UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549
 
Form 10-Q
 
(Mark One)
R     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2015
OR

o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________

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 incorporation or organization)
 
 
 
(I.R.S. Employer Identification No.)
104 Nowlin Lane, Suite 101, Chattanooga, TN
 
37421
 
(423) 510-7000
(Address of principal executive offices)
 
(zip code)
 
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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.   R  Yes   o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  R  Yes   o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  
o
Large accelerated filer
 
R
 Accelerated filer
o
 Non-accelerated filer (Do not check if a smaller reporting company)
 
o
 Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) o Yes R No

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 23, 2015
Common Stock, $3 Par Value
 
15,145,474 shares
Class B Common Stock, $3 Par Value
 
861,493 shares
Class C Common Stock, $3 Par Value
 
0 shares


Table of Contents      1



THE DIXIE GROUP, INC.

Table of Contents
PART I.  FINANCIAL INFORMATION
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 
 
 
 




Table of Contents      2



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(amounts in thousands, except share data)
 
September 26, 2015
 
December 27, 2014
ASSETS
(Unaudited)
 
 

CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
179

 
$
394

Receivables, net
53,808

 
50,524

Inventories
114,856

 
104,207

Prepaid expenses
4,762

 
5,970

Deferred income taxes
13,719

 
12,722

 
 
 
 
TOTAL CURRENT ASSETS
187,324

 
173,817

 
 
 
 
PROPERTY, PLANT AND EQUIPMENT, NET
102,069

 
102,489

GOODWILL AND OTHER INTANGIBLES
6,537

 
6,767

OTHER ASSETS
16,457

 
17,807

TOTAL ASSETS
$
312,387

 
$
300,880

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
27,658

 
$
22,108

Accrued expenses
34,717

 
29,307

Current portion of long-term debt
9,337

 
9,078

TOTAL CURRENT LIABILITIES
71,712

 
60,493

 
 
 
 
LONG-TERM DEBT
121,844

 
118,210

DEFERRED INCOME TAXES
8,166

 
9,376

OTHER LONG-TERM LIABILITIES
19,933

 
19,824

TOTAL LIABILITIES
221,655

 
207,903

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
Common Stock ($3 par value per share):  Authorized 80,000,000 shares, issued and outstanding - 15,145,474 shares for 2015 and 15,007,423 shares for 2014
45,436

 
45,022

Class B Common Stock ($3 par value per share): Authorized 16,000,000 shares, issued and outstanding - 861,493 shares for 2015 and 764,191 shares for 2014
2,584

 
2,293

Additional paid-in capital
155,377

 
155,127

Accumulated deficit
(109,850
)
 
(107,952
)
Accumulated other comprehensive income (loss)
(2,815
)
 
(1,513
)
TOTAL STOCKHOLDERS' EQUITY
90,732

 
92,977

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
312,387

 
$
300,880


See accompanying notes to the consolidated condensed financial statements.




THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(amounts in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
NET SALES
$
108,908

 
$
109,006

 
$
314,721

 
$
302,014

Cost of sales
81,643

 
82,407

 
234,811

 
230,643

GROSS PROFIT
27,265

 
26,599

 
79,910

 
71,371

 
 
 
 
 
 
 
 
Selling and administrative expenses
25,267

 
23,801

 
76,215

 
68,179

Other operating expense, net
131

 
230

 
684

 
601

Facility consolidation expenses
614

 
1,632

 
2,264

 
2,654

Impairment of assets
—

 
104

 
—

 
759

OPERATING INCOME (LOSS)
1,253

 
832

 
747

 
(822
)
 
 
 
 
 
 
 
 
Interest expense
1,203

 
991

 
3,603

 
3,161

Other (income) expense, net
4

 
(23
)
 
45

 
(60
)
Gain on purchase of business
—

 
(173
)
 
—

 
(11,110
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES
46

 
37

 
(2,901
)
 
7,187

Income tax provision (benefit)
(38
)
 
45

 
(1,121
)
 
2,884

INCOME (LOSS) FROM CONTINUING OPERATIONS
84

 
(8
)
 
(1,780
)
 
4,303

Loss from discontinued operations, net of tax
(18
)
 
(177
)
 
(118
)
 
(505
)
NET INCOME (LOSS)
$
66

 
$
(185
)
 
$
(1,898
)
 
$
3,798

 
 
 
 
 
 
 
 
BASIC EARNINGS (LOSS) PER SHARE:
 
 
 
 
 
 
 
Continuing operations
$
0.01

 
$
(0.00
)
 
$
(0.11
)
 
$
0.29

Discontinued operations
(0.00
)
 
(0.01
)
 
(0.01
)
 
(0.04
)
Net income (loss)
$
0.01

 
$
(0.01
)
 
$
(0.12
)
 
$
0.25

 
 
 
 
 
 
 
 
BASIC SHARES OUTSTANDING
15,573

 
15,394

 
15,518

 
14,040

 
 
 
 
 
 
 
 
DILUTED EARNINGS (LOSS) PER SHARE:
 
 
 
 
 
 
 
Continuing operations
$
0.01

 
$
(0.00
)
 
$
(0.11
)
 
$
0.29

Discontinued operations
(0.00
)
 
(0.01
)
 
(0.01
)
 
(0.04
)
Net income (loss)
$
0.01

 
$
(0.01
)
 
$
(0.12
)
 
$
0.25

 
 
 
 
 
 
 
 
DILUTED SHARES OUTSTANDING
15,666

 
15,394

 
15,518

 
14,216

 
 
 
 
 
 
 
 
DIVIDENDS PER SHARE:
 
 
 
 
 
 
 
Common Stock
$
—

 
$
—

 
$
—

 
$
—

Class B Common Stock
—

 
—

 
—

 
—


See accompanying notes to the consolidated condensed financial statements.  

Table of Contents      4     



THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(amounts in thousands)

 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
NET INCOME (LOSS)
$
66

 
$
(185
)
 
$
(1,898
)
 
$
3,798

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate swaps
(1,923
)
 
(24
)
 
(2,466
)
 
(2,003
)
Income taxes
(731
)
 
(9
)
 
(937
)
 
(761
)
Unrealized gain (loss) on interest rate swaps, net
(1,192
)
 
(15
)
 
(1,529
)
 
(1,242
)
 
 
 
 
 
 
 
 
Reclassification of loss into earnings from interest rate swaps (1)
187

 
86

 
453

 
259

Income taxes
71

 
32

 
172

 
99

Reclassification of loss into earnings from interest rate swaps, net
116

 
54

 
281

 
160

 
 
 
 
 
 
 
 
Reclassification of net actuarial gain into earnings from postretirement benefit plans (2)
(9
)
 
(10
)
 
(28
)
 
(30
)
Income taxes
(4
)
 
(4
)
 
(12
)
 
(12
)
Reclassification of net actuarial gain into earnings from postretirement benefit plans, net
(5
)
 
(6
)
 
(16
)
 
(18
)
 
 
 
 
 
 
 
 
Reclassification of prior service credits into earnings from postretirement benefit plans (2)
(22
)
 
(22
)
 
(66
)
 
(66
)
Income taxes
(9
)
 
(8
)
 
(28
)
 
(25
)
Reclassification of prior service credits into earnings from postretirement benefit plans, net
(13
)
 
(14
)
 
(38
)
 
(41
)
 

 

 

 
 
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
(1,094
)
 
19

 
(1,302
)
 
(1,141
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
$
(1,028
)
 
$
(166
)
 
$
(3,200
)
 
$
2,657


(1)
Amounts for cash flow hedges reclassified from accumulated other comprehensive income (loss) to net income (loss) were included in interest expense in the Company's Consolidated Condensed Statement of Operations.
(2)
Amounts for postretirement plans reclassified from accumulated other comprehensive income (loss) to net income (loss) were included in selling and administrative expenses in the Company's Consolidated Condensed Statement of Operations.


See accompanying notes to the consolidated condensed financial statements.

Table of Contents      5     



THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Income (loss) from continuing operations
$
(1,780
)
 
$
4,303

Loss from discontinued operations
(118
)
 
(505
)
Net income (loss)
(1,898
)
 
3,798

 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of acquisitions:
 
 
 
Depreciation and amortization - continuing operations
10,954

 
9,533

Depreciation and amortization - discontinued operations
—

 
48

Provision (benefit) for deferred income taxes
(1,403
)
 
2,681

Net gain on property, plant and equipment disposals
(187
)
 
(18
)
Impairment of assets
—

 
759

Gain on purchase of business
—

 
(11,110
)
Stock-based compensation expense
1,071

 
900

Excess tax benefits from stock-based compensation
(287
)
 
(367
)
Bad debt expense
110

 
325

Changes in operating assets and liabilities:
 
 
 
Receivables
(3,301
)
 
(7,686
)
Inventories
(10,649
)
 
(2,974
)
Other current assets
(649
)
 
1,627

Accounts payable and accrued expenses
9,876

 
1,902

Other operating assets and liabilities
(863
)
 
(495
)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
2,774

 
(1,077
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net proceeds from sales of property, plant and equipment
66

 
369

Deposits on property, plant and equipment
—

 
(119
)
Purchase of property, plant and equipment
(5,266
)
 
(6,753
)
Proceeds from sale of equity investment
—

 
870

Net cash paid in business acquisitions
—

 
(17,657
)
NET CASH USED IN INVESTING ACTIVITIES
(5,200
)
 
(23,290
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net borrowings on revolving credit facility
1,182

 
4,331

Borrowings on notes payable - buildings
6,290

 
—

Payments on notes payable - buildings
(522
)
 
—

Payments on notes payable related to acquisitions
(1,572
)
 
(1,513
)
Borrowings on notes payable - equipment and other
998

 
2,195

Payments on notes payable - equipment and other
(3,370
)
 
(2,072
)
Payments on capital leases
(2,050
)
 
(966
)
Change in outstanding checks in excess of cash
1,278

 
(1,848
)
Proceeds from equity offering, net of issuance costs
—

 
24,559

Proceeds from exercise of stock options
274

 
145

Repurchases of Common Stock
(584
)
 
(518
)
Excess tax benefits from stock-based compensation
287

 
367

Payments for debt issuance costs
—

 
(84
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
2,211

 
24,596

 
 
 
 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(215
)
 
229

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
394

 
255

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
179

 
$
484

 
 
 
 
 
 
 
 

Table of Contents      6     



 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Interest paid
$
3,246

 
$
2,799

Income taxes paid, net of tax refunds
104

 
325

Equipment purchased under capital leases
87

 
8,709

Equipment purchased under notes payable
2,850

 
—

Deposits utilized on purchased equipment, net
1,857

 
—

Assets acquired in acquisitions, net of cash acquired
—

 
36,349

Liabilities assumed in acquisitions
—

 
(6,397
)
Accrued consideration for working capital adjustment in acquisitions
—

 
(298
)
Accrued consideration for holdbacks in acquisition
—

 
(887
)
Deposits on property, plant & equipment financed
—

 
3,977

Shortfall of tax benefits from stock-based compensation
(93
)
 
(607
)
Note receivable on sale of equipment
93

 
—


See accompanying notes to the consolidated condensed financial statements.

