	$	212,791
	2004	$	182,833	$	180,909		$	17,568	(2)	$	381,310
Leonard F. Ferro	2006	$	230,000	$	132,916	(1)	$	24,187	(2)	$	387,103
Vice President and Chief Financial Officer	2005	$	230,000	$	—		$	47,772	(2)	$	277,772
	2004	$	119,268	$	226,472		$	64,596	(2)	$	410,336
James T. Harley	2006	$	210,100	$	98,579		$	49,886	(2)	$	358,565
Vice President of Manufacturing	2005	$	207,736	$	100,000		$	7,127	(2)	$	314,863
	2004	$	—	$	—		$	—	(2)	$	—

* Mr. Bridger resigned from his position with the Company effective November 30, 2006.

(1) These amounts include compensation payments of $25,000 for each NEO for assumption of additional responsibilities in the period of time during which the Company had no named chief executive officer.

(2) “All Other Compensation” amounts are detailed in the following table:

Name and Principal Position	Year	Life Insurance		401(K) Employer Matching Contributions		Car Allowances		Long-term Care Insurance		Accidental Death & Dismemberment Insurance		Reimbursement of Relocation Expenses
Edgar M. Bridger	2006	$	1,560	$	9,900	$	10,657	$	887	$	360	$	—
President and Chief Executive Officer	2005	$	1,560	$	7,000	$	13,323	$	887	$	360	$	—
	2004	$	1,560	$	6,050	$	13,323	$	887	$	360	$	—
Leslie (Lee) H. Schilling	2006	$	973	$	6,760	$	12,940	$	1,545	$	225	$	—
Senior Vice President of Marketing	2005	$	967	$	—	$	13,323	$	1,532	$	223	$	—
	2004	$	905	$	—	$	13,323	$	1,532	$	209	$	—
Ralph H. Grogan (d)	2006	$	1,505	$	9,900	$	12,647	$	657	$	347	$	—
Senior Vice President	2005	$	1,301	$	5,276	$	11,103	$	657	$	300	$	1,539
	2004	$	—	$	—	$	13,323	$	—	$	—	$	—
Jeffrey M. Raabe	2006	$	761	$	5,850	$	13,269	$	630	$	176	$	—
Senior Vice President of Sales	2005	$	758	$	2,911	$	13,323	$	624	$	175	$	—
	2004	$	713	$	2,743	$	13,323	$	624	$	165	$	—
Leonard F. Ferro (c)	2006	$	1,076	$	9,900	$	12,612	$	351	$	248	$	—
Vice President and Chief Financial Officer	2005	$	1,045	$	6,738	$	13,323	$	—	$	241	$	26,425
	2004	$	328	$	2,363	$	7,570	$	—	$	76	$	54,259
James T. Harley (e)	2006	$	983	$	9,900	$	14,583	$	432	$	227	$	23,761
Vice President of Manufacturing	2005	$	151	$	6,940	$	—	$	—	$	36	$	—
	2004	$	—	$	—	$	—	$	—	$	—	$	—

70

Outstanding Equity Awards at Fiscal Year-End

Outstanding equity awards held by the Company’s NEOs as of January 27, 2007 are as follows:

	Option Awards
Name	Plan Awards: Number of Securities Underlying Unexercised (#)	Option Exercise Price ($)		Option Expiration Date
Leslie (Lee) H. Schilling	2,853.08	$	35.70	July 2011
Ralph H. Grogan	3,423.70	$	35.70	July 2011
Jeffrey M. Raabe	3,423.70	$	35.70	July 2011
James T. Harley	684.74	$	35.70	July 2011

None of the options listed in the table above are exercisable and none will become exercisable given the performance vesting targets for the options. As a result, the Company replaced these options after the end of fiscal 2006 with options under the 2001 Amended and Restated Plan described herein.

No options were granted to or exercised by the NEOs in fiscal 2006 and there is no market for Tandus Group’s common stock.

Pension Benefits

As indicated previously, during fiscal 2002, the Company elected to freeze the Pension Account Plan (the “Pension Plan”). Pursuant to this action, no new employees subsequent to that time would be eligible for participation in the Pension Plan. During the time the Pension Plan was open, provided certain eligibility requirements were met, at the end of each calendar month pay credits were added to each participant’s account. The percentage of compensation was based on the participant’s length of credited service and compensation (as defined in the Pension Plan) during that month. For participants aged 50 or older, the percentage of compensation was based on either credited service or age, whichever resulted in a higher percentage.

The following chart sets forth how pay credits were determined under the Company’s Pension Plan:

Eligibility Requirements			Percentage of Compensation Used to Determine Pay Credits
Years of Credit Service	or	Age	Up to 1/3 of the S.S. Wage Base		Over 1/3 of the S.S. Wage Base
Less than 10		Less than 50	2.5	%	4.5	%
10 – 14		50 – 54	3.0	%	5.5	%
15 – 19		55 – 59	4.0	%	6.5	%
20 – 24		60 – 64	5.0	%	8.0	%
25 or more		65 or more	6.0	%	10.0	%

Participants made no contributions to the Pension Plan. Employer contributions were 100% vested after five years of service or at age 65, whichever was earlier, and might have vested under certain other circumstances as set forth in the Plan. The estimated annual benefits payable upon retirement at normal retirement age under the Pension Plan for Messrs. Schilling, Grogan, Raabe, Ferro and Harley are $7,493, $0, $16,144, $0 and $0, respectively. Participants in the Pension Plan have the option, however, of receiving the value of their vested account in a lump sum following termination of employment.

71

Employment Agreements

Glen A. Hussmann

The Company has an employment agreement with its President and Chief Executive Officer, Glen A. Hussmann, effective February 19, 2007.

As part of the agreement, Mr. Hussmann’s annual base salary is $350,000 or such higher rate as the Board of the Company may determine from time to time. Mr. Hussmann shall also be entitled to (i) participate in the Company’s employee benefit programs for which senior executives of the Company are generally eligible, (ii) four weeks of paid vacation annually, (iii) reimbursement for reasonable business expenses incurred by him, (iv) an annual bonus based upon the Company’s achievement of certain financial targets for each year, as established by the Board of the Company, with a targeted annual bonus equal to 100% of Mr. Hussmann’s base salary for each year, (v) reimbursement of either $1,225 per month for automobile expenses including insurance or an annual guaranteed bonus of $14,700 (such bonus in addition to his regular annual bonus), and (vi) certain relocation expenses.

The initial term of the Agreement shall terminate on February 18, 2010 and automatically renew for one-year periods therefrom, unless (i) either party elects not to renew the employment period at least 60 days prior to the final date of any term or (ii) Mr. Hussmann or the Company otherwise terminates Mr. Hussmann’s employment. Should Mr. Hussmann be terminated by the Company without “cause”, he will be entitled to continued base salary and participation in employee benefit programs for six months from termination, subject to his delivery of a release and certain other conditions.

The Agreement contains covenants regarding nondisclosure of confidential information (during the employment period and thereafter) and ownership of intellectual property. Mr. Hussmann has also agreed to certain non-competition, non-solicitation, non-hire and non-disparagement covenants during the employment period and for one year thereafter.

Edgar M. Bridger

The Company also entered into an employment and separation agreement with Mr. Bridger, its former President and CEO on August 31, 2006. In that agreement, the parties agreed that Mr. Bridger’s salary would be $380,000 per year and that he would be entitled to receive customary benefits. Mr. Bridger is entitled to severance payments equal to $380,000 per year until July 2008.

Mr. Bridger is obligated to a four year non-compete provision and cannot work for a company that sells the types of carpeting that the Company sells for four years after the termination of his employment. In addition, he agreed to not hire or solicit the Company’s employees for 12 months after the termination of his employment and to not disparage the Company. Tandus Group will repurchase half of Mr. Bridger’s Tandus Group stock for the aggregate purchase price of $2.5 million in two equal transactions in May 2007 and July 2008. In the event that Mr. Bridger breaches any of his post-employment covenants, he will be required to repay the purchase price he received for his stock. In addition, he agreed to not sell any of the remainder of his Tandus Group stock until after the non-compete period has ended. As part of this agreement, Mr. Bridger agreed to release the Company from all potential claims against it.

Director Compensation

None of Tandus Group’s or the Company’s directors are entitled to receive any fees for serving as directors. They are, however, reimbursed for out-of-pocket expenses related to their service as directors.

One of the Company’s directors, Daniel G. MacFarlan, is currently providing operational advisory services to the Company. The initial term of his advisory services was six months, which commenced in January 2006. The amount received by Mr. MacFarlan was $350,000 for that initial term. The term was extended for an additional six months for additional compensation of $350,000. The Company has extended Mr. MacFarlan’s advisory services arrangement throughout 2007 for compensation totaling $350,000 for the year.

72

Compensation Committee Interlocks and Insider Participation

No member of the Company’s Board of Directors serves as a member of the Board of Directors or Compensation Committee of any entity that has one or more executive officers serving as a member of the Company’s Board of Directors. Members of the Compensation Committee are Mr. MacFarlan (Chairman) and Messrs. Goldstein and Mehring.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained herein with management of the Company and, based on the review and discussion, has recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 27, 2007.

Submitted by the Compensation Committee

Daniel G. MacFarlan (Chairman)

Richard J. Goldstein

Jason A. Mehring

73

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of January 27, 2007, with respect to compensation plans under which Tandus Group equity securities are authorized for issuance.

	Equity Compensation Plan Information
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans excluding securities already issued
Equity compensation plans approved by shareholders (1)	500,000	$	n/a	500,000
Equity compensation plans not approved by shareholders	—		—	—
Total	500,000	$	n/a	500,000

(1) Consists of 500,000 shares subject to awards granted under the 2001 Tandus Group, Inc. Amended and Restated Management Stock Option Plan.

Beneficial Ownership

All of the Company’s outstanding capital stock is owned by Tandus Group. The table below sets forth certain information regarding the beneficial ownership of Tandus Group’s common stock as of April 9, 2007 by (i) each person known to beneficially own more than 5% of any class of Tandus Group’s common stock, (ii) each of the directors of Tandus Group and each of the Company’s directors and named executed officers and (iii) all of the directors of Tandus Group and all of the Company’s directors and named executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the SEC, which generally attributes beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

Name	Number of Shares of Common Stock	Percentage of Common Stock
Principal Stockholders:
OCM Principal Opportunities Fund II, L.P. (1)         333 South Grand Avenue 28th Floor         Los Angeles, CA 90071	1,120,448	34.94	%
BancAmerica Capital Investors II, L.P. (2)         231 South LaSalle Street         Chicago, IL 60697	910,364	28.39	%
Norwest Equity Partners VII, LP (3)         3600 IDS Center         80 South 8th Street         Minneapolis, MN 55402	280,112	8.74	%
Quad-C Management, Inc. (4)         230 East High Street         Charlottesville, VA 22902	264,743	8.26	%
Abu Dhabi Investment Authority (5)         P. O. Box 7106 Comiche Street         Abu Dhabi, United Arab Emirates	210,084	6.55	%

74

Directors and Executive Officers (6)
Ralph H. Grogan	—	—
Leslie (Lee) H. Schilling	24,509	*
Leonard F. Ferro	—	—
Jeffrey M. Raabe	21,008	*
Henry L. Millsaps, Jr.	16,806	*
James T. Harley	2,100	*
Richard J. Goldstein (7)	—	—
Stephen M. Burns (8)	838	*
Caleb S. Kramer (9)	—	—
Jeffrey M. Mann (10)	—	—
Jason A. Mehring (11)	—	—
Daniel G. MacFarlan	—	—
All directors and officers as a group (12 people)	65,261	2.03	%

* Less than one percent

(1) Oaktree Capital Management, LLC, (“Oaktree”) as the sole general partner of the OCM Principal Opportunities Fund II, L.P. (the “Oaktree Fund”), may be deemed to beneficially own the shares held of record by the Oaktree Fund.

(2) BancAmerica Capital Management II, L.P., as the general partner of BancAmerica Capital Investors II, L.P. (the “B of A Fund”), may be deemed to beneficially own the shares held of record by the B of A Fund. BACM II GP, LLC, as the general partner of BancAmerica Capital Management II, L.P., may also be deemed to beneficially own the shares held of record by the B of A Fund.

(3) Itasca LBO Partners VII, LLP, as the general partner of Norwest Equity Partners VII, LP, may be deemed to beneficially own the shares held by Norwest Equity Partners VII, LP.

(4) Includes 10,624 shares of common stock owned by Quad-C Partners II, L.P. (“Quad-C II”), 20,129 shares of common stock owned by Quad-C Partners III, L.P. (“Quad-C III”), 128,327 shares of common stock owned by Quad-C Partners IV, LP (“Quad-C IV”), 53,763 shares of common stock owned by QCP Investors, LLC (“QCP Investors”) and 2,152 shares of common stock owned by QCP Investors II LLC (“QCP Investors II”). Quad-C III, L.L.C. as the general partner of Quad-C II; Quad-C II, L.L.C. as the general partner of Quad-C III, L.L.C.; and Quad-C IV, L.L.C. as the general partner of Quad-C IV, may be deemed to beneficially own shares held of record by the entity of which it is the general partner. Terry Daniels, as the managing member of each of these general partners, and as the managing member of each of QCP Investors and QCP Investors II, may also be deemed to beneficially own the shares held of record by each of these entities. Also includes 49,748 shares of common stock owned of record by Paribas Principal, Inc., which Quad-C Management, Inc. has the power to vote pursuant to a proxy.

(5) The Abu Dhabi Investment Authority is an instrumentality of the government of the Emirate of Abu Dhabi and is wholly owned and controlled by that government.

