-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DRyxokY8ModKKNRWw/33OF1Pw0D3LFiVZwz3OEcfUMN6uX3Kf/kUbBvKz2/97mz6 3wfBUZ8SCe5jq8aslgRZyA== 0000029332-98-000002.txt : 19980330 0000029332-98-000002.hdr.sgml : 19980330 ACCESSION NUMBER: 0000029332-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971227 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIXIE GROUP INC CENTRAL INDEX KEY: 0000029332 STANDARD INDUSTRIAL CLASSIFICATION: CARPETS AND RUGS [2273] IRS NUMBER: 620183370 STATE OF INCORPORATION: TN FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-02585 FILM NUMBER: 98575978 BUSINESS ADDRESS: STREET 1: 1100 S WATKINS ST CITY: CHATTANOOGA STATE: TN ZIP: 37404 BUSINESS PHONE: 6156982501 MAIL ADDRESS: STREET 1: P O BOX 751 CITY: CHATTANOOGA STATE: TN ZIP: 37401 FORMER COMPANY: FORMER CONFORMED NAME: DIXIE YARNS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DIXIE MERCERIZING CO DATE OF NAME CHANGE: 19670524 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 27, 1997. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______ to _______. Commission File Number: 0-2585 The Dixie Group, Inc. (Exact name of registrant as specified in its charter) Tennessee 62-0183370 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1100 South Watkins Street Chattanooga, Tennessee 37404 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (423) 698-2501 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered None None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $3.00 Par Value (Title of Class) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] -Continued- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Continued) State the aggregate market value of the voting stock held by non-affiliates of the registrant as of March 6, 1998: Common Stock - $114,315,162; Class B Common Stock - No market exists for the shares of Class B Common Stock, which is neither registered under Section 12 of the Act nor subject to section 15(d) of the Act. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Class Outstanding as of March 6, 1998 Common Stock, $3.00 Par Value 10,597,219 shares Class B Common Stock, $3.00 Par Value 735,228 shares Class C Common Stock, $3.00 Par Value 0 shares Documents Incorporated By Reference Specified portions of the following document are incorporated by reference: Proxy Statement of the registrant for annual meeting of shareholders to be held April 30, 1998 (Part III). PART I ITEM 1. BUSINESS GENERAL The Company's sales in 1992 were $470 million and consisted of yarns, thread, and fabrics, sold to industrial manufacturers, all of which required further processing by the Company's customers prior to reaching the consumer. The Company has expanded into a group of businesses with total sales in excess of $650 million, approximately two-thirds of which are sold into selected floorcovering markets and the remainder into certain textile and apparel markets. Over fifty percent of the Company's products are supplied to its customers in the final form used by the ultimate consumer. The Company expanded into the floorcovering business through the acquisitions of Carriage Industries, Inc. and Masland Carpets, Inc. in 1993 and Patrick Carpet Mills, Inc. in 1994. In early fiscal 1997, the Company acquired the assets and business of Danube Carpet Mills, Inc. and in October 1997, the Company acquired the needlebond and artificial turf assets and business of General Felt Industries, Inc. based in Dalton, Georgia. Since the later part of 1992, the Company has sold or closed a substantial number of textile facilities, including the sale of the Company's thread business. In late 1996, the Company announced its intent to sell its Tarboro, North Carolina textile spinning facility. The facility is still held for sale but continues to operate. In each case, the Company has either exited specific markets or product lines in an effort to focus on higher-margin products. Where applicable, equipment and operations have been consolidated into existing facilities in order to continue the production and sale of products that fit the Company's strategy. The Company has pursued growth in selected finished apparel markets in order to take advantage of its vertical manufacturing capabilities. The Company believes that vertical expansion into selected finished apparel markets will provide value to its customers through a quality controlled, quick response production and distribution process. In an effort to pursue new markets in the floorcovering business, the Company is launching a new product line in 1998 which involves the manufacture and sale of carpet pad which will be made by recycling the Company's synthetic materials by-products. FLOORCOVERING THE CARPET INDUSTRY - Based on information compiled by the national trade association representing carpet and rug manufacturers, the domestic carpet and rug industry is composed of over 100 manufacturers of which the top 10 account for approximately 75% of the industry's production. The 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. The residential market consists of broadloom carpets, rugs, and bathmats in a broad range of styles, colors, and textures. The commercial market consists primarily of broadloom carpets for a variety of institutional applications. The carpet industry also manufactures carpet for the automotive, recreational vehicle, and small boat industries. There is a high degree of competition within the domestic carpet industry, which also faces competition from the hard surface floorcovering industry. The principal methods of competition within the carpet industry are quality, style, price, and service. THE COMPANY'S FLOORCOVERING BUSINESS - The Company's floorcovering business consists of four distinct specialty businesses including products for a variety of floorcovering applications and proprietary yarn for the tufting industry. Each business is described below. Masland Carpets is a manufacturer of specialty carpets and rugs for the high-end residential and commercial marketplaces. Masland's products are marketed to the architectural and interior design community and specialty floorcovering showrooms. Masland competes in each of these markets through quality, service, and innovation in styling and product design. Masland's business includes a product line designed to cater to value oriented commercial customers where style, design, and quality are required. Masland's product lines are marketed by its own sales force. Carriage Industries is a vertically integrated carpet manufacturer supplying tufted broadloom carpet for customers of the manufactured/modular housing, recreational vehicle, van conversion, and exposition trade show industries. Carriage creates specialty products geared to specifications that maximize efficiency and minimize waste for their customers with a just-in-time delivery approach through its own trucking fleet. The acquisition of Danube Carpet Mills increased Carriage's sales in the manufactured housing and recreational vehicle industries and provided the opportunity to be more competitive by expanding its core business. Carriage's product lines are marketed by a staff of salaried sales personnel. Bretlin is a manufacturer of indoor/outdoor needlebond carpet and runners, floormats, decorative accent rugs, commercial/industrial polypropylene needlebond carpet, and synthetic fiber cushion. Its products are marketed to home centers, mass merchants, floorcovering groups or co-ops, distributors, and independent floorcovering retailers. The needlebond and artificial turf assets and business acquired from General Felt Industries in October 1997 are complementary to Bretlin's existing manufacturing capabilities and product lines. High service standards in terms of speed and accuracy in filling orders for its customers are key competitive factors for Bretlin. Products of Bretlin are marketed primarily through its own sales force, and to a lesser extent, commission sales representatives. Candlewick Yarns produces yarn for the tufting industry. Candlewick's yarn systems are sold for applications in residential and commercial carpet, bath and decorative accent rugs, and automotive floorcovering. Candlewick competes in markets that emphasize product quality, innovation, and customer service. Candlewick's relationships with fiber suppliers and its product development center allow customers a means to evaluate yarn and fiber variations to achieve product enhancement and product differentiation. Approximately 35% of Candlewick's yarn production is used internally by the Company's other floorcovering businesses. Products to outside customers are marketed through Candlewick's own salaried sales force. The Company's sales order backlog position in its floorcovering businesses, excluding Carriage, was approximately $27,300,000 at December 27, 1997 and $28,000,000 at December 28, 1996. Approximately 90% of orders received by Carriage are shipped within the same week. All of the order backlog can reasonably be expected to be filled within the 1998 fiscal year. The Company's floorcovering businesses own a variety of trademarks under which their products are marketed. While such trademarks are important to the Company's businesses, there is no one trademark, other than the name "Masland", which is of material importance to the floorcovering business. TEXTILES/APPAREL TEXTILE INDUSTRY - The domestic textile industry encompasses yarn preparation, fabric formation, and product distribution. The industry is structured with various degrees of vertical integration depending on the products involved. Textile products are manufactured for a variety of end uses including home furnishings, industrial products, transportation applications, and apparel. The textile industry is made up of a great number of companies, none of which are believed to have sales that comprise as much as 10% of the total market. The domestic apparel market, which includes a substantial portion of the customers for the Company's textile products, is continually faced with competition from imports. Additionally, the Company believes that consumer buying patterns will continue to be influenced by mass merchandisers and retailers emphasizing price competition. The domestic textile industry also services the home furnishing and other industries in a number of applications which are impacted by housing sales as well as domestic automotive production levels. Apparel industry information continues to reflect an increase in the supply of apparel into domestic markets from Mexico and the Caribbean Basin compared with Asian suppliers. The Company believes a substantial portion of this increase has resulted from enacted trade legislation and has increased the demand for domestic textile products as a source of fabric for the manufacture of finished apparel. The Company also believes that merchandisers in the domestic apparel industry prefer a supply of complete finished apparel products. The Company's textile and apparel products are generally concentrated into markets and distribution chains whose customers favor higher-end products. These factors are expected to benefit the high- end value added products of the Company's textile business and support the Company's strategy to grow its package finished apparel business by utilizing the Company's vertical yarn and fabric capabilities and sewing resources in Central America. THE COMPANY'S TEXTILE/APPAREL BUSINESS - The Company's textile/apparel group is comprised of three separate businesses that compete to varying degrees in several textile markets. Products include high quality yarns, knit fabric, and upper-end knit sport finished apparel. The Company intends to utilize its vertical capacity capabilities to further expand its finished knit apparel products. Each business is discussed below. Dixie Yarns spins, dyes, and processes value-added cotton and high performance specialty synthetic yarns to select manufacturers of high-end upholstery, home furnishings, premium sportswear, hosiery, sweaters, underwear, and automotive body cloth. Products manufactured by the Yarn Group are primarily made from cotton fiber but also include products made from branded specialty synthetic fibers which impart strength, heat resistance, stretch and/or characteristics relating to comfort and insulation properties. A portion of the yarn produced is further processed by the Company's mercerizing and package dye facility. Natural, dyed, and synthetic yarns are marketed through a combination of salaried sales force and, to a lesser extent, commissioned sales agents. Caro Knit produces 100% cotton knit fabrics. Markets served by Caro Knit's customers include manufacturers of apparel for sportswear, golf shirts, activewear/athletic, and impressions (print-ons). The higher-end products made from Caro Knit fabric compete on the basis of design, fabric consistency, and color. The Company has invested in state-of-the-art dyeing and finishing facilities to achieve optimum color consistency. Caro Knit supplies 100% of the fabric to the Company's recently established finished apparel business. Caro Knit products are sold primarily by the group's salaried sales force. C-Knit Apparel produces and markets finished knit apparel products catering to sports apparel, branded lines, golf related manufacturers, and advertising specialty and screen printers. C-Knit utilizes the vertical yarn and fabric manufacturing capabilities of the Company along with cutting and contract sewing in order to control the quality and delivery process. C-Knit products are marketed through its own salaried sales force. The Company's sales order backlog position in its textile/apparel businesses was approximately $42,900,000 on December 27, 1997 compared to $56,500,000 on December 28, 1996. All of these orders can reasonably be expected to be filled within the 1998 fiscal year. The Company owns a number of patents used in its textile business, and patent protection is sought as a matter of course when machinery or process improvements are made that are considered patentable. However, in the opinion of the Company, its textile operations are not materially dependent upon patents and patent applications. CUSTOMER AND PRODUCT CONCENTRATION There was no single class of products exceeding 10 percent of the Company's consolidated sales volume for 1997, 1996, or 1995 and no single customer's sales volume exceeded 10 percent of the Company's consolidated sales volume for 1997. SEASONALITY Within the varied markets serviced by the Company, there are a number of seasonal production cycles, but the Company's business as a whole is not considered to be significantly affected by seasonal factors. Consequently, there are no material impacts on working capital relating to seasonality. ENVIRONMENTAL While compliance with current federal, state and local provisions regulating the discharge of material into the environment may require additional expenditures by the Company, these expenditures are not expected to have a material effect on capital expenditures, earnings or the competitive position of the Company. RAW MATERIALS The Company obtains natural and synthetic raw materials from a number of domestic suppliers. Cotton fiber is purchased at market rates from numerous cotton merchants and directly from cotton growing cooperatives under short-term supply contracts at costs which are significant factors in the Company's pricing of its products. Man-made fibers are purchased from major chemical suppliers. Although the Company's procurement of raw materials is subject to variations in price and availability due to agricultural and other market conditions and in the price of petroleum used to produce man-made fibers, the Company believes that its sources of raw materials are adequate and that it is not materially dependent on any single supplier. UTILITIES The Company uses electricity as its principal energy source, with oil or natural gas used in some facilities for finishing operations as well as heating. During the past five years the Company has not experienced any material problems in obtaining electricity, natural gas or oil at anticipated prices. Nevertheless, energy shortages of extended duration could have an adverse effect on the Company's operations. EMPLOYMENT LEVEL The Company had approximately 4,600 associates as of the end of fiscal 1997. ITEM 2. PROPERTIES The following table lists the Company's facilities according to location, type of operation and approximate total floor space as of March 6, 1998. Approximate Location Type of Operation Square Feet FLOORCOVERING Administrative: Dalton, GA Administrative 13,000 Calhoun, GA Administrative 22,000 Mobile, AL Administrative 20,000 Total Administrative 55,000 Warehousing: Ringgold, GA Warehousing 119,000 Manufacturing: Lemoore, CA Tufted Yarn Spinning 322,000 Ringgold, GA Tufted Yarn Spinning 290,000 (1) Roanoke, AL Tufted Yarn Spinning 190,000 Calhoun, GA Carpet Manufacturing, Distribution 1,086,000 Needlebond Manufacturing, Distribution 347,000 (2) Dalton, GA Carpet Manufacturing, Distribution 511,000 Atmore, AL Carpet Manufacturing, Distribution 342,000 Mobile, AL Rug Manufacturing, Distribution 400,000 (3) LaFayette, GA Carpet Padding Manufacturing 73,000 Total Manufacturing 3,561,000 TEXTILE/APPAREL Manufacturing: Chattanooga, TN Yarn Spinning 440,000 Mebane, NC Yarn Spinning 99,000 Ranlo, NC Yarn Spinning 319,000 (4) Tarboro, NC Yarn Spinning 340,000 Chattanooga, TN Package Yarn Dyeing, Bleaching and Mercerizing 276,000 Jefferson, SC Fabric Knitting, Dyeing and Finishing 274,000 Total Manufacturing 1,748,000 CORPORATE Administrative: Chattanooga, TN Administrative 41,000 Total 5,524,000 ITEM 2. PROPERTIES - CONTINUED (1) This property is currently leased. Under the provisions of the Roanoke, AL lease, the Company is acquiring title to the property over the term of the lease, which is expected to terminate in 2004. (2) The Company is currently leasing 63,000 square feet for carpet manufacturing. (3) The Company is in the process of converting this operation to a carpet padding manufacturing operation. No production is being performed in this location as of March 6, 1998. (4) Currently operating; "held for sale". In addition to the facilities listed above, the Company owns or leases various administrative, storage, warehouse and office spaces. In the opinion of the Company, its manufacturing facilities are well maintained and the machinery is efficient and competitive. Operations at each plant generally vary between 120 hours and 168 hours per week. There are no material encumbrances on any of the Company's operations. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or its subsidiaries are a party or of which any of its property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of 1997 to a vote of the shareholders. Pursuant to instruction G of Form 10-K the following is included as an unnumbered item to Part I. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages, positions and offices held by the executive officers of the registrant as of March 6, 1998, are listed below along with their business experience during the past five years. Name, Age Business Experience During and Position Past Five Years Daniel K. Frierson, 56 Director since 1973, Chairman of Chairman of the Board, President the Board since 1987 and Chief and Chief Executive Officer, Executive Officer since 1980. Director, Member of Executive Director of SunTrust Bank, Committee Chattanooga, N.A. Brother of Paul K. Frierson. Glenn A. Berry, 50 Executive Vice President and Chief Executive Vice President and Financial Officer since January Chief Financial Officer 1997. Vice President, Lighting Products Group, MagneTek, Inc., from March 1995 to December 1996. Vice President, Allied Signal Laminate Systems, 1986 to 1994. William N. Fry, IV, 39 Executive Vice President and Chief Executive Vice President and Chief Operating Officer, Floorcovering Operating Officer, Floorcovering Business since January 1997. Business Executive Vice President and Chief Operating Officer, Candlewick, Carriage and Bretlin since January 1996. President, Bretlin from January 1995 to January 1996. Executive Vice President, Bretlin from November 1993 to January 1995. Business Analyst, Carriage from July 1993 to November 1993. General Manager, Dyed Yarns from May 1992 to July 1993. Assistant Plant Manager, Chattanooga Finishing from July 1991 to May 1992. EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED Name, Age Business Experience During and Position Past Five Years George B. Smith, 57 Executive Vice President and Executive Vice President Chief Operating Officer, Textile/ and Chief Operating Officer, Apparel Business since September Textile/Apparel Business 1996. Executive Vice President and President, Natural/Dyed Yarns and Knits since March 1994. President, Natural and Dyed Yarn Group from August 1993 to March 1994. President Natural Yarn Group from October 1992 to August 1993. Self-employed (Consulting and Commission Sales) from June 1990 to November 1992. Philip H. Barlow, 48 Vice President and President of Vice President and President, Carriage Industries, Inc. since Carriage Industries, Inc. 1993. Vice President of Sales and Marketing, Carriage, 1988 to 1993. Director of Sales and Marketing, Carriage, 1986 to 1988. Kenneth L. Dempsey, 39 Vice President and President, Vice President and President, Masland Carpets, Inc. since Masland Carpets, Inc. January 1997. Vice President of Marketing, Masland, 1991 to 1996. Director of Marketing, The Harbinger Company, Inc., subsidiary of Horizon Industries, Inc., 1982 to 1991. Paul K. Frierson, 60 Director since 1988. Vice President Vice President and President, and President, Candlewick Yarns Candlewick Yarns, Director since 1989. Director of NationsBank/Chattanooga. Brother of Daniel K. Frierson. Jeffrey L. Gregg, 34 Vice President and President of Vice President and President, Bretlin, Inc. since January 1998. Bretlin, Inc. Vice President of Operations, Carriage Industries, Inc. from May 1996 to January 1998. Chief Operating Officer and Chief Financial Officer, The Geiger Group, Inc. from July 1991 to April 1996. W. Derek Davis, 47 Vice President of Human Resources Vice President, Human since January 1991. Corporate Resources Employee Relations Director, 1990 to 1991. EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED Name, Age Business Experience During and Position Past Five Years Gary A. Harmon, 52 Treasurer since 1993. Treasurer Director of Tax and Financial Planning, 1985 to 1993. D. Eugene Lasater, 47 Controller since 1988. Controller Starr T. Klein, 55 Secretary since November 1992. Secretary Assistant Secretary, 1987 to 1992. The executive officers of the registrant are elected annually by the Board of Directors at its first meeting held after each annual meeting of the Company's shareholders. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The Company's Common Stock trades on the over-the-counter National Market System with the NASDAQ symbol DXYN. No market exists for the Company's Class B Common Stock. As of March 6, 1998, the total number of record holders of the Company's Common Stock was approximately 4,100 and the total number of holders of the Company's Class B Common Stock was 16. Management of the Company estimates that there are approximately 3,100 shareholders who hold the Company's Common Stock in nominee names. Dividends and Price Range of Common Stock for the four quarterly periods in the years ended December 27, 1997 and December 28, 1996 are as follows: THE DIXIE GROUP, INC. QUARTERLY FINANCIAL DATA, DIVIDENDS AND PRICE RANGE OF COMMON STOCK (Unaudited) (dollars in thousands, except per share data)
1997 Quarter 1st 2nd 3rd 4th Net sales $162,360 $169,163 $159,940 $170,380 Gross profit 27,213 29,831 26,136 26,812 Net income 2,981 3,300 3,012 2,326 Earnings per share Basic .27 .29 .27 .21 Diluted .26 .29 .25 .19 Dividends: Common Stock --- --- --- --- Class B Common Stock --- --- --- --- Common Stock prices: High $ 8.13 $ 9.88 $ 15.88 $ 14.75 Low 6.38 6.00 9.63 9.13 1996 Quarter 1st 2nd 3rd 4th Net sales $161,520 $167,962 $145,400 $140,199 Gross profit 24,260 30,429 24,958 20,229 Net income (loss) (991) 1,320 2,030 (13,572) Earnings (loss) per share Basic (.09) .12 .18 (1.21) Diluted (.09) .12 .18 (1.21) Dividends: Common Stock --- --- --- --- Class B Common Stock --- --- --- --- Common Stock prices: High $ 5.13 $ 5.38 $ 5.13 $ 8.13 Low 3.81 4.25 3.88 4.38 The total of quarterly earnings per share may not equal the annual earnings per share due primarily to Common Stock purchased and issued during the respective periods. During the fourth quarter of 1996, the Company recognized asset valuation losses of $18,995 ($13,074, or $1.17 per share after taxes). The discussion of restrictions on payment of dividends is included in Note F to the Consolidated Financial Statements included herein. ITEM 6. SELECTED FINANCIAL DATA (dollars in thousands, except per share data) The following selected financial data should be read in conjunction with the related consolidated financial statements and notes thereto included under Items 8, 14(a) (1) and (2) and 14 (d) of the report on Form 10-K. Year Ended December 27, December 28, December 30, December 31, December 25, 1997(1) 1996 1995 1994 1993(2) Net sales $661,843 $615,081 $670,842 $682,859 $591,408 Income (loss) from continuing operations(2) 11,619 (11,213) (52,179) (3,227) 4,684 Total assets 386,614 328,135 396,997 488,320 496,579 Long-term debt: Senior indebtedness 68,528 34,036 97,383 87,025 87,650 Subordinated notes 50,000 50,000 50,000 50,000 50,000 Convertible subordinated debentures 42,282 44,782 44,782 44,782 44,782 Common Stock, subject to put option --- --- --- 18,178 18,178 Per Share: Income (loss) from continuing operations: (3) Basic 1.03 (1.00) (4.44) (.26) .42 Diluted .99 (1.00) (4.44) (.26) .41 Cash dividends declared: Common Stock --- --- --- .20 .20 Class B Common Stock --- --- --- .20 .20 (1) Includes the results of operations of Danube and GFI Dalton subsequent to their acquisitions on December 31, 1996 and October 2, 1997, respectively. (2) Includes the results of operations of Carriage Industries, Inc. and Masland Carpets, Inc. subsequent to their acquisitions on March 12, 1993 and July 9, 1993, respectively. (3) Income (loss) from continuing operations includes asset valuation losses of $13,074, or $1.17 per share, for the year ended December 28, 1996, asset valuation losses of $51,058, or $4.35 per share, and casualty insurance gains of $3,298, or $.28 per share, for the year ended December 30, 1995, asset valuation losses of $6,446, or $.53 per share, and a nontaxable life insurance gain of $12,835, or $1.05 per share, for the year ended December 31, 1994. See Note B, Note L, and Note N to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The Company's strategy includes expanding its floorcovering business, focusing its textile/apparel business on higher margin markets (including vertical growth through finished apparel) and increasing the production and sale by both businesses of products that are sold in the form used by the ultimate consumer. The Company continued the expansion of its floorcovering business through two acquisitions which were completed during fiscal 1997. The Company acquired the assets and business of Danube Carpet Mills, Inc. ("Danube") early in fiscal 1997 for $20.9 million cash. Danube manufactured carpet for the manufactured housing, recreational vehicle, and van conversion industries. The Danube manufacturing and distribution facilities were closed and their operations merged into existing facilities of the Company's Carriage Carpet and Candlewick Yarns operations. On October 2, 1997, the Company acquired the needlebond and artificial turf assets and business of General Felt Industries based in Dalton, Georgia ("GFI Dalton") for $40.9 million. The acquired assets and business were merged with the Company's Bretlin operation. The Company recorded unusual charges for years before 1997 related to the strategic realignment of its manufacturing facilities, product lines, and businesses to support the objectives of focusing on higher margin markets and increasing its sales of products in the form used by the ultimate consumer. The results for 1996 included charges of $20.6 million ($14.3 million after-tax, or $1.27 per share), primarily related to the write-down of the Company's Tarboro textile spinning facility, which is being held for sale, costs associated with the sale of the Company's thread business, and costs to consolidate operations and exit certain lower-margin product lines. In 1995, net charges of $58.4 million ($47.9 million after-tax, or $4.07 per share), were recorded principally related to the disposal of the Company's thread business, asset impairment losses, a plant sale, and facility consolidations. The Company reported net income of $11.6 million, or $.99 per share, in 1997. Including the unusual items described above, the Company reported a net loss of $11.2 million, or $1.00 per share, in 1996 and a net loss of $52.2 million, or $4.44 per share, in 1995. Excluding these items, net income was $3.1 million, or $.27 per share, in 1996 and the net loss was $4.3 million, or $.37 per share, in 1995. The following table reflects selected operating data related to the two business segments of the Company: Floorcovering and Textile/Apparel (see additional information in Note P to the consolidated financial statements). The effects of the unusual items have been reported separately in order to more clearly understand the operations of each segment. (dollars in millions) 1997 1996 1995 Sales Floorcovering $433.3 $366.4 $361.5 Textile/Apparel 229.7 252.0 313.7 Intersegment elimination (1.2) (3.3) (4.4) Total sales $661.8 $615.1 $670.8 Operating profit (loss) Floorcovering Excluding unusual items $ 30.7 $ 25.4 $ 20.1 Unusual items --- (1.9) 0.1 Floorcovering operating profit 30.7 23.5 20.2 Textile/Apparel Excluding unusual items 8.8 (1.3) (5.4) Unusual items --- (18.7) (58.5) Textile/Apparel operating profit (loss) 8.8 (20.0) (63.9) Combined Excluding unusual items 39.5 24.1 14.7 Unusual items --- (20.6) (58.4) Company operating profit (loss) $ 39.5 $ 3.5 $(43.7) 1997 Compared to 1996 (excluding unusual items) - Operating profits in the Company's floorcovering business were $30.7 million for 1997, an increase of $5.3 million or 21%, compared with 1996. Sales in the floorcovering business were $433.3 million in 1997 compared with $366.4 million in 1996, an increase of 18%. The increase in sales was primarily a result of the 1997 acquisitions. The improvement in operating profits resulted from incremental volume increases due to the Danube acquisition and volume improvements in the segment's high-end residential and commercial markets. Additional improvements in profitability related to the GFI Dalton acquisition are anticipated in fiscal 1998. Operating profits in the Company's textile/apparel business were $8.8 million in 1997, compared with an operating loss of $1.3 million in 1996. Textile/Apparel sales decreased in 1997 by $22.3 million compared with 1996. Excluding sales from the Company's thread business, which was sold in June 1996, sales increased $27.4 million in 1997 compared with 1996. A significant portion of this sales growth resulted from the implementation of the Company's strategy of growing finished apparel sales in its textile/apparel business. The improved profitability in 1997 compared with 1996 reflects favorable costs of raw materials and lower manufacturing costs in the segment's yarn business. Approximately $3.5 million, or 35% of the improved costs in the yarn business resulted from the discontinuance of depreciation expense associated with the Tarboro facility in 1997, under provisions of the accounting guidance for assets held for sale. The Company's periodic market value review indicated no adjustment to the facility's carrying value. Other corporate and miscellaneous expenses not included in the Company's operating segments increased $2.2 million in 1997 compared with 1996. The increase included, among other items, costs associated with the Company's leadership training process, benefit related costs, and costs associated with the Company's name change. The Company's effective income tax rate was 38.2% for the 1997 tax provision and 27.9% for the 1996 tax benefit. The rate difference is primarily related to the non-deductible goodwill impairment recorded in 1996 which received no tax benefit. 1996 Compared to 1995 (excluding unusual items) - Operating profits in the Company's floorcovering business increased by $5.3 million or 26% in 1996 compared with 1995. During this period, sales in the floorcovering business increased by 1%. The improvement in operating profit was attributable to a shift in sales mix to higher-margin products, as well as a $2.8 million gain from liquidation of LIFO inventories. Operating losses for the Company's textile/apparel business declined $4.1 million in 1996 compared with 1995, despite a 20% decline in net sales. The improved results in 1996 were attributable to the exit of lower-margin product lines and businesses and reduced manufacturing, selling and administrative expenses. The decline in sales is principally attributable to the sale of the Company's thread business on June 3, 1996. Interest expense declined in 1996 compared with 1995 by $2.6 million due to a $62.9 million reduction in debt, which was funded by the proceeds from the sale of the Company's thread business and operating cash flows. LIQUIDITY AND CAPITAL RESOURCES During the three year period ended December 27, 1997, cash flows generated from operating activities totaled $134.4 million, with an additional $36.4 million generated from the sale of assets. These funds were used to finance the Company's operations, fund capital expenditures, repurchase stock, and reduce debt. During 1997, as sales increased by $46.8 million, the dollar value of inventories decreased $10.6 million, including inventories to support the Danube and GFI Dalton acquisitions. This reflects the Company's ongoing emphasis to effectively manage its working capital. Capital expenditures were $74.4 million during the three year period ended December 27, 1997 and were directed toward upgrading equipment to improve quality and manufacturing efficiency, as well as expanding manufacturing capacity and service capabilities in the Company's floorcovering business. During this period, charges for depreciation and amortization totaled $86.7 million. In 1993, approximately 1.0 million shares of the Company's Common Stock were issued under a put option arrangement relating to the acquisition of Masland Carpet, Inc. The holders exercised their right on July 10, 1995 to put the shares to the Company at a price of approximately $18.00 per share. In October 1993, the Company entered into a seven year agreement and sold a $45.0 million undivided interest in a revolving pool of its trade accounts receivable. The sale is reflected as a reduction of accounts receivable in the Company's balance sheets. No further interest has been sold under this agreement subsequent to the original sale. The cost of this program was fixed at 6.08% per annum of the undivided interest sold plus administrative fees typical in such transactions. In addition, the Company is generally at risk for credit losses associated with sold receivables and provides for such in the Company's financial statements. At December 27, 1997, the Company's debt structure consisted of $44.8 million of convertible subordinated debentures, $50.0 million of subordinated notes and $71.2 million of senior indebtedness, principally under the Company's revolving credit and term-loan agreement. The convertible subordinated debentures require annual mandatory sinking fund payments of $2.5 million, beginning in 1998. Principal payments are not required under the Company's subordinated notes until the year 2000. The revolving credit and term-loan agreement was renewed for five years in March 1995. The agreement provides for revolving credit of up to $125.0 million (before reduction for certain significant asset sales) through the five year commitment period and a $10.0 million term-loan. Principal payments on the term-loan are due in quarterly installments of $625,000 which began in March 1996. Under the terms of the revolving credit agreement, borrowing capacity is permanently reduced by 50% of the net cash proceeds from certain significant asset sales. Accordingly, the borrowing line has been reduced by $25.5 million as a result of the sales of the Company's Newton plant in September 1995 and thread business in June 1996. Interest rates available under the facility are selected by the Company from a number of options which effectively allow for borrowings at rates equal to or lower than the greater of the lender's prime rate or the federal funds rate plus .5%. At year end, the available unused borrowing capacity under the Company's credit agreements (including amounts available under a $5,000 short-term credit line) was $39.0 million. The Company's long-term debt and credit arrangements contain financial covenants relating to minimum net worth, the ratio of debt to capitalization, payment of dividends, and certain other financial ratios. The Company's subordinated note agreement was amended to provide for the payment of dividends, subject to specified earnings levels, for periods after December 31, 1997. In February 1998, the Board of Directors approved a quarterly dividend of $.05 per share payable in March 1998. Availability under the Company's existing debt arrangements and expected operating cash flows are deemed adequate to finance the Company's future liquidity requirements, which are anticipated to consist primarily of capital expenditures and seasonal working capital needs. In February 1998, the Company received a commitment letter from its principal senior lenders agreeing to replace its unsecured revolving credit and term-loan facility with a new unsecured credit facility that would provide for revolving credit of up to $100.0 million through a five year commitment period and a $60.0 million, seven year term-loan. The new credit facility is expected to have financial covenants and interest rates similar to those of the Company's existing revolving credit and term-loan facility. The transaction, which is subject to certain contingencies, including the execution of a mutually acceptable credit agreement, is expected to be completed in early April 1998. Assuming the transaction is completed as structured in the commitment letter, the Company's committed borrowing capacity would be increased by approximately $50.0 million. ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Statement is effective for fiscal 1998 and includes provisions requiring companies to report segment information using a "management approach", which modifies the required disclosures and business segmentation approach used in a company's public financial statements. Statement No. 131 will have no effect on the consolidated results of operations or financial condition of the Company. Reporting provisions under the new statement are first required for fiscal 1998 financial statements. The Company has not made a final determination if, or to what degree, compliance with the Statement will require changes in its current business segmentation for financial reporting purposes. In March 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting For the Costs of Computer Software Developed For or Obtained For Internal Use". Adoption of the SOP is required for the Company at the beginning of fiscal 1999. Provisions of the Statement require the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. Early adoption of the SOP is permitted, and accordingly the Company plans to adopt effective with the beginning of fiscal 1998. The Company has historically expensed internal software development costs as incurred but after adoption of the Statement will capitalize and amortize such costs over the expected useful life of the associated software. YEAR 2000 SYSTEMS ISSUES The Company has electronic business systems in place at each primary business group. Systems platforms and architecture differ between the business groups. The Company has actively planned its various systems for year 2000 compliance for several years in its design, purchase, and installation processes. Year 2000 compliance plans are formalized and include specific testing and monitoring. Costs for testing and conversion for compliance is not considered material to the Company's operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The supplementary financial information as required by Item 302 of Regulation S-K is included in PART II, ITEM 5 of this report and the remaining response is included in a separate section of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section entitled "Information about Nominees for Directors" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held April 30, 1998 is incorporated herein by reference. Information regarding the executive officers of the registrant is presented in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The section entitled "Executive Compensation Information" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held April 30, 1998 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Principal Shareholders", as well as the beneficial ownership table (and accompanying notes) in the Proxy Statement of the registrant for the annual meeting of shareholders to be held April 30, 1998 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Certain Transactions Between the Company and Directors and Officers" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held April 30, 1998 is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2)-- The response to this portion of Item 14 is submitted as a separate section of this report. (3) Listing of Exhibits: (i) Exhibits Incorporated by Reference: (3a) Restated Charter of The Dixie Group, Inc. (3b) Amended and Restated By-Laws of Dixie Yarns, Inc. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED (4a) Second Amended and Restated Revolving Credit and Term Loan Agreement dated January 31, 1992 by and among Dixie Yarns, Inc., and Trust Company Bank, NationsBank of North Carolina, N.A. and Chemical Bank. (4b) Loan Agreement dated February 6, 1990, between Dixie Yarns, Inc. and New York Life Insurance Company and New York Life Insurance and Annuity Corporation. (4c) Form of Indenture, Dated May 15, 1987 between Dixie Yarns, Inc. and Morgan Guaranty Trust Company of New York as trustee. (4d) Revolving Credit Loan Agreement dated as of September 16, 1991 by and among Ti-Caro, Inc. and Trust Company Bank, individually and as Agent, NCNB National Bank and Chemical Bank. (4e) First Amendment to Revolving Credit Loan Agreement dated as of August 19, 1992 by and among Ti-Caro, Inc., T-C Threads, Inc. and Trust Company Bank, individually and as agent, NCNB National Bank, and Chemical Bank. (4f) First Amendment, dated August 25, 1993 to Second Amended and Restated Revolving Credit and Term Loan Agreement dated January 31, 1992, by and among Dixie Yarns, Inc. and Trust Company Bank, NationsBank of North Carolina, N.A. and Chemical Bank. (4g) Third Amended and Restated Credit Agreement dated March 31, 1995. (4h) Waiver and First Amendment to Credit Agreement dated February 27, 1996. (4i) Waiver and Modification Agreement dated November 1, 1996. (4j) Waiver Letter dated December 13, 1996. (4k) Second Amendment dated September 7, 1997 to the Third Amended and Restated Credit Agreement dated March 31, 1995. (10a) Dixie Yarns, Inc. Nonqualified Defined Contribution Plan. (10b) Dixie Yarns, Inc. Nonqualified Employee Savings Plan. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED (10c) Dixie Yarns, Inc. Incentive Compensation Plan. (10d) Pooling and Servicing Agreement dated as of October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and NationsBank of Virginia, N.A. (as Trustee). (10e) Annex X - Definitions, to Pooling and Servicing Agreement dated as of October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and NationsBank of Virginia, N.A. (as Trustee). (10f) Series 1993-1 Supplement, dated as of October 15, 1993, to Pooling and Servicing Agreement dated as of October 15, 1993, among Dixie Yarns, Inc., Dixie Funding Inc. and NationsBank of Virginia, N.A. (as Trustee). (10g) Certificate Purchase Agreement dated October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and New York Life Insurance and Annuity Corporation. (10h) Certificate Purchase Agreement dated October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and John Alden Life Insurance Company. (10i) Certificate Purchase Agreement dated October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and John Alden Life Insurance Company of New York. (10j) Certificate Purchase Agreement dated October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and Keyport Life Insurance Company. (10k) Asset Purchase Agreement dated May 23, 1996, by and among T-C Threads, Inc. d/b/a Threads USA, Threads of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. (10l) Amendment, dated May 31, 1996, to Asset Purchase Agreement dated May 23, 1996, by and among T-C Threads, Inc. d/b/a Threads USA, Threads of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED (10m) Second Amendment, dated June 3, 1996, to Asset Purchase Agreement dated May 23, 1996, by and among T-C Threads, Inc., d/b/a Threads USA, Threads of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. (10n) Yarn and Finished Goods Agreement dated as of June 3, 1996, by and among T-C Threads, Inc. d/b/a Threads USA, Threads of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. (10o) Accounts Receivable Agreement dated as of June 3, 1996, by and among T-C Threads, Inc. d/b/a Threads USA, Threads of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. (10p) Noncompetition Agreement dated as of June 3, 1996, by and among T-C Threads, Inc. d/b/a Threads USA, Threads of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. (10q) Asset Purchase Agreement dated as of August 29, 1997 among The Dixie Group, Inc., Bretlin, Inc., Foamex L.P. and General Felt Industries, Inc. (10r) Dixie Yarns, Inc. Incentive Stock Plan as amended. (10s) Form of Nonqualified Stock Option Agreement Under the Dixie Yarns, Inc. Incentive Stock Plan. (10t) Form of Amendment to Nonqualified Stock Option Agreement Under the Dixie Yarns, Inc. Incentive Stock Plan. (10u) Form of Stock Option Agreement Under the Dixie Yarns, Inc. Incentive Stock Plan as amended. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED (ii) Exhibits filed with this report: (4l) Amendment to 9.96% Senior Subordinated notes due February 1, 2010. (4m) Letter agreement dated February 17, 1998 re: Amendment to 9.96% Senior Subordinated Notes due February 1, 2010. (10v) Form of Stock Rights and Restrictions Agreement for Restricted Stock Award Under Incentive Stock Plan as Amended. (10w) The Dixie Group, Inc. Stock Ownership Plan as amended. (10x) Form of Stock Subscription Agreement Under Stock Ownership Plan of The Dixie Group, Inc. (10y) The Dixie Group, Inc. Directors Stock Plan. (21) Subsidiaries of the Registrant. (23) Consent of Ernst & Young LLP. (b) Reports on Form 8-K--No reports on Form 8-K have been filed by the registrant during the last quarter of the period covered by this report. (c) Exhibits--The response to this portion of Item 14 is submitted as a separate section of this report. See Item 14 (a) (3) (ii) above. (d) Financial Statement Schedules--The response to this portion of Item 14 is submitted as a separate section of this report. 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. THE DIXIE GROUP, INC. March 25, 1998 BY: /s/DANIEL K. FRIERSON Daniel K. Frierson, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Chairman of the Board, President, Director and /s/DANIEL K. FRIERSON Chief Executive Officer March 25, 1998 Daniel K. Frierson Vice President, President of Candlewick /s/PAUL K. FRIERSON Yarns and Director March 25, 1998 Paul K. Frierson Executive Vice President and /s/GLENN A. BERRY Chief Financial Officer March 25, 1998 Glenn A. Berry /s/D. EUGENE LASATER Controller March 25, 1998 D. Eugene Lasater /s/J. DON BROCK Director March 25, 1998 J. Don Brock SIGNATURES -- CONTINUED /s/PAUL K. BROCK Director March 25, 1998 Paul K. Brock /s/ LOVIC A. BROOKS, JR. Director March 25, 1998 Lovic A. Brooks, Jr. /s/JAMES H. MARTIN, JR. Director March 25, 1998 James H. Martin, Jr. /s/JOHN W. MURREY, III Director March 25, 1998 John W. Murrey, III /s/PETER L. SMITH Director March 25, 1998 Peter L. Smith /s/ROBERT J. SUDDERTH, JR. Director March 25, 1998 Robert J. Sudderth, Jr. ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14 (a)(1) AND (2) AND ITEM 14(d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 27, 1997 THE DIXIE GROUP, INC. CHATTANOOGA, TENNESSEE FORM 10-K--ITEM 14(a)(1) and (2) THE DIXIE GROUP, INC. AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of The Dixie Group, Inc. and subsidiaries are included in Item 8: Report of Independent Auditors Consolidated balance sheets--December 27, 1997 and December 28, 1996 Consolidated statements of operations--Years ended December 27, 1997, December 28, 1996, and December 30, 1995 Consolidated statements of cash flows--Years ended December 27, 1997, December 28, 1996, and December 30, 1995 Consolidated statements of stockholders' equity--Years ended December 27, 1997, December 28, 1996, and December 30, 1995 The following consolidated financial statement schedule of The Dixie Group, Inc. and subsidiaries is included in Item 14(d): Schedule II--Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, or the information is otherwise shown in the financial statements or notes thereto, and therefore have been omitted. Report of Independent Auditors Board of Directors The Dixie Group, Inc. We have audited the accompanying consolidated balance sheets of The Dixie Group, Inc. and subsidiaries as of December 27, 1997 and December 28, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 27, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Dixie Group, Inc. and subsidiaries at December 27, 1997 and December 28, 1996, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 27, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Chattanooga, Tennessee February 19, 1998 THE DIXIE GROUP, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
December 27, December 28, 1997 1996 ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,848 $ 1,988 Accounts receivable (less allowance for doubtful accounts of $3,207 in 1997 and $3,614 in 1996) 29,450 14,628 Inventories 82,661 93,226 Assets held for sale 10,000 10,350 Other 11,977 10,520 TOTAL CURRENT ASSETS 135,936 130,712 PROPERTY, PLANT AND EQUIPMENT Land and improvements 9,421 8,673 Buildings and improvements 72,683 65,960 Machinery and equipment 291,345 263,940 373,449 338,573 Less accumulated amortization and depreciation (199,027) (182,797) NET PROPERTY, PLANT AND EQUIPMENT 174,422 155,776 INTANGIBLE ASSETS (less accumulated amortization of $8,359 in 1997 and $6,928 in 1996) 63,555 31,611 OTHER ASSETS 12,701 10,036 TOTAL ASSETS $386,614 $328,135 See notes to consolidated financial statements. December 27, December 28, 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 35,768 $ 31,473 Accrued expenses 26,974 24,338 Current portion of long-term debt 5,143 2,641 TOTAL CURRENT LIABILITIES 67,885 58,452 LONG-TERM DEBT Senior indebtedness 68,528 34,036 Subordinated notes 50,000 50,000 Convertible subordinated debentures 42,282 44,782 TOTAL LONG-TERM DEBT 160,810 128,818 OTHER LIABILITIES 9,560 9,555 DEFERRED INCOME TAXES 27,115 22,760 STOCKHOLDERS' EQUITY Common Stock ($3 par value per share): Authorized 80,000,000 shares, issued - 14,038,318 shares in 1997 and 13,876,826 shares in 1996 42,115 41,630 Class B Common Stock ($3 par value per share): Authorized 16,000,000 shares, issued - 735,228 shares 2,206 2,206 Common Stock subscribed - 512,477 shares in 1997 and 449,300 shares in 1996 1,537 1,348 Additional paid-in capital 134,151 132,475 Stock subscriptions receivable (3,132) (2,190) Unearned stock compensation (894) --- Retained earnings (deficit) 2,853 (8,766) Minimum pension liability adjustment (1,839) (2,668) 176,997 164,035 Less Common Stock in treasury at cost - 3,439,999 shares in 1997 and 3,409,872 shares in 1996 (55,753) (55,485) TOTAL STOCKHOLDERS' EQUITY 121,244 108,550 Commitments - Note O TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $386,614 $328,135 See notes to consolidated financial statements. THE DIXIE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data) Years Ended December 27, December 28, December 30, 1997 1996 1995 NET SALES $661,843 $615,081 $670,842 Cost of sales 551,851 515,205 572,762 GROSS PROFIT 109,992 99,876 98,080 Selling and administrative expenses 75,837 74,061 82,624 Asset valuation losses --- 18,995 63,425 Other expense - net 2,770 9,363 1,112 INCOME (LOSS) BEFORE INTEREST AND TAXES 31,385 (2,543) (49,081) Interest expense 12,583 13,000 15,591 INCOME (LOSS) BEFORE INCOME TAXES 18,802 (15,543) (64,672) Income tax provision (benefit) 7,183 (4,330) (12,493) NET INCOME (LOSS) $ 11,619 $(11,213) $(52,179) NET EARNINGS (LOSS) PER SHARE Basic $ 1.03 $ (1.00) $ (4.44) Diluted $ .99 $ (1.00) $ (4.44) See notes to consolidated financial statements. THE DIXIE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Years Ended December 27, December 28, December 30, 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 11,619 $(11,213) $(52,179) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 24,495 28,195 35,980 Provision (benefit) for deferred income taxes 3,993 (5,395) (11,416) (Gain) loss on property, plant and equipment disposals and asset valuation adjustments (211) 18,706 65,037 Changes in operating assets and liabilities, net of effects of business combinations: Accounts receivable (14,821) 2,740 11,549 Inventories 26,361 10,028 3,517 Other current assets (1,370) (721) (585) Other assets (2,600) (3) (552) Accounts payable and accrued expenses 36 12,222 (21,143) Other liabilities 1,444 443 279 NET CASH PROVIDED BY OPERATING ACTIVITIES 48,946 55,002 30,487 CASH FLOWS FROM INVESTING ACTIVITIES Net proceeds from sales of property, plant and equipment 4,556 24,057 7,773 Purchase of property, plant and equipment (26,519) (17,634) (30,266) Cash payments in connection with business combinations (61,744) --- --- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (83,707) 6,423 (22,493) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in credit line borrowings 37,135 (60,080) 2,529 Borrowings (payments) under term loan facility (2,500) (2,500) 10,000 Purchase of Company Common Stock (268) (32) (18,457) Other 254 (238) (557) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 34,621 (62,850) (6,485) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (140) (1,425) 1,509 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,988 3,413 1,904 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,848 $ 1,988 $ 3,413 See notes to consolidated financial statements. THE DIXIE GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands, except per share data) Class B Common Additional Retained Pension Common Common Common Stock Paid-In Earnings Liability Stock In Stock Stock Subscribed Capital Other (Deficit) Adjustment Treasury BALANCE AT DECEMBER 31, 1994 $41,573 $2,206 $ --- $131,710 $ --- $ 54,626 $(4,330) $(55,277) Common Stock acquired for treasury- 28,133 shares (176) Common Stock sold under stock option and Employees' Stock Purchase Plan - 5,157 shares 15 11 Net loss for the year (52,179) Minimum pension liability adjustment 214 Adjustment for purchase of shares subject to put option (103) BALANCE AT DECEMBER 30, 1995 41,588 2,206 131,618 2,447 (4,116) (55,453) Common Stock acquired for treasury- 5,749 shares (32) Common Stock sold under stock option and Employees' Stock Purchase Plan - 14,027 shares 42 15 Common Stock subscribed - 449,300 shares 1,348 842 (2,190) Net loss for the year (11,213) Minimum pension liability adjustment 1,448 BALANCE AT DECEMBER 28, 1996 41,630 2,206 1,348 132,475 (2,190) (8,766) (2,668) (55,485) Common Stock acquired for treasury- 30,127 shares (268) Common Stock sold under stock option and Employees' Stock Purchase Plan - 60,925 shares 183 250 Common Stock subscribed - 124,677 shares 374 868 (1,242) Stock subscriptions settled 77 (185) (192) 300 Restricted stock grants - 75,000 shares 225 750 (975) Amortization of restricted stock grants 81 Net income for the year 11,619 Minimum pension liability adjustment 829 BALANCE AT DECEMBER 27, 1997 $42,115 $2,206 $1,537 $134,151 $(4,026) $ 2,853 $(1,839) $(55,753) See notes to consolidated financial statements.