Table of Contents      7     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("US GAAP") for interim financial statements which do not include all the information and footnotes required by such accounting principles for annual financial statements.  In the opinion of management, all adjustments (generally consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying financial statements.  The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 27, 2014.  Operating results for the three and nine month periods ended September 26, 2015 are not necessarily indicative of the results that may be expected for the entire 2015 year.

The Company has one reportable segment, carpet and rug manufacturing.

NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS

In April 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" . The ASU was issued to change the requirements for reporting discontinued operations and to enhance the disclosures in this area. The ASU requires a disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations only if the disposal represents a strategic shift and will have a major effect on an entity's operations and financial results. The ASU is effective prospectively for interim and annual reporting periods beginning after December 15, 2014. The adoption of this ASU did not have a material effect on the Company's Consolidated Condensed Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, " Revenue from Contracts with Customers (Topic 606) ". The ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date." The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
Management has not yet selected a transition method and is currently evaluating the impact of the pending adoption of this ASU on the Company’s Consolidated Condensed Financial Statements.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The Company does not believe the adoption of this ASU will have a significant impact on the Consolidated Condensed Financial Statements.

In April 2015, the FASB issued ASU No. 2015-03, " Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. " The amendments in ASU 2015-03 require entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in ASU 2015-03 (see paragraph 835-30-45-1A) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the FASB issued ASU No. 2015-15, "Interest—Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting)." The SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not believe the adoption of these ASUs will have a significant impact on the Consolidated Condensed Financial Statements.

Table of Contents      8     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)



In April 2015, the FASB issued ASU No. 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software license. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer's accounting for service contracts. The Company does not believe the adoption of this ASU will have a significant impact on the Consolidated Condensed Financial Statements.

In July 2015, the FASB issued ASU No. 2015-11, " Inventory (Topic 330): Simplifying the Measurement of Inventory ." Topic 330, Inventory , currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company measures substantially all inventories using the LIFO method; therefore, the Company does not believe the adoption of this ASU will have a significant impact on the Consolidated Condensed Financial Statements.

In September 2015, the FASB issued ASU No. 2015-16, " Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. " The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than retrospectively adjusting amounts previously reported. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. Effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not believe the adoption of this ASU will have a significant impact on the Consolidated Condensed Financial Statements.

NOTE 3 - RECEIVABLES, NET

Receivables are summarized as follows:
 
September 26,
2015
 
December 27,
2014
Customers, trade
$
49,279

 
$
46,422

Other receivables
4,984

 
4,552

Gross receivables
54,263

 
50,974

Less allowance for doubtful accounts
(455
)
 
(450
)
Receivables, net
$
53,808

 
$
50,524


Bad debt expense was $51 and $110 for the three and nine months ended September 26, 2015, respectively, and $179 and $325 for the three and nine months ended September 27, 2014, respectively.


Table of Contents      9     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)


NOTE 4 - INVENTORIES

Inventories are summarized as follows:
 
September 26,
2015
 
December 27,
2014
Raw materials
$
40,983

 
$
40,649

Work-in-process
23,346

 
19,976

Finished goods
61,488

 
57,913

Supplies and other
236

 
126

LIFO reserve
(11,197
)
 
(14,457
)
Inventories
$
114,856

 
$
104,207


NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consists of the following:
 
September 26,
2015
 
December 27,
2014
Land and improvements
$
7,385

 
$
7,327

Buildings and improvements
62,504

 
61,557

Machinery and equipment
175,328

 
171,586

 
245,217

 
240,470

Accumulated depreciation
(143,148
)
 
(137,981
)
Property, plant and equipment, net
$
102,069

 
$
102,489


Depreciation of property, plant and equipment, including amounts for capital leases, totaled $3,503 and $10,508 , respectively, in the three and nine months ended September 26, 2015 and $2,921 and $8,604 , respectively, in the three and nine months ended September 27, 2014.

NOTE 6 - ACQUISITIONS

On March 19, 2014, the Company acquired all outstanding stock of Atlas Carpet Mills, Inc. ("Atlas") for total purchase price consideration of $18,759 . The fair value of the net assets acquired exceeded the purchase price resulting in a bargain purchase of $10,937 for the nine months ended September 27, 2014. Net sales related to Atlas included in the Company’s Consolidated Condensed Statement of Operations for the three months ended September 26, 2015 and September 27, 2014 were $12,415 and $12,079 , respectively, and were $32,395 and $25,927 for the nine months ended September 26, 2015 and September 27, 2014, respectively.

On September 22, 2014, the Company acquired certain assets and assumed certain liabilities of Burtco Enterprises, Inc. ("Burtco") for total purchase price consideration of $2,549 . The fair value of the net assets acquired exceeded the purchase price resulting in a bargain purchase of $173 for the three and nine months ended September 27, 2014.

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying amount of goodwill is $3,389 as of September 26, 2015 and December 27, 2014. The Company has a net carrying amount of $3,148 and $3,378 as of September 26, 2015 and December 27, 2014 for certain intangible assets subject to amortization. Amortization expense was $76 and $229 for the three and nine months ended September 26, 2015, respectively, and $105 and $255 for the three and nine months ended September 27, 2014, respectively.


Table of Contents      10     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)


NOTE 8 - ACCRUED EXPENSES

Accrued expenses are summarized as follows:
 
September 26,
2015
 
December 27,
2014
Compensation and benefits
$
9,407

 
$
8,894

Provision for customer rebates, claims and allowances
9,196

 
7,960

Advanced customer deposits
5,362

 
3,501

Outstanding checks in excess of cash
2,468

 
1,190

Other
8,284

 
7,762

Accrued expenses
$
34,717

 
$
29,307


NOTE 9 - PRODUCT WARRANTY RESERVES

The Company generally provides product warranties related to manufacturing defects and specific performance standards for its products.  Product warranty reserves are included in accrued expenses in the Company's Consolidated Condensed Financial Statements. The following is a summary of the Company's product warranty activity.
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Product warranty reserve at beginning of period
$
2,115

 
$
2,210

 
$
2,214

 
$
1,850

Warranty reserve assumed in business combination
—

 
—

 
—

 
209

Warranty liabilities accrued
1,430

 
1,180

 
4,707

 
3,372

Warranty liabilities settled
(1,880
)
 
(1,266
)
 
(6,682
)
 
(3,715
)
Changes for pre-existing warranty liabilities
616

 
204

 
2,042

 
612

Product warranty reserve at end of period
$
2,281

 
$
2,328

 
$
2,281

 
$
2,328


NOTE 10 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS

Long-term debt consists of the following:
 
September 26,
2015
 
December 27,
2014
Revolving credit facility - Tranche A
$
84,080

 
$
82,897

Notes payable - buildings
14,063

 
8,295

Acquisition note payable - Obligation to Development Authority of Gordon County
2,595

 
3,413

Acquisition note payable - Robertex
2,308

 
3,062

Notes payable - equipment and other
15,101

 
14,623

Capital lease obligations
13,034

 
14,998

Total long-term debt
131,181

 
127,288

Less: current portion of long-term debt
(9,337
)
 
(9,078
)
Long-term debt
$
121,844

 
$
118,210



Revolving Credit Facility

The revolving portion of the credit facility ("Tranche A Advance") provides for a maximum of $150,000 of revolving credit, subject to borrowing base availability. The borrowing base is currently equal to specified percentages of the Company's eligible accounts receivable, inventories, fixed assets and real property less reserves established, from time to time, by the administrative agent under the facility. The term of the revolving credit facility matures on March 14, 2019. The revolving credit facility is secured by a first priority lien on substantially all of the Company's assets.

At the Company's election, Tranche A Advances of the revolving credit facility bear interest at annual rates equal to either (a) LIBOR for 1, 2 or 3 month periods, as selected by the Company, plus an applicable margin of either 1.50% , 1.75% or 2.00% , or

Table of Contents      11     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)


(b) the higher of the prime rate, the Federal Funds rate plus 0.5% , or a daily LIBOR rate plus 1.00% , plus an applicable margin of either 0.50% , 0.75% or 1.00% . The applicable margin is determined based on availability under the revolving credit facility with margins increasing as availability decreases. The Company pays an unused line fee on the average amount by which the aggregate commitments exceed utilization of the senior credit facility equal to 0.375% per annum.

The revolving credit facility includes certain affirmative and negative covenants that impose restrictions on the Company's financial and business operations. The revolving credit facility requires the Company to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that borrowing availability is less than $16,500 . As of September 26, 2015, the unused borrowing availability under the revolving credit facility was $36,362 . As of September 26, 2015, the Company's fixed charge coverage ratio was less than 1.1 to 1.0, accordingly, the unused availability accessible by the Company is the amount above $16,500 .

Notes Payable - Buildings

On November 7, 2014, the Company entered into a ten-year $8,330 note payable to purchase a previously leased distribution center in Adairsville, Georgia. The note payable is scheduled to mature on November 7, 2024 and is secured by the distribution center. The note payable bears interest at a variable rate equal to one month LIBOR plus 2.0% and is payable in equal monthly installments of principal of $35 , plus interest calculated on the declining balance of the note, with a final payment of $4,165 due on maturity. In addition, the Company entered into an interest rate swap with an amortizing notional amount effective November 7, 2014 which effectively fixes the interest rate at 4.50% .

On January 23, 2015, the Company entered into a ten-year $6,290 note payable to finance an owned facility in Saraland, Alabama. The note payable is scheduled to mature on January 7, 2025 and is secured by the facility. The note payable bears interest at a variable rate equal to one month LIBOR plus 2.0% and is payable in equal monthly installments of principal of $26 , plus interest calculated on the declining balance of the note, with a final payment of $3,145 due on maturity. In addition, the Company entered into a forward interest rate swap with an amortizing notional amount effective January 7, 2017 which effectively fixes the interest rate at 4.30% .

Acquisition Note Payable - Obligation to Development Authority of Gordon County

On November 2, 2012, the Company signed a 6.00% seller-financed note of $5,500 with Lineage PCR, Inc. ( “ Lineage ” ) related to the acquisition of the continuous carpet dyeing facility in Calhoun, Georgia. Effective December 28, 2012, through a series of agreements between the Company, the Development Authority of Gordon County, Georgia (the “ Authority ” ) and Lineage, obligations with identical payment terms as the original note to Lineage became payment obligations to the Authority. These transactions were consummated in order to provide a tax abatement to the Company related to the real estate and equipment at this facility. The tax abatement plan provides for abatement for certain components of the real and personal property taxes for up to ten years. At any time, the Company has the option to pay off the obligation, plus a nominal amount. The debt to the Authority bears interest at 6.00% and is payable in equal monthly installments of principal and interest of $106 over 57 months.