(6) The address of each director and executive officer is c/o Collins & Aikman Floorcoverings, Inc., 311 Smith Industrial Boulevard, Dalton, Georgia 30722.

(7) Mr. Goldstein is a Managing Director of Oaktree. Mr. Goldstein disclaims beneficial ownership of all shares beneficially owned by the Oaktree Fund, except for those shares in which he has a pecuniary interest.

(8) Mr. Burns is a Vice-President of Quad-C Management, Inc. Mr. Burns disclaims beneficial ownership of all shares owned by Quad-C Management, Inc. except for those shares in which he has a pecuniary interest.

(9) Mr. Kramer is a Managing Director of Oaktree. Mr. Kramer disclaims beneficial ownership of all shares beneficially owned by the Oaktree Fund, except for those shares in which he has a pecuniary interest.

(10) Mr. Mann is a Managing Director of Silver Oak Services Partners and was formerly a Managing Director of BACI.

(11) Mr. Mehring is a Managing Director of BlackRock Kelso Capital and was formerly a Principal with BACI. Mr. Mehring disclaims beneficial ownership of all shares beneficially owned by BACI, except those shares in which he has a pecuniary interest.

75

Item 13. Certain Relationships and Related Transactions, and Director Independence

Since January 2001, investment funds managed by Oaktree and BACI, specifically the Oaktree Fund and the B of A Fund, respectively, control a majority of the outstanding capital stock of Tandus Group. Effective January 2001, the Company entered into Professional Services Agreements with each of Oaktree Fund and B of A Fund (collectively, the “Funds”). The terms of both agreements are substantially the same. The Funds will provide management and financial consulting services to the Company from time to time. These services will include consulting on business strategy, future investments, future acquisitions and divestitures, and debt and equity financing. For these services, the Company has agreed to pay each of the Funds quarterly fees of $62,500 and to reimburse them for reasonable travel and other out-of-pocket fees and expenses incurred by them in providing services to the Company (including, but not limited to, fees and expenses incurred in attending Company-related meetings). The Company has also agreed to indemnify each of the Funds against any losses they may suffer arising out of the services they provide to the Company in connection with these agreements, such as losses arising from third party suits. The agreements terminate on the first of (1) the date on which the applicable Fund, as the case may be, owns less than 25% of the capital stock in Tandus Group, (2) the date on which Tandus Group is either sold to a party who does not currently own more than 5% of Tandus Group’s common stock or (3) substantially all the assets of Tandus Group are sold. Accrued liabilities of $2.5 million related to services provided to the Company by the Funds are included in the Company’s consolidated statement of financial condition as of January 28, 2006. No amount was accrued as of January 27, 2007.

As previously discussed, on January 18, 2007, the Company entered into a $80 million senior secured revolving credit facility. The lender in the facility is Bank of America N.A. which is an affiliate of the B of A Fund, the second largest shareholder of Tandus Group.

Messrs. Burns, Mann and Mehring serve on the Company’s Board of Directors and are deemed independent according to the standards of the Nasdaq Marketplace Rules. Messrs. MacFarlan, Goldstein and Kramer serve on the Company’s Board of Directors and are not independent according to those standards. Messrs. MacFarlan and Goldstein serve on the Company’s Compensation Committee. Mr. Goldstein also serves on the Company’s Audit Committee. Messrs Goldstein, Kramer and MacFarlan are affiliated with Oaktree. Messrs. Mann and Mehring were affiliated with BACI until 2006 and 2005, respectively.

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Audit Committee Report

The Audit Committee is currently comprised of two members, one of which is an “independent director” as that term is used in item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. Each of the members of the Audit Committee is financially literate and Jeffrey Mann qualifies as an “audit committee financial expert” under federal securities laws. The Audit Committee’s purposes are to assist the Board in overseeing: (a) the quality and integrity of the Company’s financial statements; (b) the qualifications and independence of the Company’s independent auditors; and (c) the performance of the Company’s internal audit function and independent registered public accounting firm.

In carrying out its responsibilities, the Audit Committee has:

• reviewed and discussed the audited financial statements with management;

• discussed with the independent registered public accounting firm the matters required to be discussed with audit committees by Statement on Auditing Standards No. 61; and

• received the written disclosures and the letter from the Company’s independent registered public accounting firm required by Independence Standards Board Standard No. 1 and has discussed with the independent registered public accounting firm their independence.

Based on the review and discussions noted above and the Company’s independent registered public accounting firm’s report to the Audit Committee, the Audit Committee has recommended to the Board that its audited financial statements be included in its Annual Report on Form 10-K for the fiscal year ended January 27, 2007.

This report is not to be deemed incorporated by reference by any general statement that incorporates by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, and it is not to be otherwise deemed filed under either such Act.

Submitted by the Audit Committee

Jeffrey M. Mann (Chairman)

Richard J. Goldstein

77

Item 14. Principal Accountant Fees and Services

Aggregate fees for professional services rendered by Grant Thornton LLP, the Company’s independent registered public accounting firm are as follows:

	Fiscal Year Ended
	January 27, 2007		January 28, 2006
Audit Fees (1)	$	459,300	$	454,300
Audit-Related Fees		—		29,000
Tax Fees		96,845		89,469
All Other Fees		41,850		76,166
Total	$	597,995	$	648,935

(1) The amount related to the fiscal year ended January 28, 2006 has been increased $144,300 to reflect additional fees billed subsequent to year-end for audit services related to that fiscal year.

Audit Fees. This category includes the aggregate fees billed for professional services rendered for the audits of the Company’s consolidated financial statements for fiscal years ended January 27, 2007 and January 28, 2006, for the reviews of the financial statements included in the quarterly reports on Form 10-Q during fiscal 2006 and fiscal 2005, and for services that are normally provided by Grant Thornton LLP in connection with statutory and regulatory filings or engagements for the relevant fiscal years.

Audit-Related Fees. This category includes the aggregate fees billed in each of the last two fiscal years for assurance and related services by Grant Thornton LLP, that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported under “Audit Fees,” as noted above. These services generally consist of fees for audits of employee benefit plans and accounting consultation.

Tax Fees. This category includes the aggregate fees billed in each of the last two fiscal years for professional services rendered by Grant Thornton LLP for tax compliance, planning and advice.

All Other Fees. This category includes the aggregate fees billed in each of the last two fiscal years for products and services provided by Grant Thornton LLP that are not reported under “Audit Fees,” “Audit-Related Fees” or “Tax Fees,” as noted above.

The Audit Committee reviews and pre-approves audit and non-audit services performed by Grant Thornton LLP, the Company’s independent registered public accounting firm, as well as the fees charged for such services. Pre-approval is generally provided for up to one year, is detailed as to the particular service or category of service and is subject to a specific budget. The Audit Committee may also pre­approve particular services on a case-by-case basis. The Chairman of the Audit Committee has authority to pre-approve such services, and his decisions are then presented to the full Audit Committee at its next scheduled meeting.

The Audit Committee has considered and determined that the fees charged for services other than “Audit Fees” discussed above are compatible with maintaining independence by Grant Thornton LLP. Since January 26, 2003, 100% of the audit and non-audit services provided by our independent auditors have been pre-approved by the Audit Committee in accordance with the Audit Committee Charter.

Independent Registered Public Accounting Firm

Upon the recommendation of the Audit Committee, the Board has appointed Grant Thornton LLP as the independent registered public accounting firm to audit the Company’s consolidated financial statements for the fiscal year ending January 27, 2007.

78

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

(a) (1) FINANCIAL STATEMENTS:

See “Item 8. Financial Statements and Supplementary Data”

(2) FINANCIAL STATEMENT SCHEDULES:

See Schedule II - Valuation and Qualifying Accounts at the end of this report.

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are not required, are inapplicable, or the information is included in the consolidated financial statements or notes thereto.

79

(3) EXHIBITS:

Exhibit No.	Description
3.1	Certificate of Incorporation of Collins & Aikman Floorcoverings, Inc., as amended to date (Incorporated by reference from Exhibit 3.1 to the Company’s Registration Statement on Form S-4 filed on April 7, 1997 (File No. 333-24699)).
3.2	By-Laws of Collins & Aikman Floorcoverings, Inc. (Incorporated by reference from Exhibit 3.2 to the Company’s Registration Statement on Form S-4 filed on April 7, 1997 (File No. 333-24699)).
4.1	Indenture, dated February 15, 2002, among Collins & Aikman Floorcoverings, Inc., Monterey Carpets, Inc., Monterey Color Systems, Inc. and The Bank of New York, as Trustee, for 9-3/4% Senior Subordinated Notes Due 2010 (Incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)).
4.2	Registration Rights Agreement, dated as of February 20, 2002, among Collins & Aikman Floorcoverings, Inc., Monterey Carpets, Inc., Monterey Color Systems, Inc., Credit Suisse First Boston Corporation, Banc of America Securities, LLC, BNP Paribas Securities Corp., First Union Securities, Inc. and Fleet Securities, Inc. (Incorporated by reference from Exhibit 4.2 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)).
10.1	Credit Agreement, dated January 25, 2001, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the lenders named therein and Credit Suisse First Boston Corporation, as Administrative Agent, BNP Paribas, as Syndication Agent and Fleet Capital Corporation, as Documentation Agent (Incorporated by reference from Exhibit 10.1 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)).
10.2	Amendment No. 1 to Credit Agreement, dated February 11, 2002, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Lenders (as defined therein) and Credit Suisse First Boston, as Administrative Agent (Incorporated by reference from Exhibit 10.2 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)).
10.3	Amendment No. 2 to Credit Agreement, dated May 1, 2004, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Lenders (as defined therein) and Credit Suisse First Boston, as Administrative Agent (Incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on June 15, 2004).
10.4	Amendment No. 3 to Credit Agreement, dated August 18, 2004, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Lenders (as defined therein) and Credit Suisse First Boston, as Administrative Agent (Incorporated by reference from Exhibit 10.1 to the Company’s Report on Form 8-K filed on August 24, 2004) .
10.5	Security Agreement, dated January 25, 2001, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Subsidiary Guarantors named therein and Credit Suisse First Boston, as Collateral Agent (Incorporated by reference from Exhibit 10.3 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)).
10.6	Pledge Agreement, dated January 25, 2001, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Subsidiary Guarantors named therein and Credit Suisse First Boston, as Collateral Agent (Incorporated by reference from Exhibit 10.4 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)).
10.7	Investor Rights Agreement, dated January 25, 2001, by and among OCM Principal Opportunities Fund II, L.P., BancAmerica Capital Investors II, L.P., the rollover participants named therein, the co-investors named therein, the executives named therein and the stockholders named therein (Incorporated by reference from Exhibit 10.5 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)).
10.8	Professional Services Agreement, dated as of January 25, 2001, by and between Collins & Aikman Floorcoverings, Inc. and OCM Principal Opportunities Fund II, L.P. (Incorporated by reference from Exhibit 10.6 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)).
10.9	Professional Services Agreement, dated as of January 25, 2001, by and between Collins & Aikman Floorcoverings, Inc. and BA SBIC Sub, Inc. (Incorporated by reference from Exhibit 10.7 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)).

10.10	Trade name License Agreement, dated as of February 6, 1997, by and between Collins & Aikman Floor Coverings Group, Inc., CAF Holdings, Inc. and Collins & Aikman Floorcoverings, Inc. (Incorporated by reference from Exhibit 10.2 to the Registration Statement on Form S-4 filed on June 4, 1997 (File No. 333-24699)).
10.11	Asset Purchase Agreement, dated as of May 1, 2002, by and among CAF Extrusion, Inc., Collins & Aikman Floorcoverings, Inc., Candlewick Yarns, Inc., Bretlin, Inc. and Dixie Group, Inc. (Incorporated by reference from Exhibit 10.9 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)).
10.12	Debt Restructuring Agreement, dated December 23, 1998, by and among Crossley Carpet Mills Limited, Montreal Trust Company of Canada and W.L. Single. (Incorporated by reference from Exhibit 10.10 to the Company’s Form 10-K for the year ending January 25, 2003).
10.13	2001 Tandus Group, Inc. Executive and Management Stock Option Plan. (Incorporated by reference from Exhibit 10.11 to the Company’s Form 10-K for the year ending January 25, 2003).*
10.14	2001 Tandus Group, Inc. Management Stock Purchase Plan. (Incorporated by reference from Exhibit 10.12 to the Company’s Form 10-K for the year ending January 25, 2003).*
10.15	Chroma Transition Agreement dated November 8, 2004, by and among Collins & Aikman Floorcoverings, Inc., Monterey Carpets, Inc., Monterey Color Systems, Inc., Chroma Technologies, Inc., The Dixie Group, Inc. and Chroma Systems Partners. (Incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on December 13, 2004).
10.16	Amendment No. 4 to Credit Agreement, dated October 29, 2005, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Lenders (as defined therein) and Credit Suisse, as Administrative Agent. (Incorporated by reference from Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q filed on December 13, 2005).
10.17	Tandus Group, Inc. Employment and Separation Agreement, between Tandus Group, Inc., Collins & Aikman Floorcoverings, Inc., and Edgar M. Bridger. (Incoporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on September 12, 2006).*
10.18	Loan and Security Agreement, dated January 18, 2007, by and among Collins & Aikman Floorcoverings, Inc. and subsidiaries (as defined therein), the Lenders (as defined therein) and Bank of America, N.A., as Administrative Agent (Incorporated by reference from Exhibit 10.1 to the Company’s Report on Form 8-K filed on January 24, 2007).
10.19	Tandus Group, Inc. Employment Agreement, dated February 2, 2007 between Tandus Group, Inc., Collins & Aikman Floorcoverings, Inc., and Glen A. Hussmann.*
10.20	Share Purchase Agreement, dated February 5, 2007, between Collins & Aikman Floorcoverings, Inc. and Interior Projects Solutions Limited.
14.1	Code of Ethics for Principal Officers. (Incorporated by reference from Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year ended January 25, 2003).
21.1	List of Subsidiaries.
24.1	Powers of Attorney (included on Signatures page).
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Audit Committee Charter. (Incorporated by reference from Exhibit 99.1 to the Company’s Annual report on Form 10K filed on May 19, 2004).

