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