Acquisition Note Payable - Robertex

On July 1, 2013, the Company signed a 4.50% seller-financed note of $4,000 , which was recorded at a fair value of $3,749 , with Robert P. Rothman related to the acquisition of Robertex Associates, LLC ("Robertex") in Calhoun, Georgia. The note is payable in five annual installments of principal of $800 plus interest. The note matures June 30, 2018.

Notes Payable - Equipment

The Company's equipment financing notes have terms ranging from three to seven years, bear interest ranging from 1.00% to 6.86% and are due in monthly or quarterly installments through their maturity dates. In connection with certain of the notes, the Company is required to maintain funds in a separate escrow account. At September 26, 2015 and December 27, 2014, the balances held were $0 and $574 , respectively, and are included in other current assets on the Company’s Consolidated Condensed Balance Sheets. The Company's equipment financing notes are secured by the specific equipment financed and do not contain any financial covenants.

Capital Lease Obligations

The Company's capital lease obligations have terms ranging from three to seven years, bear interest ranging from 2.90% to 7.37% and are due in monthly or quarterly installments through their maturity dates. The Company's capital lease obligations are secured by the specific equipment leased.





Table of Contents      12     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)


NOTE 11 - FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange value of an asset or a liability in an orderly transaction between market participants.  The fair value guidance outlines a valuation framework and establishes a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and disclosures.  The hierarchy consists of three levels as follows:

Level 1 - Quoted market prices in active markets for identical assets or liabilities as of the reported date;

Level 2 - Other than quoted market prices in active markets for identical assets or liabilities, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other than quoted prices for assets or liabilities and prices that are derived principally from or corroborated by market data by correlation or other means; and

Level 3 - Measurements using management's best estimate of fair value, where the determination of fair value requires significant management judgment or estimation.

The following table reflects the fair values of assets and liabilities measured and recognized at fair value on a recurring basis on the Company's Consolidated Condensed Balance Sheets as of September 26, 2015 and December 27, 2014:
 
September 26,
2015
 
December 27,
2014
 
Fair Value Hierarchy Level
Assets:
 
 
 
 
 
Rabbi Trust (1)
$
14,404

 
$
15,316

 
Level 2
Interest rate swaps (2)
—

 
34

 
Level 2
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Interest rate swaps (2)
$
5,072

 
$
3,040

 
Level 2
Deferred compensation plan (3)
13,412

 
14,331

 
Level 2
Contingent consideration (4)
1,093

 
1,855

 
Level 3

(1)
The Company maintains a Rabbi Trust that serves as an investment designed to offset its deferred compensation plan liability. The investment assets of the trust consist of life insurance policies for which the Company recognizes income or expense based upon changes in cash surrender value.
(2)
The fair value of the interest rate swaps was obtained from external sources. The interest rate swaps were valued using observable inputs (e.g., LIBOR yield curves, credit spreads). Valuations of interest rate swaps may fluctuate considerably from period-to-period due to volatility in underlying interest rates, which are driven by market conditions and the duration of the instrument. Credit adjustments could have a significant impact on the valuations due to changes in credit ratings of the Company or its counterparties.
(3)
Senior management and other highly compensated associates may defer a specified percentage of their compensation into a non-qualified deferred compensation plan. Changes in the value of the deferred compensation under this plan are recognized each period based on the fair value of the underlying measurement funds.
(4)
As a result of the Colormaster and Crown Rug acquisitions in 2012 and the Robertex acquisition in 2013, the Company recorded contingent consideration liabilities at fair value. These fair value measurements were based on calculations that utilize significant inputs not observable in the market including forecasted revenues, gross margins and discount rates and thus represent Level 3 measurements. These fair value measurements are directly impacted by the Company's estimates. Accordingly, if the estimates are higher or lower than the estimates within the fair value measurement, the Company would record additional charges or benefits, respectively, as appropriate.


Table of Contents      13     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)


Changes in the fair value measurements using significant unobservable inputs (Level 3) during the nine months ending September 26, 2015 and September 27, 2014 were as follows:
 
September 26,
2015
 
September 27,
2014
Beginning balance
$
1,855

 
$
2,751

Fair value adjustments
(387
)
 
(264
)
Settlements
(375
)
 
(214
)
Ending balance
$
1,093

 
$
2,273



There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during the three and nine months ending September 26, 2015 or September 27, 2014. If any, the Company recognizes the transfers in or transfers out at the end of the reporting period.

The carrying amounts and estimated fair values of the Company's financial instruments are summarized as follows:
 
September 26,
2015
 
December 27,
2014
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amount
 
Value
 
Amount
 
Value
Financial Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
179

 
$
179

 
$
394

 
$
394

Notes receivable, including current portion
282

 
282

 
282

 
282

Interest rate swaps
—

 
—

 
34

 
34

Financial Liabilities:
 
 
 
 
 
 
 
Long-term debt and capital leases, including current portion
131,181

 
128,304

 
127,288

 
119,776

Interest rate swaps
5,072

 
5,072

 
3,040

 
3,040


The fair values of the Company's long-term debt and capital leases were estimated using market rates the Company believes would be available for similar types of financial instruments and represent level 2 measurements.  The fair values of cash and cash equivalents and notes receivable approximate their carrying amounts due to the short-term nature of the financial instruments.

NOTE 12 - DERIVATIVES

The Company's earnings, cash flows and financial position are exposed to market risks relating to interest rates.  It is the Company's policy to minimize its exposure to adverse changes in interest rates and manage interest rate risks inherent in funding the Company with debt.  The Company addresses this risk by maintaining a mix of fixed and floating rate debt and entering into interest rate swaps for a portion of its variable rate debt to minimize interest rate volatility.

The following is a summary of the Company's interest rate swaps as of September 26, 2015:
Type
Notional Amount
 
Effective Date
Fixed Rate
Variable Rate
Interest rate swap
$
10,000

 
October 3, 2011 through September 1, 2016
1.330%
1 Month LIBOR
Interest rate swap
$
10,000

 
March 1, 2013 through September 1, 2016
1.620%
1 Month LIBOR
Interest rate swap
$
5,000

 
June 1, 2013 through September 1, 2016
1.700%
1 Month LIBOR
Interest rate swap
$
25,000

 
September 1, 2016 through September 1, 2021
3.105%
1 Month LIBOR
Interest rate swap
$
25,000

 
September 1, 2015 through September 1, 2021
3.304%
1 Month LIBOR
Interest rate swap
$
7,983

(1)
November 7, 2014 through November 7, 2024
4.500%
1 Month LIBOR
Interest rate swap
$
5,661

(2)
January 7, 2017 through January 7, 2025
4.300%
1 Month LIBOR

(1) Interest rate swap notional amount amortizes by $35 monthly to maturity.
(2) Interest rate swap notional amount amortizes by $26 monthly to maturity.

Table of Contents      14     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)



The following table summarizes the fair values of derivative instruments included in the Company's Consolidated Condensed Balance Sheets:
 
Location on Consolidated Balance Sheets
Fair Value
 
September 26,
2015
 
December 27,
2014
Asset Derivatives:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Interest rate swaps
Other Assets
$
—

 
$
34

Total Asset Derivatives
 
$
—

 
$
34

 
 
 
 
 
Liability Derivatives:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Interest rate swaps, current portion
Accrued Expenses
$
1,200

 
$
650

Interest rate swaps, long-term portion
Other Long-Term Liabilities
3,872

 
2,390

Total Liability Derivatives
 
$
5,072

 
$
3,040



The following tables summarize the pre-tax impact of derivative instruments on the Company's financial statements:
 
Amount of Gain or (Loss) Recognized in AOCIL on the effective portion of the Derivative
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Cash flow hedges - interest rate swaps
$
(1,923
)
 
$
(24
)
 
$
(2,466
)
 
$
(2,003
)
 
 
 
 
 
 
 
 
 
Amount of Gain or (Loss) Reclassified from AOCIL on the effective portion into Income (1)(2)(3)
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Cash flow hedges - interest rate swaps
$
(187
)
 
$
(86
)
 
$
(453
)
 
$
(259
)

(1)
The amount of gain (loss) reclassified from AOCIL is included in interest expense on the Company's Consolidated Condensed Statements of Operations.
(2)
The amount of loss expected to be reclassified from AOCIL into earnings during the next 12 months subsequent to September 26, 2015 is $1,200 .
(3)
The amount of gain (loss) recognized in income on any ineffective portion of interest rate swaps is included in other (income) expense, net on the Company's Consolidated Condensed Statements of Operations. There was no ineffective portion for the periods presented.

NOTE 13 - EMPLOYEE BENEFIT PLANS

Defined Contribution Plans

The Company sponsors a 401(k) defined contribution plan that covers a significant portion, or approximately 85% of the Company's associates. This plan includes a mandatory Company match on the first 1% of participants' contributions. The Company matches the next 2% of participants' contributions if the Company meets prescribed earnings levels. The plan also provides for additional Company contributions above the 3% level if the Company attains certain additional performance targets. Matching contribution expense for this 401(k) plan was $223 and $(95) for the three months ended September 26, 2015 and September 27, 2014, respectively, and $683 and $272 for the nine months ended September 26, 2015 and September 27, 2014, respectively. The reduction in the matching contribution expense for the three months ended September 27, 2014 was a result of a reduction in the Company match due to lower earnings levels.

Table of Contents      15     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)



Additionally, the Company sponsors a 401(k) defined contribution plan that covers those associates at one facility who are under a collective-bargaining agreement, or approximately 15% of the Company's associates. Under this plan, the Company generally matches participants' contributions, on a sliding scale, up to a maximum of 2.75% of the participant's earnings. Matching contribution expense for the collective-bargaining 401(k) plan was $17 and $20 for the three months ended September 26, 2015 and September 27, 2014, respectively, and $62 and $65 for the nine months ended September 26, 2015 and September 27, 2014, respectively.

Non-Qualified Retirement Savings Plan

The Company sponsors a non-qualified retirement savings plan that allows eligible associates to defer a specified percentage of their compensation.  The obligations owed to participants under this plan were $13,412 at September 26, 2015 and $14,331 at December 27, 2014 and are included in other long-term liabilities in the Company's Consolidated Condensed Balance Sheets. The obligations are unsecured general obligations of the Company and the participants have no right, interest or claim in the assets of the Company, except as unsecured general creditors.  The Company utilizes a Rabbi Trust to hold, invest and reinvest deferrals and contributions under the plan.  Amounts are invested in Company-owned life insurance in the Rabbi Trust and the cash surrender value of the policies was $14,404 at September 26, 2015 and $15,316 at December 27, 2014 and is included in other assets in the Company's Consolidated Condensed Balance Sheets.

Multi-Employer Pension Plan

The Company contributes to a multi-employer pension plan under the terms of a collective-bargaining agreement that covers its union-represented employees. Expenses related to the multi-employer pension plan were $66 and $69 for the three months ended September 26, 2015 and September 27, 2014, respectively, and $197 and $210 for the nine months ended September 26, 2015 and September 27, 2014, respectively.