* Management contract or compensatory plan or agreement.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on April 30, 2007.

COLLINS & AIKMAN FLOORCOVERINGS, INC.
By:	/s/ Glen A. Hussmann
	Glen A. Hussmann
	(President and Chief Executive Officer)
By:	/s/ Leonard F. Ferro
	Leonard F. Ferro
	Chief Financial Officer
	(Principal Financial & Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each of the directors of the Registrant whose signature appears below hereby appoints Glen A. Hussmann and Leonard F. Ferro, and each of them severally, as his attorney-in-fact to sign in his name and behalf, in any and all capacities stated below, and to file with the Securities and Exchange Commission any and all amendments to this report on Form 10-K, making such changes in this report on Form 10-K as appropriate, and generally to do all such things in their behalf in their capacities as directors and/or officers to enable the Registrant to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission.

Name	Title	Date
/s/ Glen A. Hussmann	President and Chief Executive Officer	April 30, 2007
Glen A. Hussmann
/s/ Jeffrey M. Mann	Director	April 30, 2007
Jeffrey M. Mann
/s/ Richard J. Goldstein	Director	April 30, 2007
Richard J. Goldstein

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Securities Exchange Act of 1934 (“the Act”) by Registrant Which Have Not Registered Securities Pursuant to Section 12 of the Act.

No annual report or proxy material has been sent to security holders.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

Schedule II – Valuation and Qualifying Accounts

For the Years ended January 27, 2007, January 28, 2006 and January 29, 2005

(In Thousands)

DESCRIPTION	Balance at Beginning of Period		Charged to Costs & Expenses			Additions		Charged to Other Accounts (a)			Deductions (b)			Balance at End of Period
Year ended January 27, 2007
Allowance for doubtful accounts	$	440	$	83		$	—	$	—		$	(59	)	$	464
Year ended January 28, 2006
Allowance for doubtful accounts	$	644	$	(26	)	$	—	$	—		$	(178	)	$	440
Year ended January 29, 2005
Allowance for doubtful accounts	$	790	$	15		$	—	$	(44	)	$	(117	)	$	644

Notes:	(a)	Represents reclassifications and collections of accounts previously written off.
	(b)	Represents write-off accounts to be uncollectible, less recovery of amounts previously written off.

EX-10.19

Exhibit 10.19

Execution Copy

COLLINS & AIKMAN FLOORCOVERINGS, INC.

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made as of February 2, 2007, between Collins & Aikman Floorcoverings, Inc., a Delaware corporation (the “Company”), and Glen A. Hussmann (“Executive”).

In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Employment. The Company shall employ Executive, and Executive hereby accepts employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on February 19, 2007 and ending as provided in Section 5 hereof (the “Employment Period”).

2. Position and Duties.

(a) During the Employment Period, Executive shall serve as the President and Chief Executive Officer of the Company and shall have the normal duties, responsibilities, functions and authority of the President and Chief Executive Officer, subject to the power and authority of the Board of Directors of the Company (the “Board”) to expand or limit such duties, responsibilities, functions and authority. During the Employment Period, Executive shall render such administrative, financial and other executive and managerial services to the Company, its Subsidiaries (as defined below) and Tandus Group, Inc., the sole owner of the common stock of the Company (collectively, the “Group”), that are consistent with Executive’s position as the Board may from time to time direct.

(b) During the Employment Period, Executive shall (i) report to the Board, (ii) devote his best efforts and his full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Group, and (iii) reside in the region including and surrounding the cities of Chattanooga, Tennessee and Dalton, Georgia. Executive shall perform his duties, responsibilities and functions to the Group hereunder to the best of his abilities in a diligent, trustworthy, professional and efficient manner and shall comply with the Group’s policies and procedures in all material respects. During the Employment Period, Executive shall not serve as an officer or director of, or otherwise perform services for compensation for, any other entity without the prior written consent of the Board; provided, however, that Executive may serve as an officer or director of or otherwise participate in solely educational, welfare, social, religious and civic organizations so long as such activities do not interfere with Executive’s duties and responsibilities with the Group.

(c) For purposes of this Agreement, “Subsidiaries” shall mean any corporation or other entity of which the securities or other ownership interests having the voting power to elect a majority of the board of directors or other governing body are, at the time of determination, owned by the Company, directly or through one of more Subsidiaries.

3. Compensation and Benefits.

(a) During the Employment Period, Executive’s base salary shall be $350,000 per annum or such higher rate as the Board may determine from time to time (as adjusted from time to time, the “Base Salary”), which salary shall be prorated based on the number of days elapsed during any partial year and payable by the Company in regular installments in accordance with the Company’s general payroll practices in effect from time to time. In addition, during the Employment Period, Executive shall be entitled to participate in the Company’s employee benefit programs for which senior executive employees of the Company are generally eligible, and Executive shall be entitled to four (4) weeks of paid vacation each calendar year in accordance with the Company’s policies.

(b) During the Employment Period, the Company shall reimburse Executive for reasonable business expenses incurred by him in the course of performing his duties and responsibilities under this Agreement which are consistent with the Company’s policies in effect from time to time with respect to travel, entertainment and other business expenses.

(c) In addition to the Base Salary, Executive shall be eligible for a bonus following the end of each fiscal year during the Employment Period based upon the Company’s achievement of certain financial targets for such year, as established by the Board. The target amount for each year’s bonus payment shall equal one hundred percent (100%) of Executive’s Base Salary for such year.

(d) The Company shall also:

(i) during the Employment Period, at the Company’s election, either (A) reimburse Executive in the amount of $1,225 per month (before appropriate tax withholding by the Company) for the cost of Executive’s personal automobile and insurance coverage thereof or (B) pay Executive an annual guaranteed bonus of $14,700, which guaranteed bonus would be provided to Executive in addition to any bonus provided to Executive pursuant to Section 3(c) above; and

(ii) reimburse Executive for reasonable expenses incurred in connection with his relocation and commencement of employment hereunder and related to: (A) the relocation of his household goods (including packing and unpacking thereof) by a moving service approved by the Company; (B) up to three (3) trips by his spouse to search for housing; (C) up to six (6) months of temporary housing; (D) the customary real estate broker commission payable in connection with Executive’s sale of his existing primary residence and (E) the customary closing costs incurred in connection with obtaining the mortgage financing for the purchase of Executive’s new primary residence referred to in Section 2(b)(iii) hereof.

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(e) All amounts payable to Executive as compensation hereunder shall be subject to all required and customary withholding by the Group.

(f) Any reimbursement by the Company for expenses incurred by Executive pursuant to this Section 3 is subject to the Company’s requirements with respect to reporting and documentation of such expenses.

4. Board Membership. With respect to all regular elections of directors during the Employment Period, the Company shall nominate, and use its reasonable efforts to cause the election of, Executive to serve as a member of the Board. Upon the termination or expiration of the Employment Period, Executive shall resign as a director of the companies within the Group (each, a “Group Company”), as applicable.

5. Term.

(a) Unless expressly renewed by the Company and Executive in writing, the Employment Period shall begin on February 19, 2007 and end on February 18, 2010 and shall automatically be renewed on the same terms and conditions set forth herein (as modified from time to time by the parties hereto) for additional one-year periods beginning on February 19, 2010, unless the Company or Executive gives the other party written notice of the election not to renew the Employment Period at least sixty (60) days prior to any such renewal date; provided, however, that (i) the Employment Period shall terminate prior to such date immediately upon Executive’s resignation, death or upon the date on which Executive becomes Disabled and (ii) the Employment Period may be terminated by the Company at any time prior to such date for Cause (as defined below) or without Cause. Except as otherwise provided herein, any termination of the Employment Period by the Company shall be effective as specified in a written notice from the Company to Executive. The date of Executive’s termination under any of the circumstances set forth in this Section 5(a) shall be referred to herein as the “Termination Date.”

(b) If the Employment Period is terminated by the Company without Cause,

(i) Executive shall be entitled to continue to receive his Base Salary, payable in regular installments in accordance with the Company’s payroll policies, at the same rate at which Executive received his Base Salary from the Company immediately prior to the Termination Date, and to continue to participate in employee benefit programs for senior executive employees (other than bonus and incentive compensation plans) to the extent permitted under the terms of such programs or, if not permitted, as provided under applicable law, commencing on such date and continuing for a period of six months thereafter (the “Severance Period”), if and only if Executive has executed and delivered to the Company within twenty-two (22) days following the Termination Date the General Release substantially in form and substance as set forth in Exhibit A attached hereto and the General Release has become effective, and only so long as Executive has not revoked or breached the provisions of the General Release or breached the provisions of Section 6, Section 7 and Section 8 hereof and does not apply for unemployment compensation chargeable to the Group during the Severance Period (provided that if the Company is a “public company” within the meaning of Code §409A, any amounts

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payable to Executive during the first six months and one day following the date of termination pursuant to this Section 5(b) shall be deferred until the date six months and one day following such termination, and if such payments are required to be so deferred, the first payment shall be in an amount equal to the total amount to which Executive would otherwise have been entitled to during the period following the Termination Date if the deferral had not been required), and

(ii) Executive shall not be entitled to any other salary, compensation or benefits after termination of the Employment Period, except as specifically provided for in the Company’s employee benefit plans or as otherwise expressly required by applicable law.

The amounts payable pursuant to this Section 5(b) shall be reduced by the amount of any compensation Executive receives with respect to any other employment during the Severance Period; provided, however, that Executive shall have no duty or obligation to seek other employment during the Severance Period or otherwise mitigate damages hereunder. Notwithstanding any other provision of this Agreement, if following the termination of his employment Executive is entitled to payments or other benefits under this Section 5(b), but the Company later determines that Cause with respect to Executive exists or existed on, prior to, or after such termination of Executive, (i) Executive shall not be entitled to any payments or other benefits pursuant to this Section 5(b), (ii) any and all payments to be made by the Company and any and all benefits to be provided to Executive pursuant to this Section 5(b) shall cease and (iii) any such payments previously made to Executive shall be returned immediately to the Company by Executive.

(c) If the Employment Period is terminated by the Company for Cause or is terminated pursuant to clause (a)(i) above, Executive shall only be entitled to receive his Base Salary through the Termination Date and shall not be entitled to any other salary, compensation or benefits from the Group thereafter, except as otherwise specifically provided for under the Company’s employee benefit plans or as otherwise expressly required by applicable law.

(d) Except as otherwise expressly provided herein, all of Executive’s rights to salary, bonuses, employee benefits and other compensation hereunder which would have accrued or become payable after the termination or expiration of the Employment Period shall cease upon such termination or expiration, other than those expressly required under applicable law (such as COBRA). The Company may offset any amounts Executive owes it or any other Group Company against any amounts it or any other Group Company owes Executive hereunder.

(e) For purposes of this Agreement, “Cause” shall mean with respect to Executive one or more of the following: (i) the commission of a felony, a crime involving moral turpitude or any other act or omission involving dishonesty, disloyalty or fraud with respect to the Group or any customer or supplier of any Group Company, (ii) conduct that brings or is reasonably likely to bring any Group Company into substantial public disgrace or disrepute, (iii) failure to perform any duty as reasonably directed by the Board, which failure is not cured within ten (10) days after notice thereof is provided to Executive by the Board, (iv) any act or omission aiding or abetting a competitor, supplier or customer of any Group Company to the material disadvantage or detriment of any Group Company, (v) breach of fiduciary duty, gross negligence or willful misconduct with respect to any Group Company, or (vi) a Contract Breach.

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(f) For purposes of this Agreement, Executive shall be deemed to be “Disabled” if Executive is unable to perform the essential duties, responsibilities and functions of his position with the Company for a period of 90 consecutive days or for a total of 180 days during any 12-month period as a result of any mental or physical illness, disability or incapacity, even with reasonable accommodations for such illness, disability or incapacity provided by the Company or if providing such accommodations would be unreasonable, all as determined by the Board in its reasonable good faith judgment. Executive shall cooperate in all respects with the Company if a question arises as to whether he has become Disabled (such cooperation to include submitting to an examination by a medical doctor or other health care specialists selected by the Company and authorizing such medical doctor or such other health care specialist to discuss Executive’s condition with the Company).

(g) For purposes of this Agreement, “Contract Breach” means (i) breach by Executive of any of his obligations under Section 6, Section 7 or Section 8 hereof, (ii) breach by Executive of any other provision of this Agreement which (A) is willful, (B) is not subject to cure, or (C) arises from Executive’s gross negligence, (iii) any other breach by Executive of this Agreement if Executive fails to cure such breach within ten (10) days following delivery to Executive of written notice describing such breach, (iv) any provision of this Agreement or, after execution and delivery of the General Release, the General Release shall cease to be (or not be) valid and binding on Executive, or (v) Executive shall claim in writing that one or more provisions of this Agreement or, after execution and delivery of the General Release, the General Release, shall not be valid and binding on Executive, or Executive shall have otherwise taken any action contrary to the purpose of Section 24 below.

