COLLINS & AIKMAN FLOOR COVERINGS INC, 10-K405, 1998-04-30

COLLINS & AIKMAN FLOOR COVERINGS INC
10-K405, 1998-04-30
CARPETS & RUGS

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<PAGE>

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 31, 1998

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

Commission File Number 333-24699

COLLINS & AIKMAN FLOORCOVERINGS, INC.
(Exact name of registrant as specified in its charter)

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

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

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (706) 259-9711

SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:

Name of each exchange
Title of Each Class on which registered:

10% $100,000,000 SENIOR SUBORDINATED NONE
NOTES DUE 2007

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

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

Indicate by check 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)

As of April 30, 1998, 1,000 shares of the Registrant's common stock, no par
value, were outstanding and held entirely by CAF Holdings, Inc. None of the
Registrant's common stock was held by non-affiliates.

Documents incorporated by reference: None.
<PAGE>

PART I

ITEM 1. BUSINESS

GENERAL
- -------

Collins & Aikman Floorcoverings, Inc. (the "Company"), a Delaware Corporation,
is a leading manufacturer of vinyl-backed commercial floorcovering in the United
States, with the number one market position in six-foot roll carpet and the
number three market position in modular carpet tile. The Company markets its
products to a wide variety of commercial end-markets, including corporate office
space, retail stores, education, health care and government facilities. The
Company differentiates itself through (i) superior product features such as
durability, long term appearance retention and its patented Powerbond RS "peel
and stick" installation system, (ii) exceptional customer-focused services,
including the Company's Source One program, which offers customers a complete
turn-key package of floorcovering supply and installation for single-site and
multiple-site projects, (iii) leading design capability and (iv) environmental
leadership, including an advanced recycling program which converts plant scrap
and reclaimed post-consumer, vinyl-backed carpeting into backing for certain of
its carpet products and other commercial uses, such as industrial block
flooring. In the fiscal year ended January 31, 1998, the Company generated net
sales and EBITDA of $160.4 million and $35.1 million, respectively.

Prior to February 6, 1997, the Company was a wholly owned subsidiary of
Collins & Aikman Floor Coverings Group, Inc. ("C&A Group"), a wholly owned
subsidiary of Collins & Aikman Products Co. ("C&A Products"), a wholly owned
subsidiary of Collins & Aikman Corporation. On February 6, 1997, pursuant to an
agreement entered into among CAF Holdings, Inc. ("Holdings"), a corporation
sponsored by Quad-C, Inc. ("Quad-C"), a Virginia merchant banking firm, and
Paribas Principal Partners ("Paribas"), the U.S. private equity group of
Paribas, CAF Acquisition Corporation ("CAF"), a wholly owned subsidiary of
Holdings, the Company and C&A Products, CAF purchased all of the issued and
outstanding capital stock of Collins & Aikman Floor Coverings, Inc. from C&A
Group for $197.0 million (including $27.0 million in consideration of a
tradename license agreement) which was reduced to $195.6 million after a $1.4
million working capital adjustment (the "Acquisition").

The U.S. commercial carpet market, which is comprised of the specified and
non-specified segments, is estimated by management to have generated sales of
approximately $3.5 billion in 1997. The specified commercial market, which
represents approximately $2.1 billion of the total U.S. commercial carpet
market, is differentiated from the non-specified market, in that products are
specified by architects, designers and owners rather than being purchased off
the shelf. While competition in the non-specified market is based largely on
price, the key differentiating factors in the specified markets are product
durability, appearance retention, product design and service, as well as price.

Within the specified commercial market, the Company competes in the six-foot
roll and modular carpet tile segments, which combined accounted for an estimated
$600 million of industry sales in 1997. The Company's focus on these niche
products provides a competitive advantage as these products tend to have
proprietary specifications and generally cannot be produced on standard
broadloom carpet manufacturing equipment utilized by the majority of
manufacturers in the carpet industry. Management believes the exceptional
performance and unique installation characteristics of the Company's products
provide a superior long-term investment for end-users relative to both broadloom
carpet, which requires more frequent replacement and higher maintenance costs,
and hard surface flooring products, which lack the aesthetics and comfort under
foot of carpet. The Company believes it has a reputation for outstanding
product quality and innovative, problem-solving products. As a result, the
Company historically has been able to achieve sales growth in excess of that in
the general commercial carpet industry. The Company's net sales have grown,
without the benefit of acquisitions, from $88.6 million in 1992 to $160.4
million in 1997, representing a CAGR of 12.6%.

1
<PAGE>

The Company believes that the diversity of its end-markets provides
significant stability to its revenue base. The Company's focus on market
segments, which are characterized by high renovation rates, as opposed to new
construction, reduces its exposure to economic fluctuations. Historically,
renovation activity has been significantly less cyclical than new construction.
Management estimates that approximately 65% of the Company's sales are related
to renovation projects and approximately 35% are attributable to new
construction. Due to the favorable U.S. economy, low interest rates and low
vacancy rates in commercial real estate, management believes that new
construction demands will remain strong in the near term. As a result, sales of
the Company's products have increased steadily despite the volatility in new
commercial construction since 1990.

COMPETITIVE STRENGTHS

The Company considers its competitive strengths to include the following:

SUPERIOR PRODUCT TECHNOLOGY

The Company has demonstrated an ability to develop value-added products that
differentiate it from its competition. The Company's proprietary vinyl cushion
backing technology, Powerbond(R), which uses a closed-cell construction that is
impermeable to moisture, exhibits demonstrably superior durability, seamability
and cleaning characteristics, and provides comfort under foot, thereby combining
the best attributes of both hard surface and carpet floorcoverings.
Powerbond(R) was enhanced in 1988 with the patented Powerbond RS system, which
employs a "peel and stick" dry adhesive for installation. Management believes
the RS system substantially reduces total installation costs and eliminates the
fumes associated with wet adhesives generally used in conventional carpet
installation.

LEADING POSITIONS IN NICHE PRODUCTS

In 1967, the Company pioneered a vinyl-backed flooring system (which includes
six-foot roll and modular carpet tile) in the U.S. commercial carpet industry as
an alternative to hard surface flooring and broadloom carpet. The Company is the
leader in the vinyl-backed commercial carpet industry. The Company has the
number one position in the fast growing six-foot roll segment of the specified
U.S. commercial carpet market. Within the modular carpet tile market, the
Company believes it has the number three position. Management believes that the
six-foot roll market will continue to grow significantly faster than the
commercial carpet industry as a whole.

UNIQUE MARKETING SEGMENTATION

The Company has implemented a segmented marketing strategy which targets the
Company's sales and marketing efforts to the specified needs of each end-market
within a given geographic area. Management believes that each end-market
(corporate office space, retail stores, education, health care and government
facilities) has distinct product, service, performance, aesthetics, distribution
and budgetary requirements. The segmentation strategy requires each account
manager to develop an expertise in a specific end-market, resulting in greater
customer-focused service, comprehensive market coverage and increased sales
productivity over time. The size of the Company's sales organization has nearly
doubled since the implementation of the segmentation strategy in 1993 from 45 to
90 account managers. Management expects to benefit from this investment
because, historically, the productivity of the sales force has increased
significantly with experience. This market-specific focus differentiates the
Company from its competitors, which generally have a geographically assigned
sales organization wherein the account managers are responsible for all end-use
markets. In addition, the diversity of the end-markets served provides
significant stability to the company's revenue base.

2
<PAGE>

LEADING RECYCLING CAPABILITY

The Company has developed a proprietary technology for recycling vinyl carpet
scrap and post-consumer, vinyl-backed floorcovering reclaimed from installation
sites. This unique capability eliminates the need for landfill disposal or
incineration of these waste products. Through this technology, the Company
produces backing for new carpet and other value-added commercial products, such
as industrial block flooring. The Company is leading the industry in recycling
initiatives at a time when many end-users, including government agencies and
professional designers, increasingly prefer and/or require products with
recycled content.

FLEXIBLE DISTRIBUTION

The Company has developed a flexible three-channeled distribution system,
which focuses on the needs of the end-user. Customers have the flexibility to
purchase the Company's products directly from the Company, through the Company's
unique Source One program or through independent dealers. These programs allow
the Company's sales and marketing personnel to (i) establish relationships
within specific market segments, (ii) continually improve and customize product
characteristics for specific applications, and (iii) maximize total value
delivered to customers. Although the majority of industry sales have
traditionally been through local dealers, management believes its emphasis on
flexible distribution and direct marketing provide the Company more influence in
the specification process, thus affording it a distinct competitive advantage.
The Company will continue to market its products to floorcovering specifiers and
end-users through programs, which emphasize one-on-one contact between its
account managers and key decision-makers.

EXPERIENCED MANAGEMENT TEAM AND SIGNIFICANT EMPLOYEE INVOLVEMENT

The Company has an experienced and successful management team with an average
of over 20 years of experience in the floorcovering industry and an average of
over 10 years of experience with the Company. Management has promoted company-
wide employee involvement in every phase of the manufacturing and selling
process, which has resulted in the implementation of suggestions from both
hourly and salaried associates regarding the Company's operations.
Manufacturing employees are cross-trained in several functions and have access
to ongoing internal training programs as well as external educational programs.

INDUSTRY OVERVIEW

Commercial carpet is manufactured in two basic forms, roll products and
modular carpet tile. Roll carpet products are manufactured in one of two
principal types: conventional twelve-foot broadloom carpet or six-foot roll
carpet.

Historically, six-foot roll goods were primarily used in the education and
health care markets. These products in recent years have been accepted in new
market segments such as corporate office space, where handling and transport of
twelve-foot broadloom is not always practical or feasible, and retail stores and
public spaces (such as airports) where comfort under foot and durability are
important criteria.

Modular carpet tile is offered in a variety of sizes to accommodate the full
range of domestic and international requirements. Because of its flexibility
within open office landscape systems, the primary uses of modular carpet tile
are for the corporate office space and government markets. Office systems are
often reconfigured to react to ever-changing office dynamics. For example,
modular carpet tile is particularly well suited to the use of raised floor
systems in which continual access to underfloor power systems is required.
Tiles are simply removed to reveal the access panel and replaced when work is
completed. Broadloom carpet cannot withstand this activity as it must be cut
open and cannot adequately be repaired.

3
<PAGE>

SALES, MARKETING AND DISTRIBUTION

SALES. In 1993, the Company implemented a highly focused sales and marketing
strategy, under which each account manager targets specific market segments
within a particular geographic area. This strategy is designed to achieve
comprehensive market coverage of the nation's leading markets. The Company
believes that each market segment (corporate office space, retail stores,
education, health care and government facilities) has specific product, service,
performance, aesthetic, distribution and budgetary requirements and that
purchasing decisions are unique to each segment. The Company's segmentation
strategy allows the account managers to develop specific expertise in a
particular market segment, which management believes results in higher customer
service levels, more comprehensive market coverage and increased sales
productivity over time.

The majority of the Company's sales are specified by the facility owner, whose
purchasing decision frequently is influenced by interior designers and
architects. Since each market has distinct performance, design and installation
requirements, the Company's account managers focus on educating the facility
owners and their design professionals on (i) the technical specifications and
proprietary advantages of its products, (ii) the Company's design capabilities
for specific market segments, (iii) the Company's dedication to responsive
delivery of customer service and (iv) the Company's environmental initiatives.
The Company's account managers take on advisory or consultant roles to the
customer as compared to a normal sales person. Management believes this end
market-oriented strategy has resulted in an improvement in service and greater
sales.

The Company has nine domestic sales offices, each directed by a regional
manager. The size of the Company's sales organization has doubled since the
implementation of the segmentation strategy in 1993 from 45 account managers and
7 regional managers to 90 account managers and 10 regional managers currently.
Historically, the productivity of the sales force has increased significantly
with experience. During 1997, the Company's account managers with four or more
years of experience produced an average of approximately 66% more in sales than
did the Company's account managers with three or fewer years of experience.
Management believes this increased sales productivity is the result of (i)
increased awareness of individual market requirements, (ii) improved product
knowledge, (iii) enhanced customer service and (iv) increased customer trust and
reliance.

MARKETING. As part of the segmentation strategy, each market segment has a
dedicated in-house marketing director responsible for the identification of
market opportunities, communications and program implementation. Marketing
personnel provide account managers with important market information, including
demographic profiles, competitive analyses, and merchandising support in the
form of brochures, advertising and videos. The marketing group also provides
specific input into product development for each market segment. The Company
has an in-house design team dedicated to developing new, innovative designs for
each of the Company's primary end-markets:

Corporate Office Space. The corporate office space market involves project-
-----------------------
oriented work and/or multi-site purchasing agreements. Management has focused
on projects where the Company tends to excel on the basis of product
performance, customer service and lower life cycle cost rather than pricing. As
part of its strategy to increase penetration of this market, the Company
recently implemented a national accounts program that targets the country's
largest corporations.

Education. The education market has been a primary focus for the Company
----------
since the development of Powerbond(R) in 1967. Powerbond(R)'s long-term
appearance retention characteristics have been the principal factor behind the
Company's success in this segment. Customers in the education segment tend to
be particularly sensitive to durability, longevity and ongoing maintenance
costs. Historically, the Company has focused on the kindergarten through
twelfth grade market. Powerbond(R) in many of these installations has been in
use for more than 20 years. The Company aggressively uses this track record in
its marketing to potential customers. Over the last two years, the Company has
begun to direct attention to the college and university market.

4
<PAGE>

Health Care. Powerbond RS is particularly well suited to the health care
------------
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 health care
market. With the growth and consolidation of national health care organizations,
the Company's Source One program, providing project management services and
single source responsibility, is well-suited to serve this market.

Government. The Company sells to federal, state and local governments. The
----------
Company is a supplier to the federal government's purchasing arm, the 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. Management
believes that its success in the government market is due in part to the
Company's environmental initiatives, including both the Powerbond RS "peel and
stick" backing system, and its recently introduced recycled content product
offerings.

Retail Stores. Retail store planning is the Company's newest market segment
--------------
with a focus on major retail chains, which have the potential for large,
nationwide volumes. A significant portion of these sales flow directly through
the Company's Source One program. The Company's "on time every time"
installation commitments and Powerbond RS' ease of installation are critical to
meet short construction schedules and to minimize business interruption and loss
of revenues in the retail sector.

International Markets. The Company established its first international sales
----------------------
office in 1989 in the United Kingdom and currently distributes throughout South
East Asia, China, Korea, Taiwan and North and South America. Sales to
international customers constituted less than 10% of the Company's revenues
during 1997. The Company plans to add distributors and dedicated sales
personnel in international markets.

DISTRIBUTION. The Company's products are sold and distributed through three
primary channels: direct to end-user, Source One and through dealers. Although
a majority of the Company's invoicing is through dealers, the Company's primary
marketing efforts are focused on the end-user and professional designers and
architects who create specifications for its products. The Company operates
with a flexible distribution philosophy to meet the needs of the customer and
not mandate from whom the customer can buy the Company's products. These
channels are outlined below:

Direct. Direct distribution allows end-users to purchase floorcovering
------
directly from the Company. The Company's 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 project management and installation.