Postretirement Plans

The Company inherited a legacy postretirement benefit plan that provides life insurance to a limited number of associates as a result of a prior acquisition.  The Company also sponsors a postretirement benefit plan that provides medical insurance for a limited number of associates who retired prior to January 1, 2003 and life insurance to a limited number of associates upon retirement. The net periodic benefit cost (credit) for all postretirement plans is insignificant.

NOTE 14 - INCOME TAXES

The Company's effective income tax rate for the period ending September 26, 2015 is based upon the projected estimated annual income tax rate. The effective income tax rate for the nine months ending September 26, 2015 was 38.6% compared with an effective income tax rate of 40.1% for the nine months ending September 27, 2014. The nine months ending September 27, 2014 included the recognition of approximately $117 of tax expense related to certain market-based stock awards that were not earned.

The Company accounts for uncertainty in income tax positions according to FASB guidance relating to uncertain tax positions. Unrecognized tax benefits were $339 and $400 at September 26, 2015 and December 27, 2014, respectively.  Such benefits, if recognized, would affect the Company's effective tax rate. There were no significant interest or penalties accrued as of September 26, 2015 and December 27, 2014.

The Company and its subsidiaries are subject to United States federal income taxes, as well as income taxes in a number of state jurisdictions.  The tax years subsequent to 2010 remain open to examination for U.S. federal income taxes.  The majority of state jurisdictions remain open for tax years subsequent to 2010.  A few state jurisdictions remain open to examination for tax years subsequent to 2009.

NOTE 15 - EARNINGS (LOSS) PER SHARE

Earnings (Loss) Per Share

The Company's unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities and are included in the computation of earnings per share. The accounting guidance requires additional disclosure of EPS for common stock and unvested share-based payment awards, separately disclosing distributed and undistributed earnings.  Undistributed earnings represent earnings that were available for distribution but were not distributed.  Common stock and unvested share-based payment awards earn dividends equally.  All earnings were undistributed in all periods presented.

Table of Contents      16     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)



The following table sets forth the computation of basic and diluted earnings (loss) per share from continuing operations:
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
84

 
$
(8
)
 
$
(1,780
)
 
$
4,303

Less: Allocation of earnings to participating securities
(2
)
 
—

 
—

 
(197
)
Income (loss) from continuing operations available to common shareholders - basic
$
82

 
$
(8
)
 
$
(1,780
)
 
$
4,106

Basic weighted-average shares outstanding (1)
15,573

 
15,394

 
15,518

 
14,040

Basic earnings (loss) per share - continuing operations
$
0.01

 
$
(0.00
)
 
$
(0.11
)
 
$
0.29

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Income (loss) from continuing operations available to common shareholders - basic
$
82

 
$
(8
)
 
$
(1,780
)
 
$
4,106

Add: Undistributed earnings reallocated to unvested shareholders
—

 
—

 
—

 
3

Income (loss) from continuing operations available to common shareholders - basic
$
82

 
$
(8
)
 
$
(1,780
)
 
$
4,109

Basic weighted-average shares outstanding (1)
15,573

 
15,394

 
15,518

 
14,040

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options (2)
37

 
—

 
—

 
111

Directors' stock performance units (2)
56

 
—

 
—

 
65

Diluted weighted-average shares outstanding (1)(2)
15,666

 
15,394

 
15,518

 
14,216

Diluted earnings (loss) per share - continuing operations
$
0.01

 
$
(0.00
)
 
$
(0.11
)
 
$
0.29


(1)
Includes Common and Class B Common shares, in thousands.
(2)
Because their effects are anti-dilutive, shares issuable under stock option plans where the exercise price is greater than the average market price of the Company's Common Stock during the relevant period and directors' stock performance units have been excluded. Aggregate shares excluded for the three and nine months ended September 26, 2015 were 220 and 308 , respectively, and for the three and nine months ending September 27, 2014 were 552 and 432 , respectively.

NOTE 16 - STOCK COMPENSATION EXPENSE

The Company recognizes compensation expense relating to share-based payments based on the fair value of the equity instrument issued and records such expense in selling and administrative expenses in the Company's Consolidated Condensed Financial Statements.  The number of shares to be issued is determined by dividing the specified dollar value of the award by the market value per share on the grant date.  The Company's stock compensation expense was $346 and $1,071 for the three and nine months ended September 26, 2015, respectively, and $289 and $900 for the three and nine months ended September 27, 2014, respectively.

On August 1, 2015, the Company granted 10,000 shares of restricted stock to an employee. The grant-date fair value of the award was $100 , or $9.980 per share and will be recognized as stock compensation over a 3 year vesting period from the date the award was granted. The award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.

On April 29, 2015, the Company granted 100,000 shares of restricted stock to the Company's Chief Executive Officer. The grant-date fair value of the award was $982 , or $9.815 per share and will be recognized as stock compensation expense over a 4 year vesting period from the date the award was granted. Vesting of the award is subject to both a service condition and performance condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.


Table of Contents      17     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)


On March 12, 2015, the Company issued 114,625 shares of restricted stock to officers and other key employees. The grant-date fair value of the awards was $1,021 , or $8.910 per share, and is expected to be recognized as stock compensation expense over a weighted-average period of 7.4 years from the date the awards were granted. Each award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.

NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Components of accumulated other comprehensive income (loss), net of tax, are as follows:
 
Interest Rate Swaps
 
Post-Retirement Liabilities
 
Total
Balance at December 27, 2014
(1,841
)
 
328

 
(1,513
)
Unrealized gain (loss) on interest rate swaps, net of tax of $937
(1,529
)
 
—

 
(1,529
)
Reclassification of loss into earnings from interest rate swaps, net of tax of $172
281

 
—

 
281

Reclassification of net actuarial gain into earnings from postretirement benefit plans, net of tax of $12
—

 
(16
)
 
(16
)
Reclassification of prior service credits into earnings from postretirement benefit plans, net of tax of $28
—

 
(38
)
 
(38
)
Balance at September 26, 2015
$
(3,089
)
 
$
274

 
$
(2,815
)

NOTE 18 - COMMITMENTS AND CONTINGENCIES

Commitments

On April 1, 2015, the Company entered into a 15-year lease agreement to lease office space in Dalton, Georgia. The lease began on September 11, 2015. Base annual rent is initially set at approximately $28 per month. Total base rent payable over the lease period is approximately $5,028 .

Contingencies

The Company assesses its exposure related to legal matters, including those pertaining to product liability, safety and health matters and other items that arise in the regular course of its business. If the Company determines that it is probable a loss has been incurred, the amount of the loss, or an amount within the range of loss, that can be reasonably estimated will be recorded.

Environmental Remediation

The Company accrues for losses associated with environmental remediation obligations when such losses are probable and estimable. Remediation obligations are accrued based on the latest available information and are recorded at undiscounted amounts. The Company regularly monitors the progress of environmental remediation. If studies indicate that the cost of remediation has changed from the previous estimate, an adjustment to the liability would be recorded in the period in which such determination is made. (See Note 21)


Table of Contents      18     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)


NOTE 19 - OTHER (INCOME) EXPENSE

Other operating (income) expense, net is summarized as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
 
 
 
 
 
 
 
Other operating (income) expense, net:
 
 
 
 
 
 
 
Gain on property, plant and equipment disposals
$
(79
)
 
$
(15
)
 
$
(187
)
 
$
(18
)
Loss on currency exchanges
85

 
116

 
530

 
342

Amortization of intangibles
76

 
105

 
229

 
255

Retirement expenses
83

 
48

 
173

 
94

Miscellaneous (income) expense
(34
)
 
(24
)
 
(61
)
 
(72
)
Other operating (income) expense, net
$
131

 
$
230

 
$
684

 
$
601



Other expense, net is summarized as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Other (income) expense, net:
 
 
 
 
 
 
 
Earnings from equity investments
$
—

 
$
(24
)
 
$
14

 
$
(67
)
Miscellaneous (income) expense
4

 
1

 
31

 
7

Other (income) expense, net
$
4

 
$
(23
)
 
$
45

 
$
(60
)

NOTE 20 - FACILITY CONSOLIDATION EXPENSES

2014 Warehousing, Distribution & Manufacturing Consolidation Plan

The Company developed a plan to align its warehousing, distribution and manufacturing to support its growth and manufacturing strategy resulting in better cost structure and improved distribution capabilities and customer service. The key element and first major step of this plan was the acquisition of a facility to serve as a finished goods warehouse and a cut-order and distribution center in Adairsville, Georgia. Costs related to the consolidation include moving and relocation expenses, information technology expenses and expenses relating to conversion and realignment of equipment. In addition, this plan includes the elimination of both carpet dyeing and yarn dyeing in the Company's Atmore, Alabama facility designed to more fully accommodate the distribution and manufacturing realignment. As a result, the dyeing operations in Atmore were moved to the Company's continuous dyeing facility, skein dyeing operation and other outside dyeing processors. These costs should be completed in the first half of fiscal 2016.

2014 Atlas Integration Plan

As a part of the March 19, 2014 acquisition of Atlas, the Company developed a plan to close the operations of the Atlas dyeing facility in Los Angeles and move the carpet dyeing of their products to the Company's dyeing operation located in Santa Ana, California. Costs related to the consolidation include equipment relocation, computer systems modifications and severance costs and should be completed in fiscal 2015.

2015 Corporate Office Consolidation Plan

In April 2015, the Company's Board of Directors approved the Corporate Office Consolidation Plan, to cover the costs of consolidating three of the Company's existing divisional and corporate offices to a single facility located in Dalton, Georgia. This plan was implemented in September 2015 and should be completed in the fourth quarter of 2015 and is estimated to cost $716 . Costs related to the consolidation include lease cancellation and moving costs.


Table of Contents      19     

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)


Costs related to the facility consolidation plans are summarized as follows:

 
 
 
 
 
 
 
 
 
As of September 26, 2015
 
Accrued Balance at December 27, 2014
 
2015 Expenses To Date
 
2015 Cash Payments
 
Accrued Balance at September 26, 2015
 
Total Costs Incurred To Date
 
Total Expected Costs
Warehousing, Distribution & Manufacturing Consolidation Plan
$
—

 
$
1,786

 
$
(1,786
)
 
$
—

 
$
5,832

 
$
6,574

Atlas Integration Plan
—

 
202

 
(202
)
 
—

 
1,670

 
1,670

Corporate Office Consolidation Plan
—

 
276

 
(82
)
 
194

 
276

 
716

Totals
$
—

 
$
2,264

(1)
$
(2,070
)
 
$
194

 
$
7,778

(1)
$
8,960

 
 
 
 
 
 
 
 
 
 
 
 
Asset impairments
 
 
$
—

(2)
 
 


 
$
1,133

(2)
$
1,133


(1) Costs incurred under these plans are classified as "facility consolidation expenses" in the Company's Consolidated Condensed Statements of Operations.
(2) Asset impairments under these plans, when applicable, are classified as "loss on impairments" in the Company's Consolidated Condensed Statements of Operations.

