<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
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.)
345-B Nowlin Lane
Chattanooga, Tennessee 37421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (423) 510-7010
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.
<TABLE>
<CAPTION>
Class Outstanding as of November 8, 2000
<S> <C>
Common Stock, $3 Par Value 10,706,877 shares
Class B Common Stock, $3 Par Value 795,970 shares
Class C Common Stock, $3 Par Value 0 shares
</TABLE>
<PAGE> 2
THE DIXIE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information: Page No.
<S> <C>
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets --
September 30, 2000 and December 25, 1999 3
Consolidated Condensed Statements of Operations --
Three and Nine Months Ended September 30, 2000
and September 25, 1999 5
Consolidated Condensed Statements of Cash Flows --
Nine Months Ended September 30, 2000
and September 25, 1999 6
Consolidated Condensed Statements of Stockholders' Equity --
Nine Months Ended September 30, 2000 8
Notes to Consolidated Condensed Financial Statements 9
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition 16
Item 3 - Quantitative and Qualitative Disclosures About
Market Risks 19
Part II. Other Information:
Item 1 - Legal Proceedings 19
Item 2 - Changes in Securities and Use of Proceeds 19
Item 3 - Defaults Upon Senior Securities 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
</TABLE>
2
<PAGE> 3
PART I - ITEM 1
FINANCIAL INFORMATION
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 25,
2000 1999
------------- ------------
(dollar amounts in thousands)
<C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,614 $ 12,541
Accounts receivable (less allowance for doubtful
accounts of $2,044 for 2000 and $1,831 for 1999) 25,161 19,454
Inventories 122,427 104,042
Net assets held for sale 68 457
Other 18,263 14,471
--------- ---------
TOTAL CURRENT ASSETS 169,533 150,965
PROPERTY, PLANT AND EQUIPMENT 330,741 307,766
Less accumulated amortization and depreciation (144,038) (134,180)
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 186,703 173,586
INTANGIBLE ASSETS (less accumulated amortization
of $7,317 for 2000 and $6,190 for 1999) 51,139 52,460
INVESTMENT IN AFFILIATE 11,589 --
OTHER ASSETS 17,210 14,890
--------- ---------
TOTAL ASSETS $ 436,174 $ 391,901
========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE> 4
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 25,
2000 1999
------------- -------------
(dollar amounts in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 52,921 $ 53,590
Accrued expenses 20,766 26,241
Accrued losses of discontinued operations 2,661 3,461
Current portion of long-term debt 14,019 13,460
--------- ---------
TOTAL CURRENT LIABILITIES 90,367 96,752
LONG-TERM DEBT
Senior indebtedness 120,798 60,961
Subordinated notes 40,476 45,238
Convertible subordinated debentures 34,737 37,237
--------- ---------
TOTAL LONG-TERM DEBT 196,011 143,436
OTHER LIABILITIES 10,238 10,295
DEFERRED INCOME TAXES 25,426 23,508
STOCKHOLDERS' EQUITY
Common Stock ($3 par value per share)
authorized 80,000,000 shares - issued
and outstanding, 14,226,315 shares for 2000 and
14,264,277 shares for 1999 42,679 42,793
Class B Common Stock ($3 par value per share)
authorized 16,000,000 shares - issued and
outstanding, 795,970 shares for 2000 and 1999 2,388 2,388
Common Stock Subscribed - 805,801 shares
for 2000 and 620,516 shares for 1999 2,417 1,861
Additional paid-in capital 135,189 136,144
Stock subscriptions receivable (5,456) (5,456)
Unearned stock compensation (106) (489)
Retained earnings (deficit) (6,265) (2,659)
Accumulated other comprehensive income (412) (412)
--------- ---------
170,434 174,170
Less Common Stock in treasury at cost -
3,519,438 shares for 2000 and
3,511,829 shares for 1999 (56,302) (56,260)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 114,132 117,910
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 436,174 $ 391,901
========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
<PAGE> 5
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- ---------------------------------
September 30, September 25, September 30, September 25,
2000 1999 2000 1999
------------- ------------- -------------- -------------
(dollar amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Net Sales $ 142,554 $142,589 $ 414,786 $435,926
Cost of Sales 116,142 111,713 333,647 342,821
--------- -------- --------- --------
GROSS PROFIT 26,412 30,876 81,139 93,105
Selling and administrative expenses 28,751 22,267 75,319 64,626
Other (income) expense - net (824) 317 (961) 2,457
--------- -------- --------- --------
INCOME (LOSS) BEFORE (1,515) 8,292 6,781 26,022
INTEREST AND TAXES
Interest expense 4,503 3,173 12,618 9,972
--------- -------- --------- --------
INCOME (LOSS) BEFORE (6,018) 5,119 (5,837) 16,050
INCOME TAXES
Income tax provision (benefit) (2,342) 2,050 (2,231) 6,341
--------- -------- --------- --------
Income (loss) from Continuing Operations (3,676) 3,069 (3,606) 9,709
Income from Disposal of
Discontinued Operations -- -- -- 4,419
--------- -------- --------- --------
Net income (loss) $ (3,676) $ 3,069 $ (3,606) $ 14,128
========= ======== ========= ========
Earnings per Share:
Basic Earnings (loss) per share:
Income (loss) from continuing operations $ (0.32) $ 0.27 $ (0.31) $ 0.86
