-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MGhrMN/OPofwh5b61PonojNBM03FUM78+Ph+i/qhbCxdjLwy1gYfkrsVifGyYr16 oYVIhjPlQf3GFISNN6Z5Wg== 0000029332-98-000008.txt : 19981111 0000029332-98-000008.hdr.sgml : 19981111 ACCESSION NUMBER: 0000029332-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIXIE GROUP INC CENTRAL INDEX KEY: 0000029332 STANDARD INDUSTRIAL CLASSIFICATION: CARPETS AND RUGS [2273] IRS NUMBER: 620183370 STATE OF INCORPORATION: TN FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-02585 FILM NUMBER: 98741500 BUSINESS ADDRESS: STREET 1: 1100 S WATKINS ST CITY: CHATTANOOGA STATE: TN ZIP: 37404 BUSINESS PHONE: 6156982501 MAIL ADDRESS: STREET 1: P O BOX 751 CITY: CHATTANOOGA STATE: TN ZIP: 37401 FORMER COMPANY: FORMER CONFORMED NAME: DIXIE YARNS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DIXIE MERCERIZING CO DATE OF NAME CHANGE: 19670524 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 26, 1998 Commission File Number 0-2585 THE DIXIE GROUP, INC. (Exact name of registrant as specified in its charter) Tennessee 62-0183370 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1100 South Watkins Street Chattanooga, Tennessee 37404 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (423) 698-2501 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. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of October 27, 1998 Common Stock, $3 Par Value 10,627,079 shares Class B Common Stock, $3 Par Value 735,228 shares Class C Common Stock, $3 Par Value 0 shares THE DIXIE GROUP, INC 2 INDEX Part I. Financial Information: Page No. Consolidated Condensed Balance Sheets -- September 26, 1998 and December 27, 1997 3 Consolidated Statements of Income -- Three Months Ended September 26, 1998 and September 27, 1997 5 Consolidated Statements of Income -- Nine Months Ended September 26, 1998 and September 27, 1997 7 Consolidated Condensed Statements of Cash Flows -- Nine Months Ended September 26, 1998 and September 27, 1997 9 Notes to Consolidated Condensed Financial Statements 11 Management's Discussion and Analysis of Results of Operations and Financial Condition 17 Part II. Other Information: Item 6 - Exhibits and Reports on Form 8-K 20 PART I - ITEM 1 3 FINANCIAL INFORMATION THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) September 26, December 27, 1998 1997 _____________ ____________ (dollar amounts in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,955 $ 1,848 Accounts receivable (less allowance for doubtful accounts of $5,369 in 1998 and $3,207 in 1997) 32,002 29,450 Inventories 81,612 82,661 Other 16,420 11,977 _____________ ____________ TOTAL CURRENT ASSETS 131,989 125,936 PROPERTY, PLANT AND EQUIPMENT 248,918 231,418 Less accumulated amortization and depreciation (117,136) (104,850) _____________ ____________ NET PROPERTY, PLANT AND EQUIPMENT 131,782 126,568 INTANGIBLE ASSETS (less accumulated amortization of $4,338 in 1998 and $3,325 in 1997) 53,379 54,393 OTHER ASSETS 13,215 11,169 NON-CURRENT ASSETS OF DISCONTINUED SEGMENTS HELD FOR SALE 58,973 68,548 _____________ ____________ TOTAL ASSETS $ 389,338 $ 386,614 _____________ ____________ _____________ ____________ See Notes to Consolidated Condensed Financial Statements. THE DIXIE GROUP, INC. 4 CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) September 26, December 27, 1998 1997 _____________ ____________ (dollar amounts in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 36,632 $ 35,768 Accrued expenses 33,634 26,974 Current portion of long-term debt 9,137 5,143 _____________ ____________ TOTAL CURRENT LIABILITIES 79,403 67,885 LONG-TERM DEBT Senior indebtedness 72,394 68,528 Subordinated notes 50,000 50,000 Convertible subordinated debentures 39,737 42,282 _____________ ____________ TOTAL LONG-TERM DEBT 162,131 160,810 OTHER LIABILITIES 10,076 9,560 DEFERRED INCOME TAXES 27,254 27,115 STOCKHOLDERS' EQUITY Common Stock - issued and outstanding, 14,051,879 shares in 1998 and 14,038,318 shares in 1997 42,156 42,115 Class B Common Stock - issued and outstanding, 735,228 shares in 1998 and 1997 2,206 2,206 Common Stock subscribed 1,720 1,537 Additional paid-in capital 134,636 134,151 Stock subscriptions receivable (3,719) (3,132) Unearned stock compensation (722) (894) Retained earnings (deficit) (8,177) 2,853 Accumulated other comprehensive income (1,839) (1,839) _____________ ____________ 166,261 176,997 Less Common Stock in treasury at cost - 3,442,800 shares in 1998 and 3,439,999 shares in 1997 (55,787) (55,753) _____________ ____________ TOTAL STOCKHOLDERS' EQUITY 110,474 121,244 _____________ ____________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 