Source One. Introduced in late 1992, the Company's in-house project
-----------
management department provides single-source coordination and turn-key project
management service. The department was established to provide a "one phone
call", "single-source" project management service to meet the specific needs of
the Company's customer base. The service includes facility measurement, project
coordination, order entry, delivery and installation of a wide range of interior
finishes, including the Company's products. Installation is provided by
company-certified installers throughout the nation.

Dealer. The carpet industry traditionally has sold products to customers
-------
through local dealers, who typically broker products from manufacturers and
subcontract installation through local installers. Many of the Company's
customers request that the product be delivered through a local dealer who
provides a range of project management services, including carpet removal,
staging and installation.

5
<PAGE>

PRODUCTS AND PRODUCT FEATURES

The Company's products are available in a wide variety of textures, densities,
colors and patterns designed to meet both the performance and aesthetic
requirements of a broad spectrum of commercial end-users. The product offerings
are available in both six-foot roll goods and modular carpet tile, which enables
the Company to market an integrated system of product solutions to address the
specific requirements of end-users. Each of these products offers distinctive
characteristics of use and application.

Six-Foot Roll Goods. The Company is the leading U.S. manufacturer of six-foot
--------------------
roll products, which provide performance advantages over twelve-foot broadloom
and hard surface flooring. All of the Company's six-foot products utilize the
proprietary Powerbond(R) backing technology, which it pioneered in 1967.
Management believes this cushion system and the patented RS technology
enhancement give the Company a sustainable competitive advantage. In addition
to superior performance characteristics, the six-foot roll product provides
handling and transport advantages over twelve-foot rolls as well as cost
advantages over modular carpet tiles.

Modular Carpet Tile. The Company was the first manufacturer in the U.S. to
--------------------
introduce vinyl-backed modular carpet tile technology in 1969 and today is the
third largest domestic producer. The Company recently introduced a tile product
utilizing the Powerbond(R) cushion technology, which provides the end-user with
improved durability and an extended life cycle as compared to competitive non-
cushioned tile products. The Company's modular carpet tile system is
specifically engineered to have a monolithic appearance on the floor and is
marketed as the most seamless tile in the industry. The Company's modular carpet
tile products are offered in a variety of sizes to accommodate a range of
domestic and international requirements.

COMPETITION

The commercial floorcovering industry is highly competitive. The Company
competes with other manufacturers of vinyl-backed carpet, as well as
manufacturers of twelve-foot broadloom carpet and other types of commercial
floorcovering. Although the industry recently has experienced consolidation, a
large number of manufacturers remain. Management believes that the Company is
the largest manufacturer of six-foot roll goods in the U.S., with a market share
over three times that of its nearest competitor, and is the third largest
manufacturer of modular carpet tile in the U.S. While no company focuses solely
on the same products as the Company, a number of the Company's domestic and
foreign competitors manufacture six-foot roll goods and modular carpet tile as
one segment of their business. Certain of these competitors have greater
financial resources than the Company.

The Company believes the principal competitive factors in its primary
floorcovering markets are performance, durability, service, style and price. In
the specified commercial market, six-foot roll goods and modular carpet tile
compete with various floorcoverings, of which broadloom carpet has the largest
market share. The performance, durability, customer service, and ease of
installation and maintenance of the Company's six-foot roll goods and modular
carpet tile are its principal competitive advantages.

Some of the Company's major competitors have significantly higher commercial
carpet sales than the Company since broadloom carpet products comprise the
majority of their sales. The market for commercial broadloom products is
substantially larger than the commercial vinyl-backed carpet market in which the
Company specializes. In addition, unlike some larger industry participants, the
Company has not made any acquisitions, but has grown organically.

Historically, the vast majority of the commercial carpet industry's sales have
been through independent carpet dealers. Within the last three years, two of
the Company's competitors and DuPont, the Company's principal raw material
supplier, each initiated a strategy of purchasing or forming alliances with
selected carpet dealers primarily in large metropolitan markets.

6
<PAGE>

MANUFACTURING AND FACILITIES

The Company owns manufacturing facilities in Dalton, Georgia. These
facilities consist of (i) a yarn processing plant with carpet dyeing
capabilities, (ii) a carpet tufting plant, (iii) a carpet finishing and tile
cutting plant which includes printing and recycling operations) and (iv) a
customer service center and distribution warehouse. In addition to the four
Dalton facilities, the Company leases nine sales and service facilities and two
warehouses in the U.S. and one sales and service facility in the U.K.

During 1996, the Company completed a $13.0 million expansion and modernization
program, including (i) the replacement of two-thirds of all existing tufting
equipment with new high speed machines, (ii) the replacement of all warping
equipment, (iii) the installation of a second vinyl production line, which
doubled the Company's finishing capacity and (iv) a 60,000 square foot building
expansion of the finishing plant. The Company has begun a 40,000 square foot
expansion to its tufting plant to improve handling and storage efficiencies for
its processes and a new vinyl production line at its finishing plant.

Management believes that employee involvement is a significant factor in the
Company's increased profitability. Management initiated a Company-wide system
of measuring and improving manufacturing quality in 1989. This system includes
extensive training, the establishment of quality checkpoints during the
manufacturing process and the formation of quality leadership and improvement
teams. Various quality measurements are taken each month and displayed
graphically in each plant so that employees can track progress. Results are
reviewed each month in planning meetings involving all employees. An employee
suggestion system called Opportunity For Involvement ("OFI") was implemented in
1991 to provide a vehicle for suggestions related to product quality, employee
safety, manufacturing costs and workplace improvement. In 1997, the category of
environment was added to the OFI program.

The following table summarizes the Company's manufacturing, distribution
and sales facilities:

<TABLE>
<CAPTION>
APPROXIMATELY
LOCATION OPERATION OWNED/LEASE SQUARE FEET
- -------- --------- ----------- -------------
<S> <C> <C> <C>
Dalton, Georgia.................... Distribution Warehouse Owned 133,200
Sales Service Office
Finance & Administration
Dalton, Georgia.................... Yarn Plant Owned 161,500
Carpet Dyeing
Dalton, Georgia.................... Tufting Owned 110,000
Corporate Offices
Dalton, Georgia.................... Six-Foot Finishing Owned 187,400
Tile Finishing
Tile Printing
Recycling
Dalton, Georgia.................... Warehouse Leased 46,200
Dalton, Georgia.................... Warehouse Leased 15,000
Marietta, Georgia.................. Sales / Showroom Leased 2,129
Chicago, Illinois.................. Sales / Showroom Leased 5,498
Dallas, Texas...................... Sales / Showroom Leased 1,960
Denver, Colorado................... Sales / Showroom Leased 1,318
Burke, Virginia.................... Sales / Showroom Leased 1,783
Newport Beach, California.......... Sales / Showroom Leased 1,600
New York, New York................. Sales / Showroom Leased 5,000
San Francisco, California.......... Sales / Showroom Leased 3,330
Farmington, Massachusetts.......... Sales / Showroom Leased 120
Milton Keynes, United Kingdom...... Sales / Showroom Leased 5,500
</TABLE>

7
<PAGE>

RAW MATERIALS

The manufacturing of carpet involves the purchasing or manufacturing of yarn,
which comprises about one-third of the carpet's typical cost structure and in
excess of 50% of total raw material costs. The Company uses DuPont 6.6
continuous filament yarn for all of its products. Yarn is either purchased
directly from DuPont to be processed through the yarn and dye plant in Dalton or
from outside yarn processors who processes DuPont yarn prior to delivery. Other
significant raw materials used by the Company in its manufacturing process
include coater materials, such as vinyl resins, and primary backing.

The Company has never experienced a problem sourcing nylon, processed yarn or
any other raw material used in the manufacture of carpet from its suppliers and
does not anticipate any difficulties in sourcing these raw materials in the
future.

PATENTS AND TRADEMARKS

The Company owns a number of patents in the United States including its
Powerbond RS patent, which expires in 2008. The Company considers its know-how
and technology more important to its current business than patents and,
accordingly, believes that expiration of existing patents would not have a
material adverse effect on its operations. However, the Company maintains an
active patent and trade secret program in order to protect its proprietary
technology, know-how and trade secrets. The Company also owns numerous
registered trademarks in the United States, including Powerbond(R).

EMPLOYEES

At January 31, 1998, the Company had a total of 777 employees of which 472
were hourly and 305 salaried. The Company has experienced no work stoppages and
believes that its employee relations are good. All of the Company's employees
are non-union. Management is not aware of any discussion or attempts to organize
the workforce within any of the Company's facilities.

ENVIRONMENTAL MATTERS

The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of, certain materials, substances and
wastes. The Company believes that its operations are in material compliance with
the terms of all applicable environmental laws and regulations as currently
interpreted. The cost of such compliance is immaterial to the financial position
and results of operations of the Company.

ITEM 2. PROPERTIES

For information concerning the principal physical properties of the Company,
see "Item 1. Business -- Manufacturing and Facilities."

8
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

The Company from time to time is subject to claims and suits arising in the
ordinary course of business, including workers' compensation and product
liability claims, which may or may not be covered by insurance. It is the
opinion of management 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.

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

None

9
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of April 30, 1998, there was one holder of record of The Company's common
stock. There is no public trading market for the Company's common stock.

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 herein. The
financial data as of January 28, 1995, January 27, 1996, January 25, 1997 and
for each of the four years ended January 31, 1998, have been derived from the
audited financial statements of the Company. The financial data as of and for
the year ended January 29, 1994 have been derived from the unaudited financial
statements of the Company. The historical consolidated financial statements of
the Company contained elsewhere herein are presented as if the Company was a
separate entity for all periods presented. The following financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto appearing elsewhere herein.

The purchase method of accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting generally results in
increased amortization and depreciation reported in periods subsequent to the
Acquisition. In addition, pre-Acquisition results include accruals and costs
allocated by C&A Products. Accordingly, pre-Acquisition results of the Company
and post Acquisition results are not comparable in all material respects. A
vertical black line on the table below distinguishes between the pre-Acquisition
and post Acquisition results.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
JANUARY 29, JANUARY 28, JANUARY 27, JANUARY 25, JANUARY 31,
1994 1995 1996 1997 1998(a)
---------------------------------------------------------------------
(Dollars in thousands) |
<S> <C> <C> <C> <C> | <C>
OPERATING DATA: |
Net sales.............................................. $ 95,590 $ 108,039 $ 122,169 $ 136,124 | $ 160,383
Costs of goods sold.................................... 55,065 62,527 73,615 81,715 | 97,263
-------- --------- --------- --------- | ----------
Gross profit........................................... 40,525 45,512 48,554 54,409 | 63,120
Selling, general and administrative expenses (b)....... 25,478 23,733 27,364 28,971 | 34,769
Corporate general & administrative allocated |
costs (c)............................................ 1,046 1,069 1,591 1,531 | 649
Goodwill and intangibles amortization (d).............. 2,645 -- -- -- | 8,468
Management equity plan expenses (e).................... 1,009 -- -- -- | --
-------- --------- --------- --------- | ----------
Operating income....................................... 10,347 20,710 19,599 23,907 | 19,234
Loss on sales of accounts receivable (f)............... -- 1,261 3,269 3,489 | --
Interest expenses (g).................................. 755 2,454 3,098 2,854 | 15,122
-------- --------- --------- --------- | ----------
Income before income taxes............................. 9,592 16,995 13,232 17,564 | 4,112
Income tax expense..................................... 4,837 6,645 5,127 6,729 | 1,710
-------- --------- --------- --------- ----------
Net Income............................................. $ 4,755 $ 10,350 $ 8,105 $ 10,835 | $ 2,402
======== ========= ========= ========= | ==========
OTHER DATA: |
EBITDA (h)............................................. $ 20,646 $ 23,247 $ 23,371 $ 27,118 | $ 35,085
Capital expenditures................................... 2,147 1,823 4,290 7,897 | 5,119
Depreciation and amortization.......................... 2,398 2,237 2,154 2,201 | 13,263
|
CASH FLOWS DATA: |
Net cash provided by operating activities.............. $ 10,057 $ 24,912 $ 11,744 $ 12,375 | $ 24,201
Net cash used in investing activities.................. (676) (972) (4,270) (7,856) | (202,856)
Net cash (used in) provided by in financing............ |
activities (i)....................................... (9,474) (23,959) (7,347) (4,508) | 184,210
|
BALANCE SHEET DATA (END OF PERIOD): |
Working capital (j).................................... $ 14,512 $ 3,268 $ 3,805 $ 6,485 | $ 26,454
Total assets (j)....................................... 41,160 27,312 31,231 39,614 | 216,823
Long-term debt (k)..................................... 8,100 43,800 43,300 25,400 | 142,000
Stockholder's equity (deficit)......................... 14,912 (32,999) (29,645) (3,780) | 54,076
</TABLE>

10
<PAGE>

(a) The fiscal period ended January 31, 1998 included 53 weeks.
(b) Amounts include costs incurred by the Company relating to certain matters
retained by C&A Products totaling $4,302,000 in fiscal 1993, $300,000 in
fiscal 1994, $1,618,000 in fiscal 1995 and $1,010,000 in fiscal 1996. The
above amounts represent all costs, including customer remediation, legal
expenses, travel expenses and claim settlements, incurred by the Company in
connection with certain claims and litigation that either were retained by
C&A Products or were incurred by the Company in anticipation of the sale of
the Company.
(c) Prior to fiscal 1997, amounts relate to services provided by C&A Products
and include tax, treasury, risk management, employee benefits, legal, data
processing, application of cash receipts and other general corporate
services. The costs of the services provided by C&A Products were
allocated to the Company based upon a combination of estimated use and the
relative sales of the Company's business to the total consolidated
operations of C&A Products. In the opinion of management, the method on
which these costs were allocated was believed to be reasonable. However,
the costs of these services charged to the Company are not necessarily
indicative of the costs that would have been incurred if the Company had
performed these functions. Fiscal 1997 amounts relate to amounts paid to
the majority shareholder as a management fee and amounts paid to C&A
Products to provide the Company with services as described above.
(d) At October 30, 1993, Collins & Aikman Corporation wrote off all goodwill
related to its December, 1988 acquisition of C&A Products based upon its
assessment that the asset was impaired. The amount reported for the year
ended January 29, 1994 includes the Company's allocated portion of the
goodwill write-off. In connection with the Acquisition, the Company
recorded goodwill and intangible assets of $137.3 million, which are being
amortized over lives of 7 to 40 years.
(e) Prior to the Acquisition, certain of the Company's employees participated
in Collins & Aikman Corporation's stock option plans which provide for the
award of options on Collins & Aikman Corporation common shares to
employees, exercisable over ten-year periods. Pursuant to such stock
option plans, Collins & Aikman Corporation granted certain employees of the
Company stock options with exercise prices below the then estimated fair
value in recognition of their prior service.
(f) Effective July 13, 1994, C&A Products entered into a Receivables Sale
Agreement with Carcorp, a wholly owned, bankruptcy-remote subsidiary of C&A
Products. The accounts receivable were purchased by Carcorp at the face
amount of the accounts receivable less a defined discount. Upon closing of
the Acquisition, the Company was terminated as a seller under the
Receivables Sale Agreement. Subsequent to the Acquisition, the Company
does not sell its accounts receivable and, as a result, does not incur any
losses related to third-party discounts associated with such sales.
(g) Substantially all of the Company's interest expense prior to the fiscal
year ended January 31, 1998 relates to the allocated debt of C&A Products
referred to in note (k) below.
(h) EBITDA represents earnings before deductions for interest expense, loss on
sales of accounts receivable, income tax expense, depreciation,
amortization, non-recurring charges related to the write-off goodwill (see
note (d) above), the management equity plan expense (see note (e) above),
the costs incurred in connection with certain matters retained by C&A
Products (see note (b) above), and the effect of writing up inventory to
fair value at the time of the Acquisition. Because of certain of these
adjustments, the measure presented may not be comparable to similarly
titled measures reported by other companies. The Company understands that
certain investors believe EBITDA reflects a company's ability to satisfy
principal and interest obligations with respect to its indebtedness and to
utilize cash for other purposes. EBITDA does not represent and should not
be considered as an alternative to net income or cash flow from operations
as determined by generally accepted accounting principles.
(i) Prior to the Acquisition, net cash used in financing activities includes
net cash transactions with C&A Products.
(j) For periods after July 13, 1994 and prior to the Acquisition, amounts
exclude all domestic trade accounts receivable sold by the Company pursuant
to the Receivables Sale Agreement referred to in note (f) above.

