6 Management’s Discussion and Analysis of  Results of Operations and Financial Condition (dollars in thousands) - continued -  internal EBIT was $11,641, or 2.4% of sales, for carpet manufacturing and $292, or .4% of sales, in the floorcovering base materials segment. Comparable 1999 internal EBIT was $27,584, or 5.8% of sales, for carpet manufacturing and $3,038, or 2.5% of sales, for floorcovering base materials. The year 2000 was a year of intensive restructuring and consolidation designed to improve the cost effec- tiveness of the Company’s operations. The costs of the restructurings and consolidations, high distribution costs and asset write-downs had a negative impact on year 2000 results. Additionally, the Company expe- rienced higher raw material and energy costs in 2000. Significant weakness in the factory-built housing market and softness in the Company's other markets during the latter part of the fourth quarter 2000 caused sales to decline well below the Company's expectations. Production in the fourth quarter was lower than anticipated due to the declining sales and the Company's efforts to reduce inventory. Selling and administrative expenses increased by 3.7% of sales compared to 1999 levels. The increase in these expenses is principally attributable to the acquisition of Fabrica International, which added $7,450 to selling and administrative expenses in 2000, the cost of new product introductions in the Company's distributor and home center businesses, and higher selling and administrative costs associ- ated with growth in the Company's high-end and home center businesses. Other (income) expense – net improved to $161 of income in 2000 from a $2,081 expense in 1999, principally as a result of gains from the sale of non-critical assets and the Company’s equity in the earn- ings of an affiliate. The Company’s effective income tax rate was 36.1% for 2000 and 39.1% for 1999. The decrease in the effective tax rate for the 2000 tax benefit is principally the result of net operating losses that cannot be carried back to prior years for state income tax purposes. During the three-year period ended December 29, 2001, cash flows generated from operating activities were $77,991. These funds were supplemented by $78,669 from asset sales and $54,694 from borrowings under the Company’s senior credit facilities. Funds were used to finance the Company’s operations, to invest $102,509 in capital assets, to invest $58,841 in business acquisitions, and to retire $51,367 of debt. A major focus of the Company’s strategy has been debt reduction. Since the high point of the Company's debt on August 11, 2000, through December 29, 2001, the Company reduced debt and amounts advanced under the accounts receivable securitization program by $71,221. The reduction is principally the result of proceeds from asset sales and better management of working capital. The Company does expect seasonal working capital to increase debt during the first half of 2002. The purchase agreement for the July 2000 acquisition of Fabrica provides for contingent consideration of $50,000 if Fabrica's cumulative gross sales exceed certain levels for the thirty-nine month period beginning April 1, 2000. Based on Fabrica's sales through the end of 2001, the Company believes this sales level should be reached, in which case the contingent consideration will become payable in April 2003. The agreement also provides for an additional contingent amount of up to $2,500 to be paid in April 2005 if Fabrica’s cumulative earnings before interest and taxes for the five-year period beginning January 1, 2000 exceed certain levels. The Company expects that any contingent payments under the agreement would be treated as additional costs of the acquisition. The acquisition of the Company’s interest in Chroma Systems Partners in 2000 is subject to an adjustment generally equal to the Company’s share of Chroma’s income or loss for the three years ending June 30, 2003, less $1,800. The LIQUIDITY AND CAPITAL RESOURCES THE DIXIE GROUP  / 2001 ANNUAL REPORT