389,338 $ 386,614 _____________ ____________ _____________ ____________ See Notes to Consolidated Condensed Financial Statements. THE DIXIE GROUP, INC. 5 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended ______________________________ September 26, September 27, 1998 1997 _____________ _____________ (dollar amounts in thousands, except per share data) Net sales $ 120,387 $ 106,932 Cost of sales 97,560 86,267 _____________ _____________ GROSS PROFIT 22,827 20,665 Selling and administrative expenses 16,850 14,804 Other expense - net 919 504 _____________ _____________ INCOME BEFORE INTEREST AND TAXES 5,058 5,357 Interest expense 2,417 1,975 _____________ _____________ INCOME BEFORE INCOME TAXES 2,641 3,382 Income tax provision 991 1,083 _____________ _____________ INCOME FROM CONTINUING OPERATIONS $ 1,650 $ 2,299 INCOME (LOSS) FROM DISCONTINUED OPERATIONS (1,444) 713 _____________ _____________ $ 206 $ 3,012 NET INCOME _____________ _____________ _____________ _____________ See Notes to Consolidated Condensed Financial Statements. THE DIXIE GROUP, INC. 6 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended _________________________________ September 26, September 27, 1998 1997 ______________ ______________ (dollar amounts in thousands, except per share data) Basic earnings (loss) per share: Income from continuing operations $ 0.15 $ 0.21 Income (loss) from discontinued operations (0.13) 0.06 Net earnings $ 0.02 $ 0.27 Diluted earnings (loss) per share: Income from continuing operations $ 0.14 $ 0.19 Income (loss) from discontinued operations (0.12) 0.06 Net earnings $ 0.02 $ 0.25 Dividends per share: Common Stock $ .05 $ --- Class B Common Stock $ .05 $ --- See Notes to Consolidated Condensed Financial Statements. THE DIXIE GROUP, INC. 7 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Nine Months Ended ______________________________ September 26, September 27, 1998 1997 _____________ _____________ (dollar amounts in thousands, except per share data) Net sales $ 369,477 $ 317,637 Cost of sales 295,145 252,025 _____________ _____________ GROSS PROFIT 74,332 65,612 Selling and administrative expenses 51,951 45,873 Other expense - net 2,999 1,739 _____________ _____________ INCOME BEFORE INTEREST AND TAXES 19,382 18,000 Interest expense 7,745 6,651 _____________ _____________ INCOME BEFORE INCOME TAXES 11,637 11,349 Income tax provision 4,397 4,282 _____________ _____________ INCOME FROM CONTINUING OPERATIONS 7,240 7,067 INCOME (LOSS) FROM DISCONTINUED OPERATIONS (1,853) 2,226 LOSS ON DISPOSAL OF KNIT FABRIC AND APPAREL SEGMENT (14,717) --- _____________ _____________ NET INCOME (LOSS) $ (9,330) $ 9,293 _____________ _____________ _____________ _____________ See Notes to Consolidated Condensed Financial Statements. THE DIXIE GROUP, INC. 8 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Nine Months Ended ______________________________ September 26, September 27, 1998 1997 ______________ ______________ (dollar amounts in thousands, except per share data) Basic earnings (loss) per share: Income from continuing operations $ 0.64 $ 0.63 Income (loss) from discontinued operations (0.16) 0.20 Loss on disposal of knit fabric and apparel segment (1.31) --- Net earnings (loss) $ (0.83) $ 0.83 Diluted earnings (loss) per share: Income from continuing operations $ 0.61 $ 0.60 Income (loss) from discontinued operations (0.16) 0.20 Loss on disposal of knit fabric and apparel segment (1.23) --- Net earnings (loss) $ (0.78) $ 0.80 Dividends per share: Common Stock $ .15 $ --- Class B Common Stock $ .15 $ --- See Notes to Consolidated Condensed Financial Statements. THE DIXIE GROUP, INC. 9 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended ______________________________ September 26, September 27, 1998 1997 _____________ _____________ (dollar amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (9,330) $ 9,293 Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations: (Income) loss from discontinued operations 1,853 (2,226) Loss on disposal of knit fabric and segment apparel 14,717 --- Depreciation and amortization 13,491 11,370 Provision (benefit) for deferred income taxes 139 (458) (Gain) loss on property, plant and equipment 246 (34) _____________ _____________ 21,116 17,945 Changes in operating assets and liabilities, net of effects of business combination 2,306 (8,273) _____________ _____________ NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 23,422 9,672 CASH FLOWS FROM INVESTING ACTIVITIES Net proceeds from sale of property, plant and equipment 112 769 Purchase of property, plant and equipment (17,933) (9,105) Net cash