6. Confidential Information.

(a) Executive acknowledges that the information, observations and data (including trade secrets) to be obtained by him while employed by the Company concerning the business or affairs of the Group (“Confidential Information”) are the property of the Group. Therefore, Executive agrees that he shall not disclose to any person or entity or use for his own purposes any Confidential Information or any confidential or proprietary information of other persons or entities in the possession of the Group (“Third Party Information”), without the prior written consent of the Board, unless and to the extent that the Confidential Information or Third Party Information becomes generally known to and available for use by the public other than as a result of Executive’s acts or omissions. Executive shall deliver to the Company on the Termination Date or at any other time the Company may reasonably request, all memoranda, notes, plans, records, reports, computer files, disks and tapes, printouts and software and other documents and data (and copies thereof) embodying or relating to Third Party Information, Confidential Information, Work Product (as defined below) or the business of any Group Company that he may then possess or have under his control.

(b) Executive shall be prohibited from using or disclosing any confidential information or trade secrets that Executive may have learned through any prior employment. If

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at any time during the Employment Period Executive believes he is being asked to engage in work that will, or will be likely to, jeopardize any confidentiality or other obligations Executive may have to former employers, Executive shall immediately advise the Board so that Executive’s duties can be modified appropriately. Executive represents and warrants to the Company that Executive took nothing with him which belonged to any former employer when Executive left his prior employment positions and that Executive has nothing that contains any information that belongs to any former employer. If at any time Executive discovers this is incorrect, Executive shall promptly return any such materials to Executive’s former employer. The Company does not want any such materials, and Executive shall not be permitted to use or refer to any such materials in the performance of Executive’s duties hereunder.

7. Intellectual Property, Inventions and Patents. Executive acknowledges that all discoveries, concepts, ideas, inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, patent applications, copyrightable work and mask work (whether or not including any confidential information) and all registrations or applications related thereto, all other proprietary information and all similar or related information (whether or not patentable) which relate to any Group Company’s actual or anticipated business, research and development or existing or future products or services and which are conceived, developed or made by Executive (whether alone or jointly with others) while employed by the Company (“Work Product”), belong to such Group Company. Executive shall promptly disclose such Work Product to the Board and, at the Company’s expense, perform all actions reasonably requested by the Board (whether during or after the Employment Period) to establish and confirm such ownership (including assignments, consents, powers of attorney and other instruments). Executive acknowledges that all Work Product shall be deemed to constitute “works made for hire” under the U.S. Copyright Act of 1976, as amended.

8. Restrictive Covenants. Because among other reasons: (i) Executive’s services are unique to the Company; (ii) Executive will have access to Confidential Information and Work Product that are proprietary to the Company; (iii) and Executive will act as the President and Chief Executive Officer of the Company and the face of the Company to its employees and customers, Executive agrees that, in consideration of the Company’s employment of Executive and the various benefits and payments provided in conjunction therewith, he will comply with the restrictive covenants contained herein.

(a) Definitions.

(i) The “Time Period” for purposes of this Section 8 shall be throughout the Employment Period and for a period of twelve (12) months after any Termination Date.

(ii) The “Geographic Area” for purposes of this Section 8 shall be any geographic location within a fifty-mile radius of the Company’s office in Dalton, Georgia.

(b) Activity Restrictions. During the Time Period and in the Geographic Area, Executive agrees that he will not, on behalf of any entity other than the Company (whether

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as an employee, consultant, agent, officer, director, shareholder, partner or member of said entity), sell, supervise others who sell, or direct the sale of, six-foot roll carpet, modular carpet tile, broadloom carpet (whether tufted or woven), or any other type of product that any Group Company sells during the Employment Period. Executive agrees and acknowledges that the Group conducts extensive business in the Geographic Area, and that competing with the Group in the Geographic Area during the Time Period would irreparably damage the Group.

(c) Non-Solicitation of Customers. During the Time Period, Executive agrees that he will not, on behalf of any entity other than the Company (whether as a consultant, employee, agent, officer, director, shareholder, partner or member of said entity), solicit any owner of a site location, customer, supplier, licensee or other business relation of any Group Company with whom Executive had contact during the last twelve (12) months of the Employment Period (i) for the sale or purchase of six-foot roll carpet, modular carpet tile, broadloom carpet (whether tufted or woven), or any other type of product that any Group Company sells during the Employment Period or (ii) to cease doing business with any Group Company.

(d) Non-Solicitation and Non-Hire of Company’s Employees. During the Time Period, Executive agrees that he will not, on behalf of any entity other than the Company (whether as an employee, consultant, agent, officer, director, shareholder, partner or member of said entity), hire or attempt to hire any person who was employed by any Group Company during the last twelve (12) months of the Employment Period, or otherwise solicit or induce any employee of any Group Company to leave the employ of any Group Company.

(e) Non-Disparagement. During the Time Period, Executive agrees that he shall not make disparaging remarks about any Group Company or any of the officers, directors, affiliates or investors of any of the foregoing.

(f) Because Executive’s services are unique, because Executive has access to Confidential Information and Work Product, and because Executive will act as the President and Chief Executive Officer of the Company and the face of the Company to its employees and customers, the parties hereto agree that in the event of the breach or a threatened breach by Executive of any of the provisions of this Section 8, the Group would suffer irreparable harm, and in addition and supplementary to other rights and remedies existing in its favor, the Group shall be entitled to specific performance and/or injunctive or other equitable relief from a court of competent jurisdiction in order to enforce or prevent any violations of the provisions hereof (without posting a bond or other security). In addition, in the event of a breach or violation by Executive of this Section 8, the Time Period shall automatically be extended by an amount of time equal to the amount of time from the initial occurrence of the breach or violation and the time as of which such breach or violation has been duly cured.

9. Additional Acknowledgments. Executive agrees that in consideration of the Company’s employment of Executive and the various benefits and payments provided in conjunction therewith, Executive will be bound by the restrictions contained in this Agreement. Executive agrees that such restrictions (including, but not limited, to the Time Period, Geographic Area, and activities restricted in Section 8 hereof) are reasonable and necessary in

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light of, among other things, the substantial compensation granted him by the Company in this Agreement, and the fact that Executive shall serve as the President and Chief Executive Officer of the Company, thus granting him extensive access to all of the Group’s confidential and proprietary information and making him the face of the Group to the Group’s customers. Executive generally acknowledges that the Group has legitimate business interests in its Confidential Information and Work Product, as well as in the relationships with the Group’s customers and employees, and Executive specifically acknowledges and agrees that the restrictions in Section 8 hereof are necessary and reasonable restrictions to protect the Group’s legitimate business interests. Executive acknowledges that he has received consideration in respect of his obligations pursuant to the provisions of Section 6, Section 7 and Section 8 hereof, including: (i) employment with the Company and (ii) additional good and valuable consideration as set forth in this Agreement. In addition, Executive agrees and acknowledges that the restrictions contained in Section 6, Section 7 and Section 8 hereof will not preclude Executive from earning a livelihood, nor do they unreasonably impose limitations on Executive’s ability to earn a living, following the Employment Period. Executive agrees and acknowledges that the potential harm to the Group of the non-enforcement of Section 6, Section 7 and Section 8 hereof outweighs any potential harm to Executive of its enforcement by injunction or otherwise. Executive acknowledges that he has carefully read this Agreement, has given careful consideration to the restraints imposed upon Executive by this Agreement and is in full accord as to their necessity for the reasonable and proper protection of confidential and proprietary information of the Group now existing or to be developed in the future. Executive also acknowledges that he has had the opportunity to review the provisions of this Agreement with his legal counsel, believes them to be enforceable, and intends to fully comply with them. Executive expressly acknowledges and agrees that each and every restraint imposed by this Agreement is reasonable with respect to subject matter, time period and geographical area. Executive further acknowledges that nothing contained in this Agreement or otherwise shall entitle Executive to remain in the employment of the Company or affect the rights of the Company to terminate Executive’s employment at any time for any reason.

10. Executive’s Representations. Executive hereby represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment, law, regulation or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. Executive hereby acknowledges and represents that he has had the opportunity to consult with independent legal counsel regarding his rights and obligations under this Agreement and that he fully understands the terms and conditions contained herein.

11. Survival. Sections 5 through 24, inclusive, shall survive and continue in full force in accordance with their terms notwithstanding the expiration or termination of the Employment Period.

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12. Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given (i) when delivered personally to the recipient, (ii) on the business day following the date on which it is sent to the recipient by reputable overnight courier service (charges prepaid), (iii) five (5) days after mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid, (iv) upon machine-generated acknowledgment of receipt after transmittal by facsimile if so acknowledged to have been received before 5:00 p.m. on a business day at the location of receipt and otherwise on the next following business day, or (v) on the business day following the date on which it is sent to the recipient by electronic mail (with hard copy to follow). Such notices, demands and other communications shall be sent to the parties at the addresses indicated below:

Notices to Executive:
	Glen A. Hussmann
	4714 Piper Glen Drive
	Charlotte, North Carolina 28277
	Electronic mail:	ghussmann@carolina.rr.com
	Facsimile:	(704) 321-9456
Notices to the Company:
	Collins & Aikman Floorcoverings, Inc.
	311 Smith Industrial Boulevard
	Dalton, Georgia 30721
	Attention:	Leonard F. Ferro, Chief Financial Officer
	Electronic mail:	lferro@tandus.com
	Facsimile:	(706) 259-2125
With a copy to:
	Oaktree Capital Management, LLC
	333 South Grand Avenue, 28th Floor
	Los Angeles, California 90071
	Attention:	Richard J. Goldstein
	Electronic mail:	rgoldstein@oaktreecap.com
	Facsimile:	(213) 830-6394
and to:
	Kirkland & Ellis LLP
	777 South Figueroa Street, 34th Floor
	Los Angeles, California 90017
	Attention:	John A. Weissenbach
		Damon R. Fisher

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Electronic mail:	jweissenbach@kirkland.com
	dfisher@kirkland.com
Facsimile:	(213) 680-8500

or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party.

13. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

14. Complete Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.

15. No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party.

16. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.

17. Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, successors and assigns, except that Executive may not assign his rights or delegate his duties or obligations hereunder.

18. Choice of Law. All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of Georgia, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Georgia or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Georgia.

19. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company (as approved by the Board) and Executive, and no course of conduct or course of dealing or failure or delay by any party hereto in enforcing or exercising any of the provisions of this Agreement (including the

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Company’s right to terminate the Employment Period for Cause) shall affect the validity, binding effect or enforceability of this Agreement or be deemed to be an implied waiver of any provision of this Agreement.

20. Insurance. The Company may, at its discretion, apply for and procure in its own name and for its own benefit life and/or disability insurance on Executive in any amount or amounts considered advisable. Executive agrees to cooperate in any medical or other examination, supply any information and execute and deliver any applications or other instruments in writing as may be reasonably necessary to obtain and constitute such insurance. Executive hereby represents that he has no reason to believe that his life is not insurable at commercially reasonable rates.

21. Indemnification and Reimbursement of Payments on Behalf of Executive. Each Group Company shall be entitled to deduct or withhold from any amounts owing from such Group Company to Executive any federal, state, local or foreign withholding taxes, excise tax, or employment taxes (“Taxes”) imposed with respect to Executive’s compensation or other payments from such Group Company or Executive’s ownership interest in such Group Company (including wages, bonuses, dividends, the receipt or exercise of equity options and/or the receipt or vesting of restricted equity). In the event any Group Company does not make such deductions or withholdings, Executive shall indemnify such Group Company for any amounts paid with respect to any such Taxes, together with any interest, penalties and related expenses thereto.

22. Waiver of Jury Trial. AS A SPECIFICALLY BARGAINED FOR INDUCEMENT FOR EACH OF THE PARTIES HERETO TO ENTER INTO THIS AGREEMENT (AFTER HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL), EACH PARTY HERETO EXPRESSLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LAWSUIT OR PROCEEDING RELATING TO OR ARISING IN ANY WAY FROM THIS AGREEMENT OR THE MATTERS CONTEMPLATED HEREBY.

23. Executive’s Cooperation. During the Employment Period and thereafter, Executive shall participate with the Company in any internal investigation, any administrative, regulatory or judicial investigation or proceeding or any dispute with a third party as reasonably requested by the Company (including Executive being available to the Company upon reasonable notice for interviews and factual investigations, appearing at the Company’s request to give testimony at trial, hearings, and otherwise without requiring service of a subpoena or other legal process, and, upon the Company’s request, providing to the Company any relevant information and documents which are or may come into Executive’s possession, all at times and on schedules that are reasonably consistent with Executive’s other permitted activities and commitments). In the event the Company requires Executive’s participation in accordance with this Section 23, the Company shall reimburse Executive solely for reasonable travel expenses (including lodging and meals), to the extent consistent with the Company’s policies in effect from time to time with respect to travel expenses, and subject to the Company’s requirements with respect to reporting and documentation of such expenses.