THE DIXIE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of The Dixie Group, Inc. and its wholly-owned subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents: Highly liquid investments with original maturities of three months or less when purchased are reported as cash equivalents. Credit and Market Risk: The Company sells floorcovering and textile/apparel products to a wide variety of manufacturers and retailers located primarily throughout the United States. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. An allowance for doubtful accounts is maintained at a level which management believes is sufficient to cover potential credit losses including potential losses on receivables sold (see Note D). The Company invests its excess cash in short-term investments and has not experienced any losses on those investments. Inventories: Substantially all inventories are stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or market. The reduction of certain inventory quantities resulted in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these reductions was to increase net income in 1997 by $1,065 ($.09 per share), to decrease the net loss in 1996 by $4,909 ($.44 per share), and to decrease the net loss in 1995 by $750 ($.06 per share). These effects include $690 ($.06 per share) in 1997 and $3,195 ($.29 per share) in 1996 relating to inventory reductions resulting from the sale of the Company's thread business (see Note C). Inventories are summarized as follows: 1997 1996 At current cost: Raw materials $19,080 $ 20,276 Work-in-process 20,954 26,294 Finished goods 47,819 54,109 Supplies, repair parts and other 3,183 4,000 91,036 104,679 Excess of current cost over LIFO value (8,375) (11,453) Total inventories $82,661 $ 93,226 Property, Plant and Equipment: Property, plant and equipment is stated at the lower of cost or impaired value. Provision for depreciation and amortization of property, plant and equipment has been computed for financial reporting purposes using the straight-line method over the estimated useful lives of the related assets, ranging from 10 to 40 years for buildings and improvements, and 3 to 10 years for machinery and equipment. Applicable statutory recovery methods are used for tax purposes. Depreciation and amortization of property, plant and equipment for financial reporting purposes totaled $22,780 in 1997, $26,893 in 1996, and $33,545 in 1995. Intangible Assets: The excess of the purchase price over the fair market value of identifiable net assets acquired in business combinations is recorded as goodwill and is amortized using the straight-line method over 40 years. Impairment of Assets: In 1995, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets. There was no material effect on the financial statements from the adoption because the Company's prior impairment recognition practice was consistent with the major provisions of the Statement. Under provisions of the Statement, impairment losses are recognized when expected future cash flows are less than the assets' carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of property, plant, and equipment and intangibles in relation to the operating performance and estimated future undiscounted cash flows of the underlying business. The Company adjusts the net book value of the underlying assets if the sum of expected future cash flows is less than book value. Stock Based Compensation: During 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". As permitted under Statement No. 123, the Company continues to account for stock based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Earnings per Share: In 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share". Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share is computed using the weighted average common shares outstanding including the assumed conversion of Class B Common Stock. Diluted earnings per share considers the effects of all potentially dilutive securities. Earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the provisions of Statement No. 128. Revenue Recognition: The Company recognizes revenue for goods sold at the time title passes to the customer. Reclassifications: Certain amounts for 1996 and 1995 have been reclassified to conform with the 1997 presentation. NOTE B - BUSINESS COMBINATIONS In early fiscal 1997, the Company acquired for $20,854, the business and operating assets of Danube Carpet Mills, Inc. ("Danube"), a manufacturer of carpet for the manufactured housing, recreational vehicle, and van conversion industries. The Danube manufacturing and distribution facilities were closed and their operations merged into existing facilities of the Company's Carriage Carpet and Candlewick Yarns operations. On October 2, 1997, the Company acquired the needlebond and artificial turf assets and business of General Felt Industries based in Dalton, Georgia ("GFI Dalton") for $40,890. The acquired assets and business were merged with the Company's Bretlin operation. The acquisitions were accounted for as purchase business combinations, and accordingly, the results of operations of Danube subsequent to December 31, 1996 and GFI Dalton subsequent to October 2, 1997 are included in the Company's consolidated financial statements. The purchase price of each acquisition was allocated to the net tangible assets acquired based on their estimated fair market values. The excess amounts of the purchase price over the estimated fair market value of the net tangible assets were recorded as intangible assets and are being amortized using the straight-line method over forty years. A summary of net assets acquired is as follows: GFI Danube Dalton Current assets $ 8,363 $ 9,015 Property, plant, and equipment 4,359 13,550 Current liabilities (4,703) (2,356) Deferred taxes 141 --- Intangible asset 12,694 20,681 Net assets acquired $20,854 $40,890 The following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions of Danube and GFI Dalton had occurred at the beginning of the periods presented after giving effect to certain adjustments, including the closure of Danube facilities and consolidation into existing operations, amortization of cost in excess of net tangible assets acquired, interest expense on debt to finance the acquisitions, and related income taxes. The pro forma results are presented for comparative purposes only and do not purport to be indicative of future results or of the results that would have occurred had the acquisitions taken place at the beginning of the periods presented. 1997 1996 Net sales $694,199 $692,604 Net income (loss) 12,397 (9,923) Net income (loss) per share: Basic 1.10 (.89) Diluted 1.05 (.89) NOTE C - SALE OF THE COMPANY'S THREAD BUSINESS On June 3, 1996, the Company sold substantially all of the property, plant and equipment, raw material and in-process inventories, and certain other assets related to its thread business to American & Efird, Inc. for $27,157 cash (including $1,500 held in escrow). Under the terms of the asset purchase agreement: (i) greige and finished thread inventories were retained by the Company and held for purchase by American & Efird to service the acquired business; (ii) the Company's branded thread product lines were to be continued until the earlier of six months or all such inventories were purchased from the Company; and (iii) the Company is prohibited from competing in the thread business for a period of five years. Accounts receivable associated with the Company's thread business were retained. From June 3, 1996 through the end of fiscal 1997, net proceeds related to the disposition of the Company's thread business were approximately $55,533. The proceeds include the collection of substantially all of the accounts receivables and the sale of substantially all inventories retained by the Company. Sales related to thread inventories retained by the Company were $3,025 in 1997 and the Company's results included charges of $558 primarily related to adjustments to the inventory carrying values. During 1996, operations of the thread business generated sales of $53,034, including $12,483 after June 3, 1996 related to inventories retained by the Company. The Company's 1996 results included thread business operating losses of $369 and the Company recorded $5,154 of costs to exit the thread business. Included in the exit costs were $3,867 relating to 63 selling and administrative associates receiving termination benefits and approximately 700 wage associates receiving excess benefits under a pre-existing pension plan. Also included were other exit costs of $1,287 consisting primarily of contractual support expenses under the sales agreement and non-fixed asset valuation losses. These costs were classified in "Other expense-net" in the Company's consolidated statements of operations. NOTE D--SALE OF ACCOUNTS RECEIVABLE On October 15, 1993, the Company entered into a seven year agreement and sold a $45,000 undivided interest in a revolving pool of its trade accounts receivable. No further interest has been sold under this agreement subsequent to the original sale. At December 27, 1997 and December 28, 1996, the $45,000 interest sold is reflected as a reduction of accounts receivable in the Company's consolidated balance sheets. Costs of this program were fixed at 6.08% per annum on the amount of the interest sold plus administrative fees typical in such transactions. These costs, which were approximately $2,985 for 1997, $2,948 for 1996, and $2,998 for 1995 are included in other expense - net. In addition, the Company is generally at risk for credit losses associated with sold receivables and provides for such in the Company's financial statements. NOTE E--ACCRUED EXPENSES Accrued expenses include the following: 1997 1996 Compensation and benefits $ 12,172 $ 10,263 NOTE F--LONG-TERM DEBT AND CREDIT ARRANGEMENTS Long-term debt consists of the following: 1997 1996 Senior indebtedness: Credit line borrowings $ 65,449 $ 28,314 Term loan 5,000 7,500 Other 722 863 Total senior indebtedness 71,171 36,677 Subordinated notes 50,000 50,000 Convertible subordinated debentures 44,782 44,782 Total long-term debt 165,953 131,459 Less current portion (5,143) (2,641) Total long-term debt (less current portion) $160,810 $128,818 The Company's unsecured revolving credit and term-loan agreement provides revolving credit of up to $125,000 (before reduction for certain significant asset sales) through March of 2000 and a $10,000 term-loan payable in quarterly installments of $625 which began in March 1996. The terms of the agreement provide for a reduction in the revolving credit availability by 50% of the net cash proceeds from certain significant asset sales, but the credit availability cannot be reduced below $90,000. The total reduction of the facility for asset sales through December 27, 1997 was $25,524. Interest rates available under the facility may be selected by the Company from a number of options which effectively allow for borrowing at rates equal to or lower than the greater of the lender's prime rate or the federal funds rate plus .5%. The effective annual interest rate on the revolving credit and term-loan agreement was 6.79% in 1997, 6.85% in 1996, and 7.21% in 1995. The interest rate on debt outstanding under this agreement was 6.83% at December 27, 1997. Commitment fees, ranging from .25% to .375% per annum on the revolving credit line are payable on the average daily unused balance of the revolving credit facility. At December 27, 1997, unused borrowing capacity under the Company's credit agreements (including amounts available under a $5,000 short-term credit line) was approximately $39,027 (see Note Q). The Company's subordinated notes are unsecured, bear interest at 9.96% payable semiannually, and are due in semiannual installments of $2,381 beginning February 1, 2000. The Company's convertible subordinated debentures bear interest at 7% payable semiannually, are due in 2012, and are convertible by the holder into shares of Common Stock of the Company at an effective conversion price of $32.20 per share, subject to adjustment under certain circumstances. Mandatory sinking fund payments commencing May 15, 1998 will retire $2,500 principal amount of the debentures annually and approximately 70% of the debentures prior to maturity. The convertible debentures are subordinated in right of payment to all other indebtedness of the Company. The Company's long-term debt and credit arrangements contain financial covenants relating to minimum net worth, the ratio of debt to capitalization, payment of dividends and certain other financial ratios. Under an amendment to the Company's subordinated note agreement effective December 31, 1997, retained earnings available for the payment of dividends is $1,000 plus 50% of future net income subject to certain adjustments. Approximate maturities of long-term debt for each of the five years succeeding December 27, 1997 are $5,143 in 1998, $5,113 in 1999, $72,732 in 2000, $7,285 in 2001, and $7,287 in 2002 (see Note Q). Interest payments were $12,424 in 1997, $13,550 in 1996, and $14,852 in 1995. NOTE G--FAIR VALUE OF FINANCIAL INSTRUMENTS All of the Company's financial instruments are held or issued for purposes other than trading. The carrying amounts and estimated fair values of the Company's financial instruments are summarized as follows: 1997 1996 Carrying Fair Carrying Fair Amount Value Amount Value Financial assets Cash and cash equivalents $ 1,848 $ 1,848 $ 1,988 $ 1,988 Notes receivable (including current portion) 2,178 2,178 2,158 2,158 Escrow funds 1,270 1,270 1,751 1,751 Financial liabilities Long-term debt (including current portion) $165,953 $163,758 $131,460 $123,295 The fair values of the Company's financial assets approximate their carrying amounts due to their short-term nature and for notes receivable, adjustable interest rate provisions. The fair values of the Company's long-term debt were estimated using discounted cash flow analyses based on incremental borrowing rates for similar types of borrowing arrangements and quoted market rates for the Company's convertible debentures. NOTE H--PENSION PLANS The Company has defined benefit and defined contribution pension plans which cover essentially all associates. Benefits for associates participating in the defined benefit plans are based on years of service and compensation during the period of participation. Plan assets consist primarily of cash equivalents and publicly traded stocks and bonds. At December 27, 1997, the Company's defined benefit plans included 130,226 shares of the Company's Common Stock with a fair value of $1,481, or 11.4% of the fair value of the plans' assets. All accrued benefits under the Company's largest defined benefit plan became fully vested and were frozen at December 24, 1993, and participants became eligible to participate in a 401(k) defined contribution plan. A portion of these accrued benefits have been settled through lump sum payments. Losses from settlements (excluding losses related to the sale of the Company's thread business, see Note C) were $284 in 1997, $772 in 1996, and $1,209 in 1995. The Company's practice is to fund its defined benefit plans in accordance with minimum contribution requirements of the Employee Retirement Income Security Act of 1974. Costs of the defined contribution plans are based on several factors including each participant's compensation, the operating performance of the Company and matching Company contributions. The net periodic pension cost of all plans included the following components: 1997 1996 1995 Defined benefit plans: Service cost $ 47 $ 42 $ 30 Interest cost 1,026 1,464 1,434 Actual return on plan assets (2,166) (1,788) (3,305) Other components 1,793 1,748 3,382 700 1,466 1,541 Defined contribution plans 4,685 2,009 1,715 Net periodic pension cost $ 5,385 $ 3,475 $3,256 The following table sets forth the funded status of the Company's defined benefit retirement plans and related amounts included in the Company's consolidated balance sheets: 1997 1996 Actuarial present value of benefit obligations: Vested benefits $ 14,503 $ 14,727 Nonvested benefits 30 27 Accumulated benefit obligations $ 14,533 $ 14,754 Plan assets at fair value $ 12,966 $ 10,941 Projected benefit obligation (14,533) (14,754) Projected benefit obligation in excess of plan assets (1,567) (3,813) Unrecognized net loss 2,972 4,373 Adjustment to recognize minimum liability (3,014) (4,373) Pension related liability included in the consolidated balance sheets $ (1,609) $ (3,813) In accordance with the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," the Company has recorded an additional minimum liability representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension liability. This additional liability, net of the related income tax benefit, reduced stockholders' equity by $1,839 at December 27, 1997 and $2,668 at December 28, 1996. The weighted average discount rate used in determining the projected benefit obligation was 7.0% for each year presented. There has been no increase in future compensation levels assumed due to the freezing of benefits in 1993. The assumed