11
<PAGE>

(k) Amounts for periods prior to fiscal 1997 represent the debt of C&A Products
that has been allocated to the Company as a result of its guarantee of
certain C&A Products debt. In connection with the sale of the Company, the
Company was released from this guarantee, and accordingly, the Company was
not required to repay any of the allocated amounts.

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

GENERAL

The Company is the leading U.S. manufacturer of six-foot roll carpet and
the third largest manufacturer of modular carpet tiles within the specified
commercial carpet market. The Company markets its products directly to the end-
user utilizing its national sales force and other distribution channels. The
Company's products are marketed to a wide variety of commercial end-markets,
including corporate office space, retail stores, education, health care and
government facilities. The Company believes that the diversity of its target
markets softens the impact of economic downturns.

As discussed in Item 1, prior to February 6, 1997, the Company was a wholly
owned subsidiary of Collins & Aikman Floor Coverings Group, Inc. ("C&A Group"),
a wholly owned subsidiary of Collins & Aikman Products Co. ("C&A Products"), a
wholly owned subsidiary of Collins & Aikman Corporation. On February 6, 1997,
CAF Acquisition Corporation ("CAF") purchased all of the issued and outstanding
capital stock of Collins & Aikman Floor Coverings, Inc. from C&A Group for
$197.0 million (including $27.0 million in consideration of the Tradename
License Agreement) which was reduced to $195.6 million after a $1.4 million
working capital adjustment (the "Acquisition"). Immediately subsequent to the
Acquisition, CAF was merged with Collins & Aikman Floor Coverings, Inc. with the
Company as the successor company. Financing for the Acquisition was provided by
(i) $57.0 million of borrowings under an $85.0 million senior secured credit
facility, (ii) $100.0 million of proceeds from an offering by CAF of its 10%
Senior Subordinated Notes due in 2007, and (iii) $51.0 million in contributed
capital. In connection with the Acquisition, the Company made an election under
Section 338 (h) (10) of the Internal Revenue Code, which provides for the
Acquisition to be treated as a purchase of assets for federal income tax
purposes. As a result of this election, the Company's tax basis in its assets
was increased to the respective fair market values of such assets. The newly
allocated basis is amortizable for tax purposes over the respective useful lives
of the assets. The balance of the purchase price was allocated to goodwill and
other intangibles, which is amortizable for tax purposes over fifteen years.

The Company finished 1997 with $160.4 million in sales and $35.1 million in
EBITDA, which is the fifth consecutive record year. For the five-year period
from 1993 to 1997, sales and EBITDA experienced compounded annual growth rates
of 12.6% and 18.7%, respectively. The Company's success over the last five
years are attributed to (i) the sales to diverse end-use markets served, (ii)
the highly focused segmentation philosophy within sales and marketing, (iii) the
continued strong demand of the customers to utilize the Company's Source One
program of turn-key services, (iv) the focus on cost containment through all
operations of the Company, and (v) the continued input from all associates of
the Company through the formalized suggestion systems in place and the day to
day interaction.

12
<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
JANUARY 27, JANUARY 25, JANUARY 31,
1996 1997 1998
---------- ---------- ----------
(PERCENTAGE OF NET SALES)
<S> <C> <C> <C>
Net sales.................................................................. 100.0% 100.0% 100.0%
Cost of goods sold......................................................... 60.3 60.0 60.6
----- ----- -----
Gross profit............................................................... 39.7 40.0 39.4
Selling, general and administrative expenses............................... 22.4 21.3 27.0
Corporate general and administrative allocated costs....................... 1.3 1.1 .4
----- ----- -----
Operating income........................................................... 16.0 17.6 12.0
Interest expense........................................................... 2.5 2.1 9.4
Loss on sales of accounts receivable....................................... 2.7 2.6 0.0
----- ----- -----
Income before income taxes................................................. 10.8 12.9 2.6
Income tax expense......................................................... 4.2 4.9 1.1
----- ----- -----
Net income................................................................. 6.6% 8.0% 1.5%
===== ===== =====
EBITDA margin.............................................................. 19.1% 19.9% 21.9%
===== ===== =====
</TABLE>

FISCAL YEAR ENDED (53 WEEKS) JANUARY 31, 1998 ("FISCAL 1997")
COMPARED WITH FISCAL YEAR ENDED JANUARY 25, 1997 ("FISCAL 1996")

Net Sales. Net sales represent gross sales less product returns, customer
allowances and various customer discounts. Sales are comprised of six-foot roll
goods, modular carpet tile and other products, including adhesives and walk-off
mats. The Company's net sales increased to $160.4 million in fiscal 1997, an
increase of $24.3 million or 17.8% over fiscal 1996. The increase in net sales
in fiscal 1997 was due to strength in most of the Company's end-markets. The
Company experienced strong volume and average selling price increases in both
six-foot roll goods and modular carpet tiles.

Gross Profit. The Company's gross profit increased to $63.1 million in
fiscal 1997, an increase of $8.7 million or 16.0% over fiscal 1996. Gross
margin decreased to 39.4% in fiscal 1997 from 40.0% in fiscal 1996. The
increase in gross profit was the result of increased sales and manufacturing
efficiencies associated with higher volumes and 53 weeks in the fiscal year,
offset by the inventory write up to fair value at the time of the Acquisition.
Gross margin overall decreased in fiscal 1997 due to the $2.6 million inventory
write up previously mentioned. Excluding this write-up, gross margin increased
to 41.0% in fiscal 1997.

Selling, general and administrative ("SG&A") expenses. The Company`s S,G&A
expenses increased to $43.2 million in fiscal 1997, an increase of $14.2 million
or 49.0% over fiscal 1996. As a percentage of sales, S,G&A expenses increased to
27.0% during fiscal 1997 from 21.3% in fiscal 1996. S,G&A expenses (excluding
expenses relating to the matters retained by C&A Products for 1996) increased
due to (i) $8.5 million in goodwill and intangible assets amortization resulting
from the Acquisition, (ii) personnel additions to handle growth under the
Company's segmentation marketing strategy, (iii) higher sales commissions due to
the increase in sales, (iv) increased sample expense and (v) increased costs due
to services no longer performed by C&A Products which, in fiscal 1996, were
previously included in Corporate General and Administrative Costs. Excluding
goodwill and intangible assets amortization, the Company's S,G&A expense
increased by $5.8 million or 20.0% over fiscal 1996.

Corporate general and administrative allocated costs. Corporate general
and administrative allocated costs include costs associated with services
provided by C&A Products. Services provided include tax, treasury, risk
management, employee benefits administration, legal, data processing,
application of cash receipts and other general corporate services. The Company
had the option to continue receiving certain of these services from C&A Products
under a Management Services Agreement, for up to a one-year period. These costs
in fiscal 1997 were lower than comparable charges in fiscal 1996 due to the
lower cost as stipulated in the Management Services Agreement. As a percentage
of sales, the allocated costs decreased to 0.4% during fiscal 1997 from 1.1% in
fiscal 1996.

13
<PAGE>

Interest expense. Interest expense during fiscal 1997 represented the charges
related to the Company's direct loans and indebtedness incurred as a result of
the Acquisition, as previously discussed. Interest expense during fiscal 1996
was the result of the Company's guarantee of certain debt of C&A Products.
Interest expense was allocated based upon the ratio of the Company's net assets
to the consolidated invested capital of C&A Products. Accordingly, interest
expense of $15.1 million in fiscal 1997 increased from the fiscal 1996 level of
$2.9 million.

Net income. The Company's net income of $2.4 million in fiscal 1997 was
$8.4 million lower than the $10.8 million in fiscal 1996. The decrease was a
result of the factors described above, offset by $5.0 million in lower taxes
from the decrease in pretax earnings. The Company's effective tax rate was
41.5% in fiscal 1997 and 38.3% in fiscal 1996.

EBITDA. The Company's EBITDA of $35.1 million in fiscal 1997 was $8.0 million
or 29.4% higher than the $27.1 million in fiscal 1996. As a percentage of sales,
EBITDA increased to 21.9% in fiscal 1997 from 19.9% in fiscal 1996. The increase
in EBITDA and the increase in EBITDA margin were the combined result of the
factors described above.

FISCAL YEAR ENDED JANUARY 25, 1997 ("FISCAL 1996")
COMPARED WITH FISCAL YEAR ENDED JANUARY 27, 1996 ("FISCAL 1995")

Net sales. The Company's net sales increased to $136.1 million in fiscal
1996, an increase of $14.0 million or 11.4% over fiscal 1995. The increase in
net sales in fiscal 1996 was due to strength in most of the Company's end-
markets. The Company experienced strong volume increases in six-foot roll goods
and other product categories. The increase in six-foot roll sales was due to
continued strong volume growth in the education and health care markets, offset
by a minor decrease in average selling price per square yard. Tile sales in
fiscal 1996 were up slightly, a result of a slight increase in unit pricing
offset by a slight decrease in volume.

Gross profit. The Company's gross profit increased to $54.4 million in fiscal
1996, an increase of $5.9 million or 12.1% over fiscal 1995. Gross margin
increased to 40.0% in fiscal 1996 from 39.7% in fiscal 1995. The increase in
gross profit and gross margin were the result of increased sales and
manufacturing efficiencies associated with higher volumes, offset by a $0.5
million inventory write-off booked in January 1997 resulting from the year-end
physical inventory. Gross margin improved in fiscal 1996 in both the six-foot
roll and modular carpet tile categories.

Selling, general and administrative ("SG&A") expenses. The Company`s
SG&A expenses increased to $29.0 million in fiscal 1996, an increase of $1.6
million or 5.9% over fiscal 1995. As a percentage of sales, SG&A expenses
decreased to 21.3% during fiscal 1996 from 22.4% in fiscal 1995. Excluding
expenses related to certain matters retained by C&A Products of $1.0 million in
fiscal 1996 and $1.6 million in fiscal 1995, SG&A expenses would have been $28.0
million in fiscal 1996, an increase of $2.2 million or 8.6% over fiscal 1995.
See Note (b) to "Selected Financial Data." As a percentage of sales, SG&A
expenses (excluding expenses relating to the matters retained by C&A Products)
decreased to 20.5% during fiscal 1996 from 21.1% in fiscal 1995. SG&A expenses
(excluding expenses relating to the matters retained by C&A Products) increased
due to (i) personnel additions to handle growth under the Company's segmentation
marketing strategy and (ii) higher sales commissions due to the increase in
sales.

Corporate general and administrative allocated costs. Allocated costs in
fiscal 1996 were slightly lower than comparable charges in fiscal 1995. As a
percentage of sales, the allocated costs decreased to 1.1% during fiscal 1996
from 1.3% in fiscal 1995.

14
<PAGE>

Interest expense. Because of the Company's guarantee of certain debt of C&A
Products prior to the Acquisition, interest expense has been allocated based
upon the ratio of the Company's net assets to the consolidated invested capital
of C&A Products. Allocated interest expense of $2.9 million in fiscal 1996
decreased from the fiscal 1995 level of $3.1 million. This decrease resulted
primarily from C&A Products' 1996 offering of senior subordinated debentures
that had the effect of reducing the debt guaranteed by the Company. In
connection with the sale of the Company, the Company was subsequently released
from all guarantees.

Loss on sales of accounts receivable. Effective July 13, 1994, C&A Products
entered into a Receivables Sale Agreement with Carcorp, a wholly owned,
bankruptcy-remote subsidiary of C&A Products. Under the terms of the Receivables
Sale Agreement, Carcorp purchased on a revolving basis, without recourse,
virtually all trade accounts receivable generated by C&A Products and its
subsidiaries, including the Company. The accounts receivable were purchased by
Carcorp at the face amount of the accounts receivable less a defined discount.
Upon closing of the Acquisition, the Company was terminated as a seller under
the Receivables Sale Agreement and as a result will no longer incur a loss on
the sale of its accounts receivable related thereto. Loss on sales of accounts
receivable increased to $3.5 million in fiscal 1996, an increase of $0.2 million
or 6.7% over fiscal 1995. The increase in net sales resulted in a higher level
of accounts receivable which, in turn, led to greater sales of accounts
receivable to Carcorp.

Net income. The Company's net income of $10.8 million in fiscal 1996 was $2.7
million or 33.7% higher than the $8.1 million in fiscal 1995. The increase was a
result of the factors described above, offset by $1.6 million in higher taxes
from the increase in pretax earnings. The Company's effective tax rate was 38.3%
in fiscal 1996 and 38.7% in fiscal 1995.

EBITDA. The Company's EBITDA of $27.1 million in fiscal 1996 was $3.7 million
or 16.0% higher than the $23.4 million in fiscal 1995. As a percentage of sales,
EBITDA increased to 19.9% in fiscal 1996 from 19.1% in fiscal 1995. The increase
in EBITDA and the increase in EBITDA margin were the combined result of the
factors described above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary cash needs have historically been for operating
expenses, working capital and capital expenditures. The Company has financed its
cash requirements primarily through internally generated cash flow and, prior to
the Acquisition, inter-company advances from C&A Products.

Net cash provided by operating activities in fiscal 1997 was $24.2 million as
compared with $12.4 million in fiscal 1996. This increase is primarily
attributable to depreciation, amortization and $6.5 million increase in working
capital. Capital expenditures were $5.1 million and $7.9 million in fiscal 1997
and fiscal 1996, respectively.

Concurrent with the consummation of the Acquisition, the Company incurred
significant indebtedness, which consisted of $100.0 million of 10% Senior
Subordinated Notes due 2007, $55.0 million in term loan borrowings and $2.0
million in revolving credit borrowings under an $85.0 million Senior Secured
Credit Facility (the "Credit Facility"). During 1997, $2.0 million of the
revolving credit borrowings were repaid, $3.0 million of the term loan
borrowings was repaid and $10.0 million of the term loan borrowings was
voluntarily prepaid. The Company has approximately $28.5 million (net of $1.5
million in letters of credits outstanding) in availability under the revolving
credit portion of the Credit Facility. The term loan portion of the Credit
Facility will mature on June 30, 2002 and, as of January 31, 1998, will require
annual principal payments (payable in quarterly installments) totaling $4.0
million in the fourth quarter of 1999, $15.0 million in each of 2000 and 2001
and $8.0 million in 2002. The revolving credit portion of the Credit Facility
will mature on June 30, 2002 and may be repaid and reborrowed from time to time.