paid in business combination --- (19,046) _____________ _____________ NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS (17,821) (27,382) See Notes to Consolidated Condensed Financial Statements. THE DIXIE GROUP, INC. 10 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED (UNAUDITED) Nine Months Ended ______________________________ September 26, September 27, 1998 1997 _____________ _____________ (dollar amounts in thousands) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in credit line borrowings 4,176 9,839 Payments on subordinated debentures (2,545) --- Payments on term-loan (2,125) (1,875) Dividends paid (1,701) --- Other 12 17 _____________ _____________ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS (2,183) 7,981 NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS (3,311) 9,837 INCREASE IN CASH AND CASH EQUIVALENTS 107 108 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,848 1,988 _____________ _____________ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,955 $ 2,096 _____________ _____________ _____________ _____________ SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 9,897 $ 9,602 _____________ _____________ _____________ _____________ Income taxes paid, net of tax refunds received $ 1,962 $ 2,159 _____________ _____________ _____________ _____________ See Notes to Consolidated Condensed Financial Statements. THE DIXIE GROUP, INC. 11 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements which do not include all of the information and footnotes required in annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 26, 1998 are not necessarily indicative of the results that may be expected for the entire year. Consolidated Statements of Income for all periods include the results related to the Company's Textile Businesses under the reporting provisions for discontinued operations. Restatements were made for periods previously presented where applicable. NOTE B - INVENTORIES Inventories are summarized as follows: September 26, December 27, 1998 1997 _____________ ____________ (dollar amounts in thousands) At current cost Raw materials $ 18,418 $ 19,080 Work-in-process 22,668 20,954 Finished goods 45,125 47,819 Supplies, repair parts and other 2,891 3,183 _____________ ____________ 89,102 91,036 Excess of current cost over LIFO value (7,490) (8,375) _____________ ____________ $ 81,612 $ 82,661 _____________ ____________ _____________ ____________ NOTE C - COMPREHENSIVE INCOME The only component of accumulated other comprehensive income is the minimum pension liability adjustment of $1,839 recorded as of December 27, 1997 and unchanged as of September 26, 1998. 12 NOTE D - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended September 26, September 27, 1998 1997 Income from continuing operations $ 1,650 $ 2,299 Income (loss) from discontinued operations (1,444) 713 Net income $ 206 $ 3,012 (No adjustments needed for diluted calculation) Denominator for calculation of basic earnings per share - weighted average shares (1) 11,268 11,253 Effect of dilutive securities: Stock options 263 513 Stock subscriptions 175 255 Denominator for calculation of diluted earnings per share - weighted average shares adjusted for potential dilution (2) 11,706 12,021 Basic earnings (loss) per share: Income from continuing operations $ 0.15 $ 0.21 Income (loss) from discontinued operations (0.13) 0.06 Net earnings $ 0.02 $ 0.27 Diluted earnings (loss) per share: Income from continuing operations $ 0.14 $ 0.19 Income (loss) from discontinued operations (0.12) 0.06 Net earnings $ 0.02 $ 0.25 (1) Includes Common and Class B Common shares in thousands. (2) Because their effects are anti-dilutive, excludes shares issuable pursuant to certain grants under stock option, stock subscription, and restricted stock plans whose grant price was greater than the average market price of common shares outstanding during the periods presented and the assumed conversion of subordinated debentures into shares of Common Stock as follows: 1,998 shares in 1998 and 1,697 shares in 1997. 