Income from disposal of
discontinued operations -- -- -- 0.39
--------- -------- --------- --------
Net income (loss) $ (0.32) $ 0.27 $ (0.31) $ 1.25
========= ======== ========= ========
Shares outstanding 11,470 11,390 11,471 11,318
Diluted Earnings (loss) per share:
Income (loss) from continuing operations $ (0.32) $ 0.26 $ (0.31) $ 0.83
Income from disposal of
discontinued operations -- -- -- 0.37
--------- -------- --------- --------
Net income (loss) $ (0.32) $ 0.26 $ (0.31) $ 1.20
========= ======== ========= ========
Shares outstanding 11,470 11,857 11,471 11,733
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
5
<PAGE> 6
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
September 30, September 25,
2000 1999
------------- -------------
(dollar amounts in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,606) $ 14,128
Adjustments to reconcile net income (loss) to net cash
provided by operating activities of continuing operations:
(Income) on disposal of discontinued operations -- (4,419)
Depreciation and amortization 17,923 16,945
Provision (benefit) for deferred income taxes 3,492 (1,358)
(Gain) on property, plant and equipment disposals (1,933) (53)
-------- --------
15,876 25,243
Changes in operating assets and liabilities, including
discontinued operations, net of effects of
business combination (32,113) (23,053)
-------- --------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (16,237) 2,190
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of property, plant,
and equipment 17,962 91
Net proceeds from assets held for sale -- 57,380
Purchase of property, plant, and equipment (41,142) (23,845)
Net cash paid in business combinations (9,117) (32,194)
Investment in affiliate (11,589) --
-------- --------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (43,886) 1,432
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
6
<PAGE> 7
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
- CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
September 30, September 25,
2000 1999
------------- -------------
(dollar amounts in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in credit line borrowings 64,915 16,921
Payments on subordinated debentures (7,262) (2,500)
Payments on term loan (6,179) (14,000)
Other (278) 734
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 51,196 1,155
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (8,927) 4,777
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 12,541 2,815
-------- --------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 3,614 $ 7,592
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 13,299 $ 11,289
======== ========
Income taxes paid
(refunds received) $ (201) $ 10,837
======== ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
7
<PAGE> 8
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Accumulated
Stock and Common Additional Retained Other Common Total
Class B Stock Paid-In Earnings Comprehensive Stock In Stockholders'
Stock Subscribed Capital Other (Deficit) Income Treasury Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 25, 1999 $ 45,181 $ 1,861 $ 136,144 $(5,945) $(2,659) $ (412) $(56,260) $ 117,910
Common Stock acquired for treasury -
7,609 shares (42) (42)
Common Stock subscribed -
355,389 shares 1,066 474 (1,540) --
Stock subscriptions settled -
170,104 shares (510) (1,030) 1,540 --
Amortization of restricted
stock grants 178 178
Restricted stock grants cancelled -
40,000 shares (120) (400) 205 (315)
Common Stock sold under stock
option plan - 2,038 shares 6 2 8
Other (1) (1)
Net (loss) for the period (3,606) (3,606)
BALANCE AT SEPTEMBER 30, 2000 $ 45,067 $ 2,417 $ 135,189 $(5,562) $(6,265) $ (412) $(56,302) $ 114,132
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
8
<PAGE> 9
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except where noted or per share data)
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 30, 2000 are not necessarily indicative of the results
that may be expected for the entire year.
Cash and Cash Equivalents: Cash and highly liquid investments with original
maturities of three months or less when purchased are reported as cash
equivalents.
Credit and Market Risk: The Company sells floorcovering products and, prior to
July 1999, sold textile/apparel products to a wide variety of manufacturers and
retailers located primarily throughout the United States. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. An allowance for doubtful accounts is maintained at a level which
management believes is sufficient to cover potential credit losses, including
potential losses on receivables sold. The Company invests its excess cash in
short-term investments and has not experienced any losses on those investments.
NOTE B - SALE OF ACCOUNTS RECEIVABLE
In June, 2000, the Company replaced its existing $45.0 million accounts
receivable securitization program with a new one-year program which provides for
up to $60.0 million of funding. Under the agreement, a significant portion of
the Company's accounts receivable is sold, on a revolving basis, to a special
purpose wholly-owned subsidiary which assigns such receivables to an independent
issuer of receivables-backed commercial paper as security for amounts borrowed
by the special purpose subsidiary.