24. Dispute Resolution. Except with respect to any dispute or claim seeking injunctive or equitable relief (by itself or in addition to damages) under Section 6, Section 7 or

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Section 8 hereof (which may be pursued in any federal or state court in the state of Georgia as specified below and with respect to which each party shall bear the cost of its own attorneys’ fees and expenses except as otherwise required by applicable law), each party hereto agrees that the dispute resolution procedure set forth in Exhibit B hereto shall be the sole and exclusive method for resolving any claim or dispute (“Claim”) arising out of or relating to the rights and obligations acknowledged and agreed to in this Agreement and the employment of Executive by the Company and its affiliates (including disputes and claims regarding employment discrimination, sexual harassment, termination and discharge), whether such Claim arose or the facts on which such Claim is based occurred prior to or after the execution and delivery of this Agreement. The parties agree that the result of any arbitration hereunder shall be final, conclusive and binding on all of the parties hereto. Nothing in this Section 24 shall prohibit a party hereto from instituting litigation to enforce any Final Determination (as defined in Exhibit B hereto). Each party hereto hereby irrevocably submits to the non-exclusive jurisdiction of any state or federal court of competent jurisdiction located in the State of Georgia, for the purposes of any suit, action or other proceeding to: (a) resolve a dispute or claim seeking injunctive or equitable relief (by itself or in addition to damages) under Section 6, Section 7, or Section 8 hereof; or (b) enforce any Final Determination. Each party hereto further agrees that service of any process, summons, notice or document by U.S. registered mail to such party’s respective address set forth above shall be effective service of process for any action, suit or proceeding in the State of Georgia with respect to any matters to which it has submitted to jurisdiction in this Section 24. Each party hereto irrevocably and unconditionally consents to jurisdiction, and waives any objection to personal jurisdiction or the laying of venue, in any state or federal court located in the State of Georgia, for any action, suit or proceeding seeking injunctive or equitable relief under Section 6, Section 7 or Section 8 hereof (by itself or in addition to damages). Each party hereto further agrees that each other party hereto may initiate litigation in any court of competent jurisdiction to execute any judicial judgment enforcing a Final Determination.

* * * * *

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

THE COMPANY
COLLINS & AIKMAN FLOORCOVERINGS, INC.
By:	/s/ Richard J. Goldstein
Name:	Richard J. Goldstein
Title:	Director
EXECUTIVE
	/s/ Glen A. Hussmann
	Glen A. Hussmann

[Signature Page to Hussmann Employment Agreement]

Exhibit A

GENERAL RELEASE

I, Glen A. Hussmann, in consideration of and subject to the performance by Collins & Aikman Floorcoverings, Inc. (collectively with its subsidiaries and Tandus Group, Inc., the sole owner of its common stock, the “Company”) of its obligations under the Employment Agreement, dated as of February 2, 2007 (the “Agreement”), do hereby release and forever discharge as of the date hereof the Company and its affiliates and all present and former directors, officers, agents, representatives, employees, successors and assigns of the Company and its affiliates and the Company’s direct or indirect owners (collectively, the “Released Parties”) to the extent provided below.

1. I understand that any payments or benefits paid or granted to me under Section 5(b) of the Agreement represent, in part, consideration for signing this General Release and are not salary, wages or benefits to which I was already entitled. I understand and agree that I will not receive the payments and benefits specified in Section 5(b) of the Agreement unless I execute this General Release and do not revoke this General Release within the time period permitted hereafter or breach this General Release. I also acknowledge and represent that I have received all payments and benefits that I am entitled to receive (as of the date hereof) by virtue of any employment by the Company.

2. Except as provided in paragraph 4 below and except for the provisions of the Agreement which expressly survive the termination of my employment with the Company, I knowingly and voluntarily (for myself, my heirs, executors, administrators and assigns) release and forever discharge the Company and the other Released Parties from any and all claims, suits, controversies, actions, causes of action, cross-claims, counter-claims, demands, debts, compensatory damages, liquidated damages, punitive or exemplary damages, other damages, claims for costs and attorneys’ fees, or liabilities of any nature whatsoever in law and in equity, both past and present (through the date this General Release becomes effective and enforceable) and whether known or unknown, suspected, or claimed against the Company or any of the Released Parties which I, my spouse, or any of my heirs, executors, administrators or assigns, may have, which arise out of or are connected with my employment with, or my separation or termination from, the Company (including, but not limited to, any allegation, claim or violation, arising under: Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights Act of 1991; the Age Discrimination in Employment Act of 1967, as amended (including, but not limited to, the Older Workers Benefit Protection Act); the Equal Pay Act of 1963, as amended; the Americans with Disabilities Act of 1990; the Family and Medical Leave Act of 1993; the Worker Adjustment Retraining and Notification Act; the Employee Retirement Income Security Act of 1974; any applicable Executive Order Programs; the Fair Labor Standards Act; or their state or local counterparts; or under any other federal, state or local civil or human rights law, or under any other local, state, or federal law, regulation or ordinance; or under any public policy, contract or tort, or under common law; or arising under any policies, practices or procedures of the Company; or any claim for wrongful discharge, breach of contract, infliction of emotional distress, defamation; or any claim for costs, fees, or other expenses, including without limitation attorneys’ fees incurred in these matters) (all of the foregoing collectively referred to herein as the “Claims”).

ExA-1

3. I represent that I have made no assignment or transfer of any right, claim, demand, cause of action, or other matter covered by paragraph 2 above.

4. I agree that this General Release does not waive or release any rights or claims that I may have under the Age Discrimination in Employment Act of 1967 which arise after the date I execute this General Release. I acknowledge and agree that my separation from employment with the Company in compliance with the terms of the Agreement shall not serve as the basis for any claim or action (including, but not limited to, any claim under the Age Discrimination in Employment Act of 1967).

5. In signing this General Release, I acknowledge and intend that it shall be effective as a bar to each and every one of the Claims hereinabove mentioned or implied. I expressly consent that this General Release shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected Claims (notwithstanding any state statute that expressly limits the effectiveness of a general release of unknown, unsuspected and unanticipated Claims), if any, as well as those relating to any other Claims hereinabove mentioned or implied. I acknowledge and agree that this waiver is an essential and material term of this General Release and that without such waiver the Company would not have agreed to the terms of the Agreement. I further agree that in the event I should bring a Claim seeking damages against the Company, or in the event I should seek to recover against the Company in any Claim brought by a governmental agency on my behalf, this General Release shall serve as a complete defense to such Claims. I further agree that I am not aware of any pending claim of the type described in paragraph 2 as of the execution of this General Release.

6. I agree that neither this General Release, nor the furnishing of the consideration for this General Release, shall be deemed or construed at any time to be an admission by the Company, any Released Party or myself of any improper or unlawful conduct.

7. I agree that I will forfeit all amounts payable by the Company pursuant to the Agreement if I challenge the validity of this General Release. I also agree that if I violate this General Release by suing the Company or the other Released Parties, I will pay all costs and expenses of defending against the suit incurred by the Released Parties, including without limitation reasonable attorneys’ fees, and return all payments received by me pursuant to the Agreement.

8. I agree that this General Release and the Agreement are confidential and agree not to disclose any information regarding the terms of this General Release or the Agreement, except to my immediate family and any tax, legal or other counsel I have consulted regarding the meaning or effect hereof or as required by law, and I will instruct each of the foregoing not to disclose the same to anyone.

ExA-2

9. Any non-disclosure provision in this General Release does not prohibit or restrict me (or my attorney) from responding to any inquiry about this General Release or its underlying facts and circumstances by the Securities and Exchange Commission (SEC), the National Association of Securities Dealers, Inc. (NASD), any other self-regulatory organization or governmental entity.

10. I agree to participate as may reasonably be necessary with the Company in any internal investigation, any administrative, regulatory, or judicial proceeding or any dispute with a third party. I understand and agree that my participation may include, but not be limited to, making myself available to the Company upon reasonable notice for interviews and factual investigations; appearing at the Company’s request to give testimony at trial, hearing, and otherwise without requiring service of a subpoena or other legal process; upon request of the Company, providing to the Company any relevant information and documents which are or may come into my possession all at times and on schedules that are reasonably consistent with my other permitted activities and commitments. I understand that in the event the Company asks for my participation in accordance with this provision, I will not be entitled to any additional compensation in connection therewith but the Company will reimburse me solely for reasonable travel expenses, (including lodging and meals), to the extent consistent with the Company’s policies in effect from time to time with respect to travel expenses, and subject to the Company’s requirements with respect to reporting and documentation of such expenses.

11. I agree not to disparage the Company, its past and present investors, officers, directors or employees or its affiliates and to keep all confidential and proprietary information about the past or present business affairs of the Company and its affiliates confidential unless a prior written release from the Company is obtained. I further agree that as of the date hereof, I have returned to the Company any and all property, tangible or intangible, relating to its business, which I possessed or had control over at any time (including, but not limited to, company-provided credit cards, building or office access cards, keys, computer equipment, manuals, files, documents, records, software, customer data base and other data) and that I shall not retain any copies, compilations, extracts, excerpts, summaries or other notes of any such manuals, files, documents, records, software, customer data base or other data.

12. Notwithstanding anything in this General Release to the contrary, this General Release shall not relinquish, diminish, or in any way affect any rights or claims arising out of any breach by the Company or by any Released Party of the Agreement after the date hereof.

13. Whenever possible, each provision of this General Release shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of this General Release is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this General Release shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

ExA-3

BY SIGNING THIS GENERAL RELEASE, I REPRESENT AND AGREE THAT:

(a) I HAVE READ IT CAREFULLY;

(b) I UNDERSTAND ALL OF ITS TERMS AND KNOW THAT I AM GIVING UP IMPORTANT RIGHTS, INCLUDING BUT NOT LIMITED TO, RIGHTS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, AS AMENDED, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, AS AMENDED; THE EQUAL PAY ACT OF 1963, THE AMERICANS WITH DISABILITIES ACT OF 1990; AND THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED;

(c) I VOLUNTARILY CONSENT TO EVERYTHING IN IT;

(d) I HAVE BEEN ADVISED TO CONSULT WITH AN ATTORNEY BEFORE EXECUTING IT AND I HAVE DONE SO OR, AFTER CAREFUL READING AND CONSIDERATION I HAVE CHOSEN NOT TO DO SO OF MY OWN VOLITION;

(e) I HAVE BEEN GIVEN ALL TIME PERIODS REQUIRED BY LAW TO CONSIDER THIS GENERAL RELEASE, INCLUDING THE 21-DAY PERIOD REQUIRED BY THE ADEA. I UNDERSTAND THAT I MAY EXECUTE THIS GENERAL RELEASE LESS THAN 21 DAYS FROM ITS RECEIPT FROM THE COMPANY, BUT AGREE THAT SUCH EXECUTION WILL REPRESENT MY KNOWING WAIVER OF SUCH 21-DAY CONSIDERATION PERIOD;

(f) I UNDERSTAND THAT I HAVE SEVEN DAYS AFTER THE EXECUTION OF THIS RELEASE TO REVOKE IT AND THAT THIS RELEASE SHALL NOT BECOME EFFECTIVE OR ENFORCEABLE UNTIL THE REVOCATION PERIOD HAS EXPIRED;

(g) I HAVE SIGNED THIS GENERAL RELEASE KNOWINGLY AND VOLUNTARILY AND WITH THE ADVICE OF ANY COUNSEL RETAINED TO ADVISE ME WITH RESPECT TO IT; AND

(h) I AGREE THAT THE PROVISIONS OF THIS GENERAL RELEASE MAY NOT BE AMENDED, WAIVED, CHANGED OR MODIFIED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE COMPANY AND BY ME.

DATE:	February 2, 2007	/s/ Glen A. Hussmann
		Glen A. Hussmann

ExA-4

Exhibit B

DISPUTE RESOLUTION PROCEDURE

1. Notice of Claim. A party asserting a Claim (the “Claimant”) shall deliver written notice to each party against whom the Claim is asserted (collectively, the “Opposing Party”), with a copy to the persons required to receive copies of notices under the Agreement (the “Additional Notice Parties”), specifying the nature of the Claim and requesting mediation to resolve same. The Additional Notice Parties shall be given reasonable notice of and invited and permitted to attend any such mediation. Executive and the Board shall attempt to agree on a mediator to hear and decide the Claim. If Executive and the Board cannot agree on a mediator within ten business days, they shall promptly and jointly request that JAMS (previously known as the Judicial Arbitration & Mediation Service) appoint a mediator to assist the parties in attempting to resolve the Claim. If a mutually acceptable resolution is not reached pursuant to mediation within 60 days of the delivery of the notice of Claim, the Claimant or the Opposing Party may invoke the arbitration procedure provided herein by delivering to each Opposing Party and the Additional Notice Parties a Notice of Arbitration, which shall specify the Claim as to which arbitration is sought, the nature of the Claim, the basis for the Claim, and the nature and amount of any damages or other compensation or relief sought (a “Notice of Arbitration”). Each party agrees that no punitive damages may be sought or recovered in any arbitration, judicial proceeding or otherwise. Failure to file a Notice of Arbitration within 90 days of delivery of the notice of Claim shall constitute a waiver of any right to relief for the matters asserted in the notice of Claim. Any Claim shall be forever barred, and no relief may be sought therefor, if written notice of such Claim is not made as provided above within one year of the date such Claim accrues.

2. Selection of Arbitrator. Within 20 business days after receipt of the Notice of Arbitration, Executive and the Board shall meet and attempt to agree on an arbitrator to hear and decide the Claim. If Executive and the Board cannot agree on an arbitrator within five business days, then they shall each appoint a representative for purposes of negotiating the appropriate arbitrator within 30 days after receipt of the Notice of Arbitration. Executive’s representative shall meet with the Board’s representative within five business days of their appointment, and shall mutually agree on an arbitrator. If Executive’s representative and the Board’s representative fail to agree to an arbitrator within ten business days of their appointment, the Parties shall promptly and jointly request that JAMS appoint an arbitrator experienced in the area of dispute who does not have an ongoing business relationship with any of the parties to the dispute and who was not chosen as the mediator pursuant to paragraph 1 of this Dispute Resolution Procedure. If the arbitrator selected informs the parties he cannot hear and resolve the Claim within the time-frame specified below, Executive and the Board shall request the appointment of another arbitrator by the same procedure described above.