13 Nine Months Ended September 26, September 27, 1998 1997 Income from continuing operations $ 7,240 $ 7,067 Income (loss) from discontinued operations (1,853) 2,226 Loss on disposal of knit fabric and apparel segment (14,717) --- Net income (loss) $ (9,330) $ 9,293 (No adjustments needed for diluted calculation) Denominator for calculation of basic earnings per share - weighted average shares (1) 11,264 11,219 Effect of dilutive securities: Stock options 438 276 Stock subscriptions 227 189 Denominator for calculation of diluted earnings per share - weighted average shares adjusted for potential dilution (2) 11,929 11,684 Basic earnings (loss) per share: Income from continuing operations $ 0.64 $ 0.63 Income (loss) from discontinued operations (0.16) 0.20 Loss on disposal of knit fabric and apparel segment (1.31) --- Net earnings (loss) $ (0.83) $ 0.83 Diluted earnings (loss) per share: Income from continuing operations $ 0.61 $ 0.60 Income (loss) from discontinued operations (0.16) 0.20 Loss on disposal of knit fabric and apparel segment (1.23) --- Net earnings (loss) $ (0.78) $ 0.80 (1) Includes Common and Class B Common shares in thousands. (2) Because their effects are anti-dilutive, excludes shares issuable pursuant to certain grants under stock option, stock subscription, and restricted stock plans whose grant price was greater than the average market price of common shares outstanding during the periods presented and the assumed conversion of subordinated debentures into shares of Common Stock as follows: 1,801 shares in 1998 and 1,900 shares in 1997. 14 NOTE E - DEBT AND CREDIT ARRANGEMENTS On March 31, 1998, the Company entered into a new unsecured revolving credit and term-loan facility with its principal senior lenders. The new credit facility provides for revolving credit of up to $100.0 million through a five year commitment period and a $60.0 million, seven year term- loan. The new agreement contains financial covenants relating to minimum net worth, the ratio of debt to capitalization, payment of dividends, and certain other financial ratios. Interest rates available under the facility may be selected by the Company from a number of options which effectively allow for borrowing at rates equal to or lower than the greater of the lender's prime rate, or the federal funds rate plus .5% per annum. Commitment fees, ranging from .25% to .375% per annum on the revolving credit line are payable on the average daily unused balance of the revolving credit facility. On April 2, 1998, the Company completed an agreement with the Development Authority of Lafayette, Georgia to obtain up to $7.0 million from the Authority under a development bond issuance. Amounts received by the Company are secured by a letter of credit issued by the Company's lead lender in favor of the Development Authority. The value of the letter of credit reduces the Company's availability under its revolving credit and term-loan facility. The proceeds are to be used for financing real property and machinery and equipment needs of the Company's synthetic materials recycling center under development in Lafayette, Georgia. Restrictions set forth in the Company's subordinated note agreement have limited the Company's ability to pay dividends due to losses associated with the disposal of the Company's knit fabric and apparel businesses. Absent a waiver from the lender or an amendment, future dividends can only be paid to the extent of 50% of the excess of cumulative income for periods subsequent to September 26, 1998 above $10,732. As of September 26, 1998, the most restrictive covenants under the revolving credit and term-loan agreement limit available borrowing capacity to $33,898. NOTE F - BUSINESS COMBINATION As disclosed in Note B to the Company's consolidated financial statements included in its 1997 Annual Report to Shareholders, the Company acquired the needlebond and artificial turf assets and business of General Felt Industries, Inc. based in Dalton, Georgia on October 2, 1997. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisition had occurred at the beginning of 1997 after giving effect to certain adjustments, including the amortization of cost in excess of net tangible assets acquired, interest expense on debt to finance the acquisition, and related income taxes. The pro forma results are presented for comparative purposes only and do not purport to be indicative of future results or of the results that would have occurred had the acquisition taken place at the beginning of 1997. 