The transaction is accounted for as a sale of accounts receivable. Accordingly,
the undivided interest in receivables sold under the agreement is excluded from
the Company's balance sheet. Amounts sold under this arrangement and the
previous program were $44.3 million at September 30, 2000 and $45.0 million at
December 25, 1999. The Company's retained interest in the accounts receivable is
included in the balance sheet as accounts receivable.
Proceeds from the sale of accounts receivable are less than the face amount of
the accounts receivable sold by an amount which approximates the variable
financing cost of receivables-backed commercial paper plus administrative fees
typical in such transactions. The Company continues to service the receivables
and maintains an allowance for doubtful accounts based upon the expected
collectibility of all of the accounts receivable generated by the Company.
NOTE C - INVENTORIES
Inventories are stated at the lower of cost or market. At September 30, 2000,
the last-in, first-out (LIFO) cost method was used for substantially all
inventories. At December 25, 1999, LIFO cost method was used for approximately
80% of total inventories and the first-in, first-out (FIFO) cost method was used
for approximately 20% of total inventories. Inventories are summarized as
follows:
9
<PAGE> 10
<TABLE>
<CAPTION>
September 30, December 25,
2000 1999
------------- ------------
<S> <C> <C>
At FIFO cost:
Raw materials $ 40,065 $ 31,664
Work-in-process 20,666 18,389
Finished goods 57,392 49,121
Supplies, repair parts, and other 2,247 1,835
---------- ----------
120,370 101,009
LIFO value over FIFO value 2,057 3,033
---------- ----------
Total inventories $ 122,427 $ 104,042
========== ==========
</TABLE>
NOTE D - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
Sept 30, Sept 25, Sept 30, Sept 25,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations (1) $ (3,676) $ 3,069 $ (3,606) $ 9,709
Income from disposal of
discontinued operations (1) -- -- -- 4,419
Net income (loss) $ (3,676) $ 3,069 $ (3,606) $ 14,128
========= ========= ========= =========
Denominator for calculation of
basic earnings per share -
weighted average shares (2) 11,470 11,390 11,471 11,318
Effect of dilutive securities:
Stock options -- 184 -- 166
Stock subscriptions -- 283 -- 249
Denominator for calculation of
diluted earnings per share -
weighted average shares adjusted
for potential dilution (3) 11,470 11,857 11,471 11,733
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
Sept 30, Sept 25, Sept 30, Sept 25,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic Earnings per share:
Income (loss) from continuing operations $ (0.32) $ 0.27 $ (0.31) $ 0.86
Income from disposal of
discontinued operations -- -- -- 0.39
Net income (loss) $ (0.32) $ 0.27 $ (0.31) $ 1.25
======= ======= ======= =======
Diluted Earnings per share:
Income (loss) from continuing operations $ (0.32) $ 0.26 $ (0.31) $ 0.83
Income from disposal of
discontinued operations -- -- -- 0.37
Net Income (loss) $ (0.32) $ 0.26 $ (0.31) $ 1.20
======= ======= ======= =======
</TABLE>
(1) No adjustments needed for diluted calculation.
(2) Includes Common and Class B Common shares in thousands.
(3) Because their effects are anti-dilutive, excludes shares issuable pursuant
to certain grants under stock option, stock subscription, and restricted stock
plans and the assumed conversion of subordinated debentures into shares of
Common stock as follows: 3,281 shares in 2000 and 1,655 shares in 1999.
NOTE E - LONG TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 25,
2000 1999
------------ ------------
<S> <C> <C>
Senior indebtedness:
Credit line borrowings $ 95,989 $ 30,073
Term loan 30,167 36,346
Other 1,399 740
----------- -----------
Total senior indebtedness 127,555 67,159
Subordinated notes 45,238 50,000
Convertible subordinated debentures 37,237 39,737
----------- -----------
Total long-term debt 210,030 156,896
Less current portion (14,019) (13,460)
----------- -----------
Total long-term debt (less current
portion) $ 196,011 $ 143,436
=========== ===========
</TABLE>
The Company's senior credit arrangement was amended on November 2, 2000 to
secure, with a significant portion of the Company and its subsidiaries' assets,
borrowings under the arrangement and adjust covenants to reflect expected
future results and the Company's current financial structure. The credit
agreement provides revolving credit of up to $100.0 million through March 2003
and $5.0 million of short-term credit. The $30.2 million term loan outstanding
under the agreement is payable in quarterly installments of approximately $1.6
million through December 31, 2002 with a final installment of $15.4 million in
March, 2003. Interest rates under the credit agreement effectively allow for
borrowing at
11
<PAGE> 12
rates equal to LIBOR plus 1.75% to 2.75%. Commitment fees, ranging from .25% to
.50% per annum on the revolving credit line are payable on the average daily
unused balance of the revolving credit facility.