NOTE 21 - DISCONTINUED OPERATIONS

The Company has previously either sold or discontinued certain operations that are accounted for as "Discontinued Operations" under applicable accounting guidance. Discontinued operations are summarized as follows:


 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
 
 
 
 
 
 
 
Net sales - Carousel operations
$
—

 
$
353

 
$
417

 
$
829

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations:
 
 
 
 
 
 
 
Income (loss) from Carousel operations
$
(12
)
 
$
(304
)
 
$
(89
)
 
$
(680
)
Workers' compensation costs from former textile operations
$
(12
)
 
$
(8
)
 
$
(48
)
 
$
(54
)
Environmental remediation costs from former textile operations
(13
)
 
(25
)
 
(56
)
 
(106
)
Loss from discontinued operations, before taxes
(37
)
 
(337
)
 
(193
)
 
(840
)
Income tax benefit
(19
)
 
(160
)
 
(75
)
 
(335
)
Loss from discontinued operations, net of tax
$
(18
)
 
$
(177
)
 
$
(118
)
 
$
(505
)

In the fourth quarter of 2014, the Company discontinued the Carousel specialty tufting and weaving operation that was part of the 2013 Robertex, Inc. acquisition. Operating results associated with Carousel have been classified as discontinued operations for all periods presented.

Undiscounted reserves are maintained for the self-insured workers' compensation obligations related to the Company's former textile operations. These reserves are administered by a third-party workers' compensation service provider under the supervision of Company personnel. Such reserves are reassessed on a quarterly basis. Pre-tax cost incurred for workers' compensation as a component of discontinued operations primarily represents a change in estimate for each period for medical costs associated with the Company's obligations.

Reserves for environmental remediation obligations are established on an undiscounted basis for the Company's former textile operations. The Company has an accrual for environmental remediation obligations of $1,604 and $1,637 as of September 26, 2015 and December 27, 2014, respectively. The liability established represents the Company's best estimate of possible loss and is the reasonable amount to which there is any meaningful degree of certainty given the periods of estimated remediation


THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)


and the dollars applicable to such remediation for those periods. The actual timeline to remediate, and thus, the ultimate cost to complete such remediation through these remediation efforts, may differ significantly from our estimates. Pre-tax cost for environmental remediation obligations classified as discontinued operations were primarily a result of specific events requiring action and additional expense in each period.

NOTE 22 - RELATED PARTY TRANSACTIONS

The Company purchases a portion of its product needs in the form of fiber, yarn, carpet and dyeing services from Engineered Floors, an entity substantially controlled by Robert E. Shaw, a shareholder of the Company. Mr. Shaw holds approximately 8.4% of the Company's Common Stock, which represents approximately 3.9% of the total vote of all classes of the Company's Common Stock. Engineered Floors is one of several suppliers of such services to the Company. Total purchases from Engineered Floors during the three and nine months ended September 26, 2015 were approximately $2,396 and $6,889 , respectively; or approximately 2.9% and 2.9% , respectively, of the Company's cost of goods sold. Total purchases from Engineered Floors during the three and nine months ended September 27, 2014 were approximately $2,666 and $8,792 , respectively; or approximately 3.2% and 3.8% , respectively, of the Company's cost of goods sold. Purchases from Engineered Floors are based on market value, negotiated prices. The Company has no contractual arrangements or commitments with Mr. Shaw associated with its business relationship with Engineered Floors. Transactions with Engineered Floors were reviewed and approved by the Company's board of directors.

The Company is a party to a 5-year lease with the seller of Atlas Carpet Mills, Inc. to lease three manufacturing facilities as part of the acquisition in 2014. The lessor is controlled by an associate of the Company. Rent paid to the lessor during the three and nine months ended September 26, 2015 was $114 and $343 , respectively. Rent paid to the lessor during the three and nine months ended September 27, 2014 was $114 and $229 , respectively. The lease was based on current market values for similar facilities.

The Company is a party to a 10-year lease with the Rothman Family Partnership to lease a manufacturing facility as part of the Robertex acquisition in 2013. The lessor is controlled by an associate of the Company. Rent paid to the lessor during the three and nine months ended September 26, 2015 was $66 and $196 , respectively. Rent paid to the lessor for the three and nine months ended September 27, 2014 was $65 and $192 , respectively. The lease was based on current market values for similar facilities. In addition, the Company has a note payable to Robert P. Rothman related to the acquisition of Robertex Inc. (See Note 10).


Table of Contents      21     



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is presented to update the discussion of results of operations and financial condition included in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

FORWARD-LOOKING INFORMATION

This Report contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include the use of terms or phrases that include such terms as "expects," "estimates," "projects," "believes," "anticipates," "intends," and similar terms and phrases. Such forward looking statements relate to, among other matters, our future financial performance, business prospects, growth strategies or liquidity. The following important factors may affect our future results and could cause those results to differ materially from our historical results; these factors include, in addition to those “Risk Factors” detailed in item 1A of this report and described elsewhere in this document, the cost and availability of capital, raw material and transportation costs related to petroleum price levels, the cost and availability of energy supplies, the loss of a significant customer or group of customers, materially adverse changes in economic conditions generally in carpet, rug and floor covering markets we serve and other risks detailed from time to time in our filings with the Securities and Exchange Commission.

OVERVIEW

During the third quarter of 2015, our sales were 0.1% below those of the same period in 2014. Sales of residential products decreased 1.5% in 2015 versus 2014, while, we estimate, the industry had a decrease in the low single digits. We anticipate the residential remodeling market to have marginal growth for the remainder of the year.

Commercial product sales increased 4.5% during the third quarter of 2015, while, we believe, the industry reflected an increase in the low single digits. Our Atlas products had an increase of 11.8% during the quarter. We are pleased with the new products we have introduced for Atlas so far in 2015.

We have completed the bulk of our capacity expansion and consolidation initiatives. The more significant impacts in 2015 relate to training, quality and waste associated with these endeavors. We anticipate these costs to drop as the training process comes to an end and our associates become more proficient in their new duties. Further we are seeing a decline in quality related costs for production subsequent to our restructuring efforts, reflecting the results of our training and related process improvement efforts. The status of our restructuring and facilities consolidation plans are discussed below.
 
Our Warehousing, Distribution & Manufacturing Consolidation Plan was developed to align our warehousing, distribution and manufacturing with our growth and manufacturing strategy. The plan was designed to create a better cost structure as well as improve distribution capabilities and customer service. In June of 2014, the Board of Directors approved a modification of this plan to include the elimination of both carpet dyeing and yarn dyeing in our Atmore, Alabama facility. Elimination of dyeing at this facility was designed to more fully accommodate our distribution and manufacturing realignment. Accordingly, the dyeing operations in Atmore were moved to our Colormaster continuous dyeing facility, our Calhoun Wool skein dyeing operation and other outside dyeing processors.
  
Total expenses of the Warehousing, Distribution & Manufacturing Consolidation Plan are anticipated to be approximately $6.4 million. Expenses of this plan were $341 thousand in the third quarter of 2015 and $5.8 million since its initiation in 2014. We estimate additional spending primarily related to the movement of our Saraland, Alabama rug operation moving from a rented facility into a company-owned facility of approximately $742 thousand under this plan through early 2016. These expenses of the plan primarily consist of moving and relocating inventory and equipment, facility restoration, information technology expenses and expenses relating to conversion and realignment of equipment. In addition, we incurred non-cash asset impairment charges of $1.1 million subsequent to the first quarter of 2014 related to manufacturing changes and equipment taken out of service in our facilities.

On March 19, 2014, we acquired Atlas Carpet Mills. As a part of the Atlas acquisition, we discontinued operations at the Atlas dyeing facility in Los Angeles and moved the carpet dyeing of their products to our Susan Street dyeing operation located in Santa Ana, California. We initiated an Atlas Integration Plan to accommodate the dyeing move and address the modification of computer systems. The costs of these initiatives were $1.7 million. This plan was completed in the second quarter of 2015.

In April 2015, our Board of Directors approved our Corporate Office Consolidation Plan, to cover the costs of consolidating three of our existing divisional and corporate offices to a single facility located in Dalton, Georgia. We began implementing this plan during the third quarter of 2015 and incurred expenses of $276 thousand during the quarter. We estimate this plan to cost approximately $716 thousand, primarily related to lease cancellation charges for the facilities we are vacating.






Table of Contents      22



RESULTS OF OPERATIONS

As a result of the discontinuance of the non-core Carousel brand in the fourth quarter of 2014, the operating results of Carousel have been reclassified to discontinued operations for all periods presented. Carousel was acquired as a portion of the Robertex acquisition in 2013.

The following table sets forth certain elements of our continuing operations as a percentage of net sales for the periods indicated:

 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
 %
Cost of sales
75.0
%
 
75.6
%
 
74.6
%
 
76.4
 %
Gross profit
25.0
%
 
24.4
%
 
25.4
%
 
23.6
 %
Selling and administrative expenses
23.2
%
 
21.8
%
 
24.2
%
 
22.6
 %
Other operating expense, net
0.1
%
 
0.2
%
 
0.3
%
 
0.2
 %
Facility consolidation expenses
0.5
%
 
1.5
%
 
0.7
%
 
0.9
 %
Impairment of assets
—
%
 
0.1
%
 
—
%
 
0.2
 %
Operating income (loss)
1.2
%
 
0.8
%
 
0.2
%
 
(0.3
)%

Net Sales

Net sales for the quarter ended September 26, 2015 were $108.9 million, a decrease of 0.1% compared with net sales of $109.0 million for the year-earlier quarter. In the third quarter of 2015, residential carpet sales decreased 1.5% while net sales of commercial carpet increased 4.5% compared with the third quarter of 2014.

Net sales in the first nine months of 2015 were $314.7 million compared with net sales of $302.0 million in the first nine months of 2014, an increase of 4.2%. Excluding sales related to Atlas, net sales reflected an increase of 2.3% in the nine months of 2015 compared to the nine months of 2014. Residential carpet sales decreased 0.3% and commercial net sales increased 16.7% in the first nine months of 2015 compared with the first nine months of 2014.

Cost of Sales

Cost of sales as a percentage of net sales was 75.0% in the third quarter of 2015 compared with 75.6% in the third quarter of 2014, reflecting a 0.6 percentage point improvement as a percentage of net sales. The improvement was a result of improved operations as our restructuring winds down, partially offset by continued higher than desired levels of waste and quality costs related to production made during the facility consolidation period. The third quarter of 2014 included expenses of $196 thousand for the amortization of the step-up in inventory for the acquisition of Atlas. The third quarter of 2014 was negatively affected by operational inefficiencies in our manufacturing processes as we implemented our facility consolidation plans.