3. Arbitration Procedure. The following procedures shall govern the conduct of any arbitration under this section. All procedural matters relating to the conduct of the arbitration other than those specified below shall be discussed among counsel for the parties and the arbitrator. Subject to any agreement of the parties, the arbitrator shall determine all procedural matters not specified herein.

ExB-1

(a) Within 30 days after the delivery of a Notice of Arbitration, each party shall afford the other, or its counsel, with reasonable access to documents relating directly to the issues raised in the Notice of Arbitration. All documents produced and all copies thereof shall be maintained as strictly confidential, shall be used for no purpose other than the arbitration hereunder, and shall be returned to the producing party upon completion of the arbitration. There shall be no other discovery except that, if a reasonable need is demonstrated to the arbitrator or agreed to by the parties, the parties may each be allowed to take a single deposition of no longer than five hours, it being the expressed intention and agreement of each party to have the arbitration proceedings conducted and resolved as expeditiously, economically and fairly as reasonably practicable, and with the maximum degree of confidentiality.

(b) All written communications regarding the proceeding sent to the arbitrator shall be sent simultaneously to each party or its counsel, with a copy to the Additional Notice Parties. Oral communications between any of the parties or their counsel and the arbitrator shall be conducted only when all parties or their counsel are present and participating in the conversation.

(c) Within 20 days after selection of the arbitrator, the Claimant shall submit to the arbitrator a copy of the Notice of Arbitration, along with a supporting memorandum and any exhibits or other documents supporting the Claim.

(d) Within 20 days after receipt of the Claimant’s submission, the Opposing Party shall submit to the arbitrator a memorandum supporting its position and any exhibits or other supporting documents.

(e) Within 20 days after receipt of the Opposing Party’s response, the Claimant may submit to the arbitrator a reply to the Opposing Party’s response, or notification that no reply is forthcoming.

(f) Within 10 days after the last submission as provided above, the arbitrator shall notify the parties and the Additional Notice Parties of the date of the hearing on the issues raised by the Claim. Scheduling of the hearing shall be within the sole discretion of the arbitrator, but in no event more than 60 days after the last submission by the parties, and shall take place at a place selected by the arbitrator or such other place as is mutually agreed. Both parties shall be granted substantially equal time to present evidence at the hearing.

(g) Within 30 days after the conclusion of the hearing, the arbitrator shall issue a written decision to be delivered to both parties and the Additional Notice Parties (the “Final Determination”). The Final Determination shall address each issue disputed by the parties, state the arbitrator’s findings and reasons therefor, and state the nature and amount of any damages, compensation or other relief awarded.

ExB-2

(h) The award rendered by the arbitrator shall be final and non-appealable, except as otherwise provided by applicable law, and judgment may be entered upon it in accordance with applicable law in such court as has jurisdiction thereof.

4. Costs of Arbitration. As part of the Final Determination, the arbitrator shall determine the allocation of the costs and expenses of the arbitration, including the arbitrator’s fee and both parties’ attorneys’ fees and expenses, based upon the extent to which each party prevailed in the arbitration. In the event that any relief which is awarded is non-monetary, then such costs and expenses shall be allocated by the arbitrator.

5. Satisfaction of Award. If any party fails to pay the amount of the award, if any, assessed against it within 30 days after the delivery to such party of the Final Determination, the unpaid amount shall bear interest from the date of such delivery at the lesser of (i) prime lending rate announced by Citibank N.A. plus three hundred basis points and (ii) the maximum rate permitted by applicable usury laws. In addition, such party shall promptly reimburse the other party for any and all costs or expenses of any nature or kind whatsoever (including attorneys’ fees) reasonably incurred in seeking to collect such award or to enforce any Final Determination.

6. Confidentiality of Proceedings. The parties hereto agree that all of the arbitration proceedings provided for herein, including any notice of Claim, the Notice of Arbitration, the submissions of the parties, and the Final Determination issued by the arbitrator, shall be confidential and shall not be disclosed at any time to any person other than the parties, their representatives, the arbitrator and the Additional Notice Parties; provided, however, that this provision shall not prevent the party prevailing in the arbitration from submitting the Final Determination to a court for the purpose of enforcing the award, subject to comparable confidentiality protections if the court agrees; and further provided that the foregoing shall not prohibit disclosure to the minimum extent reasonably necessary to comply with (i) applicable law (or requirement having the force of law), court order, judgment or decree, including disclosures which may be required pursuant to applicable securities laws, and (ii) the terms of contractual arrangements (such as financing arrangements) to which any Group Company or any Additional Notice Party may be subject so long as such contractual arrangements were not entered into for the primary purpose of permitting disclosure which would otherwise be prohibited hereunder.

ExB-3

EX-10.20

Exhibit 10.20

Dated 05 February 2007

Interior Projects Solutions Limited

(as the Purchaser)

Collins & Aikman Floorcoverings Inc

(as the Vendor)

Share Purchase Deed

relating to the shares in

Tandus Europe Limited

99 Bishopsgate

London EC2M 3XF

+44 (0)20 7710 1000 (Tel)

+44 (0)20 7374 4460 (Fax)

www.lw.com

Contact: Rory Negus / John Houghton

CONTENTS

Clause		Page
1.	Interpretation	1
2.	Sale of shares	3
3.	Consideration	3
4.	Completion	3
5.	Stamping and share rights	4
6.	Warranties	5
7.	Post Completion Obligations	6
8.	Employees	7
9.	Confidentiality	7
10.	Announcements	8
11.	Provisions relating to this Agreement	9
12.	Law and Jurisdiction	11
schedule 1 : Adjustment of Consideration		12
schedule 2 : Former employees		16

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THIS AGREEMENT is made as a deed on 05 February 2007

BETWEEN

(1) INTERIOR PROJECTS SOLUTIONS LIMITED (the “PURCHASER”) a company registered in England and Wales under company number 04110449 with its registered office at Unit B6, The Seedbed Centre Wyncolls Road, Severalls Business Park, Colchester Essex, CO4 9HT; and

(2) COLLINS & AIKMAN FLOORCOVERINGS INC (the “VENDOR”) a company registered in the United States with its registered office at 311 Smith Industrial Blvd, Dalton, GA 30722-1447, USA.

BACKGROUND:

(A) The Vendor wishes to sell and the Purchaser wishes to acquire the entire issued share capital of Tandus Europe Limited on and subject to the terms of this Agreement.

NOW IT IS AGREED as follows:

1. Interpretation

1.1 Definitions

In this Agreement where the context admits:

“Affiliate” means, in relation to a body corporate, any subsidiary or holding company of such body corporate, and any subsidiary of any such holding company for the time being;

“Agreed Form” means, in relation to any document, a document in the terms signed or initialled by or on behalf of the parties for identification;

“Audited Accounts” means the audited consolidated balance sheet of the Company and the Subsidiaries made up as at the Balance Sheet Date and the audited consolidated profit and loss account of the Company and the Subsidiaries in respect of the period ended on the Balance Sheet Date including, in each case, the notes thereto and the directors’ report and auditors’ report;

“Balance Sheet Date” means 29 January 2006;

“Business Day” means a day (other than a Saturday or Sunday) on which banks are open for ordinary banking business in London;

“Company” means Tandus Europe Limited a company registered in England and Wales under company number 02186099 with its registered office at Unit 8/9 Rising Sun Estate, Blaina, Abertillery, Gwent NP13 3JW;

“Companies Acts” means statutes from time to time in force concerning companies including (without limitation) the Companies Act 1985, the Companies Act 1989, Part V of the Criminal Justice Act 1993 and the Companies Consolidation (Consequential Provisions) Act 1985;

“Completion” means completion of the sale and purchase of the Sale Shares in accordance with clause 4;

“Completion Date” means the day on which Completion takes place;

“Compromise Agreements” means the compromise agreements between the Company and each of David Nuttall and Ian Wolstenholme in the Agreed Form;

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“Consideration” means the consideration to be paid for the Sale Shares in accordance with clause 3.1;

“Debenture” means the debenture in the Agreed Form given by the Company as security for, inter alia, the Loan Notes;

“Directors” means in relation to the Company or any of the Subsidiaries, its directors;

“Encumbrance” means any mortgage, charge, pledge, lien, assignment, hypothecation, security interest (including any created by law), or other security agreement or arrangement but does not include any retention of title provision;

“Guarantee” means any guarantee, suretyship, indemnity, bonding liability or similar contingent liability given or undertaken by a person to secure or support the obligations of any third party but does not include any Guarantee given to National Westminster Bank plc by the Vendor in respect of the overdraft facility of the Company;

“Loan Notes” means the US$4,090,200 Floating Rate Secured Loan Notes due 2009 to 2014 in the Agreed Form to be issued by the Purchaser to the Vendor on Completion;

“London Stock Exchange” means London Stock Exchange plc;

“Provisional Consideration” has the meaning given in schedule 1;

“Purchaser Documents” has the meaning set out in clause 6.1(A);

“Purchaser’s Group” means the Purchaser and each of its Affiliates including, after Completion, the Company and each of the Subsidiaries;

“Recognised Investment Exchange” has the meaning given to it by s.285 Financial Services and Markets Act 2000;

“Sale Shares” means the shares to be bought and sold pursuant to clause 2.1 being all the issued shares in the capital of the Company;

“Subsidiaries” means each of Tandus Manufacturing Limited and Tandus BV;

“Supply Agreement” means the distribution agreement in the Agreed Form to be entered into between a member of the Vendor’s Group and the Company on Completion;

“Vendor’s Group” means the Vendor and each of its Affiliates other than the Company and the Subsidiaries; and

“Vendor’s Solicitors” means Latham & Watkins of 99 Bishopsgate, London, EC2M 3XF.

1.2 Construction of certain references

In this Agreement, where the context admits:

(A) words and phrases the definitions of which are contained or referred to in Part XXVI Companies Act 1985 shall be construed as having the meanings thereby attributed to them;

(B) references to clauses and schedules are references to clauses of and schedules to this Agreement, references to paragraphs are, unless otherwise stated, references to paragraphs of the schedule in which the reference appears, and references to this Agreement include the schedules;

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(C) references to the singular shall include the plural and vice versa and references to the masculine, the feminine and the neuter shall include all such genders;

(D) “person” includes any individual, partnership, body corporate, corporation sole or aggregate, state or agency of a state, and any unincorporated association or organisation, in each case whether or not having separate legal personality; and

(E) “company” includes any body corporate; and

(F) references to “indemnify” and “indemnifying” any person against any liability or circumstance include indemnifying him and keeping him harmless from all actions, claims, demands and proceedings from time to time made against that person and all losses, damages, payments, costs and expenses (including legal costs and expenses on a full indemnity basis) made, suffered or incurred by that person as a consequence of or which would not have arisen but for that liability or circumstance.

1.3 Headings

The headings and sub-headings are inserted for convenience only and shall not affect the construction of this Agreement.

1.4 Schedules

Each of the schedules shall have effect as if set out herein.

2. Sale of shares

2.1 Sale and purchase

Subject to the terms of this Agreement, the Vendor shall sell with full title guarantee and the Purchaser shall purchase, free from all Encumbrances (whether known about or not) and together with all rights now or hereafter attaching thereto the entire issued share capital of the Company comprising 3,436,555 ordinary shares of £1.00 each.

2.2 No sale of part only and waiver of pre-emption rights

Neither the Vendor nor the Purchaser shall be obliged to complete the sale and purchase of any of the Sale Shares unless the sale and purchase of all the Sale Shares is completed simultaneously. The Vendor waives all pre-emption rights in respect of the transfer of the Sale Shares and any other rights which it may have which restrict the transfer of the Sale Shares, howsoever conferred on them.

3. Consideration

3.1 Amount

The total consideration for the Sale Shares shall be the sum of US$4,090,200 but subject to adjustment as provided in this Agreement. Such consideration shall be satisfied by the issue of the Loan Notes on Completion.

4. Completion

4.1 Date and place of Completion

Completion shall take place at the offices of the Vendor’s Solicitors immediately following the signing of this Agreement.

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4.2 Vendor’s obligations

On Completion the Vendor shall subject to the due performance by the Purchaser of its obligations under clause 4.3:

(A) deliver to the Purchaser transfers of the Sale Shares duly executed by the registered holders thereof in favour of the Purchaser or its nominees together with the related share certificates or an indemnity in respect of any missing certificates;

(B) procure that the Directors of the Company and the Subsidiaries retire from all their offices and employments with the Company and the Subsidiaries;

(C) save in respect of any Encumbrance in respect of National Westinster Bank plc, the Vendor will forthwith procure the release of the Company and the Subsidiaries from any contract, arrangement, commitment, Guarantee or security given by the Company and the Subsidiaries in respect of any indebtedness, liabilities or obligations of any member of the Vendor’s Group and shall indemnify the Purchaser against all liabilities arising after Completion in pending such release;

(D) to the extent not already held by or to the order of the Company or any Subsidiary, deliver to the Purchaser as agent for the Company and the Subsidiaries:

(1) all the statutory and other books of the Company and each of the Subsidiaries and its/their certificate(s) of incorporation, any certificates of incorporation on change of name and common seal(s);

(2) certificates in respect of all issued shares in the capital of each of the Subsidiaries;

(E) procure board meetings of the Company and of each of the Subsidiaries to be held at which there shall be:

(1) passed a resolution to approve, in the case of the Company, the transfers of the Sale Shares and (subject only to due stamping) to register, in the register of members, each transferee as the holder of the shares concerned;

(2) appointed as directors and/or secretary such persons as the Purchaser may nominate;

(3) tendered and accepted the resignations and acknowledgements of the directors and secretary referred to in clause 4.2(B); and

(F) deliver to the Purchaser, duly signed by the Vendor, the Supply Agreement.