The Company's subordinated notes are unsecured, bear interest at 9.96% to 10.61%
payable semiannually, and are due in semiannual installments of $2,381 which
commenced February 1, 2000.
The Company's convertible subordinated debentures bear interest at 7% payable
semiannually, are due in 2012, and are convertible by the holder into shares of
Common Stock of the Company at an effective conversion price of $32.20 per
share, subject to adjustment under certain circumstances. Mandatory sinking fund
payments, which commenced May 15, 1998, will retire $2,500 principal amount of
the debentures annually and approximately 70% of the debentures prior to
maturity. The convertible debentures are subordinated in right of payment to all
other indebtedness of the Company.
At September 30, 2000, the Company is party to an interest rate swap agreement,
with a notional amount of $70.0 million, to reduce the impact of changes in
interest rates on its floating rate long-term debt. Under the agreement, the
Company pays a fixed rate of 6.75% and receives a variable rate, which was 6.80%
at September 30, 2000. Any interest rate differential realized is recognized as
an adjustment to interest expense over the life of the swap agreement.
The Company's long-term debt and credit agreements contain financial covenants
relating to minimum net worth, the ratio of debt to capitalization and debt to
earnings before interest, taxes depreciation and amortization (EBITDA), payment
of dividends and certain other financial ratios. Payment of dividends is limited
to 50% of aggregate consolidated net income subsequent to December 25, 1999 and
financial covenants currently do not permit the payment of dividends.
As of November 2, 2000, the Company's borrowing capacity under its credit
arrangements was $13.1 million (including amounts available under short-term
credit lines).
NOTE F - BUSINESS COMBINATION AND INVESTMENTS IN AFFILIATES
On July 1, 2000, the Company acquired 90% of the capital stock of Fabrica
International ("Fabrica"), a privately held California corporation and a
one-third interest in Chroma Systems Partners ("Chroma"). On September 8, 2000,
the Company acquired the remaining 10% of the capital stock of Fabrica.
Subsequent to the end of the third quarter, the Company's interest in Chroma
increased to 50%. Fabrica produces and sells higher-end carpet and rugs to
carpet retailers, interior designers, luxury yacht manufacturers, furniture
stores and other markets. Chroma performs dyeing and finishing processes on a
contract basis for Fabrica and other carpet businesses. The acquisition of
Fabrica was accounted for under the purchase method and the Chroma interest was
accounted for under the equity method.
The Company acquired the stock of Fabrica for $9.0 million in cash. In
connection with the acquisition, the Company recorded assets with a fair value
of approximately $17.1 million and liabilities of $9.1 million. The agreement
provides for additional payment of $50.0 million in 2003 if Fabrica's cumulative
gross sales for the period of April 1, 2000 through June 30, 2003 exceed certain
levels. The agreement also provides for an additional contingent amount of up to
$2.5 million to be paid in April 2005 based upon Fabrica's cumulative earnings
before interest and taxes for the five-year period beginning January 1, 2000.
Any contingent amounts that may become payable under the agreement will be
treated as an additional cost of the acquisition. Goodwill that may be generated
from these transactions will be amortized over future periods on a straight-line
basis.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition of Fabrica had occurred at the beginning of the
periods presented after giving effect to certain adjustments, including interest
expense on debt to finance the acquisition, depreciation expense on adjusted
fixed asset values 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 the results that would have occurred had the acquisition taken place
at the beginning of the periods presented. The pro forma information below does
not include information pertaining to the equity investment in Chroma. Their
results of operations have been included in the Company's statement of
operations subsequent to July 1, 2000.
12
<PAGE> 13
<TABLE>
<CAPTION>
Nine Months Ended
Quarter Ended -------------------------------
Sept 25, Sept 30, Sept 25,
1999 2000 1999
------------- ------------ ------------
<S> <C> <C> <C>
Net sales $ 153,860 $ 439,951 $ 467,034
Income (loss) from continuing
Operations 4,386 (1,805) 12,502
Net income (loss) 4,386 (1,805) 16,921
Basic earnings (loss) per share:
Income (loss) from continuing
Operations 0.39 (0.16) 1.10
Net income (loss) 0.39 (0.16) 1.50
Diluted earnings (loss) per share:
Income (loss) from continuing
Operations 0.37 (0.16) 1.07
Net income (loss) 0.37 (0.16) 1.44
</TABLE>
The initial investment in Chroma was $11.0 million paid in cash on July 3, 2000.
The agreement provides for an adjustment to the amount paid generally equal to
the Company's share of Chroma's income or loss for the three years ending June
30, 2003 less $1.8 million. The excess of cost over the Company's share of
Chroma's net assets was approximately $9.0 million. Such amount is amortized as
a reduction against the Company's share of Chroma's earnings over the
appropriate periods. The Company's share of Chroma's earnings for the third
quarter ending September 30, 2000 were approximately $556.