Cost of sales as a percentage of net sales was 74.6% in the first nine months of 2015 compared with 76.4% in the first nine months of 2014, reflecting a 1.8 percentage point improvement as a percentage of net sales. During the first nine months of 2015, we experienced higher costs associated with our self-insured group medical plan, certain product quality costs, training and increased waste as we continued to realign processes within our facilities. We have seen decreases in raw material costs in 2015; however, due to the volatility of raw material costs, it is difficult at this time to predict the future cost trends. The nine months of 2015 included a reduction of cost of $459 thousand for an adjustment to estimated acquisition-related contingent payments compared with a reduction of cost of $391 thousand in the nine months of 2014. The nine months of 2014 included expenses of $390 thousand for the amortization of the step-up in inventory for the acquisition of Atlas. The first nine months of 2014 were negatively affected by operational inefficiencies in our manufacturing processes as we implemented our facility consolidation plans. Additionally, the first nine months of 2014 included $1.5 million of costs directly attributable to the adverse weather conditions in January and February of 2014 and manufacturing inefficiencies related to the replacement of the dryer at our Colormaster continuous dyeing facility.

Gross Profit

Gross profit as a percentage of sales improved in the third quarter of 2015 and nine months of 2015 compared with the year-earlier periods for the reasons discussed above in Cost of Sales.




Table of Contents      23



Selling and Administrative Expenses

Selling and administrative expenses were 23.2% of sales during the third quarter of 2015 compared with 21.8% of sales during the third quarter of 2014. Selling and administrative expenses increased as a percentage of sales primarily as a result of higher selling expenses and higher health care costs. The third quarter of 2014 included $151 thousand of costs related primarily to the Atlas and Burtco acquisitions.

Selling and administrative expenses were 24.2% of sales during the nine months of 2015 compared with 22.6% of sales during the nine months of 2014. Selling and administrative expenses increased as a percentage of sales primarily as a result of higher selling expenses, partially due to the acquisition of Atlas which has higher selling and administrative costs than the overall company average, and higher health care costs. In addition, we continued to spend at a higher level for product sampling during the nine months of 2015 related to a number of new and differentiated products to be introduced intended to enhance our market position and profitability. The nine months of 2014 included $759 thousand of costs related to the Atlas and Burtco acquisitions.

Other Operating Expense, Net

Other operating expense, net was an expense of $131 thousand in the third quarter of 2015 compared with an expense of $231 thousand in the third quarter of 2014. Other operating expense, net was an expense of $684 thousand in the nine months of 2015 compared with an expense of $601 thousand in the year-earlier period.

Facility Consolidation Expenses & Impairment of Assets

Facility consolidation expenses were $614 thousand in the third quarter of 2015 compared with $1.6 million in the year-earlier period. We did not have any asset impairment charges in the third quarter of 2015 as compared to $104 thousand of such charges in the year earlier period. Expenses in the third quarter of 2015 were lower as a result of the completion of the Atlas Integration Plan and the winding down of the Warehousing, Distribution & Manufacturing Consolidation Plan during the quarter.

Facility consolidation expenses were $2.3 million in the first nine months of 2015 compared with $2.7 million in the year-earlier period. We did not have any asset impairment charges in the nine month period in 2015 as compared to $759 thousand in such charges in the year earlier period.

Operating Income (Loss)

We reported operating income of $1.3 million in the third quarter of 2015 compared with $832 thousand in the third quarter of 2014. During the third quarter of 2015, our operations continued to improve as our restructuring continued to wind down partially offset by continued higher than desired levels of quality and waste costs. The third quarter of 2014 was negatively affected by operational inefficiencies in our manufacturing processes as we implemented our facility consolidation plans.

For the nine months of 2015, we reported operating income of $747 thousand compared with an operating loss of $822 thousand in the year-earlier period. During the first nine months of 2015, we experienced higher costs associated with our self-insured group medical plan, certain product quality costs, training and increased waste as we continued to realign processes within our facilities. Operating results in the 2014 reporting period were negatively affected by weather-related costs, manufacturing inefficiencies related to the replacement of the dryer at Colormaster and the Atlas acquisition-related expenses.

Interest Expense

Interest expense increased $212 thousand in the third quarter of 2015 and $442 thousand in the nine months of 2015 compared with the year-earlier periods principally a result of higher interest rates and levels of debt in 2015.

Other (Income) Expense, Net

Other (income) expense, net was not significant in the third quarter or nine months of 2015 or 2014.

Income Tax Provision (Benefit)

Our effective income tax rate is based upon estimated annual income tax rates. The effective income tax rate in the nine months of 2015 was 38.6% compared with an effective income tax rate of 40.1% in the year-earlier period. The first nine months of 2014 included the recognition of approximately $117 thousand of tax expense related to certain market-based stock awards that were not earned.

Income (Loss) from Continuing Operations

We had income from continuing operations of $84 thousand, or $0.01 per diluted share in the third quarter of 2015 compared with a loss from continuing operations of $8 thousand, or $0.00 per diluted share in the third quarter of 2014. We had a loss from continuing operations of $1.8 million, or $0.11 per diluted share in the nine months of 2015 compared with income from

Table of Contents      24



continuing operations of $4.3 million, or $0.29 per diluted share in the nine months of 2014. The nine months of 2014 included a pretax gain of $11.1 million on the purchases of Atlas and Burtco which had a positive effect on income from continuing operations of approximately $6.6 million after-tax.

Net Income (Loss)

Discontinued operations reflected a loss of $18 thousand, or $0.00 per diluted share, in the third quarter of 2015 compared with a loss of $177 thousand, or $0.01 per diluted share, in the same period in 2014. Including discontinued operations, we had net income of $66 thousand, or $0.01 per diluted share, in the third quarter of 2015 compared with a net loss of $185 thousand, or $0.01 per diluted share, in the third quarter of 2014.

Discontinued operations reflected a loss of $118 thousand, or $0.01 per diluted share, in the nine months of 2015 compared with a loss of $505 thousand, or $0.04 per diluted share, in the same period in 2014. Including discontinued operations, we had a net loss of $1.9 million, or $0.12 per diluted share, in the nine months of 2015 compared with net income of $3.8 million, or $0.25 per diluted share, in the nine months of 2014.

LIQUIDITY AND CAPITAL RESOURCES
 
During the nine months ended September 26, 2015, cash provided by operations was $2.8 million. Inventories increased $10.6 million which was offset by an increase in accounts payable and accrued expenses of $9.9 million. Inventories increased to seasonal levels to support anticipated higher levels of business.

Capital asset acquisitions for the nine months ended September 26, 2015 were $10.0 million; $5.3 million of cash used in investing activities, $2.9 million of equipment acquired under notes and capital leases and $1.8 million of previous deposits utilized for capital additions. Depreciation and amortization for the nine months ended September 26, 2015 were $11.0 million. We expect capital expenditures to be approximately $13.0 million in 2015 for normal capital expenditures while depreciation and amortization is expected to be approximately $14.5 million. Planned capital expenditures in 2015 are primarily for new equipment.

During the nine months ended September 26, 2015, cash provided by financing activities was $2.2 million. In January 2015, we entered into a ten-year $6.3 million mortgage note payable to finance an owned facility in Saraland, Alabama. We had proceeds of $1.2 million from our revolving credit facility and $1.0 million from equipment notes payable. These proceeds are offset by payments on other notes payable and lease obligations of $7.5 million. See Note 10 in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q for a discussion of our long-term debt arrangements which is incorporated herein by reference.

We believe our operating cash flows, credit availability under our revolving credit facility and other sources of financing are adequate to finance our normal liquidity requirements. As of September 26, 2015, the unused borrowing availability under our revolving credit facility was $36.4 million. Our revolving credit facility requires us to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that borrowing availability is less than $16.5 million. As of the date hereof, our fixed coverage ratio was less than 1.1 to 1.0, accordingly the unused availability accessible by us is the amount above $16.5 million. Significant additional cash expenditures above our normal liquidity requirements or significant deterioration in economic conditions could affect our business and require supplemental financing or other funding sources. There can be no assurance that such supplemental financing or other sources of funding can be obtained or will be obtained on terms favorable to us.

Contractual Obligations

Our contractual obligations were described in Management's Discussion and Analysis of Results of Operations and Financial Condition in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission. On April 1, 2015, we entered into a 15-year lease agreement to lease office space in Dalton, Georgia. The lease began in September 2015. Base annual rent is initially set at approximately $28 thousand per month. Total base rent payable over the lease period is $5.0 million.

Critical Accounting Policies

Our critical accounting policies were outlined in Management's Discussion and Analysis of Results of Operations and Financial Condition in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no significant changes to those critical accounting policies subsequent to the date of that report.

Recent Accounting Pronouncements

See Note 2 in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q for a discussion of new accounting pronouncements which is incorporated herein by reference.



Table of Contents      25



Item 3. Quantitative and Qualitative Disclosures About Market Risk (Dollars in thousands)

Our earnings, cash flows and financial position are exposed to market risks relating to interest rates, among other factors.  It is our policy to minimize our exposure to adverse changes in interest rates and manage interest rate risks inherent in funding our Company with debt.  We address this financial exposure through a risk management program that includes maintaining a mix of fixed and floating rate debt and the use of interest rate swap agreements (See Note 12 to the Consolidated Condensed Financial Statements).

At September 26, 2015, $40,160, or approximately 31% of our total debt, was subject to floating interest rates.  A 10% fluctuation in the variable interest rates applicable to this floating rate debt would have an annual after-tax impact of approximately $5.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated  the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rules 13(a)-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of September 26, 2015, the date of the financial statements included in this Form 10-Q (the “Evaluation Date”). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the Evaluation Date.

No changes in our internal control over financial reporting occurred during the quarter covered by this report that materially affected, or are reasonably likely to affect, our internal control over financial reporting.

On March 19, 2014 and September 22, 2014, we acquired Atlas Carpet Mills, Inc. ("Atlas") and Burtco Enterprises ("Burtco"), respectively. We excluded the operations of Atlas and Burtco from the scope of our Sarbanes-Oxley Section 404 report on internal controls over financial reporting for the year ended December 27, 2014. We are in the process of implementing our internal control structure with respect to the acquired operations. This implementation will be completed in fiscal 2015.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures, as well as diverse interpretation of U. S. generally accepted accounting principles by accounting professionals.  It is also possible that internal control over financial reporting can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  These inherent limitations are known features of the financial reporting process; therefore, while it is possible to design into the process safeguards to reduce such risk, it is not possible to eliminate all risk.


Table of Contents      26



PART II. OTHER INFORMATION


Item 1. Legal Proceedings

None.


Item 1A. Risk Factors

In addition to the other information provided in this Report, the following risk factors should be considered when evaluating the results of our operations, future prospects and an investment in shares of our Common Stock.  Any of these factors could cause our actual financial results to differ materially from our historical results, and could give rise to events that might have a material adverse effect on our business, financial condition and results of operations.
 
The floorcovering industry is sensitive to changes in general economic conditions and a decline in residential or commercial construction activity or corporate remodeling and refurbishment could have a material adverse effect on our business.

The floorcovering industry, in which the Company participates, is highly dependent on general economic conditions, such as consumer confidence and income, corporate and government spending, interest rate levels, availability of credit and demand for housing. The Company derives a majority of its sales from the replacement segment of the market. Therefore, economic changes that result in a significant or prolonged decline in spending for remodeling and replacement activities could have a material adverse effect on the Company’s business and results of operations.

