Form 10-K The Dixie Group

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A

(Mark One)

R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 30, 2006
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ________.


Commission File Number 0-2585

[f10kaamended200671307002.gif]

The Dixie Group, Inc.

(Exact name of registrant as specified in its charter)

Tennessee

 

62-0183370

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

104 Nowlin Lane, Suite 101
Chattanooga, TN  37421

 

 

(Address of principal executive offices)

 

 

(423) 510-7000

 

(Registrant's telephone number, including area code)

 

 

 


Securities registered pursuant to Section 12(b) of the Act:

 

None

 

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, $3.00 Par Value

 

None


 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o

Yes

R

No


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

o

Yes

R

No


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


Indicate by check mark if disclosure of delinquent filer 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 information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K.  R


Indicate by check mark whether the registrant is a large accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):


Large accelerated filer   o   Accelerated filer    R   Non-accelerated filer     o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

o

Yes

R

No



Page 1



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A (Continued)


The aggregate market value of the Common Stock held by non-affiliates of the registrant on June 29, 2007 (the last business day of the registrant's most recently completed fiscal second quarter) was approximately $125,800,000.  The aggregate market value was computed by reference to the closing price of the Common Stock on such date.  In making this calculation, the registrant has assumed, without admitting for any purpose, that all executive officers, directors, and holders of more than 10% of a class of outstanding Common Stock, and no other persons, are affiliates.  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 June 2, 2007

Common Stock, $3.00 Par Value

 

12,238,876 shares

Class B Common Stock, $3.00 Par Value

 

877,539 shares

Class C Common Stock, $3.00 Par Value

 

0 shares


DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the following document is incorporated by reference:

Proxy Statement of the registrant for annual meeting of shareholders to be held May 2, 2007 (Part III).




Page 2



EXPLANATORY NOTE


We have received comments from the Securities and Exchange Commission (“SEC”) regarding our Annual Report on Form 10-K for the fiscal year ended December 30, 2006, and as a result of those comments, we are amending and restating our annual report on Form 10-K.  The restatement does not affect our net income, net income per share, total cash flow, balance sheets, or stockholders' equity for any periods.


This Annual Report on Form 10-K/A amends our Annual Report on Form 10-K for the year ended December 30, 2006 as of the date of its original filing on March 9, 2007 to correct the following classification errors:


·

The classification of certain pension expenses as costs of discontinued operations.  


·

The classification of certain income tax payments as investing activities.  


The amendment reclassifies certain pension expenses from discontinued operations to continuing operations in our Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2006 and December 31, 2005.  We previously classified pension expenses related to employees of our textile operations based on our interpretation that Accounting Principles Board Opinion No. 30 required that such expenses be treated as costs of discontinued operations.  The pension expenses related to former employees of our textile operations that were discontinued in 1998 and sold in 1999 and prior years.  Our original classification of such pension costs and their presentation in our consolidated financial statements was reviewed with Ernst & Young LLP, our independent registered public accounting firm, who concurred with our presentation.   Based on a review of our presentation, we have reclassified these expenses as costs of continuing operations in accordance with the requirements of Statement of Financial Accounting Standards No.88, as clarified by the answer to Question 37 in the Financial Accounting Standards Board Special Report, "A Guide to Implementation of Statement 88 on Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits: Questions and Answers".


In determining the original classification for the income tax payments, as cash flows from investing activities, we considered that these income tax payments directly related to the sale of a business and discussed the presentation with our independent registered public accounting firm, who concurred with this presentation.  Based on a subsequent review of our presentation, we have now reclassified these income tax payments as operating activities in accordance with paragraph 23(c) of Statement of Financial Accounting Standards No. 95


We have also revised our presentation of comprehensive income to prominently display the details of comprehensive income in our Consolidated Statements of Stockholders’ Equity and Comprehensive Income and made conforming changes to other relevant portions of our Annual Report on Form 10-K.


As a result of the reclassifications discussed above, modifications were required to previously filed notes to our consolidated financial statements as follows: Note D, Note J, Note K, and Note L.


We have revised our discussion of disclosure controls and procedures and our report on internal control over financial reporting contained in our Report on Form 10-K for the fiscal year ended December 30, 2006 to discuss the above-referenced restatement and how such restatement affected our CEO’s and CFO’s conclusions regarding our disclosure controls and procedures and internal control over financial reporting.  We have concluded that, solely because of the restatement as described above and described in greater detail in Note Q to our consolidated financial statements, we are required to conclude, and we have concluded, that we had a material weakness in internal control.  Accordingly, we have concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of December 30, 2006.


The following sections of our Annual Report on Form 10-K for the fiscal year ended December 30, 2006 are hereby amended and are filed herewith:


o

Item 5  -  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

o

Item 6  -  Selected Financial Data

o

Item 7  -  Management’s Discussion and Analysis of Results of Operations and Financial Condition

o

Item 8  -  Financial Statements and Supplementary Data

o

Item 9A  -  Controls and Procedures

o

Item 15  -  Exhibits, Financial Statement Schedules



Page 3




Except for the foregoing amended information, this Form 10-K/A continues to describe conditions as of the date of the original filing and we have not updated the disclosures contained herein to reflect events that occurred at a later date.  This Annual Report on Form 10-K/A contains forward-looking statements that were made at the time the original Annual Report on Form 10-K was filed on March 9, 2007.  It is subject to the factors described in Item 1A - Risk Factors and must be considered in light of any subsequent statements, including forward-looking statements, in any reports made by the Company subsequent to the filing of the original Form 10-K, including all filings we made with the Securities and Exchange Commission.  Furthermore, the remainder of our Annual Report on Form 10-K is not amended and, accordingly, is not filed herewith.



Page 4



PART II


ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


The Company's Common Stock trades on the NASDAQ Global Market under the symbol DXYN.  No market exists for the Company's Class B Common Stock.

As of June 29, 2007, the total number of holders of the Company's Common Stock was approximately 4,000, including an estimated 3,500 shareholders who hold the Company's Common Stock in nominee names, but excluding approximately 880 participants in the Company's 401(k) plan who may direct the voting of the shares allocated to their accounts.  The total number of holders of the Company's Class B Common Stock was 13.


Recent Sales of Unregistered Securities


None.


Quarterly Financial Data, Dividends and Price Range of Common Stock


Following are quarterly financial data, dividends and price range of Common Stock for the four quarterly periods in the years ended December 30, 2006 and December 31, 2005.  Totals of the quarterly information for each of the years reflected below may not necessarily equal the annual totals.  The discussion of restrictions on payment of dividends is included in Note G to the Consolidated Financial Statements included herein.




Page 5



THE DIXIE GROUP, INC.
QUARTERLY FINANCIAL DATA, DIVIDENDS AND PRICE RANGE OF COMMON STOCK
(unaudited)
(dollars in thousands, except per share data)


 

2006 Quarters

 

 

1st 

 

 

2nd
Previously
Reported

 

 

2nd 
Restated

 

 

3rd 

 

 

4th 

Net sales

$

79,173 

 

$

88,046

 

$

88,046 

 

83,606 

 

80,275 

Gross profit

 

22,199 

 

 

24,464

 

 

24,750 

 

 

24,845 

 

 

24,044 

Operating income

 

3,168 

 

 

5,767

 

 

2,804 

 

 

5,606 

 

 

4,979 

Income from continuing operations

 

926 

 

 

2,904

 

 

1,028

 

 

2,703 

 

 

3,234 

(Loss) income from discontinued operations

 

(91)

 

 

(1,960)

 

 

(84)

 

 

(86)

 

 

72 

Income on disposal of discontinued operations

 

--- 

 

 

---

 

 

--- 

 

 

--- 

 

 

--- 

Net income

 

835 

 

 

944

 

 

944 

 

 

2,617 

 

 

3,306 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Continuing operations

 

0.07 

 

 

0.23

 

 

0.08 

 

 

0.21 

 

 

0.25 

   Discontinued operations

 

--- 

 

 

(0.16)

 

 

(0.01)

 

 

--- 

 

 

0.01 

   Disposal of discontinued operations

 

--- 

 

 

---

 

 

--- 

 

 

--- 

 

 

--- 

   Net income

 

0.07 

 

 

0.07

 

 

0.07 

 

 

0.21 

 

 

0.26 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Continuing operations

 

0.07 

 

 

0.22

 

 

0.08 

 

 

0.21 

 

 

0.25 

   Discontinued operations

 

(0.01)

 

 

(0.15)

 

 

(0.01)

 

 

(0.01)

 

 

--- 

   Disposal of discontinued operations

 

--- 

 

 

---

 

 

--- 

 

 

--- 

 

 

--- 

   Net income

 

0.06 

 

 

0.07

 

 

0.07 

 

 

0.20 

 

 

0.25 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Common Stock

 

--- 

 

 

---

 

 

--- 

 

 

--- 

 

 

--- 

   Class B Common Stock

 

--- 

 

 

---

 

 

--- 

 

 

--- 

 

 

--- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Prices:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   High

 

16.55 

 

 

15.26

 

 

15.26 

 

 

15.55 

 

 

14.92 

   Low

 

12.62 

 

 

11.44

 

 

11.44 

 

 

10.75 

 

 

11.80 

 

2005 Quarters

 

 

1st

 

 

2nd

 

 

3rd

 

 

4th
Previously
Reported

 

 

4th
Restated

Net sales

$

72,034 

 

$

82,073 

 

76,661 

 

$

87,759

 

87,759 

Gross profit

 

22,043 

 

 

26,148 

 

 

22,453 

 

 

25,874

 

 

25,866 

Operating income

 

4,293 

 

 

6,935 

 

 

3,161 

 

 

5,455

 

 

5,447 

Income from continuing operations

 

1,872 

 

 

3,584 

 

 

1,253 

 

 

3,254

 

 

3,249 

Loss from discontinued operations

 

(412)

 

 

(95)

 

 

(32)

 

 

(122)

 

 

(117)

Income on disposal of discontinued operations

 

834 

 

 

--- 

 

 

--- 

 

 

---

 

 

--- 

Net income

 

2,294 

 

 

3,489 

 

 

1,221 

 

 

3,132

 

 

3,132 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Continuing operations

 

0.15 

 

 

0.29 

 

 

0.10 

 

 

0.26

 

 

0.26 

   Discontinued operations

 

(0.03)

 

 

(0.01)

 

 

--- 

 

 

(0.01)

 

 

(0.01)

   Disposal of discontinued operations

 

0.07 

 

 

--- 

 

 

--- 

 

 

---

 

 

--- 

   Net income

 

0.19 

 

 

0.28 

 

 

0.10 

 

 

0.25

 

 

0.25 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Continuing operations

 

0.15 

 

 

0.28 

 

 

0.10 

 

 

0.25

 

 

0.25 

   Discontinued operations

 

(0.03)

 

 

(0.01)

 

 

(0.01)

 

 

(0.01)

 

 

(0.01)

   Disposal of discontinued operations

 

0.06 

 

 

--- 

 

 

--- 

 

 

---

 

 

--- 

   Net income

 

0.18 

 

 

0.27 

 

 

0.09 

 

 

0.24

 

 

0.24 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Common Stock

 

--- 

 

 

--- 

 

 

--- 

 

 

---

 

 

--- 

   Class B Common Stock

 

--- 

 

 

--- 

 

 

--- 

 

 

---

 

 

--- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Prices:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   High

 

19.40 

 

 

18.05 

 

 

18.42 

 

 

16.82

 

 

16.82 

   Low

 

16.65 

 

 

14.84 

 

 

16.12 

 

 

12.83

 

 

12.83 



Page 6



Shareholder Return Performance Presentation


The Company has elected to compare its performance to two different industry indexes published by Dow Jones, Inc.  The first of these is the Dow Jones Furnishings Index, which is composed of 9 publicly traded companies classified by Dow Jones in the furnishings industry.  The second is the Dow Jones Building Materials & Fixtures Index, which is composed of 7 publicly traded companies classified by Dow Jones in the building materials and fixtures industry.

In accordance with SEC rules, set forth below is a line graph comparing the yearly change in the cumulative total shareholder return on the Company’s Common Stock against the total return of the Standard & Poor’s 600 Stock Index, plus both the Dow Jones Furnishings Index and the Dow Jones Building Materials & Fixtures Index, in each case for the five year period ended December 31, 2006.  The comparison assumes that $100.00 was invested on December 31, 2001, in each of the Company’s Common Stock, the S&P 600 Index, and each of the two Peer Groups, and assumes the reinvestment of dividends.


[f10kaamended200671307004.gif]


The foregoing shareholder performance presentation shall not be deemed "soliciting material" or to be "filed" with the Commission subject to Regulation 14A, or subject to the liabilities of Section 18 of the Exchange Act.




Page 7



ITEM 6.   SELECTED FINANCIAL DATA


The following selected consolidated financial data have been derived from our consolidated financial statements.  All financial information set forth below reflects the restatement of our financial statements as discussed in Note (Q) of the Notes to Consolidated Financial Statements.  The classification errors affected periods prior to 2004 and, accordingly, we have restated our selected financial data for fiscal year 2003.  This data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, and “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


 

FISCAL YEARS

 

 

2006 (1)
Restated

 

 

2005
Restated

 

 

2004 (2)

 

 

2003 (3)
Restated

 

 

2002 (4)

OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

331,100 

 

$

318,526 

 

$

291,971 

 

$

234,149 

 

$

223,283 

Gross profit

 

95,838 

 

 

96,510 

 

 

99,479 

 

 

79,326 

 

 

77,183 

Operating income

 

16,558 

 

 

19,835 

 

 

25,597 

 

 

2,212 

 

 

24,104 

Income (loss) from
   continuing operations
   before income taxes

 

9,672 

 

 

14,411 

 

 

21,891 

 

 

(14,762)

 

 

16,790 

Income tax provision
   (benefit)

 

1,781 

 

 

4,453 

 

 

7,851 

 

 

(5,371)

 

 

5,342 

Income (loss) from
   continuing operations

 

7,891 

 

 

9,958 

 

 

14,040 

 

 

(9,391)

 

 

11,448 

Depreciation and
   amortization (5)

 

11,500 

 

 

10,058 

 

 

 8,601 

 

 

9,349 

 

 

9,684 

Dividends

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

Capital expenditures (5)

 

16,450 

 

 

27,175 

 

 

13,611 

 

 

5,182 

 

 

3,715 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL POSITION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

$

277,674 

 

$

278,089 

 

$

249,358 

 

$

239,840 

 

$

417,510 

Working capital

 

73,126 

 

 

75,516 

 

 

58,610 

 

 

47,260 

 

 

65,262 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Senior indebtedness

 

61,717 

 

 

65,714 

 

 

42,077 

 

 

28,011 

 

 

21,342 

   Convertible subordinated
     debentures

 

19,662 

 

 

22,162 

 

 

24,737 

 

 

27,237 

 

 

29,737 

Stockholders' equity

 

135,678 

 

 

123,484 

 

 

110,837 

 

 

96,081 

 

 

111,352 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from
   continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

$

0.62 

 

$

0.80 

 

$

1.16 

 

$

(0.80)

 

$

0.98 

   Diluted

 

0.61 

 

 

0.77 

 

 

1.12 

 

 

(0.80)

 

 

0.97 

Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Common Stock

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

   Class B Common Stock

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

Book value

 

10.49 

 

 

9.75 

 

 

9.03 

 

 

8.07 

 

 

9.46 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GENERAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common
   shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

12,701,506 

 

 

12,415,743 

 

 

12,119,050 

 

 

11,773,024 

 

 

11,723,192 

   Diluted

 

12,958,610 

 

 

12,878,886 

 

 

12,574,695 

 

 

11,773,024 

 

 

11,820,827 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shareholders (6)

 

4,850 

 

 

5,100 

 

 

2,800 

 

 

2,800 

 

 

2,800 

Number of associates

 

1,500 

 

 

1,500 

 

 

1,400 

 

 

1,300 

 

 

2,850 


(1)

Includes expenses of $3,249, or $1,829 net of tax, to terminate a defined benefit pension plan in 2006.


(2)

 Includes the results of operations of Chroma Systems Partners subsequent to November 7, 2004.


(3)

 Includes impairment, other charges and debt extinguishment costs that resulted from the sale of our North Georgia operations during 2003.  These items reduced operating income by $11,366, income (loss) from continuing operations before income taxes by $21,073 and income (loss) from continuing operations by $13,445, or $1.14 per basic and diluted share.


(4)

Includes impairment and other charges of $3,614 and a gain from the sale of an extrusion yarn facility of $6,901.  These items increased operating income by $3,287.


(5)

Excludes discontinued operations.


(6)

The approximate number of record holders of the Company's Common Stock for 2002 through 2006 includes Management's estimate of shareholders who held the Company's Common Stock in nominee names as follows:  2002 - 2,000 shareholders; 2003 - 2,100 shareholders; 2004 - 2,100 shareholders; 2005 - 4,500 shareholders; 2006 - 4,300 shareholders.



Page 8



 

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

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report.


OVERVIEW


Our business is concentrated in areas of the soft floorcovering market where innovative styling, design, color, quality and service as well as limited distribution are welcomed and rewarded.  Through our Fabrica, Masland Residential, Masland Contract and Dixie Home brands, we have a significant presence in the high-end of the soft floorcovering market.  We utilize a small amount of our manufacturing capacity to process plied and heat-set filament yarns and provide carpet dyeing and finishing services for independent carpet manufacturers.


During the five year period ending December 30, 2006, our carpet sales grew at a compounded annual growth rate of 12.6% in dollars and 12.7% in units, significantly faster than the sales of the carpet industry. During this five year period the compounded annual growth rate of carpet sales for the industry was 4.1% in dollars and its units sold declined by 0.7%.  We believe our focus on high-end markets, which appear to be growing faster than the overall carpet industry, and our dedication to the development of new and differentiated products are responsible for much of our revenue growth.


The rapid growth of our carpet business increased the complexity of our operations, significantly overtaxed our manufacturing, distribution and operating capabilities and created a number of issues - all of which increased cost, particularly in the second half of 2005 and the first half of 2006.  We addressed these issues by adding facilities and making a number of changes in our existing facilities and management to simplify our operations and reduce cost in the future.  We began seeing the benefits of these changes in the third and fourth quarters of 2006.


CRITICAL ACCOUNTING POLICIES


Certain estimates and assumptions are made when preparing our financial statements.  These estimates and assumptions affect various matters, including:


·

Amounts reported for assets and liabilities in our Consolidated Balance Sheets at the dates of the financial statements, and


·

Amounts reported for revenues and expenses in our Consolidated Statements of Operations during the reporting periods presented.


Estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict.  As a result, actual amounts could differ from estimates made in preparing the financial statements.


The Securities and Exchange Commission ("SEC") has issued disclosure guidance requiring management to identify its most critical accounting policies as defined by such guidance.  Such critical accounting policies are those that are both most important to the portrayal of our financial condition and results and the application of which requires our most difficult, subjective, and complex judgments.  Although estimates have not been materially different from actual experience, our estimates pertain to inherently uncertain matters that could result in material differences in subsequent periods.


