DIXIE GROUP INC, DEF 14A, 1998-03-30

DIXIE GROUP INC
DEF 14A, 1998-03-30
CARPETS & RUGS

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<PAGE> 1

SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

THE DIXIE GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials:

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
<PAGE> 2

THE DIXIE GROUP, INC.
1100 SOUTH WATKINS STREET
CHATTANOOGA, TENNESSEE 37404
(423) 698-2501

---------------------

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To the Shareholders of The Dixie Group, Inc.:

The Annual Meeting of Shareholders of The Dixie Group, Inc. will be held at
the Company's general office, 1100 South Watkins Street, Chattanooga, Tennessee
37404, on April 30, 1998, at 10:00 a.m., Eastern Daylight Time, for the
following purposes:

1. Election of nine individuals to the Board of Directors for a term
of one year each;

2. Amendment of the Company's Incentive Stock Plan to: (i) increase
the maximum number of shares of the Company's Common Stock that may be
issued pursuant to awards under the Plan from 1,770,000 to 2,270,000; and
(ii) expressly provide that any shares of Class B Common Stock issued to
participants under the Plan shall count against the overall limit of shares
of Common Stock issuable under the Plan;

3. Approval of issuance of Class B Common Stock to certain electing
participants in the Company's Incentive Stock Plan and Stock Ownership
Plan, and with respect to future employee benefit plans that may be adopted
by the Company, in the discretion of the Board of Directors;

4. Approval of the Directors Stock Plan; and

5. Such other business as may properly come before the Annual Meeting
of Shareholders, or any adjournment thereof.

Only shareholders of record of the Common Stock and Class B Common Stock at
the close of business on March 6, 1998, are entitled to notice of, and to vote
at, the Annual Meeting or any adjournment thereof.

Your attention is directed to the Proxy Statement accompanying this Notice
for more complete information regarding the matters to be acted upon at the
Annual Meeting.

By Order of the Board of Directors

Daniel K. Frierson
Chairman of the Board
Chattanooga, Tennessee
Dated: March 27, 1998

PLEASE READ THE ATTACHED MATERIAL CAREFULLY AND COMPLETE, DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT PROMPTLY TO THE COMPANY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE SO THAT YOUR SHARES OF COMMON STOCK AND CLASS B COMMON
STOCK WILL BE REPRESENTED AT THE MEETING. IF YOU ATTEND THE MEETING, YOU MAY
REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON, SHOULD YOU SO DESIRE.
<PAGE> 3

THE DIXIE GROUP, INC.
1100 SOUTH WATKINS STREET
CHATTANOOGA, TENNESSEE 37404
(423) 698-2501

---------------------

ANNUAL MEETING OF SHAREHOLDERS
APRIL 30, 1998

---------------------

PROXY STATEMENT

---------------------

INTRODUCTION

The enclosed proxy is solicited on behalf of the Board of Directors of the
Company for the purposes set forth in the accompanying Notice of Annual Meeting
of Shareholders. This proxy statement and the enclosed proxy will be mailed on
or about March 27, 1998, to shareholders of record of the Company's Common Stock
and Class B Common Stock as of the close of business on March 6, 1998.

At the Annual Meeting, holders of the Company's Common Stock, $3.00 par
value per share ("Common Stock"), and Class B Common Stock, $3.00 par value per
share ("Class B Common Stock"), will be asked to: (i) elect nine individuals to
the Board of Directors for a term of one year each; (ii) approve an amendment to
the Company's Incentive Stock Plan to (a) increase the maximum number of shares
of the Company's Common Stock that may be issued pursuant to awards under the
Plan from 1,770,000 to 2,270,000; and (b) expressly provide that any shares of
Class B Common Stock issued under the Plan (assuming the approval of Proposal 3)
shall count against the limit of shares of Common Stock which may be granted
under the Plan; and (iii) approve the issuance of Class B Common Stock to
qualifying participants who elect to receive such shares under the Company's
Incentive Stock Plan and Stock Ownership Plan, and with respect to future
employee benefit plans that may be adopted by the Company, in the discretion of
the Board of Directors (the Incentive Stock Plan, the Stock Ownership Plan, and
any such future plans, collectively, the "Stock Plans"); (iv) approve the
Directors' Stock Plan; and (v) transact any other business that may properly
come before the meeting.

The Board of Directors recommends that the Company's shareholders vote FOR
the election of the nine nominees for director, FOR approval of the amendments
to the Incentive Stock Plan, FOR approval of issuance of Class B Common Stock to
qualifying participants under the Stock Plans, and FOR approval of the
Directors' Stock Plan.

RECORD DATE, VOTE REQUIRED AND RELATED MATTERS

The Board has fixed the close of business on March 6, 1998, as the Record
Date for the determination of shareholders entitled to notice of, and to vote
at, the Annual Meeting. Each outstanding share of Common Stock is entitled to
one vote, and each outstanding share of Class B Common Stock is entitled to 20
votes, exercisable in person or by properly executed Proxy, on each matter
brought before the Annual Meeting. Cumulative voting is not permitted. As of
March 6, 1998, 10,597,219 shares of Common Stock, representing
<PAGE> 4

10,597,219 votes, were held of record by approximately 3,650 shareholders
(including an estimated 2,650 shareholders whose shares are held in nominee
names), and 735,228 shares of Class B Common Stock, representing 14,704,560
votes, were held by 15 individual shareholders together representing an
aggregate of 25,301,779 votes.

Shares represented at the Annual Meeting by properly executed Proxy will be
voted in accordance with the instructions indicated therein unless such Proxy
has previously been revoked. If no instructions are indicated, such shares will
be voted FOR the election of the nine nominees for director as set forth in this
Proxy Statement, FOR approval of the amendments to the Incentive Stock Plan, FOR
authorization of the issuance of Class B Common Stock to qualifying participants
under the Stock Plans, and FOR approval of the Directors' Stock Plan.

Any Proxy given pursuant to this solicitation may be revoked at any time by
the shareholder giving it by delivering to the Secretary of the Company a
written notice of revocation bearing a later date than the Proxy, by submitting
a later-dated, properly executed Proxy, or by revoking the Proxy and voting in
person at the Annual Meeting. Attendance at the Annual Meeting will not, in and
of itself, constitute a revocation of a Proxy. Any written notice revoking a
Proxy should be sent to The Dixie Group, Inc., P. O. Box 751, Chattanooga,
Tennessee 37401, Attention: Starr T. Klein, Secretary.

The persons designated as proxies were selected by the Board of Directors
and are Daniel K. Frierson, John W. Murrey, III, and Robert J. Sudderth, Jr. The
cost of solicitation of Proxies will be borne by the Company.

The presence, in person or by Proxy, of the holders of a majority of the
aggregate outstanding vote of Common Stock and Class B Common Stock entitled to
vote is necessary to constitute a quorum at the Annual Meeting. The affirmative
vote of a plurality of the total votes cast that are represented in person or by
Proxy at the Annual Meeting is required to elect the Board of Directors'
nominees. The affirmative vote of a majority of the total votes cast that are
represented in person or by Proxy at the Annual Meeting is required to approve
the amendments to the Incentive Stock Plan, to authorize issuance of Class B
Common Stock to qualifying participants under the Stock Plans, and to approve
the Directors' Stock Plan.

The Board is not aware of any other matter to be brought before the Annual
Meeting for a vote of shareholders. If, however, other matters are properly
presented, Proxies representing shares of Common Stock and Class B Common Stock
will be voted in accordance with the best judgment of the proxyholders. Shares
covered by abstentions and broker non-votes, while counted for purposes of
determining the presence of a quorum at the Annual Meeting, are not considered
affirmative votes and thus will have no effect upon the election of directors by
a plurality vote. With respect to approval of the amendments to the Incentive
Stock Plan, authorization of the issuance of Class B Common Stock to qualifying
participants under the Stock Plans, and approval of the Directors' Stock Plan,
an abstention will have the same effect as a "NO" vote and broker non-votes will
have no effect.

A copy of the Company's Annual Report for the year ended December 27, 1997,
is enclosed herewith.

PRINCIPAL SHAREHOLDERS

Shareholders of record at the close of business on March 6, 1998, the
Record Date, will be entitled to vote at the Annual Meeting. Messrs. Daniel K.
Frierson, T. Cartter Frierson, and Paul K. Frierson collectively have the power
to direct 15,215,813 votes (547,013 shares of Common Stock and 733,440 shares of
Class B Common Stock), representing 60.14% of the total votes eligible to be
cast at the Company's Annual Meeting.
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<PAGE> 5

The following table presents information regarding beneficial ownership of
the Company's equity securities by beneficial owners of more than 5% of the
Common Stock or Class B Common Stock. The table also presents beneficial
ownership information for the executive officers named in the Summary
Compensation Table, the nominees for director, and all directors and executive
officers as a group as of March 6, 1998.

<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIALLY OWNED(1) % OF CLASS(1)
- ------------------------------------ -------------------- --------------------- -------------
<S> <C> <C> <C>
Daniel K. Frierson................. Common Stock 1,505,983(2)(3)(4) 13.90%
111 East and West Road Class B Common Stock 661,440(5) 89.96
Lookout Mountain, TN 37350
Paul K. Frierson................... Common Stock 1,291,466(3)(4)(6) 12.09
606 Fleetwood Drive Class B Common Stock 251,373(7) 34.19
Lookout Mountain, TN 37350
T. Cartter Frierson................ Common Stock 283,809(3)(8) 2.68
1103 Tinker Bell Lane Class B Common Stock 226,121(9) 30.75
Lookout Mountain, GA 30750
SunTrust Banks, Inc................ Common Stock 1,513,544(10) 14.28
25 Park Place Class B Common Stock -- --
Atlanta, GA 30303
The TCW Group, Inc................. Common Stock 754,900(11) 7.12
865 South Figueroa Street Class B Common Stock -- --
Los Angeles, CA 90017
Franklin Resources, Inc............ Common Stock 700,000(12) 6.61
777 Mariners Island Blvd. Class B Common Stock -- --
San Mateo, CA 94404
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF SHARES
ADDITIONAL DIRECTORS AND EXECUTIVE OFFICERS: TITLE OF CLASS BENEFICIALLY OWNED(1) % OF CLASS(1)
- -------------------------------------------- -------------------- --------------------- -------------
<S> <C> <C> <C>
Philip H. Barlow....................... Common Stock 113,811(13) 1.07%
Class B Common Stock -- --
Glenn A. Berry......................... Common Stock 50,564(14) *
Class B Common Stock -- --
J. Don Brock........................... Common Stock 7,500(15) *
Class B Common Stock -- --
Paul K. Brock.......................... Common Stock 13,100(15) *
Class B Common Stock -- --
Lovic A. Brooks, Jr.................... Common Stock 1,124,306(4)(15)(16) 10.60
Class B Common Stock -- --
William N. Fry, IV..................... Common Stock 115,900(17) 1.09
Class B Common Stock -- --
John W. Murrey, III.................... Common Stock 9,700(15) *
Class B Common Stock -- --
James H. Martin, Jr.................... Common Stock 14,500(15) *
Class B Common Stock -- --
</TABLE>

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<PAGE> 6

- ---------------

* Percentage of shares beneficially owned does not exceed 1% of the Class.