The floorcovering industry is highly dependent on construction activity, including new construction, which is cyclical in nature, and recently experienced a downturn. The 2008 downturn in the U.S. and global economies, along with the residential and commercial markets in such economies, negatively impacted the floorcovering industry and the Company’s business. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, these activities lagged during the downturn. Although the difficult economic conditions have improved, there may be additional downturns that could cause the industry to deteriorate in the foreseeable future. A significant or prolonged decline in residential or commercial construction activity could have a material adverse effect on the Company’s business and results of operations.

We have significant levels of sales in certain channels of distribution and reduction in sales through these channels could adversely affect our business.

A significant amount of our sales are generated through certain retail and mass merchant channels of distribution. Because we depend on such certain channels of distribution, a significant reduction of sales through these channels could adversely affect our business.

We have significant levels of indebtedness that could result in negative consequences to us.

We have a significant amount of indebtedness relative to our equity. Insufficient cash flow, profitability or the value of our assets securing our loans could materially adversely affect our ability to generate sufficient funds to satisfy the terms of our senior loan agreements and other debt obligations. Additionally, the inability to access debt or equity markets at competitive rates in sufficient amounts to satisfy our obligations could adversely impact our business.

Uncertainty in the credit market or downturns in the economy and our business could affect our overall availability and cost of credit.

Uncertainty in the credit markets could affect the overall availability and cost of credit. Despite recent improvement in overall economic conditions, market conditions could impact our ability to obtain financing in the future, including any financing necessary to refinance existing indebtedness, and the cost and terms of it, remains uncertain. These and other economic factors could have a material adverse effect on demand for our products and on its financial condition and operating results.

We face intense competition in our industry, which could decrease demand for our products and could have a material adverse effect on our profitability.

The floorcovering industry is highly competitive. We face competition from a number of domestic manufacturers and independent distributors of floorcovering products and, in certain product areas, foreign manufacturers. Significant consolidation within the floorcovering industry has caused a number of our existing and potential competitors to grow significantly larger and have greater access to resources and capital than we do. Maintaining our competitive position may require us to make substantial additional investments in our product development efforts, manufacturing facilities, distribution network and sales and marketing activities. These additional investments may be limited by our access to capital, as well as restrictions set forth in our

Table of Contents      27



credit facilities. Competitive pressures, both from other providers of soft surfaces and the growth of hard surface alternatives, may also result in decreased demand for our products and in the loss of market share. In addition, we face, and will continue to face, competitive pressures on our sales price and cost of our products. As a result of any of these factors, there could be a material adverse effect on our sales and profitability.

If we are unable to anticipate consumer preferences and successfully develop and introduce new, innovative and updated products, we may not be able to maintain or increase our net revenues and profitability.

Our success depends on our ability to identify and originate product trends as well as to anticipate and react to changing consumer demands in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. In addition, long lead times for certain of our products may make it hard for us to quickly respond to changes in consumer demands. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of flooring products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing consumer preferences could lead to, among other things, lower sales and excess inventory levels, which could have a material adverse effect on our financial condition.

Raw material prices may vary and the inability to either offset or pass on such cost increases or avoid passing on decreases larger than the cost decrease to our customers could materially adversely affect our business, results of operations and financial condition.
We require substantial amounts of raw materials to produce our products, including nylon and polyester yarn, as well as wool yarns, synthetic backing, latex, and dyes. Substantially all of the raw materials we require are purchased from outside sources. The prices of raw materials and fuel-related costs vary significantly with market conditions. The fact that we source a significant amount of raw materials means that several months of raw materials and work in process are moving through our supply chain at any point in time. We are not able to predict whether commodity costs will significantly increase or decrease in the future. If commodity costs increase in the future and we are not able to reduce or eliminate the effect of the cost increases by reducing production costs or implementing price increases, our profit margins could decrease. If commodity costs were to decline, we may experience pressures from customers to reduce our selling prices. The timing of any price reductions and decreases in commodity costs may not align. As a result, our margins could be affected.

Unanticipated termination or interruption of our arrangements with third-party suppliers of nylon yarn could have a material adverse effect on us.

Nylon yarn is the principal raw material used in our floorcovering products. A significant portion of such yarn is purchased from one supplier. Our yarn supplier is one of the leading fiber suppliers within the industry and is the exclusive supplier of certain innovative branded fiber technology upon which we rely. We believe our offerings of this innovative fiber technology contribute materially to the competitiveness of our products. While we believe there are other sources of nylon yarns, an unanticipated termination or interruption of our current supply of nylon yarn could have a material adverse effect on our ability to supply our product to our customers and have a material adverse impact on our competitiveness if we are unable to replace our nylon supplier with another supplier that can offer similar innovative fiber products. An extended interruption in the supply of these or other raw materials or sourced products used in the Company’s business or in the supply of suitable substitute materials or products would disrupt the Company’s operations, which could have a material adverse effect on the Company’s business.

We may experience certain risks associated with internal expansion, acquisitions, joint ventures and strategic investments.
We have recently embarked on several strategic and tactical initiatives, including aggressive internal expansion, acquisitions and investment in new products, to strengthen our future and to enable us to return to sustained growth and profitability. Growth through expansion and acquisition involves risks, many of which may continue to affect us after the acquisition or expansion. An acquired company, operation or internal expansion may not achieve the levels of revenue, profitability and production that we expect. The combination of an acquired company’s business with ours involves risks. Further, internally generated growth that involves expansion involves risks as well. Such risks include the integration of computer systems, alignment of human resource policies and the retention of valued talent. Reported earnings may not meet expectations because of goodwill and intangible asset impairment, other asset impairments, increased interest costs and issuance of additional securities or debt as a result of these acquisitions. We may also face challenges in consolidating functions and integrating our organizations, procedures, operations and product lines in a timely and efficient manner.
The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on our revenues, level of expenses and operating results. Failure to successfully manage and integrate an acquisition with our existing operations or expansion of our existing operations could lead to the potential loss of customers of the acquired or existing business, the potential loss of employees who may be vital to the new or existing operations, the potential loss of business opportunities or other adverse consequences that could have a material adverse effect on our business, financial condition and results of operations. Even if integration occurs successfully, failure of the expansion or acquisition to achieve levels of anticipated sales growth, profitability or productivity, or otherwise perform as expected, may have a material adverse effect on our business, financial condition and results of operations.

Table of Contents      28



We are subject to various environmental, safety and health regulations that may subject us to costs, liabilities and other obligations, which could have a material adverse effect on our business, results of operations and financial condition.

We are subject to various environmental, safety and health and other regulations that may subject us to costs, liabilities and other obligations which could have a material adverse effect on our business. The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts. We could incur material expenditures to comply with new or existing regulations, including fines and penalties and increased costs of its operations. Additionally, future laws, ordinances or regulations could give rise to additional compliance or remediation costs that could have a material adverse effect on our business, results of operations and financial condition. For example, producer responsibility regulations regarding end-of-life disposal could impose additional cost and complexity to our business.

Various federal, state and local environmental laws govern the use of our current and former facilities. These laws govern such matters as:

•
Discharge to air and water;
•
Handling and disposal of solid and hazardous substances and waste, and
•
Remediation of contamination from releases of hazardous substances in our facilities and off-site disposal locations.

Our operations also are governed by laws relating to workplace safety and worker health, which, among other things, establish noise standards and regulate the use of hazardous materials and chemicals in the workplace. We have taken, and will continue to take, steps to comply with these laws. If we fail to comply with present or future environmental or safety regulations, we could be subject to future liabilities. However, we cannot ensure that complying with these environmental or health and safety laws and requirements will not adversely affect our business, results of operations and financial condition.

We may be exposed to litigation, claims and other legal proceedings in the ordinary course of business relating to our products or business, which could have a material adverse effect on our business, results of operations and financial condition.

In the ordinary course of business, we are subject to a variety of work-related and product-related claims, lawsuits and legal proceedings, including those relating to product liability, product warranty, product recall, personal injury, and other matters that are inherently subject to many uncertainties regarding the possibility of a loss our business. Such matters could have a material adverse effect on our business, results of operations and financial condition if we are unable to successfully defend against or resolve these matters or if our insurance coverage is insufficient to satisfy any judgments against us or settlements relating to these matters. Although we have product liability insurance, the policies may not provide coverage for certain claims against us or may not be sufficient to cover all possible liabilities. Further, we may not be able to maintain insurance at commercially acceptable premium levels. Additionally, adverse publicity arising from claims made against us, even if the claims are not successful, could adversely affect our reputation or the reputation and sales of our products.

Our business operations could suffer significant losses from natural disasters, catastrophes, fire or other unexpected events.

Many of our business activities involve substantial investments in manufacturing facilities and many products are produced at a limited number of locations. These facilities could be materially damaged by natural disasters, such as floods, tornadoes, hurricanes and earthquakes, or by fire or other unexpected events such as adverse weather conditions or other disruptions to our facilities, supply chain or our customer's facilities. We could incur uninsured losses and liabilities arising from such events, including damage to our reputation, and/or suffer material losses in operational capacity, which could have a material adverse impact on our business, financial condition and results of operations.


Table of Contents      29




Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases of Common Stock

The following table provides information regarding our repurchases of shares of our Common Stock during the three months ended September 26, 2015:
Month Ending
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Maximum Number (or approximate dollar value) of Shares That May Yet Be Purchased Under Plans or Programs
August 1, 2015
 
—

 
$
—

 
—

 
August 29, 2015
 
3,876

 
10.98

 
3,876

 
September 26, 2015
 
1,205

 
10.02

 
1,205

 
Three Months Ended September 26, 2015
 
5,081

 
$
10.75

 
5,081

$
2,496,241


(1) During the three months ended September 26, 2015, 5,081 shares were withheld from employees in lieu of cash payments for withholding taxes due for a total amount of $54,633.


Item 3. Defaults Upon Senior Securities

None.


Item 4. Mine Safety Disclosures

Not Applicable.


Item 5. Other Information

None.


Item 6. Exhibits
(a.)
Exhibits

10.1
Thornton Edge LLC Lease for Reed Road Facility
10.2
Thornton Edge LLC First Lease Amendment for Reed Road Facility
10.3
Thornton Edge LLC Second Lease Amendment for Reed Road Facility
31.1
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
CFO Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

Table of Contents      30



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)
 
 
 
Date: November 4, 2015
      
By: /s/ JON A. FAULKNER
 
 
Jon A. Faulkner
Vice President and Chief Financial Officer
 
 
 


Table of Contents      31


Exhibit 10.1

THIS LEASE, is made this 1st day of April, 2015, by and among Thornton Edge LLC, (hereinafter called "Landlord"), and TDG Operations, LLC (hereinafter called "Tenant'').