We believe application of the following accounting policies require significant judgments and estimates in preparing our Consolidated Financial Statements and represent our critical accounting policies.  Other significant accounting policies are discussed in Note A to our Consolidated Financial Statements.


·

Revenue recognition.  Revenues, including shipping and handling amounts, are recognized when the following criteria are met:  persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, price to the buyer is fixed and determinable, and collectibility is reasonably assured.  Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment.  At the time revenue is recognized, we record a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions that exist at the time revenue is recognized.



Page 9




·

Accounts receivable.  We provide allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical experience and periodic evaluation of the financial condition of our customers.  If the financial condition of our customers significantly deteriorates, or other factors impair their ability to pay their debts, credit losses could differ from allowances recorded in our Consolidated Financial Statements.


·

Customer claims and product warranties.  We provide varying warranties related to our products against manufacturing defects and specific performance standards.  We record reserves for the estimated costs of defective products and failure to meet applicable performance standards.  The levels of reserves are established based primarily upon historical experience and our evaluation of known claims.  Because our evaluations are primarily based on historical experience, actual results could differ from the reserves used in our Consolidated Financial Statements.


·

Inventories.  Inventories are stated at the lower of cost or market.  Cost is determined using the last-in, first-out method (LIFO), which generally matches current costs of inventory sold with current revenues, for substantially all inventories.  Reserves are also established to adjust inventories that are off-quality, aged or obsolete to their estimated fair market value.  Inventories on hand are compared against anticipated future usage in order to evaluate obsolescence and excessive quantities.  Additionally, rates of recoverability per unit of off-quality, obsolete or excessive inventory are estimated based on historical rates of recoverability and other known conditions or circumstances that may affect future recoverability.  Actual results could differ from assumptions used to value our inventory.


·

Goodwill.  Goodwill is subject to annual impairment testing.  The impairment tests are based on determining the fair value of the underlying assets and businesses to which the goodwill applies based on estimates of future cash flows, which require judgments and assumptions about future economic factors that are difficult to predict and in some cases beyond our control.  Changes in our judgments and assumptions about future economic factors could materially change our estimate of values and could materially impact the value of goodwill and our Consolidated Financial Statements.


·

Self-insured accruals.  We estimate the costs to settle claims related to our self-insured medical, dental and workers' compensation plans.  These estimates include costs to settle known claims, as well as incurred and unreported claims.  The estimated costs of known and unreported claims are based on historical experience.  Actual results could differ from assumptions used to estimate these accruals.


·

Deferred tax assets and liabilities.  We recognize deferred tax assets and liabilities for the future tax consequences of differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted income tax rates that will be applicable in future periods when the temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities due to a change in income tax rates is recognized in earnings in the period that the change in income tax rates is enacted.  Taxing jurisdictions could retroactively disagree with our tax treatment of various items in a manner that could affect the tax treatment of such items going forward.  Accounting rules require these future effects to be evaluated using existing laws, rules and regulations, each of which is subject to change.


SHARE-BASED COMPENSATION


We adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based Payments" effective January 1, 2006.  Prior to January 1, 2006, we accounted for share-based payments using Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), as permitted by SFAS No. 123, and accordingly, did not record compensation expense for stock options.  


We did not modify existing stock-based awards prior to adoption of the new accounting statement and used the modified prospective method to account for compensation expense for share-based payments for periods after the date of adoption for (a) all unvested stock-based awards granted prior to January 1, 2006, based on the estimated grant-date fair value in accordance with previous guidance, and (b) all awards granted after January 1, 2006, based on the estimated grant-date fair value in accordance with the new provisions.  All stock-based awards granted prior to adoption of the new standard, and some of the awards granted after the adoption of the new standard, were not subject to a market condition.  Accordingly, we used the Black-Scholes option-pricing model to determine the grant-date fair value of these awards, both prior to and after adoption of the new statement.  The grant-date fair value of awards granted after the adoption of the new standard that are subject to a market condition were determined using



Page 10



a binomial model.  Because we used the modified prospective method to adopt the new standard and the estimated forfeiture method was used under SFAS No. 123 prior to the adoption of SFAS No. 123(R), there was no cumulative effect on our Consolidated Financial Statements as a result of the adoption of SFAS 123(R).  


At December 30, 2006, unvested stock options and shares of restricted stock awards are expected to vest over the next six and one half years.  The compensation expense associated with these awards was $662 thousand in 2006.  On March 2, 2007, restricted stock with a grant-date fair value of approximately $1.4 million that will vest over the next 2 years to 20 years was awarded under our 2006 stock incentive plan.  The compensation expense for all unvested stock options and restricted stock, including the awards granted in 2007, is expected to be $1.1 million in 2007, $831 thousand in 2008, $676 thousand in 2009 and $1.1 million thereafter.  No stock options were granted in 2006 and we do not expect to grant any stock options in 2007.


RESULTS OF OPERATIONS


Our discussion and analysis of financial condition and results of operations is based on our Consolidated Financial Statements that were prepared in accordance with U. S. generally accepted accounting principles.  The following table sets forth certain elements of our continuing operations as a percentage of net sales for the periods indicated:


 

Fiscal Year Ended

 

December 30,
2006

 

December 30,
2005

 

December 25,
2004

 

 

 

 

 

 

Net sales

100.0 %

 

100.0 %

 

100.0 %

Cost of sales

71.1%

 

69.7%

 

65.9%

 

 

 

 

 

 

Gross profit

28.9%

 

30.3 %

 

34.1 %

Selling and administrative expenses

22.9%

 

24.1 %

 

25.1 %

 

 

 

 

 

 

Other operating income

(0.2)%

 

(0.2)%

 

(0.1)%

Other operating expense

0.2 %

 

0.2 %

 

0.3 %

Defined benefit pension plan termination
   expenses


1.0 %

 


0.0 %

 


0.0 %

 

 

 

 

 

 

Operating income

5.0 %

 

6.2 %

 

8.8 %


Fiscal Year Ended December 30, 2006 (52 weeks), Compared with Fiscal Year Ended December 31, 2005 (53 weeks)

Net Sales.  Net sales for the year ended December 30, 2006 increased 3.9% to $331.1 million.  Net sales of our carpet products increased 4.7% and net sales related to our carpet yarn and carpet dyeing and finishing services decreased 7.4%.  Compared with 2005, net sales of residential carpet increased 4.1% and net sales of commercial carpet increased 5.9%.  Our 2006 net sales were negatively affected by significant weakness in the carpet industry during the third and fourth quarters of the year and one less operating week in 2006, compared with 2005.  Adjusting for the extra operating week in 2005, our net sales of carpet products rose 6.7% in dollars and 7.9% in units in 2006, compared to the previous year.  Our carpet sales continued to outpace the carpet industry, where 2006 sales of carpet declined 0.6% in dollars and 6.5% in units, compared with the prior year.


We believe the improvement in our net sales is principally attributable to our focus on high-end markets and the new and differentiated products we have developed over the past several years. Our ancillary sales of carpet yarn and carpet dyeing and finishing services are not significant to our core business and their decrease had less than a 0.5% effect on our total net sales.


Cost of Sales.  The increase in cost of sales as a percentage of sales in 2006, compared with 2005, was principally attributable to costs related to start-up a new tufting and modular/carpet tile operations and higher levels of off-quality production during the first half of the year.  A significant portion of the quality issues were related to outsourcing of tufting production prior to June when our new tufting facility began operating on a full schedule.  The year-over-year comparison was also affected by LIFO inventory liquidations that reduced cost of sales by $297 thousand in 2006 and $389 thousand in 2005.  



Page 11



Gross Profit.  The 1.4 percentage point decline in gross profit was attributable to the cost increases described above.


Selling and Administrative Expenses.  Selling and administrative expenses were down $864 thousand in 2006, compared with 2005, due to tight control of discretionary spending.  The decrease of these expenses as a percentage of net sales to 22.9% in 2006, compared with 24.1% in 2005, reflects the effect of lower levels of spending and higher net sales in 2006.


Other Operating Income.  Other operating income increased $78 thousand in 2006 due to insurance settlements and refunds that more than offset lower gains from the sale of operating assets.


Other Operating Expense.  Other operating expense increased $298 thousand in 2006 primarily as a result of losses recognized from the impairment of certain operating assets.


Defined Benefit Pension Plan Termination Expenses.  Expenses to terminate our legacy defined benefit pension plan were $3.2 million in 2006.  Approximately $2.9 million of these expenses related to the settlement of pension benefits for employees of our discontinued textile business segment.  These employees were terminated in 1999 and prior years.  The remaining expenses related to the settlement of pension benefits for employees of our ongoing floorcovering business segment.  


Operating Income.  Operating income was $16.6 million, or 5.0% of sales in 2006, compared with $19.8 million, or 6.2% of sales in 2005.


Interest Expense.  Interest expense increased $1.3 million in 2006 primarily as a result of higher levels of debt.


Other Income.  Other income decreased $157 thousand in 2006 principally as a result of a gain on the sale of real estate in 2005 that did not repeat in 2006.


Other Expense.  Other expense was not significant in 2006 or 2005.


Income Tax Provision.  Our effective income tax rate was 18.4% in 2006, compared with 30.9% in 2005.  The change in the effective tax rates is principally due to reductions in our tax contingency reserve due to favorable resolution of federal and state tax examinations and expirations of tax statute of limitations.  We also were able to utilize more state and federal income tax credits in 2006.


Net Income.  Income from continuing operations was $7.9 million, or $0.61 per diluted share in 2006, compared with $10.0 million, or $0.77 per diluted share in 2005.  Results related to discontinued operations reflected a loss of $188 thousand, or $0.02 per diluted share in 2006, compared to income of $178 thousand, or $0.02 per diluted share, in 2005.  Including discontinued operations, net income was $7.7 million, or $0.59 per diluted share in 2006, compared with $10.1 million, or $0.79 per diluted share, in 2005.


Fiscal Year Ended December 31, 2005 (53 weeks), Compared with Fiscal Year Ended December 25, 2004 (52 weeks)


Net Sales.  Net sales for the year ended December 31, 2005 increased 9.1% to $318.5 million.  Net sales of carpet products increased 9.9% and net sales of carpet yarn and dyeing and finishing services decreased 2.5%.  Compared with 2004, net sales of residential carpet products increased 8.8% and net sales of commercial carpet products increased 12.3%.  Net sales in 2005 were positively affected by one more operating week than in the 2004 year.  Adjusting for the extra operating week in 2005, net sales of carpet products rose 7.8%, in 2005, compared with the previous year.  Over half of the total improvement in net sales was attributable to the Dixie Home collection of residential products.  A significant portion of the growth in our carpet business resulted from increased selling prices enacted during 2005 in response to raw material and other cost increases.  The decrease in carpet yarn sales is principally a result of carpet yarn sourcing arrangements in the prior year associated with the sale of our North Georgia operations that did not continue into 2005.


Cost of Sales.  Cost of sales was 69.7% of net sales in 2005 compared with 65.9% in 2004.  The increase in cost as a percentage of net sales in 2005 reflects the effect of our rapid growth, higher raw material, energy and other costs and weather related disruptions on our operations.  The rapid growth of our carpet business experienced in



Page 12



recent years increased the complexity of our operations, significantly overtaxed our manufacturing, distribution and operational capabilities, and had a negative impact on customer service, product quality and manufacturing efficiencies.  To improve service to our customers, we added associates, lengthened operating schedules, and increased production outsourcing - all of which increased costs in 2005.  To simplify our East Coast manufacturing and distribution operations and consolidate our West Coast operations, we added staff and moved inventory to two new distribution centers and started a new tufting manufacturing operation.  While the cost to staff and build the infrastructure of these new facilities was incurred in 2005, these actions should simplify our operations and reduce cost in the future.  Lags in passing higher raw material and utility costs through to our customers also significantly impacted our costs in 2005.  The year-over-year comparison was also affected by LIFO inventory liquidations that reduced cost of sales by $389 thousand, or one tenth of a percentage point in 2005 and $2.3 million, or eight tenths of a percentage point in 2004.


Gross Profit.  The 3.8 percentage point decline in gross profit was attributable to the cost increases described above.


Selling and Administrative Expenses.  Selling and administrative expenses increased $3.7 million in 2005, but decreased as a percentage of net sales to 24.1% in 2006, compared with 25.1% in 2004.  The percentage decrease is primarily attributable to the higher sales volume.


Other Operating Income.  Other operating income increased $283 thousand in 2005 principally due to gains from the sale of operating equipment.


Other Operating Expense.  Other operating expense decreased $583 thousand in 2005 primarily as a result of costs related to a contract dispute in 2004 that did not repeat in 2005.


Operating Income.  Operating income was $19.8 million, or 6.2% of sales in 2005, compared with $25.6 million, or 8.8% of sales in 2004.


Interest Expense.  Interest expense increased $823 thousand in 2005 as a result of higher levels of debt and higher interest rates.


Other Income.  Other income decreased $814 thousand in 2005 principally as a result of earnings from an unconsolidated subsidiary and the favorable settlement of a vendor dispute in 2004, most of which did not repeat in 2005.


Income Tax Provision.  Our effective income tax rate was 30.9% for 2005, compared with 35.9% for 2004.  The change in the effective tax rates is principally due to reductions in our tax contingency reserve, greater utilization of state income tax credits and the deduction for domestic manufacturing/production activities that became effective in 2005.


Net Income.  Income from continuing operations was $10.0 million, or $0.77 per diluted share in 2005, compared with $14.0 million, or $1.12 per diluted share in 2004.  Results related to discontinued operations reflected income of $178 thousand, or $0.02 per diluted share in 2005, compared to a loss of $1.7 million, or $0.14 per diluted share in 2004.  The discontinued operations loss in 2004 principally consisted of workers' compensation costs associated with businesses sold in 2003 and 2004 and the loss on the sale of a spun yarn facility in 2004.  Including discontinued operations, net income was $10.1 million, or $0.79 per diluted share in 2005, compared with $12.3 million, or $0.98 per diluted share in 2004.


LIQUIDITY AND CAPITAL RESOURCES


During the year ended December 30, 2006, cash generated from operating activities was $21.6 million and $1.1 million of funds were received from the exercise of stock options.  These funds were used to finance $16.5 million of purchases of property, plant and equipment and to reduce total debt by $5.7 million.  Working capital decreased $2.4 million in 2006 principally as a result of lower levels of accounts receivable, inventories and income tax refunds receivable which more than offset lower levels of accounts payable and accrued expenses.  Accounts receivable decreased by $2.6 million, inventory decreased by $3.3 million and accounts payable and accrued expenses decreased by $6.4 million, due to softness in our business in the fourth quarter of the year.  Other current assets decreased due principally to lower levels of income tax refunds receivable.  



Page 13




During the year ended December 31, 2005, cash generated from operating activities was $5.9 million.  These funds were supplemented by $18.3 million of net borrowing under our credit facilities, $2.0 million from the exercise of stock options and $1.0 million from the sale of property plant and equipment.  These funds financed $27.2 of property, plant and equipment purchases.  Working capital increased $16.9 million principally due to higher levels of inventory to support sales growth and to better service our customers.


During the year ended December 25, 2004, our operations were funded by $11.1 million of available cash, $6.4 million of proceeds from the sale of property, plant and equipment, and $1.7 million from the exercise of stock options.  These funds financed $13.6 million of purchases of property, plant and equipment, $2.5 million related to adjustments of prior year business combinations and sales, $1.5 million to reduce total debt and to fund our operations.  Our operating activities used $1.5 million of funds, including $10.2 million of income taxes related to the sale of a business in 2003.  Working capital increased $11.4 million principally due to higher levels of accounts receivable and inventory to support a 25% increase in net sales.  Net cash on our balance sheet decreased $11.1 million and was primarily used to fund accounts payable and accrued expenses related to liabilities we retained when we sold our North Georgia operations in late 2003, including $10.2 million of related income tax liabilities.

In June 2006, we terminated a legacy defined benefit pension plan and distributed the plan's assets to participants.  Approximately $2.6 million of cash was used to fully fund the pension plan in order to complete the plan's termination and asset distribution.


Capital expenditures were $16.5 million in 2006 and depreciation and amortization was $11.5 million.  Capital expenditures in 2006 were primarily for equipment installed in our new tufting facility, new manufacturing technology in our other carpet operations and investments in information systems.  We expect capital expenditures to be approximately $14.0 million to $17.0 million in 2007, and depreciation and amortization is expected to be approximately $12.9 million.  The 2007 capital expenditures will be primarily for newer manufacturing technology and to a lesser extent, information systems.


In 2006, we amended our senior loan and security agreement to increase the revolving credit portion of the facility, change certain definitions in the agreement to facilitate the increase in revolving credit and reduce credit spreads applicable to borrowings under the agreement.  As amended, the senior loan and security agreement matures on May 11, 2010 and at December 30, 2006 provides us with $77.7 million of credit, consisting of $60 million of revolving credit and a $17.7 million term loan facility.  The term loan is payable in monthly principal installments of $142 thousand and is due May 11, 2010.


Interest rates available under the senior loan and security agreement may be selected from a number of options that effectively allow us to borrow at rates ranging from the lender's prime rate to the lender's prime rate plus 0.50% for base rate loans, or at rates ranging from LIBOR plus 1.00% to LIBOR plus 2.75% for LIBOR loans.  The weighted-average interest rate on borrowings outstanding under this agreement was 6.99% at December 30, 2006 and 6.60% at December 31, 2005.  Commitment fees ranging from 0.25% to 0.375% per annum are payable on the average daily unused balance of the revolving credit facility.  The interest rate on borrowings under the senior loan and security agreement are fixed by an interest rate swap arrangement, that effectively fixes $30.0 million of borrowings under the agreement at 4.79% plus the applicable credit spreads.  The levels of our accounts receivable and inventory limit borrowing availability under the revolving credit facility.  The facility is secured by a first priority lien on substantially all of our assets.


The senior loan and security agreement generally permits dividends and repurchases of our Common Stock up to an aggregate annual amount of $3.0 million and such distributions in excess of $3.0 million annually as may be made under conditions specified in the agreement.  The agreement also contains covenants that could limit future acquisitions.  The unused borrowing capacity under the senior credit facility on February 8, 2007 was approximately $23.0 million.


In 2006, $6.5 million of capital expenditures were financed by equipment financing notes.  Our $9.3 million of equipment financing notes have terms ranging from five to seven years, are secured by the specific equipment financed, bear interest ranging from 5.55% to 6.94% and are due in monthly installments of principal and interest of $206 thousand through February 2010 and monthly installments of principal and interest ranging from $157 thousand to $23 thousand from March 2010 through February 2013.  The notes do not have financial covenants.




Page 14



Our $5.2 million of capitalized lease obligations have terms ranging from five to six years, are secured by the specific equipment leased, bear interest ranging from 5.93% to 7.27% and are due in monthly installments of principal and interest of $135 thousand through January 2010 and monthly installments of principal and interest ranging from $110 thousand to $11 thousand from February 2010 through June 2011.  One of the lease obligations requires a final installment of $200 thousand at the end of its lease term in July 2010.  The capitalized leases do not have financial covenants.