(1) Under the rules of the Securities and Exchange Commission and for the
purposes of the disclosures in this table, a person is deemed to be a
"beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. Under these rules, more than one
person may be deemed to be a beneficial owner of the same securities. The
Class B Common Stock is convertible on a share-for-share basis into shares
of Common Stock; however, information presented in this table as to the
number of shares of Common Stock beneficially owned and the percent of
class does not give effect to the possible conversion of shares of Class B
Common Stock into shares of Common Stock.
(2) Includes: (i) 7,879 shares of Common Stock as to which Mr. Frierson has
sole investment and sole voting power; (ii) 151,288 shares of Common Stock
for which Mr. Frierson has subscribed but has not yet purchased, pursuant
to the Company's Stock Ownership Plan; (iii) 122,827 shares of Common Stock
owned by the wife, children, and grandchildren of Daniel K. Frierson and as
to which he shares voting and investment power; (iv) options, which are
exercisable within 60 days of the Record Date, to purchase 84,250 shares of
Common Stock owned directly by Mr. Frierson; and (v) options, which are
exercisable within 60 days of the Record Date, to purchase 3,500 shares of
Common Stock owned by one of his children and as to which he shares voting
and investment power.
(3) Includes 27,433 shares of Common Stock held by Daniel K. Frierson, Paul K.
Frierson and T. Cartter Frierson, as trustees of a charitable remainder
trust formed by Rowena K. Frierson.
(4) Includes 1,108,806 shares of Common Stock owned by The Dixie Group, Inc.
Retirement Plans for which Daniel K. Frierson, Paul K. Frierson, Lovic A.
Brooks, Jr., and Robert J. Sudderth, Jr. are fiduciaries and for which
SunTrust Bank, Chattanooga, N.A. serves as trustee.
(5) Includes: (i) 105,072 shares of Class B Common Stock owned by Mr.
Frierson's wife and children as to which he shares investment and voting
power and (ii) 556,368 shares of Class B Common Stock held pursuant to a
shareholder agreement under which he has been granted a proxy, which
expires October 2005, to vote such shares (the "Shareholder Agreement").
The proxy is terminable under certain limited circumstances prescribed in
the Shareholder Agreement. The Shareholder Agreement is among the Estate of
J. Burton Frierson, the wife of J. Burton Frierson (Rowena K. Frierson),
and the five sons of J. Burton and Rowena K. Frierson (Daniel K. Frierson;
Paul K. Frierson; T. Cartter Frierson; James W. Frierson; and J. Burton
Frierson, III). The 576,136 shares of Class B Common Stock subject to the
Shareholder Agreement include: (a) 236,178 shares of Class B Common Stock
owned directly by him; 94,069 shares of Class B Common Stock owned directly
by Paul K. Frierson; 15,678 shares of

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<PAGE> 7

Class B Common Stock owned directly by T. Cartter Frierson; (b) 40,000
shares of Class B Common Stock held by Paul K. Frierson, T. Cartter
Frierson, and Daniel K. Frierson as co-trustees of the Frierson Family
Trusts; (c) 45,304 shares of Class B Common Stock held by Paul K. Frierson,
T. Cartter Frierson, and Daniel K. Frierson as co-trustees of the Special
Purpose Trust of J. Burton Frierson; and (d) 125,139 shares of Class B
Common Stock owned directly by Rowena K. Frierson but subject to a general
power of attorney granted to Daniel K. Frierson and T. Cartter Frierson.
(6) Includes: (i) 17,225 shares of Common Stock as to which Mr. Frierson holds
sole investment and sole voting power; (ii) 68,700 shares of Common Stock
for which Mr. Frierson has subscribed but has not yet purchased, pursuant
to the Company's Stock Ownership Plan; (iii) 50,802 shares of Common Stock
owned by his wife and children and as to which he shares investment and
voting power; and (iv) options, which are exercisable within 60 days of the
Record Date, to purchase 18,500 shares of Common Stock owned directly by
Mr. Frierson.
(7) Includes: (i) 94,069 shares of Class B Common Stock owned directly by Mr.
Frierson; (ii) 40,000 shares of Class B Common Stock held by Paul K.
Frierson, T. Cartter Frierson, and Daniel K. Frierson as co-trustees of the
Frierson Family Trusts; and (iii) 45,304 shares of Class B Common Stock
held by Paul K. Frierson, T. Cartter Frierson, and Daniel K. Frierson as
co-trustees of the Special Purpose Trust of J. Burton Frierson and held
subject to the Shareholder Agreement described in Note 5. Also includes
72,000 shares of Class B Common Stock owned by his children and as to which
he shares investment and voting power.
(8) Includes: (i) 150,402 shares of Common Stock as to which Mr. Frierson holds
sole investment and sole voting power and (ii) 105,974 shares of Common
Stock owned by his wife and children as to which he shares investment and
voting power.
(9) Includes: 15,678 shares of Class B Common Stock owned directly by Mr.
Frierson; (ii) 40,000 shares of Class B Common Stock held by Paul K.
Frierson, T. Cartter Frierson, and Daniel K. Frierson as co-trustees of the
Frierson Family Trusts; (iii) 45,304 shares of Class B Common Stock held by
Paul K. Frierson, T. Cartter Frierson, and Daniel K. Frierson as
co-trustees of the Special Purpose Trust of J. Burton Frierson; and (iv)
125,139 shares of Class B Common Stock owned directly by Rowena K. Frierson
but subject to a general power of attorney granted to Daniel K. Frierson
and T. Cartter Frierson. All such shares of Class B Common Stock are held
subject to the Shareholder Agreement described in Note 5.
(10) SunTrust Banks, Inc., as Parent Holding Company for SunTrust Banks of
Tennessee, Inc.; SunTrust Banks of Georgia, Inc.; and in various fiduciary
capacities, has reported beneficial ownership of 1,513,544 shares of Common
Stock as follows: SunTrust Banks of Tennessee, Inc., as Parent Holding
Company for SunTrust Bank, Chattanooga, N.A. ("STB"), has reported
1,403,822 shares of Common Stock over which STB has sole power to vote,
65,322 shares of Common Stock over which STB has shared power to vote,
1,161,532 shares of Common Stock over which STB has sole investment power,
and 166,457 shares of Common Stock over which STB has shared investment
power. SunTrust Banks of Georgia, Inc., as Parent Holding Company of
SunTrust Bank, Savannah, has reported 18,125 shares of Common Stock over
which it has sole voting power and 6,875 shares of Common Stock over which
it has sole investment power. The address of SunTrust Banks, Inc. is 25
Park Place, Atlanta, GA 30303.
(11) The TCW Group, Inc., as Parent Holding Company for certain associated
entities, has reported beneficial ownership of 754,900 shares of Common
Stock, for which it has sole voting and sole investment power; its address
is 865 South Figueroa Street, Los Angeles, CA 90017.
(12) The 850,000 shares of Common Stock are beneficially owned by one or more
open or closed-end investment companies or other managed accounts that are
advised by direct and indirect investments advisory subsidiaries of
Franklin Resources, Inc. Such advisory contracts grant the advisory
subsidiaries
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<PAGE> 8

of Franklin Resources, Inc. sole voting and sole investment power over all
such shares. The address of Franklin Resources, Inc., is 777 Mariners
Island Blvd., San Mateo, CA 94404.
(13) Includes: (i) 26,575 shares of Common Stock owned directly by Mr. Barlow;
(ii) 58,942 shares of Common Stock for which Mr. Barlow has subscribed but
has not yet purchased, pursuant to the Company's Stock Ownership Plan;
(iii) options to acquire 28,294 shares of Common Stock which are
immediately exercisable or exercisable within 60 days of the Record Date.
(14) Includes: (i) 800 shares of Common Stock owned directly by Mr. Berry with
sole voting power and investment power; and (ii) 49,764 shares of Common
Stock for which Mr. Berry has subscribed but has not yet purchased pursuant
to the Company's Stock Ownership Plan.
(15) Includes an option to acquire 7,500 shares of Common Stock, which is
immediately exercisable, issued to all non employee directors.
(16) Includes 8,000 shares owned directly by Mr. Brooks.
(17) Includes: (i) 40,900 shares owned directly by Mr. Fry (ii) 62,500 shares of
Common Stock for which Mr. Fry has subscribed but has not yet purchased,
pursuant to the Company's Stock Ownership Plan; and (iii) options, which
are exercisable within 60 days of the Record Date, to acquire 12,500 shares
of Common Stock.
(18) Includes: (i) 23,460 shares of Common Stock owned directly by Mr. Smith;
(ii) 72,283 shares of Common Stock for which Mr. Smith has subscribed but
has not yet purchased, pursuant to the Company's Stock Ownership Plan; and
(iii) options, which are exercisable within 60 days of the Record Date, to
acquire 15,000 shares of Common Stock.
(19) Includes: (i) options, which are either immediately exercisable or
exercisable within 60 days of the Record Date, to acquire 245,044 shares of
Common Stock; (ii) 539,433 shares for which individuals in this group have
subscribed, but have not yet purchased, and (iii) 201,102 shares held by
spouses and children of certain individuals comprising this group.

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<PAGE> 9

PROPOSAL 1

ELECTION OF DIRECTORS

INFORMATION ABOUT NOMINEES FOR DIRECTOR

Pursuant to the Company's Bylaws, all Directors are elected to serve a one
year term, or until their successors are elected and qualified. The Board of
Directors is permitted to appoint directors to fill the unexpired terms of
directors who resign.

The names of the nominees for election to the Board, their ages, their
principal occupation or employment (which has continued for at least the past
five years unless otherwise noted), directorships held by them in other
publicly-held corporations or investment companies, the dates they first became
directors of the Company, and certain other relevant information with respect to
such nominees are as follows:

J. Don Brock, age 59, is the Chairman of the Board and the Chief
Executive Officer of Astec Industries, Inc., a manufacturer of asphalt and
environmental equipment located in Chattanooga, Tennessee. He serves as a
director of Crown Andersen, Inc. in Atlanta, Georgia.

Paul K. Brock, age 65, was the Chairman of Brach & Brock Confections,
Inc., a candy manufacturer headquartered in Chattanooga, Tennessee until
1995. He has been a director of the Company since 1983. Mr. Brock is
Chairman of the Company's Compensation Committee and a member of the
Company's Executive Committee.

Lovic A. Brooks, Jr., age 70, is a Member of Constangy, Brooks &
Smith, LLC, attorneys-at-law, in Atlanta, Georgia. He has been a director
of the Company since 1993. Mr. Brooks is a member of the Company's Audit
Committee and is a member of the Company's Retirement Plans Committee.

Daniel K. Frierson, age 56, is Chairman of the Board of the Company, a
position he has held since 1987. He also has been Chief Executive Officer
of the Company since 1980 and a director of the Company since 1973. Mr.
Frierson serves as a director of SunTrust Bank, Chattanooga, N.A. and of
Astec Industries, Inc., headquartered in Chattanooga, Tennessee. Mr.
Frierson is Chairman of the Company's Executive Committee and a member of
the Company's Retirement Plans Committee.

Paul K. Frierson, age 60, is Vice President of the Company and
President of Candlewick Yarns, positions he has held since 1989. He served
as Executive Vice President of Candlewick Yarns from 1984 to 1989 and has
been a director of the Company since 1988. Mr. Frierson serves as a
director of NationsBank/Chattanooga. Mr. Frierson is a member of the
Company's Retirement Plans Committee.

William N. Fry, IV, age 39, is Executive Vice President and Chief
Operating Officer, Floorcovering Business, a position he has held since
January 1997. He served as Executive Vice President and Chief Operating
Officer, Candlewick, Carriage and Bretlin from January, 1996 to January,
1997; President of Bretlin from January, 1995 to January, 1996; and
Executive Vice President of Bretlin from November, 1993 to January, 1995.

John W. Murrey, III, age 55, is a Senior Member of the law firm of
Witt, Gaither & Whitaker, P.C., general counsel to the Company, in
Chattanooga, Tennessee. He has been a director of the Company since 1997.
Mr. Murrey is chairman of the Company's Audit Committee. Mr. Murrey serves
as a director of Coca-Cola Bottling Co. Consolidated in Charlotte, North
Carolina.

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<PAGE> 10

Peter L. Smith, age 56, is a Managing Director of Lazard Freres & Co.,
LLC, investment bankers, in New York, New York. He has been a director of
the Company since 1987. Mr. Smith is a member of the Company's Audit
Committee.

Robert J. Sudderth, Jr., age 55, is Chairman and Chief Executive
Officer of SunTrust Bank, Chattanooga, N.A. in Chattanooga, Tennessee. He
has been a director of the Company since 1983. Mr. Sudderth a member of the
Company's Executive Committee, a member of the Company's Compensation
Committee, and a member of the Company's Retirement Plans Committee.

Daniel K. Frierson and Paul K. Frierson are brothers. Paul K. Brock is the
first cousin of Daniel K. Frierson and Paul K. Frierson, and James H. Martin,
Jr. is the uncle of Daniel K. Frierson, Paul K. Frierson, and Paul K. Brock.
Other than as set forth above, no director, nominee, or executive officer of the
Company has any family relationship, not more remote than first cousin, to any
other director, nominee, or executive officer.

COMMITTEES, ATTENDANCE, AND DIRECTORS' FEES

The Company has a standing Executive Committee, Audit Committee, Retirement
Plans Committee, and Compensation Committee, but no nominating committee.

Members of the Executive Committee during 1997 were Daniel K. Frierson,
Paul K. Brock, James H. Martin, Jr., and Robert J. Sudderth, Jr. Except as
otherwise limited by law or by resolution of the Board of Directors, the
Committee has and may exercise all of the powers and authority of the Board of
Directors for the management of the business and affairs of the Company, which
power the Committee exercises between the meetings of the full Board of
Directors. The Executive Committee performs the function of a nominating
committee. The Executive Committee met four times in 1997.

Members of the Audit Committee during 1997 were John W. Murrey, III., J.
Don Brock, and Peter L. Smith. The Audit Committee evaluates audit performance,
handles relations with the Company's independent accountants, and evaluates
policies and procedures relating to internal accounting functions and controls.
The Committee recommends to the Board of Directors the appointment of the
independent accountants for the Company. The Audit Committee met three times in
1997.

Members of the Compensation Committee during 1997 were Paul K. Brock, Lovic
A. Brooks, Jr., and Robert J. Sudderth, Jr. The Compensation Committee
administers the Company's compensation plans, reviews and may establish the
compensation of the Company's officers, and makes recommendations to the Board
of Directors concerning such compensation and related matters. The Compensation
Committee met six times in 1997.

Members of the Retirement Plans Committee during 1997 were Daniel K.
Frierson, Paul K. Frierson and Robert J. Sudderth, Jr. The Retirement Plans
Committee administers the Company's retirement plans. The committee met two
times in 1997.

