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

(dollars in thousands) - continued - 

be no assurance that replacement financing or other sources of funding can be obtained or will be obtained on terms favorable to the Company. 

The Company is a party to two non-cancelable operating leases assumed by the Company as part of acquisitions made in 1999 and 2000. Principals of the businesses acquired are employed by the Company and are lessors in the respective leases. 

## QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

In January 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities". The Company is party to an interest rate swap agreement through March 2003. The swap agreement qualifies as a cash flow hedge subject to provisions of SFAS 133. The agreement has a notional amount of $70,000. Under the agreement, the Company pays a fixed interest rate and receives a variable interest rate calcu- lated with respect to the notional amount. Based on the market value of the swap instrument and provisions of SFAS 133, the Company recorded an after-tax charge of $906 to "accumulated other comprehensive loss" in the equity section of the Company's balance sheet upon adoption. An addi- tional after-tax charge of $1,551 was recorded in 2001, representing the change in fair value from the date of adoption to December 29, 2001. Any interest rate differential realized is recognized as an adjustment to interest expense over the life of the swap agreement. Based on the Company's $70,000 interest rate swap agreement, a 10% fluctuation in the variable rate would result in an annual after-tax economic impact of approximately $83. 

## CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES 

Inventory represents a significant asset of the Company. Substantially all of the Company's invento- ries are valued at the lower of cost or market under the LIFO method. The Company inspects inventories at the completion of its production process to determine their quality and maintains statis- tical data relating to the age, size and quality of its inventories. The Company uses business judgement along with historical sales data and market conditions to value inventory, which is aged, less than stan- dard size or off-quality, at estimated market value. Changes in market conditions within the floorcovering industry, the cost of raw materials, or other conditions, none of which the Company controls, could affect the value ultimately received for the Company's inventories. There can be no assurance that inventories will ultimately be sold at prices equal to or in excess of the value of the inven- tories recorded in the Company's financial statements. 

The Company establishes reserves for potential bad debts related to the collectibility of accounts receiv- able based on numerous factors, including but not limited to, the customer's financial strength, payment patterns, and specific knowledge of the customers as obtained by direct communication. Additionally, the Company maintains reserves for allowances and customer claims based primarily on historical claims experience for specific markets, customers, or products. The Company believes that such reserves for bad debts, allowances and claims are reasonable. 