Our $6.8 million mortgage note payable is secured by real property, is payable in monthly principal installments ranging from $17 thousand to $28 thousand during its remaining term and matures on March 2013.  The mortgage note bears interest based at LIBOR plus 2.0% and the interest rate is fixed at 6.54% through its maturity date by an interest rate swap arrangement.


Our $22.2 million convertible subordinated debentures bear interest at 7% payable semi-annually, are due in 2012, and are convertible by the holder into shares of our Common Stock at an effective conversion price of $32.20 per share, subject to adjustment under certain circumstances.  Mandatory sinking fund payments, which commenced May 15, 1998, retire $2.5 million principal amount of the debentures annually and approximately 86% of the debentures prior to maturity.  The convertible debentures are subordinated in right of payment to all of our other indebtedness.


Interest payments for our continuing operations were $7.2 million in 2006, $5.6 million in 2005, and $5.8 million in 2004.  Interest capitalized was $243 thousand in 2006 and $151 thousand in 2005.


The following table contains a summary of the Company's future minimum payments under contractual obligations as of December 30, 2006.


 

Payments Due By Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

2008

 

2009

 

2010

 

2011

 

Thereafter

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

6.4 

 

6.5 

 

6.7 

 

44.9 

 

3.8 

 

15.5 

 

83.8 

Interest - debt (1)

 

5.8 

 

 

5.5 

 

 

5.2 

 

 

2.8 

 

 

1.4 

 

 

0.7 

 

 

21.4 

Capital leases

 

1.3 

 

 

1.4 

 

 

1.5 

 

 

1.0 

 

 

0.1 

 

 

--- 

 

 

5.3 

Interest - capital leases

 

0.3 

 

 

0.2 

 

 

0.1 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

0.6 

Operating leases

 

1.7 

 

 

1.6 

 

 

1.2 

 

 

1.0 

 

 

0.9 

 

 

--- 

 

 

6.4 

Purchase commitments

 

3.5 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

3.5 

 

19.0 

 

15.2 

 

14.7 

 

49.7 

 

6.2 

 

16.2 

 

121.0 


(1) Variable rates used were those in effect at December 30, 2006.


We believe our operating cash flows, credit availability under our senior loan and security agreement and other sources of financing are adequate to finance our normal liquidity requirements.


Future Income Tax Considerations.   We do not anticipate that cash outlays for income taxes will be materially different than our provision for income taxes during the next three fiscal years.  Net operating loss and income tax credit carryforwards in the amount of approximately $1.0 million are expected to be utilized in the future.


RECENT ACCOUNTING PRONOUNCEMENTS


In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").  FIN 48 clarified the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes."  The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  It also provides guidance on accounting for adjustments of a previously recognized tax position, classification, interest and penalties, taxes in interim periods and disclosure requirements.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  We do not expect the adoption of FIN 48 to have a material effect on our financial statements.




Page 15



In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS No. 157").  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  We are currently in the process of evaluating the impact of SFAS No. 157 on our financial statements.


In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statement No. 87, 88, 106 and 132(R)" ("SFAS No. 158").  SFAS No. 158 requires recognition of the funded status of benefit plans in statements of financial position.  It also requires recognition in other comprehensive income of changes in the funding status of such plans during the year a change occurs, as well as modifies the timing of reporting and disclosure requirements.  SFAS No. 158 is effective for recognition of funding status and disclosures as of the end of the fiscal year ending after December 15, 2006.  The measurement of defined benefit plan assets and benefit obligations under SFAS No. 158 is effective for fiscal years ending after December 15, 2008.  The adoption of SFAS No. 158 resulted in decreasing other liabilities associated with our postretirement plans by $1,381 and increasing accumulated other comprehensive income by $856, net of $525 of deferred taxes.  The adoption of SFAS No. 158 did not have an effect on our defined benefit retirement plan (See Note J).


In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities", including an amendment of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities".  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  Eligible items for the measurement option include all recognized financial assets and liabilities except: investments in subsidiaries, interests in variable interest entities, employers' and plans' obligations for pension benefits, assets and liabilities recognized under leases, deposit liabilities, financial instruments that are a component of shareholder’s equity.  Also included are firm commitments that involve only financial instruments, nonfinancial insurance contracts and warranties and host financial instruments.  The statement permits all entities to choose at specified election dates, after which the entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings, at each subsequent reporting date.  The fair value option may be applied instrument by instrument; however, the election is irrevocable and is applied only to entire instruments and not to portions of instruments.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  We do not expect the adoption of this statement to have a material effect on our financial position or results of operations.


CERTAIN FACTORS AFFECTING THE COMPANY'S PERFORMANCE


In addition to the other information provided in this Report, the risk factors included in Item 1A should be considered when evaluating results of our operations, future prospects and an investment in shares of our Common Stock.  Any of these factors could cause our actual financial results to differ materially from our historical results, and could give rise to events that might have a material adverse effect on our business, financial condition and results of operations.


FORWARD-LOOKING INFORMATION


This Report contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  These statements include the use of terms or phrases that include such terms as "expects," "estimated," "projects," "believes," "anticipates," "intends," and similar terms and phrases.  Such terms or phrases relate to, among other matters, our future financial performance, business prospects, growth strategies or liquidity.  The following important factors may affect our future results and could cause those results to differ materially from our historical results.  These factors include, in addition to those "Risk Factors" detailed in Item 1A of this report, the cost and availability of capital, raw material and transportation costs related to petroleum price levels, the cost and availability of energy supplies, the loss of a significant customer or group of customers, materially adverse changes in economic conditions generally in carpet, rug and floorcovering markets we serve and other risks detailed from time to time in our filings with the Securities and Exchange Commission.




Page 16



ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


The supplementary financial information required by ITEM 302 of Regulation S-K is included in PART II, ITEM 5 of this report and the Financial Statements are included in a separate section of this report.


ITEM 9A.   CONTROLS AND PROCEDURES


Restatement

See Note Q – “Restatement of Consolidated Financial Statements”, of Notes to Consolidated Financial Statements, which fully describes the restatement of our previously issued financial statements to change the presentation of pension costs relating to our discontinued textile business in our Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the years ended December 30, 2006 and December 31, 2005 and of income tax payments related to the sale of a business in our Consolidated Statement of Cash Flows for the year ended December 25, 2004.  These changes in presentation had no impact on previously reported Net Income, Net Income per share, total cash flow, our Balance Sheets or stockholder’s equity.  These changes in presentation also did not affect our compliance with loan covenants or financial rewards granted to our associates and officers.


Evaluation of Disclosure Controls and Procedures.  We maintain disclosure controls and procedures to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the commission’s rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated the effectiveness of our disclosure controls and procedures (as such terms are defined in Rules 13(a)-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 30, 2006, the date of the financial statements included in this Form 10-K (the “Evaluation Date”).  In connection with the restatement described above, we reevaluated the effectiveness of our disclosure controls and procedures.


Public Company Accounting Oversight Board Auditing Standard No. 2 (“AS-2”) defines a material weakness over financial reporting as a significant deficiency or a combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  AS-2 identifies certain circumstances that are to be regarded as a “significant deficiency” and as a “strong indicator” that a material weakness in internal control over financial reporting exists.  The restatement of previously issued financial statements to reflect the correction of an error is such an indicator, under AS-2.


In conducting our reevaluation, we considered the provisions of AS-2, which identifies a restatement as a strong indicator of a material weakness in internal control over financial reporting.  We also considered the following additional factors: the facts underlying our original classification of the pension costs and income tax payments that are the subject of our restatement were disclosed in our consolidated financial statements and notes thereto, and our original classification of such pension costs and income tax payments were reviewed with and concurred in by Ernst & Young, LLP, our independent registered public accounting firm.  Based on our reevaluation on July 12, 2007, our CEO and CFO concluded that our original classification of such pension costs in our Consolidated Statements of Operations and Consolidated Statements of Cash Flows and certain income taxes in our Consolidated Statement of Cash Flows must be considered, as AS-2 is currently interpreted, a material weakness in our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 30, 2006.


Remediation of Material Weakness in Internal Control and Changes in Internal Control Over Financial Reporting


Subsequent to March 31, 2007, we remediated the material weakness described above by restating our financial statements to reclassify (1) pension costs related to our discontinued textile business from discontinued operations to continuing operations in our Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the years ended December 30, 2006, December 31, 2005, the three and six months ended June 30, 2006 and the nine months ended September 30, 2006 and (2) income taxes related to the sale of a business from investing activities to operating activities in our Consolidated Statements of Cash Flows for the year ended December 25, 2004.



Page 17




We continue to monitor new and emerging accounting guidance and industry interpretations to assist in our application of U. S. Generally Accepted Accounting Principles, and we will seek additional guidance regarding the accounting treatment of matters that, in our judgment, require such additional review.  Accordingly, we have remediated the material weakness in our internal control and our CEO and CFO have concluded that, as of date hereof, our disclosure controls and procedures and internal controls over financial reporting are effective.


Changes in Internal Control over Financial Reporting.  During the last fiscal quarter, there have not been any changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.



MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f).


Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.  Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures, as well as diverse interpretation of U. S. Generally Accepted Accounting Principals by accounting professionals.  Internal control over financial reporting also can be circumvented by collusion or improper management override.  Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  These inherent limitations are known features of the financial reporting process; therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.


We conducted, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, an evaluation of the effectiveness of our internal control over financial reporting based on the frame work in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.


In our annual report on Form 10-K for the year ended December 30, 2006, based on our evaluation under such framework, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 30, 2006.  In response to our restatements described above, our review of PCAOB Auditing Standard No. 2 and our discussions with Ernst & Young, LLP, our independent registered public accounting firm, we reevaluated the effectiveness of our internal control over financial reporting.  Based on the information and guidance available during our reevaluation on July 12, 2007, we have determined that under current interpretation of AS-2 we are required to and have concluded that our classification of certain pension costs in our Consolidated Statements of Operations and Consolidated Statements of Cash Flows and certain income taxes in our Consolidated Statement of Cash Flows should be regarded as a control deficiency that represents a material weakness in our internal control over financial reporting.  Accordingly, and solely as a consequence of the restatement described above, we have revised our earlier assessment and have concluded our internal control over financial reporting was not effective as of December 30, 2006.


Our revised assessment of the effectiveness of our internal control over financial reporting as of December 30, 2006 has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.



Page 18



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (as revised), that The Dixie Group, Inc. did not maintain effective internal control over financial reporting as of December 30, 2006, because of the effect of a material weakness in the Company’s internal control that arose from the Company’s incorrect classification of amounts previously reported as discontinued operations in the consolidated statements of operations and consolidated statements of cash flows for the years ended December 30, 2006 and December 31, 2005 and to income tax payments related to the sale of a business previously reported as an investing activity in the consolidated statement of cash flows for the year ended December 25, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Dixie Group Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.


We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


In our report dated March 5, 2007, we expressed an unqualified opinion on management's previous assessment that the Company maintained effective internal control over financial reporting as of December 30, 2006 and an unqualified opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2006, based on the COSO criteria.  As described in the following paragraph, the Company subsequently identified misstatements in its annual and quarterly financial statements.  Such matters were considered to be a material weakness as further discussed in the following paragraph.  Accordingly, management has revised its assessment about the effectiveness of the Company’s internal control over financial reporting and our present opinion on the effectiveness of the Company’s internal control over financial reporting as of December 30, 2006, as expressed herein, is different from that expressed in our previous report.


A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  The following material weakness has been identified and included in management’s assessment.  Subsequent to December 30, 2006, management concluded that the Company’s historical (i) classification of the expenses and losses incurred associated with a terminated defined benefit pension plan as discontinued operations in the 2006 and 2005 consolidated statements of operations was not correct and (ii) classification of income tax payments related to a discontinued operation was incorrectly classified as an investing activity in the 2004 consolidated statement of cash flows.  Management concluded that the incorrect application of generally accepted accounting principles related to the classification of these amounts constituted a material weakness in internal control over financial reporting as of December 30, 2006.  As a result of this material weakness in internal



Page 19



control, management concluded that the 2006 and 2005 consolidated statements of operations and 2004 consolidated statement of cash flows should be restated to properly (i) classify the expenses and losses incurred associated with a terminated defined benefit pension plan as continuing operations and (ii) classify income tax payments related to a sold business as an operating activity.  See Note Q to the consolidated financial statements for a full discussion of the effects of these changes to the Company’s consolidated financial statements.  This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and this report does not affect our report dated March 5, 2007, except for Notes D, J, K, L and Q, as to which the date is July 12, 2007 on those consolidated financial statements.


In our opinion, management’s revised assessment that The Dixie Group, Inc. did not maintain effective internal control over financial reporting as of December 30, 2006, is fairly stated, in all material respects, based on the COSO control criteria.  Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, The Dixie Group, Inc. has not maintained effective internal control over financial reporting as of December 30, 2006, based on the COSO criteria.


/s/ Ernst & Young LLP


Atlanta, Georgia

March 5, 2007, except for the effects of the

  material weakness described in the sixth paragraph

  above, as to which the date is July 12,  2007





Page 20



 

PART IV.


ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES.



(a)

(1) and (2) - The response to this portion of Item 15 is submitted as a separate section of this report.

 

(3)

Please refer to the Exhibit Index which is attached hereto.

(b)

Exhibits - The response to this portion of Item 15 is submitted as a separate section of this report.  See Item 15 (a) (3) above.

(c)

Financial Statement Schedules - The response to this portion of Item 15 is submitted as a separate section of this report.




Page 21



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.

 July 13, 2007

The Dixie Group, Inc.

/s/ DANIEL K. FRIERSON          
By: Daniel K. Frierson
      Chairman of the Board
      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.

/s/ DANIEL K. FRIERSON         
Daniel K. Frierson

Chairman of the Board,
Director and Chief Executive Officer

July 13, 2007



/s/ GARY A. HARMON            
Gary A. Harmon



Vice President,
Chief Financial Officer



July 13, 2007



/s/ D. EUGENE LASATER        
D. Eugene Lasater



Controller



July 13, 2007



/s/ J. DON BROCK                 
J. Don Brock



Director



July 13, 2007



/s/ PAUL K. FRIERSON           
Paul K. Frierson



Director



July 13, 2007



/s/ WALTER W. HUBBARD       
Walter W. Hubbard



Director



July 13, 2007



/s/ LOWRY F. KLINE               
Lowry F. Kline



Director



July 13, 2007



/s/ JOHN W. MURREY, III         
John W. Murrey, III



Director



July 13, 2007

 

 

 


 



Page 22





ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 15(a)(1) AND (2) AND ITEM 15(c)

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS

FINANCIAL STATEMENT SCHEDULES

YEAR ENDED DECEMBER 30, 2006

THE DIXIE GROUP, INC.

CHATTANOOGA, TENNESSEE



Page 23




FORM 10-K - ITEM 15(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 Registered Public Accounting Firm


Consolidated Balance Sheets - December 30, 2006 and December 31, 2005


Consolidated Statements of Operations - Years ended December 30, 2006, December 31, 2005, and December 25, 2004


Consolidated Statements of Cash Flows - Years ended December 30, 2006, December 31, 2005, and December 25, 2004


Consolidated Statements of Stockholders' Equity and Comprehensive Income - Years ended December 30, 2006, December 31, 2005, and December 25, 2004


Notes to Consolidated Financial Statements


The following Consolidated Financial Statement schedule of The Dixie Group, Inc. and subsidiaries is included in Item 15(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.




Page 24



Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders of The Dixie Group, Inc.


We have audited the accompanying consolidated balance sheets of The Dixie Group, Inc. as of December 30, 2006 and December 31, 2005, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 30, 2006.  Our audits also included the financial statement schedule listed in the Index at Item 15(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 the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Dixie Group, Inc. at December 30, 2006 and December 31, 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 30, 2006, in conformity with U.S. 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.


As discussed in Note A to the consolidated financial statements, in 2006 the Company changed its methods of accounting for share-based compensation and postretirement benefit plans.


As discussed in Note Q to the consolidated financial statements, the consolidated statements of cash flows for the years ended December 30, 2006, December 31, 2005 and December 25, 2004 and the statements of operations for the years ended December 30, 2006 and December 31, 2005 have been restated.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Dixie Group, Inc.’s internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2007, except for the effects of the material weakness described in the sixth paragraph of that report, as to which the date is July 12, 2007, expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.


