Masland and Fabrica Carpet

From 1996 through 2000, the Company continued the process of selling or closing its textile operations and investing in floor covering businesses. In the second quarter of 1999, the Company sold its specialty textile yarns operations, completing the disposal of its textile business segment.

The Company’s investments in floor covering businesses began with the acquisitions of Carriage Industries, Inc., Bretlin Inc., and Masland Carpets, Inc. in 1993. Subsequent acquisitions included Patrick Carpet Mills in 1994, Danube Carpet Mills, Inc. and certain carpet assets of General Felt Industries, Inc. in 1997, and Ideal Fibers, Inc. in late 1998. In January 1999, the Company acquired the assets of Multitex Corporation of America, Inc. (“Globaltex”), and Graphic Technologies, Inc. In 2000, the Company acquired Fabrica International, and an interest in the dyeing and finishing operations of Chroma Systems Partners.

In the first half of 2000, the Company expanded its yarn and extrusion production capacity, and re-aligned and consolidated its yarn processing facilities. In the third quarter of 2000, the Company began implementing a plan to consolidate and restructure its North Georgia tufting, finishing and distribution operations. The consolidation, which was substantially completed by the end of the fourth quarter of 2000, integrated the tufted manufacturing operations of Globaltex and Carriage, closed an inefficient dyeing operation, and significantly reduced personnel in its North Georgia carpet operations. Additionally, the information systems of Globaltex were integrated into those of Carriage which improved the timeliness and quality of management information of these businesses.

The Company is now positioned as a leading carpet and rug manufacturer and supplier to higher-end residential and commercial customers serviced by Masland Carpets and Fabrica International, to consumers through major retailers under the Bretlin, Globaltex and Alliance Mills brands, and to the factory-built housing, recreational vehicle and exposition tradeshow markets through Carriage Carpets.

Candlewick Yarns supplies a variety of filament and spun yarns to the Company’s carpet operations as well as specialty yarns to unrelated carpet manufacturing customers.

INDUSTRY INFORMATION – The carpet and rug industry has two primary markets, residential and commercial, with the residential market making up the largest portion of the industry’s sales. A substantial portion of industry shipments is made in response to replacement demand. Residential products consist of broadloom carpets, rugs, and bathmats in a broad range of styles, colors, and textures. Commercial products consist primarily of broadloom carpets for a variety of institutional applications such as office buildings, restaurant chains, schools and other commercial establishments. The carpet industry also manufactures carpet for the automotive, recreational vehicle, and small boat industries.

The Carpet and Rug Institute (the “CRI”) is the national trade association representing carpet and rug manufacturers. Based on information compiled by the CRI, the domestic carpet and rug industry is composed of less than 100 manufacturers, with a significant majority of the industries production concentrated in a limited number of manufacturers. The carpet industry has undergone substantial consolidation in recent years. The Company believes the consolidations provide opportunities in selected markets where styling product differentiation and focused service can add value to selected customers.

4 THE COMPANY’S BUSINESSES – The Company’s businesses are segmented between carpet manufacturing and floor covering base materials (see Note M in the Company’s 2000 Consolidated Financial Statements for Quantitative Segment Information). The products of each segment are sold to carpet and rug markets in the floor covering industry.

The Company’s carpet manufacturing segment has a wide range of manufacturing, selling, marketing, and distribution capabilities to serve selected markets with a variety of products. The products are sold as broadloom, rugs or piece goods with a breadth of textures, colors and designs. Products in the carpet manufacturing segment, although marketed for diverse applications under different marketing names, are manufactured by similar techniques and are sold principally by the Company’s own sales force to wholesale and retail distribution channels. Operations of the Company’s carpet manufacturing segment are described below.

MASLAND AND FABRICA focus on higher-end residential and commercial business.

MASLAND CARPETS is a manufacturer of design-driven specialty carpets and rugs for the high-end residential and commercial marketplaces. Its high-style products are marketed through the architectural/specifiers and interior design community, specialty floor covering showrooms and direct to corporate end-users. Masland competes in each of these markets through quality, service, and innovation in styling and product design. Masland’s business also includes a product line designed to cater to value oriented commercial customers where style, design, and quality are required.

FABRICA produces and sells luxurious residential carpet and custom rugs to high-end retailers, interior designers, luxury yacht manufacturers, furniture stores and the upscale home building market. Chroma Systems Partners, in which the Company acquired an interest, performs dyeing and finishing on a contract basis for Fabrica and other carpet manufacturers.

NORTH GEORGIA CARPET OPERATIONS. During 2000, the Company consolidated the tufted manufacturing operations of Carriage and Globaltex and integrated the information systems of these businesses. The tufted operations of Carriage, Globaltex and the needlebond operations of Bretlin have been reorganized under one management structure to more efficiently service our customers.

CARRIAGE CARPETS supplies tufted broadloom carpet with innovative styling for customers of the factory-built housing, recreational vehicle, van conversion and exposition trade show industries. Carriage is known for its ability to provide its customers with floor covering solutions and outstanding service. Its specialty products are designed to maximize efficiency and minimize waste for its customers. Most of its products are delivered by its own trucking fleet to insure just-in-time delivery to its customers, a key competitive advantage to serving its markets.

GLOBALTEX markets an array of high fashion, trend-setting tufted broadloom residential carpet, indoor/outdoor needle bond carpet, runners floor mats and decorative accent rugs to home center and mass merchant retailers. Product differentiation through unique styling, coupled with high service and speed of delivery, are key competitive factors.

BRETLIN markets tufted broadloom carpet, indoor/outdoor needle bond carpet, runners, floor mats, decorative accent rugs, industrial fabrics and carpet pads to independent floor covering specialty retailers and selected distributors. High service standards in terms of speed and accuracy in filling orders for its customers are key competitive factors.

5 The Company’s floor covering base materials segment includes CANDLEWICK YARNS and the filament yarn extrusion assets of Ideal Fibers. The base materials group produces high-end quality yarns for use in the production of residential and commercial carpet, bath and decorative accent rugs and automotive floor covering. The Company’s floor covering base materials group develops and produces a complex variety of innovative filament and spun yarns for the Company’s internal needs and Candlewick’s external customers. Approximately 70% of this segment’s unit production volume is utilized by the Company’s carpet manufacturing operations.

The Company’s sales order backlog in its floor covering base materials segment was approximately $19,488,000 at December 30, 2000 and $34,313,000 at December 25, 1999. Sales order backlog in the Company’s carpet manufacturing segment is not significant. The Company’s order fulfillment timeframe is generally several days in its home center/mass merchants, factory-built housing and other residential markets. Commercial order fulfillment varies depending upon the customer’s requirements which generally occur within six weeks but, in certain cases, may span several months.

The Company’s floor covering businesses own a variety of trademarks under which their products are marketed. Among such trademarks, the names “Masland” and “Fabrica” are of greatest importance to the Company’s business. The Company believes it has taken steps to protect its interest in all such trademarks.

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