15 Three months Nine months ended ended Sept 27, 1997 Sept 27, 1997 Net sales $116,758 $349,993 Income from continuing operations 2,399 7,845 Net income 3,112 10,071 Basic earnings per share: Income from continuing operations .22 .70 Net income .28 .90 Diluted earnings per share: Income from continuing operations .20 .66 Net income .26 .86 NOTE G - DISCONTINUED OPERATIONS In June 1998, the Company announced the decision to discontinue its knit fabric and apparel businesses. Operations of the apparel business have ceased and the Company is actively seeking a buyer for its knit fabric business and anticipates a disposition by year-end, 1998. During September, 1998, the Company announced the decision to discontinue and hold for sale its remaining Textile operations, the Specialty Yarns Business, and has retained First Union Capital Markets to assist in marketing the discontinued businesses. The table set forth below summarizes (in thousands of dollars) the results of operations of the discontinued Textile Businesses and the estimated loss on disposal (including estimated operating losses during the disposition period) pertaining to the knit fabric and apparel businesses. The Company has recorded no asset valuation impairment related to the Specialty Yarns assets nor can the likelihood or amount of any impairment be reasonably estimated until such time that valuation indicators are present through the asset marketing process. Additionally, revenues for these operations are shown below and have been excluded from Net Sales in the Statements of Income for all periods presented. Three Months Ended Nine Months Ended Sept 26, Sept 27, Sept 26, Sept 27, 1998 1997 1998 1997 Net Sales $42,930 $53,008 $142,091 $173,827 Pre-tax operating income (loss) $(2,155) $ 1,211 $ (2,697) $ 3,783 Tax provision (benefit) (711) 498 (844) 1,557 Net operating income (loss) $(1,444) $ 713 $ (1,853) $ 2,226 Pre-tax loss on disposal including $700 of operating losses through disposition period $ --- $ --- $(21,745) $ --- Tax (benefit) --- --- (7,028) --- Net loss on disposal $ --- $ --- $(14,717) $ --- 16 Assets and liabilities related to the knit fabric and apparel operations are presented in the Consolidated Condensed Balance Sheets at their estimated net realizable values and reflect all adjustments believed to be necessary. As noted above, no adjustments have been recorded to the carrying value of the assets of the Specialty Yarns Business. Property, plant and equipment and intangible assets of the discontinued operations are reported in Non-current Assets of Discontinued Segments Held for Sale. PART I - ITEM 2 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is presented to update the discussion of results of operations and financial condition included in the Company's 1997 Annual Report. RESULTS OF OPERATIONS In the second quarter of 1998, the Company announced the decision to discontinue its knit fabric and apparel operations and the intent to spin- off the remaining Textile Business (Specialty Yarn Business) into a separate public company. Due to conditions in the stock market and in the textile industry, the spin-off process was ceased in September, 1998 and the decision was made to hold the Specialty Yarns Business for sale. With these actions, the Company's entire textile operations are being held for sale. An outside firm has been retained to assist the Company in marketing the assets of the Specialty Yarn Business. The Company's financial results reflect the operations of the textile businesses as discontinued operations for all periods presented. The Company has recorded no asset valuation impairment related to the Specialty Yarns assets nor can the likelihood or amount of any impairment be reasonably estimated until such time that valuation indicators are present through the asset marketing process. The Company is committed to completing the disposition of the textile assets expeditiously. Net income of $.2 million was reported for the three months ended September 26, 1998 and included a loss of $1.5 million related to the operations of the discontinued textile businesses. A net loss of $9.3 million was reported for the first nine months of 1998 and included a loss of $1.8 million for the discontinued operations and $14.7 million for estimated disposal losses for the Company's knit fabric and apparel segment. The Company's continuing operations, the Floorcovering Business, reported sales of $120.4 million and income of $1.7 million for the three month period ended September 26, 1998 compared with sales of $106.9 million and income of $2.3 million for the third quarter of 1997. The Floorcovering Business reported sales of $369.5 million and income of $7.2 million for the nine months ended September 26, 1998 compared with sales of $317.6 million and income of $7.1 million for the first nine months of 1997. Sales increased 13% for the third quarter of 1998 and 16% for the first nine months of 1998 compared with the 1997 reporting periods. The increases in both reporting periods were attributable to higher sales volumes associated with the October, 1997 acquisition of the needlebond and artificial turf assets of General Felt Industries and strong growth in higher-end commercial markets. Third quarter 1998 earnings of $1.7 million were down compared with the third quarter of 1997. Earnings were negatively impacted during the third quarter by inefficiencies and disruptions related to Masland's capacity expansion to support growth, the delayed start-up of the Company's synthetic materials recycling center, and the short-term effect of the General Motors strike on Candlewick's tufted yarn business. 