/s/ Ernst & Young LLP



Atlanta, Georgia

March 5, 2007, except for Notes D, J, K, L and Q,

  as to which the date is July 12,  2007






Page 25



THE DIXIE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

 

 

December 30, 2006

 

 

December 31, 2005

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

538 

 

$

--- 

 

Accounts receivable (less allowance for doubtful

 

 

 

 

 

 

 

 

accounts of $651 for 2006 and $595 for 2005)

 

 

30,922 

 

 

33,482 

 

Inventories

 

 

69,600 

 

 

72,871 

 

Other current assets

 

 

7,652 

 

 

9,814 

 

 

TOTAL CURRENT ASSETS

 

 

108,712 

 

 

116,167 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

 

 

Land and improvements

 

 

6,047 

 

 

6,047 

 

Buildings and improvements

 

 

45,407 

 

 

44,348 

 

Machinery and equipment

 

 

113,673 

 

 

107,993 

 

 

 

 

 

165,127 

 

 

158,388 

 

Less accumulated depreciation and amortization

 

 

(66,729)

 

 

(65,440)

 

 

NET PROPERTY, PLANT AND EQUIPMENT

 

 

98,398 

 

 

92,948 

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

 

 

Goodwill

 

 

56,960 

 

 

57,177 

 

Other long-term assets

 

 

13,604 

 

 

11,797 

 

 

TOTAL OTHER ASSETS

 

 

70,564 

 

 

68,974 

TOTAL ASSETS

 

$

277,674 

 

$

278,089 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

8,382 

 

$

14,929 

 

Accrued expenses

 

 

19,541 

 

 

19,381 

 

Current portion of long-term debt

 

 

7,663 

 

 

6,341 

 

 

TOTAL CURRENT LIABILITIES

 

 

35,586 

 

 

40,651 

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT

 

 

 

 

 

 

 

Senior indebtedness

 

 

57,780 

 

 

60,987 

 

Capital lease obligations

 

 

3,937 

 

 

4,727 

 

Convertible subordinated debentures

 

 

19,662 

 

 

22,162 

 

 

TOTAL LONG-TERM DEBT

 

 

81,379 

 

 

87,876 

 

 

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

 

11,697 

 

 

10,768 

 

 

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

 

13,334 

 

 

15,310 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note O)

 

 

--- 

 

 

--- 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Common Stock ($3 par value per share):  Authorized

 

 

 

 

 

 

 

 

80,000,000 shares, issued - 15,506,664 shares

 

 

 

 

 

 

 

 

for 2006 and 15,347,589 shares for 2005

 

 

46,520 

 

 

46,043 

 

Class B Common Stock ($3 par value per share):

 

 

 

 

 

 

 

 

Authorized 16,000,000 shares, issued - 829,825

 

 

 

 

 

 

 

 

shares for 2006 and 714,560 shares for 2005

 

 

2,489 

 

 

2,144 

 

Additional paid-in capital

 

 

134,469 

 

 

134,353 

 

Unearned stock compensation

 

 

--- 

 

 

(719)

 

Retained earnings (accumulated deficit)

 

 

6,297 

 

 

(1,406)

 

Accumulated other comprehensive loss

 

 

(8)

 

 

(2,887)

 

 

 

 

 

189,767 

 

 

177,528 

 

Less Common Stock in treasury at cost - 3,398,845

 

 

 

 

 

 

 

 

shares for 2006 and 3,395,390 shares for 2005

 

 

(54,089)

 

 

(54,044)

 

 

TOTAL STOCKHOLDERS' EQUITY

 

 

135,678 

 

 

123,484 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

277,674 

 

$

278,089 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

 

 



Page 26



 THE DIXIE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


 

 

 

 

Year Ended

 

 

 

 

 

December 30, 2006
Restated

 

 

December 31, 2005
Restated

 

 

December 25, 2004

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 331,100 

 

$

 318,526 

 

$

 291,971 

Cost of sales

 

 

 235,262 

 

 

 222,016 

 

 

192,492 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 95,838 

 

 

96,510 

 

 

 99,479 

Selling and administrative expenses

 

 

 75,938 

 

 

 76,802 

 

 

 73,143 

Other operating income

 

 

 (640)

 

 

 (562)

 

 

 (279)

Other operating expense

 

 

 733 

 

 

 435 

 

 

 1,018 

Defined benefit pension termination expenses

 

 

3,249 

 

 

---

 

 

---

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 16,558 

 

 

19,835 

 

 

 25,597 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 7,213 

 

 

5,948 

 

 

  5,125 

Other income

 

 

 (454)

 

 

 (611)

 

 

 (1,425)

Other expense

 

 

 127 

 

 

 87 

 

 

 6 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before taxes

 

 

 9,672 

 

 

14,411 

 

 

 21,891 

Income tax provision

 

 

1,781 

 

 

4,453 

 

 

 7,851 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

7,891 

 

 

 9,958 

 

 

14,040 

Loss from discontinued operations, net of tax

 

 

 (188)

 

 

  (656)

 

 

 (1,287)

Income (loss) on disposal of discontinued
   operations, net of tax

--- 

 

 

834 

 

 

 (438)

Net income

 

$

7,703 

 

$

 10,136 

 

$

 12,315 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS (LOSS) PER SHARE:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.62 

 

$

 0.80 

 

$

 1.16 

 

Discontinued operations

 

 

(0.01)

 

 

 (0.05)

 

 

 (0.10)

 

Disposal of discontinued operations

 

 

---    

 

 

 0.07 

 

 

 (0.04)

 

Net income

 

$

 0.61 

 

$

 0.82 

 

$

 1.02 

 

 

 

 

 

 

 

 

 

 

 

 

SHARES OUTSTANDING

 

 

 12,702 

 

 

 12,416 

 

 

 12,119 

 

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS (LOSS) PER SHARE:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.61 

 

$

 0.77 

 

$

 1.12 

 

Discontinued operations

 

 

 (0.02)

 

 

 (0.05)

 

 

 (0.10)

 

Disposal of discontinued operations

 

 

---    

 

 

 0.07 

 

 

 (0.04)

 

Net income

 

$

0.59 

 

$

 0.79 

 

$

0.98 

 

 

 

 

 

 

 

 

 

 

 

 

SHARES OUTSTANDING

 

 

12,959 

 

 

12,879 

 

 

12,575 

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER SHARE:

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

---    

 

 

---    

 

 

---    

 

Class B Common Stock

 

 

---    

 

 

---    

 

 

---    

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

 

 

 




Page 27



THE DIXIE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

 

 

Year Ended

 

 

 

December 30, 2006
Restated

 

 

December 31, 2005
Restated

 

 

December 25, 2004
Restated

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

7,891 

 

$

9,958 

 

$

14,040 

 

Loss from discontinued operations

 

 

(188)

 

 

(656)

 

 

(1,287)

 

Income (loss) on disposal of discontinued operations

 

 

--- 

 

 

834 

 

 

(438)

 

Net income

 

 

7,703 

 

 

10,136 

 

 

12,315 

 

Adjustments to reconcile net income to net

 

 

 

 

 

 

 

 

 

 

 

cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,500 

 

 

10,058 

 

 

8,601 

 

 

 

Change in deferred income taxes

 

 

369 

 

 

(486)

 

 

567 

 

 

 

Tax benefit from exercise of stock options

 

 

(202)

 

 

1,042 

 

 

486 

 

 

 

Net (gain) loss on property, plant and equipment
   disposals and impairments

 

 


191 

 

 


(121)

 

 


755 

 

 

 

Stock-based compensation expense

 

 

662 

 

 

431 

 

 

--- 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,560 

 

 

3,616 

 

 

(7,950)

 

 

 

 

Inventories

 

 

3,271 

 

 

(14,879)

 

 

(6,708)

 

 

 

 

Other current assets

 

 

3,023 

 

 

3,584 

 

 

2,765 

 

 

 

 

Other assets

 

 

(1,889)

 

 

(2,337)

 

 

1,930 

 

 

 

 

Accounts payable and accrued expenses

 

 

(6,387)

 

 

(6,381)

 

 

(2,381)

 

 

 

 

Other liabilities

 

 

842 

 

 

1,234 

 

 

(1,664)

 

 

 

 

Income taxes paid related to sale of business

 

 

---

 

 

---

 

 

(10,230)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

21,643 

 

 

5,897 

 

 

(1,514) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

Net proceeds from sales of property, plant and
   equipment

 

 

51 

 

 

1,004 

 

 

6,438 

 

Additional purchase price consideration paid related
   to sale of business

 

 

--- 

 

 

--- 

 

 

(3,351)

 

Purchase of property, plant and equipment

 

 

(16,450)

 

 

(27,175)

 

 

(13,611)

 

Investment in affiliate

 

 

--- 

 

 

--- 

 

 

(55)

 

Additional cash received in business combination

 

 

--- 

 

 

--- 

 

 

861 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(16,399)

 

 

(26,171)

 

 

(9,718)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

Net (payments) borrowings on credit line

 

 

(5,128)

 

 

21,196 

 

 

4,753 

 

Borrowings on term loan

 

 

--- 

 

 

3,575 

 

 

1,479 

 

Payments on term loan

 

 

(1,709)

 

 

(2,000)

 

 

(8,624)

 

Borrowings from equipment financing

 

 

6,456 

 

 

1,610 

 

 

3,723 

 

Payments on equipment financing

 

 

(1,461)

 

 

(646)

 

 

(347)

 

Borrowings under capitalized leases

 

 

--- 

 

 

--- 

 

 

1,579 

 

Payments on capitalized leases

 

 

(1,158)

 

 

(1,372)

 

 

(1,540)

 

Payments on subordinated indebtedness

 

 

(2,500)

 

 

(2,498)

 

 

(2,500)

 

Payments on mortgage note payable

 

 

(217)

 

 

(203)

 

 

(15)

 

Payment on note payable

 

 

--- 

 

 

(1,338)

 

 

--- 

 

Common stock issued under stock option plans

 

 

853 

 

 

1,950 

 

 

1,666 

 

Tax benefit from exercise of stock options

 

 

202 

 

 

--- 

 

 

--- 

 

Other

 

 

(44)

 

 

--- 

 

 

--- 

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

 

 

(4,706)

 

 

20,274 

 

 

174 

 

 

 

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

538 

 

 

--- 

 

 

(11,058)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

 

 

--- 

 

 

--- 

 

 

11,058 

CASH AND CASH EQUIVALENTS AT END OF YEAR

 

$

538 

 

$

--- 

 

$

--- 

 

 

 

 

 

 

 

 

 

 

Equipment purchased under capital leases

 

$

542 

 

$

--- 

 

$

--- 


See accompanying notes to the consolidated financial statements.

 

 

 

 

 

 



Page 28



THE DIXIE GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

(dollars in thousands)

RESTATED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock and Class B Common Stock

 

Common  Stock Subscribed

 

Additional Paid-In Capital

 

Other

 

 Accumulated Deficit

 

Accumulated Other Comprehensive Loss

 

Common Stock in Treasury

 

Total Stockholders' Equity

Balance at December 27, 2003

$

45,917 

 

$

383 

 

$

130,862 

 

$

(1,185)

 

$

 (23,857)

 

$

(1,995)

 

$

(54,044)

 

$

96,081 

Stock subscriptions settled -
   127,694 shares

 

96 

 

 

(383)

 

 

(844)

 

 

1,131 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

Common Stock issued under    Directors' Stock Plan -
   26,020 shares

 

78 

 

 

--- 

 

 

62 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

140 

Common Stock sold under stock
   option plan - 303,542 shares

 

911 

 

 

--- 

 

 

1,241 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

2,152 

Amortization of restricted stock grants

 

--- 

 

 

--- 

 

 

--- 

 

 

28 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

28 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Net income

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

 12,315 

 

 

--- 

 

 

--- 

 

 

12,315 

     Unrealized gain on interest rate
       swap agreements, net of tax
       of $191

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

180 

 

 

--- 

 

 

180 

     Change in additional minimum
       pension liability, net of tax
       of $37

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

(59)

 

 

--- 

 

 

 (59)

Total Comprehensive Income

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

 12,315 

 

 

121 

 

 

--- 

 

 

12,436 

Balance at December 25, 2004

 

47,002 

 

 

--- 

 

 

131,321 

 

 

(26)

 

 

 (11,542)

 

 

(1,874)

 

 

 (54,044)

 

 

110,837 

Common Stock issued under
   Directors' Stock Plan -
   1,740 shares

 

 

 

--- 

 

 

19 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

25 

Common Stock and Class B sold
   under stock option plan -
   332,770 shares

 

 998 

 

 

--- 

 

 

952 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

1,950 

Tax benefit from exercise of stock options

 

--- 

 

 

--- 

 

 

1,042 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

1,042 

Restricted stock grants issued -
   67,180 shares

 

202 

 

 

--- 

 

 

998 

 

 

(1,200)

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

Restricted stock grants forfeited -
   9,190 shares

 

 (28)

 

 

--- 

 

 

(137)

 

 

143 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

(22)

Amortization of restricted stock grants

 

--- 

 

 

--- 

 

 

--- 

 

 

364 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

364 

Acceleration of stock options

 

--- 

 

 

--- 

 

 

88 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

88 

Common Stock issued upon
   conversion of convertible
   subordinated  debentures
   2,391 shares

 

 

 

--- 

 

 

70 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

77 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Net income

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

10,136 

 

 

--- 

 

 

--- 

 

 

10,136 

     Unrealized gain on interest rate
      swap agreements, net of tax
      of $45

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

102 

 

 

--- 

 

 

102 

     Change in additional minimum
       pension liability, net of tax
       of $650

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

(1,115)

 

 

--- 

 

 

(1,115)

Total Comprehensive Income

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

 10,136 

 

 

(1,013)

 

 

--- 

 

 

 9,123 

Balance at December 31, 2005

 

48,187 

 

 

--- 

 

 

134,353 

 

 

(719)

 

 

(1,406)

 

 

(2,887)

 

 

 (54,044)

 

 

123,484 

Common Stock acquired for
   treasury - 3,455 shares

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

(45)

 

 

(45)

Common Stock and Class B sold
   under stock option plan -
   125,340 shares

 

375 

 

 

--- 

 

 

478 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

 853 

Restricted stock grants issued -
   149,000 shares

 

447 

 

 

--- 

 

 

 (447)

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

Tax benefit from exercise of stock options

 

--- 

 

 

--- 

 

 

 202 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

202 

Stock-based compensation expense

 

--- 

 

 

--- 

 

 

 602 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

 602 

Reclassification upon adoption of
   SFAS No. 123{R}

 

--- 

 

 

--- 

 

 

(719)

 

 

719 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

Adoption of SFAS No. 158

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

856

 

 

--- 

 

 

856

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--- 

     Net income

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

7,703 

 

 

--- 

 

 

--- 

 

 

 7,703 

     Unrealized gain on interest rate
       swap agreements, net of tax
       of $168

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

 274 

 

 

--- 

 

 

 274 

     Change in additional minimum
       Pension liability, net of tax
        of $1,040

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

 1,749 

 

 

--- 

 

 

1,749 

Total Comprehensive Income

 

--- 

 

 

--- 

 

 

--- 

 

 

--- 

 

 

 7,703 

 

 

2,023 

 

 

--- 

 

 

 9,726 

Balance at December 30, 2006

$

 49,009 

 

$

--- 

 

$

134,469 

 

$

--- 

 

$

 6,297 

 

$

 (8)

 

$

 (54,089)

 

$

135,678

See accompanying notes to the consolidated financial statements.




Page 29




THE DIXIE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)
RESTATED



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Business:  The Company's business consists of marketing, manufacturing and selling finished carpet, rugs and carpet yarns.  The Company is in one line of business, Carpet Manufacturing.


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.  The Company utilizes the equity method of accounting for 50% or less investments when the Company exercises significant influence but does not control the investee.

Use of Estimates in the Preparation of Financial Statements:  The preparation of financial statements in conformity with U. S. 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.


Fiscal Year:  The Company ends its fiscal year on the last Saturday of December.  All references herein to "2006," "2005," and "2004," mean the fiscal years ended December 30, 2006, December 31, 2005, and December 25, 2004, respectively.  The years 2006 and 2004 contained 52 weeks and the year 2005 contained 53 weeks.


Reclassifications:  Certain amounts of accounts receivable and accrued expenses for 2005 have been reclassified to conform to the 2006 presentation.


Discontinued Operations:  The financial statements separately report discontinued operations and the results of continuing operations (See Note D).  Disclosures included herein pertain to the Company's continuing operations unless noted otherwise.


Cash and 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 carpet and yarn products and supplies a limited amount of carpet dyeing and finishing services to a wide variety of retailers and certain manufacturers located principally throughout the United States.  No customer accounts for more than 10% of net sales in 2006, 2005 or 2004 and the Company does not make a significant amount of sales to foreign countries.  The Company grants credit to customers based on defined payment terms, performs ongoing credit evaluations of its customers and generally does not require collateral.  Accounts receivable are carried at their outstanding principal amounts, less an allowance for doubtful accounts, which management believes is sufficient to cover potential credit losses based on historical experience and periodic evaluation of the financial condition of the Company's customers.  Notes receivable are carried at their estimated fair values.  The Company evaluates the fair value of its notes receivable based on the financial condition of borrowers and collateral held by the Company.  The Company invests its excess cash, if any, in short-term investments and has not experienced any losses on those investments.


Inventories:  Inventories are stated at the lower of cost or market.  Cost is determined using the last-in, first-out (LIFO) method, which generally matches current costs of inventory sold with current revenues, for substantially all inventories.  Reduction in inventory quantities resulted in liquidations of LIFO inventory carried at lower costs prevailing in prior years.  The effect of LIFO liquidations was to decrease cost of sales by $297 in 2006, $389 in 2005 and $2,253 in 2004.




Page 30



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


Inventories are summarized as follows:

 

 

 

 

 

2006

 

 

2005

 

 

 

 

 

 

 

 

 

Raw materials

 

$

21,678 

 

$

22,037 

 

Work-in-process

 

 

15,210 

 

 

17,498 

 

Finished goods

 

 

41,107 

 

 

40,959 

 

Supplies, repair parts and other

 

 

410 

 

 

480 

 

LIFO reserve

 

 

(8,805)

 

 

(8,103)

 

Total inventories

 

$

69,600 

 

$

72,871 


Property, Plant and Equipment:  Property, plant and equipment is stated at the lower of cost or impaired value.  Provisions for depreciation and amortization of property, plant and equipment have 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 depreciation methods are used for income tax purposes.  Depreciation and amortization of property, plant and equipment, including amounts for capital leases, for financial reporting purposes totaled $11,201 in 2006, $9,681 in 2005 and $8,228 in 2004.  Cost to repair and maintain the Company's equipment and facilities is expensed as incurred.  Such costs typically include expenditures to keep equipment and facilities in proper working condition.


Impairment of Long-Lived Assets:  Long-lived assets and intangibles are reviewed for impairment when circumstances indicate that the carrying value of an asset may not be fully recoverable.  When the carrying value of the asset exceeds the value of its expected undiscounted future cash flows, an impairment charge is recognized equal to the difference between the asset's carrying value and its fair value.  


Goodwill:  Goodwill represents the excess of the purchase price over the fair market value of identified net assets acquired in business combinations.  Goodwill is tested for impairment annually or when indication of impairment may exist.  The Company measures goodwill impairment by comparing the carrying value of its reporting units, including goodwill, with the present value of its reporting units' expected future cash flows.  


Goodwill decreased by $217 in 2006 and increased $2,395 in 2005 principally as a result of non-cash adjustments to deferred taxes associated with a prior acquisition.  Unamortized goodwill at December 30, 2006 was $56,960.


Customer Claims and Product Warranties:  The Company provides varying warranties related to its products against manufacturing defects and specific performance standards.  The Company records reserves for the estimated costs of defective products and failure of its products to meet applicable performance standards.  The level of reserves is established based primarily upon historical experience and the Company's evaluation of known claims.


Self-Insured Accruals:  The Company records liabilities to reflect the cost of claims related to its self-insured medical and dental benefits and workers' compensation.  The amounts of such liabilities are based on an analysis of the cost of known claims and estimates of the cost of incurred and unreported claims.


Deferred Tax Assets and Liabilities:  The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.


Derivative Financial Instruments:  The Company does not hold speculative financial instruments, nor does it hold or issue financial instruments for trading purposes.  The Company uses derivative instruments, currently interest rate swaps, to minimize interest rate volatility.




Page 31



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


Derivatives that are designated as cash flow hedges are linked to specific liabilities on the balance sheet.  The Company assesses, both at inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction are highly effective in offsetting changes in cash flows of the hedged items.  When it is determined that a derivative is not highly effective or the derivative expires, is sold, terminated, or exercised, the Company discontinues hedge accounting for that specific hedge instrument.  The Company recognizes all derivatives on its balance sheet at fair value.  Changes in the fair value of cash flow hedges are deferred in "accumulated other comprehensive loss".  Changes in the fair value of derivatives that are not effective cash flow hedges are recognized in income.


Revenue Recognition:  Revenues, including shipping and handling amounts, are recognized when the following criteria are met:  persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, price to the buyer is fixed and determinable, and collectibility is reasonably assured.  Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment.  At the time revenue is recognized, the Company records a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions that exist at the time revenue is recognized.


Advertising Costs and Vendor Consideration:  The Company engages in promotional and advertising programs that include rebates, discounts, points and cooperative advertising programs.  The expenses relating to these programs are charged to earnings during the period in which they are earned and these arrangements do not require significant estimates of costs.  Substantially, all such expenses are recorded as a deduction from sales.  The cost of cooperative advertising programs is recorded as selling and administrative expenses when the Company can identify a tangible benefit associated with the program, and can reasonably estimate that the fair value of the benefit is equal to or greater than its cost.  The amount of advertising and promotion expenses included in selling and administrative expenses were not significant for the years 2006, 2005 or 2004.