The Company's ability to make scheduled payments of principal, or to pay
interest on, or to refinance its indebtedness (including the Notes), depends on
its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors

15
<PAGE>

beyond its control. Based upon the current level of operations and anticipated
growth, management of the Company believes that cash flow from operations,
together with available borrowings under the Credit Agreement, will be adequate
to meet the Company's anticipated future requirements for capital expenditures
and debt service. 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 account sufficient to enable the Company to service its
indebtedness, including the Notes, or to make necessary capital expenditures.

EFFECTS OF INFLATION

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

SEASONALITY

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

YEAR 2000

As it is the case with other companies using computers in their operations,
the Company is faced with the task of addressing the Year 2000 issue. The Year
2000 issue arises from the widespread use of computer programs which rely on
two-digit codes to perform computations or decision-making functions. The
Company has performed a review of its computer programs and is in the process of
reviewing the Company's year 2000 exposure to third party customers, suppliers
and banking institutions. Due to conversions already in progress and previously
completed, in which Year 2000 compliance was ancillary, the Company estimates
Year 2000 exposure to be minimal.

There can be no guarantee that these estimates will be achieved and actual
results could differ from those anticipated. Specific factors that might cause
differences include, but are not limited to, the ability of other companies on
which the Company's systems rely to modify or convert their systems to be Year
2000 compliant and similar uncertainties.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The
statement addresses the reporting and display of changes in equity that result
from transactions and other economic events, excluding transactions with owners.
Management has not evaluated the impact of this statement on the financial
statements.

During 1998, the Company plans to adopt Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information". The statement addresses reporting of segment information.
Management has not evaluated the impact of this statement on the financial
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosures are not required at this time.

16
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

See the consolidated financial statements of Collins & Aikman Floorcoverings,
Inc. and subsidiary included herein beginning on page F-1 and listed on the
index to Financial Statements set forth in Item 14 (a) of this Form 10-K report.

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

None

17
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the name, age and position of each director or
executive officer of the Company. The directors of the Company are also the
directors of Holdings. Each director of the Company has been a director of the
Company since February 6, 1997 and will continue to hold office until the next
annual meeting of shareholder of the Company or until his successor has been
elected and qualified. The Shareholders Agreement governs the election of
directors of the Company. See "Item 12. Security Ownership Shareholders
Agreement". Officers of the Company are elected by the Board of Directors of the
Company and serve at the discretion of the Board of Directors. There are no
family relationships among any of the directors or executive officers.

NAME AGE POSITIONS
Edgar M. Bridger........ 46 President, Chief Executive Officer and Director
Lee H. Schilling........ 57 Senior Vice President of Marketing & Sales
Darrel V. McCay......... 37 Vice President and Chief Financial Officer
Jeffrey M. Raabe........ 36 Vice President of Sales
Wallace J. Hammel....... 52 Vice President of Manufacturing
Henry L. Millsaps, Jr... 42 Vice President of Human Resources
Terrence D. Daniels..... 55 Chairman of the Board
Gary A. Binning......... 37 Director
Stephen M. Burns........ 36 Director
Stephen Eisenstein...... 36 Director
J. Hunter Reichert...... 31 Director
R. Ted Weschler......... 36 Director

Edgar M. (Mac) Bridger, President, Chief Executive Officer and Director,
joined the Company in 1987 as the Midwest District Manager. Prior to being
appointed President and Chief Executive Officer in February 1997, he served as
the Company's President since December 1993. He previously served as Vice
President of Sales and as National Sales Manager.

Lee H. Schilling, Senior Vice President of Marketing & Sales, joined the
Company in 1985 as National Sales Manager. In 1987, he was promoted to Vice
President of Marketing & Sales, and in December 1993 he was promoted to his
present position.

Darrel V. McCay, Vice President and Chief Financial Officer, joined the
Company in March 1989 as Division Controller and became Vice President of
Administration & Control in August 1994. Mr. McCay was appointed Chief Financial
Officer, in February 1997.

Jeffrey M. Raabe, Vice President of Sales, joined the Company in 1990 as a
Contract Specialist in Atlanta, Georgia. Prior to being promoted to his present
position with the Company in February 1996, he served as the Southeast District
Sales Manager and Director of North American Sales.

Wallace J. Hammel, Vice President of Manufacturing, joined the Company in
March 1983 as Finishing Manager. Mr. Hammel served as Director of Customer
Service and Claims from July 1991 through April 1994 when he assumed his present
position.

Henry L. Millsaps, Jr., Vice President of Human Resources, joined the Company
in 1980. Mr. Millsaps was Human Resource Director from March 1988 until 1995,
when he was promoted to his present position.

18
<PAGE>

Terrence D. Daniels, Chairman of the Board, has served as a director and as
Chairman of the Board of Holdings since 1996 and became the Chairman of the
Board of Directors of the Company upon consummation of the Acquisition. Since
1990, Mr. Daniels has been President of Quad-C. During 1989 and prior thereto,
Mr. Daniels was a Vice Chairman and director of W. R. Grace & Co. with
responsibility for the Specialty Chemical, Health Care, Natural Resource,
Restaurant, Retail and Corporate Technical groups. Mr. Daniels is also a
director of IGI, Inc., Stimsonite Corporation and several privately-held
corporations.

Gary A. Binning, Director, has served as a director and as a Vice President of
Holdings since 1996 and became a director of the Company upon consummation of
the Acquisition. Since 1992, Mr. Binning has been employed by Paribas where he
is currently a Partner with Paribas Principal Partners and an officer and
director of Paribas Principal, Inc. Mr. Binning is also a director of several
privately-held corporations.

Stephen M. Burns, Director, has served as a director of Holdings since 1996
and became a director of the Company upon consummation of the Acquisition. Since
1994, Mr. Burns has been a Vice President of Quad-C. Prior to joining Quad-C,
Mr. Burns was a Vice President of Paribas North America and Paribas. Mr. Burns
is also a director of several privately-held corporations.

Stephen Eisenstein, Director, became a director of the Company following the
Acquisition. Since 1990, Mr. Eisenstein has been employed by Paribas where he is
currently a Partner with Paribas Principal Partners and an officer and director
of Paribas Principal, Inc. Mr. Eisenstein is also a director of several
privately-held corporations.

J. Hunter Reichert, Director, became a director of the Company following the
Acquisition. Since 1994, Mr. Reichert has been a Staff Vice President of Quad-C.
Prior to joining Quad-C, Mr. Reichert was an Associate with RFE Investment
Partners. Mr. Reichert is also a director of a privately-held corporation.

R. Ted Weschler, Director, became a director of the Company following the
Acquisition. Since 1990, Mr. Weschler has been Vice President, Secretary and
Treasurer of Quad-C. Mr. Weschler is also a director of WSFS Financial
Corporation and several private-held corporations.

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.

19
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning compensation of
the Company's Chief Executive Officer and each of the other four most highly
compensated executive officers during the fiscal years presented.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATIONS ($) (a) LONG-TERM COMPENSATION
---------------------------- -------------------------------
STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (b) OPTIONS (#) COMPENSATION ($)
- --------------------------- ---- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Edgar M. Bridger...................... 1997 $250,000 $250,000 205,020 (c) $6,918 (e)
President and Chief 1996 190,000 73,200 25,000 (d) 6,462
Executive Officer

Lee H. Schilling...................... 1997 $150,000 $120,000 97,920 (c) $7,420 (f)
Senior Vice President of 1996 137,084 27,160 -- 3,905
Marketing & Sales

Jeffrey M. Raabe...................... 1997 $125,000 $100,000 88,740 (c) $3,145 (g)
Vice President of 1996 108,000 20,952 -- 3,250
Sales

Wallace J. Hammel..................... 1997 $125,000 $100,000 88,740 (c) $1,548 (h)
Vice President of 1996 100,250 19,788 -- 3,385
Manufacturing

Darrel V. McCay....................... 1997 $115,000 $ 92,000 88,740 (c) $ 228 (i)
Vice President and 1996 85,000 16,490 -- 2,297
Chief Financial Officer
</TABLE>

(a) None of the named executive officers received perquisites or other personal
benefits in excess of the lesser of $50,000 or 10% of the total of their
salary and bonus.
(b) In connection with the Acquisition, C&A Products, the Company's parent
prior to the Acquisition, paid bonuses conditioned upon the sale of the
Company in the approximate amounts of $576,120, $295,352, $237,740,
$217,868 and $187,740 to Messrs. Bridger, Schilling, Raabe, Hammel and
McCay, respectively.
(c) Shares of CAF Holdings, the Company's parent subsequent to the Acquisition.
(d) Subsequent to the Acquisition, Messrs. Bridger, Schilling, Raabe, Hammel
and McCay held 127,149, 22,246, 10,000, 15,000 and 8,000, respectively,
options for shares of Collins & Aikman Corporation, C&A Products' parent.
All of these shares were exercised during fiscal 1997 which resulted in
compensation of $312,818, $80,864, $12,500, $19,500 and $9,750 for Messrs.
Bridger, Schilling, Raabe, Hammel and McCay, respectively.
(e) Reflects $4,750 401(k) plan employer matching contribution and $2,168
premiums for life insurance made on Mr. Bridger's behalf.
(f) Reflects $4,375 401(k) plan employer matching contribution and $3,045
premiums for life insurance made on Mr. Schilling's behalf.
(g) Reflects $2,812 401(k) plan employer matching contribution and $333
premiums for life insurance made on Mr. Raabe's behalf.
(h) Reflects $1,548 premiums for life insurance made on Mr. Hammel's behalf.
(i) Reflects $228 premiums for life insurance made on Mr. McCay's behalf.

20
<PAGE>

STOCK OPTION GRANTS IN LAST FISCAL YEAR

On February 24, 1997, following consummation of the Acquisition, Holdings
adopted a Management Stock Incentive Plan under which grants have been and will
be made to certain members of management and other employees of the Company of
options to purchase an aggregate of between 504,396 and 728,571 Common Shares of
Holdings, representing between 9.0% and 13.0% of the Common Shares which were
outstanding at the time of the Acquisition on a fully-diluted basis. The
exercise price will be $1.00 per share. Vesting of the options will be subject
(i) to the Company's achieving its five-year EBITDA target, (ii) to the
principal investors in Holdings achieving a specified internal rate of return
upon sale of the Company or a public offering of Common Shares, or (iii) in any
event, options for 504,396 Common Shares will vest on the ninth anniversary of
the grant. To date, no stock options have been exercised.

The following table sets forth certain information concerning share options
granted by Holdings to the officers named in the Summary Compensation Table
above:

<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Percent of Total Share Price Appreciation for
Number of Shares Options Granted Option Terms (a)
Underlying to Employees in -----------------------------
Name Options Granted Fiscal Year Exercise Price Expiration Date 5 Percent 10 Percent
---- ----------------- ------------------ -------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Edgar M. Bridger.... 205,020 (b) 29.1% $1.00 1/31/08 $145,634 $379,926
Lee H. Schilling.... 97,920 (b) 13.9% $1.00 1/31/08 $ 69,556 $181,457
Jeffrey M. Raabe.... 88,740 (b) 12.6% $1.00 1/31/08 $ 63,036 $164,446
Wallace J. Hammel... 88,740 (b) 12.6% $1.00 1/31/08 $ 63,036 $164,446
Darrel V. McCay..... 88,740 (b) 12.6% $1.00 1/31/08 $ 63,036 $164,446
</TABLE>
- ------------

(a) Amounts represent hypothetical gains that could be achieved if exercised at
end of option term. The dollar amounts under these columns assume 5% and
10% compounded annual appreciation in the Common Shares from the date the
respective options were granted. These calculations and assumed realizable
values are required to be disclosed under Securities and Exchange
Commission rules and, therefore, are not intended to forecast possible
future appreciation of Holdings' Common Shares or amounts that may be
ultimately realized upon exercise.

(b) Options with respect to 150,198 shares, 71,736 shares, 65,011 shares,
65,011 shares and 65,011 shares, respectively, vest January 31, 2006, or
earlier in the event certain EBITDA or internal rate of return targets are
achieved. The remaining options vest only if certain higher EBITDA or
internal rate of return targets is achieved.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

Table is not included as no options were exercised and there is no market for
Holdings' common stock.

RETIREMENT PLAN

Provided certain eligibility requirements were met, at the end of each
calendar month, pay credits are applied to a participant's account under the
Company's Employees' Pension Account Plan based on the participant's length of
credited service and compensation (as defined) during that month. For
participants aged 50 or older, the monthly pay credit was based on either
credited service compensation or age and compensation, whichever resulted in the
higher amount.

21
<PAGE>

The following chart sets forth how pay credits were determined under the
Company's plan:

PERCENTAGE OF COMPENSATION
ELIGIBILITY REQUIREMENTS USED TO DETERMINE PAY CREDITS
------------------------------ -----------------------------
YEARS OF UP TO 1/3 OVER 1/3
CREDITED OF THE S.S. OF THE S.S.
SERVICE OR AGE WAGE BASE 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%

The dollar amounts that resulted from these percentages were added together
and the total was the pay credit for the month.

In addition, interest credits are applied each month to the account balance.
Participants make no contributions to the plan. Employer contributions are 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 plan for Messrs. Bridger, Schilling, Raabe, Hammel and McCay are
$29,356, $10,483, $61,099, $20,554 and $56,836, respectively. Participants in
the plan have the option, however, of receiving the value of their vested
account in a lump sum following termination of employment.

DIRECTOR COMPENSATION

The Company pays no additional remuneration to its employees or to executives
of Quad-C or Paribas for serving as directors.

COMPENSATION COMMITTEE INTERLOCKS

The compensation committee consists of Terrence D. Daniels, R. Ted Weschler
and Gary A. Binning. No interlocking relationship exists between any member of
the Compensation Committee and any member of any other company's board of
directors or compensation committee, nor did any such interlocking relationship
exist during the fiscal year ended January 31, 1998.

ITEM 12. SECURITY OWNERSHIP

The authorized capital stock of the Company consists of 1,000 shares of common
stock, par value $.01 per share, all of which are issued and outstanding and are
presently held by Holdings.

22
<PAGE>

Holdings' authorized capital stock consists of 50 million common shares, no
par value (the "Common Shares"). Holdings has outstanding 5,157,600 Common
Shares. The table below sets forth certain information, as of April 30, 1998,
regarding equity ownership of Holdings by (i) each director or executive officer
of Holdings who owns Common Shares, (ii) all directors and executive officers of
Holdings as a group and (iii) each person or entity who beneficially owns 5% or
more of the Common Shares. There is no established public trading market for
the securities of Holdings.

