STOCK COMPENSATION EXPENSE AND STOCK PLANS

Stock Compensation Expense

The Company recognizes compensation expense relating to share-based payments based on the fair value of the equity instrument issued and records such expense in selling and administrative expenses in the Company's Consolidated Financial Statements. The number of shares to be issued is determined by dividing the specified dollar value of the award by the market value per share on the grant date. Pursuant to a policy adopted by the Compensation Committee of the Board of Directors applicable to awards granted for years 2009 through 2011, $5.00 per share will be used as the market value per share to calculate the number of shares to be issued if the market value per share is less than $5.00 per share on the grant date.

The Company's stock compensation expense was $663 for 2011, $888 for 2010 and $1,193 for 2009.

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 provided for the issuance of up to 800,000 shares of Common Stock and/or Class B Common Stock as 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 The 2006 Plan superseded and replaced The Dixie Group, Inc. Stock Incentive Plan (the "2000 Plan"), which was terminated with respect to the granting of new awards.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.

On April 27, 2010, the Company's shareholders' approved the amendment and restatement of the 2006 Plan to increase the number of shares that may be issued under the plan from 800,000 to 1,300,000.

Restricted Stock Awards

Each executive officer has the opportunity to earn a Primary Long-Term Incentive Award of restricted stock and receive an award of restricted stock denominated as “Career Shares.” The number of shares issued, if any, is based on the market price of the Company’s Common Stock at the time of grant of the award, subject to a $5.00 per share minimum value effective for 2011, 2010 and 2009. Primary Long-Term Incentive Awards vest over 3 years, and Career Shares vest when the participant becomes qualified to retire from the Company at 60 years of age and has retained the Career Shares for 24 months following the grant date.

During 2011, the Company granted 91,340 shares of restricted stock to officers and other key employees. The grant-date fair value of the awards was $417, or $4.565 per share, and will be recognized as stock compensation expense over the vesting periods which range from 2 to 16 years from the date the awards were granted. Each award is subject to a continued service condition. 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.

During 2010, the Company granted 100,940 shares of restricted stock to officers and other key employees of the Company. The grant-date fair value of the awards was $266, or $2.635 per share, and will be recognized as stock compensation expense over the vesting periods which range from 2 to 17 years from the date the awards were granted. Each award is subject to a continued service condition. 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.

During 2009, the Company amended and restated a 125,000 share Restricted Stock Award ("award") originally granted to its Chief Executive Officer on June 6, 2006 with a seven year term. The fair value on the date of the original 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. Such value was determined using a binomial model and will be expensed over the term of the award. Vesting of the shares is contingent on a 35% increase in the market value of the Company's Common Stock (the "Market Condition") prior to five years from the date of the original grant. 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 after the Market Condition and minimum vesting period are met on the anniversary date of the award. The award was amended to extend the term by one year to June 6, 2014, and to extend the time during which the awards' market condition may be met by three years to June 6, 2014. The modification resulted in incremental stock compensation expense of $41 which is amortized over the awards' remaining vesting period.

Restricted stock activity for the three years ended December 31, 2011 is summarized as follows:



	Number of Shares		Weighted-Average Fair Value of Awards Granted During the Year
Outstanding at December 27, 2008	393,170		$	—
Granted	—		—
Vested	(97,526	)	—
Forfeited	(13,988	)	—
Outstanding at December 26, 2009	281,656		—
Granted	100,940		2.64
Vested	(81,417	)	—
Forfeited	—		—
Outstanding at December 25, 2010	301,179		—
Granted	91,340		4.57
Vested	(85,990	)	—
Forfeited	—		—
Outstanding at December 31, 2011	306,529		$	—

As of December 31, 2011, unrecognized compensation cost related to unvested restricted stock was $885. That cost is expected to be recognized over a weighted-average period of 5.1 years. The total fair value of shares vested was approximately $385, $227 and $146 during the year 2011, 2010 and 2009, respectively.

Stock Performance Units

The Company's non-employee directors receive an annual retainer of $12 in cash and $12 in value of Stock Performance Units (subject to a $5.00 minimum per unit, for 2011, 2010 and 2009) under the Director's Stock Plan. The market value at the date of the grants in 2010 was above $5.00 per share; therefore, there was no reduction in the number of units issued. Units in 2011 and 2009 were reduced to reflect the $5.00 per share minimum. Upon retirement, the Company issues a number of shares of Common Stock equivalent to the number of Stock Performance Units held by non-employee directors at that time. As of December 31, 2011, 84,372 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 31, 2011, 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 2011, 2010 or 2009.

Stock Options

All stock options issued under the Company's 2000 Plan were exercisable generally at a cumulative rate of 25% per year after the second year from the date the options are granted. Options granted under the Company's 2006 Plan are exercisable for periods determined at the time the awards are granted. Effective 2009, the Company established a $5.00 minimum exercise price on all options granted. No options were granted during 2011 or 2010.

The fair value of each option was estimated on the date of grant using the Black-Scholes model. Expected volatility was based on historical volatility of the Company's stock, calculated using the most recent period equal to the expected life of the options. The risk-free interest rate was based on the U.S. Treasury yield for a term equal to the expected life of the option at the time of grant. The Company uses historical exercise behavior data of similar employee groups to determine the expected life of options.

The following weighted-average assumptions were used to estimate the fair value of stock options granted:



	2011		2010		2009
Expected volatility	—	%	—	%	49.70	%
Risk-free interest rate	—	%	—	%	2.36	%
Dividend yield	—	%	—	%	—	%
Expected life of options	—		—		5 years

During 2009, the Company extended the life of 234,081 options held by 27 of the Company's employees by an additional three years. The modification increased stock compensation expense by $9.

Option activity for the three years ended December 31, 2011 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, 2008	858,941		$	11.62	$	—
Granted above market	139,000		5.00		0.90
Exercised	—		—		—
Forfeited	(80,663	)	9.97		—
Outstanding at December 26, 2009	917,278		10.76		—
Granted	—		—		—
Exercised	—		—		—
Forfeited	(130,550	)	9.88		—
Outstanding at December 25, 2010	786,728		10.91		—
Granted	—		—		—
Exercised	—		—		—
Forfeited	—		—		—
Outstanding at December 31, 2011	786,728		$	10.91	$	—

Options exercisable at:
December 26, 2009	778,278		$	11.79	—
December 25, 2010	647,728		12.18		—
December 31, 2011	682,478		11.81		—

The following table summarizes information about stock options at December 31, 2011:



Options Outstanding
Range of Exercise Prices	Number of Shares	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price
$3.875 - $5.00	179,500	6.8 years	$	4.90
$6.96 - $6.96	107,418	3.3 years	6.96
$11.85 - $17.58	499,810	3.4 years	13.92
$3.875 - $17.58	786,728	4.2 years	$	10.91

Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price
$3.875 - $5.00	75,250	5.3 years	$	4.75
$6.96 - $6.96	107,418	3.3 years	6.96
$11.85 - $17.58	499,810	3.4 years	13.92
$3.875 - $17.58	682,478	3.6 years	$	11.81

At December 31, 2011, the market value of all outstanding stock options was less than their exercise price by $6,271 and the market value of exercisable stock options was less than their exercise price by $6,056. At December 31, 2011, unrecognized compensation expense related to unvested stock options was $71 and is expected to be recognized over a weighted-average period of 2.8 years.