With the exception of James H. Martin, Jr., no director attended fewer than
75% of the total of meetings of the Board of Directors and any Committee of the
Board of Directors on which he served.

Directors who are employees of the Company do not receive any additional
compensation for their services as members of the Board of Directors.
Non-Employee directors receive an annual retainer of $10,000 cash and, subject
to approval of the Company's shareholders at this meeting, $10,000 in value of
Performance Units under the Directors Stock Plan. In addition to the annual
retainer, directors who are not employees of the Company receive $500 for each
Board meeting attended and $400 for each committee meeting attended.
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<PAGE> 11

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, and regulations of
the Securities and Exchange Commission ("SEC") thereunder, require the Company's
executive officers and directors and persons who beneficially own more than 10%
of the Company's Common Stock, as well as certain affiliates of such persons, to
file initial reports of ownership and monthly transactions reports covering any
changes in ownership with the SEC and the National Association of Securities
Dealers. Executive officers, directors and persons owning more than 10% of the
Company's Common Stock are required by SEC regulations to furnish the Company
with all such reports they file. Based solely on its review of the copies of
such reports received by it and written representations that no other reports
were required for such persons, the Company believes that, during fiscal year
1997, all filing requirements applicable to its executive officers, directors
and owners of more than 10% of the Company's Common Stock were complied with,
except for one transaction which was reported late by Mr. Brooks.

CERTAIN TRANSACTIONS BETWEEN THE COMPANY AND DIRECTORS AND OFFICERS

The Company adopted a Stock Ownership Plan in 1996 for its most senior
executive officers, to encourage such officers to own a number of shares of
Common Stock with a fair market value equal to twice such participant's base
salary. All subscriptions are at the prevailing market price on the relevant
subscription date and are payable either in cash or through a combination of
cash and/or the surrender to the Company of either (i) shares of Common Stock
already owned by the participant or (ii) a portion of the shares of Common Stock
otherwise covered by the subscription. As of March 6, 1998, officers listed in
the Summary Compensation Table have participated in the plan as follows: Daniel
K. Frierson -- 151,288 shares ($799,994 aggregate subscription price); Philip H.
Barlow -- 58,942 shares ($359,996 aggregate subscription price); George B.
Smith -- 72,283 shares ($439,991.50 aggregate subscription price); Glenn A.
Berry -- 49,764 shares ($379,991 aggregate subscription price); and William N.
Fry, IV -- 62,500 shares ($406,250 aggregate subscription price).

Mr. Murrey is a Senior Member of Witt, Gaither & Whitaker, P.C., a law firm
which the Company paid $833,437 in 1997 for certain legal services performed for
the Company. Mr. Smith is a managing director of Lazard Freres & Co., LLC, an
investment banking firm that performs certain investment banking functions for
the Company from time to time. Mr. Martin provides advisory services to the
Company as a consultant and was paid $34,000 in Directors' fees, retainer fees
and other fees in 1997 (plus the award of 1,509 Performance Units under the
Directors Stock Plan as discussed under Proposal 4 herein).

9
<PAGE> 12

SHAREHOLDER RETURN PERFORMANCE PRESENTATION

Set forth below is a line graph comparing the yearly change in the
cumulative total shareholder return on the Common Stock against the total return
of the Standard & Poor's 500 Stock Index and of the Value Line Textiles Index
for the five year period ended December 27, 1997.

<TABLE>
<CAPTION>
Measurement Period DIXIE GROUP, Standard & Poor's
(Fiscal Year Covered) INC. 500 Textile
<S> <C> <C> <C>
1992 100.00 100.00 100.00
1993 82.08 110.09 108.34
1994 55.99 111.85 104.98
1995 30.99 153.80 115.29
1996 61.98 189.56 147.86
1997 90.98 252.82 225.73
</TABLE>

COMPENSATION COMMITTEE REPORT

The Compensation Committee reviews and recommends compensation for all
executive officers of the Company. The Committee considers recommendations from
senior management and reviews public and private compensation surveys, as well
as the publicly reported executive compensation of other textile and carpet
companies. The Committee's final decisions respecting compensation of executive
officers are reported to the Board for review and ratification. Individual
officers abstain from decisions concerning their own compensation.

The Committee believes that executive compensation should reflect overall
Company performance as well as each executive's performance in specific areas of
responsibility. During 1997, the Committee undertook a comprehensive review of
executive compensation with a view toward making such compensation more
competitive and appropriately awarding the Company's officers for their
contribution to the improved financial performance of the Company.

10
<PAGE> 13

As a result of the Committee's review, adjustments were recommended in the
compensation levels of the Company's executive officers which had the effect of
increasing such compensation to more closely approach the median compensation of
comparable companies.

THE ELEMENTS OF EXECUTIVE OFFICER COMPENSATION

Compensation for each of the Company's executive officers may consist of
four elements: base salary; annual bonuses; stock plan awards; and retirement
and other fringe benefits. Overall, compensation is intended to be competitive
and in the median range of compensation for comparable companies. A significant
portion of each executive's compensation consists of stock options, restricted
stock awards, or other stock ownership elements designed to align the interests
of executive officers with the interests of the Company's shareholders.

Base Salary

Recommendations with respect to base salary depend on a variety of factors,
including qualifications and experience, duties and responsibilities, and the
competitive market for executive talent. Increases in base salary were awarded
in 1997 to each officer named in the Summary Compensation Table.

Bonus

The Company's management incentive plan permits the discretionary award of
bonuses to executive officers based on achieving specified levels of return on
capital employed and on individual performance. Recommendations are made by
senior management, and final bonus amounts are approved by the Compensation
Committee. Discretionary bonuses were awarded under the plan during 1997 to each
officer named in the Summary Compensation Table.

Stock Options, Restricted Stock Awards and the Stock Ownership Plan

Each executive officer of the Company is entitled to participate in the
Company's Incentive Stock Plan. The Company's practice has been to grant options
under the plan exercisable generally at or above then existing market prices and
subject to phase-in vesting schedules. The Committee believes that such stock
options create an important incentive to enhance long-term shareholder value.

During 1997, restricted stock awards were made to George B. Smith, William
N. Fry, IV, and Philip H. Barlow. Restricted stock is subject to significant
holding requirements and restrictions on transferability designed to encourage
participants to remain employed by the Company.

Certain senior executive officers of the Company also participate in the
Company's Stock Ownership Plan. Each participant is encouraged to subscribe for
the purchase of shares having a fair market value equal to two times such
executive officer's base salary.

The Committee believes that participation in the Company's stock plans will
result in ownership of Common Stock in amounts that are significant for its
executive officers, and will serve to align the interests of such officers with
the Company's shareholders.

Retirement Plans and Other Benefits

The Company's compensation for its executive officers also includes the
opportunity to participate in two retirement plans, one qualified for federal
tax purposes and one non-qualified, and certain health insurance, life

11
<PAGE> 14

insurance, relocation allowances, and other benefits. Such benefits are designed
to be substantially similar to the benefits available to those for other exempt,
salaried associates.

Executive officers receive a Company contribution to the qualified plan
based on a fixed percentage of their compensation and may elect to contribute an
additional limited amount of their compensation to the plan and receive a
matching Company contribution of one-half of their deferral, up to 3% of their
compensation. Participants in the non-qualified plan may make deferrals into
that plan, receive contributions from the Company equal to a percentage of their
compensation in excess of certain levels, and receive contributions from the
Company equal to a percentage of their compensation, based primarily on the
Company's return on equity.

CEO COMPENSATION

The Chief Executive Officer's compensation in 1997 included his base
salary, as adjusted; a bonus awarded under the management incentive plan; stock
option awards and retirement plan and other customary benefits. The factors and
criteria upon which such compensation was based are the same as those applied to
the Company's other executive officers.

As noted, the Committee recommended adjustment of each executive officer's
compensation to a level more nearly approaching median levels of compensation
for comparable companies. Consideration was given to each element of
compensation in this recommendation, and the Committee believes that, as
adjusted, the Chief Executive's overall compensation falls within the median
tier of executive compensation for similar positions in comparable companies.

Compensation Committee:

Paul K. Brock
Robert J. Sudderth, Jr.
Lovic A. Brooks, Jr.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Mr. Brooks is a Member of Constangy, Brooks & Smith, LLC, a law firm that
performed certain legal services for the Company in 1997.

12
<PAGE> 15

EXECUTIVE COMPENSATION INFORMATION

The following table sets forth the annual and long-term compensation during
the last three fiscal years for the Company's Chief Executive Officer and the
other four most highly compensated executive officers (the "Named Executive
Officers") as of December 27, 1997:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -----------------------
---------------------------------- SECURITIES
OTHER UNDERLYING ALL
ANNUAL RESTRICTED OPTION/ OTHER
SALARY BONUS COMPENSATION STOCK SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(A)(B) AWARDS(C) (#)(D) (E)
- --------------------------- ---- -------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel K. Frierson....... 1997 $366,667 $200,000 $270,193 -- 80,000 29,750
Chairman of the Board 1996 350,000 -- 222,147 -- 74,000 7,000
and Chief Executive 1995 350,000 -- 216,846 -- 134,000 --
Officer
William N. Fry, IV....... 1997 216,667 150,000 5,733 $520,000 18,000 40,375
Executive Vice President 1996 170,000 125,000 583 -- 40,000 3,400
and Chief Operating 1995 119,896 60,000 1,305 -- 20,000 --
Officer, Floorcovering
Business
George B. Smith.......... 1997 206,667 75,000 912 260,000 13,000 17,750
Executive Vice President 1996 186,667 -- 1 -- 30,000 3,733
and Chief Operating 1995 180,000 -- 13 -- 30,000 --
Officer, Textile/Apparel
Business
Glenn A. Berry........... 1997 180,000 86,000 3 -- 43,000 7,875
Executive Vice President 1996 -- -- -- -- -- --
and Chief Financial 1995 -- -- -- -- -- --
Officer
Philip H. Barlow......... 1997 170,000 115,000 15,145 195,000 10,000 34,987
Vice President and 1996 155,000 104,000 2,935 -- 17,000 3,100
President, Carriage 1995 151,667 60,000 4,626 -- 25,000 --
Industries, Inc.
</TABLE>

- ---------------

(a) Reflects the excess of actual earnings of funds held for such officers'
retirement in the Company's qualified and non-qualified defined
contribution and salary savings plans over 120% of the average applicable
federal rates, determined in accordance with applicable regulations of the
Securities and Exchange Commission. The actual rate of earnings of such
plans is substantially the same as the rate of earnings on the Company's
other such plans for salaried employees and is not established or
guaranteed by the Company. Such rate of earnings may vary from year to
year.
(b) No named officer received perquisites or other personal benefits in an
amount exceeding the lesser of $50,000 or 10% of such officer's salary and
bonus for periods presented.

13
<PAGE> 16

(c) The value of the restricted stock awards at the end of the last fiscal year
is $460,000, $230,000, and 172,500 for Mr. Fry, Mr. Smith, and Mr. Barlow,
respectively. The value of such awards included in the table is determined
by the market price of the stock at the grant date. The number of
restricted stock awards held by Mr. Fry, Mr. Smith, and Mr. Barlow at the
end of the last fiscal year was 40,000, 20,000 and 15,000, respectively.
Restrictions lapse at the end of five years from the date of grant for Mr.
Fry and Mr. Barlow and at the end of three years for Mr. Smith.
(d) Reflects the number of shares of the Company's Common Stock subject to
options granted to the Named Executive Officers for the periods presented.
(e) Amounts reported in the "All Other Compensation" column for 1997 consist of
Company contributions on behalf of the Named Executive Officers to defined
contribution plans.

The following table sets forth information concerning options granted
during fiscal 1997 to the Named Executive Officers:

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION FOR
GRANTED TO EXERCISE OR OPTION TERM(A)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---- ---------- ------------ ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Daniel K. Frierson
August 22, 1997............. 80,000 15.64% $13.00 8/22/07 $654,400 $1,657,600
William N. Fry, IV
August 22, 1997............. 18,000 3.52 13.00 8/22/07 147,240 372,960
George B. Smith
August 22, 1997............. 13,000 2.54 13.00 8/22/07 106,340 269,360
Glenn A. Berry
January 3, 1997............. 30,000 5.87 7.375 1/03/07 139,050 352,650
August 22, 1997............. 13,000 2.54 13.00 8/22/07 106,340 269,360
Philip H. Barlow
August 22, 1997............. 10,000 1.96% $13.00 8/22/07 $ 81,800 $ 207,200
</TABLE>

(a) The assumed annual rates of appreciation of five and ten percent
on the market price of the Company's Common Stock at the date the options
were granted would result in the Company's Common Stock price per share
increasing as follows during the option term:

<TABLE>
<CAPTION>
ANNUAL RATE OF STOCK
APPRECIATION FOR OPTION
TERM
--------------------------
FIVE PERCENT TEN PERCENT
------------ -----------
<S> <C> <C>
Options issued at $7.375 exercise price................ $12.01 $19.13
Options issued at $13.00 exercise price................ 21.18 33.72
</TABLE>

(b) The Company did not grant any stock appreciation rights ("SARs")
during fiscal 1997.