Cost of Sales:  Cost of sales includes all costs related to manufacturing the Company's products, including purchasing and receiving costs, inspection costs, warehousing costs, freight costs, internal transfer costs or other costs of the Company's distribution network.


Selling and Administrative Expenses:  Selling and administrative expenses include all costs, not included in cost of sales, related to the sale and marketing of the Company's products and general administration of the Company's business.


Operating Leases:  Leasehold improvements are amortized over the shorter of their economic lives or the lease term.  Rent is expensed, including the effect of any rent holiday and rent escalation provisions, over the lease period with the effect of the rent holiday amortized on a straight-line basis over the lease period.  Any leasehold improvement made by the Company and funded by the lessor is treated as a leasehold improvement and amortized over the shorter of its economic life or the lease term.  Funding provided by the lessor for such improvements, if any, is treated as deferred costs and amortized over the lease period.


Stock-Based Compensation:  Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment ("SFAS No. 123(R)").  SFAS No. 123(R) requires that compensation expense relating to share-based payments be recognized in financial statements based on the fair value of the equity or liability instrument issued.  




Page 32



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


The Company adopted SFAS No. 123(R) using the modified prospective method to account for stock options, restricted shares and stock performance units granted by the Company.  Under the modified prospective method, compensation expense for share-based payments is recognized for periods after the date of adoption for (a) all unvested awards granted prior to January 1, 2006, based on the estimated grant-date fair value in accordance with the original provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), and (b) all awards granted subsequent to January 1, 2006, based on the estimated grant-date fair value in accordance with the provisions of SFAS No. 123(R).  Because the Company used the modified prospective method and the estimated forfeiture method was used under SFAS No. 123 prior to the adoption of SFAS 123(R), there was no cumulative effect on the Company's consolidated financial statements as a result of the adoption of SFAS 123(R).


Restricted stock grants with pro-rata vesting are expensed using the straight-line method.


Recent Accounting Pronouncements:


In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").  FIN 48 clarified the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes."  The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  It also provides guidance on accounting for adjustments of a previously recognized tax position, classification, interest and penalties, taxes in interim periods and disclosure requirements.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company does not expect the adoption of FIN 48 to have a material effect on its financial statements.


In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS No. 157").  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The Company is currently in the process of evaluating the impact of SFAS No. 157 on our financial statements.


In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statement No. 87, 88, 106 and 132(R)" ("SFAS No. 158").  SFAS No. 158 requires recognition of the funded status of benefit plans in statements of financial position.  It also requires recognition in other comprehensive income of changes in the funding status of such plans during the year a change occurs, as well as modifies the measurement date to account for benefits.  SFAS No. 158 was effective for recognition of funding status and disclosures as of December 30, 2006 for the Company.  The measurement of defined benefit plan assets and benefit obligations under SFAS No. 158 is effective for fiscal years ending after December 15, 2008.  The adoption of SFAS No. 158 decreased other liabilities associated with the Company's postretirement plans by $1,381 and increased accumulated other comprehensive income by $856, net of $525 of deferred taxes.  The adoption of SFAS No. 158 did not have an effect on the Company's defined benefit retirement plan (See Note J).




Page 33



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities", including an amendment of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities".  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  Eligible items for the measurement option include all recognized financial assets and liabilities except: investments in subsidiaries, interests in variable interest entities, employers' and plans' obligations for pension benefits, assets and liabilities recognized under leases, deposit liabilities, financial instruments that are a component of shareholder’s equity.  Also included are firm commitments that involve only financial instruments, nonfinancial insurance contracts and warranties and host financial instruments.  The statement permits all entities to choose at specified election dates, after which the entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings, at each subsequent reporting date.  The fair value option may be applied instrument by instrument; however, the election is irrevocable and is applied only to entire instruments and not to portions of instruments.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company does not expect the adoption of this statement to have a material effect on the financial position or results of operations.


NOTE B - ACCOUNTS RECEIVABLE


Receivables are as follows:

 

 

 

 

 

 

 

2006

 

 

2005

 

 

 

 

 

 

 

 

 

Customers, trade

 

 

 

$

28,278 

 

$

31,260 

Other

 

 

 

 

 

3,295 

 

 

2,817 

Gross receivables

 

 

 

 

31,573 

 

 

34,077 

Less allowance for doubtful accounts

 

 

 

 

(651)

 

 

(595)

Net receivables

 

 

 

$

30,922 

 

$

33,482 


The Company also had notes receivable in the amount of $589 and $522 at 2006 and 2005, respectively.  The notes receivable are included in accounts receivable and other long-term assets in the Company's Consolidated Financial Statements.


Portions of the Company's trade accounts receivable are factored without recourse to a financial institution.  The amounts due to the Company from the factor are included in accounts receivable.  At December 30, 2006 and December 31, 2005, the amounts due from the factor were $3,066 and $3,461, respectively.


NOTE C - BUSINESS COMBINATIONS AND INVESTMENT IN AFFILIATE


Prior to November 8, 2004, the Company owned a 50% interest in Chroma Systems Partners, a carpet dyeing and finishing business, ("Chroma") which was accounted for under the equity method of accounting. On November 8, 2004, the remaining 50% interest was redeemed by Chroma for a nominal cash consideration.  The Company accounted for the transaction by the purchase method of accounting and, accordingly, the results of Chroma's operations subsequent to November 7, 2004 are included in the Company's Consolidated Financial Statements.


The Company's equity in the earnings and distributions received from Chroma prior to November 8, 2004 were $919 and $1,179, respectively in 2004.  The Company's proportionate share of Chroma's earnings for periods prior to November 8, 2004 is reflected in "Other income" and "Cost of sales" in the Company's Consolidated Financial Statements.  Purchases by the Company from Chroma prior to November 8, 2004, were $5,221 in 2004.



Page 34



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED

NOTE D - DISCONTINUED OPERATIONS


Results associated with operations that have been sold or discontinued are generally classified as discontinued operations for all periods presented.  Pension expenses associated with employees of our discontinued textile operations are included in continuing operations in accordance with Statement of Financial Accounting Standards No. 88.


Following is summary financial information for the Company's discontinued operations:


 

 

 

 

2006   
Restated

 

 

2005   
Restated

 

 

2004   

Loss on discontinued operations:

 

 

 

 

 

 

 

 

 

Before income taxes

$

(321)

 

$

(1,036)

 

$

(2,067)

 

Income tax benefit

 

(133)

 

 

(380)

 

 

(780)

Loss from discontinued operations, net of tax

$

(188)

 

(656)

 

$

(1,287)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) on disposal of discontinued operations:

 

 

 

 

 

 

 

 

 

Before income taxes

$

--- 

 

$

1,320 

 

$

(703)

 

Income tax provision (benefit)

 

--- 

 

 

486 

 

 

(265)

Income (loss) on disposal of discontinued operations,
   net of tax

$

--- 

 

$

834 

 

$

(438)


Discontinued operations losses in 2005 and 2004 principally consisted of workers' compensation cost associated with businesses sold in 2003 and 2004 and the loss on the sale of a spun yarn facility in 2004.


NOTE E - ACCRUED EXPENSES


Accrued expenses are summarized as follows:

 

 

 

 

2006

 

 

2005

 

 

 

 

 

 

Compensation and benefits

$

5,768

 

$

6,076

Accrued income taxes

 

319

 

 

1,856

Provision for customer claims, rebates and allowances

 

4,968

 

 

4,160

Outstanding checks in excess of cash

 

4,193

 

 

1,918

Other

 

 

4,293

 

 

5,371

 

 

 

$

19,541

 

$

19,381


The Company's self-insured Workers' Compensation program is collateralized by letters of credit in the aggregate amount of $2,557.


NOTE F - PRODUCT WARRANTY RESERVES


The Company provides varying warranties related to its products against manufacturing defects and specific performance standards.  The Company records reserves for the estimated costs of defective products and failure of its products to meet applicable performance standards at the time sales are recorded. The levels of reserves are established based primarily upon historical experience and evaluation of known claims.  Following is a summary of the Company's warranty activity.


 

 

 

 

2006

 

 

2005

 

 

 

 

 

 

Warranty reserve beginning of year

$

1,109 

 

$

922 

Warranty liabilities accrued

 

5,075 

 

 

4,499 

Warranty liabilities settled

 

(5,201)

 

 

(5,162)

Changes for pre-existing warranty liabilities

 

293 

 

 

850 

Warranty reserve end of year

$

1,276 

 

$

1,109 



Page 35



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


NOTE G - LONG-TERM DEBT AND CREDIT ARRANGEMENTS


 

 

 

 

 

2006

 

 

2005

Senior indebtedness

 

 

 

 

 

 

 

Credit line borrowings

 

$

27,821 

 

$

32,949 

 

Term loans

 

 

17,721 

 

 

19,430 

 

Equipment financing

 

 

9,336 

 

 

4,341 

 

Capital lease obligations

 

 

5,232 

 

 

5,848 

 

Mortgage note payable

 

 

6,770 

 

 

6,987 

Total senior indebtedness

 

 

66,880 

 

 

69,555 

Convertible subordinated debentures

 

 

22,162 

 

 

24,662 

Total long-term debt

 

 

89,042 

 

 

94,217 

Less current portion of long-term debt

 

 

(6,368)

 

 

(5,221)

Less current portion of capital lease obligations

 

(1,295)

 

 

(1,120)

Total long-term debt, less current portion

 

$

81,379 

 

$

87,876 


In 2006, the Company amended its senior loan and security agreement to (1) increase the revolving credit portion of the facility and change certain definitions in the agreement to facilitate the increase in revolving credit, and (2) reduce the credit spreads applicable to certain borrowings under the agreement by 0.25% and (3) reduce the maximum credit spreads that could be applicable to borrowings under the agreement by 0.50%.  The senior loan and security agreement matures on May 11, 2010 and at December 30, 2006 provided the Company with $77,721 of credit, consisting of $60,000 of revolving credit and a $17,721 term loan.  The term loan is payable in monthly principal installments of $142 and is due May 11, 2010.


Interest rates available under the senior loan and security agreement may be selected from a number of options that effectively allow the Company to borrow at rates ranging from the lender's prime rate to the lender's prime rate plus 0.50% for base rate loans, or at rates ranging from LIBOR plus 1.00% to LIBOR plus 2.75% for LIBOR loans.  The weighted-average interest rate on borrowings outstanding under this agreement was 6.99% at December 30, 2006 and 6.60% at December 31, 2005.  Commitment fees ranging from 0.25% to 0.375% per annum are payable on the average daily unused balance of the revolving credit facility.  The interest rate on borrowings under the senior loan and security agreement are fixed by an interest rate swap arrangement, that effectively fixes $30.0 million of borrowings under the agreement at 4.79% plus the applicable credit spreads.  The levels of the Company's accounts receivable and inventory limit borrowing availability under the revolving credit facility.  The facility is secured by a first priority lien on substantially all of the Company's assets.


The senior loan and security agreement generally permits dividends and repurchases of the Company's Common Stock up to an aggregate annual amount of $3,000 and such distributions in excess of $3,000 annually as may be made under conditions specified in the agreement.  The agreement also contains covenants that could limit future acquisitions.  The unused borrowing capacity under the senior loan and security agreement on December 30, 2006 was approximately $27,095.


The Company's equipment financing notes have terms ranging from five to seven years, are secured by the specific equipment financed, bear interest ranging from 5.55% to 6.94% and are due in monthly installments of principal and interest of $206 through February 2010 and monthly installments of principal and interest ranging from $157 to $23 from March 2010 through February 2013.  The notes do not have financial covenants.


The Company's significant capitalized lease obligations have terms ranging from five to six years, are secured by the specific equipment leased, bear interest ranging from 5.93% to 7.27% and are due in monthly installments of principal and interest of $135 through January 2010 and monthly installments of principal and interest ranging from $110 to $11 from February 2010 through June 2011.  One of the lease obligations requires a final installment of $200 at the end of its lease term in July 2010.  The capitalized leases do not have financial covenants.



Page 36



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


The Company's $6,770 mortgage note payable is secured by real property, is payable in monthly principal installments ranging from $17 to $28 during the remaining term and matures on March 2013.  The mortgage note bears interest based on LIBOR plus 2.0% and the interest rate is fixed at 6.54% through March 13, 2013 by an interest rate swap.


The Company's convertible subordinated debentures bear interest at 7% payable semi-annually, 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, which commenced May 15, 1998, retire $2,500 principal amount of the debentures annually and approximately 86% of the debentures prior to maturity.  The convertible debentures are subordinated in right of payment to all other indebtedness of the Company.


Interest payments for continuing operations were $7,152 in 2006, $5,646 in 2005, and $5,760 in 2004.  Interest capitalized by the Company was $243 in 2006 and $151 in 2005.


Maturities of long-term debt for periods following December 30, 2006 are as follows:


 

Long-Term Debt

 

Capital Leases (See Note O)

 

Total

 

 

 

 

 

 

 

 

 

2007

$

6,368

 

$

1,295

 

$

7,663

2008

 

 6,510

 

 

1,389

 

 

7,899

2009

 

6,662

 

 

1,489

 

 

8,151

2010

 

44,919

 

 

 985

 

 

45,904

2011

 

 3,762

 

 

 74

 

 

3,836

Thereafter

 

15,589

 

 

---

 

 

15,589

Total

$

83,810

 

$

5,232

 

$

89,042


NOTE H - FINANCIAL INSTRUMENTS


The Company's financial instruments are not held or issued for trading purposes.  The carrying amounts and estimated fair value of the Company's financial instruments are summarized as follows:


 

 

2006

 

 

2005

 

 

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

   Cash and cash equivalents

$

538 

 

$

538

 

$

--- 

 

$

--- 

   Notes receivable, including current portion

 

589 

 

 

589

 

 

522 

 

 

522 

   Escrow funds

 

66 

 

 

66

 

 

68 

 

 

68 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital leases,
      including current portion

 

89,042 

 

 

87,514

 

 

94,217 

 

 

97,055 

   Interest rate swaps

 

324 

 

 

324

 

 

(140)

 

 

(140)


The fair value of the Company's long-term debt and capital leases were estimated using market rates the Company believes are available for similar types of financial instruments.


NOTE I - DERIVATIVE FINANCIAL INSTRUMENTS


The Company is a party to an interest rate swap agreement with a notional amount of $30,000 through May 11, 2010.  Under the interest rate swap agreement, the Company pays a fixed rate of interest of 4.79% times the notional amount and receives in return a specified variable rate of interest times the same notional amount.  The interest rate swap is linked to the Company's variable rate debt and is considered a highly effective hedge.  The fair value of the interest rate swap agreement is reflected on the Company's balance sheet and related gains and losses are deferred in Accumulated Other Comprehensive Loss ("AOCL").  Net unrealized gains included in AOCL were $103 at December 30, 2006.



Page 37



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


The Company is also a party to an interest rate swap agreement through March 2013, which is linked to a mortgage note payable and considered a highly effective hedge.  Under the interest rate swap agreement, the Company pays a fixed rate of interest times a notional amount equal to the outstanding balance of the mortgage note, and receives in return an amount equal to a specified variable rate of interest times the same notional amount.  The fair value of the interest rate swap agreement is reflected on the Company's balance sheet and related gains and losses are deferred in AOCL.  At December 30, 2006, the notional amount of the interest swap agreement was $6,770.  Under the terms of the swap agreement, the Company pays a fixed interest rate of 4.54% through March 2013, which effectively fixes the interest rate on the mortgage note payable at 6.54%.  Net unrealized gains included in AOCL were $90 at December 30, 2006.


The Company was a party to an interest rate swap agreement which expired March 11, 2005.  Under the interest rate swap agreement, the Company paid a fixed rate of interest of 3.24% times a notional amount of $70,000, and received in return an amount equal to a specified variable rate of interest times the same notional amount.  The interest rate swap agreement was considered highly effective as a cash flow hedge by the Company until a significant portion of the related debt was retired in 2003.  At the time the interest rate swap agreement became ineffective, the Company wrote off to interest expense the portion of AOCL related to the debt retired.  Changes in the fair value of the interest rate swap agreement were marked to market through interest expense.  Amounts that remained in AOCL at the time of the interest rate swap agreement became ineffective were amortized into earnings through interest expense over the remaining life of the interest rate swap agreement.  During 2005, the Company reduced earnings by approximately $52, net of taxes, to amortize the unrealized loss in AOCL related to the interest rate swap agreement.


NOTE J - EMPLOYEE BENEFIT PLANS


The Company sponsors a 401(k) defined contribution plan covering substantially all associates.  The Company matches associates' contributions, on a sliding scale, up to a maximum of 5% of the associate's earnings.  The Company may make additional contributions to the plan if the Company attains certain performance targets.


The Company sponsors a non-qualified retirement savings plan that allows eligible associates to defer a specified percentage of their compensation.  The obligations owed to participants under this plan were $11,704 at December 30, 2006 and $10,217 at December 31, 2005 and are included in other liabilities in the Company's balance sheets.  The obligations are unsecured general obligations of the Company and the participants have no right, interest or claim in the assets of the Company, except as unsecured general creditors.  The Company has established a Rabbi Trust to hold, invest and reinvest deferrals and contributions under the plan.  Amounts invested in cash and company-owned life insurance in the Rabbi Trust were $11,673 at December 30, 2006 and $9,688 at December 31, 2005 and are included in cash and cash equivalents and other long-term assets in the Company's balance sheets.


The Company also sponsors a defined benefit retirement plan that covers a limited number of the Company's active associates.  During June 2006, the Company completed the termination and distribution of assets of a defined benefit pension plan that had been frozen since 1993 as to new benefits.  A significant number of associates covered by this plan were previously employed by operations that were sold or discontinued.  Settlement expenses for the plan termination in the amount of $3,249, or $2,057, net of tax, were recognized during 2006.  The funds required to terminate the plan were $2,595.  Disclosures in this note pertaining to the terminated plan and the ongoing defined benefit plan have been segregated in order to provide more meaningful information about the Company's retirement plans.


The Company sponsors a legacy postretirement benefit plan that provides life insurance to a limited number of associates as a result of a prior acquisition.  The Company also sponsors a postretirement benefit plan that provides medical and life insurance for a limited number of associates who retired prior to January 1, 2003.




Page 38



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


During 2006, the Company adopted the provisions of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statement Nos. 87, 88, 106 and 132(R)".  See Note A, "Recent Accounting Pronouncements" to the Company's Financial Statements.