NOTE G - COMMITMENTS
On August 15, 2000, the Company sold machinery and equipment used in its
operations for approximately $15.0 million. The assets were leased back from the
purchaser under an operating lease for a period of four years at an annual lease
cost of approximately $2.9 million. The lease requires the Company to pay
customary operating and repair expenses and to observe certain operating
restrictions and financial covenants.
NOTE H - SEGMENT DATA
The Company's floorcovering operations are segmented based on product
similarities. Accordingly, its two reportable segments are Carpet Manufacturing
and Floorcovering Base Materials. The Company's Carpet Manufacturing segment is
a leading carpet and rug manufacturer and supplier to higher-end residential and
commercial customers serviced by Masland Carpets and Fabrica International, to
consumers through major retailers under the Bretlin, Globaltex and Alliance
Mills brands and to the factory-built housing and recreational vehicle markets
through Carriage Carpets. The Company's Floorcovering Base Materials segment
supplies extruded plied and heat-set filament and spun yarn, through Candlewick
Yarns, to the Company's Carpet Manufacturing segment and, to a lesser extent, to
specialty carpet yarn markets.
The profit performance measure for the Company's segments is defined as Internal
EBIT (earnings before interest and taxes). The aggregate of Internal EBIT for
the reportable segments differs from the Company's consolidated earnings before
interest and taxes by costs associated with the sale of accounts receivable
under the Company's accounts receivable sales agreement and other amounts that
are not included in the segments' operations. Assets measured in each reportable
segment include long-lived assets, goodwill, inventories at current cost, and
accounts receivable
13
<PAGE> 14
Allocations of corporate general and administrative expenses are used in the
determination of segment profit performance; however, assets of the corporate
departments are not used in the segment asset performance measurement. All
amortization of goodwill is included in segment profit performance measurement;
however, only selected intangible assets are included in the asset performance
measurement.
The following table reflects selected operating data relating to the two
reportable segments of the Company:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Sept 30, Sept 25, Sept 30, Sept 25,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES - EXTERNAL CUSTOMERS
Carpet Manufacturing $ 125,011 $ 113,136 $ 356,485 $ 339,989
Floorcovering Base Materials 17,543 29,453 58,301 95,937
---------- ---------- ---------- ----------
Total Net Sales $ 142,554 $ 142,589 $ 414,786 $ 435,926
INTERSEGMENTAL SALES
Carpet Manufacturing $ 7,878 $ 5,791 $ 19,973 $ 14,418
Floorcovering Base Materials 38,269 27,489 105,028 74,530
---------- ---------- ---------- ----------
Total intersegmental sales $ 46,147 $ 33,280 $ 125,001 $ 88,948
PROFIT (LOSS) PERFORMANCE
Carpet Manufacturing $ (3,201) $ 7,764 $ 5,805 $ 23,694
Floorcovering Base Materials (163) 619 (1,043) 3,626
---------- ---------- ---------- ----------
Segment Total (3,364) 8,383 4,762 27,320
Cost of A/R sales program 1,005 661 2,514 2,148
Other non-segment (income) (2,854) (570) (4,533) (850)
---------- ---------- ---------- ----------
Earnings (loss) Before Interest and Taxes (1,515) 8,292 6,781 26,022
Interest expense 4,503 3,173 12,618 9,972
---------- ---------- ---------- ----------
Consolidated income (loss) before income
taxes from continuing operations $ (6,018) $ 5,119 $ (5,837) $ 16,050
</TABLE>
<TABLE>
<CAPTION>
As of
----------------------------
September 30, December 25,
2000 1999
------------- ------------
<S> <C> <C>
IDENTIFIABLE ASSETS
Carpet Manufacturing $ 343,712 $ 292,889
Floorcovering Base Materials 76,174 76,051
Other 16,220 22,504
Assets of discontinued operations 68 457
---------- ----------
Total consolidated assets $ 436,174 $ 391,901
</TABLE>
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NOTE I - OTHER INCOME
On September 30, 2000, the Company sold certain recreational real estate. The
gain of approximately $2.0 million on the sale was included in the other
(income) expense - net of the Company's income statement.
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<PAGE> 16
PART I - ITEM 2
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 1999 Annual Report (dollar amounts
in thousands, except where noted or per share data).