14
<PAGE> 17

The following table presents summary information concerning options
exercised during 1997 and estimates the value of unexercised options held by the
Named Executive Officers at fiscal year end.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS/SARS
SHARES OPTIONS AT FY-END(#) AT FISCAL YEAR-END($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel K. Frierson................ -- -- 50,750 237,250 $206,519 $652,681
William N. Fry, IV................ -- -- 5,000 73,000 17,500 304,375
George B. Smith................... -- -- 7,500 65,500 26,260 255,625
Glenn A. Berry.................... -- -- -- 43,000 -- 123,750
Philip H. Barlow(a)............... -- -- 22,044 45,750 123,821 167,760
</TABLE>

- ---------------

(a) Includes options to purchase 15,794 shares of the Company's Common Stock
issued on March 12, 1993, to replace options to purchase shares of
Carriage's common stock which were canceled upon the acquisition of Carriage
by the Company. Such options include: (i) options to purchase 3,057 shares
of Common Stock at an exercise price of $4.2934 per share; (ii) options to
purchase 2,547 shares of Common Stock at an exercise price of $5.0294 per
share; and (iii) options to purchase 10,190 shares of Common Stock at an
exercise price of $5.2748 per share.

PROPOSAL 2

PROPOSAL TO AMEND THE COMPANY'S INCENTIVE STOCK PLAN

The Company seeks approval of an amendment to increase the maximum number
of shares of the Company's Common Stock that may be issued pursuant to awards
under the Company's Incentive Stock Plan from 1,770,000 to 2,270,000.

The Company also seeks approval of a technical amendment to the Incentive
Stock Plan to provide that, assuming the approval by shareholders of Proposal 3
herein, such limitation will apply to the total number of shares of both Common
Stock and Class B Common Stock that may be issued pursuant to Incentive Stock
Plan awards, so that any shares of Class B Common Stock that are awarded would
be counted against the overall limit on the number of shares of common stock
available for award under the Incentive Stock Plan.

If the amendments are adopted as proposed, the terms of the Incentive Stock
Plan will otherwise remain unchanged, with the exception that the aggregate
number of shares subject to issuance pursuant to awards under the Incentive
Stock Plan will be increased to 2,270,000 shares, and that such limit will be
applicable (in the aggregate) both to shares of Common Stock and to shares of
Class B Common Stock that may be issued to electing participants (assuming the
approval of Proposal 3 herein).

The purpose of the amendments is to ensure that the Incentive Stock Plan
will continue to provide a means to attract, retain, and motivate experienced
and highly qualified personnel by providing competitive annual compensation
packages and long-term initiatives linked to shareholder return and Company and
business unit performance over a period of years. At present, 12,750 shares of
Common Stock are available for further awards under the Incentive Stock Plan and
the Board believes that, without amending the Incentive

15
<PAGE> 18

Stock Plan to increase the number of available shares, the Company will not have
an adequate number of shares for issuance under the Incentive Stock Plan.
Additionally, the Incentive Stock Plan does not expressly provide for counting
shares of Class B Common Stock issued under the Incentive Stock Plan (assuming
the approval by shareholders of Proposal 3 herein) toward the overall limit on
the number of shares of Common Stock available for issuance under the Incentive
Stock Plan. The Company has been advised by Company counsel that clarifying the
method of determining the number of shares of Common Stock available for
issuance under the Incentive Stock Plan is necessary to maintain the tax
qualified status of incentive stock options granted under the Incentive Stock
Plan.

Counsel has advised the Company of the tax consequences of both incentive
stock options and nonqualified stock options under the Incentive Stock Plan, for
both the Company and the individuals who are granted options. An optionee will
not realize taxable income upon the granting of a stock option pursuant to the
Incentive Stock Plan nor will the Company be entitled to a deduction at that
time. There will be no realization of taxable income by an optionee upon the
exercise of an incentive stock option (if exercised no later than three months
after termination of employment in the case of retirement and one year in the
case of disability, and to the extent that the aggregate fair market value of
Common Stock issuable with respect to such incentive stock options, when first
exercised, does not exceed $100,000 during any calendar year). However, upon the
exercise of an incentive stock option, the excess of the fair market value of
the shares of Common Stock received over the option exercise price will be
considered an "item of tax preference" for such optionee, includable in his
alternative minimum taxable income calculation in the year of exercise, and such
amount will be added to the tax basis of such shares for purposes of determining
alternative minimum taxable income in the year or years such shares are sold. If
an optionee sells or otherwise disposes of Common Stock received upon exercise
of an incentive stock option after one year from the exercise date and two years
from the date of grant of the incentive stock option, any gain or loss on the
sale will be treated as long-term capital gain or loss, and the Company will not
be entitled to any deduction on account of the issuance of Common Stock or the
grant of the incentive stock option. If an optionee sells or otherwise disposes
of Common Stock received upon exercise of an incentive stock option without
satisfying the one year/two year holding period described in the preceding
sentence, he will realize compensation income in an amount equal to the excess
of the fair market value of the Common Stock on the date that he exercised the
option over the option exercise price, and the Company will have an compensation
expense deduction in the same amount. Any additional gain on the sale of such
shares (beyond the "spread" between the option exercise price and the market
value of the stock on the date of exercise) will be taxable to the optionee as
either long term or short term capital gain, depending upon the length of the
optionee's holding period for such shares.

Upon exercise of a nonqualified stock option, an optionee will realize
compensation income in the amount of the excess of the fair market value of the
Common Stock on the day of exercise over the stock option exercise price, and
the Company will receive a corresponding deduction. The tax basis of any
nonqualified stock option shares of Common Stock received will be the fair
market value of such shares on the date the stock option is exercised. This
discussion of tax consequences does not purport to be a complete analysis of all
potential tax effects relevant to recipients of options or to the Company and
does not address Awards under the Incentive Stock Plan other than stock options.
It is based on federal income tax law and interpretational authorities as of the
date of this Proxy Statement, which are subject to change at any time.

The foregoing summary of the amendments to the Incentive Stock Plan is
qualified in its entirety by reference to the full text of the Incentive Stock
Plan, as amended, which is set forth as ANNEX A to this Proxy Statement.

16
<PAGE> 19

PROPOSAL 3

APPROVAL OF ISSUANCE OF CLASS B COMMON STOCK

The Board of Directors has approved issuance of shares of the Company's
Class B Common Stock at the election of qualifying participants in the Company's
Incentive Stock Plan and Stock Ownership Plan, as well as with respect to
similar elections under any future employee benefit plans that may be adopted by
the Company, in the discretion of the Board of Directors. In accordance with the
Board's resolution, and subject to shareholder approval, such election will have
to be made at the time of exercise of a qualifying participant's rights under
such plans. Upon exercise of options granted under the Incentive Stock Plan, or
upon payment for shares subject to subscriptions under the Stock Ownership Plan,
a participant under any of such plans who holds shares of Class B Common Stock
would be entitled to elect to receive shares of Class B Common Stock with
respect to any such plan transaction in proportion to the relative number of
shares of Common Stock and Class B Common Stock held by such participant at the
time of such transaction. Such shares of Class B Common Stock would be issued in
place of a portion of the shares of Common Stock which the electing participants
would otherwise be entitled to receive.

If issuance of the Class B Common Stock is approved, no outstanding stock
option under the Incentive Stock Plan or stock subscription under the Stock
Ownership Plan would be amended without approval of the participant. Any
participant who currently has outstanding subscriptions to purchase Common Stock
under the Stock Ownership Plan would be permitted to elect to have his
subscription agreement amended to permit the purchase shares of Class B Common
Stock in accordance with this authorization upon payment of such subscription.
Further, any new option granted under the Incentive Stock Plan, and any new
stock subscription entered into pursuant to the Stock Ownership Plan, would
automatically permit any participant to elect to receive shares of Class B
Common Stock in proportion to the number of shares of Common Stock and Class B
Common Stock held by such participant at that time. Pursuant to the Board's
resolution, if this Proposal 3 is approved by the Company's shareholders, the
Board of Directors will also have the discretion to include a similar election
feature with respect to Class B Common Stock in any future employee benefit
plans that may be adopted by the Company.

The Compensation Committee of the Board of Directors would have the
discretion to choose whether or not to offer an amendment permitting a
proportional exercise for shares of Class B Common Stock, as described above, to
any eligible participant who presently holds awards of incentive stock options
or nonqualified stock options under the Incentive Stock Plan. The Company has
been advised, however, that any such amendment of an outstanding incentive stock
option to add the election to acquire shares of Class B Common Stock would have
the effect of disqualifying such options for the favorable tax treatment
provided incentive stock options under the Internal Revenue Code (as described
under Proposal 2 above), unless the exercise price for such options is
simultaneously reset to equal the current market price for the Common Stock.
Otherwise, the addition of the election to acquire shares of Class B Common
Stock would cause such options to automatically be converted to nonqualified
stock options. With respect to incentive stock options granted in the future
under the Incentive Stock Plan, the favorable tax treatment of such options
would not be affected by implementation of this resolution authorizing the
issuance of Class B Common Stock.

As of the date hereof, the only participants in the Incentive Stock Plan,
the Stock Purchase Plan, or the Stock Ownership Plan who hold shares of Class B
Common Stock are Daniel K. Frierson, Paul K. Frierson, and D. Kennedy Frierson,
Jr., the son of Daniel K. Frierson. If the resolution is approved, Daniel K.
Frierson could elect to purchase up to 227,930 additional shares of Class B
Common Stock and Paul K. Frierson could elect to purchase up to 94,069 shares of
Class B Common Stock, upon exercise of the options and

17
<PAGE> 20

subscriptions they currently hold under the Stock Ownership Plan and the
Incentive Stock Plan. Kennedy Frierson could elect to purchase up to 1,666
shares of Class B Common Stock upon exercise of options he currently holds. If
both Daniel K. Frierson and Paul K. Frierson elected to acquire the maximum
number of shares of Class B Common Stock permitted by this resolution in
connection with the options and subscription agreements they currently hold, the
percentage of total vote which they control would be increased from
approximately 61% to approximately 67%.

PROPOSAL 4

APPROVAL OF DIRECTORS STOCK PLAN

In 1997, the Company revised its compensation program for directors who are
not employees of the Company, increasing the director's annual retainer from
$10,000 to $20,000, with one half the amount ($10,000) to be deferred pursuant
to the terms of a Directors Stock Plan.

Subject to approval of the Company's shareholders at this meeting, each
non-employee Director of the Company will receive an award of Performance Units
annually under the Directors Stock Plan. Each Performance Unit represents one
share of Common Stock. The number of Performance Units awarded is determined by
dividing one-half of the annual director's fee by the market price of the Common
Stock as reported by NASDAQ on the day prior to the annual meeting of
shareholders. Performance Units in a director's account will be adjusted for
stock splits, stock dividends, or other capital transactions in the same manner
as outstanding shares. Additionally, holders of Performance Units will receive
cash payments in an amount equal to any dividends paid on outstanding shares of
the Common Stock. Upon retirement, directors may elect to receive shares of
Common Stock represented by Performance Units in their account either in one
lump sum distribution or in five equal annual installments. If a director should
die while still serving on the Board, shares of Common Stock representing the
Performance Units in his account would be issued to his estate.

Effective with the annual meeting of stockholders held May 1, 1997, all
non-employee directors elected at that meeting were awarded Performance Units
under the Directors Stock Plan, subject to shareholder approval at this year's
annual meeting. If the Directors Stock Plan is approved, all non-employee
directors elected at this year's annual meeting of shareholders, and at all
subsequent annual meetings, will be awarded Performance Units which will be
subsequently paid in Common Stock of the Company in accordance with the plan.
The number of such Performance Units to be awarded at this year's annual meeting
will be determined immediately following the annual meeting, based on the price
of the Common Stock on the day prior to the annual meeting.

18
<PAGE> 21

The following table sets forth information as to the number of performance
units currently held by each non-employee director of the Company.

<TABLE>
<CAPTION>
PERFORMANCE
NON-EMPLOYEE DIRECTOR UNITS #(A)(B)
- --------------------- -------------
<S> <C>
J. Don Brock................................................ 1,509
Paul K. Brock............................................... 1,509
Lovic A. Brooks, Jr......................................... 1,509
James H. Martin, Jr......................................... 1,509
John W. Murrey, III......................................... 1,509
Peter L. Smith.............................................. 1,509
Robert J. Sudderth, Jr...................................... 1,509
</TABLE>

- ---------------

(a) Determined by dividing one-half the director's fee by the closing price of
the Common Stock as reported by NASDAQ on April 30, 1997, the day prior to
the annual meeting date ($6.625). Each Performance Unit represents one share
of Common Stock.
(b) Subject to adjustment for stock splits, stock dividends, or other capital
transactions in the same manner as outstanding shares.

SHAREHOLDER PROPOSALS

In the event any shareholder wishes to present a proposal at the 1999
Annual Meeting of Shareholders, such proposal must be received by the Company on
or before November 27, 1998, to be considered for inclusion in the Company's
proxy materials.