18 LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 1998, net cash provided from operating activities of continuing operations was $23.4 million. Operating cash flow was supplemented by $2.0 million of funds from increased net borrowings under the Company's revolving credit and term-loan facility. These funds were used primarily for purchases of property, plant and equipment of $17.9 million, dividend payments of $1.7 million, sinking fund payments of $2.5 million for the Company's subordinated debentures, and $3.3 million to fund operations associated with the discontinued Textile Businesses. On March 31, 1998, the Company entered into a new unsecured revolving credit and term-loan facility with its principal senior lenders. The new credit facility provides for revolving credit of up to $100.0 million through a five year commitment period and a $60.0 million, seven year term- loan. The new agreement contains financial covenants relating to minimum net worth, the ratio of debt to capitalization, payment of dividends, and certain other financial ratios. Interest rates available under the facility may be selected by the Company from a number of options which effectively allow for borrowing at rates equal to or lower than the greater of the lender's prime rate, or the federal funds rate plus .5% per annum. Commitment fees, ranging from .25% to .375% per annum on the revolving credit line are payable on the average daily unused balance of the revolving credit facility. On April 2, 1998, the Company completed an agreement with the Development Authority of Lafayette, Georgia to obtain up to $7.0 million from the Authority under a development bond issuance. Amounts received by the Company are secured by a letter of credit issued by the Company's lead lender in favor of the Development Authority. The value of the letter of credit reduces the Company's availability under its revolving credit and term-loan facility. The proceeds are to be used for financing real property and machinery and equipment needs of the Company's synthetic materials recycling center under development in Lafayette, Georgia. Restrictions set forth in the Company's subordinated note agreement have limited the Company's ability to pay dividends due to losses associated with the disposal of the Company's knit fabric and apparel businesses. Absent a waiver from the lender or an amendment, future dividends can only be paid to the extent of 50% of the excess of cumulative income for periods subsequent to September 26, 1998 above $10.7 million. As of September 26, 1998, the most restrictive covenants under the revolving credit and term-loan agreement limit available borrowing capacity to $33.9 million. The Company considers its unused debt availability and operating cash flows to be adequate to fund its anticipated liquidity needs including anticipated increases in capital expenditures to support sales growth and market needs. 19 ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting For the Costs of Computer Software Developed For or Obtained For Internal Use". Adoption of the SOP is required for the Company at the beginning of fiscal 1999. Provisions of the Statement require the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. Early adoption of the SOP is permitted, and accordingly the Company adopted the Statement effective with the first quarter of 1998. The Company has historically expensed internal software development costs as incurred but after adoption of the Statement will capitalize and amortize such costs over the expected useful life of the associated software. YEAR 2000 SYSTEMS ISSUES The Company has electronic business systems in place at each primary business group. Systems platforms and architecture differ between the business groups. The Company has actively planned its various systems for year 2000 compliance for several years in its design, purchase, and installation processes. The impact of non-compliant systems from major vendors, customers, or its own internal applications could be material to the operations of the Company. Year 2000 compliance plans are formalized and include specific testing of all systems and conversion to a compliant state for those applications that are not planned for replacement