Information about the benefit obligation, assets and funded status of the Company's defined benefit pension plans is summarized as follows:


 

 

2006

 

2005

 

 

 

Ongoing
Plan

 

 

Terminated
Plan

 

 

Total

 

 

Ongoing
Plan

 

 

Terminated
Plan

 

 

Total

Change in benefit obligation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit obligation at beginning of year

$

2,899 

 

$

4,962 

 

$

7,861 

 

$

2,560 

 

$

3,601 

 

$

6,161 

 

Service cost

 

183 

 

 

--- 

 

 

183 

 

 

179 

 

 

--- 

 

 

179 

 

Interest cost

 

155 

 

 

117 

 

 

272 

 

 

148 

 

 

202 

 

 

350 

 

Actuarial (gain) loss

 

(23)

 

 

697 

 

 

674 

 

 

169 

 

 

1,327 

 

 

1,496 

 

Benefits paid

 

(16)

 

 

--- 

 

 

(16)

 

 

 (157)

 

 

(168)

 

 

(325)

 

Settlements

 

(353)

 

 

(5,776)

 

 

(6,129)

 

 

--- 

 

 

--- 

 

 

--- 

Benefit obligation at end of year

 

2,845 

 

 

--- 

 

 

2,845 

 

 

2,899 

 

 

4,962 

 

 

7,861 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in plan assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   beginning of year

 

2,300 

 

 

3,215 

 

 

5,515 

 

 

1,923 

 

 

2,475 

 

 

4,398 

 

Actual return on plan assets

 

144 

 

 

(34)

 

 

110 

 

 

42 

 

 

(22)

 

 

20 

 

Employer contributions

 

467 

 

 

2,595 

 

 

3,062 

 

 

492 

 

 

930 

 

 

1,422 

 

Benefits paid

 

(16)

 

 

--- 

 

 

(16)

 

 

(157)

 

 

(168)

 

 

(325)

 

Settlements

 

(353)

 

 

(5,776)

 

 

(6,129)

 

 

--- 

 

 

--- 

 

 

--- 

Fair value of plan assets at end of year

 

2,542 

 

 

--- 

 

 

2,542 

 

 

2,300 

 

 

3,215 

 

 

5,515 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funded status: Underfunded

$

(303)

 

$

--- 

 

$

(303)

 

$

(599)

 

$

(1,747)

 

$

(2,346)


The balance sheet classification of the Company's liability for defined benefit pension plans and asset allocation for such plans are summarized as follows:


 

2006

 

2005

 

Ongoing
Plan

 

Terminated
Plan

 

Total

 

Ongoing
Plan

 

Terminated
Plan

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued benefit liability -
   Non-current portion

$

303

 

$

---

 

$

303

 

$

599

 

$

1,747

 

$

2,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected benefit obligation

 

2,845

 

 

---

 

 

2,845

 

 

2,899

 

 

4,962

 

 

7,861

Accumulated benefit obligation

 

2,845

 

 

---

 

 

2,845

 

 

2,899

 

 

4,962

 

 

7,861

Fair value of plan assets

 

2,542

 

 

---

 

 

2,542

 

 

2,300

 

 

3,215

 

 

 5,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit plan asset
   allocation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

66.65%

 

 

---

 

 

66.65%

 

 

65.49%

 

 

38.08%

 

 

49.51%

 

Debt securities

 

31.30%

 

 

---

 

 

31.30%

 

 

32.05%

 

 

9.33%

 

 

18.81%

 

Other

 

2.05%

 

 

---

 

 

2.05%

 

 

2.46%

 

 

52.59%

 

 

31.68%

Total

 

100.00%

 

 

---

 

 

100.00%

 

 

100.00%

 

 

100.00%

 

 

100.00%


At December 31, 2005, prior to the adoption of SFAS No. 158, the net amount recognized for defined benefit pension plans was $2,140 as follows:  $79 of unrecognized prior service cost and $4,407 of unrecognized actuarial losses as components of accumulated other comprehensive loss (before taxes) and $2,346 as a non-current liability.



Page 39



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


Information about the benefit obligation and funded status of the Company's postretirement benefit plans is summarized as follows:

 

 

 

 

 

 

2006

 

 

2005

Change in benefit obligation:

 

 

 

 

 

 

 

 

 

Benefit obligation at beginning of year

 

$

812 

 

1,017 

 

Service cost

 

 

 

 

 

 

 6 

 

Interest cost

 

 

 

 

53 

 

 

51 

 

Participant contributions

 

 

 

 

30 

 

 

42 

 

Actuarial (gain) loss

 

 

 

 

24 

 

 

(258)

 

Benefits paid

 

 

 

 

(38)

 

 

(46)

Benefit obligation at end of year

 

 

 

 

886 

 

 

812 

 

 

 

 

 

 

 

 

 

 

Change in plan assets:

 

 

 

 

 

 

 

 

 

Employer contributions

 

 

 

 

 

 

 

Participant contributions

 

 

 

 

30 

 

 

42 

 

Benefits paid

 

 

 

 

(38)

 

 

(46)

Fair value of plan assets at end of year

 

 

 

 

--- 

 

 

--- 

 

 

 

 

 

 

 

 

 

 

Funded status Underfunded

 

$

(886)

 

(812)


The balance sheet classification of the Company's liability for postretirement benefit plans is summarized as follows:


 

 

 

2006 

 

 

2005 

 

 

 

 

 

 

 

Accrued benefit liability - Current portion

 

$

25 

 

--- 

Accrued benefit liability - Non-current portion

 

 

861 

 

 

2,398 

Total Liability

 

 

 

$

886 

 

2,398 


At December 31, 2005, prior to the adoption of SFAS No. 158, the Company's liability for postretirement plans included unrecognized prior service credit of $893 and unrecognized actuarial gains of $693.


There were no shares of the Company's Common Stock included in the assets of the Company’s defined benefit pension plans at December 30, 2006 or December 31, 2005.  Assets of the defined benefit pension plan are invested in moderate risk investments with a strategy to maintain a balanced investment portfolio of 60% equity instruments and 40% debt instruments.  The investment strategy is geared toward a balance of capital growth and income.  During 2005, approximately $1,700 of the assets in the defined benefit pension plan that was in the process of being terminated were invested in highly liquid investments and is presented in the "Other" classification of asset allocations in the table above.  The Company expects to contribute $295 to its on-going pension plan and $10 to its postretirement plans in 2007.


Benefits expected to be paid on behalf of associates for defined benefit pension and postretirement benefit plans during the period 2007 through 2016 are summarized as follows:


 

 

 

Pension Plans

 

Postretirement Plans

 

 

 

 

 

 

 

 

 

2007

 

$

 25

 

$

25

 

2008

 

 

35

 

 

26

 

2009

 

 

46

 

 

27

 

2010

 

 

70

 

 

 29

 

2011

 

 

 89

 

 

20

 

2012 - 2016

 

 

886

 

 

111




Page 40



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


Assumptions used to determine benefit obligations, net periodic pension cost and return on assets of the Company's defined benefit pension plans are summarized as follows:


 

 

2006

 

2005

 

 

Ongoing

 

 

Terminated

 

 

 

 

Ongoing

 

 

Terminated

 

 

 

Plan

 

Plan

 

Total

Plan

 

 

Plan

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average assumptions
   as of year-end:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate (benefit obligations)

5.75%

 

 

---

 

 

5.75%

 

5.50%

 

 

4.73%

 

 

5.01%

 

Discount rate (net periodic pension costs)

5.50%

 

 

---

 

 

5.50%

 

5.75%

 

 

5.75%

 

 

5.75%

 

Expected return on plan assets

7.50%

 

 

---

 

 

7.50%

 

7.50%

 

 

7.50%

 

 

7.50%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


The Company currently uses a 7.5% expected long-term rate of return on assets to determine pension cost.  The rate of return considers the defined benefit pension plan's asset allocation strategy and the historical and expected future returns on its assets.


Assumptions used to determine benefit obligations of the Company's postretirement benefit plans are summarized as follows:


 

 

 

2006

 

 

2005

Weighted-average assumptions as of year-end:

 

 

 

 

 

 

Discount rate (benefit obligations)

 

5.40%

 

 

6.44%



Assumptions used and related effects of health care cost are summarized as follows:


 

 

 

2006

 

 

2005

 

 

 

 

 

 

 

 

Health care cost trend assumed for next year

 

10.00%

 

 

10.00%

 

Rate to which the cost trend is assumed to decline

 

6.00%

 

 

6.00%

 

Year that the rate reaches the ultimate trend rate

 

2011  

 

 

2010  



The effect of a 1% change in health care cost trend on the Company's postretirement benefit plans is summarized as follows:


 

2006

 

2005

 

 

1% Increase

 

 

1% Decrease

 

 

1% Increase

 

 

1% Decrease

 

Service and interest components of
   cost for postretirement benefit plans

$

---

 

$

--- 

 

$

---

 

$

--- 

 

Accumulated postretirement benefit
   obligation

 

2

 

 

(3)

 

 

 3

 

 

(3)





Page 41



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


Components of net periodic benefit costs for all retirement plans are summarized as follows:


 

 

 

2006

 

 

 

 

 

 

2005

 

 

 

 

 

 

2004

 

 

 

Ongoing Plan

 

Terminated Plan

 

Total

 

 

Ongoing Plan

 

Terminated Plan

 

Total

 

 

Ongoing Plan

 

Terminated Plan

 

Total

Defined benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Service cost

$      183 

 

$            --- 

 

$       183 

 

 

$      179 

 

$            --- 

 

$       179 

 

 

$      153 

 

$            --- 

 

$     153 

   Interest cost

155 

 

117 

 

272 

 

 

148 

 

202 

 

 350 

 

 

124 

 

264 

 

388 

   Expected return on plan
      assets

(184)

 

(121)

 

(305)

 

 

(161)

 

(220)

 

 (381)

 

 

(114)

 

(236)

 

(350)

   Amortization of prior service
      costs

 

--- 

 

 

 

 

--- 

 

 6 

 

 

 

--- 

 

   Recognized net actuarial
      loss

90 

 

106 

 

196 

 

 

78 

 

59 

 

137 

 

 

67 

 

75 

 

142 

   Settlement loss

202 

 

3,249 

 

 3,451 

 

 

--- 

 

--- 

 

--- 

 

 

--- 

 

386 

 

386 

Total defined benefit plans

452 

 

3,351 

 

 3,803 

 

 

250 

 

41 

 

291 

 

 

236 

 

489 

 

725 

Defined contribution plan

1,022 

 

--- 

 

1,022 

 

 

841 

 

--- 

 

841 

 

 

1,287 

 

--- 

 

1,287 

Net periodic benefit cost

$   1,474 

 

$       3,351 

 

$    4,825 

 

 

$   1,091 

 

$            41 

 

$    1,132 

 

 

$   1,523 

 

$          489 

 

$  2,012 



Costs charged for all postretirement benefit plans are summarized as follows:


 

 

 

2006

 

2005

 

2004

Defined benefit plans

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 

 

 

Interest cost

 

 

53 

 

 

51 

 

 

63 

 

Amortization of prior service costs

 

 

(88)

 

 

(88)

 

 

(88)

 

Recognized net actuarial gain

 

 

(95)

 

 

(84)

 

 

(82)

 

Settlement gain

 

 

--- 

 

 

(111)

 

 

(64)

 

Net periodic benefit credit

$

(125)

 

(226)

 

(166)



Pre-tax components of Accumulated Other Comprehensive Income (Loss) related to defined benefit pension and postretirement benefit plans at December 30, 2006:


 

 

Defined Benefit Pension Plans

 

Postretirement Benefit Plans

 

 

 

2006

 

2007 Expected Amortization

 

 

2006

 

2007 Expected Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service costs (credit)

$

74 

 

 

(805)

 

(88)

Unrecognized actuarial (gains) losses

 

1,629 

 

 

74 

 

 

(576)

 

 

(56)

Totals

$

1,703 

 

80 

 

(1,381)

 

(144)




Page 42



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED

NOTE K - INCOME TAXES


The provision for income taxes on income from continuing operations consists of the following:


 

 

 

 

2006
Restated

 

 

2005
Restated

 

 


2004

Current

 

 

 

 

 

 

 

 

 

 

Federal

$

1,309

 

$

2,301

 

$

6,395

 

State

 

103

 

 

188

 

 

642

Total current

 

1,412

 

 

2,489

 

 

7,037

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

 

Federal

 

324

 

 

1,724

 

 

714

 

State

 

45

 

 

240

 

 

100

Total deferred

 

369

 

 

1,964

 

 

814

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

$

1,781

 

$

4,453

 

$

7,851


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 basis of those assets and liabilities.


Significant components of the Company's deferred tax liabilities and assets are as follows:


 

 

 

 

 

2006

 

 

2005

Deferred tax liabilities:

 

 

 

 

 

 

 

Property, plant and equipment

 

13,071 

 

12,658 

 

Intangible assets

 

 

81 

 

 

41 

 

Other

 

 

3,312 

 

 

3,324 

Total deferred tax liabilities

 

 

16,464 

 

 

16,023 

 

 

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

 

 

Inventories

 

 

967 

 

 

519 

 

Postretirement benefits

 

 

3,723 

 

 

4,149 

 

Other employee benefits

 

 

1,037 

 

 

1,409 

 

State net operating losses

 

 

1,430 

 

 

1,061 

 

State tax credit carryforwards

 

 

1,959 

 

 

1,455 

 

Allowances for bad debts, claims and discounts

 

 

2,188 

 

 

1,770 

 

Other

 

 

165 

 

 

251 

Total deferred tax assets

 

 

11,469 

 

 

10,614 

 

Valuation allowance

 

 

(2,410)

 

 

(1,627)

Net deferred tax asset

 

 

9,059 

 

 

8,987 

Net deferred tax liabilities

 

7,405 

 

7,036 


Differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income from continuing operations are reconciled as follows:


 

 

 

 

2006
Restated

 

 

2005
Restated

 

 


2004

Statutory rate applied to income from continuing operations

$

3,385 

 

$

5,044 

 

$

7,662 

Plus state income taxes net of federal tax effect

 

97 

 

 

278 

 

 

482 

Total statutory provision

 

3,482 

 

 

5,322 

 

 

8,144 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) attributable to:

 

 

 

 

 

 

 

 

 

Tax contingency reserve

 

(1,221)

 

 

(434)

 

 

--- 

 

Refunds from utilization of tax credits

 

(411)

 

 

(394)

 

 

--- 

 

Other items

 

(69)

 

 

(41)

 

 

(293)

Total tax provision

$

1,781 

 

$

4,453 

 

$

7,851 




Page 43



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


Income tax payments, net of income tax refunds, for continuing and discontinued operations were $1,625 in 2006, $5,539 in 2005, and $17,937 in 2004.


At December 30, 2006 and December 31, 2005, income tax refunds receivable in the amount of $924 and $3,175, respectively, were included in other current assets on the Company's balance sheet.


At December 30, 2006, approximately $36,000 of state tax NOL ("net operating loss") carryforwards and $1,959 state tax credit carryforwards were available to the Company that will expire in five to twenty years.  A valuation allowance of $2,410 is recorded to reflect the estimated amount of deferred tax assets that may not be realized during the carryforward periods.


NOTE L - COMMON STOCK AND EARNINGS PER SHARE


The Company's Charter authorizes 80,000,000 shares of Common Stock with a $3 par value per share and 16,000,000 shares of Class B Common Stock with a $3 par value 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 also 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.


The following table sets forth the computation of basic and diluted earnings per share from continuing operations:

 

 

 

 

 

 

2006
Restated

 

 

2005
Restated

 

 


2004

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations (1)

 

 

$

7,891

 

$

9,958

 

$

14,040

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for calculation of basic earnings per share -

 

 

 

 

 

 

 

   weighted-average shares outstanding (2)

12,702

 

 

12,416

 

 

12,119

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

Stock options (3)

 

 

 

222

 

 

432

 

 

420

 

Stock subscriptions (3)

 

 

 

---

 

 

---

 

 

14

 

Restricted stock grants

 

 

 

6

 

 

18

 

 

12

 

Directors' stock performance units

 

 

 

29

 

 

13

 

 

10

Denominator for calculation of diluted earnings per

 

 

 

 

 

 

 

 

 

 

   share - weighted-average shares adjusted

 

 

 

 

 

 

 

 

 

 

   for potential dilution (2)(3)

 

 

 

12,959

 

 

12,879

 

 

12,575

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.62

 

$

0.80

 

$

1.16

 

Diluted

 

 

 

0.61

 

 

0.77

 

 

1.12


 (1)

No adjustments needed in the numerator for diluted calculations.


 (2)

Includes Common and Class B Common shares in thousands.


 (3)

Because their effects are anti-dilutive, excludes shares issuable under stock option and stock subscription plans, whose grant price is greater than the average market price of Common Shares outstanding at the end of the relevant period, and shares issuable on conversion of subordinated debentures into shares of Common Stock.  Aggregate shares excluded were 995 shares in 2006, 845 shares in 2005, and 981 shares in 2004.




Page 44



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


NOTE M - STOCK COMPENSATION EXPENSE AND STOCK PLANS


Stock Compensation Expense


Stock compensation expense in 2006 for restricted stock and stock performance units granted prior to December 31, 2006 and unvested stock options as of January 1, 2006 was $662.  No stock options were granted in 2006.  The compensation expense for all such stock awards is expected to be approximately $719 in 2007, $360 in 2008, $298 in 2009 and $867 thereafter. Subsequent to December 30, 2006, restricted stock with a grant-date fair value of approximately $1,400 that will vest over the next 2 years to 20 years was awarded under our 2006 stock incentive plan.  The compensation expense for all unvested stock options and restricted stock, including the awards granted in 2007, is expected to be $1,100 in 2007, $831 in 2008, $676 in 2009 and $1,100 thereafter.


Prior to January 1, 2006, as permitted by SFAS No. 123, the Company accounted for share-based payments to employees using Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and accordingly, did not record compensation expense for stock options granted.  Results for prior periods have not been retrospectively restated.  Following is a pro forma summary of the Company's net income and earnings per share, as if the Company had determined compensation expense for stock options based under the recognition provisions of SFAS No. 123.


 

 

 

 

 

2005

 

 

2004

 

 

 

 

 

 

 

Net income, as reported

 

10,136 

 

12,315 

Stock compensation expense, net of taxes

 

 

(3,350)

 

 

(1,113)

Adjusted net income

 

6,786 

 

11,202 

 

 

 

 

 

 

 

 

 

Basic earnings per share, as reported

 

0.82 

 

1.02 

Stock compensation expense, net of taxes

 

 

(0.27)

 

 

(0.09)

Adjusted basic earnings per share

 

0.55 

 

0.93 

 

 

 

 

 

 

 

 

 

Diluted earnings per share, as reported

 

0.79 

 

0.98 

Stock compensation expense, net of taxes

 

 

(0.26)

 

 

(0.09)

Adjusted diluted earnings per share

 

0.53 

 

0.89 


The pro forma effect of applying SFAS No. 123 on net income and earnings per share shown above is not necessarily indicative of future results.


A significant portion of stock option awards granted in 2005 and 2004 vested either immediately or within six months of their grant date.  The pro forma effect of these options on stock compensation expense and diluted earnings per share was $3,097, or $0.24 per diluted share in 2005 and $866, or $0.07 per diluted share in 2004.


At December 30, 2006, unrecognized compensation expense related to unvested stock options was $119.  This compensation expense is expected to be recognized over a weighted-average period of 1.7 years.