INDEPENDENT AUDITORS

The firm of Ernst & Young LLP has been selected as independent auditors for
the Company. A representative of Ernst & Young LLP is expected to be present at
the Annual Meeting and will have the opportunity to make a statement if he so
desires and to respond to appropriate questions from shareholders.

ADDITIONAL INFORMATION

The entire cost of soliciting proxies will be borne by the Company. In
addition to solicitation of proxies by mail, proxies may be solicited by the
Company's directors, officers, and other employees by personal interview,
telephone, and telegram. The persons making such solicitations will receive no
additional compensation for such services. The Company also requests that
brokerage houses and other custodians, nominees, and fiduciaries forward
solicitation materials to the beneficial owners of the shares of Common Stock
held of record by such persons and will pay such brokers and other fiduciaries
all of their reasonable out-of-pocket expenses incurred in connection therewith.

19
<PAGE> 22

OTHER MATTERS

As of the date of this Proxy Material, the Board does not intend to
present, and has not been informed that any other person intends to present, any
matter for action at the Annual Meeting other than those specifically referred
to herein. If other matters should properly come before the Annual Meeting, it
is intended that the holders of the proxies will vote in accordance with their
best judgment.

The Dixie Group, Inc.

Daniel K. Frierson
Chairman of the Board

Dated: March 27, 1998

20
<PAGE> 23

ANNEX A

DIXIE YARNS, INC.

INCENTIVE STOCK PLAN

1. Purpose. The purpose of the Dixie Yarns, Inc. Incentive Stock Plan
(the "Plan") is to advance the interests of Dixie Yarns, Inc. and its
shareholders by providing incentives to directors of the Company and to certain
selected key employees performing services for the Company and its Affiliates
(as hereinafter defined) who contribute significantly to the strategic and
long-term performance objectives and growth of the Company and its Affiliates
(collectively, "Participants").

2. Administration. The Plan shall be administered solely by the
Compensation Committee (the "Committee") of the Board of Directors (the "Board")
of the Company as such Committee is from time to time constituted, or by any
successor committee that the Board may designate to administer the Plan;
provided that if at any time Rule 16b-3 or any successor rule ("Rule 16b-3")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), so
permits without adversely affecting the ability of the Plan to comply with the
conditions for exemption from Section 16 of the Exchange Act (including for
purposes of the Plan any successor provision to such Section) provided by Rule
16b-3, the Committee may delegate the administration of the Plan in whole or in
part, on such terms and conditions, and to such person or persons as it may
determine in its discretion. Whenever the context in the Plan so permits, any
reference to the "Committee" shall include, if applicable, any successor or
delegate of the Committee as permitted herein. The membership of the Committee
shall be constituted so as to comply at all times with the applicable
requirements of Rule 16b-3. In particular, no member of the Committee shall have
any present or prior relationship with the Company or any of its Affiliates that
would prevent such member from qualifying as a "non-employee director" under
Rule 16b-3; provided that, if at any time Rule 16b-3 so permits without
adversely affecting the ability of the Plan to comply with its conditions for
exemption from Section 16 of the Exchange Act, one or more members of the
Committee may cease to be "non-employee directors." Unless the Board should
determine for any period that it is not important to the Company for stock
options granted under the Plan to be excludable from the $1,000,000 deduction
limit of Internal Revenue Code Section 162(m) as "performance-based
compensation," the membership of the Committee shall at all times be constituted
so that each member of the Committee also qualifies as an "outside director" for
purposes of Section 162(m).

The Committee has all the powers vested in it by the terms of the Plan set
forth herein, such powers to include exclusive authority to select the
Participants to be granted awards under the Plan ("Awards"), to determine the
type, size and terms of the Award to be made to each individual selected, to
modify the terms of any Award that has been granted, to determine the time when
Awards will be granted, to establish performance objectives, to make any
adjustments necessary or desirable as a result of the granting of Awards to
eligible individuals and to prescribe the form of the instruments embodying
Awards made under the Plan. The Committee is authorized to interpret the terms
of the Plan and the Awards granted under the Plan, to establish, amend and
rescind any rules and regulations relating to the Plan, and to make any other
determinations which it deems necessary or desirable for the administration of
the Plan. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any Award in the manner and to the
extent the Committee deems necessary or desirable to carry it into effect. The
Committee may act only by a majority of its members in office, except that the
members thereof may authorize any one or more of their members or any officer of
the Company to execute and deliver documents or to take any other ministerial
action on behalf of the Committee with respect to Awards made or to be made to
Plan

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<PAGE> 24

Participants. No member of the Board or of the Committee, and no officer of the
Company, shall be liable for anything done or omitted to be done by him, by any
other member of the Board or the Committee, or by any officer of the Company in
connection with the performance of duties under the Plan, except for his own
willful misconduct or as expressly provided by statute.

3. Participation.

(a) Non-Director Participants. Consistent with the purposes of the
Plan, the Committee shall have exclusive power to select the key employees
of the Company who may be granted Awards as Participants under the Plan.
Eligible individuals shall be selected individually or by groups or
categories as determined by the Committee.

(b) Director Participants. Consistent with the purposes of the Plan,
all non-employee directors of the Company shall be eligible to receive
Awards in accordance with Paragraph 5(a). Directors who are not employees
of the Company shall not be eligible for Awards under the Plan except as
provided in Paragraph 5(a).

(c) Affiliates. The term "Affiliate" means any entity in which the
Company has a substantial direct or indirect equity interest, as determined
by the Committee. If an Affiliate of the Company wishes to participate in
the Plan and its participation shall have been approved by the Board upon
the recommendation of the Committee, the board of directors or other
governing body of the Affiliate shall adopt a resolution in form and
substance satisfactory to the Committee authorizing participation by the
Affiliate in the Plan with respect to its key employees (except that, where
the Company owns, directly or indirectly, 100% of the equity of any such
Affiliate, approval of the Affiliate's participation by the Company's Board
shall be sufficient, and no separate approval by the Affiliate's Board of
Directors shall be required).

An Affiliate participating in the Plan may cease to be a participating
company at any time by action of the Board or by action of the board of
directors or other governing body of such Affiliate, which latter action
shall be effective not earlier than the date of delivery to the Secretary
of the Company of a certified copy of a resolution of the Affiliate's board
of directors or other governing body taking such action. If the
participation in the Plan by an Affiliate shall terminate, such termination
shall not relieve it of any obligations theretofore incurred by it under
the Plan, except as may be approved by the Committee.

4. Awards under the Plan.

(a) Types of Awards. Awards under the Plan may include one or more of
the following types, either alone or in any combination thereof: (i) "Stock
Options," (ii) "Stock Appreciation Rights," (iii) "Restricted Stock," (iv)
"Performance Grants" and (v) any other type of Award deemed by the
Committee to be consistent with the purposes of the Plan. Stock Options,
which include "Nonqualified Stock Options" and "Incentive Stock Options" or
combinations thereof, are rights to purchase shares of common stock (which
may include both the Company's Common Stock and Class B Common Stock) and
stock of any other class into which such shares may thereafter be changed
(the "Common Shares"). Nonqualified Stock Options and Incentive Stock
Options are subject to the terms, conditions and restrictions specified in
Paragraph 5. Stock Appreciation Rights are rights to receive (without
payment to the Company) cash, Common Shares, other Company securities
(which may include, but need not be limited to, debentures, preferred
stock, warrants, securities convertible into Common Shares or other
property, and other types of securities including, but not limited to,
those of the Company or an Affiliate, or any combination thereof ("Other
Company Securities")) or property, or other forms of payment, or

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<PAGE> 25

any combination thereof, as determined by the Committee, based on the
increase in the value of the number of Common Shares specified in the Stock
Appreciation Right. Stock Appreciation Rights are subject to the terms,
conditions and restrictions specified in Paragraph 6. Shares of Restricted
Stock are Common Shares which are issued subject to certain restrictions
pursuant to Paragraph 7. Performance Grants are contingent awards subject
to the terms, conditions and restrictions described in Paragraph 8,
pursuant to which Participants may become entitled to receive cash, Common
Shares, Other Company Securities or property, or other forms of payment, or
any combination thereof, as determined by the Committee.

(b) Maximum Number of Shares that May be Issued. There may be issued
under the Plan (as Restricted Stock, in payment of Performance Grants,
pursuant to the exercise of Stock Options or Stock Appreciation Rights, or
in payment of or pursuant to the exercise of such other Awards as the
Committee may determine) an aggregate of not more than 2,270,000 Common
Shares, subject to adjustment as provided in Paragraph 15. Common Shares
issued pursuant to the Plan may be either authorized but unissued shares,
treasury shares, reacquired shares, or any combination thereof. If any
Common Shares issued as Restricted Stock or otherwise subject to repurchase
or forfeiture rights are reacquired by the Company pursuant to such rights,
or if any Award is canceled, terminates or expires unexercised, any Common
Shares that would otherwise have been issuable pursuant thereto will be
available for issuance under new Awards.

(c) Annual Limitation on Awards. The Committee shall not grant Awards
covering more than a maximum of 100,000 shares in the aggregate (subject to
adjustment as provided in Paragraph 15) to any single Participant during
any one calendar-year period.

(d) Rights with respect to Common Shares and Others Securities.

(i) Unless otherwise determined by the Committee, a Participant to
whom an Award of Restricted Stock has been made (or his successor) shall
have, after issuance of a certificate for the number of Common Shares
awarded and prior to the expiration of the Restricted Period or the
earlier repurchase of such Common Shares as herein provided, ownership
of such Common Shares, including the right to vote the same and to
receive dividends or other distributions made or paid with respect to
such Common Shares (provided that such Common Shares, and any new,
additional or different shares, or Other Company Securities or property,
or other forms of consideration which the Participant may be entitled to
receive with respect to such Common Shares as a result of a stock split,
stock dividend or any other change in the corporation or capital
structure of the Company, shall be subject to the restrictions
hereinafter described as determined by the Committee), subject, however,
to the options, restrictions and limitations imposed thereon pursuant to
the Plan. Notwithstanding the foregoing, a Participant with whom an
Award agreement is made to issue Common Shares in the future, shall have
no rights as a shareholder with respect to Common Shares related to such
agreement until issuance of a certificate to him.

(ii) Unless otherwise determined by the Committee, a Participant to
whom a grant of Stock Options, Stock Appreciation Rights, Performance
Grants or any other Award is made (or his successor) shall have no
rights as a shareholder with respect to any Common Shares or as a holder
with respect to any other securities, if any, issuable pursuant to any
such Award until the date of the issuance to him of a stock certificate
or other instrument of ownership representing such Common Shares. Except
as provided in Paragraph 15, no adjustment shall be made for dividends,
distributions or other rights (whether ordinary or extraordinary, and
whether in cash, Securities, other

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<PAGE> 26

property or other forms of consideration, or any combination thereof)
for which the record date is prior to the date such stock certificate or
other instrument of ownership is issued.

5. Stock Options. The Committee may grant Stock Options either alone, or
in conjunction with Stock Appreciation Rights, Performance Grants or other
Awards, either at the time of grant or by amendment thereafter; provided that an
Incentive Stock Option may be granted only to an eligible employee of the
Company or its subsidiary corporation. Each Stock Option (referred to herein as
an "Option") granted under the Plan shall be evidenced by an instrument in such
form as the Committee shall prescribe from time to time in accordance with the
Plan and shall comply with the following terms and conditions, and with such
other terms and conditions, including, but not limited to, restrictions upon the
Option or the Common Shares issuable upon exercise thereof, as the Committee
shall establish:

(a) Option Grants to Outside Directors. Each member of the Board of
Directors on November 14, 1996 who is not an employee of the Company, and
each person who becomes a non-employee director of the Company following
such date, shall be eligible, subject to approval by the full Board of
Directors, to be granted Nonqualified Stock Options to purchase a number of
Common Shares to be determined by the Board of Directors at the time of
such grant, with an exercise price per share equal to the fair market value
(as defined in Paragraph 17) of such shares on the date of grant and with
such other terms, consistent with this Plan, as may be established by the
Board of Directors at the time of grant.

(b) Option Price. In the case of Options granted to employees
selected by the Committee, the option price may be less than, equal to, or
greater than, the fair market value (as defined in Paragraph 17) of the
Common Shares subject to such Option at the time the Option is granted, as
determined by the Committee. The option price may either be fixed when the
option is granted or may be determined in accordance with a formula
prescribed by the Committee for such purpose, provided, however, that in no
event will the option price be less than (i) in the case of an Incentive
Stock Option, 100% of the fair market value of the Common Shares subject to
such Option at the time such Option is granted, or (ii) in the case of a
Nonqualified Stock Option, 85% of the fair market value of the Common
Shares subject to such Option at the time such Option is granted.
Additionally, in the case of an Incentive Stock Option granted to an
employee Participant who owns, directly or indirectly (as determined by
reference to Section 424(d) of the Code), stock representing more than ten
percent of the voting power of all classes of stock of the Company or of
its parent or subsidiary (a "Ten Percent Employee"), such option price
shall in no event be less than 110% of such fair market value at the time
the Option is granted. In no event will the option price for any Option be
less than the par value of the Common Shares subject to such Option.