prior to year 2000 impact dates. The Company anticipates completion of the applications conversions by March 1999. Significant vendors and customers are included in the determination and assessment of the Company's year 2000 readiness. Written contact has occurred with the vendors and customers with response monitoring and follow-up where inadequate assurances exist. The costs for year 2000 compliance assessment and remediation is estimated to be less than $0.2 million in fiscal 1998 and less than $0.2 million in fiscal 1999. The Company has not deferred any information technology projects as a result of personnel or financial resource allocations toward year 2000 compliance issues. The Company has not developed a formal contingency plan due to its current planned state of readiness and timetable. Progress will continue to be monitored by management and plans subjected to alteration if deemed appropriate. SUBSEQUENT EVENT The Company announced on October 28, 1998 that it completed the acquisition of the assets of Ideal Fibers, a Calhoun, Georgia, corporation that is starting up a manufacturing facility to produce extruded carpet yarns. The business will be operated as part of Candlewick Yarns, and is expected to begin production in January, 1999 with capacity to produce about 25 million pounds of continuous filament annually. The Company's investment in fiber extrusion is a strategic move to support anticipated continued growth in the carpet industry. PART II. OTHER INFORMATION 20 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits (i) Exhibits Incorporated by Reference None. (ii) Exhibits Filed with this Report (4a) Waiver letter dated August 17, 1998 from New York Life Insurance and Annuity Corporation. (4b) Waiver letter dated August 17, 1998 from New York Life Insurance Company. (b) Reports on Form 8-K No reports on Form 8-K have been filed by the registrant during the three month period ended September 26, 1998. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE DIXIE GROUP, INC. __________________________ (Registrant) November 9, 1998 ____________________ (Date) /s/GLENN A. BERRY __________________________ Glenn A. Berry Executive Vice President and Chief Financial Officer /s/D. EUGENE LASATER __________________________ D. Eugene Lasater Controller QUARTERLY REPORT ON FORM 10-Q 22 ITEM 6(a) EXHIBITS QUARTER ENDED SEPTEMBER 26, 1998 THE DIXIE GROUP, INC. CHATTANOOGA, TENNESSEE Exhibit Index EXHIBIT NO. EXHIBIT DESCRIPTION INCORPORATION BY REFERENCE (4a) Waiver letter dated Filed herewith. August 17, 1998 from New York Life Insurance and Annuity Corporation. (4b) Waiver letter dated Filed herewith. August 17, 1998 from New York Life Insurance Company. EX-4.A 2 EXHIBIT (4a) EXHIBIT 4a New York Life Insurance and Annuity Corporation (A Delaware Corporation) 51 Madison Avenue, New York, NY 10010 212 576-7000 August 17, 1998 Mr. Daniel K. Frierson Chairman of the Board President and Chief Executive Officer The Dixie Group, Inc. P. O. Box 751 Chattanooga, TN 37407 Re: The Dixie Group, Inc. ("Dixie") 9.96% Senior Subordinated Notes due February 1, 2010 ("Notes") Dear Mr. Frierson: The Notes, as amended, pursuant to the terms of Section 9, Paragraph (F), provide that Dixie shall not declare or pay, or set apart funds for the payment of, any dividends if immediately after giving effect to such Dividend Action (i) the sum of the amounts declared and paid or payable as, or set apart for, dividends on, or distribution in respect of, all shares of capital stock of the Company subsequent to December 31, 1997, would be in excess of $1,000,000 plus 50% of aggregate cumulative consolidated net income as defined in the NYL Notes for all periods subsequent thereto, determined as of the first day of the fiscal quarter in which a Dividend Action is declared by the Board of Directors of the Company, or (ii) if the Company's Interest Coverage Ratio for the fiscal period consisting of the four fiscal quarters immediately preceding such Dividend Action is less than the ratio set forth below: FOUR QUARTER FISCAL PERIOD ENDING IN RATIO Fiscal Year 1998 1.25 to 1 Fiscal Year 1999 and thereafter 1.50 to 1 You have informed the holders of the Notes ("Noteholders") that due to the terms of such section and the anticipated results of operations of Dixie for the second quarter of 1998 no dividend may be declared and paid to Dixie's shareholders in the third quarter of 1998 without a waiver by Noteholders of Dixie's compliance with its obligations as set forth in such section. Dixie has requested such a waiver. Mr. Daniel K. Frierson Page 2 Pursuant to Dixie's request, New