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:


 

 

 

 

 

 

2005 Grants

 

 

2004 Grants

 

 

 

 

 

 

 

 

Expected life

 

 

 

5 years

 

 

5 years

Expected volatility

 

 

 

59.80%

 

 

63.40%

Risk-free interest rate

 

 

 

4.35%

 

 

3.53%

Dividend yield

 

 

 

0.00%

 

 

0.00%

 

 

 

 

 

 

 

 

 

 




Page 45



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


SFAS No. 123(R) requires that excess tax benefits relating to compensation expense be reported as a financing cash flow, rather than as an operating cash flow as required under prior guidance.  Excess tax benefits of $202 were included in cash provided by financing activities for the year ended December 30, 2006 as compared to excess tax benefits of $1,042 and $486 included in cash provided by operating activities for the years ended December 31, 2005 and December 25, 2004, respectively.


2006 Stock Award Plan


On May 3, 2006, the Company's shareholders approved and adopted the Company's 2006 Stock Award Plan (the "2006 Plan") which provides for the issuance of a maximum of 800,000 shares of Common Stock and/or Class B Common Stock for the stock-based or stock-denominated awards to directors of the Company, and to salaried employees of the Company and its participating subsidiaries.  The 2006 Plan superseded and replaced The Dixie Group, Inc. Stock Incentive Plan (the "2000 Plan"), which was terminated with respect to the granting of new awards.  Awards previously granted under the 2000 Plan will continue to be governed by the terms of that plan and will not be affected by its termination.


Restricted Stock Awards


On June 6, 2006, the Company granted 125,000 shares of restricted stock to its Chief Executive Officer.  The award is intended to retain and motivate the Company's Chief Executive Officer over the term of the award and to bring his total compensation package closer to median levels for Chief Executive Officers of comparable companies.  The fair value of the award was $1,556, or $12.45 per share, equivalent to 92% of the market value of a share of the Company's Common Stock on the date the award was granted.  Such value was determined using a binomial model and will be expensed over the seven year term of the award.  Vesting of the shares is contingent on a 35% increase in the market value of the Company's Common Stock ("Market Condition") prior to June 5, 2011.  Additionally, vesting of shares requires the Chief Executive Officer to meet a continued service condition during the term of the award, with a two year minimum vesting period.  Shares subject to the award vest pro rata annually on the anniversary date the award was granted after the market condition and minimum vesting period are met.


During 2006, the Company also granted awards of 24,000 shares of restricted stock to key employees.  The grant-date fair value of the awards was $333, or $13.88 per share.  Vesting of the awards is subject to a continued service condition, with one-third to one-fifth of the awards vesting each year on the anniversary date the awards were granted.  The fair value of each share of restricted stock awarded was equal to the market value of a share the Company's Common Stock on the grant date.


During 2005, the Company granted awards of 67,180 shares of restricted stock to officers and other key employees.  The grant-date fair value of the awards was $1,200, or $17.86 per share.  Vesting of the awards is subject to a continued service condition, with one-third of the awards vesting each year on the anniversary date the awards were granted.  The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.




Page 46



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


Restricted stock activity for the three years ended December 30, 2006 is summarized as follows:


 

 

 

 

 

Number of Shares

 

Weighted-Average Fair Value Granted During the Year

 

 

 

 

 

 

 

Outstanding at December 27, 2003

 

 

20,000 

 

$

---

 

Granted

 

 

--- 

 

 

---

 

Vested

 

 

--- 

 

 

---

 

Forfeited

 

 

--- 

 

 

---

 

 

 

 

 

 

 

 

 

Outstanding at December 25, 2004

 

 

20,000 

 

 

---

 

Granted

 

 

67,180 

 

 

17.86 

 

Vested

 

 

(20,000)

 

 

---

 

Forfeited

 

 

(9,190)

 

 

---

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2005

 

 

57,990 

 

 

---

 

Granted

 

 

149,000 

 

 

12.68 

 

Vested

 

 

(19,330)

 

 

---

 

Forfeited

 

 

--- 

 

 

---

 

 

 

 

 

 

 

 

 

Outstanding at December 30, 2006

 

 

187,660 

 

$

---


As of December 30, 2006, unrecognized compensation cost related to unvested restricted stock was $2,124.  That cost is expected to be recognized over a period of 5.2 years.  The total fair value of shares vested during the year ended December 30, 2006 and December 31, 2005 was approximately $261 and $273, respectively.


Stock Performance Units


The Company's non-employee directors receive 50% of their annual retainer ($12 in 2006) in Stock Performance Units under the Directors' Stock Plan.  Upon retirement, the Stock Performance Units vest and the Company issues Common Stock equivalent to the number of Stock Performance Units held by non-employee directors.  The fair value of each Stock Performance Unit awarded was equal to the market value of a share of the Company's Common Stock on the grant date.  As of December 30, 2006, 36,442 Stock Performance Units were outstanding under this plan.


Stock Purchase Plan


The Company 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 30, 2006, 27,480 shares remained available for issuance under the plan.  Shares sold under this plan are held in escrow until paid for and are subject to repurchase agreements which give the Company a right of first refusal to purchase the shares if they are subsequently sold.  No shares were sold under the plan in 2006, 2005, or 2004.


Stock Options


All unvested stock options issued under the Company's 2000 Plan are generally exercisable at a cumulative rate of 25% per year after the second year from the date the options are granted.  Any options granted under the Company's 2006 Plan will be exercisable for periods determined at the time the awards are granted.  No options were granted under either of these plans during the year ended December 30, 2006.  




Page 47



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


Option activity for the three years ended December 30, 2006 is summarized as follows:


 

 

Number of Shares

 

 

Weighted-Average  Exercise  Price

 

 

Weighted-Average Fair Value of Options Granted During the  Year

 

 

 

 

 

 

 

 

 

Outstanding at December 27, 2003

 

1,159,739 

 

$

5.97

 

$

---

 

Exercised

 

(317,807)

 

 

5.91

 

 

---

 

Granted at market price

 

379,997 

 

 

13.97

 

 

7.86

 

Granted above market price

 

16,113 

 

 

13.84

 

 

6.79

 

Forfeited

 

(28,000)

 

 

4.66

 

 

---

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 25, 2004

 

1,210,042 

 

 

8.64

 

 

---

 

Exercised

 

(361,118)

 

 

6.79

 

 

---

 

Granted at market price

 

378,000 

 

 

13.77

 

 

7.56

 

Forfeited

 

(37,612)

 

 

10.05

 

 

 ---

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2005

 

1,189,312 

 

 

10.78

 

 

---

 

Exercised

 

(125,340)

 

 

6.81

 

 

---

 

Forfeited

 

(34,375)

 

 

14.71

 

 

 ---

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 30, 2006

 

1,029,597 

 

$

11.13

 

 ---

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at:

 

 

 

 

 

 

 

 

 

 December 25, 2004

 

737,599 

 

$

7.41

 

$

---

 

 December 31, 2005

 

1,077,083 

 

 

11.22

 

 

---

 

 December 30, 2006

 

976,635 

 

 

11.36

 

 

---


The following table summarizes information about stock options at December 30, 2006:


 

Options Outstanding

 

Range of Exercise Prices

 

Number of Shares

 

 

Weighted-Average Remaining Contractual Life

 

Weighted-Average Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$3.210 - $4.875

 

161,600

 

 

5.0 years

 

$

4.23

 

 

  5.750 -  7.660

 

184,837

 

 

4.7 years

 

 

7.05

 

 

11.420 - 17.580

 

 683,160

 

 

6.4 years

 

 

13.87

 

 

  3.210 - 17.580

 

1,029,597

 

 

5.9 years

 

$

11.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Exercisable

 

Range of Exercise Prices

 

Number of  Shares

 

 

Weighted-Average Remaining Contractual Life

 

Weighted-Average Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$3.210 - $4.875

 

 129,575

 

 

4.8 years

 

$

 4.23

 

 

  5.750 -  7.660

 

180,400

 

 

4.7 years

 

 

 7.05

 

 

11.420 - 17.580

 

666,660

 

 

6.4 years

 

 

 13.91

 

 

  3.210 - 17.580

 

 976,635

 

 

5.9 years

 

$

 11.36




Page 48



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


At December 30, 2006, the market value of outstanding stock options exceeded their exercise price by $1,550 and the market value of exercisable stock options exceeded their exercise price by $1,249.  The market value of stock options exercised exceeded the exercise price of the stock options exercised during the year ended 2006, 2005 and 2004 by $905, $3,711 and $1,900, respectively.


NOTE N - COMPREHENSIVE INCOME


 

 

 

 

2006

 

 

2005

 

 

2004

 

 

 

 

 

 

 

 

 

Net income

$

7,703 

 

10,136 

 

12,315 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swap agreements,
   net of tax of $168 in 2006, $45 in 2005, and $191 in
   2004

 

274 

 

 

102 

 

 

180 

 

 

 

 

 

 

 

 

 

 

 

 

Change in additional minimum pension liability, net of tax
   of $1,040 in 2006, $650 in 2005, and $37 in 2004

 

1,749 

 

 

(1,115)

 

 

(59)

Comprehensive income

$

9,726 

 

9,123 

 

12,436 


Components of accumulated other comprehensive loss are as follows:

 

 

 

 

Minimum Pension Liability

 

 

Interest Rate Swaps

 

 

Pension and Post-Retirement Liability

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 27, 2003

$

(1,632)

 

$

(363)

 

$

--- 

 

$

(1,995)

 

Change in additional minimum pension liability,
   net of tax of $37

 

(59)

 

 

--- 

 

 

--- 

 

 

 (59)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swap
   agreements, net of tax of $147

 

--- 

 

 

108 

 

 

--- 

 

 

108 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ineffective portion of interest rate swap
   agreement, net of tax of $44

 

--- 

 

 

72 

 

 

--- 

 

 

72 

Balance at December 25, 2004

 

(1,691)

 

 

(183)

 

 

--- 

 

 

(1,874)

 

Change in additional minimum pension liability,
   net of tax of $650

 

(1,115)

 

 

--- 

 

 

--- 

 

 

(1,115)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swap
   agreements, net of tax of $45

 

--- 

 

 

102 

 

 

--- 

 

 

102 

Balance at December 31, 2005

 

(2,806)

 

 

(81)

 

 

--- 

 

 

(2,887)

 

Change in additional minimum pension liability,
   net of tax of $1,040

 

1,749 

 

 

--- 

 

 

--- 

 

 

1,749 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swap
   agreements, net of tax of $168

 

--- 

 

 

274 

 

 

--- 

 

 

274 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification upon adoption of SFAS
   No. 158, net of tax of $646

 

1,057 

 

 

--- 

 

 

(1,057)

 

 

--- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of unrecognized gains upon adoption of SFAS No. 158, net of tax of $525

 

--- 

 

 

--- 

 

 

856 

 

 

856 

Balance at December 30, 2006

$

--- 

 

$

193 

 

$

(201) 

 

$

(8)




Page 49



THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED

NOTE O - COMMITMENTS


The Company had commitments for purchases of machinery and equipment and information systems of approximately $3,464 at December 30, 2006.


The Company leases certain equipment under capital leases and certain buildings, machinery and equipment under operating leases.  Commitments for minimum rentals under non-cancelable leases, including any applicable rent escalation clauses, are as follows:


 

 

 

 

Capital

 

 

Operating

 

 

 

 

Leases

 

 

Leases

 

2007

$

1,622 

 

1,731 

 

2008

 

1,622 

 

 

1,580 

 

2009

 

1,622 

 

 

1,168 

 

2010

 

1,016 

 

 

1,032 

 

2011

 

75 

 

 

940 

 

Total commitments

 

5,957 

 

 

6,451 

 

Less amounts representing interest

 

(725)

 

 

--- 

 

 

 

$

5,232 

 

6,451 


Property, plant and equipment includes machinery and equipment under capital leases which have cost and accumulated depreciation of $9,165 and $3,883, respectively, at December 30, 2006, and $8,623 and $2,724, respectively, at December 31, 2005.


Rental expense in 2006, 2005 and 2004 amounted to approximately $2,437, $3,033 and $3,219, respectively.  There was no rent paid to related parties during 2006, 2005 or 2004.


NOTE P - OTHER (INCOME) EXPENSE


Other income and expense is summarized as follows:

 

 

 

 

 

 

2006

 

 

2005

 

 

2004

Other operating income:

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of other operating assets

 

 

(27)

 

(174)

 

--- 

 

Insurance settlements and refunds

 

 

 

(353)

 

 

--- 

 

 

--- 

 

Miscellaneous income

 

 

 

(260)

 

 

(388)

 

 

(279)

Other operating income

 

 

(640)

 

(562)

 

(279)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expense:

 

 

 

 

 

 

 

 

 

 

 

Contract dispute

 

 

--- 

 

--- 

 

500 

 

Retirement expenses

 

 

 

453 

 

 

331 

 

 

434 

 

Loss on impairment of assets

 

 

 

218 

 

 

--- 

 

 

--- 

 

Miscellaneous expense

 

 

 

62 

 

 

104 

 

 

84 

Other operating expense

 

 

733 

 

435 

 

1,018 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated subsidiary

 

--- 

 

--- 

 

(419)

 

Interest income

 

 

 

(32)

 

 

(118)

 

 

(310)

 

Dispute settlement

 

 

 

(294)

 

 

(107)

 

 

(500)

 

Gain on sale of real estate

 

 

 

--- 

 

 

(218)

 

 

--- 

 

Miscellaneous income

 

 

 

(128)

 

 

 (168)

 

 

(196)

Other income

 

 

(454)

 

(611)

 

(1,425)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

Miscellaneous expense

 

 

127 

 

87 

 

Other expense

 

 

127 

 

87 

 




Page 50




THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
(Continued)
RESTATED


NOTE Q - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS


This Form 10-K/A for the fiscal year ended December 30, 2006 restates the Company’s consolidated financial statements to reclassify expenses related to our legacy defined benefit pension plan as costs of continuing operations in the Company’s Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the years 2006 and 2005, and restates the Company’s 2004 Consolidated Statement of Cash Flows to reclassify tax payments related to the sale of a business as operating rather than investing activities.  These classification errors did not affect net income or net income per share, or total cash flow, nor did they affect the Company’s Consolidated Balance Sheets, or Consolidated Statements of Stockholders’ Equity and Comprehensive Income in any year.


·

The Company interpreted Accounting Principles Board Opinion No. 30 to require that pension expenses related to employees of its discontinued textile operations should be classified as a loss from discontinued operations.  Based on a subsequent review of the presentation, the Company  reclassified these expenses as costs of continuing operations in accordance with the requirements of Statement of Financial Accounting Standards No. 88, as clarified by the answer to Question 37 in the FASB Special Report, “A Guide to Implementation of Statement 88 on Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits: Questions and Answers”.

·

The income tax payments that were reclassified relate to the sale of a business in 2003 and 2004.  The treatment of such taxes was disclosed in our financial statements.  Such taxes were reclassified as operating activities rather than investing activities, in accordance with paragraph 23(c) of Statement of Financial Accounting Standards No. 95.  

The Company has also revised its presentation of comprehensive income to prominently display the details of comprehensive income in the Company’s Consolidated Statements of Stockholders’ Equity and Comprehensive Income.


As a result of the reclassifications discussed above, modifications were required to previously filed notes to the Company’s consolidated financial statements as follows: Note D, Note J, Note K, and Note L.  The following tables present the details of the restatement:





Page 51



SUMMARY OF CHANGES TO CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)


 

 

 

 

Year Ended December 30, 2006

 

 

 

 

 

Previously
Reported

 

 


Adjustments

 

 


Restated

Net sales

 

$

331,100 

 

$

--- 

 

$

331,100 

Cost of sales

 

 

235,548 

 

 

(286)

 

 

235,262 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

95,552 

 

 

286 

 

 

95,838 

Selling and administrative expenses

 

 

75,938 

 

 

---   

 

 

75,938 

Other operating income

 

 

(640)

 

 

---   

 

 

(640)

Other operating expense

 

 

733 

 

 

---   

 

 

733 

Defined benefit plan termination expenses

 

 

--- 

 

 

 3,249 

 

 

3,249 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

19,521 

 

 

(2,963)

 

 

16,558 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

7,213 

 

 

--- 

 

 

7,213 

Other income

 

 

(454)

 

 

--- 

 

 

(454)

Other expense

 

 

127 

 

 

--- 

 

 

127 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before taxes

 

 

12,635 

 

 

(2,963)

 

 

9,672 

Income tax provision

 

 

2,868 

 

 

(1,087)

 

 

1,781 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

9,767 

 

 

(1,876)

 

 

7,891 

Loss from discontinued operations, net of tax

 

 

(2,064)

 

 

1,876 

 

 

(188)

Income (loss) on disposal of discontinued operations,
   net of tax

--- 

 

 

--- 

 

 

--- 

Net income

 

$

7,703 

 

$

--- 

 

$

7,703 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS (LOSS) PER SHARE:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.77 

 

$

(0.15)

 

$

0.62 

 

Discontinued operations

 

 

(0.16)

 

 

0.15 

 

 

(0.01)

 

Disposal of discontinued operations

 

 

--- 

 

 

--- 

 

 

--- 

 

Net income

 

$

0.61 

 

$

--- 

 

$

0.61 

 

 

 

 

 

 

 

 

 

 

 

 

SHARES OUTSTANDING

 

 

12,702 

 

 

12,702 

 

 

12,702 

 

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS (LOSS) PER SHARE:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.75 

 

$

(0.14)

 

$

0.61 

 

Discontinued operations

 

 

(0.16)

 

 

0.14 

 

 

(0.02)

 

Disposal of discontinued operations

 

 

--- 

 

 

--- 

 

 

---    

 

Net income

 

$

0.59 

 

$

--- 

 

$

0.59 

 

 

 

 

 

 

 

 

 

 

 

 

SHARES OUTSTANDING

 

 

12,959 

 

 

12,959 

 

 

12,959 

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER SHARE:

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

---    

 

 

---    

 

 

---    

 

Class B Common Stock

 

 

---    

 

 

---    

 

 

---    




Page 52




SUMMARY OF CHANGES TO CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)


 

 

 

 

Year Ended December 31, 2005

 

 

 

 

 

Previously
Reported

 

 

Adjustments

 

 

Restated

Net sales

 

$

318,526 

 

$

--- 

 

$

318,526 

Cost of sales

 

 

222,008 

 

 

 

 

222,016 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

96,518 

 

 

(8)

 

 

96,510 

Selling and administrative expenses

 

 

76,802 

 

 

--- 

 

 

76,802 

Other operating income

 

 

(562)

 

 

--- 

 

 

(562)

Other operating expense

 

 

435 

 

 

--- 

 

 

 435 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

19,843 

 

 

(8)

 

 

19,835 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

5,948 

 

 

--- 

 

 

5,948 

Other income

 

 

(611)

 

 

--- 

 

 

(611)

Other expense

 

 

87 

 

 

--- 

 

 

87 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before taxes

 

 

14,419 

 

 

(8)

 

 

14,411 

Income tax provision

 

 

4,456 

 

 

(3)

 

 

4,453 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

9,963 

 

 

(5)

 

 

9,958 

Loss from discontinued operations, net of tax

 

 

(661)

 

 

 

 

 (656)