(c) Number of shares subject to Option. The Committee shall determine
the number of Common Shares to be subject to each Option. The number of
Common Shares subject to an outstanding Option may be reduced on a
share-for-share or other appropriate basis, as determined by the Committee,
to the extent that Common Shares under such Option are used to calculate
the cash, Common Shares, Other Company Securities or property, or other
forms of payment, or any combination thereof, received pursuant to exercise
of a Stock Appreciation Right attached to such Option, or to the extent
that any other Award granted in conjunction with such Option is paid.

(d) Timing of exercise. Unless the Committee determines otherwise,
the Options shall not be exercisable for at least six months after the date
of grant, unless the grantee ceases employment or performance of services
before the expiration of such six-month period by reason of his disability
(as defined in Paragraph 12) or his death. Subject to the restrictions of
the preceding sentence (and, in the

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<PAGE> 27

case of Incentive Stock Options, subject to Paragraph 5(f)), such Options
may become exercisable in accordance with any vesting schedule prescribed
by the Committee.

(e) Conditions to exercise. The Option shall not be exercisable:

(i) in the case of any Incentive Stock Option granted to a Ten
Percent Employee, after the expiration of five years from the date it is
granted, and, in the case of any other Option, after the expiration of
ten years from the date it is granted;

(ii) unless payment in full is made for the shares being acquired
thereunder (as well as for any amounts required to be withheld in
accordance with Paragraph 17(f)) at the time of exercise. Such payment
shall be made in such form (including, but not limited to, cash, Common
Shares, or the surrender of another outstanding Award under the Plan, or
any combination thereof) as the Committee may determine in its
discretion;

(iii) in the case of Options granted to Participants who are
employees selected by the Committee, unless the Participant exercising
the Option has been, at all times during the period beginning with the
date of the grant of the Option and ending on a date not more than
ninety (90) days prior to such exercise, employed by or otherwise
performing services for the Company (or a parent or subsidiary
corporation of the Company), or a corporation, or subsidiary of a
corporation, issuing or assuming the Option in a transaction to which
Section 424(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), is applicable, subject to the following exceptions:

(A) in the case of any Nonqualified Stock Option (or any
Incentive Stock Option that is converted into a Nonqualified Stock
Option by reason of its extension pursuant to this subparagraph), if
such Participant shall cease to be employed by or otherwise
performing services for the Company solely by reason of a period of
Related Employment as defined in Paragraph 14, he may, during such
period of Related Employment, exercise the Nonqualified Stock Option
as if he continued such employment or performance of service; or

(B) if such Participant shall cease such employment or
performance of services by reason of his disability as defined in
Paragraph 12 or early, normal or late retirement under an approved
retirement program of the Company (or such other plan or arrangement
as may be approved by the Committee for this purpose) while holding
an Option which has not expired and has not been fully exercised,
such Participant, at any time within one (1) year (or such other
period determined by the Committee) after the date he ceased such
employment or performance of services (but in no event after the
Option has expired), may exercise the Option with respect to any
shares as to which he could have exercised the Option on the date he
ceased such employment or performance of services, or with respect to
such greater number of shares as determined by the Committee up to
the total number of shares subject to the Option; provided, however,
that any such extension of the period within which an Incentive Stock
Option may be exercised beyond three months following cessation of
employment (twelve months in the case of Participant's permanent
disability) will result in the Option ceasing to qualify as an
Incentive Stock Option; or

(C) if any person to whom an Option has been granted dies
holding an Option which has not expired and has not been fully
exercised, his successor may, at any time within one (1) year (or
such other period determined by the Committee) after the date of
death (but in no event after the Option has expired), exercise the
Option with respect to any shares as to which the

A-5
<PAGE> 28

decedent could have exercised the Option at the time of his death, or
with respect to such greater number of shares as determined by the
Committee up to the total number of shares subject to the Option.

(iv) in the case of Options granted to Participants who are
non-employee directors of the Company, unless such Participant either:
(A) is actively serving as a member of the Board of Directors of the
Company or (B) ceased to serve as a member of the Board of Directors on
a date not more than one (1) year prior to such exercise, in which case
such Participant (or his successor, in the event of the Participant's
death or legal incapacity) may exercise the Option during such period
(or such other period determined by the Committee, but in no event after
the Option has expired) with respect to any shares as to which the
Participant could have exercised the Option on the date when he ceased
to serve as a Director of the Company, or with respect to such greater
number of shares as determined by the Committee up to the total number
of shares subject to the Option.

(f) Incentive Stock Option limits. In the case of an Incentive Stock
Option, the aggregate fair market value (as defined in Paragraph 17) of
Common Shares, determined at the time of grant of the Option, with respect
to which Incentive Stock Options are exercisable for the first time by an
employee during any calendar year (under all such plans of the Company and
any parent or subsidiary corporation of the Company) shall not exceed
$100,000.

(g) Intent. It is the intent of the Company that Nonqualified Stock
Options granted under the Plan not be classified as Incentive Stock
Options, that the Incentive Stock Options granted under the Plan be
consistent with and contain or be deemed to contain all provisions required
under Section 422 and the other appropriate provisions of the Code and any
implementing regulations (including any successor provisions thereto), and
that any ambiguities in construction shall be interpreted in order to
effectuate such intent.

6. Stock Appreciation Rights. The Committee may grant Stock Appreciation
Rights either alone, or in conjunction with Stock Options, Performance Grants or
other Awards, either at the time of grant or by amendment thereafter. Each Award
of Stock Appreciation Rights granted under the Plan shall be evidenced by an
instrument in such form as the Committee shall prescribe from time to time in
accordance with the Plan and shall comply with the following terms and
conditions, and with such other terms and conditions, including, but not limited
to, restrictions upon the Award of Stock Appreciation Rights or the cash, Common
Shares or Other Company Securities issuable upon exercise thereof, as the
Committee shall establish:

(a) Committee discretion. The Committee shall determine the number of
Common Shares to be subject to each Award of Stock Appreciation Rights. The
number of Common Shares subject to an outstanding Award of Stock
Appreciation Rights may be reduced on a share-for-share or other
appropriate basis, as determined by the Committee, to the extent that any
other Award granted in conjunction with such Award of Stock Appreciation
Rights is paid.

(b) Timing of exercise. Unless the Committee determines otherwise,
the Award of Stock Appreciation Rights shall not be exercisable for at
least six months after the date of grant, unless the grantee ceases
employment or performance of services before the expiration of such
six-month period by reason of his disability as defined in Paragraph 12 or
his death. Subject to the restrictions of the preceding sentence (and, in
the case of Stock Appreciation Rights granted in conjunction with Incentive
Stock Options, subject to Paragraph 5(f) hereof), such Stock Appreciation
Rights may become exercisable in accordance with any vesting schedule
prescribed by the Committee.
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<PAGE> 29

(i) in the case of any Award of Stock Appreciation Rights that are
attached to an Incentive Stock Option granted to a Ten Percent Employee,
after the expiration of five years from the date it is granted, and, in
the case of any other Award of Stock Appreciation Rights, after the
expiration of ten years from the date it is granted. Any Award of Stock
Appreciation Rights may be exercised during such period only at such
time or times and in such installments as the Committee may establish;

(ii) unless any Option or other Award to which the Award of Stock
Appreciation Rights may be attached is at the time exercisable; and

(iii) unless the Participant exercising the Award of Stock
Appreciation Rights has been, at all times during the period beginning
with the date of the grant of the Option and ending on a date not more
than ninety (90) days prior to such exercise, employed by or otherwise
performing services for the Company (or a parent or subsidiary
corporation of the Company), or a corporation, or subsidiary of a
corporation, issuing or assuming the Award of Stock Appreciation Rights
in a transaction to which Section 424(a) of the Internal Revenue Code of
1986, as amended (the "Code"), is applicable, subject to the following
exceptions:

(A) in the case of any Award of Stock Appreciation Rights, if
such person shall cease to be employed by or otherwise performing
services for the Company solely by reason of a period of Related
Employment as defined in Paragraph 14, he may, during such period of
Related Employment, exercise the Award of Stock Appreciation Rights
as if he continued such employment or performance of services
(provided, however, that if such Stock Appreciation Rights are
attached to an Incentive Stock Option, application of this
subparagraph will result in such Option ceasing to qualify as an
Incentive Stock Option if the period of Related Employment lasts for
more than ninety (90) days); or

(B) if such Participant shall cease such employment or
performance of services by reason of his disability as defined in
Paragraph 12 or early, normal or late retirement under an approved
retirement program of the Company (or such other plan or arrangement
as may be approved by the Committee for this purpose) while holding
an Award of Stock Appreciation Rights which has not expired and has
not been fully exercised, such Participant, at any time within one
(1) year (or such other period determined by the Committee) after the
date he ceased such employment or performance of services (but in no
event after the Award of Stock Appreciation Rights has expired), may
exercise the Award of Stock Appreciation Rights with respect to any
shares as to which he could have exercised the Award of Stock
Appreciation Rights on the date he ceased such employment or
performance of services, or with respect to such greater number of
shares as determined by the Committee up to the total number of
shares subject to the Award; provided, however, that, in the case of
any Award of Stock Appreciation Rights attached to an Incentive Stock
Option, any such extension of the period within which the Award may
be exercised beyond ninety (90) days following cessation of
employment (twelve months in the case of Participant's permanent
disability) will result in the attached Option ceasing to qualify as
an Incentive Stock Option; or

(C) if any person to whom an Award of Stock Appreciation Rights
has been granted dies holding an Award of Stock Appreciation Rights
which has not expired and has not been fully exercised, his successor
may, at any time within one (1) year (or such other period determined
by the Committee) after the date of death (but in no event after the
Award of Stock
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<PAGE> 30

Appreciation Rights has expired), exercise the Award with respect to
any shares as to which the decedent could have exercised the Award at
the time of his death, or with respect to such greater number of
shares as determined by the Committee up to the total number of
shares subject to the Award.

(d) Payment of the Award. An Award of Stock Appreciation Rights shall
entitle the Participant (or his successor) to exercise such Award or, if
applicable, to surrender to the Company unexercised the Option (or other
Award) to which the Stock Appreciation Right is attached (or any portion of
such Option or other Award), and to receive from the Company in exchange
therefor, without payment to the Company, that number of Common Shares
having an aggregate value equal to (or, in the discretion of the Committee,
less than) the excess of the fair market value of one share, at the time of
such exercise, over the exercise price (or Option Price, as the case may
be) per share, times the number of shares subject to the Award of the
Option (or other Award), or portion thereof. which is so exercised or
surrendered, as the case may be. The Committee may elect to settle the
obligation arising out of the exercise of a Stock Appreciation Right by the
payment of cash or Other Company Securities or property, or other forms of
payment, or any combination thereof, as determined by the Committee, equal
to the aggregate value of the Common Shares it would otherwise be obligated
to deliver. Any such election by the Committee shall be made as soon as
practicable after the receipt by the Committee of written notice of the
exercise of the Stock Appreciation Right. The value of a Common Share,
Other Company Securities or property, or other forms of payment determined
by the Committee for this purpose shall be the fair market value thereof on
the last business day next preceding the date of the election to exercise
the Stock Appreciation Right, unless the Committee determines otherwise.

(e) Deemed exercise. A Stock Appreciation Right may provide that it
shall be deemed to have been exercised at the close of business on the
business day preceding the expiration date of the Stock Appreciation Right
or of the related Option (or other Award), or such other date as specified
by the Committee, if at such time such Stock Appreciation Right has a
positive value. Such deemed exercise shall be settled or paid in the same
manner as a regular exercise thereof as provided in Paragraph 6(d) hereof.

(f) No fractional shares. No fractional shares may be delivered under
this Paragraph 6, but in lieu thereof a cash or other adjustment shall be
made as determined by the Committee.

7. Restricted Stock. Each Award of Restricted Stock under the Plan shall
be evidenced by an instrument in such form as the Committee shall prescribe from
time to time in accordance with the Plan and shall comply with the following
terms and conditions, and with such other terms and conditions as the Committee
shall establish:

(a) Consideration. The Committee shall determine the number of Common
Shares to be issued to a Participant pursuant to the Award, and the extent,
if any, to which they shall be issued in exchange for cash, other
consideration, or both.