On July 1, 2000, the Company acquired 90% of the stock of Fabrica International
("Fabrica"), a privately held corporation which manufactures and sells high-end
luxury carpet and rugs to carpet retailers, interior designers, luxury yacht
manufacturers, furniture stores and other markets. On September 8, 2000, the
Company acquired the remaining 10% of the capital stock of Fabrica. The total
purchase price was $9.0 million plus up to $52.5 million of contingent
consideration based on future sales and earnings. Additionally, the Company
acquired a one-third equity interest in Chroma Systems Partners ("Chroma"), a
business which performs dyeing and finishing processes for Fabrica and other
carpet businesses. The equity investment in Chroma was $11.0 million, and
provides for an adjustment to the amount paid generally equal to the Company's
share of Chroma's income or loss for the three years ending June 30, 2003 less
$1.8 million. Subsequent to the end of the third quarter the Company's interest
in Chroma increased to 50%.
In the third quarter 2000, the Company began implementing a strategy to improve
asset utilization and operating efficiencies to improve the Company's cost
structure by integrating manufacturing operations and information support
systems of it's North Georgia tufted carpet businesses. The Company also began
reducing inventories, which had been increased to excessive levels to insure
service to customers during the re-alignment of the Company's yarn operations
and construction of a new distribution center and to support aggressive internal
sales forecasts. As a result of implementation of the integration and inventory
reduction plan, the Company recorded approximately $6.5 million of cost, which
are not anticipated to reoccur in 2001, in the third quarter 2000. The Company
anticipates an additional $2.5 million to $3.0 million of similar costs in the
fourth quarter of 2000 to substantially complete the planed manufacturing
consolidation and inventory reduction.
The Company anticipates annual savings of $12.0 million to $15.0 million from
the manufacturing consolidations and other identified costs reduction programs.
Expected cost improvements should result from increased utilization of tufting,
dyeing, finishing and distribution assets, improved operating efficiencies, and
product quality, as well as elimination of fixed cost associated with the
multi-site operations. Realization of the savings will be dependent upon many
factors, including continued and increasing levels of demand and careful
avoidance of additional, offsetting cost.
RESULTS OF OPERATIONS
The Company recorded a net loss of $3,676, or $.32 per diluted share, in the
quarter ended September 30, 2000 and $3,606, or $.31 per diluted share, for the
first nine months of 2000. Results for the third quarter and year-to-date 2000
reflected cost of $6.5 million to consolidate manufacturing operations and
information systems, curtail operations to reduce inventories and to recognize
losses associated with off quality inventories identified during the third
quarter. Results for the 2000 reporting periods also included a gain of $2.0
million from the sale of real estate. The effect of these costs, net of the real
estate gain, was $4.5 million ($2.8 million after-tax), or $.24 per diluted
share, for the third quarter and nine months ended September 30, 2000. The 2000
results compared with net income of $3,069, or $.26 per diluted share, in the
third quarter 1999 and income from continuing operations of $9,709, or $.83 per
diluted share, for the first nine months of 1999. Net income for the first nine
months of 1999 included a gain of $4,419, or $.37 per diluted share, related to
discontinued operations.
Net sales were $142,554 in the third quarter of 2000 and $414,786 for the first
nine months of 2000, compared with net sales of $142,589 in the third quarter of
1999 and $435,926 in the first nine months of 1999.
The Company's operations are segmented based on product similarities.
Accordingly, its two reportable segments are Carpet Manufacturing and
Floorcovering Base Materials. The Company's Carpet Manufacturing segment is a
leading carpet and rug manufacturer and supplier to higher-end residential and
commercial customers serviced by Masland Carpets and Fabrica International, to
consumers through major retailers under the Bretlin, Globaltex and Alliance
Mills brands and to the factory-built housing and recreational vehicle markets
through Carriage Carpets. The Company's
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<PAGE> 17
Floorcovering Base Materials segment supplies extruded plied and heat-set
filament and spun yarn, through Candlewick Yarns, to the Company's Carpet
Manufacturing segment and, to a lesser extent, to external customers in
specialty carpet yarn markets.
Sales to external customers in the Company's Carpet Manufacturing segment were
$125,011 in the quarter ended September 30, 2000 and $356,485 for the first nine
months of 2000. Sales increased 10.5% in the third quarter of 2000 and 4.9% for
the first nine months of 2000, over the comparable 1999 periods. The improvement
reflects a significant increase in dollar volume of sales to high-end commercial
and residential markets, including $12.0 million related to the acquisition of
Fabrica, and to home center/mass merchant markets which more than offset a
decline in sales to the factory-built housing market.
Results of operations in the Carpet Manufacturing segment was a $3,201 loss in
the third quarter of 2000 and a $5,805 profit for the first nine months of 2000.
Excluding unusual cost associated with inventories and manufacturing and system
consolidations, the Carpet Manufacturing segment's operating profit was $2,388
in the third quarter of 2000 and $11,394 for the first nine months of 2000.
These results compare with an operating profit of $7,764 in the third quarter of
1999 and $23,694 for the 1999 year-to-date period. The decrease in profitability
for the 2000 periods was principally the result of high manufacturing and
distribution cost in the Company's rapidly growing tufted home center and
distributor businesses, lower sales volume to the factory-built housing market
and higher raw material costs.