4.3 Purchaser’s obligations

On Completion the Purchaser shall:

(A) deliver the Loan Notes duly signed by the Purchaser together with the related loan note certificates issuable thereunder in the name of the Vendor (or its nominee);

(B) deliver duly signed by the Purchaser the Debenture; and

(C) deliver duly signed by the Purchaser, the Supply Agreement.

5. Stamping and share rights

5.1 As soon as reasonably practicable, and in any event within 28 days following Completion, the Purchaser shall procure delivery of the stock transfer form in respect of the Shares to the stamp office for stamping and following their return, procure the registration of the Purchaser as the legal holder of all of the Shares transferred to it under this Agreement.

4

5.2 The Vendor declares that for as long as it remains the registered holder of any of the Shares after Completion (and without prejudice to the Vendor’s right in respect of the Consideration) it will:

(A) hold such Shares and the dividends and any other moneys paid or distributed in respect of them after Completion and all rights arising out of or in connection with them in trust for the Purchaser; and

(B) deal with such Shares and all such dividends, distributions and rights as the Purchaser may direct for the period between Completion and the day on which the Purchaser or its nominee is entered in the register of members of the Company as the holder of such Shares.

5.3 With effect from Completion the Vendor irrevocably appoints the Purchaser as its attorney for the purpose of exercising any rights, privileges or duties attaching to the Shares including receiving notices of and attending and voting at all meetings of the members of the Company from Completion to the day on which the Purchaser or its nominee is entered in the register of members of the Company as the holder of such Shares.

5.4 For the purpose of clause 5.3, the Vendor authorises:

(A) the Company to send any notices in respect of its Shares to the Purchaser; and

(B) the Purchaser to complete and return proxy cards, consents to short notice and any other document required to be signed by the Vendor as a member of the Company.

6. Warranties

6.1 Warranties

The Purchaser warrants to the Vendor as follows:

(A) the Purchaser has the requisite power and authority to enter into and perform this Agreement and any other agreement referred to herein to which it is or has agreed to become a party (the “Purchaser Documents”);

(B) this Agreement constitutes and the Purchaser Documents will, when executed, constitute binding obligations of the Purchaser in accordance with their respective terms;

(C) no order has been made and no resolution has been passed for the winding up of the Purchaser or for a provisional liquidator to be appointed in respect of it and no petition has been presented and no meeting has been convened for the purposes of winding up the Purchaser;

(D) no administration order has been made and no petition for such an order has been presented in respect of the Purchaser;

(E) no receiver (which expression shall include an administrative receiver) has been appointed in respect of the Purchaser;

(F) the Purchaser is not insolvent or unable to pay its debts within the meaning of s.123 Insolvency Act 1986 and has not stopped paying its debts as they fall due;

(G) no voluntary arrangement has been proposed under s.1 of the Insolvency Act 1986 in respect of the Purchaser;

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(H) no event analogous to any of the foregoing has occurred in or outside England with respect to the Purchaser;

(I) the Purchaser has obtained all necessary shareholder and board approvals in respect of the entry into of this Agreement and the Purchaser Documents; and

(J) the execution and delivery of, and the performance by the Purchaser of its obligations under, this Agreement and the Purchaser Documents will not:

(1) be or result in a breach of any provision of the memorandum or articles of association of the Purchaser;

(2) be or result in a breach of, or constitute a default under, any instrument to which the Purchaser is a party or by which the Purchaser is bound and which is material in the context of the transactions contemplated by this Agreement;

(3) be or result in a breach of any order, judgment or decree of any court or governmental agency to which the Purchaser is a party or by which the Purchaser is bound and which is material in the context of the transactions contemplated by this Agreement; or

(4) require the Purchaser to obtain any consent or approval of, or give any notice to or make any registration with, any governmental or other authority which has not been obtained or made at the date hereof both on an unconditional basis and on a basis which cannot be revoked (save pursuant to any legal or regulatory entitlement to revoke the same other than by reason of any misrepresentation or misstatement).

6.2 Undertaking by Purchaser

The Purchaser agrees and undertakes that (in the absence of fraud or dishonesty) it has no rights against and shall not make any claim against any member of the Vendor’s Group (other than the Vendor) or any present or former employee, director, agent or officer of any member of the Vendor’s Group in connection with this Agreement or its subject matter. The rights of the said persons are intended to be enforceable under the Contracts (Rights of Third Parties) Act 1999 but subject to clauses 11.8 and 12 and the parties to this Agreement may rescind or vary this Agreement without the consent of any of such persons.

7. Post Completion Obligations

7.1 Changes of Name

The Purchaser shall procure that forthwith after Completion the Company and each of the Subsidiaries shall change their respective corporate names to names that do not include the name “Tandus” or any name intended or likely to be confused or associated with it, and the Purchaser shall supply a copy of the Certificate of Incorporation on Change of Name (or equivalent official confirmation in the case of any subsidiary incorporated outside the United Kingdom) to the Vendor when each such change is effected.

7.2 Books and Records

The Purchaser shall procure that:

(A) the Company and the Subsidiaries shall preserve until the sixth anniversary of Completion all books, records and documents of the Company and the Subsidiaries which are at Completion in the possession under the control of each of them or insofar as the same record matters occurring on or before Completion; and

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(B) until the sixth anniversary of Completion, the Vendor and its agents, accountants, solicitors and other professional advisers shall be allowed the right to inspect and take copies of the books, records and documents referred to in clause 7.2(A) (but only in relation to matters recorded therein which occurred on or before Completion) at all reasonable times upon the Vendor giving reasonable written notice of such requirement to the Company or the relevant Subsidiary.

7.3 Guarantees etc.

The Purchaser shall use its best endeavours to secure on or as soon as reasonably practicable following Completion the release of the Vendor and any other member of the Vendor’s Group from all the guarantees, indemnities and other contingent liabilities given in respect of or otherwise relating to any obligations or liabilities of any of the Company and the Subsidiaries (other than in respect of goods manufactured or sold which were, at the time they were manufactured or sold, were faulty or defective or did not comply with warranties or representations expressly made or implied by or on behalf of the Company or the Subsidiaries) (a “Vendor’s Guarantee”) (offering its own covenant and appropriate security in substitution if requested by the Vendor). The Purchaser shall in the meantime with effect from Completion indemnify the Vendor and every other member of the Vendor’s Group against any liability incurred in relation thereto and pay to the Vendor (on behalf of itself and every other member of the Vendor’s Group) an amount equal to every such liability so incurred within 40 days of written notification from the Vendor or any other member of the Vendor’s Group that such a liability has arisen, such payment to be made into a bank account specified by the Vendor. Until such time as all the Vendor’s Guarantees have ceased to have any effect, the Purchaser shall not sell, transfer or otherwise dispose of a controlling shareholding in the Company or the Subsidiary in respect of the obligations of which any such Vendor’s Guarantee was given (the “relevant company”) without (i) each such Vendor’s Guarantee being released or (ii) the consent in writing of the Vendor, not to be unreasonably withheld, and if every such Vendor’s Guarantee is not so released on or before such sale, transfer or other disposal being effected the Purchaser shall procure (without prejudice to the rights of the Vendor as to the giving or withholding of its consent) that the person acquiring such controlling shareholding shall enter into a direct undertaking with the Vendor in the terms set out in this clause 7.3 in relation to each such Vendors’ Guarantee and any sale, transfer or other disposal of a controlling interest in the relevant company by such person. Save as to any payment in respect of monies owed to National Westminster Bank plc, any payment by the Purchaser pursuant to this clause 7.3 shall be deemed a reduction in the Consideration and shall be effected by a reduction in the principal outstanding under the Loan Notes in accordance with paragraph 5.2 of schedule 1.

8. Employees

8.1 Termination costs under Compromise Agreements

The Vendor shall indemnify the Purchaser against any sum due or action, award, claim or other legal recourse, debt, expense, fine, liability or other costs incurred by the Company or the Purchaser as a result of the termination of employment of those former employees of the Company listed in schedule 2. Any payment made by the Purchaser under this clause, shall be deemed a reduction in the Consideration and shall be effected by a reduction in the principal outstanding under the Loan Notes in accordance with paragraph 5.2 of schedule 1.

9. Confidentiality

9.1 Confidentiality

Subject to clause 9.2 and to clause 10, each party:

(A) shall treat as strictly confidential the provisions of this Agreement and the process of their negotiation and all information about the other party obtained or received by it as a result of negotiating, entering into or performing its obligations under this Agreement (“Confidential Information”); and

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(B) shall not, except with the prior written consent of the other party (which shall not be unreasonably withheld or delayed), make use of (save for the purposes of performing its obligations under this Agreement) or disclose to any person any Confidential Information.

9.2 Permitted disclosure or use

Clause 9.1 shall not apply if and to the extent that the party using or disclosing Confidential Information can demonstrate that:

(A) such disclosure is required by law or by any supervisory, regulatory or governmental body having jurisdiction over it (including but not limited to the Financial Services Authority, the London Stock Exchange, the Panel on Take-overs and Mergers, the Serious Fraud Office, the US Securities and Exchange Commission or the New York Stock Exchange) and whether or not the requirement has the force of law; or

(B) such disclosure is to its professional advisers in relation to the negotiation entry into or performance of this Agreement or any matter arising out of the same;

(C) in the case of disclosure or use, the Confidential Information concerned was lawfully in its possession (as evidenced by written records) prior to its being obtained or received as described in clause 9.1(A); or

(D) in the case of disclosure or use, the Confidential Information concerned has come into the public domain other than through its fault or the fault of any person to whom such Confidential Information has been disclosed in accordance with clause 9.1(B).

9.3 Continuance of restrictions

The restrictions contained in this clause 9 shall survive Completion and shall continue without limit of time.

10. Announcements

10.1 Restrictions

Subject to clauses 10.2 and 10.4, and whether or not any restriction contained in clause 9 applies, no party to this Agreement shall make any announcement, (including, without limitation any communication to the public, to any customers or suppliers of the Company, or to all or any of the employees of the Company) concerning the provisions or subject matter of this Agreement or containing any information about the other party without the prior written approval of the other (which shall not be unreasonably withheld or delayed).

10.2 Permitted announcements

Clause 10.1 shall not apply if and to the extent that such announcement is required by law or by any supervisory, regulatory or governmental body having jurisdiction over it (including but not limited to the Financial Services Authority, the London Stock Exchange, The Panel on Take-overs and Mergers, the Serious Fraud Office, the US Securities and Exchange Commission or the New York Stock Exchange ) and whether or not the requirement has the force of law and provided that any such announcement shall be made only after consultation with the other party.

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10.3 Continuance of restrictions

The restrictions contained in this clause 10 shall survive Completion and shall continue without limit of time.

10.4 Announcements to customers and suppliers

The Vendor and the Purchaser shall as soon as practicable after Completion, and in any event within 10 Business Days of Completion, procure that a joint announcement of the sale and purchase of the Sale Shares is made to the customers and suppliers of the Company and each Subsidiary in the Agreed Form.

11. Provisions relating to this Agreement

11.1 Successors and assigns

This Agreement shall be binding upon and enure for the benefit of the successors of the parties but shall not be assignable. Any purported assignment shall be void.

11.2 Whole agreement and variations

(A) This Agreement, together with any documents referred to in it, constitutes the whole agreement between the parties relating to its subject matter and supersedes and extinguishes any prior drafts, agreements, and undertakings, whether in writing or oral, relating to such subject matter.

(B) No variation of this Agreement shall be effective unless made in writing and signed by each of the parties.

11.3 Rights etc cumulative and other matters

(A) The rights, powers, privileges and remedies provided in this Agreement are cumulative and are not exclusive of any rights, powers, privileges or remedies provided by law or otherwise.

(B) No failure to exercise nor any delay in exercising any right, power, privilege or remedy under this Agreement shall in any way impair or affect the exercise thereof or operate as a waiver thereof in whole or in part.

(C) No single or partial exercise of any right, power, privilege or remedy under this Agreement shall prevent any further or other exercise thereof or the exercise of any other right, power, privilege or remedy.

11.4 Invalidity

If any provision of this Agreement shall be held to be illegal, void, invalid or unenforceable under the laws of any jurisdiction, the legality, validity and enforceability of the remainder of this Agreement in that jurisdiction shall not be affected, and the legality, validity and enforceability of the whole of this Agreement in any other jurisdiction shall not be affected.

11.5 Counterparts

This Agreement may be executed in any number of counterparts, which shall together constitute one Agreement. Any party may enter into this Agreement by signing any such counterpart.

11.6 Costs

Save as otherwise expressly provided herein, each party shall bear its own costs arising out of or in connection with the preparation, negotiation and implementation of this Agreement.

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11.7 Further assurance

After Completion the parties shall execute such documents and take such steps as either party may reasonably require:

(A) to vest the full title to the Shares in the Purchaser; and

(B) to give the parties the full benefit of this Agreement.

11.8 Notices

(A) Any notice or other communication required to be given under this Agreement or in connection with the matters contemplated by it shall, except where otherwise specifically provided, be in writing in the English language and shall be addressed as provided in clause 11.8(B) and may be:

(1) personally delivered, in which case it shall be deemed to have been given upon delivery at the relevant address; or

(2) if within the United Kingdom, sent by first class pre-paid post, in which case it shall be deemed to have been given two Business Days after the date of posting; or

(3) if from or to any place outside the United Kingdom, sent by pre-paid priority airmail, in which case it shall be deemed to have been given seven Business Days after the date of posting; or

(4) sent by fax, in which case it shall be deemed to have been given when despatched, subject to confirmation of uninterrupted transmission by a transmission report provided that any notice despatched by fax after 17:00 hours (at the place where such fax is to be received) on any day shall be deemed to have been received at 09:00 on the next Business Day.