(b) Restricted period and Company repurchase option. Common Shares
issued to a Participant in accordance with the Award may not be sold,
assigned, transferred, pledged, hypothecated or otherwise disposed of,
except by will or the laws of descent and distribution, or as otherwise
determined by the Committee, for such period as the Committee shall
determine, from the date on which the Award is granted (the "Restricted
Period"). The Company will have the option to repurchase the shares subject
to the Award at such price as the Committee shall have fixed when the Award
was made or as amended thereafter, which option will be exercisable: (i)
subject to Paragraph 7(c), if the Participant's continuous
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<PAGE> 31

employment or performance of services for the Company shall terminate for
any reason, except solely by reason of a period of Related Employment as
defined in Paragraph 14, prior to the expiration of the Restricted Period,
(ii) if, on or prior to the expiration of the Restricted Period or the
earlier lapse of such repurchase option, the Participant has not paid to
the Company an amount equal to any federal, state, local or foreign income
or other taxes which the Company determines is required to be withheld in
respect of such shares, or (iii) under such other circumstances as
determined by the Committee and set forth in the terms of the Award. Such
repurchase option shall be exercisable on such terms, in such manner and
during such period as shall be determined by the Committee when the Award
is made or as amended thereafter. Each certificate for Common Shares issued
pursuant to a Restricted Stock Award shall bear an appropriate legend
referring to the foregoing repurchase option and other restrictions (and to
the fact that the shares are partly paid, if applicable), shall be
deposited by the Award holders with the Company, together with a stock
power endorsed in blank, or shall be evidenced in such other manner
permitted by applicable law as determined by the Committee. Any attempt to
dispose of any such Common Shares in contravention of the foregoing
repurchase option and other restrictions shall be null and void and without
effect. If Common Shares issued pursuant to a Restricted Stock Award shall
be repurchased pursuant to the repurchase option described above, the
Participant or his successor shall forthwith deliver to the Secretary of
the Company the certificates for the Common Shares awarded to the
Participant, accompanied by such instrument of transfer, if any, as may
reasonably be required by the Secretary of the Company. If the repurchase
option described above is not exercised by the Company during the
Restricted Period, such option and the restrictions imposed pursuant to the
first sentence of this Paragraph 7(b) shall terminate and be of no further
force and effect.

(c) Termination of Employment. If a Participant who has been in
continuous employment or performance of services for the Company or an
Affiliate since the date on which a Restricted Stock Award was granted to
him shall, while in such employment or performance of services, die, or
terminate such employment or performance of services by reason of
disability as defined in Paragraph 12 or by reason of early, normal or late
retirement under an approved retirement program of the Company or an
Affiliate (or such other plan or arrangement as may be approved by the
Committee for this purpose) and any of such events shall occur after the
date on which the Award was granted to him and prior to the end of the
Restricted Period for such Award, the Committee may determine to cancel the
repurchase option (and any or all other restrictions) on any or all of the
Common Shares subject to such Award. The repurchase option shall become
immediately exercisable at such time with respect to any remaining shares
for which the Committee does not determine to cancel such restrictions.

8. Performance Grants. The Award of a Performance Grant ("Performance
Grant") to a Participant will entitle him to receive a specified amount
determined by the Committee (the "Actual Value"), if the terms and conditions
specified herein and in the Award are satisfied. Each Award of a Performance
Grant shall be subject to the following terms and conditions, and to such other
terms and conditions, including but not limited to, restrictions upon any cash,
Common Shares, Other Company Securities or property, or other forms of payment,
or any combination thereof, issued in respect of the Performance Grant, as the
Committee shall establish, and shall be embodied in an instrument in such form
and substance as is determined by the Committee:

(a) Committee Determination of Award. The Committee shall determine
the value or range of values of a Performance Grant to be awarded to each
Participant selected for an Award and whether or not such a Performance
Grant is granted in conjunction with an Award of Options, Stock
Appreciation Rights, Restricted Stock or other Award, or any combination
thereof, under the Plan (which may

A-9
<PAGE> 32

include, but need not be limited to, deferred Awards) concurrently or
subsequently granted to the Participant (the "Associated Award"). As
determined by the Committee, the maximum value of each Performance Grant
(the "Maximum Value") shall be: (i) an amount fixed by the Committee at the
time the Award is made or as amended thereafter; (ii) an amount which
varies from time to time based in whole or in part on the then current
value of a Common Share, Other Company Securities or property, or other
securities or property, or any combination thereof; or (iii) an amount that
is determinable from criteria specified by the Committee. Performance
Grants may be issued in different classes or series having different names,
terms and conditions. In the case of a Performance Grant awarded in
conjunction with an Associated Award, the Performance Grant may be reduced
on an appropriate basis to the extent that the Associated Award has been
exercised, paid to or otherwise received by the Participant, as determined
by the Committee.

(b) Award Period and Performance Objectives. The award period ("Award
Period") in respect of any Performance Grant shall be a period determined
by the Committee. At the time each Award is made, the Committee shall
establish performance objectives to be attained within the Award Period as
the means of determining the Actual Value of such a Performance Grant. The
performance objectives shall be based on such measure or measures of
performance (which may include, but need not be limited to, the performance
of the Participant, the Company, one or more of its subsidiaries or one or
more of their divisions or units, or any combination of the foregoing) as
the Committee shall determine, and may be applied on an absolute basis or
be relative to industry or other indices, or any combination thereof. The
Actual Value of a Performance Grant shall be equal to its Maximum Value
only if the performance objectives are attained in full, but the Committee
shall specify the manner in which the Actual Value of Performance Grants
shall be determined if the performance objectives are met in part. Such
performance measures, the Actual Value or the Maximum Value, or any
combination thereof, may be adjusted in any manner by the Committee at any
time and from time to time during or as soon as practicable after the Award
Period, if it determines that such performance measures, the Actual Value
or the Maximum Value, or any combination thereof, are not appropriate under
the circumstances.

(c) Provisional Rights. The rights of a Participant in Performance
Grants awarded to him shall be provisional and may be canceled or paid in
whole or in part, all as determined by the Committee, if the Participant's
continuous employment or performance of services for the Company shall
terminate for any reason prior to the end of the Award Period, except
solely by reason of a period of Related Employment as defined in Paragraph
14.

(d) Actual Value. The Committee shall determine whether the
conditions of Paragraphs 8(b) or Paragraph 8(c) hereof have been met and,
if so, shall ascertain the Actual Value of the Performance Grants. If the
Performance Grants have no Actual Value, the Award and such Performance
Grants shall be deemed to have been canceled and the Associated Award, if
any, may be canceled or permitted to continue in effect in accordance with
its terms. If the Performance Grants have any Actual Value and:

(i) were not awarded in conjunction with an Associated Award, the
Committee shall cause an amount equal to the Actual Value of the
Performance Grants earned by the Participant to be paid to him or his
successor as provided below; or

(ii) were awarded in conjunction with an Associated Award, the
Committee shall determine, in accordance with criteria specified by the
Committee (A) to cancel the Performance Grants, in which event no amount
in respect thereof shall be paid to the Participant or his successor,
and the Associated Award may be permitted to continue in effect in
accordance with its terms, (B) to pay

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<PAGE> 33

the Actual Value of the Performance Grants to the Participant or his
successor as provided below, in which event the Associated Award may be
canceled or (C) to pay to the Participant or his successor as provided
below, the Actual Value of only a portion of the Performance Grants, in
which event all or a portion of the Associated Award may be permitted to
continue in effect in accordance with its terms or be canceled, as
determined by the Committee.

Such determination by the Committee shall be made as promptly as practicable
following the end of the Award Period or upon the earlier termination of
employment or performance of services, or at such other time or times as the
Committee shall determine, and shall be made pursuant to criteria specified by
the Committee.

Payment of any amount in respect of the Performance Grants which the
Committee determines to pay as provided above shall be made by the Company as
promptly as practicable after the end of the Award Period or at such other time
or times as the Committee shall determine, and may be made in cash, Common
Shares, Other Company Securities or property, or other forms of payment, or any
combination thereof or in such other manner, as determined by the Committee.
Notwithstanding anything in this Paragraph 8 to the contrary, the Committee may
determine and pay out the Actual Value of the Performance Grants at any time
during the Award Period.

9. Deferral of Compensation. The Committee shall determine whether an
Award shall be made in conjunction with deferral of the Participant's salary,
bonus or other compensation, or any combination thereof, and whether such
deferred amounts may be:

(i) forfeited to the Company or to other Participants, or any
combination thereof, under certain circumstances (which may include, but
need not be limited to, certain types of termination of employment or
performance of services for the Company and its Affiliates);

(ii) subject to increase or decrease in value based upon the
attainment of or failure to attain, respectively, certain performance
measures; and/or

(iii) credited with income equivalents (which may include, but need
not be limited to, interest, dividends or other rates of return) until the
date or dates of payment of the Award, if any.

10. Deferred Payment of Awards. The Committee may specify that the
payment of all or any portion of cash, Common Shares, Other Company Securities
or property, or any other form of payment, or any combination thereof, under an
Award shall be deferred until a later date. Deferrals shall be for such periods
or until the occurrence of such events, and upon such terms, as the Committee
shall determine. Deferred payments of Awards may be made by undertaking to make
payment in the future based upon the performance of certain investment
equivalents (which may include, but need not be limited to, government
securities, Common Shares, other securities, property or consideration, or any
Combination thereof), together with such additional amounts of income
equivalents (which may be compounded and may include, but need not be limited
to, interest, dividends or other rates of return, or any combination thereof) as
may accrue thereon until the date or dates of payments, such investment
equivalents and such additional amounts of income equivalents to be determined
by the Committee.

11. Amendment or Substitution of Awards under the Plan. The terms of any
outstanding Award under the Plan may be amended from time to time by the
Committee in any manner that it deems appropriate (including, but not limited
to, acceleration of the date of exercise of any Award and/or payments
thereunder); provided that no such amendment shall reduce the amount of any
benefit which a Participant is then entitled to obtain or collect at such time,
unless the Committee determines that there have occurred or are about to occur
significant changes in the Participant's position, duties or responsibilities,
or significant changes in
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<PAGE> 34

economic, legislative, regulatory, tax, accounting or cost-benefit conditions
which are determined by the Committee to have or to be expected to have a
substantial effect on the performance of the Company, or any subsidiary,
Affiliate, division or department thereof, on the Plan or on any Award under the
Plan. The Committee may require or permit holders of Awards under the Plan to
surrender outstanding Awards in order to exercise or realize the rights under
other Awards, or in exchange for the grant of new Awards, and may require
holders of Awards to surrender outstanding Awards as a condition precedent to
the grant of new Awards under the Plan.

12. Disability. For the purposes of this Plan, a Participant shall be
deemed to have terminated his employment or performance of services for the
Company by reason of disability, if the Committee shall determine that the
physical or mental condition of the Participant by reason of which such
employment or performance of services terminated was such at that time as would
entitle him to payment of monthly disability benefits under the Company's Long
Term Disability Benefit Plan, or, if the Participant is not eligible for
benefits under such plan, under any similar disability plan of the Company in
which he is a participant. If the Participant is not eligible for benefits under
any disability plan of the Company, he shall be deemed to have terminated such
employment or performance of services by reason of disability if the Committee
determines that his physical or mental condition would entitle him to benefits
under the Company's Long Term Disability Benefit Plan if he were eligible
therefore.

13. Termination of a Participant. For all purposes under the Plan, the
Committee shall determine whether a Participant has terminated employment by or
the performance of services for the Company; provided, however, that transfers
between the Company and an Affiliate or between Affiliates, and approved leaves
of absence may not be deemed such a termination, in the Committee's discretion.

14. Related Employment. For the purposes of this Plan, Related Employment
shall mean the employment or performance of services by an individual for an
employer other than the Company, provided that (i) such employment or
performance of services is undertaken by the individual at the request of the
Company, (ii) immediately prior to undertaking such employment or performance of
services, the individual was employed by or performing services for the Company
or was engaged in Related Employment as herein defined, and (iii) such
employment or performance of services is in the best interests of the Company
and is recognized by the Committee, in its discretion, as Related Employment for
purposes of this Paragraph 14. The death or disability of an individual during a
period of Related Employment as herein defined shall be treated, for purposes of
this Plan, as if the death or onset of disability had occurred while the
individual was employed by or performing services for the Company.

15. Dilution, Change in Control and Other Adjustments. In the event of
any change in the outstanding Common Shares of the Company by reason of any
stock split, reverse stock split, stock dividend, split-up, split-off, spin-off,
recapitalization, merger, consolidation, rights offering, reorganization,
combination or exchange of shares, a sale by the Company of all or part of its
assets, a change in control (as defined in Paragraph 17(o)), any distribution to
shareholders other than a normal cash dividend, or other extraordinary or
unusual event, if the Committee shall determine that such change equitably
requires an adjustment in the terms of any Award or the number of Common Shares
available for Awards, such adjustment may be made by the Committee and shall be
final, conclusive and binding for all purposes of the Plan.

16. Designation of Beneficiary by Participant. A Participant may name a
beneficiary to receive any payment to which he may be entitled in respect of any
Award under the Plan in the event of his death, on a written form to be provided
by and filed with the Committee, and in a manner determined by the Committee.
The Committee reserves the right to review and approve beneficiary designations.
A Participant may change

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<PAGE> 35

his beneficiary from time to time in the same manner, unless such Participant
has made an irrevocable designation. Any designation of beneficiary under the
Plan accepted by the Committee shall be controlling over any other disposition,
testamentary or otherwise. If no designated beneficiary is living on the date on
which any amount becomes payable to such Participant's beneficiary, such payment
will be made to the estate of the Participant, the legal representatives of the
Participant's estate, or any heir or other person or entity legally entitled to
act for or on behalf of such Participant after such Participant's death (the
"Participant's successor"). Any reference in the Plan to the "successor" of a
Participant shall include any one or more of the above, as appropriate. The
Committee shall resolve any question as to the legal right of any person or
entity to receive a distribution under the Plan as a Participant's successor,
and upon payment of the amount in question to the successor determined by the
Committee, the Company, the Board and the Committee, and the members thereof
will have no further liability to anyone with respect to such amount.