long-term rate of return on plan assets was 8.5% for each year presented. NOTE I--INCOME TAXES The provision (benefit) for income taxes on income (loss) from continuing operations consists of the following: 1997 1996 1995 Current Deferred Current Deferred Current Deferred Federal $4,190 $2,220 $ (158) $(3,603) $(1,825) $ (9,586) State 676 97 1,223 (1,792) 748 (1,830) Total $4,866 $2,317 $1,065 $(5,395) $(1,077) $(11,416) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases of those assets and liabilities. Significant components of the Company's deferred tax liabilities and assets are as follows: Deferred Tax Liabilities: 1997 1996 Property, plant and equipment $28,749 $28,042 Inventories 1,097 3,404 Intangible assets 1,185 972 Other 3,241 3,016 Total deferred tax liabilities 34,272 35,434 Deferred Tax Assets: Post-retirement benefits 3,007 3,150 Other employee benefits 2,046 2,276 Alternative minimum tax 2,674 5,739 Allowances for bad debts, claims and discounts 1,891 2,749 Other 1,700 1,366 Valuation reserve --- --- Total deferred tax assets 11,318 15,280 Net deferred tax liabilities $22,954 $20,154 Differences between the provision (benefit) for income taxes and the amount computed by applying the statutory Federal income tax rate to income (loss) from continuing operations are reconciled as follows: 1997 1996 1995 Statutory rate applied to income (loss) from continuing operations $ 6,393 $(5,285) $(21,988) Plus state income taxes net of Federal tax effect 948 (375) (714) Total statutory provision (benefit) 7,341 (5,660) (22,702) Increase(decrease) attributable to: Nondeductible amortization of and impairment adjustments to intangible assets 305 1,020 9,816 Nondeductible portion of travel and entertainment 228 193 267 Net operating loss carryback benefit (781) --- --- Other items 90 117 126 Total tax provision (benefit) $ 7,183 $(4,330) $(12,493) Income tax payments, net of income tax refunds received, were $3,162 in 1997 and $1,677 in 1996. Income tax refunds received, net of income tax payments, were $1,072 in 1995. NOTE J--COMMON STOCK AND EARNINGS PER SHARE Holders of Class B Common Stock have the right to twenty votes per share on matters that are submitted to Shareholders for approval and to dividends in an amount not greater than dividends declared and paid on Common Stock. Class B Common Stock is restricted as to transferability and may be converted into Common Stock on a one share for one share basis. The Company's Charter authorizes 200,000,000 shares of Class C Common Stock, $3 par value per share, and 16,000,000 shares of Preferred Stock. No shares of Class C Common Stock or Preferred Stock have been issued. In August 1996, the Company's Board of Directors adopted a stock ownership plan applicable to the senior management of the Company for the purpose of encouraging each participant to make a significant investment in the Company's Common Stock. Pursuant to the plan, at December 27, 1997, 512,477 shares were subscribed at an average price of $6.11 per share and at December 28, 1996, 449,300 shares were subscribed at a price of $4.875 per share. The following table sets forth the computation of basic and diluted earnings (loss) per share: 1997 1996 1995 Net income (loss) $11,619 $(11,213) $(52,179) (No adjustments needed for diluted calculation) Denominator for calculation of basic earnings per share - weighted average shares (1) 11,229 11,200 11,744 Effect of dilutive securities: Stock options 332 --- --- Stock subscriptions 204 --- --- Denominator for calculation of diluted earnings per share - weighted average shares adjusted for potential dilution (2) 11,765 11,200 11,744 Earnings (loss) per share: Basic $ 1.03 $ (1.00) $ (4.44) Diluted 0.99 (1.00) (4.44) (1) Includes Common and Class B Common shares in thousands (2) Because their effects are anti-dilutive, excludes shares issuable under stock option, stock subscription, and restricted stock plans whose grant price was greater than the average market price of common shares outstanding and the assumed conversion of subordinated debentures into shares of Common Stock as follows: 1,737 shares in 1997, 3,100 shares in 1996, and 2,161 shares in 1995. NOTE K--STOCK PLANS The Company's 1990 Incentive Stock Plan reserves 2,270,000 shares of Common Stock (including 500,000 shares approved by the Board of Directors and recommended to the shareholders for approval at the annual meeting) for sale or award to key associates or to the outside directors of the Company under stock options, stock appreciation rights, restricted stock performance grants, or other awards. Outstanding options are generally exercisable at a cumulative rate of 25% per year after the second year from the date the options are granted and generally expire after ten years from the date of grant. Options outstanding were granted at prices at or above market price on the date of grant and include grants under the 1983 Incentive Stock Plan, under which no further options may be granted. At December 28, 1996 no options remain outstanding under the 1983 plan. On May 4,1995, the Board of Directors acted, effective as of such date, to reprice outstanding options granted prior to 1995 under the Company's 1990 Incentive Stock Plan. Options to purchase 516,000 shares of the Company's Common Stock, originally granted at prices ranging from $10.25 to $15.25 per share, were amended to provide for a revised exercise price of $8.00 per share, which was above the market price of $6.25 per share on the effective date of the amendment. The expiration date of the repriced options was also amended to provide for a new ten-year term commencing on May 4, 1995. Under the amendment, the options become exercisable at a cumulative rate of 25% per year beginning on May 4, 1997. In 1993, the Company issued options for the purchase of 83,044 shares of Common Stock, which were immediately exercisable at prices ranging from $3.19 - $5.27 per share, in connection with the acquisition of Carriage Industries, Inc. A summary of the option activity for 1995 is as follows: Number of Exercise Price Shares Per Share Outstanding at December 31, 1994 618,316 $ 3.19 - $19.50 Granted 716,000 6.50 - 8.00 Exercised (3,057) 3.43 - 5.03 Canceled (561,500) 8.00 - 17.00 Outstanding at December 30, 1995 769,759 $ 3.19 - $19.50 A summary of the 1996 and 1997 option activity is as follows: Weighted- Weighted- Average Number Average Fair Value of of Exercise Options Granted Shares Price During the Year Outstanding at December 30, 1995 769,759 $ 7.74 Granted at market price 532,500 5.49 $2.61 Granted above market price 85,000 6.33 2.57 Exercised (12,227) 3.96 Forfeited (111,190) 7.55 Expired (4,000) 19.50 Outstanding at December 28, 1996 1,259,842 6.71 Granted at market price 499,500 9.74 4.45 Granted above market price 12,000 14.30 5.54 Exercised (22,825) 6.46 Forfeited (80,250) 7.28 Outstanding at December 27, 1997 1,668,267 $ 7.65 Options exercisable at December 28, 1996 45,342 $ 4.85 December 27, 1997 240,392 6.85 The following table summarizes information about stock options at December 27, 1997: Options Outstanding Weighted-Average Range of Number of Remaining Weighted-Average Exercise Prices Shares Contractual Life Exercise Price $3.43 - $ 5.27 176,267 7.4 years $ 4.82 5.75 - 8.00 1,216,000 7.9 6.99 9.25 - 14.30 276,000 9.5 12.37 $3.43 - $14.30 1,668,267 8.1 $ 7.65 Options Exercisable Range of Number of Weighted-Average Exercise Prices Shares Exercise Price $3.43 - $5.27 41,267 $4.86 5.75 - 8.00 199,125 7.26 $3.43 - $8.00 240,392 $6.85 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted- average assumptions: 1997 Grants 1996 Grants 1995 Grants Expected life 5 years 5 years 5 years Expected volatility 41.6% 44.3% 42.6% Risk-free interest rate 6.25% 6.38% 6.75% Dividend yield 0% 0% 0% The following pro forma summary presents the Company's net income (loss) and earnings (loss) per share which would have been reported had the Company determined stock compensation cost using the alternative fair value method of accounting set forth under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The pro forma impact on net income (loss) shown below may not be representative of future pro forma effects. 1997 1996 1995 Pro forma Net income (loss) $11,073 $(11,495) $(52,282) Earnings (loss) per share: Basic .99 (1.03) (4.45) Diluted .94 (1.03) (4.45) The Company also has a stock purchase plan which authorizes 108,000 shares of Common Stock for purchase by supervisory associates at the market price prevailing at the time of purchase. At December 27, 1997, 29,740 shares remained available for issue. Shares sold under this plan are held in escrow until paid for and are subject to repurchase agreements which give the Company the right of first refusal at the prevailing market price. Numbers of shares sold under the plan were 38,500 in 1997, 1,800 in 1996, and 2,100 in 1995. NOTE L--ASSET VALUATION LOSSES The Company incurred asset valuation losses of $18,995 ($13,074, after taxes) in 1996 and $63,425 ($51,058, after taxes) in 1995. The losses recorded in 1996 consisted of $14,297 related to a write-down of the Company's Tarboro textile spinning operation to its estimated net recoverable value following the Company's decision to exit this business and hold the facility for sale. Losses relating to Tarboro operations of $4,304, excluding the write-down described above, were included in the Company's textile segment results for 1996. Additional losses of $4,698 consisted primarily of write-downs of fixed assets and related intangibles where expected future cash flows are less than the assets' carrying value. Included in the 1996 asset valuation losses are $3,395 related to intangibles. At December 27, 1997, the Tarboro facility continued to operate while being held for sale. The Company anticipates completion of a transaction during fiscal 1998. Operating results of the Company's textile and apparel business included an operating profit of $864 associated with the Tarboro operation. In accordance with Statement of Financial Accounting Standards No. 121, no depreciation expense was recorded for the Tarboro physical assets, which are held for sale. Depreciation expense for the Tarboro assets was $3,585 in 1996 prior to the Company's decision to hold the facility for sale. Asset valuation losses recorded in 1995 included a $41,480 loss to adjust the assets of the Company's thread business to their estimated fair market value following an agreement in principle to sell the assets. Additional 1995 asset valuation losses of $17,988 in the Company's textile business related to a plant sold in 1995, equipment write-downs and the consolidation of certain facilities. The floorcovering segment included losses of $3,957 primarily related to the write-down of equipment utilized for a product line to be discontinued. NOTE M--RESTRUCTURING AND EXIT COSTS At December 28, 1996, the financial statements included $1,311 of accrued costs associated with the exit of two product lines in the Company's floorcovering business and consolidations of facilities in both the floorcovering and textile/apparel businesses. Included in the accrual were $600 associated with involuntary termination benefits related to 40 production associates and 29 sales, administrative or distribution associates. These costs were classified in "Selling and administrative expenses" in the Company's financial statements. At December 27, 1997, $60 remains accrued related to involuntary termination benefits. Additional costs that were incremental and directly attributable to the exit and consolidations totaling $711 were recorded in 1996. These costs primarily relate to inventory devaluations and impairment of current assets associated with discontinued product lines and clean up costs related to a facility idled in a consolidation. Of these costs, $326 were classified in "Cost of sales" and $385 were classified in "Other expense - net" in the Company's financial statements. At December 27, 1997, $92 remains accrued related to impairment of current assets associated with discontinued product lines and facility clean up costs. NOTE N--CASUALTY DAMAGE The Company recognized insurance benefits of $5,148 in 1995 related to manufacturing facilities that were damaged or destroyed in 1993 and 1994. These benefits were included in other income in the financial statements. NOTE O--COMMITMENTS The Company had commitments for purchases of machinery and equipment, building construction, and information system of approximately $10,362 at December 27, 1997. NOTE P--INDUSTRY SEGMENT INFORMATION The Company operates in two industry segments: Floorcovering and Textile/Apparel. Floorcovering includes carpet for manufactured housing, recreational vehicles, high-end residential and commercial markets, rugs and yarns. Textile/Apparel includes yarns, knit fabrics and apparel. Net Sales Operating Profit(Loss)(1) 1997 1996 1995 1997 1996 1995 Business Segments: Floorcovering $433,248 $366,431 $361,520 $30,724 $ 23,584 $ 20,213 Textile/Apparel 229,757 251,968 313,697 8,852 (20,166) (63,958) Intersegment elimination (1,162) (3,318) (4,375) 7 18 (3) Segment total $661,843 $615,081 $670,842 39,583 3,436 (43,748) Interest expense 12,583 13,000 15,591 Corporate expenses 9,315 6,156 5,444 Other (income) expense - net (1,117) (177) (111) Consolidated income (loss) before income taxes $18,802 $(15,543) $(64,672) Identifiable Capital Assets at Year End Expenditures 1997 1996 1995 1997 1996 1995 Business Segments: Floorcovering $231,714 $185,071 $189,208 $18,961 $11,016 $19,591 Textile/Apparel 138,853 129,692 192,134 7,336 5,539 10,222 Corporate 16,047 13,372 15,655 222 1,079 453 Total $386,614 $328,135 $396,997 $26,519 $17,634 $30,266 Depreciation and Amortization 1997 1996 1995 Business Segments: Floorcovering $15,181 $13,847 $13,988 Textile/Apparel 8,686 13,802 21,444 Corporate 628 546 548 Total $24,495 $28,195 $35,980 (1) Operating profit (loss) on a segment basis includes (income) expense related to casualty insurance (gains) losses and asset valuation losses which were recognized as follows: 1997 1996 1995 Floorcovering $ --- $ 1,136 $ (91) Textile/Apparel --- 17,609 58,468 NOTE Q--SUBSEQUENT EVENT In February 1998, the Company received a commitment letter from its principal senior lenders agreeing to replace its unsecured revolving credit and term-loan facility with a new unsecured credit facility that would provide for revolving credit of up to $100.0 million through a five year commitment period and a $60.0 million, seven year term-loan. The new credit facility is expected to have financial covenants and interest rates similar to those of the Company's existing revolving credit and term-loan facility. The transaction, which is subject to certain contingencies, including the execution of a mutually acceptable credit agreement, is expected to be completed in early April 1998. Assuming the transaction is completed as structured in the commitment letter, the Company's committed borrowing capacity would be increased by approximately $50.0 million. Under the revised agreement, the Company's maturities of long-term debt for the five years succeeding December 27, 1997 would be as follows: $7,268 in 1998, $9,947 in 1999, $15,950 in 2000, $16,285 in 2001, and $16,287 in 2002 (see Note F).
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS THE DIXIE GROUP, INC. AND SUBSIDIARIES (dollars in thousands) COL. A COL. B COL. C COL. D COL. E ADDITIONS (1) (2) DESCRIPTION Balance at Charged to Charged to Deductions- Balance at Beginning of Costs and Other Accounts Describe End of Period Period Expenses -Describe Year ended December 27, 1997: Reserves deducted from asset accounts: Allowance for doubtful accounts $ 3,614 $ 386 $ -0- $ 793 (2) $ 3,207 Provision to reduce inventories to net realizable value 7,346 -0- 2,447 (1) 2,129 (3) 7,664 Provision to reduce assets held for sale to estimated fair market value 18,564 -0- -0- 2,364 (4) 16,200 Year ended December 28, 1996: Reserves deducted from asset accounts: Allowance for doubtful accounts $ 3,156 $ 1,538 $ -0- $ 1,080 (2) $ 3,614 Provision to reduce inventories to net realizable value 9,668 -0- -0- 2,322 (3) 7,346 Provision to reduce assets held for sale to estimated fair market value 23,005 13,425 -0- 17,866 (4) 18,564 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS THE DIXIE GROUP, INC. AND SUBSIDIARIES (dollars in thousands) COL. A COL. B COL. C COL. D COL. E ADDITIONS (1) (2) DESCRIPTION Balance at Charged to Charged to Deductions- Balance at Beginning of Costs and Other Accounts Describe End of Period Period Expenses -Describe Year ended December 30, 1995: Reserves deducted from asset accounts: Allowance for doubtful accounts $ 3,617 $ 1,259 $-0- $ 1,720 (2) $ 3,156 Provision to reduce inventories to net realizable value 10,052 -0- -0- 384 (3) 9,668 Provision to reduce assets held for sale to estimated fair market value 1,999 21,006 -0- -0- 23,005 (1) Increase in reserves in connection with business combinations. (2) Uncollectible accounts written off, net of recoveries. (3) Provision for current items net of reductions for previous items. (4) Reserve reductions for assets sold.