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME COMMON SHARES COMMON SHARES
- ---------------------------------------------------- ---------------- --------------------
<S> <C> <C>
DIRECTORS:
Terrence D. Daniels (c)........................... 70,000 1.37%
Gary A. Binning (b) (d)........................... -- *
Stephen M. Burns.................................. 15,000 *
Stephen Eisenstein (b) (d)........................ -- *
J. Hunter Reichert................................ 4,000 *
R. Ted Weschler................................... 15,000 *
Edgar M. Bridger**................................ 30,000 *

NAMED EXECUTIVE OFFICERS:
Lee H. Schilling.................................. 17,500 *
Jeffrey M. Raabe.................................. 12,500 *
Wallace J. Hammel................................. 12,500 *
Darrel V. McCay................................... 10,000 *
Henry L. Millsaps, Jr............................. 8,000 *
All directors & executives officers as a group.... 194,500 3.77

BENEFICIAL OWNERS OF MORE THAN 5%:
Quad-C Partners II, L.P. (a)...................... 190,000 3.68
Quad-C Partners III, L.P. (a)..................... 360,000 6.98
Quad-C Partners IV, L.P. (a)...................... 2,295,000 44.50
Paribas Principal, Inc. (b)....................... 2,000,000 38.78
</TABLE>

* Less than 1%.
** Mr. Bridger is also a Named Executive Officer.

(a) The address of Quad-C Partners II, L.P., Quad-C Partners III, L.P., Quad-C
Partners IV, L.P is 230 East High Street, Charlottesville, Virginia 22902.
(b) The address of Paribas Principal Inc. is 787 Seventh Avenue, New York, New
York 10019.
(c) Excludes 2,845,000 Common Shares held by Quad-C Partners II, L.P., Quad-C
Partners III, L.P. and Quad-C Partners IV, L.P., as to which shares Mr.
Daniels disclaims beneficial ownership except to the extent of his
interests in such partnerships, and includes 20,000 Common Shares held by
children of Mr. Daniels, as to which shares Mr. Daniels disclaims
beneficial ownership.
(d) Excludes 2,000,000 Common Shares held by Paribas Principal Inc., as to
which shares Messrs. Binning and Eisenstein disclaim beneficial ownership.

Shareholders Agreement

Quad-C, Paribas and the other shareholders of Holdings entered into a
shareholder's agreement effective as of February 6, 1997 that provides for,
among other things, the matters described below. Subject to certain
requirements, each shareholder will vote the Common Shares held by it so as to
elect to the Board of Directors of Holdings four designees of Quad-C (the "Quad-
C Directors"), two designees of Paribas (the "Paribas Directors"), and the chief
executive officer of the Company. Although most action by the Board of
Directors requires only the vote of a majority of the directors, certain
significant corporate actions require the approval of a majority of the Quad-C
Directors and at least one Paribas Director.

23
<PAGE>

Under the shareholders agreement, subject to certain exceptions, transfers
of Holdings' Common Shares and Holdings' Preferred Shares are subject to rights
of first refusal in favor of the Company and the other shareholders. In
addition, the other shareholders are entitled to require the transferee of
shares from Quad-C or Paribas to purchase a certain percentage of the shares
held by such shareholder, and, subject to certain limitations, each shareholder
is obligated to transfer all of its shares to a third party to whom the holders
of a majority of the outstanding Common Shares wish to sell their shares.

The shareholders agreement will terminate, with certain limitations, upon
the earlier of a transfer of control of Holdings to a third party or a qualified
public offering (as defined therein) of Common Shares.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Quad-C and Paribas. In connection with the Acquisition, Holdings paid
Quad-C a fee of $1.5 million, plus out-of-pocket expenses, for, among other
things, its services in analyzing and negotiating the Acquisition and for
analyzing, arranging and negotiating the financing for the Acquisition. In
addition, Holdings entered into an agreement with Quad-C pursuant to which
Holdings retained Quad-C to render consulting services to it regarding the
Company, its financial and business affairs, its relationship with its lenders
and securityholders, and the operation and expansion of its business. The
agreement provides for payment to Quad-C of an annual fee of $350,000, payable
quarterly and reimbursement of out-of-pocket expenses. The agreement will
expire in 1999, but will be automatically renewed for successive one-year terms
unless either party provides written notice of termination 60 days prior to the
scheduled renewal date. Paribas was reimbursed for its out-of-pocket expenses
in connection with the Acquisition.

C&A Products. Prior to the Acquisition, the Company together with other
subsidiaries of C&A Products, was a guarantor of certain indebtedness of C&A
Products. C&A Products has pledged the stock of its significant subsidiaries,
which included the Company, as security for debt of C&A Products. Additionally,
the Company had pledged a portion of the stock and intercompany balances of its
foreign subsidiary as additional security for these borrowings. This guarantee
by the Company and such liens were released in connection with the closing of
the Acquisition.

The Company, together with C&A Products and its other subsidiaries,
participated in benefits, risk management and other corporate-wide programs.
The Company's allocated costs relating to such programs are reflected in the
financial statements. C&A Products performed certain services in connection
with these programs and other corporate administrative functions, including tax,
treasury, risk management, employee benefits administration, legal, data
processing, application of cash receipts and other general corporate services.
Costs allocated to the Company for these services totaled $1.6 million and $1.5
million for fiscal 1995 and fiscal 1996, respectively. C&A Products, during
1997, continued to provide certain of such services for up to one year after the
closing of the Acquisition for monthly payments, based upon the services
requested by the Company.

Policy. As required by Delaware law, the material facts as to the
relationship or interest of any person or entity that is affiliated with the
Company with respect to a proposed future transaction between the Company and
such person or entity will be disclosed to the Company's board of directors or
the transaction will be fair to the Company at the time of authorization by the
board of directors. Furthermore, under the Shareholders Agreement among the
Holdings and its shareholders, any transaction with an affiliate must be
approved by a majority of the Quad-C directors and at least one Paribas
director.

24
<PAGE>

PART IV

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

(a) (1) FINANCIAL STATEMENTS:
--------------------
PAGE
NUMBER
------

Report of Independent Public Accountants F-1

Consolidated Statements of Operations for the fiscal years ended
January 27, 1996, January 25, 1997 and January 31, 1998 F-2

Consolidated Balance Sheets at January 25, 1997 and January 31, 1998 F-3

Consolidated Statements of Cash Flows for the fiscal years ended
January 27, 1996, January 25, 1997, and January 31, 1998 F-4

Consolidated Statements of Common Stockholder's Equity (Deficit) for
the fiscal years ended January 27, 1996, January 25, 1997, and
January 31, 1998 F-5

Notes to Consolidated Financial Statements F-6

(2) FINANCIAL SCHEDULES:
-------------------

The following financial statement schedule of Collins & Aikman Floorcoverings,
Inc. and Subsidiary for the fiscal years ended January 27, 1996, January 25,
1997 and January 31, 1998 is filed as part of this Report and should be read in
conjunction with the Consolidated Financial Statements of Collins & Aikman
Floorcoverings, Inc. and Subsidiary.

PAGE
NUMBER
------
Report of Independent Public Accountants on Schedule.................... S-1
Schedule II- Valuation and Qualifying Accounts.......................... S-2

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.

(3) EXHIBITS:
--------

EXHIBIT
NUMBER DESCRIPTION
------ -----------

* 1.1 Purchase Agreement among CAF Holdings, Inc., CAF Acquisition
Corporation and BT Securities Corporation, dated as of January
29, 1997, incorporated by reference to Exhibit 1.1 of the
Registration Statement of Form S-4 filed with the Securities
and Exchange Commission on June 4, 1997 under the Securities
Act of 1933, as amended (SEC file number 333-24699) (the
"Registration Statement").

25
<PAGE>

* 2.1 Acquisition Agreement, by and among Collins & Aikman Products
Co., Collins & Aikman Floor Coverings Group, Inc., the
Registrant, CAF Holdings, Inc. and CAF Acquisition Corporation,
dated as of December 9, 1996, as amended, incorporated by
reference to Exhibit 2.1 of the Registration Statement.

* 3.1 Certificate of Incorporation of the Registrant, as amended to
date, incorporated by reference to Exhibit 3.1 of the
Registration Statement.

* 3.2 By-Laws of the Registrant, incorporated by reference to Exhibit
3.2 of the Registration Statement.

* 4.1 Indenture, dated as of February 6, 1997, by and among CAF
Acquisition Corporation and IBJ Schroder Bank & Trust Company,
incorporated by reference to Exhibit 4.1 of the Registration
Statement.

* 4.2 First Supplemental Indenture, dated as of February 6, 1997, by
and among the Registrant and IBJ Schroder Bank & Trust Company,
incorporated by reference to Exhibit 4.2 of the Registration
Statement.

* 4.3 Form of Series B 10% Senior Subordinated Note, incorporated by
reference to Exhibit 4.3 of the Registration Statement.

* 4.4 Registration Rights Agreement, dated as of February 6, 1997, by
and between CAF Acquisition Corporation and BT Securities
Corporation, incorporated by reference to Exhibit 4.4 of the
Registration Statement.

*10.1 Credit Agreement among CAF Holdings, Inc., CAF Acquisition
Corporation, various lending institutions and Bankers Trust
Company, as Agent dated as of February 6, 1997, incorporated by
reference to Exhibit 10.1 of the Registration Statement.

*10.2 Tradename License Agreement, dated as of February 6, 1997, by
and between Collins & Aikman Floor Coverings Group, Inc., CAF
Holdings, Inc. and the Registrant, incorporated by reference to
Exhibit 10.2 of the Registration Statement.

*10.3 Consulting Services Agreement dated as of February 6, 1997,
among CAF Holdings, Inc., the Registrant and Quad-C, Inc.,
incorporated by reference to Exhibit 10.3 of the Registration
Statement.

*10.4 1997 Stock Option Plan and Form of Grant Letter, incorporated
by reference to Exhibit 10.4 of the Registration Statement.

*10.5 Non-Competition Agreement among CAF Holdings, Inc., the
Registrant, Collins & Aikman Corporation and Collins & Aikman
Products Co., dated as of February 6, 1997, incorporated by
reference to Exhibit 10.5 of the Registration Statement.

*10.6 Tax Sharing Agreement, dated as of February 6, 1997, between
CAF Holdings, Inc. and the Registrant, incorporated by
reference to Exhibit 10.6 of the Registration Statement.

21.1 Subsidiaries of Registrant.

27.1 Financial Data Schedule.

*99.1 Form of Letter of Transmittal for the 10% Senior Subordinated
Notes due 2007, incorporated by reference to Exhibit 99.1 of
the Registration Statement.

*99.2 Notice of Guaranteed Delivery, incorporated by reference to
Exhibit 99.2 of the Registration Statement.

26
<PAGE>

- ------------
* Previously filed.

(B) REPORTS ON FORM 8-K
-------------------

None

27
<PAGE>

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, 1998.

COLLINS & AIKMAN FLOORCOVERINGS, INC.

By: /s/ Edgar M. Bridger
--------------------
Edgar M. Bridger
President and Chief
Executive Officer

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

NAME TITLE DATE
---- ----- ----

/s/ Edgar M. Bridger President, Chief Executive April 30, 1998
- --------------------------- Officer and Director
EDGAR M. BRIDGER

/s/ Darrel V. McCay Chief Financial Officer April 30, 1998
- --------------------------- (Principal Financial And
DARREL V. MCCAY Account Officer)

/s/ Terrence D. Daniels Director April 30, 1998
- ---------------------------
TERRENCE D. DANIELS

/s/ Stephen M. Burns Director April 30, 1998
- ---------------------------
STEPHEN M. BURNS

/s/ Gary A. Binning Director April 30, 1998
- ---------------------------
GARY A. BINNING

/s/ Stephen Eisenstein Director April 30, 1998
- ---------------------------
STEPHEN EISENSTEIN

/s/ R. Ted Weschler Director April 30, 1998
- ---------------------------
R. TED WESCHLER

/s/ J. Hunter Reichert Director April 30, 1998
- ---------------------------
J. HUNTER REICHERT

28
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------

To The Board of Directors and Stockholder
of Collins & Aikman Floorcoverings, Inc.:

We have audited the accompanying consolidated balance sheet of COLLINS & AIKMAN
FLOORCOVERINGS, INC. (a Delaware corporation) and Subsidiary ("Company") as of
January 31, 1998 and the related consolidated statements of operations,
stockholder's equity (deficit) and cash flows for the year then ended. We have
also audited the accompanying consolidated balance sheet of Collins & Aikman
Floor Coverings, Inc. (a Delaware Corporation) and Subsidiary ("Predecessor") as
of January 25, 1997, and the related consolidated statements of operations,
stockholder's equity, and cash flows for the years ended January 27, 1996 and
January 25, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of January 31,
1998 and the results of their operations and their cash flows for the year then
ended and the financial position of the Predecessor as of January 25, 1997 and
the results of their operations and their cash flows for the years ended January
27, 1996 and January 25, 1997 in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
April 3, 1998

F-1
<PAGE>

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARY (COMPANY)

COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY (PREDECESSOR)

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 27, 1996, JANUARY 25, 1997 AND JANUARY 31, 1998

(IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
(PREDECESSOR) (PREDECESSOR) | (COMPANY)
JANUARY 27, 1996 JANUARY 25, 1997 | JANUARY 31, 1998
(52 WEEKS) (52 WEEKS) | (53 WEEKS)
---------------- ---------------- | ----------------
<S> <C> <C> | <C>
NET SALES................................................. $122,169 $136,124 | $160,383
-------- -------- | --------
COST OF GOODS SOLD........................................ 73,615 81,715 | 97,263
SELLING, GENERAL & ADMIN. EXPENSES........................ 27,364 28,971 | 43,237
CORPORATE GENERAL AND |
ADMINISTRATIVE ALLOCATED COSTS........................ 1,591 1,531 | 649
-------- -------- | --------
102,570 112,217 | 141,149
-------- -------- | --------
OPERATING INCOME.......................................... 19,599 23,907 | 19,234
INTEREST EXPENSE.......................................... 3,098 2,854 | 15,122
LOSS ON SALES OF ACCOUNTS RECEIVABLE...................... 3,269 3,489 | --
-------- -------- | --------
INCOME BEFORE INCOME TAXES................................ 13,232 17,564 | 4,112
INCOME TAX EXPENSE........................................ 5,127 6,729 | 1,710
-------- -------- | --------
NET INCOME................................................ $ 8,105 $ 10,835 | $ 2,402
======== ======== | ========
</TABLE>

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

F-2
<PAGE>

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARY (COMPANY)

COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY (PREDECESSOR)

CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 25, 1997 AND JANUARY 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
(PREDECESSOR) | (COMPANY)
ASSETS JANUARY 25, 1997 | JANUARY 31, 1998
---------------- | ----------------
<S> <C> | <C>
CURRENT ASSETS: |
Cash and Cash Equivalents..................................................... $ 144 | $ 5,699
Accounts Receivable, Net of Allowances of $15 and $300 in Fiscal |
1996 and Fiscal 1997, Respectively.......................................... 1,577 | 20,578
Inventories................................................................... 16,172 | 15,849
Deferred Tax Assets........................................................... 1,433 | 1,533
Prepaid Expenses and Other.................................................... 488 | 222
-------- | --------
Total Current Assets................................................ 19,814 | 43,881
|
PROPERTY, PLANT AND EQUIPMENT, Net............................................... 19,521 | 34,320
DEFERRED TAX ASSETS.............................................................. 259 | 1,368
GOODWILL AND INTANGIBLES, Net.................................................... -- | 128,840
OTHER ASSETS..................................................................... 20 | 8,414
-------- | --------
$ 39,614 | $216,823
======== | ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) |
|
CURRENT LIABILITIES: |
Accounts Payable.............................................................. $ 8,659 | $ 7,150
Accrued Expenses.............................................................. 4,670 | 10,277
-------- | --------
Total Current Liabilities........................................... 13,329 | 17,427
OTHER LIABILITIES, INCLUDING POSTRETIREMENT BENEFIT |
OBLIGATION............................................................... 4,665 | 3,320
ALLOCATED DEBT OF C&A PRODUCTS................................................... 25,400 | --
LONG TERM DEBT................................................................... -- | 142,000
|
COMMITMENTS AND CONTINGENCIES (note 14).......................................... |
|
STOCKHOLDER'S EQUITY (DEFICIT): |
Common Stock ($.01 par Value per Share, 1,000 Shares |
Authorized, Issued and Outstanding Fiscal 1996 and Fiscal 1997)............ -- | --
Paid-in Capital............................................................... 7,821 | 51,576
Retained Earnings............................................................. 18,940 | 2,402
Investment and Advances to C&A Products....................................... (30,386) | --
Foreign Currency Translation Adjustment....................................... 222 | 98
Pension Equity Adjustment..................................................... (377) | --
-------- | --------
(3,780) | 54,076
-------- | --------
$ 39,614 | $216,823
======== | ========
</TABLE>

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

F-3
<PAGE>

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARY (COMPANY)

COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY (PREDECESSOR)

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 27, 1996, JANUARY 25, 1997 AND JANUARY 31, 1998

(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
(PREDECESSOR) (PREDECESSOR) | (COMPANY)
JANUARY 27, JANUARY 25, | JANUARY 31,
1996 1997 | 1998
------------ ------------ | -----------
<S> <C> <C> | <C>
OPERATING ACTIVITIES: |
Net Income................................... $ 8,105 $10,835 | $ 2,402
Adjustments to Reconcile Net Income |
to Net Cash Provided by Operating |
Activities: |
Depreciation and Leasehold |
Amortization............................ 2,154 2,201 | 4,795
Amortization of Goodwill & |
Intangible Assets....................... -- -- | 8,468
Amortization of Deferred |
Financing Fees.......................... -- -- | 1,314
Deferred Income Tax Expense.............. -- -- | 78
Changes in Operating Assets and |
Liabilities: |
Accounts Receivable...................... (414) 670 | (2,062)
Inventories.............................. (1,857) (3,907) | 2,519
Accounts Payable......................... 2,196 1,703 | 362
Accrued Liabilities...................... -- -- | 6,785
Other, net............................... 1,560 873 | (460)
------- ------- | --------
Total Adjustments..................... 3,639 1,540 | 21,799
------- ------- | --------
Net cash provided by |
operating activities................. 11,744 12,375 | 24,201
------- ------- | --------
INVESTING ACTIVITIES: |
Acquisition of C&A Floor Coverings, |
Inc....................................... -- -- | (197,737)
Additions to Property, Plant & |
Equipment................................. (4,290) (7,897) | (5,119)
Other, net................................... 20 41 | --
------- ------- | --------
Net cash used in |
investing activities................. (4,270) (7,856) | (202,856)
------- ------- | --------
FINANCING ACTIVITIES: |
Proceeds from Bank Financing................. -- -- | 57,000
Proceeds from Issuance of Senior Notes....... -- -- | 100,000
Repayments of Long Term Debt................. -- -- | (15,000)
Capital Contributions from CAF |
Holdings.................................... -- -- | 51,576
Financing Costs.............................. -- -- | (9,366)
Net Transactions with C&A Products .......... (7,347) (4,508) | --
------- ------- | --------
Net cash provided by |
(used in) financing activities....... (7,347) (4,508) | 184,210
NET CHANGE IN CASH............................ 127 11 | 5,555
|
CASH, BEGINNING OF YEAR....................... 6 133 | 144
------- ------- | --------
CASH, END OF YEAR............................. $ 133 $ 144 | $ 5,699
======= ======= | ========
</TABLE>

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

F-4
<PAGE>

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARY (COMPANY)

COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY (PREDECESSOR)

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the Years Ended January 25, 1996, January 25, 1997, and January 31, 1998

(In Thousands)

<TABLE>
<CAPTION>
INVESTMENTS
& ADVANCES
FROM (TO) FOREIGN
COLLINS & CURRENCY PENSION
COMMON PAID-IN RETAINED AIKMAN TRANSLATION EQUITY
STOCK CAPITAL EARNINGS PRODUCTS CO. ADJUSTMENTS ADJUSTMENT TOTAL
------ ------- -------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance, January 28, 1995................ $ -- $ -- $ -- $(32,698) $ 10 $(311) $(32,999)
Reclassification of Capital
Related to the Incorporation
of the Company....................... -- 7,821 -- (7,821) -- -- --
Net income............................. -- -- 8,105 -- -- -- 8,105
Foreign currency translation
adjustment........................... -- -- -- -- 172 -- 172
Pension Equity Adjustment.............. -- -- -- -- -- 14 14
Net transactions with
C&A Products......................... -- -- -- (4,937) -- -- (4,937)
----- ------- ------- -------- ----- ----- --------
BALANCE, January 27, 1996................ -- 7,821 8,105 (45,456) 182 (297) (29,645)

Net income............................. -- -- 10,835 -- -- -- 10,835
Foreign currency translation
adjustment........................... -- -- -- -- 40 -- 40
Pension Equity Adjustment.............. -- -- -- -- -- (80) (80)
Net transactions with
C&A Products......................... -- -- -- 15,070 -- -- 15,070
----- ------- ------- -------- ----- ----- --------
BALANCE, January 25, 1997................ -- 7,821 18,940 (30,386) 222 (377) (3,780)

=============================================================================================================================

COMPANY
Acquisition of C&A Floor
Coverings, Inc.:
Elimination of Predecessor
Accounts........................... -- (7,821) (18,940) 30,386 -- 377 4,002
Purchase of C&A Floor
Coverings, Inc..................... -- 51,000 -- -- -- -- 51,000
Capital Contribution by
CAF Holdings, Inc...................... -- 576 -- -- -- -- 576
Net income............................... -- -- 2,402 -- -- -- 2,402
Foreign currency translation
adjustment............................. -- -- -- -- (124) -- (124)
----- ------- ------- -------- ----- ----- --------
BALANCE, January 31,1998................. $ -- $51,576 $ 2,402 -- $ 98 -- $ 54,076
===== ======= ======= ======== ===== ===== ========
</TABLE>

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

F-5
<PAGE>

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Collins & Aikman Floorcoverings, Inc. (a Delaware Corporation incorporated
on January 29, 1995), together with its wholly owned subsidiary, Collins &
Aikman Floorcoverings UK Limited (collectively referred to as the "Company"), is
a leading manufacturer of floorcoverings for the specified commercial sector of
the floorcoverings market.

Prior to February 6, 1997, the Company was a wholly owned subsidiary of
Collins & Aikman Floor Coverings Group, Inc. ("C&A Group"). C&A Group is a
wholly owned subsidiary of Collins & Aikman Products Co. ("C&A Products"), which
is a wholly owned subsidiary of Collins & Aikman Corporation ("C&A
Corporation"). On February 6, 1997 (January 26, 1997 for accounting purposes),
pursuant to an agreement dated December 9, 1996 entered into by C&A Products,
C&A Group, the Company, CAF Holdings, Inc. ("Holdings"), and CAF Acquisition
Corporation ("CAF"), a wholly owned subsidiary of Holdings, CAF acquired from
C&A Group all the outstanding capital stock of the Company (the "Acquisition")
for $197.0 million which was reduced to $195.6 million after a $1.4 million
working capital adjustment, plus transaction costs. Simultaneous with the
consummation of the Acquisition, CAF was merged with and into the Company (see
Note 3) and the Company changed its name from Collins & Aikman Floor Coverings,
Inc. to Collins & Aikman Floorcoverings, Inc.

Financing for the Acquisition was provided by (i) borrowings of $57.0
million under an $85.0 million senior secured credit facility among the Company,
Holdings, certain lenders, and Bankers Trust Company, as agent, (ii) proceeds
from an offering by CAF of $100.0 million aggregate principal amount of 10%
Senior Subordinated Notes due in 2007, and (iii) capital investments of $51.0
million by affiliates of Quad-C, Inc., Paribas Principal Partners, management of
the Company and certain other investors in Holdings.

The purchase method of accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting generally results in
increased amortization and depreciation reported in future periods. In
addition, the 1996 results include accruals and costs allocated by C&A Products.
Accordingly, the accompanying consolidated financial statements of the Company
and of Collins & Aikman Floor Coverings, Inc. and subsidiary (collectively
referred to as the "Predecessor") are not comparable in all material respects.
A vertical black line on the accompanying consolidated financial statements
distinguishes between the Predecessor and the Company.

As the Acquisition was accounted for by the purchase method of accounting,
to which the purchase price, which includes $27.0 million in consideration for a
trade name license agreement, was allocated among the acquired assets and
liabilities in accordance with estimates of fair market value on the date of
Acquisition. The excess of the purchase price over the estimated fair value of
net assets, acquired amounted to approximately $71.3 million, which is being
accounted for as goodwill and is being amortized over 40 years using the
straight line method (See Note 8).

The following summary presents unaudited pro forma results of operations as
if the Acquisition occurred as of January 28, 1996 (in thousands):

<TABLE>
<S> <C>
Net Sales.................................................. $136,124
Operating Income........................................... 16,674
Net Income................................................. 413
</TABLE>

These pro forma results do not purport to represent what the Company's results
of operations would have been if the Acquisition had occurred as of such date
nor what results will be for any future period.

F-6
<PAGE>

2. BASIS OF PRESENTATION

At January 27, 1996, Collins & Aikman Floor Coverings, Inc. and Collins &
Aikman UK Limited were separate indirect subsidiaries of C&A Products. In
preparation for the sale of the Company, on August 3, 1996, C&A Products
contributed its ownership in Collins & Aikman UK Limited to Collins & Aikman
Floor Coverings, Inc., making Collins & Aikman UK Limited a wholly owned
subsidiary. For financial reporting purposes, these transfers between related
entities have been treated in a manner similar to a pooling of interests.
Accordingly, the results of Collins & Aikman Floor Coverings, Inc. and its
subsidiary have been consolidated and treated as a single reporting entity for
all periods presented.

Prior to January 29, 1995, the business of the Predecessor was conducted
principally as a division of C&A Products. At the date of incorporation, $10 of
the $32.7 million in investments and advances to C&A Products was allocated to
common stock and $7.8 million was allocated to other paid-in capital.
Subsequent to the incorporation of the Predecessor and prior to the Acquisition,
transfers of operating funds between C&A Products and the Predecessor continued
on a noninterest-bearing basis, with the net amounts of these transfers
reflected in investments and advances from (to) C&A Products in the accompanying
consolidated financial statements. The net balance in investments and advances
to C&A Products at January 25, 1997 of $30.4 million is classified as a
component of stockholder's deficit in the accompanying consolidated balance
sheet as the amount was forgiven at the time of the Acquisition.

As indicated above, the accompanying consolidated financial statements
present the financial position, results of operations, and cash flows of the
Company as if it were a separate entity for all periods presented. In
accordance with Staff Accounting Bulletin No. 54 of the Securities and Exchange
Commission, C&A Product's investment in the Company is reflected in the
consolidated financial statements of the Company. The accompanying consolidated
financial statements reflect the allocation of the purchase price in excess of
the net assets acquired on the same basis as in consolidation with C&A
Corporation. In accordance with the provisions of Staff Accounting Bulletin 73,
a portion of the debt and the related interest expense of C&A Products has been
allocated to the Company in 1995 and 1996 as a result of its guarantee of
certain C&A Products debt. The allocations have been made based upon the ratio
of the Predecessor's net assets to the consolidated invested capital of C&A
Products, which approximates the Predecessor's guaranteed share of the related
C&A Products debt. These allocations, which have been made to conform to the
presentation requirements of the Securities and Exchange Commission, result in a
financial statement presentation that differs from the Predecessor's previous
financial statements that excluded these allocated amounts. The average
interest rates in effect for fiscal 1995 and fiscal 1996 were 8.1%, and 7.9%,
respectively. In connection with the Acquisition, the Company was released from
its guarantee of all C&A Products debt and, accordingly, the Company was not
required to repay any of the allocated debt reflected in the accompanying
consolidated balance sheets.

Prior to the Acquisition, C&A Products performed certain services and
incurred certain costs for the Predecessor. Services provided include tax,
treasury, risk management, employee benefits, legal, data processing,
application of cash receipts, and other general corporate services. The costs
of these services provided by C&A Products were allocated to the Predecessor
based on a combination of estimated use and the relative sales of the
Predecessor's business to the total consolidated operations of C&A Products.

Corporate costs of C&A Products totaling $1.6 million and $1.5 million have
been allocated to the Predecessor for fiscal 1995 and fiscal 1996, respectively.
In the opinion of management, the method of allocating these costs was
reasonable. However, the costs of services charged to the Predecessor are not
necessarily indicative of the costs that would have been incurred if the
Predecessor had performed these functions prior to the Acquisition. Subsequent
to the Acquisition, the Company performed these functions using its own
resources and purchased services, including services purchased from C&A Products
during a transition period ended January 31, 1998.

F-7
<PAGE>

C&A Products administers its self-insurance programs on a corporate wide
basis and charges its individual participating subsidiaries and divisions based
on estimated claims and loss experience. Costs charged by C&A Products to the
Predecessor for product, automotive and general liability, worker's
compensation, employee group health claims, and insurance amounted to
approximately $1.7 million and $1.7 million in fiscal 1995 and fiscal 1996,
respectively. The accompanying consolidated balance sheet as of January 25, 1997
includes accruals for product, automotive, general liability, worker's
compensation, and employee group health claims.

Subsequent to the Acquisition, the Company is insured for product,
automotive, general liability and worker's compensation. The Company
administers its self-insurance program for employee group health claims.
Accordingly, the accompanying consolidated balance sheet as of January 31, 1998
includes an accrual for employee group health claims.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Collins & Aikman
Floorcoverings, Inc. and Collins & Aikman UK Limited. All significant
intercompany items have been eliminated in consolidation.

Reclassifications

Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.

USE OF ESTIMATES

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

FISCAL YEAR

The fiscal year of the Company ends on the last Saturday of January.
Fiscal 1995 and fiscal 1996 were 52-week years which ended on January 27, 1996
and January 25, 1997, respectively. Fiscal 1997 was a 53-week year, which ended
on January 31, 1998.

FOREIGN CURRENCY

Foreign currency activity is reported in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation."
SFAS No. 52 generally provides that the assets and liabilities of foreign
operations be translated at the current exchange rates as of the end of the
accounting period and that revenues and expenses be translated using average
exchange rates. The resulting translation adjustments arising from foreign
currency translations are accumulated as a separate component of stockholder's
equity. Translation adjustments resulted in changes in equity of approximately
$172,000 in fiscal 1995, $40,000 in fiscal year 1996, and $(124,000) in fiscal
1997.