(B) The addresses and other details of the parties referred to in clause 11.8(A) are, subject to clause 11.8(C):

Name:	Collins & Aikman Floorcoverings Inc
For the attention of:	Len Ferro
Address:	311 Smith Industrial Blvd, Dalton, GA 30722-1447, USA
Fax number:	+1 706 259 2125
Name:	Interior Projects Solutions Limited
For the attention of:	Eric Roelandt
Address:	42 Rayne Road, Braintree, Essex, CM7 2QP
Fax number:	+44 (0)1376 552491

(C) Any party to this Agreement may notify the other parties of any change to its address or other details specified in clause 11.8(B), provided that such notification shall only be effective on the date specified in such notice or five Business Days after the notice is given, whichever is later.

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12. Law and Jurisdiction

12.1 English Law

This Agreement shall be governed by, and construed in accordance with, English law.

12.2 Jurisdiction

In relation to any legal action or proceedings to enforce this Agreement or arising out of or in connection with this Agreement (“Proceedings”) each of the parties submits to the non-exclusive jurisdiction of the English courts and waives any objection to Proceedings in such courts on the grounds of venue or on the grounds that the Proceedings have been brought in an inappropriate forum.

12.3 Contracts (Rights of Third Parties) Act 1999

Except pursuant to clause 6.2, no person who is not a party to this Agreement other than any other member of the Vendor’s Group shall have any right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement.

AS WITNESS the hands of the duly authorised representatives of the parties on the date first before written have executed this Agreement as a Deed.

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SCHEDULE 1: ADJUSTMENT OF CONSIDERATION

1. Interpretation

In this schedule, where the context admits:

“2006 EBIT” means the earnings before interest and taxation of the Company and the Subsidiaries for the period from the Balance Sheet Date to the Completion Date, as shown by the Completion Accounts;

“Completion Accounts” means the accounts prepared in accordance with paragraph 2 and agreed or determined in accordance with paragraph 4 ;

“FRS” means a Financial Reporting Standard published by the Accounting Standards Board in force at the date of this Agreement;

“Net Tangible Assets” means the aggregate value of all fixed and current assets minus the aggregate value of all liabilities and provisions (in accordance with paragraph 89 of Schedule 4 of the Companies Act 1985) of the Company and the Subsidiaries as shown by the Completion Accounts;

“Provisional Consideration” means the consideration for the Sale Shares of US$4,090,200 stated in clause 3.1;

“Purchaser’s Accountants” means such firm of accountants as the Purchaser may nominate from time to time; and

“Vendor’s Accountants” means such firm of accountants as the Vendor may nominate from time to time.

2. Completion Accounts

2.1 Preparation

The Purchaser shall as soon as practicable, and in any event within 60 Business Days after Completion, procure that accounts for the Company and the Subsidiaries shall be prepared in accordance with this schedule and the parties shall use all reasonable endeavours to secure compliance with this schedule by their respective accountants. The Purchaser shall promptly supply all such information and provide access to all such records and personnel as the Vendor and the Vendor’s Accountants and any independent firm of accountants appointed under paragraph 4.3 shall reasonably require for the purposes of preparing, reviewing and/or agreeing the Completion Accounts.

2.2 Description

The Completion Accounts shall consist of a consolidated balance sheet of the Company and the Subsidiaries as at the close of business on the Completion Date and a consolidated profit and loss account of the Company and the Subsidiaries in respect of the period from the day following the Balance Sheet Date to the Completion Date (both dates inclusive).

2.3 General requirements

Subject to the specific requirements of paragraph 2.4 which shall take priority over the general requirements set out below, the Completion Accounts shall:

(A) apply and adopt the same policies, bases, methods, practices and procedures of accounting as were applied or adopted for the purposes of the December 2006 management accounts;

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(B) be prepared as if the Completion Date was the end of an accounting reference period.

2.4 Specific requirements

In preparing the Completion Accounts:

(A) stock shall be determined in accordance with paragraph 3 and valued at the lower of cost and net realisable value;

(B) no provision shall be made for any liability arising as a result of the entry into this Agreement or any change of control of the Company occurring on or after the date of this Agreement;

(C) no provision shall be made in respect of the cost of making good dilapidations and/or wants of repair on or to any premises occupied by the Company or the Subsidiaries;

(D) no provision shall be made for any deferred tax liability of the Company or any Subsidiary;

(E) no provision shall be made in respect of audit fees;

(F) no account shall be taken of any change in the value of any asset or liability arising (directly or indirectly) as a result of the transaction contemplated by this Agreement or any other agreement entered into in connection with the sale of the Sale Shares;

(G) no general provisions in respect of potential or unquantified tax liabilities shall be made;

(H) no provision shall be made in respect of loyalty bonuses or long-service awards which any Company or Subsidiary is contractually obliged to pay to any Employee;

(I) the release of any amounts owing to creditors shall be treated as income to the amount of the release in the profit and loss statement; and

(J) no information relating to the state of affairs of the Company and the Subsidiaries as at the Completion Date which comes to the knowledge of any of them at any time and is obtained as the result of an event occurring after the Completion Date shall be reflected in the Completion Accounts to the extent that such event is attributable to any change in the commercial policy or the nature or manner of operation of any business of the Company or any of the Subsidiaries occurring after the Completion Date.

3. Stock valuation

For the purposes of the preparation of the Completion Accounts, the value of stock shall be ascertained in accordance with the provisions of this paragraph 3:

(A) the Vendor and the Purchaser shall cause a stocktaking to be made on the Completion Date of all the stock then belonging to the Company and the Subsidiaries;

(B) unless otherwise agreed by the parties such stocktaking shall consist of a physical check of the amount, quality and condition of all such stock situated on the Premises at the Completion Date and an inspection of the books and records and contractual documentation (of the Company and the Subsidiaries) for all such stock not so situated together with confirmation from the person or persons having physical possession of such stock of the extent of any interest in or Encumbrance claimed over such stock (if any); and

(C) when such stocktaking has been completed the stock shall be valued by the Purchaser in accordance with paragraph 2.4(A) and included in the Completion Accounts.

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4. Procedure

4.1 Submission of draft

(A) As soon as the draft Completion Accounts shall have been prepared, the Purchaser shall send a draft copy to the Vendor and shall procure that the Vendor is permitted access to such working papers used in connection with the preparation of the same as the Vendor considers necessary or appropriate to understand and agree the Completion Accounts and shall in addition, at the same time, send to the Vendor its calculation of the Net Tangible Assets and 2006 EBIT.

(B) Unless the Vendor shall within 30 Business Days after receipt of the draft Completion Accounts and calculation as provided in paragraph 4.1(A) serve a notice in writing on the Purchaser that it objects to the draft Completion Accounts (identifying the reason for any objection and the amount(s) or item(s) in the draft Completion Accounts and/or calculation which is/are in dispute) (such notification being, for the purposes of this paragraph 4, an “Objection Notice”) the Vendor shall be deemed to have irrevocably agreed to the Completion Accounts in the form of the draft and the Purchaser’s calculation of the Net Tangible Assets for all purposes of this Agreement.

(C) If the Purchaser shall not send the Completion Accounts to the Vendor within the period specified in paragraph 2.1, the Completion Accounts shall no longer be required, and notwithstanding any other provision of this schedule, no adjustment to the Consideration shall be made, other than pursuant to clause 8.1.

4.2 Agreement of draft

If, within the period referred to in paragraph 4.1(B), the Vendor shall serve upon the Purchaser an Objection Notice then the Purchaser and the Vendor shall use their reasonable endeavours to reach agreement upon adjustments to the draft Completion Accounts and the value of the Net Tangible Assets. Neither the Vendor nor the Purchaser shall be entitled to propose any adjustments to the draft Completion Accounts except (i) in the case of the Vendor an adjustment referred to in its Objection Notice and (ii) in the case of either of them, an adjustment by way of a counter-proposal to an adjustment proposed by the other of them, being in each case a revision of an adjustment referred to in the Objection Notice.

4.3 Independent accountant

In the event that the Vendor and the Purchaser fail to reach agreement within 20 Business Days following service of the Objection Notice, either the Vendor or the Purchaser shall be entitled to refer the matter or matters in dispute to an independent firm of chartered accountants (the “Firm”) agreed upon between them or (failing agreement) to be selected (at the instance of either party) by the President for the time being of the Institute of Chartered Accountants in England and Wales. The Firm shall act as experts not as arbitrators and shall determine the matter or matters in dispute (which may include any dispute concerning the interpretation of any provision of this Agreement affecting the Completion Accounts or their jurisdiction to determine the dispute or the content or interpretation of their terms of reference) and their decision shall be final and binding. The Firm may (so far as is reasonable) instruct valuers, solicitors and other professional advisers to the extent they consider necessary to reach their determination. The fees and expenses of the Firm (including the fees of any professional advisers appointed by them as aforesaid) shall be borne by the Vendor and the Purchaser in such proportions as the said accountants shall direct and any professional fees incurred by the Vendor or the Purchaser in relation to the dispute shall be borne by the party incurring them.

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4.4 Accounts final and binding

If within the period referred to in paragraph 4.1(B) the Vendor shall not have served an Objection Notice on the Purchaser, or if such notice is served and the Vendor and the Purchaser shall subsequently agree the draft Completion Accounts or the matters in dispute are referred to the Firm under paragraph 4.3, the draft Completion Accounts, as adjusted (where applicable) so as to be in accordance with the agreement of the Vendor and the Purchaser or the determination of the Firm, shall be the Completion Accounts for the purposes of this Agreement and shall be final and binding on the parties.

4.5 Information and explanations

The Purchaser and the Purchaser’s Accountants shall provide such information and explanations relating to the draft Completion Accounts and their preparation as the Vendor’s Accountants, or the Firm shall reasonably require.

5. Adjustment of Consideration

5.1 Increase or reduction

When the Completion Accounts have become final and binding, the Provisional Consideration shall forthwith:

(A) be reduced by the amount (if any) by which the Net Tangible Assets of the Company and the Subsidiaries as at the date of Completion as shown by the Completion Accounts are less than £2,076,000; and

(B) be reduced by the amount (if any) by which the 2006 EBIT of the Company and the Subsidiaries, for the period from the Balance Sheet Date to the date of Completion, as shown by the Completion Accounts, is less than £6,397.

5.2 Payment

Any reduction in the Provisional Consideration shall be effected by a reduction in the principal outstanding under the Loan Notes, and the Vendor shall deliver such of the certificates issued un the Loan Notes, and which are the latest in time due for payment back to the Purchaser for cancellation to satisfy on a £ for £ basis any reduction in the Consideration made pursuant to paragraph 5.2 above. The Purchaser shall issue any balancing certificate to the Vendor if the amount of Loan Notes tendered by the Purchaser exceeds the amount of any Consideration reduction made pursuant to paragraph 5.2 above, which shall be the repayable as the final instalment under the Loan Notes. In order to calculate the reduction in the amount outstanding under the Loan Notes in US$, the exchange rate as shown in the Financial Times on the first Business Day following the day on which Completion Accounts become final and binding will be used. For the avoidance of doubt, no interest will be payable in respect any certificates delivered by the Vendor to the Purchaser pursuant to this paragraph 5.2.

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SCHEDULE 2: FORMER EMPLOYEES

Thomas Price

David Daniels

Alison Thomas

John Wilson

Wyndham Lewis

Sean Goode

Ian Wolstenholme

David Nuttall

Kath Samuel

Han Nooijen

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Executed as a deed by	)	/s/ Eric Roelandt
Interior Projects	)	Director
Solutions Limited acting by	)
2 directors or a director and	)
secretary	)	/s/ Julie Chapman
	)	Director/Secretary
Executed as a deed by	)
Collins & Aikman	)	/s/ Leonard F. Ferro
Floorcoverings Inc	)	Duly authorised signatory

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EX-21.1

EXHIBIT 21.1

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

List of Subsidiary Corporations

Entity	Jurisdiction of Origin
Tandus U.S., Inc.	United States
Tandus Europe Limited*	United Kingdom
Tandus Manufacturing Limited*	United Kingdom
Collins & Aikman Floorcoverings Asia Pte. Ltd.	Singapore
Tandus Asia Pte. Ltd.	Singapore
Monterey Carpets, Inc.	United States
Crossley Carpet Mills, Ltd.	Canada
Tandus Canada Limited	Canada
Crossley Carpets (U.S.) Limited	Canada
CAF Extrusion, Inc.	United States
Tandus Floorcoverings (Suzhou) Co. Ltd.	China
Tandus BV*	United Kingdom

* Represent discontinued operations as of January 27, 2007.

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Glen A. Hussmann, certify that:

1. I have reviewed this annual report on Form 10-K 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 the 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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 (or persons performing the equivalent functions):

(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.

Date: April 30, 2007

/s/ Glen A. Hussmann

Glen A. Hussmann

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Leonard F. Ferro, certify that:

1. I have reviewed this annual report on Form 10-K 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 the 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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 (or persons performing the equivalent functions):

(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.

Date: April 30, 2007

/s/ Leonard F. Ferro

Leonard F. Ferro

Vice President, Secretary, Treasurer &

Chief Financial Officer

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

The undersigned hereby certifies that, to the best of my knowledge, the Annual Report on Form 10-K for the year ended January 27, 2007, of Collins & Aikman Floorcoverings, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Glen A. Hussmann

Glen A. Hussmann

President and Chief Executive Officer

April 30, 2007

/s/ Leonard F. Ferro

Leonard F. Ferro

Vice President, Secretary, Treasurer &

Chief Financial Officer

April 30, 2007