ANNUAL REPORT ON FORM 10-K ITEM 14 (c) EXHIBITS YEAR ENDED DECEMBER 27, 1997 THE DIXIE GROUP, INC. CHATTANOOGA, TENNESSEE Exhibit Index EXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (3a) Restated Charter of The Incorporated by reference to Dixie Group, Inc. Exhibit (3) to Dixie's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997.* (3b) Amended and Restated By- Incorporated by reference to Laws of Dixie Yarns, Inc. Exhibits (3b) and (3c) to Dixie's Annual Report on Form 10-K for the year ended December 29, 1990.* (4a) Second Amended and Restated Incorporated by reference to Revolving Credit and Term Exhibit (4a) to Dixie's Annual Loan Agreement, dated Report on Form 10-K for the January 31, 1992, by and year ended December 28, 1991.* among Dixie Yarns, Inc. and Trust Company Bank, NationsBank of North Carolina, N.A. and Chemical Bank. (4b) Loan Agreement, dated Incorporated by reference to February 6, 1990 between Exhibit (4d) to Dixie's Annual Dixie Yarns, Inc. and New Report on Form 10-K for the York Life Insurance Company year ended December 30, 1989.* and New York Life Annuity Corporation. (4c) Form of Indenture, dated Incorporated by reference to May 15, 1987 between Dixie Exhibit 4.2 to Amendment No. 1 Yarns, Inc. and Morgan of Dixie's Registration Guaranty Trust Company of Statement No. 33-140 78 on Form New York as Trustee. S-3, dated May 19, 1987. * Commission File No. 0-2585 Exhibit Index - Continued EXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (4d) Revolving Credit Loan Incorporated by reference to Agreement dated as of Exhibit (4d) to Dixie's Annual September 16, 1991 by Report on Form 10-K for the and among Ti-Caro, Inc. and year ended December 28, 1991.* Trust Company Bank, individually and as agent, NCNB National Bank, and Chemical Bank. (4e) First Amendment to Revolving Incorporated by reference to Credit Loan Agreement dated Exhibit (4e) to Dixie's Annual as of August 19, 1992 by and Report on Form 10-K for the among Ti-Caro, Inc., T-C year ended December 26, 1992.* Threads, Inc. and Trust Company Bank, individually and as agent, NCNB National Bank, and Chemical Bank. (4f) First Amendment, dated Incorporated by reference to August 25, 1993 to Second Exhibit (4f) to Dixie's Annual Amended and Restated Report on Form 10-K for the year Revolving Credit and Term ended December 25, 1993.* Loan Agreement dated January 31, 1992, by and among Dixie Yarns, Inc. and Trust Company Bank, NationsBank of North Carolina, N.A. and Chemical Bank. (4g) Third Amended and Restated Incorporated by reference to Credit Agreement dated Exhibit (4) to Dixie's Quarterly March 31, 1995. Report on Form 10-Q for the quarter ended April 1, 1995.* (4h) Waiver and First Amendment Incorporated by reference to to Credit Agreement dated Exhibit (4h) to Dixie's Annual February 27, 1996. Report on Form 10-K for the year ended December 30, 1995.* (4i) Waiver and Modification Incorporated by reference to Agreement dated Exhibit (4i) to Dixie's Annual November 1, 1996. Report on Form 10-K for the year ended December 28, 1996.* (4j) Waiver Letter dated Incorporated by reference to December 13, 1996. Exhibit (4j) to Dixie's Annual Report on Form 10-K for the year ended December 28, 1996.* * Commission File No. 0-2585 Exhibit Index - Continued EXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (4k) Second Amendment dated Incorporated by reference to September 7, 1997 to the Exhibit (4) to Dixie's Quarterly Third Amended and Restated Report on Form 10-Q for the Credit Agreement dated quarter ended September 27, 1997.* March 31, 1995. (4l) Amendment to 9.96% Senior Filed herewith. Subordinated Notes due February 1, 2010. (4m) Letter agreement dated Filed herewith. February 17, 1998 re: Amendment to 9.96% Senior Subordinated Notes due February 1, 2010. (10a) Dixie Yarns, Inc. Nonquali- Incorporated by reference to fied Defined Contribution Exhibit (10c) to Dixie's Annual Plan. Report on Form 10-K for the year ended December 26, 1992.* (10b) Dixie Yarns, Inc. Nonquali- Incorporated by reference to fied Employee Savings Plan. Exhibit (10d) to Dixie's Annual Report on Form 10-K for the year ended December 26, 1992.* (10c) Dixie Yarns, Inc. Incentive Incorporated by reference to Compensation Plan. Exhibit (10e) to Dixie's Annual Report on Form 10-K for the year ended December 26, 1992.* (10d) Pooling and Servicing Incorporated by reference to Agreement dated as of Exhibit (2a) to Dixie's October 15, 1993, among Current Report on Form 8-K Dixie Yarns, Inc., Dixie dated October 15, 1993.* Funding, Inc. and NationsBank of Virginia, N.A. (as Trustee). (10e) Annex X - Definitions, to Incorporated by reference to Pooling and Servicing Exhibit (2b) to Dixie's Agreement dated as of Current Report on Form 8-K October 15, 1993, among dated October 15, 1993.* Dixie Yarns, Inc., Dixie Funding, Inc. and NationsBank of Virginia, N.A. (as Trustee). * Commission File No. 0-2585 Exhibit Index - Continued EXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (10f) Series 1993-1 Supplement, Incorporated by reference to dated as of October 15, Exhibit (2c) to Dixie's 1993, to Pooling and Current Report on Form 8-K Servicing Agreement dated as dated October 15, 1993.* of October 15, 1993, among Dixie Yarns, Inc., Dixie Funding, Inc. and NationsBank of Virginia, N.A. (as Trustee). (10g) Certificate Purchase Incorporated by reference to Agreement dated October 15, Exhibit (2d) to Dixie's 1993, among Dixie Yarns, Current Report on Form 8-K Inc., Dixie Funding, Inc. dated October 15, 1993.* and New York Life Insurance and Annuity Corporation. (10h) Certificate Purchase Incorporated by reference to Agreement dated October 15, Exhibit (2e) to Dixie's 1993, among Dixie Yarns, Current Report on Form 8-K Inc., Dixie Funding, Inc. dated October 15, 1993.* and John Alden Life Insurance Company. (10i) Certificate Purchase Incorporated by reference to Agreement dated October 15, Exhibit (2f) to Dixie's 1993, among Dixie Yarns, Current Report on Form 8-K Inc., Dixie Funding, Inc. dated October 15, 1993.* and John Alden Life Insurance Company of New York. (10j) Certificate Purchase Incorporated by reference to Agreement dated October 15, Exhibit (2g) to Dixie's 1993, among Dixie Yarns, Current Report on Form 8-K Inc., Dixie Funding, Inc. dated October 15, 1993.* and Keyport Life Insurance Company. (10k) Asset Purchase Agreement Incorporated by reference to dated May 23, 1996, by and Exhibit (2a) to Dixie's Current among T-C Threads, Inc. Report on Form 8-K dated d/b/a Threads USA, Threads June 3, 1996.* of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. * Commission File No. 0-2585 Exhibit Index - Continued EXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (10l) Amendment, dated May 31, Incorporated by reference to 1996, to Asset Purchase Exhibit (2b) to Dixie's Current Agreement dated May 23, Report on Form 8-K dated 1996, by and among T-C June 3, 1996.* Threads, Inc. d/b/a Threads USA, Threads of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. (10m) Second Amendment, dated Incorporated by reference to June 3, 1996, to Asset Exhibit (2c) to Dixie's Current Purchase Agreement dated Report on Form 8-K dated May 23, 1996, by and among June 3, 1996.* T-C Threads, Inc., d/b/a Threads USA, Threads of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. (10n) Yarn and Finished Goods Incorporated by reference to Agreement dated as of Exhibit (2d) to Dixie's Current June 3, 1996, by and among Report on Form 8-K dated T-C Threads, Inc. d/b/a June 3, 1996.* Threads USA, Threads of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. (10o) Accounts Receivable Incorporated by reference to Agreement dated as of Exhibit (2e) to Dixie's Current June 3, 1996, by and among Report on Form 8-K dated T-C Threads, Inc. d/b/a June 3, 1996.* Threads USA, Threads of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. * Commission File No. 0-2585 Exhibit Index - Continued EXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (10p) Noncompetition Agreement Incorporated by reference to dated as of June 3, 1996, by Exhibit (2f) to Dixie's Current and among T-C Threads, Inc. Report on Form 8-K dated d/b/a Threads USA, Threads June 3, 1996.* of Puerto Rico, Inc., Productos para la Industria de la Maquila, S. A., PRIMA, Hilos y Accessorios, S. A. de C. V., and Dixie Yarns, Inc. and American & Efird, Inc. (10q) Asset Purchase Agreement Incorporated by reference to dated as of August 29, 1997 Exhibit (2) to Dixie's Current among The Dixie Group, Inc., Report on Form 8-K dated Bretlin, Inc., Foamex L.P. August 29, 1997. and General Felt Industries, Inc. (10r) Dixie Yarns, Inc. Incentive Incorporated by reference to Stock Plan as amended. ANNEX A to Dixie's Proxy Statement dated March 27, 1998 for its 1998 Annual Meeting of Shareholders. (10s) Form of Nonqualified Stock Incorporated by reference to Option Agreement Under the Exhibit (10a) to Dixie's Quarterly Dixie Yarns, Inc. Incentive Report on Form 10-Q for the Stock Plan. quarter ended July 1, 1995.* (10t) Form of Amendment to Incorporated by reference to Nonqualified Stock Option Exhibit (10b) to Dixie's Quarterly Agreement Under the Dixie Report on Form 10-Q for the Yarns, Inc. Incentive Stock quarter ended July 1, 1995.* Plan. (10u) Form of Stock Option Incorporated by reference to Agreement Under the Dixie Exhibit (10b) to Dixie's Annual Yarns, Inc. Incentive Report on Form 10-K for the Stock Plan as amended. Year ended December 28, 1996.* (10v) Form of Stock Rights and Filed herewith. Restrictions Agreement for Restricted Stock Award Under Incentive Stock Plan as Amended. (10w) The Dixie Group, Inc. Stock Filed herewith. Ownership Plan as amended. *Commission File No. 0-2585 Exhibit Index - Continued EXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (10x) Form of Stock Subscription Filed herewith. Agreement Under Stock Ownership Plan of The Dixie Group, Inc. (10y) The Dixie Group, Inc. Filed herewith. Directors Stock Plan (21) Subsidiaries of the Filed herewith. Registrant. (23) Consent of Ernst & Young LLP. Filed herewith. *Commission File No. 0-2585 EX-4.L 2 EXHIBIT (4l) AMENDMENT TO 9.96% SENIOR SUBORDINATED NOTES DUE FEBRUARY 1, 2010 This shall constitute an amendment to the 9.96% Senior Subordinated Notes due February 1, 2010, by and between New York Life Insurance Company, or registered assigns, and Dixie Yarns, Inc. dated February 6, 1990, in the aggregate principal amount of $50,000,000 and the related Loan Agreement dated February 6, 1990, by and between the same parties, which is incorporated therein by reference (together the "NYL Notes"). All defined terms herein shall have the same meaning as in the NYL Notes unless a different meaning is clearly set forth herein. Whereas, Dixie Yarns, Inc. (the "Company"), whose name has been changed to The Dixie Group, Inc., and New York Life Insurance Company or registered assigns (the "holders") have agreed to certain amendments to the terms of the NYL Notes as set forth herein; and Whereas, the parties hereto desire to amend the NYL Notes to reflect the amendments agreed upon by them. Now, Therefore, for and in consideration of the mutual promises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be bound hereby, agree as follows: 1. Section 9, paragraph (F) of the NYL Notes is hereby deleted in its entirety and the following is substituted therefor: (F) DIVIDENDS. The Company will not declare or pay, or set apart any funds for the payment of, any dividends (other than dividends paid or payable in capital stock of the Company) on any shares of capital stock of the Company, by reduction of the Company's capital surplus or otherwise, or make any other distribution in respect of any shares of capital stock of the Company ("Dividend Action"), if immediately after giving effect to such Dividend Action (i) the sum of the amounts declared and paid or payable as, or set apart for, dividends (other than dividends paid or payable in capital stock of the Company) on, or distribution (taken at cost to the Company or fair value at time of distribution, whichever is higher) in respect of, all shares of capital stock of the Company subsequent to December 31, 1997, would be in excess of $1,000,000 plus 50% of aggregate cumulative Consolidated net income as defined in the NYL Notes for all periods subsequent thereto, determined as of the first day of the fiscal quarter in which a Dividend Action is declared by the Board of Directors of the Company; or (ii) if the Company's Interest Coverage Ratio for the fiscal period consisting of the four fiscal quarters immediately preceding such Dividend Action is less than the ratio set forth below: Four Quarter Fiscal Period Ending In Ratio Fiscal year 1998 1.25 to 1 Fiscal year 1999 and thereafter 1.50 to 1 For the purpose of determining the Company's compliance with this obligation, Interest Coverage Ratio shall mean, with respect to the applicable period, the ratio of (i) Consolidated net income as defined in the NYL Notes plus, to the extent deducted in determining such Consolidated net income, interest expense of the Company and its subsidiaries for the applicable period and any provision for taxes for such period (whether paid or deferred), exclusive of any non-cash gains or losses associated with restructuring or consolidations and gains or non-cash losses from sales of assets other than inventory sold in the ordinary course of business, to (ii) interest expense, of the Company and its subsidiaries, for the applicable period. 2. Section 9, paragraph (G) of the NYL Notes is hereby deleted in its entirety and the following is substituted therefor: (G) MINIMUM NET WORTH. The Company will not permit its consolidated Net Worth, measured at the end of each fiscal quarter, (exclusive of any amount previously written down for the property, machinery and related assets of the Tarboro manufacturing facility located in Tarboro, North Carolina, adjusted for any subsequent gain or non-cash losses on the sale of such property) to be at any time less than $115,000,000 plus fifty percent (50%) of the aggregate cumulative Consolidated net income (excluding losses) as defined in the NYL Notes, for any fiscal quarter from and after the beginning of the 1998 fiscal year; provided however, that net losses for any quarter during a fiscal year may be offset to the extent of net income during another quarter in the same fiscal year, but net losses for any fiscal year shall not be offset against net income for any other fiscal year and shall not reduce the amount of the minimum net worth requirements at the beginning of such fiscal year. 3. Section 9, paragraph (A) of the NYL Notes is hereby deleted in its entirety and the following is substituted therefor: (A) FUNDED INDEBTEDNESS OF THE COMPANY. The Company will not borrow or incur additional Funded Indebtedness if, immediately after giving effect thereto, the aggregate principal amount of Funded Indebtedness would exceed the percentage ratio set forth in the table below of the Capitalization of the Company; except that nothing in this paragraph (A) shall prohibit the renewal or refinancing of any Funded Indebtedness heretofore or hereafter incurred or assumed in compliance with this paragraph (A), provided such renewal or refinancing shall not result in an increase in the outstanding principal amount of such Funded Indebtedness. Period Ratio Fiscal year 1998 72.5% Fiscal year 1999 70.0% Fiscal year 2000 and thereafter 67.5% For the purpose of this paragraph only, Funded Indebtedness shall mean as of any date of determination the sum of all indebtedness, whether senior or subordinated indebtedness, (including the 7% Convertible Subordinated Debentures due 2012), which would in accordance with generally accepted accounting principles constitute long term or short term debt, any amount of off-balance sheet financing that is not shown on the balance sheet as debt,(including the 6.08% Trade Receivable-Backed Certificates, Series 1993-1), all reimbursement obligations under any letters of credit or acceptances (excluding letters of credit incurred in the ordinary course by another person other than with respect to Indebtedness of such person for money borrowed, including, without limitation, letters of credit issued for workers compensation and other insurance liabilities and trade letters of credit), all guarantees of obligations of another person, whether direct or indirect, contingent or otherwise, including but not limited to an obligation of such other person to purchase or otherwise acquire, or otherwise insure any creditor against loss in respect of, Indebtedness of any other person for borrowed money, and any amount representing mandatory dividend rights on capital stock or other equity of the Company. Capitalization shall mean as of any date of determination the sum of Funded Indebtedness plus Stockholders Equity (Net Worth) as reflected on the consolidated balance sheet of the Company plus an amount not to exceed $31,400,000 relating to the write-down of assets of T-C Threads, Inc. and its Subsidiaries. 4. As consideration for the amendments herein provided for, the Company agrees to pay to the holders, to be divided ratably between them, an additional fee in the amount of $250,000. 5. Notwithstanding the provisions of Section 9(B) and (D) of the NYL Notes, all wholly owned subsidiaries of the Company that have assets of $1,000,000 or more, except for Dixie Funding, Inc., shall guarantee the NYL Notes and shall be permitted to guarantee the Senior Indebtedness of the Company. All such guarantees of such Subsidiaries of the Company of the NYL Notes shall be subordinated to the obligations of the subsidiaries under the guarantee of the Senior Indebtedness in the same manner and to the same extent as the NYL Notes are subordinated to the Senior Indebtedness, and such subordination provisions shall be expressly set forth in any such guarantees of the NYL Notes. 