Income (loss) on disposal of discontinued operations,
   net of tax

834 

 

 

--- 

 

 

834 

Net income

 

$

10,136 

 

$

--- 

 

$

10,136 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS (LOSS) PER SHARE:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.80 

 

$

(0.00)

 

$

 0.80 

 

Discontinued operations

 

 

(0.05)

 

 

0.00 

 

 

(0.05)

 

Disposal of discontinued operations

 

 

0.07 

 

 

--- 

 

 

0.07 

 

Net income

 

$

0.82 

 

$

--- 

 

$

0.82 

 

 

 

 

 

 

 

 

 

 

 

 

SHARES OUTSTANDING

 

 

12,416 

 

 

12,416 

 

 

12,416 

 

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS (LOSS) PER SHARE:

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.77 

 

$

(0.00)

 

$

 0.77 

 

Discontinued operations

 

 

(0.05)

 

 

0.00 

 

 

(0.05)

 

Disposal of discontinued operations

 

 

0.07 

 

 

--- 

 

 

0.07 

 

Net income

 

$

0.79 

 

$

--- 

 

$

0.79 

 

 

 

 

 

 

 

 

 

 

 

 

SHARES OUTSTANDING

 

 

12,879 

 

 

12,879 

 

 

12,879 

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER SHARE:

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

---    

 

 

---    

 

 

---    

 

Class B Common Stock

 

 

---    

 

 

---    

 

 

---    




Page 53




SUMMARY OF CHANGES TO STATEMENTS OF CASH FLOWS

(Reported in Thousands of Dollars)



 

 

 

Year Ended December 30, 2006

 

 

 

Previously Reported

 

 

Adjustments

 

 

Restated

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Income from continuing operations

$

9,767 

 

$

(1,876)

 

$

7,891 

Loss from discontinued operations

 

(2,064)

 

 

1,876 

 

 

(188)

Net Income

$

7,703 

 

$

--- 

 

$

7,703 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2005

 

 

 

Previously Reported

 

 

Adjustments

 

 

Restated

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Income from continuing operations

$

9,963 

 

$

(5)

 

$

9,958 

Loss from discontinued operations

 

(661)

 

 

 

 

(656)

Income (loss) on disposal of discontinued operations

 

834 

 

 

--- 

 

 

834 

Net Income

$

10,136 

 

$

--- 

 

$

10,136 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 25, 2004

 

 

 

Previously Reported

 

 

Adjustments

 

 

Restated

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Income taxes paid related to sale of a business

$

--- 

 

$

(10,230)

 

$

(10,230)

NET CASH PROVIDED BY (USED IN) OPERATING

   ACTIVITIES

 

8,716 

 

 

(10,230)

 

 

(1,514)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Income taxes paid related to sale of a business

 

(10,230)

 

 

10,230 

 

 

--- 

NET CASH PROVIDED BY (USED IN) INVESTING

   ACTIVITIES

$

(19,948)

 

$

10,230 

 

$

(9,718)



Segment Information.  The Company’s ongoing operations are conducted in one line of business, Carpet Manufacturing. Therefore, the Company has one reportable business segment: Carpet Manufacturing.  Consolidated net sales and assets reported in the Company’s consolidated financial statements pertain to its carpet manufacturing operations.  Pension expenses included in income from continuing operations for employees of our discontinued textile business were $2,963 and $8, respectively for the years 2006 and 2005.  Such employees were terminated in 1999 and prior years.





Page 54




SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THE DIXIE GROUP, INC. AND SUBSIDIARIES
(dollars in thousands)


 

Description

 

Balance at Beginning of Year

 

 

Additions Charged to Costs and Expenses

 

 

Deductions

 

 

 

Balance at End of Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 30, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves deducted from asset accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

$

595

 

$

384

 

$

328

(1)

 

$

651

 

Provision to reduce inventories to net realizable value

 

6,705

 

 

---

 

 

1,530

(2)

 

 

5,175

 

Deferred tax asset valuation allowance

 

1,627

 

 

1,002

 

 

219

(3)

 

 

2,410

Reserves classified as liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for claims and allowances

 

2,699

 

 

9,150

 

 

8,760

(4)

 

 

3,089

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves deducted from asset accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

$

1,425

 

$

18

 

$

848

(1)

 

$

595

 

Provision to reduce inventories to net realizable value

 

4,614

 

 

2,091

 

 

---

 

 

 

6,705

 

Deferred tax asset valuation allowance

 

1,886

 

 

45

 

 

304

(3)

 

 

1,627

Reserves classified as liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for claims and allowances

 

2,374

 

 

9,824

 

 

9,499

(4)

 

 

2,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 25, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves deducted from asset accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

$

899

 

$

732

 

$

 206

(1)

 

$

1,425

 

Provision to reduce inventories to net realizable value

 

3,769

 

 

845

 

 

---

 

 

 

4,614

 

Deferred tax asset valuation allowance

 

3,019

 

 

18

 

 

1,151

(3)

 

 

1,886

Reserves classified as liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for claims and allowances

 

1,809

 

 

7,049

 

 

6,484

(4)

 

 

2,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Uncollectible accounts written off, net of recoveries.


(2)

Current year provision or reserve reductions for inventories sold.


(3)

Reductions resulting from settlement of federal and state income tax examinations and expiration of tax statute of limitations.


(4)

Reserve reductions for claims and allowances settled.






Page 55



ANNUAL REPORT ON FORM 10-K
ITEM 15 (e)
EXHIBITS

YEAR ENDED DECEMBER 30, 2006
THE DIXIE GROUP, INC.
CHATTANOOGA, TENNESSEE

Exhibit Index


EXHIBIT NO.


EXHIBIT DESCRIPTION

 


INCORPORATION BY REFERENCE

(2.1)

Asset Purchase Agreement between The Dixie Group and certain of its subsidiaries, and Shaw industries Group, Inc., dated September 4, 2003.



 

Incorporated by reference to Exhibit (10.1) to Dixie's Quarterly Report on Form 10-Q for the quarter ended September 27, 2003. *

(2.2)

First Amendment, dated November 12, 2003, to Asset Purchase Agreement dated September 4, 2003.



 

Incorporated by reference to Exhibit (2.2) to Dixie's Current Report on Form 8-K dated November 12, 2003. *

(3.1)

Restated Charter of The Dixie Group, Inc.

 

Incorporated by reference to Exhibit (3) to Dixie's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997. *



(3.2)

Amended and Restated By-Laws of Dixie Yarns, Inc.

 

Incorporated by reference to Exhibit (3.2) to Dixie's Annual Report on Form 10-K for the year ended December 28, 2002. *



(3.3)

Amendment to Restated Charter of The Dixie Group, Inc.

 

Incorporated by reference to Exhibit (3.3) to Dixie's Annual Report on Form 10-K for the year ended December 27, 2003. *



(3.4)

Text of Restated Charter of The Dixie Group, Inc. as Amended - Blackline Version.

 

Incorporated by reference to Exhibit (3.4) to Dixie's Annual Report on Form 10-K for the year ended December 27, 2003. *



(4.1)

Form of Indenture, dated May 15, 1987 between Dixie Yarns, Inc. and Morgan Guaranty Trust Company of New York as Trustee.



 

Incorporated by reference to Exhibit 4.2 to Amendment No. 1 of Dixie's Registration Statement No. 33-14078 on Form S-3, dated May 19, 1987. *

(4.2)

Loan and Security Agreement and Forms of Notes dated May 14, 2002 by and among The Dixie Group, Inc., Fleet Capital Corporation, as "Agent", General Electric Capital Corporation, as "Documentation Agent", and Congress Financial Corporation (Southern), as "Co-Agent".



 

Incorporated by reference to Exhibit (4.1) to Dixie's Current Report on Form 8-K dated May 14, 2002.*



Page 56






(4.3)

Amended and Restated Loan and Security Agreement dated April 14, 2004 by and among The Dixie Group, Inc. each of its subsidiaries as guarantors, and Fleet Capital Corporation.



 

Incorporated by reference to Exhibit (4.13) to Dixie's Current Report on Form 8-K dated April 14, 2004. *

(4.4)

First Amendment to Amended and Restated Loan and Security Agreement, dated November 10, 2004 by and among The Dixie Group, Inc. each of its subsidiaries as guarantors, and Fleet Capital Corporation.



 

Incorporated by reference to Exhibit (4.1) to Dixie's Current Report on Form 8-K dated November 8, 2004. *

(4.5)

Consent to Acquisition of Partnership Interest by Chroma Systems Partners, dated October 29, 2004, by Fleet Capital Corporation.



 

Incorporated by reference to Exhibit (4.2) to Dixie's Current Report on Form 8-K dated November 8, 2004. *

(4.6)

Second Amendment, dated July 27, 2005, to Amended and Restated Loan and Security Agreement dated April 14, 2004 by and among The Dixie Group, Inc. each of its subsidiaries as guarantors, and Bank of America, N.A. (successor to Fleet Capital Corporation).



 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated July 27, 2005. *

(10.1)

Dixie Yarns, Inc. Incentive Stock Plan as amended. **

 

Incorporated by reference to ANNEX A to Dixie's Proxy Statement dated March 27, 1998 for its 1998 Annual Meeting of Shareholders. *



(10.2)

Form of Non-qualified Stock Option Agreement Under the Dixie Yarns, Inc. Incentive Stock Plan. **

 

Incorporated by reference to Exhibit (10a) to Dixie's Quarterly Report on Form 10-Q for the quarter ended July 1, 1995. *



(10.3)

Form of Amendment to Non-qualified Stock Option Agreement Under the Dixie Yarns, Inc. Incentive Stock Plan. **

 

Incorporated by reference to Exhibit (10b) to Dixie's Quarterly Report on Form 10-Q for the quarter ended July 1, 1995. *



(10.4)

Form of Stock Option Agreement Under the Dixie Yarns, Inc. Incentive Stock Plan as amended. **

 

Incorporated by reference to Exhibit (10b) to Dixie's Annual Report on Form 10-K for the year ended December 28, 1996. *



(10.5)

Form of Stock Rights and Restrictions Agreement for Restricted Stock Award Under Incentive Stock Plan as amended. **



 

Incorporated by reference to Exhibit (10v) to Dixie's Annual Report on Form 10-K for the year ended December 27, 1997. *

(10.6)

The Dixie Group, Inc. Director's Stock Plan. **

 

Incorporated by reference to Exhibit (10y) to Dixie's Annual Report on Form 10-K for the year ended December 27, 1997. *



(10.7)

The Dixie Group, Inc. New Non-qualified Retirement Savings Plan effective August 1, 1999. **

 

Incorporated by reference to Exhibit (10.1) to Dixie's Quarterly Report on Form 10-Q for the quarter ended June 26, 1999. *





Page 57






(10.8)

The Dixie Group, Inc. Deferred Compensation Plan Amended and Restated Master Trust Agreement effective as of August 1, 1999. **

 

Incorporated by reference to Exhibit (10.2) to Dixie's Quarterly Report on Form 10-Q for the quarter ended June 26, 1999. *



(10.9)

Stock Purchase Agreement dated as of July 1, 2000, by and among the Company and the stockholders of Fabrica International, Inc. named therein.



 

Incorporated by reference to Exhibit (2.1) to Dixie's Current Report on Form 8-K dated July 1, 2000. *

(10.10)

Stock Purchase Agreement dated as of July 1, 2000, by and among the Company and all of the stockholders of Chroma Technologies, Inc.



 

Incorporated by reference to Exhibit (2.2) to Dixie's Current Report on Form 8-K dated July 1, 2000. *

(10.11)

Pledge and Security Agreement, dated July 1, 2000, by and among the Company and Scott D. Guenther.



 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated July 1, 2000. *

(10.12)

Pledge and Security Agreement, dated July 1, 2000, by and among the Company, Albert A. Frink, the Albert A. Frink and Denise Frink Charitable Remainder Unitrust and the Albert A. Frink Loving Trust.



 

Incorporated by reference to Exhibit (10.2) to Dixie's Current Report on Form 8-K dated July 1, 2000. *

(10.13)

The Dixie Group, Inc. Stock Incentive Plan, as amended. **

 

Incorporated by reference to Annex A to Dixie's Proxy Statement dated April 5, 2002 for its 2002 Annual Meeting of Shareholders. *



(10.14)

Amended and restated stock purchase agreement by and among The Dixie Group, Inc., and Scott D. Guenther, Royce R. Renfroe, and the Albert A. Frink and Denise Frink Charitable Remainder Unitrust and the Albert A. Frink Loving Trust dated September 8, 2000.



 

Incorporated by reference to Exhibit (10.1) to Dixie's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. *

(10.15)

Pledge and security agreement dated September 8, 2000.

 

Incorporated by reference to Exhibit (10.2) to Dixie's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. *



(10.16)

Form of Stock Option Agreement under The Dixie Group, Inc. Stock Incentive Plan. **

 

Incorporated by reference to Exhibit (10.23) to Dixie's Annual Report on Form 10-K for the year ended December 29, 2001. *



(10.17)

Form of Stock Rights and Restrictions Agreement for Restricted Stock Award under The Dixie Group, Inc. Stock Incentive Plan, as amended.**



 

Incorporated by reference to Exhibit (10.35) to Dixie's Annual Report on Form 10-K for the year ended December 25, 2004. *



Page 58






(10.18)

Form of Stock Option Agreement under The Dixie Group, Inc. Stock Incentive Plan for Non-Qualified Options Granted December 20, 2005.**



 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated December 20, 2005. *

(10.19)

Employment Agreement between The Dixie Group, Inc. and David E. Polley, dated November 20, 2002**



 

Incorporated by reference to Exhibit (10.1) to Dixie's Quarterly Report on Form 10-Q for the quarter ended March 29, 2003. *

(10.20)

Master Lease Agreement for Synthetic Lease, dated October 14, 2003, between the Company and General Electric Capital Corporation.



 

Incorporated by reference to Exhibit (10.28) to Dixie's Annual Report on Form 10-K for the year ended December 27, 2003. *

(10.21)

First Amendment dated January 26, 2004 to Employment Agreement between The Dixie Group, Inc. and David E. Polley, dated November 20, 2002.**



 

Incorporated by reference to Exhibit (10.29) to Dixie's Annual Report on Form 10-K for the year ended December 27, 2003. *

(10.22)

Chroma Transition Agreement, dated November 8, 2004, by and among The Dixie Group, Inc., Chroma Technologies, Inc., Chroma Systems Partners, Collins & Aikman Floorcoverings, Inc., Monterey Carpets, Inc. and Monterey Color Systems, Inc.



 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated November 8, 2004. *

(10.23)

Summary Description of the 2004 Annual Incentive Plan for The Dixie Group, Inc.**



 

Incorporated by reference to Exhibit (10.33) to Dixie's Annual Report on Form 10-K for the year ended December 25, 2004. *

(10.24)

Summary Description of the Director Compensation Arrangements for The Dixie Group, Inc. (current arrangements remain unchanged from those described for 2004)**



 

Incorporated by reference to Exhibit (10.34) to Dixie's Annual Report on Form 10-K for the year ended December 25, 2004. *

(10.25)

Severance Agreement and Release Between Fabrica International and Royce Renfroe effective as of May 12, 2005.**



 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated May 12, 2005. *

(10.26)

Second Amendment, dated January 18, 2006, to Employment Agreement dated November 20, 2002 between The Dixie Group, Inc. and David E. Polley.**



 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated January 18, 2006. *

(10.27)

The Dixie Group, Inc. 2006 Stock Awards Plan. **

 

Incorporated by reference to Annex A to the Company's Proxy Statement for its 2006 Annual Meeting of Shareholders, filed March 20, 2006. *



(10.28)

The 2006 Incentive Compensation Plan, approved February 23, 2006.**  



 

Incorporated by reference to Current Report on Form 8-K dated March 1, 2006. *



Page 59






(10.29)

Material terms of the performance goals for the period 2007-2011, pursuant to which incentive compensation awards may be made to certain key executives of the Company based on the results achieved by the Company during such years, approved March 14, 2006.**



 

Incorporated by reference to Current Report on Form 8-K dated March 20, 2006. *

(10.30)

Third Amendment dated May 3, 2006, to Amended and Restated Loan and Security Agreement, by and among The Dixie Group, Inc., each of its subsidiaries as guarantors, Bank of America, N.A., in its capacity as collateral and administrative agent for the Lenders, and the Lenders (as such term is defined in the Loan Agreement).



 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated May 4, 2006. *

(10.31)

Form of Award of Career Shares under the 2006 Incentive Compensation Plan for Participants holding only shares of the Company’s Common Stock.**


 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated June 6, 2006. *

(10.32)

Form of Award of Career Shares under the 2006 Incentive Compensation Plan for Participants holding shares of the Company’s Class B Common Stock.**


 

Incorporated by reference to Exhibit (10.2) to Dixie's Current Report on Form 8-K dated June 6, 2006. *

(10.33)

Form of Award of Long Term Incentive Plan Shares under the 2006 Incentive Compensation Plan for Participants holding only shares of the Company’s Common Stock.**



 

Incorporated by reference to Exhibit (10.3) to Dixie's Current Report on Form 8-K dated June 6, 2006. *

(10.34)

Form of Award of Long Term Incentive Plan Shares under the 2006 Incentive Compensation Plan for Participants holding shares of the Company’s Class B Common Stock.**



 

Incorporated by reference to Exhibit (10.4) to Dixie's Current Report on Form 8-K dated June 6, 2006. *

(10.35)

Award of 125,000 shares of Restricted Stock under the 2006 Stock Awards Plan to Daniel K. Frierson.**



 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated June 7, 2006. *

(10.36)

Fourth Amendment dated October 25, 2006, to Amended and Restated Loan and Security Agreement, by and among The Dixie Group, Inc., each of its subsidiaries as guarantors, Bank of America, N.A., in its capacity as collateral and administrative agent for the Lenders, and the Lenders (as such term is defined in the Loan Agreement).



 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated October 25, 2006. *



Page 60






(10.37)

Third Amendment, dated January 6, 2007, to Employment Agreement dated November 20, 2002 between The Dixie Group, Inc. and David E. Polley.**


 

Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated January 16, 2007. *

 

 

 

 

(14)

Code of Ethics.

 

Incorporated by reference to Exhibit (14) to Dixie's Annual Report on Form 10-K for the year ended December 27, 2003. *



(21)

Subsidiaries of the Registrant.

 

Filed herewith.



(23)

Consent of Independent Registered Public Accounting Firm.



 

Filed herewith.



(31.1)

CEO Certification pursuant to Securities Exchange Act Rule 13a-14(a).



 

Filed herewith.



(31.2)

CFO Certification pursuant to Securities Exchange Act Rule 13a-14(a).



 

Filed herewith.



(32.1)

CEO Certification pursuant to Securities Exchange Act Rule 13a-14(b).



 

Filed herewith.

(32.2)

CFO Certification pursuant to Securities Exchange Act Rule 13a-14(b).



 

Filed herewith.

 

 

 

 



*   Commission File No. 0-2585.

** Indicates a management contract or compensatory plan or arrangement.




Page 61