Gains and losses resulting from foreign currency transactions are
recognized in income.

F-8
<PAGE>

REVENUE RECOGNITION

Revenue is recognized when goods are shipped.

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 maturity of cash and cash
equivalents and trade accounts receivables, carrying value approximates fair
value.

The carrying value of the senior credit facility portion of the Company's long
term debt approximates the fair value as the Credit Facility (see Note 10) is
subject to variable interest rates. The fair value of the Senior Subordinated
Notes (see Note 10), representing the amount at which the debt could be
exchanged on the open market, is $104.0 million.

RELIANCE ON PRINCIPAL SUPPLIER

One supplier currently supplies all of the Company's requirements for nylon
yarn, the principal raw material used in the Company's floorcovering products.
While the Company believes that there are adequate alternative sources of supply
from which it could fulfill its nylon yarn requirements, the unanticipated
termination of the current supply arrangement or a prolonged interruption in
shipments could have a material adverse effect on the Company.

CASH AND CASH EQUIVALENTS

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

INVENTORIES

Inventories are valued at the lower of cost or market, but not in excess of
net realizable value. Cost is determined on the first-in, first-out basis.

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 3 to 40 years. Leasehold improvements are
amortized over the lesser of the lease term or the estimated useful lives of the
improvements.

LONG-LIVED ASSETS

Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. 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.

ADVERTISING COSTS

The Company expenses all advertising costs as they are incurred.

F-9
<PAGE>

INCOME TAXES

The Company accounts for income taxes under an asset and liability approach
that 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 charges in tax laws or rates. The effect on deferred tax
asset and liabilities of a charge in tax rates will be recognized or incur an
expense in the period that includes the enactment date.

Prior to the Acquisition, the Predecessor was included in the consolidated
federal income tax return of C&A Corporation, while state and foreign income
taxes were provided on a separate return basis.

RECENT ACCOUNTING PRONOUNCEMENTS

4. INVENTORIES

Net inventory balances are summarized below (in thousands):

<TABLE>
<CAPTION>
(PREDECESSOR) (Company)
JANUARY 25, 1997 January 31, 1998
---------------------------- ---------------------------
<S> <C> <C>
Raw materials........................................... $ 7,376 $ 7,596
Work in process......................................... 2,843 2,986
Finished goods.......................................... 5,953 5,267
---------------------------- ---------------------------
$ 16,172 $ 15,849
============================ ===========================
</TABLE>

5. PROPERTY, PLANT, AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
(PREDECESSOR) (Company)
JANUARY 25, 1997 January 31, 1998
---------------------------- ---------------------------
<S> <C> <C>
Land and improvements................................... $ 902 $ 1,528
Buildings............................................... 7,672 8,739
Machinery and equipment................................. 32,606 24,696
Leasehold improvements.................................. 853 21
Construction in progress................................ 5,710 4,131
---------------------------- ---------------------------
47,743 39,115
Less accumulated depreciation and
amortization.......................................... (28,222) (4,795)
---------------------------- ---------------------------
$ 19,521 $ 34,320
============================ ==========================
</TABLE>

Depreciation and leasehold amortization of property, plant and equipment
were $2.2 million for fiscal 1995 and fiscal 1996 and $4.8 million for fiscal
1997.

F-10
<PAGE>

6. ACCRUED EXPENSES

Accrued expenses are summarized below (in thousands):

<TABLE>
<CAPTION>
(PREDECESSOR) (Company)
JANUARY 25, 1997 January 31, 1998
---------------------------- ---------------------------
<S> <C> <C>
Payroll and employee benefits............................. $ 3,648 $ 4,354
Accrued taxes............................................. 237 1,153
Customer claims and repairs............................... 550 2,502
Accrued interest.......................................... -- 1,134
Other..................................................... 235 1,134
$ 4,670 $ 10,277
============================ ========================
</TABLE>

7. RECEIVABLES FACILITY

Effective July 13, 1994, C&A Products and certain other subsidiaries,
including the Predecessor, (each of the foregoing, a "Seller") entered into a
Receivables Sale Agreement with Carcorp, Inc. ("Carcorp"), a wholly owned,
bankruptcy remote subsidiary of C&A Products (as amended and restated as of
March 30, 1995, the "Receivables Sale Agreement"). Under the terms of the
Receivables Sale Agreement, Carcorp purchased on a revolving basis, without
recourse, virtually all trade receivables generated by the Sellers. Carcorp
sold certain interests in the purchased receivables to outside parties. C&A
Products retained the responsibility of servicing the trade receivables sold to
Carcorp, and it was compensated by Carcorp for its servicing activities.

As of January 25, 1997, the face value of the open accounts receivable of
the Predecessor that had been purchased by Carcorp aggregated to $17.8 million.

The receivables were purchased by Carcorp at the face amount of the
receivables, less a defined discount. The discount percentage included a yield
factor, factors for Carcorp's servicing and processing expenses, as well as
other factors, which were subject to variation, based upon the collectibility
and aging of the receivables purchased. In connection with the sale of the
receivables to Carcorp, the Predecessor recorded losses of $3.3 million and $3.5
million for fiscal 1995 and fiscal 1996, respectively.

In connection with the Acquisition, the Predecessor was terminated as a
Seller under the Receivables Sale Agreement. Receivables sold by the
Predecessor to Carcorp prior to the termination of the Predecessor as a Seller
remained with Carcorp. Under the terms of the Acquisition, C&A Products
remitted, as collected, the accounts receivable receipts relating to the
Predecessor's open accounts held by Carcorp at the date of closing. As of
January 31, 1998, all accounts receivable held by Carcorp at the date of closing
have been collected.

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of the cost of the net assets of the
Predecessor over the fair market value of net tangible and identified intangible
assets in connection with the Acquisition. The Company reviews the carrying
value of goodwill for impairment using undiscounted cash flows whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable.

F-11

<PAGE>

At January 31, 1998, Goodwill and Intangible Assets consisted of the
following:

<TABLE>
<S> <C>
Goodwill................................................. $ 71,307
Patent................................................... 27,000
Tradename Use Agreement.................................. 27,000
Non-Compete Agreement.................................... 12,000
Accumulated Amortization................................. (8,467)
------------
$ 128,840
============
</TABLE>

Amortization is calculated on the straight-line basis over the following
lives:

Goodwill...................................... 40 Years
Patent........................................ 11 Years
Tradename Use Agreement....................... 40 Years

Amortization for the Non-Compete Agreement is calculated using the double-
declining balance method over seven years.

9. EMPLOYEE BENEFIT PLANS

PREDECESSOR SPONSORED EMPLOYEE BENEFIT PLANS

DEFINED BENEFIT PLAN

Prior to the Acquisition, substantially all domestic employees of the
Predecessor who met eligibility requirements, along with eligible employees from
certain other affiliated companies, participated in a defined benefit plan
administered by C&A Products. Plan benefits were generally based on years of
service and employees' compensation during their years of employment. Funding
of retirement costs for this plan complied with the minimum funding requirements
specified by the Employee Retirement Income Security Act of 1974. Assets of the
pension plan were held in a C&A Products master trust that invests primarily in
equity and fixed income securities. Actuarially determined calculations of plan
benefits for the Company as a stand-alone entity are included in the
accompanying consolidated financial statements.

The net periodic cost of the Predecessor for fiscal 1995 and fiscal 1996
includes the following components (in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 27, 1996 JANUARY 25, 1997
------------------- -------------------
<S> <C> <C>
Service cost.................................................... $ 407 $ 442
Interest cost on projected benefit obligation and
service cost.................................................. 374 343
Actual gain on assets........................................... (303) (344)
Net amortization and deferral................................... 1 (1)
Net periodic pension cost....................................... $ 479 $ 440
=================== ===================
</TABLE>

F-12
<PAGE>

The following table sets forth the Predecessor's actuarially determined
portion of the plan's funded status and amounts recognized in the Predecessor's
consolidated balance sheets at January 25, 1997 (in thousands):

<TABLE>
<CAPTION>
Actuarial present value of benefit obligations:
<S> <C>
Vested benefit obligation....................................................... $ (4,316)
====================
Accumulated benefit obligation.................................................. $ (4,783)
====================
Projected benefit obligation.................................................... (4,985)
Plan assets at fair value....................................................... 4,149
--------------------
Projected benefit obligation in excess of plan assets........................... (836)
Unrecognized net loss........................................................... 1,108
Prior service not yet recognized in net periodic pension cost................... (294)
Adjustment required to recognize minimum liability.............................. (611)
--------------------
Pension liability recognized in the consolidated balance sheet............... $ (633)
====================
</TABLE>

The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% at January 27, 1996 and January 25, 1997.
SFAS No. 87, "Employers' Accounting for Pensions," requires companies with any
plans that have an unfunded accumulated benefit obligation to recognize an
additional minimum pension liability, an offsetting intangible pension asset,
and, in certain situations, a contra-equity balance. In accordance with the
provisions of SFAS No. 87, the consolidated balance sheet at January 25, 1997
includes an additional minimum pension liability of $611,000 and a contra-equity
balance, net of the related tax effect, of $377,000.

As of February 6, 1997, all participant balances became fully vested and
participants could elect to maintain balances in the current plan, receive a
lump-sum distribution, or roll over balances into a new defined contribution
plan.

DEFINED CONTRIBUTION PLAN

Prior to the Acquisition, certain of the Predecessor's employees who met
eligibility requirements were included in C&A Products sponsored defined
contribution plans. C&A Products contributions were based on specified formulas
and, for one contribution plan, were at the discretion of C&A Products, as
specified in the plan documents. The accompanying statements of operations
include expenses of approximately $465,000 and $376,000 in fiscal 1995 and
fiscal 1996, respectively, for the Predecessor's participation in the plans.

As of February 6, 1997, all participant balances became fully vested and
were rolled over into a new defined contribution plan sponsored by the Company.

POSTRETIREMENT BENEFIT PLAN

C&A Products provided life and health coverage for certain of the
Predecessor's retirees under plans sponsored by C&A Products. Actuarially
determined calculations of plan benefits for the Predecessor as a stand-alone
entity are included in the accompanying consolidated financial statements.

F-13
<PAGE>

The net periodic postretirement benefit cost for the Predecessor's
participation in these plans includes the following components (in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
JANUARY 27, 1996 JANUARY 25, 1997
------------------ ------------------
<S> <C> <C>
Service cost......................................................... $ 69 $ 86
Interest cost on accumulated postretirement benefit obligation....... 148 153
Net amortization..................................................... (111) (97)
Net periodic postretirement benefit cost............................. $ 106 $ 142
================== ==================
</TABLE>

The following table sets forth the amount of accumulated postretirement
benefit obligation for the Predecessor's participation in these plans as of
January 25, 1997 (in thousands):

<TABLE>
<S> <C>
Retirees and beneficiaries......................................... $ 621
Fully eligible active plan participants............................ 915
Other active plan participants..................................... 803
------------------
Accumulated postretirement benefit obligation...................... 2,339
Unrecognized prior service gain from plan amendments............... 931
Unrecognized net loss.............................................. (104)
------------------
Net postretirement benefit obligations............................. $ 3,166
==================
</TABLE>

The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at January 27, 1996. These plans
were unfunded. For measurement purposes, an 11% annual rate of increase in the
per capita cost of covered health care benefits was assumed for fiscal 1996; the
rate was assumed to decrease one percentage point per year to 6% and remain at
that level thereafter.

COMPANY SPONSORED EMPLOYEE BENEFIT PLANS

DEFINED BENEFIT PLAN

Subsequent to the Acquisition, substantially all domestic employees of the
Company who met eligibility requirements participate in a defined benefit plan,
which is administered by the Company. Plan benefits are generally based on years
of service and employees' compensation during their years of employment. Funding
of retirement costs for this plan complied with the minimum funding requirements
specified by the Employee Retirement Income Security Act of 1974. Assets of the
pension plan will be held in a trust that will invest primarily in equity and
fixed income securities. Actuarially determined calculations of plan benefits
for the Company are included in the accompanying consolidated financial
statements.

The net periodic cost of the Company for fiscal 1997 includes the following
components (in thousands):

<TABLE>
<S> <C>
Service cost......................................................... $ 422
Interest cost on projected benefit obligation and service cost....... 30
Net periodic pension cost............................................ $ 452
========
</TABLE>

F-14
<PAGE>

The following table sets forth the Company's actuarially determined funded
status and amounts recognized in the Company's consolidated balance sheets at
January 31, 1998 (in thousands):

<TABLE>
<CAPTION>
<S> <C>
Vested benefit obligation $ (97)
=======================
Accumulated benefit obligation $ (225)
=======================
Projected benefit obligation.......................................................... (452)
Plan assets at fair value............................................................. --
-----------------------
Projected benefit obligation in excess of plan assets and pension liability
recognized in the consolidated balance sheet..................................... $ (452)
=======================
</TABLE>

The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7% at January 31, 1998. The expected rate of
increase in future compensation levels is 5% in fiscal 1997 and the expected
long-term rate of return on plan assets was 9% in fiscal 1997.

DEFINED CONTRIBUTION PLAN

Subsequent to the Acquisition, the Company began a defined contribution
plan in which certain of the Company's employees who met eligibility
requirements were included. The Company's contributions are based on specified
formulas as specified in the plan document. The accompanying statement of
operations includes expenses of approximately $514,000 for fiscal 1997 for the
Company's contribution to the plan.

POSTRETIREMENT BENEFIT PLAN

The Company provides life and health coverage for certain of the Company's
retirees under plan currently in effect. The plan is closed to new enrollment,
as a result, the Company's current employees will not be eligible for coverage
when they reach retirement age. Participation in the plan is limited to those
employees retired as of February 6, 1997. Actuarially determined calculations
of plan benefits for the Company are included in the accompanying consolidated
financial statements.

The net periodic postretirement benefit cost for this plan for fiscal 1997
includes the following components (in thousands):

<TABLE>
<S> <C>
Service cost.................................................................... $ 43
Interest cost on accumulated postretirement benefit obligations................. 88
---------------------------
Net periodic postretirement benefit cost........................................ $ 131
===========================
</TABLE>

The following table sets forth the amount of the accumulated postretirement
benefit obligation for this plan at January 31, 1998 (in thousands):

<TABLE>
<CAPTION>
<S> <C>
Retirees and beneficiaries...................................................... $ 498
Fully eligible active plan participants......................................... 216
Other active plan participants.................................................. 563
---------------------------
Accumulated postretirement benefit obligation................................... $ 1,277
---------------------------
Net postretirement benefit obligation........................................... $ 1,277
===========================
</TABLE>

F-15
<PAGE>

The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7% at January 31, 1998. This plan is
unfunded. For measurement purposes, 6% increase in the per capita cost of
covered health care benefits was assumed for 1997. The Plan allows for an
increase in employer-paid cost for 1998 of 6% over 1997 costs with no additional
increases after 1998, therefore, the health care cost trend rate assumption has
no impact on the obligation of the Company.