6. The Company shall provide calculations of and a certificate of compliance with the Dividends, Minimum Net Worth and Funded Indebtedness requirements set forth herein as soon as reasonably possible, and in any event within 60 days after the close of each of the first three fiscal quarters of the Company in each fiscal year and within 90 days after the close of each fiscal year of the Company. In all other respects except as specifically amended herein, the NYL Notes shall remain in effect as on the date hereof unchanged. This amendment has been approved in accordance with the provisions of Section 10 of NYL Notes and has been approved by 66-2/3% of the NYL Note holders as evidenced by their signatures hereto. The Dixie Group, Inc., formerly Dixie Yarns, Inc. By: Gary A. Harmon Its: Treasurer New York Life Insurance New York Life Insurance Company and Annuity Corporation By: New York Life Insurance Company By: Steven M. Benevento By: Steven M. Benevento Its: Investment Manager Its: Investment Manager EX-4.M 3 Exhibit (4m) SunTrust Bank, Atlanta Post Office Box 4418 Atlanta, GA 30302-4418 February 17, 1998 The Dixie Group, Inc. 1100 Watkins Street Chattanooga, Tennessee 37404 Attention: Mr. Gary Harmon Re: Third Amended and Restated Credit Agreement, dated as of March 31, 1995, by and among The Dixie Group, Inc. (formerly known as Dixie Yarns, Inc.), SunTrust Bank Atlanta (formerly known as Trust Company Bank), individually and as Agent, NationsBank, N.A. (formerly known as NationsBank, N.A. (Carolinas)), individually and as Lead Manager, and Chemical Bank, as amended Ladies and Gentlemen: Reference is hereby made to that certain Third Amended and Restated Credit Agreement, dated as of March 31, 1995, by and among The Dixie Group, Inc. (formerly known as Dixie yarns, Inc.) (the "Borrower"), SunTrust Bank, Atlanta (formerly known as Trust Company Bank), individually and as Agent, NationsBank, N.A. (formerly known as NationsBank, N.A. (Carolinas)), individually and as Lead Manager and Chemical Bank, as amended through the date hereof (the "Credit Agreement"). All terms used herein without definition shall have the meaning set forth in the Credit Agreement. Pursuant to Section 9.12 of the Credit Agreement, the Borrower is restricted from modifying or amending Subordinated Debt and documents relating to Subordinated Debt to add or make more onerous any provision thereof. The Borrower has requested that the Agent and the Lenders, by their signatures below, consent to the execution and delivery by the Borrower of that certain amendment of the Senior Subordinated Note Agreement in the form attached hereto as Exhibit A. Except as expressly set forth herein, this letter agreement shall not be deemed to be a waiver of any provisions of the Credit Agreement or any other Credit Document and shall not preclude the future exercise of any right, power or privilege available to the Agent, the Lead manager or the Lenders whether under the Credit Agreement or otherwise. The Dixie Group, Inc. February 17, 1998 Page 2 This letter agreement constitutes the entire understanding of the parties with respect to the subject matter hereof, and any other prior or contemporaneous agreements, whether written or oral, with respect thereto are expressly superseded hereby. This letter agreement shall be governed by and construed in accordance with the laws of the State of Georgia. This letter agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. This letter agreement may be executed by telecopy and such facsimile signature shall be binding upon all parties hereto. Please indicate your consent to the terms and conditions of this letter agreement by signature of your authorized officers in the space indicated below. This letter agreement shall be effective upon receipt by the Agent of an executed counterpart hereof from the Required Lenders. SUNTRUST BANK, ATLANTA, Individually and as Agent By: Bradley J. Staples Title: Assistant Vice President NATIONSBANK, N.A., Individually and as Lead Manager By: David H. Dinkins Title: Vice President CHASE MANHATTAN BANK, Accepted and Agreed as the Date First Set Forth Above By: Karen M. Sharf Title: Vice President ACCEPTED AND AGREED AS OF THE DATE FIRST ABOVE WRITTEN THE DIXIE GROUP, INC. By: Gary A. Harmon Title: Treasurer EX-10.V 4 Exhibit (10v) THE DIXIE GROUP, INC. Amended and Restated Stock Rights and Restrictions Agreement for Restricted Stock Award Under 1990 Incentive Stock Plan Stock Rights and Restrictions Agreement made as of this ______ day of _______________, 199____, by and between The Dixie Group, Inc., a Tennessee corporation (hereinafter referred to as the "COMPANY"), and ______________________________________, an employee of the Company (hereinafter referred to as the "PARTICIPANT"); W I T N E S S E T H: WHEREAS, the shareholders of the Company have approved the 1990 Incentive Stock Plan, as amended (hereinafter referred to as the "PLAN"), for the purpose of providing financial incentives to directors of the Company and to selected key associates of the Company and its Affiliates who contribute significantly to the strategic and long-term performance objectives and growth of the Company and its Affiliates; and WHEREAS, the Company desires to grant to the Participant an Award of restricted shares of the Company's common stock under the Plan as a financial incentive and in consideration for the Participant's agreement to abide by the terms and conditions of the covenant not to compete contained in Section 10 hereof, and upon the additional terms and subject to the conditions described herein; and WHEREAS, the Participant desires to accept such grant and to enter into the covenant not to compete contained in Section 10 hereof in consideration for such grant; and WHEREAS, this Amended and Restated Agreement is intended to replace and supersede any prior Stock Rights and Restricted Agreement for Restricted Stock awarded to Participant. NOW, THEREFORE, in consideration of the mutual covenants herein set forth, for other good and valuable consideration, and subject to the terms and conditions of the Plan (a copy of which is or has been furnished to Participant) which are hereby incorporated herein by reference, the parties hereto hereby agree as follows: 1. ADMINISTRATION. Under the Plan the Compensation Committee of the Board of Directors of the Company ("COMMITTEE") administers the Plan, may grant shares of restricted stock and other Awards under the Plan, construe and interpret the Plan, establish rules and regulations and perform all other acts as it believes reasonable and proper under the Plan. Any Award may be canceled if a Participant violates the terms of either this Stock Rights and Restrictions Agreement or the Plan or acts in a manner which the Committee determines to be inimical to the best interest of the Company. Any decision made, or action taken, by the Committee shall be final, conclusive and binding on both parties to this Agreement. 2. AWARD OF RESTRICTED SHARES. Effective _______________, (the date the Committee approved this grant) the Committee hereby irrevocably grants to the Participant ____________ shares of the Company's Common Stock, par value $3.00 per share, as an Award of shares of restricted stock (the "RESTRICTED SHARES") pursuant to the Plan and as incentive compensation, subject to the terms and conditions hereinafter set forth. The number of Restricted Shares which are the subject of this Award shall be subject to antidilution and other adjustments in accordance with PARAGRAPH 15 of the Plan, provided that any additional shares issued as a result of such an adjustment shall be Restricted Shares as if such shares were originally issued subject hereto. By signing his name to the acceptance at the end of this Agreement, the Participant hereby irrevocably agrees to accept such Award subject to the terms and conditions hereinafter set forth. 3. LENGTH OF THE RESTRICTED PERIOD. This Award of Restricted Shares is conditioned upon Participant's continued employment by the Company for a minimum period of _______ (____) years. Accordingly, and subject to the other provisions of this Agreement, the restrictions set forth herein with respect to the Restricted Shares shall remain in full force and effect until 5:00 p.m., Eastern Time, on the ______ (___th) anniversary of the effective date of the Award set forth in Section 2 hereof. The period of time from such effective date until the expiration of restrictions in accordance with the preceding sentence is referred to herein as the "RESTRICTED PERIOD". The Committee, in its sole discretion, may elect to accelerate (but not delay) the expiration of the Restricted Period with respect to all or any portion of the Restricted Shares. 4. RESTRICTIONS ON TRANSFER DURING THE RESTRICTED PERIOD. During the Restricted Period, the Restricted Shares shall not be transferable by the Participant. More particularly, such shares may not be sold, assigned or transferred (whether by sale, gift or otherwise), pledged, hypothecated or encumbered in whole or in part either directly or by operation of law or otherwise including, but not by way of limitation, by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner. Any attempted assignment, transfer, pledge, hypothecation or other disposition of any of the Restricted Shares in violation of the foregoing provisions shall be null and void and without effect and shall cause the Participant to immediately forfeit all rights to the Restricted Shares, which shall immediately revert to the Company. 5. ANTI-ASSIGNMENT PROVISION. This Agreement shall be binding upon and inure to the benefit of the parties hereto, and the successors and assigns of the Company and its subsidiaries. However, except as may be approved by the Committee, where such approval will not adversely affect compliance of the Plan with Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), neither the Restricted Shares nor this Agreement shall be transferable or assignable by the Participant. 6. TERMINATION OF EMPLOYMENT. Since this Award of Restricted Shares is being made (subject to the terms and conditions hereof) as additional incentive compensation and Participant is not being required to make any payment for the Restricted Shares, the provisions of PARAGRAPH 7 of the Plan which deal with the Company's repurchase option are inapplicable to the Restricted Shares. Instead, upon any termination of the Participant's employment (as defined in Section 9 hereof) prior to the expiration of the Restricted Period with respect to any of the Restricted Shares for any reason other than Participant's death or disability, regardless of whether such termination is initiated by Participant or by the Company and regardless of whether it is for cause or without cause, voluntary or involuntary, all of the Restricted Shares shall immediately revert to the Company and the Participant shall cease to have any right or interest in such shares. In the event of Participant's death or disability, the Participant shall be entitled to receive a portion of the Restricted Shares granted hereunder equal to that fraction of the Restricted Shares with respect to which the Company has recognized compensation expense under generally accepted accounting principles (as such principles are in effect on the date this Award is effective) as of the date of death or disability. Disability shall be determined for this purpose in accordance with Paragraph 12 of the Plan. 7. CERTIFICATES ISSUED WITH RESPECT TO RESTRICTED SHARES. All certificates evidencing Restricted Shares issued to the Participant under this Agreement shall be registered in the name of the Participant, shall be deposited by him, together with a stock power endorsed in blank, with the Company, and shall bear a restrictive legend in substantially the following form: THESE SECURITIES HAVE BEEN ISSUED PURSUANT TO THE DIXIE GROUP, INC. INCENTIVE STOCK PLAN (THE "PLAN") AND ARE SUBJECT TO THE TERMS, CONDITIONS AND LIMITATIONS CONTAINED IN SUCH PLAN AND IN A STOCK RIGHTS AND RESTRICTIONS AGREEMENT DATED __________________, 1997. THESE SECURITIES MAY NOT BE SOLD OR OTHERWISE DISPOSED OF OR ENCUMBERED EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF THE PLAN AND OF SUCH AGREEMENT. Upon the expiration of the Restricted Period with respect to any of the Restricted Shares represented by any such certificate, the Company shall: (i) cancel any earlier certificate evidencing such shares which was issued as described above; and (ii) issue and deliver to the Participant a certificate of like tenor representing the number of shares of Common Stock for which the Restricted Period shall have expired, registered in the Participant's name but not bearing the restrictive legend described above. 8. RIGHTS OF PARTICIPANT WITH RESPECT TO RESTRICTED SHARES. Except as otherwise provided in the Plan or in this Stock Rights and Restrictions Agreement, Participants who receive Restricted Shares in accordance with this Agreement shall have all of the rights of any holder of the Company's common stock with respect to such shares, including without limitation the right to vote such shares and to receive any dividends declared and paid with respect to such shares during the Restricted Period. 9. EMPLOYMENT. As used herein, the term "employment" shall mean the employment or performance of services by an individual for the Company (or any Affiliate of the Company, as defined in the Plan) in Participant's current officer capacity, or in any future capacity which constitutes a promotion or increase in Participant's responsibilities as compared to Participant's present position as __________________. "Employment" shall also include any period of "Related Employment" as set forth in PARAGRAPH 14 of the Plan. Except as otherwise explicitly provided herein, any other change in Participant's employment status with the Company shall be deemed a termination of employment for purposes of this Stock Rights and Restrictions Agreement. 10. COVENANT NOT TO COMPETE. Participant agrees that for a period of one (1) year following any termination of Participant's employment with the Company, Participant will not own, manage, operate, control, be employed by, engage in or participate in the ownership, management, operation, control of, or be connected in any manner with or have any other direct or indirect financial interest in any business, firm, person, partnership, corporation, enterprise or concern which is engaged in any business of the type and character competitive with the operations of the Company with respect to which Participant was associated, including any of its subsidiaries or Affiliates, at the time of Participant's termination of employment. The above notwithstanding, the Participant may own stock in any publicly traded corporation that competes with the Company, provided that such stock constitutes less than one- percent (1%) of the issued and outstanding stock of such company. 11. NO RIGHT TO CONTINUED EMPLOYMENT. It is understood that this Agreement is not intended and shall not be construed as an agreement or commitment by the Company or any subsidiary or Affiliate to employ the Participant during the term of the Restricted Period with respect to the Restricted Shares which are the subject hereof, or for any fixed period of time. 12. WITHHOLDING. The Company shall not deliver or otherwise make Restricted Shares, or shares of common stock with respect to which the Restricted Period has expired, available to the Participant until the Company has received from Participant, in cash or any other form acceptable to the Committee, the amount necessary to enable the Company to remit to the appropriate government entity on behalf of the Participant any amounts required to be withheld for taxes, in accordance with Paragraph 17(f) of the Plan. If the applicable party fails to cooperate with the Company in fulfilling the requirements of this Section 13, then the Company shall have the right to retain, or to sell without notice, a sufficient number of shares of such stock to cover the amount required to be withheld. 13. PAYMENT OF EXPENSES. The Company shall pay all fees and expenses necessarily incurred by it in connection with the issue of shares pursuant hereto and will use its best efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable. 14. ENTIRE AGREEMENT. This Stock Rights and Restrictions Agreement and the Plan represent the entire agreement between the parties with respect to the subject matter hereof, and supersedes all negotiations, representations or agreements, either written or oral, with respect hereto. This agreement may not be amended, modified or altered, except in writing, duly accepted and executed by both parties. 15. GOVERNING LAW. This Stock Rights and Restrictions Agreement has been entered into pursuant to and shall be governed by the laws of the State of Tennessee. 16. GENDER AND NUMBER. Any use of the masculine includes the feminine and the neuter; and any use of the singular includes the plural, whenever such meanings are appropriate. 