17. Miscellaneous Provisions.

(a) No Employment Rights Created Pursuant to the Plan. No employee or
other person shall have any claim or right to be granted an Award under the
Plan. Neither the Plan nor any action taken hereunder shall be construed as
giving any employee or other person any right to continue to be employed by
or perform services for the Company, and the right to terminate the
employment of or performance of services by any Participant at any time and
for any reason is specifically reserved.

(b) Written Requirement. No Participant or other person shall have
any right with respect to the Plan, the Common Shares reserved for issuance
under the Plan or in any Award, contingent or otherwise, until written
evidence of the Award shall have been delivered to the recipient and all
the terms, conditions and provisions of the Plan and the Award applicable
to such recipient or his successor have been met. The rights of each
Participant shall be limited to those that are specifically granted in the
written evidence of the Award. Any right not specifically granted therein
is reserved entirely to the discretion of the Board.

(c) No Alienation. Except as may be approved by the Committee where
such approval shall not adversely affect compliance of the Plan with Rule
16b-3 under the Exchange Act, a Participant's rights and interest under the
Plan may not be assigned or transferred, hypothecated or encumbered in
whole or in part either directly or by operation of law and otherwise
(except in the event of a Participant's death) including, but not by way of
limitation, execution, levy, garnishment, attachment. pledge, bankruptcy or
in any other manner; provided, however, that any Incentive Stock Option or
similar right (including any Stock Appreciation Right granted in
conjunction with any such Option) offered pursuant to the Plan shall not be
transferable other than by will or the laws of descent and distribution and
shall be exercisable during the Participant's lifetime only by him (or by a
duly appointed guardian or personal representative). Any such transferee of
a Participant's rights approved by the Committee shall be treated as the
"Participant" for all purposes of the Plan, unless the Committee directs
otherwise.

(d) Legal Compliance. No Common Shares, Other Company Securities or
property, other securities or property, or other forms of payment shall be
issued hereunder with respect to any Award unless counsel for the Company
is satisfied that such issuance will be in compliance with applicable
federal, state, local and foreign legal, securities exchange and other
applicable laws and regulations.

(e) ISO Rules and SEC Rule 16b-3 Compliance. It is the intent of the
Company that the Plan comply in all respects with Rule 16b-3 under the
Exchange Act and (with respect to those Plan provisions affecting Incentive
Stock Options) with Section 422 of the Code, that any ambiguities or
inconsistencies in construction of the Plan be interpreted to give effect
to such intention and that if any
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<PAGE> 36

provision of the Plan is found not to be in compliance with Rule 16b-3 or
with Code Section 422 (as applicable), such provision shall be deemed null
and void to the extent required to permit the Plan to comply with Rule
16b-3 or with Code Section 422 (as applicable). The Board shall have the
power, without further approval of the Company's shareholders, to amend the
Plan in any respect necessary at any point in time to permit the Plan, and
Awards granted under the Plan, to continue to comply with Rule 16b-3 and
with Section 422 of the Code, as applicable.

(f) Withholding. The Company and its Affiliates shall have the right
to deduct from any payment made under the Plan any federal, state, local or
foreign income or other taxes required by law to be withheld with respect
to such payment. It shall be a condition to the obligation of the Company
to issue Common Shares, Other Company Securities or property, other
securities or property, or other forms of payment, or any combination
thereof, upon exercise, settlement or payment of any Award under the Plan,
that the Participant or his successor pay to the Company, upon its demand,
such amount as may be requested by the Company for the purpose of
satisfying any liability to withhold federal, state, local or foreign
income or other taxes. If the amount requested is not paid, the Company may
refuse to issue Common Shares, Other Company Securities or property, other
securities or property, or other forms of payment, or any combination
thereof. Notwithstanding anything in the Plan to the contrary, the
Committee may permit an eligible Participant or his successor to elect to
pay a portion or all of the amount requested by the Company for such taxes
with respect to such Award, at such time and in such manner as the
Committee shall determine (including, but not limited to, by authorizing
the Company to withhold, or agreeing to surrender to the Company on or
about the date such tax liability is determinable, Common Shares, other
Company Securities or property, other securities or property, or other
forms of payment, or any combination thereof, owned by such person or a
portion of such forms of payment that would otherwise be distributed, or
have been distributed, as the case may be, pursuant to such Award to such
person, having a fair market value equal to the amount of such taxes);
provided, however, that any election by a Participant to utilize any equity
security of the Company to satisfy such tax liability must fully comply
with all applicable requirements of Rule 16b-3 and of Code Section 422.

(g) Plan Expenses. The expenses of the Plan shall be borne by the
Company. However, if an Award is made to an individual employed by or
performing services for an Affiliate, and the Company does not own
(directly or indirectly) 100% of the equity of such Affiliate:

(i) if such Award results in payment of cash to the Participant,
such Affiliate shall pay to the Company an amount equal to such cash
payment; and

(ii) if the Award results in the issuance by the Company to the
Participant of Common Shares, Other Company Securities or property,
other securities or property, or other forms of payment, or any
combination thereof, such Affiliate shall pay to the Company an amount
equal to the fair market value thereof, as determined by the Committee,
on the date such Common Shares, Other Company Securities or property,
other securities or property, or other forms of payment, or any
combination thereof, are issued (or, in the case of the issuance of
Restricted Stock or of Common Shares, Other Company Securities or
property, or other securities or property, or other forms of payment
subject to transfer and forfeiture conditions, equal to the fair market
value thereof on the date on which they are no longer subject to
applicable restrictions), minus the amount, if any, received by the
Company in respect of the purchase of such Common Shares, Other Company
Securities or property, other securities or property or other forms of
payment, or any combination thereof.

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<PAGE> 37

(h) Unfunded. The Plan shall be unfunded. The Company shall not be
required to establish any special or separate fund or to make any other
segregation of assets to assure the payment of any Award under the Plan,
and rights to the payment of Awards shall be no greater than the rights of
the Company's general creditors.

(i) Participant Consent. By accepting any Award or other benefit
under the Plan, each Participant or his successor shall be conclusively
deemed to have indicated his acceptance and ratification of, and consent
to, any action taken under the Plan by the Company, the Board or the
Committee or its delegates.

(j) Fair Market Value. Fair market value in relation to Common
Shares, Other Company Securities or property, other securities or property
or other forms of payment of Awards under the Plan, or any combination
thereof, as of any specific time shall mean such value as determined by the
Committee in accordance with applicable law.

(k) Determinations of Committee. Determinations made by the Committee
under the Plan need not be uniform and may be made selectively among
eligible individuals under the Plan, whether or not such eligible
individuals are similarly situated. All determinations and decisions made
by the Committee shall be final, conclusive, and binding on all parties
concerned and are made in the sole and absolute discretion of the Committee
unless a contrary standard for action is expressly stated in the Plan.

(1) Gender and Number. The masculine pronoun includes the feminine
and the singular includes the plural wherever appropriate.

(m) Information Filings. The appropriate officers of the Company
shall cause to be filed any reports, returns or other information regarding
Awards hereunder or any Common Shares issued pursuant hereto as may be
required by the Code, by the Exchange Act or by any other applicable
statute, rule or regulation (or any successor provisions thereto).

(n) Governing Law. The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations,
and rights relating to the Plan and to Awards granted under the Plan, shall
be governed by the laws of the State of Tennessee.

(o) Change in Control. A change in control is any event which results
in a "person" (as such term is defined in Sections 3(a)(9) and 13(d)(3) of
the Securities and Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder) acquiring directly or indirectly,
whether by sale, transfer, assignment, pledge, hypothecation, gift, or
other disposition, in one or more transactions, a majority controlling
interest in the voting capital stock of the Company (or the entering into
of any agreement with the Company to do any of the foregoing); provided,
however, that a change in control shall not include any transaction in
which one or more members of the Frierson family (which shall include all
current members of the family of J. Burton Frierson, including descendants
and spouses, and trusts for the benefit of same, who presently own capital
stock) shall have a majority controlling interest in the Company.

18. Plan Amendment or Suspension. The Plan may be amended, suspended, or
terminated in whole or in part at any time and from time to time by the Board,
but no amendment shall be effective unless and until the same is approved by
shareholders of the Company where the failure to obtain such approval would
adversely affect the compliance of the Plan with Rule 16b-3 under the Exchange
Act or with any other applicable law.

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<PAGE> 38

19. Plan Termination. This plan shall terminate upon the earlier of the
following dates or events to occur:

(a) upon the adoption of a resolution of the Board terminating the
Plan; or

(b) ten years from the date the Plan is initially approved and adopted
by the shareholders of the Company in accordance with Paragraph 20 hereof;
provided, however, that the Board may, prior to the expiration of such
ten-year period, extend the term of the Plan for an additional period of up
to five years for the grant of Awards other than Incentive Stock Options.

20. Shareholder Adoption. The Plan was initially approved and adopted by
the shareholders of the Company at a meeting held on May 3, 1990. Certain
amendments to the Plan were approved by the Board of Directors (subject to
shareholder approval) on November 14, 1996, and were approved by the Company's
shareholders at a meeting held on May 1, 1997. Subsequently, at a meeting held
on February 19, 1998, the Board of Directors of the Company approved the
amendment of the Plan in various respects, subject to the approval and adoption
of such amendments and of the restated Plan, as amended, by the shareholders of
the Company at a meeting to be held on April 30, 1998, or at any adjournment
thereof. Such amendments to the Plan shall not be effective and no Award made in
reliance on any of the terms of such amendments shall be permitted to become
effective, unless and until such amendments (and the Plan, as amended and
restated accordingly) have been so approved and adopted. The shareholders shall
be deemed to have approved and adopted such amendments to the Plan only if they
are approved and adopted at a meeting of the shareholders duly held by vote
taken in the manner required by the laws of the State of Tennessee.

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<PAGE> 39
APPENDIX A

PROXY

THE DIXIE GROUP, INC.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

ANNUAL MEETING OF SHAREHOLDERS

APRIL 30, 1998

The undersigned hereby appoints Daniel K. Frierson, John W. Murrey, III,
and Robert J. Sudderth, Jr., and each of them, proxies, with full power of
substitution, to act and to vote the shares of common stock which the
undersigned is entitled to vote at the Annual Meeting of Shareholders to be held
at 1100 South Watkins Street, Chattanooga, Tennessee 37404, at 10:00 A.M.,
Eastern Daylight Time, on April 30, 1998, and any adjournment or adjournments
thereof, as designated on the reverse side.

PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE
ACCOMPANYING PREPAID SELF-ADDRESSED ENVELOPE. THANK YOU.

---------
SEE REVERSE
SIDE
---------

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED IN FAVOR
OF PROPOSALS 1, 2, 3, AND 4. THE BOARD IS NOT AWARE OF ANY OTHER MATTER TO BE
BROUGHT BEFORE THE ANNUAL MEETING FOR A VOTE OF SHAREHOLDERS. IF, HOWEVER, OTHER
MATTERS ARE PROPERLY PRESENTED, THE PROXIES WILL VOTE IN ACCORDANCE WITH THEIR
BEST JUDGMENT.

1. Election of Directors.

FOR all nominees WITHHOLD AUTHORITY
[ ] [ ] to vote for all
nominees listed
below.

J. Don Brock; Paul K. Brock; Lovic A. Brooks, Jr.;
Daniel K. Frierson; Paul K. Frierson; William N. Fry, IV;
John W. Murrey, III; Peter L. Smith; Robert J. Sudderth, Jr.

(Instruction: To withhold authority to vote for any individual,
write than nominee's name in the space provided below.)

---------------------------------------------------------------

FOR AGAINST ABSTAIN

2. Approval of amendment to the Company's Incentive [ ] [ ] [ ]
Stock Plan to: (i) increase the maximum number of
shares of the Company's Common Stock that may be
issued pursuant to awards under the Plan from
1,770,000 to 2,270,000; and (ii) provide that shares
of Class B Common Stock issued pursuant to the Plan
shall count against the number of shares of Common
Stock issuable under the Plan.

3. Authorization of issuance of shares of Class B [ ] [ ] [ ]
Common Stock to certain electing participants in the
Incentive Stock Plan and the Stock Ownership Plan,
and with respect to future employee benefit plans
that may be adopted by the Company, in the
discretion of the Board of Directors:

4. Approval of the Directors Stock Plan:

5. Acting upon any other business which may be properly [ ] [ ] [ ]
brought before said meeting or any adjournment or
adjournments thereof.

The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders, dated March 27, 1998, and the Proxy Materials and Annual Report to
Shareholders furnished therewith.

SIGNATURE(S):_________________________________________________ DATE____________
NOTE: Signature should agree with name on stock certificate as printed hereon.
When signing in a representative capacity, please give your full title.