10. LONG-TERM DEBT

Long-term debt consists of the following at January 31, 1998 (in
thousands):

<TABLE>
<S> <C>
10% Senior Subordinated Notes, due 2007........ $ 100,000
Senior Secured Credit Facility................. 42,000
------------
Total Debt................................ $ 142,000
============
</TABLE>

Concurrent with the consummation of the Acquisition, the Company issued
$100.0 million of 10% Senior Subordinated Notes ("the Senior Notes") due January
15, 2007. Interest is payable semi-annually commencing July 15, 1997. The 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 Senior Notes contains certain restrictive covenants that limit the
ability of the company, among other things, to incur additional indebtedness,
pay dividends or make certain other restricted payments, limitations on the
incurrence of indebtedness, asset dispositions and transactions with affiliates.

Also concurrent with the consummation of the Acquisition, the Company
entered into the Senior Secured Credit Facility (the "Credit Facility"). The
Credit Facility consists of a term loan facility in the amount of $55.0 million
due in quarterly installments through June 30, 2002 and a revolving credit
facility in the amount of $30.0 million due June 30, 2002, which includes a
letter of credit sublimit of $8.0 million. Loans under the term loan facility
and $2.0 million under the revolving credit facility were borrowed to finance
the Acquisition. During 1997, $2.0 million of the revolving credit facility was
repaid, $3.0 million of the term loan facility was repaid and $10.0 million of
the term loan facility was voluntarily prepaid.

The Company's obligations under the Credit Facility are secured by a pledge
of all the capital stock and the tangible and intangible assets of the Company
and 65% of the capital stock of, or equity interests in, each foreign subsidiary
of the Company.

The Credit Facility contains restrictive covenants including minimum levels
of consolidated EBITDA (earnings before interest, taxes, depreciation,
amortization and other non-cash charges), interest coverage and leverage ratios.
In addition, the Credit Facility also contains covenants which, among other
things, limit the incurrence of additional indebtedness, dividends, transactions
with affiliates, asset sales, Acquisitions, mergers, prepayments of other
indebtedness, liens and encumbrances, and other matters customarily restricted
in loan agreements.

The Credit Facility bears interest at a per annum rate equal to the
Company's choice of (a) an adjusted rate based on the Eurodollar Rate plus
2.50%, or (b) Base Rate, as defined by the Credit Facility, plus 1.50%. The
weighted average rate of interest on the balances outstanding under the Credit
Facility at January 31, 1998 was 8.31%.

Expenses of $8.3 million associated with the issuance of the Credit
Facility and Senior Notes are included in other assets on the accompanying
Balance Sheet as of January 31, 1998. These costs are being amortized on the
straight-line method over the term of the respective debt agreements.
Amortization expense charged to interest expense in fiscal 1997 was $1.3
million.

F-16
<PAGE>

At January 31, 1998, the scheduled annual maturities of long-term debt are
as follows (in thousands):

<TABLE>
<CAPTION>
<S> <C>
Fiscal Year:
1998............................................................ $ --
1999............................................................ 4,000
2000............................................................ 15,000
2001............................................................ 15,000
2002............................................................ 8,000
Thereafter...................................................... 100,000
----------
$ 142,000
==========
</TABLE>

Total interest paid by the Company on all indebtedness was $12.8 million
for fiscal 1997.

11. INCOME TAXES

Prior to the Acquisition, the Predecessor was included in the consolidated
federal income tax return of C&A Corporation and state and foreign income taxes
were provided on a separate return basis. C&A Products and its subsidiaries,
including the Predecessor, were parties to a tax-sharing agreement with C&A
Corporation which provided for tax-sharing payments to or from C&A Corporation,
calculated in accordance with federal tax regulations, based on taxable income.
C&A Corporation, as appropriate, paid such amounts to the Internal Revenue
Service ("IRS") and/or distributes the amounts to the companies included in its
consolidated income tax return that generated losses which resulted in reduced
payments to the IRS. In fiscal 1995 and fiscal 1996, the Predecessor received,
under the tax-sharing agreement, an additional benefit of $1.3 million and $5
million, respectively, that has been reported as a component of net transactions
with C&A Products.

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
(PREDECESSOR) (PREDECESSOR) (COMPANY)
JANUARY 27, 1996 JANUARY 25, 1997 JANUARY 31, 1998
-------------------- ------------------- -----------------
<S> <C> <C> <C>
Domestic....................................... $ 13,187 $ 17,430 $ 4,112
Foreign........................................ 45 134 --
-------------------- ------------------- -----------------
$ 13,232 $ 17,564 $ 4,112
==================== =================== =================
</TABLE>

Components of the income tax provision for fiscal 1995, fiscal 1996, and
fiscal 1997 are summarized as follows (in thousands):

<TABLE>
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
(PREDECESSOR) (PREDECESSOR) (COMPANY)
JANUARY 27, 1996 JANUARY 25, 1997 JANUARY 31, 1998
-------------------- ------------------- -----------------
<S> <C> <C> <C>
Current:
Federal................................... $ 3,866 $ 5,289 $ 1,485
State..................................... 618 838 147
-------------------- ------------------- -----------------
4,484 6,127 1,632
-------------------- ------------------- -----------------
Deferred:
Federal................................... 556 521 71
State..................................... 87 81 7
-------------------- ------------------- -----------------
643 602 78
-------------------- ------------------- -----------------
Income tax expense............................. $ 5,127 $ 6,729 $ 1,710
==================== =================== =================
</TABLE>

F-17
<PAGE>

Collins & Aikman UK Limited had sufficient loss carryforwards to offset
taxable income in fiscal 1995 and fiscal 1996. No benefit was recorded for the
operating loss in fiscal 1997. Therefore, no foreign income tax expense is
reflected in the statements of operations.

Reconciliation between income taxes computed at the federal rate and the
provision for income taxes is as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
(PREDECESSOR) (PREDECESSOR) (COMPANY)
JANUARY 27, 1996 JANUARY 25, 1997 JANUARY 31, 1998
-------------------- ------------------- -----------------
<S> <C> <C> <C>
Amount at statutory federal rate................ $ 4,631 $ 6,147 $ 1,439
State income taxes, net of federal income
tax benefit.................................. 458 597 142
Foreign taxes................................... (16) (47) --
Other........................................... 54 32 129
Income tax expense.............................. $ 5,127 $ 6,729 $ 1,710
==================== =================== ==================
</TABLE>

The components of the net deferred tax assets as of January 25, 1997 and
January 31, 1998 were as follows (in thousands):

<TABLE>
<CAPTION>
(Predecessor) (Company)
January 25, 1997 January 31, 1998
---------------------- ----------------------
<S> <C> <C>
Deferred tax assets:
Warranty & customer claims accruals................ $ 211 $ 1,230
Employee benefits.................................. 2,755 875
Inventory reserves................................. 543 890
Other liabilities and reserves..................... 256 756
Foreign net operating loss carryforwards........... 91 91
Valuation allowance................................ (91) (91)
--------------------- ---------------------
Total deferred tax assets....................... 3,765 3,751
Deferred tax liabilities:
Deferred financing fees............................ -- (656)
Property, plant and equipment...................... (2,073) (174)
Goodwill and intangible amortization............... -- (20)
--------------------- ---------------------
Total deferred tax liabilities.................. (2,073) (850)
--------------------- ---------------------
Net deferred tax assets................................. $ 1,692 $ 2,901
===================== =====================
</TABLE>

The valuation allowance is provided because, in management's assessment, it
was uncertain whether the net deferred tax asset related to the foreign net
operating loss carryforwards would be realized.

Payments for income taxes by the Company amounted to $1.3 million for
fiscal 1997.

12. STOCK OPTIONS

In February 1997, Holdings adopted the 1997 Stock Option Plan (the "Plan"),
under which 800,000 shares of CAF Holdings, Inc. common stock are authorized and
reserved for use in the Plan. The Plan allows the issuance of nonqualified stock
options at an exercise price determined by Holdings'

F-18

<PAGE>

board of directors. A certain number of options granted during 1997 become
exercisable over nine years and expire eleven years from the date of grant.
Accelerated vesting may occur for these options, as well as for incremental
levels of additional options, based on achievement of specific performance
targets. Accelerated vesting may also occur due to a change in control. At
January 31, 1997, options to purchase 85,000 shares of common stock were
available for future grant under the Plan, and 715,000 options were outstanding
at an exercise price of $1.00 per share. No shares were exercised or canceled
during 1997.

The Company has elected to account for its stock-based compensation plan
under Accounting Principles Board ("APB") Opinion No. 25; however, the Company
has computed for pro forma disclosure purposes the value of all options granted
during 1997 using the minimum value option pricing model as prescribed by
Financial Accounting Standards Board ("SFAS") No. 123 and using a weighted
average risk free interest rate of 6.5%, an expected dividend yield of 0%, and
an expected life of nine years.

The total values of the options granted during 1997 were computed as
approximately $313,000, which would be amortized over the vesting period of the
options. If the Company had accounted for the plan in accordance with SFAS No.
123, net income would have decreased by approximately $20,000 for the year ended
January 31, 1998.

13. RELATED-PARTY TRANSACTIONS

Prior to January 25, 1997, the Predecessor, together with other
subsidiaries of C&A Products, was guarantor of certain indebtedness of C&A
Products. In connection with the Acquisition, the Company was released from
this pledge.

C&A Products performed certain services and incurred certain costs for the
benefit of the Company. Services provided include tax services, treasury
services, risk management, employee benefit services, legal services, accounts
receivable servicing, and other general corporate services. Costs allocated to
the Predecessor for these services totaled $1.6 million and $1.5 million for
fiscal 1995 and fiscal 1996, respectively.

The Predecessor utilized facilities and services available at C&A Products'
New York office. The Predecessor was allocated a portion of the cost for these
facilities based on the actual facilities and services utilized. Costs for
these facilities and services totaling $103,000 and $171,000 in fiscal 1995 and
fiscal 1996, respectively, are included in the accompanying consolidated
statements of operations.

Certain of the Predecessor's employees participated in C&A Corporation's
stock option plans, which provided for the award of options on common shares to
employees, exercisable over ten-year periods. Effective January 28, 1994, C&A
Corporation granted certain employees of the Predecessor stock options with
exercise prices below the then-estimated fair value in recognition of their
prior service. In subsequent periods, C&A Corporation granted additional stock
options to certain employees of the Predecessor with exercise prices equal to
the market value at the time of grant. In connection with the sale of the
Predecessor, all outstanding options held by employees of the Company
automatically vested and the employees have exercised all options as of January
31, 1998.

In connection with the Acquisition, the Company paid Quad-C a fee of
$1.5 million, plus out-of- pocket expenses, for, among other things, its
services in analyzing and negotiating the Acquisition and for analyzing,
arranging and negotiating the financing for the Acquisition. In addition,
Holdings entered into an agreement with Quad-C pursuant to which Holdings
retained Quad-C to render consulting services to it regarding the Company, its
financial and business affairs, its relationship with its lenders and security
holders, and the operation and expansion of its business. The agreement
provides for payment to Quad-C of an annual fee of $350,000, payable
quarterly and reimbursement of out-of-pocket expense. The agreement will expire
in 1999, but will be automatically renewed for successive one-year terms

F-19
<PAGE>

unless either party provides written notice of termination 60 days prior to the
scheduled renewal date. Paribas was reimbursed and will be reimbursed for its
out of pocket expenses associated with the Acquisition and the operations of the
Company.

14. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

The Company is obligated under various leases for office space, machinery
and equipment. At January 31, 1998 future minimum lease payments under operating
leases are as follows (in thousands):

<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
1998............................................................ $ 634
1999............................................................ 600
2000............................................................ 585
2001............................................................ 483
2002............................................................ 319
--------
Thereafter...................................................... $ 2,861
========
</TABLE>

Rental expense under operating leases was approximately $665,000, $816,000
and $942,000 in fiscal 1995, fiscal 1996 and fiscal 1997, respectively.

ENVIRONMENTAL

The Company is subject to federal, state and local laws and regulations
concerning the environment. At January 31, 1998, 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 consolidated financial condition or results of operations.

LITIGATION

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

During July 1996, the Predecessor agreed to a settlement including payment
of approximately $427,500 in connection with a patent infringement claim related
to the manufacturing of a certain product. This amount is included as a
component of selling, general and administrative expenses in the accompanying
consolidated statement of operations for fiscal 1996.

OTHER COMMITMENTS

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

F-20
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To Collins & Aikman Floorcoverings, Inc.:

We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Collins & Aikman Floorcoverings, Inc. and
subsidiary ("Company") and Collins & Aikman Floor Coverings, Inc. and subsidiary
("Predecessor") included in this Form 10-K, and have issued our report thereon
dated April 3, 1998. Our audits were made for the purpose of forming an opinion
on those statements taken as a whole. The schedule listed in Item 14 of this
Form 10-K is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
April 3, 1998

S-1
<PAGE>

COLLINS & AIKMAN FLOORCOVERINGS, INC. & SUBSIDIARY (COMPANY)
COLLINS & AIKMAN FLOOR COVERINGS, INC. & SUBSIDIARY (PREDECESSOR)

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED JANUARY 27, 1996, JANUARY 25, 1997 AND JANUARY 31,1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER DEDUCTIONS AT END OF
DESCRIPTION PERIOD EXPENSES ADDITIONS ACCOUNTS (a) PERIOD
- ----------------------------------------------------------------------------------------------------------------------------
PREDECESSOR
<S> <C> <C> <C> <C> <C> <C>
Year ended January 27, 1996
Allowance for doubtful accounts..... $78 $ 48 $ -- $ -- $ (38) $ 88

Year ended January 25, 1997
Allowance for doubtful accounts..... 88 18 -- -- (91) 15
- ----------------------------------------------------------------------------------------------------------------------------
COMPANY

Year ended January 31, 1998
Allowance for doubtful accounts..... $15 $116 $ 303 $ -- $(134) $300

</TABLE>

Notes:
(a) Represents write-off accounts to be uncollectible, less recoveries of
amounts previously written off.
(b) Represents additional provision recorded at the purchase of C&A Floor
Coverings, Inc.

S-2

<PAGE>

EXHIBIT 21.1

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARY

LIST OF SUBSIDIARY CORPORATION

Entity Jurisdiction of Origin
- ------ ----------------------
Collins & Aikman Floorcoverings UK Limited United Kingdom

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> JAN-26-1997
<PERIOD-END> JAN-31-1998
<CASH> 5,699
<SECURITIES> 0
<RECEIVABLES> 20,878
<ALLOWANCES> 300
<INVENTORY> 15,849
<CURRENT-ASSETS> 43,881
<PP&E> 39,115
<DEPRECIATION> 4,795
<TOTAL-ASSETS> 216,823
<CURRENT-LIABILITIES> 17,427
<BONDS> 142,000
0
0
<COMMON> 0
<OTHER-SE> 54,261
<TOTAL-LIABILITY-AND-EQUITY> 216,823
<SALES> 160,383
<TOTAL-REVENUES> 160,383
<CGS> 97,263
<TOTAL-COSTS> 97,263
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 116
<INTEREST-EXPENSE> 15,122
<INCOME-PRETAX> 4,112
<INCOME-TAX> 1,710
<INCOME-CONTINUING> 2,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,402
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>