17. HEADINGS AND DEFINITIONS. The headings appearing at the beginning of each Section in this Agreement are intended only as an index and are not to be construed to vary the meaning of the provision to which they refer. Any capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Plan. IN WITNESS WHEREOF, this Agreement has been duly executed by the Participant and the Company has caused this Agreement to be duly executed by its officers thereunto duly authorized on the date and year above written. ATTEST: THE DIXIE GROUP, INC. _______________________ By:_______________________ Name: Title: Title: ACCEPTED BY: __________________________ PARTICIPANT Name:_____________________ Social Security No.:_________ EX-10.W 5 Exhibit (10w) THE DIXIE GROUP, INC. STOCK OWNERSHIP PLAN PURPOSE: The Board of Directors believes that it is desirable and in the best interest of the Company to encourage ownership of Common Stock of the Company by the principal officers of the Company. It is believed that a substantial investment in the Company by such officers will encourage and enhance their incentive to manage the Company for the long term benefit of its shareholders. Accordingly, the Board of Directors adopts this Plan in order to carry out such goals. GOAL: Every participant is encouraged to own that number of shares of Common Stock of the Company that represents in fair market value on the date of such subscription two (2) times such participant's base salary commencing on the first business day three (3) years following the Initial Subscription Offering Date (as defined herein) with respect to such participant. For such purpose, fair market value shall be determined by the closing price of the Company's Common Stock as reported by NASD on the date of such determination, or if the Common Stock is not traded on such day, then the earliest day prior thereto when such stock trades (the "NASD Price".) PARTICIPANTS: This Plan shall apply to the Chief Executive Officer, President, Chief Financial Officer, and all Corporate vice-presidents, and, such other persons as may be identified periodically from time to time hereafter by the Compensation Committee. PURCHASE FROM COMPANY: In order to facilitate the acquisition of Common Stock of the Company, the Company will on the date of adoption of the Plan by the Board of Directors, or as soon thereafter as may be practical, or on the next anniversary date of the adoption of the Plan (an "Anniversary Date") that occurs following the selection of a new corporate officer eligible to participate in the Plan (or on such earlier date as the Compensation Committee may designate in the case of a new corporate officer) (such date, as applicable, the "Initial Subscription Offering Date"), allow each participant to subscribe for shares of Common Stock up to but not to exceed that number of shares having a fair market value based upon the NASD Price on the Initial Subscription Offering Date equal to two (2) times the participant's base salary. The subscription price for such shares shall be the NASD Price on the Initial Subscription Offering Date. Thereafter on the two (2) successive Anniversary Dates following the Initial Subscription Offering Date, a participant shall be allowed to subscribe for the purchase of additional shares of Common Stock having a fair market value equal to two (2) times the participant's base salary on such Anniversary Date less the subscription price applicable to any previous subscriptions. The subscription price of such shares shall be the NASD Price of the Common Stock on the applicable Anniversary Date for such offering. Each participant's subscription shall be automatically called for payment on the third anniversary date of the Initial Subscription Offering Date with respect to that participant. At that time, the participant may pay the subscription price in cash and/or the surrender to the Company of shares of Common Stock of equal value either (i) owned by the participant or (ii) subject to acquisition under the subscription. DEATH OR DISABILITY: In the event of the death of a participant or the disability of a participant such that the participant shall no longer continue to be employed by the Company, all subscriptions outstanding shall become due and payable, if not earlier pursuant to their terms, six (6) months from the date of such participant's death or disability, as applicable. TERMINATION OF EMPLOYMENT: In the event of the termination of employment of a participant for any reason other than death or disability, whether for or without cause, voluntary or involuntary, all subscriptions outstanding shall become due and payable, if not earlier pursuant to their terms, ten (10) days from the participant's termination date. ACQUISITION: In the event that the Company is acquired by another person, corporation or legal entity, whether by merger, consolidation, sale of assets, tender offer or other means, the Company shall have the right to immediately call all outstanding subscriptions for payment, at its sole option. RESTRICTED STOCK: All shares of Common Stock purchased by a participant from the Company shall be restricted stock and shall be subject to the resale restrictions imposed by all applicable federal and state securities laws. RULE 16B-3 REQUIREMENTS: The Board of Directors reserves the right to modify the Plan retroactively. The Board of Directors may submit the Plan to the Company's shareholders for approval should it determine that it is desirable to do so either to meet the requirements of Rule 16b-3 of the Securities Exchange Act of 1934 or for any other reason. AUTHORITY TO MODIFY THE PLAN: The Company reserves the right to modify or terminate the Plan at all times, provided that the Company will not change the number of shares of Common Stock or the maturity date of any subscription agreement outstanding without such participant's consent. COMPENSATION COMMITTEE AUTHORITY: The Board of Directors grants to the Compensation Committee the authority to administer the Plan and to make any changes in the Plan necessary or desirable in order to carry out the purposes of the Plan. Furthermore, the Compensation Committee shall have exclusive authority to interpret the Plan provisions and to waive or modify any requirement of the Plan or any terms of a subscription agreement issued to a participant in the Plan. EX-10.X 6 Exhibit (10x) STOCK SUBSCRIPTION AGREEMENT UNDER STOCK OWNERSHIP PLAN OF THE DIXIE GROUP, INC. The undersigned participant in the Stock Ownership Plan (the "Plan") adopted by the Board of Directors of The Dixie Group, Inc., f/k/a Dixie Yarns, Inc. ("Dixie") on August 22, 1996, hereby subscribes for ________ shares of Common Stock of Dixie, par value of $3 per share, at a price of $________ per share (the "Shares"), a total purchase price of $________ (the "Purchase Price"). The undersigned participant in the Plan hereby agrees that the Purchase Price for the Shares shall be due and payable on ____________, 2001 (the third anniversary of the undersigned participant's Initial Subscription Offering Date), if not sooner, in accordance with the Plan. The undersigned hereby acknowledges receipt of a copy of the Plan and confirms that the undersigned has read the Plan. This subscription is subject to the terms and conditions of the Plan, including specifically the provisions of the Plan that provide for automatic call for payment of the Purchase Price and the optional call for payment of the Purchase Price before ____________, 2001. All shares of Common Stock issued pursuant to this subscription may be restricted shares and subject to limitations and conditions of sale, including the holding of such shares for a minimum period of time. Executed as of this ______ day of ____________, 1998. _________________ _____________ Participant Witness This subscription is accepted by The Dixie Group, Inc. pursuant to the terms of the Stock Ownership Plan adopted by the Board of Directors on August 22, 1996. The Dixie Group, Inc. By: _________________ Chairman and CEO EX-10.Y 7 Exhibit (10y) THE DIXIE GROUP, INC. DIRECTORS STOCK PLAN 1. PURPOSE. The purpose of the Dixie Group, Inc. Directors Stock Plan (the "Plan") is to create an environment conducive to the long-term benefit of the Company. The Board of Directors believes that if a substantial portion of the annual director's fee to be paid to non-employee directors of the Company is deferred and subsequently paid in Common Stock of the Company following the retirement from service of a director, there will be greater director interest in and focus upon the Company and its affairs. 2. ADMINISTRATION. The Plan and all decisions with respect thereto shall be administered by the Compensation Committee of the Board of Directors. The Compensation Committee shall periodically report to the Board of Directors upon the status of the Plan. 3. PARTICIPATION. All non-employee directors of the Company who are paid an annual fee for serving as a director (the "Participants") shall participate in the Plan. 4. DEFERRAL OF PAYMENT OF A PORTION OF THE ANNUAL FEE AND SUBSEQUENT PAYMENT THEREOF IN COMMON STOCK. Effective on the date of election of a director beginning with the annual meeting of stockholders held on May 1, 1997, one-half of the annual fee to be paid to Participants for serving as a director shall be deferred as to payment and converted into Performance Units which will be subsequently paid to each Participant in Common Stock of the Company in accordance with the terms and conditions of this Plan. The purchase price of the Performance Units for the purpose of determining the number of Performance Units to be recorded for each Participant shall be the closing price of the Common Stock as reported by NASDAQ on the day prior to the annual meeting date. The number of Performance Units to be recorded for each Participant shall be determined by dividing one-half the annual fee for serving as a director by the closing price. 5. PERFORMANCE UNIT ACCOUNT. An account (an "Account") shall be maintained by the Company for each Participant, and the number of Performance Units awarded to each Participant shall be recorded in the account. The number of Performance Units shall be adjusted for any stock splits, dividends or other capital transactions to the same extent as is effective for any stockholder of the Company. An amount equal to any cash dividends paid on the Common Stock of the Company shall be paid to each Participant for each Performance Unit held in the Participant's Account. No certificates shall be issued for shares of Common Stock and a Participant shall have no right or power to sell or transfer any Performance Units or shares of Common Stock to be issued subsequently with respect thereto nor to exercise any rights of a shareholder of Common Stock with respect to such Performance Units while the Participant continues to serve as a director of the Company. 6. DELIVERY OF CERTIFICATES FOR THE SHARES. At any time on or before the beginning of the final year of service of a Participant as a director of the Company, the Participant may elect in writing to have all shares of Common Stock to be issued to the Participant under the Plan delivered (a) upon the Participant ceasing to serve as a director or (b) in five (5) equal share distributions commencing upon the date the Participant ceases to serve as a director, and thereafter, on the four (4) successive anniversary dates thereof. If the Participant does not make an election, the shares will be issued upon the Participant ceasing to serve as a director. At such time or times, the Company will issue a certificate to the Participant for one share of Common Stock of the Company for each Performance Unit in the Participant's Account being distributed. The shares of Common Stock will then be available to be sold by the former director; subject, however, to the former director complying with all federal and state laws applicable to the sale of such securities. Participants shall have no rights of a shareholder with respect to Common Stock of the Company to be issued under the Plan until certificates for shares have been issued. 7. PREMATURE DEATH OF A PARTICIPANT. In the event of the death of a Participant, the Company will issue a certificate to the executor or administrator of the Participant's estate for one share of Common Stock of the Company for each Performance Unit in the Participant's Account. Such shares may then be sold, subject to the executor or administrator complying with all federal and state laws applicable to the sale of such securities. 8. LEGENDING OF SHARES. The Company shall have the right in its sole discretion to place a legend upon all certificates for shares of Common Stock issued under the Plan reflecting any legal restrictions upon or requirements necessary in order to sell the shares. 9. TERMINATION OF OR AMENDMENT OF THE PLAN. The Company retains the right to terminate the Plan at any time and for any purpose, and the Company shall have the right to amend the Plan in any manner at any time for any purpose. 10. GOVERNING LAW. The laws of the State of Tennessee shall govern all matters relating to the Plan and the rights of all Participants under the Plan. 11. LEGAL COMPLIANCE. No certificates for Common Stock shall be issued hereunder unless counsel for the Company is satisfied that such issuance will be in compliance with all applicable federal and state laws and regulations. 12. WITHHOLDING. The Company shall have the right to deduct from any payment made under the Plan any federal, state, or local income or other taxes required by law to be withheld with respect to such payment. It shall be a condition to the obligation of the Company to issue Common Stock that the participant pay the to Company such amount as may be required for the purpose of satisfying any liability to withhold federal, state or local income or other taxes. 13. DEFERRED COMPENSATION. It is the intent of the Company that the portion of the annual director fees retained under the Plan shall qualify for deferred compensation treatment under the Internal Revenue Code. Accordingly, no provision of the Plan shall be effective to the extent that it would cause the portion of director fees retained by the Company and the award of Performance Units under the Plan to become immediately taxed as income under the Internal Revenue Code. The Plan shall be unfunded, and the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any fee or right hereunder, it being intended that the rights to payment shall be no greater than those of the Company's general creditors hereunder. EX-21 8 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT THE DIXIE GROUP, INC. SUBSIDIARIES STATE/COUNTRY OF SUBSIDIARY INCORPORATION Dixie Export, Inc. USVI Carriage Industries, Inc. Georgia Masland Carpets, Inc. Alabama Patrick Carpet Mills, Inc. California Candlewick - Ringgold, Inc. Tennessee Candlewick - Lemoore, Inc. Tennessee Candlewick - Roanoke/Tennessee, Inc. Tennessee Dixie Funding, Inc. Tennessee DEL, Inc. Tennessee RMK, Inc. North Carolina Caro Knit Incorporated South Carolina C-Knit Apparel, Inc. Tennessee EX-23 9 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-30473) pertaining to the Employee Stock Purchase Plan of The Dixie Group, Inc., the Registration Statement (Form S-8 No. 33-59564) pertaining to options to acquire Common Stock of The Dixie Group, Inc. issued in connection with the acquisition of Carriage Industries, Inc., the Registration Statement (Form S-8 No. 33-42615) pertaining to the Incentive Stock Option Plan of The Dixie Group, Inc., and Post-Effective Amendment Number 2 to the Registration Statements (Form S-8 No. 2-20604 and No. 2- 56744) pertaining to the Employee Stock Purchase Plan and Employee Stock Option Plan of The Dixie Group, Inc. of our report dated February 19, 1998, with respect to the consolidated financial statements and schedule of The Dixie Group, Inc. included in the Annual Report (Form 10-K) for the year ended December 27, 1997. ERNST & YOUNG LLP Chattanooga, Tennessee March 25, 1998 EX-27 10
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF THE DIXIE GROUP, INC. AT AND FOR THE TWELVE MONTHS ENDED DECEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-27-1997 DEC-27-1997 1,848 0 32,657 3,207 82,661 135,936 373,449 199,027 386,614 67,885 160,810 44,321 0 0 76,923 386,614 661,843 661,843 551,851 551,851 0 0 12,583 18,802 7,183 11,619 0 0 0 11,619 1.03 .99
EX-27.1 11 RESTATED FDS FOR QUARTER ENDED MARCH 29, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF THE DIXIE GROUP, INC. AT AND FOR THE THREE MONTHS ENDED MARCH 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. ***EPS RESTATED*** 1,000 3-MOS DEC-27-1997 MAR-29-1997 1,882 0 32,868 3,205 104,738 155,729 345,417 188,560 368,964 65,459 158,969 43,836 0 0 67,695 368,964 162,360 162,360 135,147 135,147 0 0 3,337 4,964 1,983 2,981 0 0 0 2,981 .27 .26
EX-27.2 12 RESTATED FDS FOR QUARTER ENDED JUNE 28, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF THE DIXIE GROUP, INC. AT AND FOR THE SIX MONTHS ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. ***EPS RESTATED*** 1,000 6-MOS DEC-27-1997 JUN-28-1997 2,052 0 34,754 3,415 100,102 151,618 346,960 190,270 363,775 68,985 147,170 43,917 0 0 70,703 363,775 331,523 331,523 274,479 274,479 0 0 6,619 10,539 4,258 6,281 0 0 0 6,281 .56 .55
EX-27.3 13 RESTATED FDS FOR QUARTER ENDED SEPTEMBER 27, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF THE DIXIE GROUP, INC. AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. ***EPS RESTATED*** 1,000 9-MOS DEC-27-1997 SEP-27-1997 2,096 0 33,635 3,209 94,873 145,196 352,668 195,533 357,065 72,841 134,186 44,087 0 0 73,879 357,065 491,463 491,463 408,283 408,283 0 0 9,417 15,132 5,839 9,293 0 0 0 9,293 .83 .80
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