Sales to external customers in the Company's Floorcovering Base Materials
segment were $17,543 in the quarter ended September 30, 2000 and $58,301 for the
first nine months of 2000, a decrease of approximately 40% compared with the
corresponding 1999 periods. The sales decline was primarily the result of
reduced external sales volume subsequent to the sale of the Company's Ulmer, SC
yarn plant in July 1999, greater utilization of yarn capacity by the Company's
carpet operations and the shift of a number of the Company's external yarn
programs from a full package basis to a conversion basis, in which the customer
supplies fiber for yarn processing.
Operating losses in the Floorcovering Base Materials segment were $163 in the
third quarter of 2000 and $1,043 for the first nine months of 2000. In the third
quarter of 2000, certain of the Company's base materials facilities were
operated at reduced levels to reduce inventory, which resulted in fixed costs
absorption losses. Excluding such losses, operations resulted in a profit of
$651 for the quarter and a loss of $229 for the nine months. These results
compare with operating profits of $619 and $3,626 respectively, for the third
quarter and first nine months of 1999. The profitability decrease for the
year-to-date 2000 period was principally a result of cost associated with
realignment and expansion of the Company's yarn manufacturing facilities and
expansion of the Company's extrusion capacity. The majority of the yarn
manufacturing and extrusion projects were completed by the end of the second
quarter of 2000. Higher raw material prices also negatively impacted results
during the first nine months of 2000 compared with 1999.
A number of the Company's suppliers of petroleum based raw materials increased
prices in 2000. The Company's ability to recover such cost increases has varied
according to the market served. The extent to which further cost increases can
be recovered is uncertain. However, selected raw material price decreases have
occurred since the end of the third quarter.
Selling and administrative expenses were $28,751, or 20.2% of sales, in the
third quarter of 2000 and $75,319, or 18.2% of sales, in the first nine months
of 2000. This compared with $22,267, or 15.6% of sales, in the third quarter of
1999 and $64,626, or 14.8% of sales, for the first nine months in 1999. The
increase resulted from growth in the Company's high-end residential, commercial
and home center businesses and start-up expenses associated with expanded
distribution channels. Selling and administrative expenses increased as a
percent of sales principally due to the decline in the sales to yarn and factory
built housing markets. Sales to the yarn and factory built housing markets have
relatively low selling and administrative expenses compared with sales to the
Company's other markets, which grew during the periods.
Interest expense increased in 2000 over the comparable 1999 periods due to
increased debt and higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2000, the Company's long-term debt increased
$51,196 excluding debt assumed in the Fabrica acquisition. Funds of $41,142 were
utilized for property, plant and equipment expenditures, $20,706 for the
acquisition of Fabrica and the investment in Chroma and, $16,237 through
operating activities. Funds of $17,962 were generated from the sale of property,
plant and
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<PAGE> 18
equipment. Additionally, funds of $8,927, as reflected as a reduction of cash on
the Company's balance sheet, were utilized to reduce debt. The majority of the
capital expenditures were focused on the Company's yarn realignment and
expansion, extrusion expansion and a new distribution center. Inventories were
increased to maintain customer service levels while the yarn realignment and
distribution center were being completed and to support forecasted growth in the
Company's Home Center Business. During the third quarter of 2000, inventories
were reduced by $3.0 million and the Company anticipates an additional $8.0
million reduction by year-end.
At September 30, 2000, the Company's debt consisted of $37.2 million of
convertible subordinated debentures, $45.2 million of subordinated notes, $30.2
million of senior term loans and $97.4 million of credit line indebtedness,
principally under the Company's senior credit agreement.
The Company's senior credit arrangement was amended on November 2, 2000 to
secure borrowing under the arrangement and adjust covenants to reflect expected
future results and the Company's current financial structure. The credit
agreement provides revolving credit of up to $100.0 million through March 2003
and $5.0 million of short-term credit. The $30.2 million term loan outstanding
under the agreement is payable in quarterly installments of approximately $1.6
million through December 31, 2002 with a final installment of $15.4 million in
March, 2003. Interest rates under the credit agreement effectively allow for
borrowing at rates equal to LIBOR plus 1.75% to 2.75%. Commitment fees, ranging
from .25% to .50% per annum on the revolving credit line are payable on the
average daily unused balance of the revolving credit facility.
The Company's long-term debt and credit agreements contain financial covenants
relating to minimum net worth, the ratio of debt to capitalization and debt to
earnings before interest, taxes depreciation and amortization (EBITDA), payment
of dividends and certain other financial ratios. Payment of dividends is limited
to 50% of aggregate consolidated net income subsequent to December 25, 1999 and
financial covenants currently do not permit the payment of dividends.