York Life Insurance and Annuity Corporation hereby waives Dixie's compliance with the terms of Section 9, Paragraph (F) of the Notes only to the extent that Dixie may pay dividends of $0.05 per share on Common Stock and Class B Common Stock in the third quarter of 1998. The aggregate amount of such payment for Common Stock and Class B Common Stock shall not exceed $650,000. This waiver is not intended to be a waiver of Dixie's compliance with any other terms of the Notes or the Loan Agreement ("Agreement") dated February 6, 1990, as amended, executed by Dixie and the Noteholders that are parties thereto in connection with the issuance of the Notes and shall not be construed as a waiver or amendment of any other provisions or sections of the Notes or the Agreement. In all other respects the Notes and the Agreement shall continue in full force and effect. Sincerely, NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION By: New York Life Insurance Company By:/s/STEVEN M. BENEVENTO Its: Director EX-4.B 3 EXHIBIT (4b) EXHIBIT 4b New York Life Insurance Company 51 Madison Avenue, New York, NY 10010 212 576-7000 August 17, 1998 Mr. Daniel K. Frierson Chairman of the Board President and Chief Executive Officer The Dixie Group, Inc. P. O. Box 751 Chattanooga, TN 37407 Re: The Dixie Group, Inc. ("Dixie") 9.96% Senior Subordinated Notes due February 1, 2010 ("Notes") Dear Mr. Frierson: The Notes, as amended, pursuant to the terms of Section 9, Paragraph (F), provide that Dixie shall not declare or pay, or set apart funds for the payment of, any dividends if immediately after giving effect to such Dividend Action (i) the sum of the amounts declared and paid or payable as, or set apart for, dividends on, or distribution in respect of, all shares of capital stock of the Company subsequent to December 31, 1997, would be in excess of $1,000,000 plus 50% of aggregate cumulative consolidated net income as defined in the NYL Notes for all periods subsequent thereto, determined as of the first day of the fiscal quarter in which a Dividend Action is declared by the Board of Directors of the Company, or (ii) if the Company's Interest Coverage Ratio for the fiscal period consisting of the four fiscal quarters immediately preceding such Dividend Action is less than the ratio set forth below: FOUR QUARTER FISCAL PERIOD ENDING IN RATIO Fiscal Year 1998 1.25 to 1 Fiscal Year 1999 and thereafter 1.50 to 1 You have informed the holders of the Notes ("Noteholders") that due to the terms of such section and the anticipated results of operations of Dixie for the second quarter of 1998 no dividend may be declared and paid to Dixie's shareholders in the third quarter of 1998 without a waiver by Noteholders of Dixie's compliance with its obligations as set forth in such section. Dixie has requested such a waiver. Mr. Daniel K. Frierson Page 2 Pursuant to Dixie's request, New York Life Insurance Company hereby waives Dixie's compliance with the terms of Section 9, Paragraph (F) of the Notes only to the extent that Dixie may pay dividends of $0.05 per share on Common Stock and Class B Common Stock in the third quarter of 1998. The aggregate amount of such payment for Common Stock and Class B Common Stock shall not exceed $650,000. This waiver is not intended to be a waiver of Dixie's compliance with any other terms of the Notes or the Loan Agreement ("Agreement") dated February 6, 1990, as amended, executed by Dixie and the Noteholders that are parties thereto in connection with the issuance of the Notes and shall not be construed as a waiver or amendment of any other provisions or sections of the Notes or the Agreement. In all other respects the Notes and the Agreement shall continue in full force and effect. Sincerely, NEW YORK LIFE INSURANCE COMPANY By:/s/STEVEN M. BENEVENTO Its: Director EX-27.1 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF THE DIXIE GROUP, INC. AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-26-1998 SEP-26-1998 1,955 0 37,371 5,369 81,612 131,989 248,918 117,136 389,338 79,403 162,131 44,362 0 0 66,112 389,338 369,477 369,477 295,145 295,145 0 0 7,745 11,637 4,397 7,240 (16,570) 0 0 (9,330) (.83) (.78)
EX-27.2 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF THE DIXIE GROUP, INC. AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS, AS RESTATED FOR DISCONTINUED OPERATIONS. 1,000 9-MOS DEC-27-1997 SEP-27-1997 2,096 0 33,635 3,209 94,873 135,196 212,322 101,368 357,065 72,841 134,186 44,087 0 0 73,879 357,065 317,637 317,637 252,025 252,025 0 0 6,651 11,349 4,282 7,067 2,226 0 0 9,293 .83 .80
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