In June, 2000, the Company replaced its existing $45.0 million accounts
receivable securitization program with a new one-year program which provides for
up to $60.0 million of funding. At September 30, 2000, amounts funded under the
agreement were $44.3 million.
On August 15, 2000, the Company sold machinery and equipment used in its
operations for approximately $15.0 million. The assets were leased back from the
purchaser under an operating lease for a period of four years at an annual lease
cost of approximately $2.9 million.
Availability under the Company's existing debt arrangements, together with the
Company's operating cash flows, are expected to be adequate to finance the
Company's anticipated liquidity requirements. However, significant additional
cash expenditures beyond normal requirements could require supplementation or
replacement of the Company's credit facilities. There can be no assurance that
any such additional credit will be available on terms as favorable as the
Company's current credit facilities.
YEAR 2000 SYSTEMS ISSUES
The Company has not experienced any significant system related year 2000
conversion issues.
NEW ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS No.133), which establishes
accounting and reporting standards for derivative instruments and hedging
activities. In June 1999, FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133", which amends the effective date of SFAS No. 133 to
all fiscal quarters of fiscal years beginning after June 15, 2000. Adoption of
the statement is not expected to have a significant impact on the Company's
results of operations or financial position.
In July, 2000 the Emerging Issue Task Force ( EITF) reached a consensus that all
shipping and handling billings to a customer in a sale transaction represent
fees earned for goods provided and, accordingly, amounts billed related to
shipping and handling should be classified as revenue. In September, 2000 the
EITF reached a consensus that a company
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<PAGE> 19
cannot net the shipping and handling costs against the shipping and handling
revenues in the financial statements and that a company may adopt a policy of
including shipping and handling costs in cost of goods sold. If shipping and
handling costs are significant and are not included in cost of goods sold, a
company should disclose both the amount of such costs and which line item on the
income statement includes that amount. Implementation date is the fourth quarter
of a registrant's fiscal year beginning after December 15, 1999 and requires
restatement for all periods presented. The Company is assessing it's
classification alternatives for adoption in the fourth quarter, 2000. Adoption
of EITF 00-10 is not expected to have a significant impact on the Company's
results of operations and financial condition.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q may contain certain statements that may be
considered forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as such are amended. These forward-looking statements are identified by their
use of terms or phrases such as "expects," "estimates," "projects," "believes,"
"anticipates," "intends," and similar terms and phrases. Such terms or phrases
relate to, among other matters, the Company's future financial performance,
business prospects, growth, strategies, or liquidity. Forward-looking statements
involve a number of risks and uncertainties. The following important factors may
affect the future results of The Dixie Group, Inc. and could cause those results
to differ materially from its historical results or those expressed in the
forward-looking statements. These factors include, among others, market risks
relating to interest rates, raw material prices, the loss of a significant
customer or group of customers, materially adverse changes in economic
conditions generally in carpet, rug and floorcovering markets served by the
Company and other risks detailed from time to time in the Company's filings with
the Securities and Exchange Commission.
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is party to an interest rate swap agreement as a hedge to market
risk exposure for potential fluctuations in its variable rate long-term debt
instruments. Any interest rate differential is reflected as an adjustment to
interest expense over the life of the swap agreement. The Company does not use
derivative financial instruments for trading purposes.
Based on the Company's $70.0 million interest rate swap agreement, the Company
pays a fixed rate and receives a variable rate. A 10% fluctuation in the
variable rate would result in an annual economic impact to the Company of
approximately $300.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
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Item 6
(a) Exhibits
(i) Exhibits Incorporated by Reference
None.
(ii) Exhibits Filed with this Report
(4.1) Second Amendment, dated October 5, 2000 to Credit
Agreement dated March 31, 1998.
(4.2) Third Amendment, dated November 2, 2000 to Credit
Agreement dated March 31, 1998.
(4.3) Pledge Agreement dated November 2, 2000 between the
Company and SunTrust Bank, as collateral agent.
(4.4) Security Agreement dated November 2, 2000 between
the Company and SunTrust Bank, as collateral Agent.
(27) Financial Data Schedule (for SEC Use only)
(b) Reports on Form 8-K
(1) A Current Report on Form 8-K dated July 1, 2000 was filed to report the
acquisition of 90% of Fabrica International and a one-third equity interest in
Chroma Systems Partners.
(2) An Amended Current Report on Form 8-K dated July 1, 2000 was filed to
include the financial statements of Fabrica International and pro forma
financial information as required by article 3 of Regulation S-X and Article 11
of Regulation S-X, respectively.
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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 14, 2000
-----------------
(Date)
/s/ GARY A. HARMON
-----------------------------------
Gary A. Harmon
Vice President and
Chief Financial Officer
/s/ D. EUGENE LASATER
-----------------------------------
D. Eugene Lasater
Controller
21