PREMISES
WITNESS E TH:

1.
Landlord, for and in consideration of the rents, covenants, agreements and stipulations hereinafter mentioned, provided for and contained to be paid, kept and performed by Tenant, leases and rents unto Tenant, and Tenant hereby leases and takes upon the terms and conditions which hereinafter appear, the following described property (hereinafter called the "Premises"), to wit:

Approximately 42,790 SF of a 95,625 SF two story concrete brick building as shown on Exhibit A attached hereto,

And being known as a portion of475 Reed Road Dalton, GA. 30720. No easement for light or air is included in the · Premises.

TERM

2.
The Tenant shall have and hold the Premises for a term of 180 months beginning on the 1st day of September 2015 and ending on the 31st day of August 2030 at midnight, unless sooner terminated as hereinafter provided .

Tenant agrees to pay Landlord at the address as stated in this Lease, without deduction, demand or setoff, an annual rental of $299,530.00 payable in equal monthly installments of $24,960.83 in advance on the first day of each calendar month during the term hereof . Upon execution of this Lease, Tenant shall pay to Landlord the first month's rental due hereunder. Rental for any period under the term hereof which is for less than one month shall be a prorated portion of the monthly rental due. The Tenant shall have the option of 2 renewals for 5 years per each renewal. Tenant shall not pay rent for the months of September, October and November 2015 .

The Tenant must notify the Landlord 90 days prior to renewal to exercise each option.

In the event Landlord cannot complete the required Landlord repairs per Exhibit B attached hereto and the Tenant Improvement renovations per Exhibit C attached · hereto (subject to Tenant's review and approval of the final floor plans) on or before September 1, 2015, then Tenant shall receive two (2) days additional free rent for every one (1) day that landlord is late in delivering the Premises fully renovated and ready for Tenant's use.

RENTAL ESCALATION

3.
Beginning on September 1 st , 2016, and on each September 1 st thereafter during the term of this Lease, Tenant agrees to pay additional rental equal to 2% of the prior year ' s rental (payable as additional · monthly rental), for purposes of increased rentals under this paragraph.

LATE CHARGES

4.
If Landlord fails to receive all or any portion of a rent payment within five (5) days after it becomes due, Tenant shall pay Landlord, as additional rental, a late charge equal to Five percent (5%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. Landlord will accept ACH bank payments as method of payment.

SECURITY DEPOSIT

5.
Tenant shall deposit with Landlord upon execution of this Lease $24,960.83 as a security deposit which shall be held by Landlord in a segregated interest bearing trust account, without liability to Tenant for any interest thereon,






TDG Operations, LLC
Page 1 of 19





as security for the full and faithful performance by Tenant of each and every term, covenant and condition of this Lease of Tenant. If any of .the rents or other charges or sums payable by Tenant to Landlord shall be overdue and unpaid or should Landlord make payments on behalf of Tenant, or should Tenant fail to perform any of the terms of this Lease, then Landlord may, at its option, appropriate and apply the security deposit, or so much thereof as may be necessary to compensate Landlord toward the payment of the rents, charges or other sums due from Tenant, or towards any Joss, damage or expense sustained by Landlord resulting from such default on the part of Tenant; and in such event Tenant shall upon demand restore the security deposit to the original sum deposited. In the event Tenant furnishes Landlord with proof that all utility bills have been paid through the date of Lease termination, and performs all of Tenant's other obligations under this Lease, the security deposit shall be returned in full to Tenant within thirty (30) days after the date of the expiration or sooner termination of the term of this Lease and the surrender of the Premises by Tenant in compliance with the provisions of this Lease (provided that no surrender of the Premises will be required if Tenant purchases the Premises.) The deposit shall not be considered an advance payment of rental or a measure of Landlord's damage in case of default by Tenant.

UTILITY BILLS

6.
Landlord agrees to separate or sub meter the utilities for the Premises at Landlord's sole cost. Tenant shall pay directly all utility bills, including, but not limited to water, sewer, gas, electricity, fuel, light, telephone, data services and heat bills for the Premises and Tenant shall pay all charges for garbage collection or other sanitary services. Except for Landlord's default in its obligations hereunder, Landlord shall not be liable to furnish these defined services, or any cessation thereof, resulting from causes beyond the control of Landlord, and except for a default by Landlord, any such failure of utility services shall not render Landlord liable in any respect for damage to either person or property, shall not be construed as an eviction of Tenant, shall not work an abatement of rent, nor relieve Tenant from fulfillment of any covenant of this Lease. Should any of the equipment or machinery break down, or for any cause cease to function properly, Landlord shall use reasonable diligence to repair the same promptly, but Tenant shall have no claim for rebate of rent or damages on account of any interruptions in service occasioned from the repairs unless such continues for a period of five (5) business. days, or occurs more than twice in any calendar month.

COMMON AREA COSTS; RULES AND REGULATIONS

7.
If the Premises are part of a larger building or group of buildings, Tenant shall pay as additional rental monthly, in advance, its pro rata share of common area maintenance costs ("CAM") as hereinafter more particularly set forth in the Special Stipulations. The Rules and Regulations attached hereto are made a part of this Lease. Tenant agrees to perform and abide by those Rules and Regulations and such other Rules and Regulations as may be reasonably amended from time to time by Landlord.

Landlord covenants that Landlord will not lease any portion of the building in which the Premises are located to any user(s) or other tenant(s) that will disturb the use and quite enjoyment of the Tenant, including but not limited to any excess noise, dangerous chemicals or offensive odor caused by such user(s) or tenant(s).

USE OF PREMISES

8.
The Premises shall be used for office and showroom purposes only and no other. The Premises shall not be used for any illegal purposes, or in any manner to create any nuisance or trespass, or in any manner to vitiate the insurance or increase the rate of insurance on the Premises.

The entire property located at 475 Reed Road, Dalton, Georgia (the "Property") shall be restricted to industrial, commercial or office space use and shall not be used for "Residential Use," in whole or in part. "Residential Use" as used herein shall mean and include any improvement, structure or dwelling used for Jiving accommodations (single or multi-family occupancy, including, without limitation, detached housing, condominiums, apartment buildings, dormitories, and senior citizen housing); any day care facility (whether for infants, children, the infirm, or the elderly); any hospital, hospice, and nursing home facility; any school for individuals under the age of twenty-one (21); any prison; any playground; and any other similar or like use.








TDG Operations, LLC
Page 2 of 19






Groundwater beneath the Property shall not be used for any purpose, and no groundwater wells shall be drilled, constructed, or installed on the Property excepting any groundwater wells that may be required by a governmental authority having jurisdiction over the Property for the purpose of required environmental testing, monitoring, or remediation.


ABANDONMENT OF THE PREMISES

9.
Tenant agrees not to abandon or vacate the Premises during the term of this Lease and agrees to use the Premises for the
purposes herein leased until the expiration hereof.

TAX AND INSURANCE

10.
Tenant shall pay upon demand as additional rental during the term of this Lease, and any extension or renewal thereof, it's prorata share of the amount by which all taxes (including but not limited to, ad valorem taxes, special assessments and any other governmental charges) on the Premises for each tax year exceed $0.00. In the event the Premises are less than the entire property assessed for such taxes for any such tax year, then the tax for any such year applicable to the Premises shall be determined by proration on the basis that the rentable floor area of the Premises bears to the rentable floor area of the entire property assessed. If the first and/or final year of the Lease term fails to coincide with the tax year, then any excess for the tax year during which the term ends shall be reduced by the pro rata part of such tax year beyond the Lease term. If such taxes for the year in which the Lease terminates are not ascertainable before payment of the last month's rental, then the amount of such taxes assessed against the property for the previous tax year shall be used as a basis for determining the pro rata share, if any, to be paid by Tenant for that portion of the last Lease year. Tenant shall further pay, upon demand, it's pro rata share of the excess costs of fire and extended coverage insurance including any and all public liability insurance on the building over the cost for the first year of the Lease term for each subsequent year du r ing the term of this Lease. Tenant's pro rata portion of taxes or share of excess cost of fire and extended coverage and liability insurance, as provided herein, shall be payable within ten (10) days after receipt of notice from Landlord or Agent as to the amount due, subject to Tenant's review of the evidence of such charges for manifest error.

INDEMNITY; INSURANCE

11. Tenant agrees to and hereby does indemnify and save Landlord harmless against all claims for damages to persons or property by reason of Tenant's us(;,) or occupancy of the Premises, and all expenses incurred by Landlord because thereof, including reasonable attorney's fees and court costs. Supplementing the foregoing and in addition thereto, Tenant shall during the term of this Lease and any extension or renewal thereof, and at Tenant's expense, maintain in full force and effect comprehensive general liability insurance with limits of $1 , 000,000.00 per person and $2,000,000.00 per incident, and property damage limits of $500,000.00, which insurance shall contain a special endorsement recognizing and insuring any liability accruing to Tenant under the first sentence of this Paragraph 11 , and naming Landlord as additional insured. Tenant shall provide evidence of such insurance to Landlord prior to the commencement of the term of this Lease. Landlord and Tenant each hereby release and relieve the other, and waive its right of recovery, for loss or damage arising out of or incident to the perils insured against which perils occur in, on or about the Premises, whether due to the negligence of Landlord or Tenant or their Brokers, employees, contractors and/or invitees, to the extent that such loss or damage is within the policy limits of said comprehensive general liability insurance. Landlord and Tenant shall, upon obtaining the policies of insurance required, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease.

WAIVER OF SUBROGATION

12.
Anything in this Lease to the contrary notwithstanding, Landlord and Tenant hereby waive and release each other of and from any and all rights of recovery , claim, action or cause of action, against each other, their agents, officers and employees, for any loss or damage that may occur to the Premises, improvements to the building of which the Premises are a part, or personal property (building contents) within the building, by reason of fire, the elements or any other cause which could be insured against under the terms of standard fire and extended
coverage insurance policies, regardless of cause or origin, including negligence of Landlord or Tenant and their




TDG Operations, LLC
Page 3 of 19





agents, officers and employees. Because this paragraph will preclude the assignment of any claim mentioned in it by way of subrogation for (or otherwise) to an insurance company (or any other person), each party to this Lease agrees immediately to give to each insurance company which has issued to it policies of fire and extended coverage insurance, written notice of the terms of the mutual waivers contained in this paragraph, and to have the insurance policies properly endorsed, if necessary, to prevent the invalidation of the insurance coverage's by reason of the mutual waivers contained in this paragraph.

REPAIRS BY LANDLORD

13.
Landlord agrees to keep in good repair the roof, foundations and exterior walls of the Premises (including all glass and all exterior doors), major_repairs and replacement of the HVAC system, underground utility and sewer pipes outside the exterior walls of the building, and any paving of driveways and parking lots, and this cost shall not be included in CAM. The grounds around the building, including the mowing of grass, care of shrubs and landscaping, maintenance of outdoor lighting, and routine HVAC maintenance shall be part of CAM except repairs rendered necessary by the negligence. or intentional wrongful acts of Tenant, its employees or invitees. Tenant shall promptly report in writing to Landlord any defective condition known to it, which Landlord is required to repair and failure so to report such conditions shall make Tenant responsible to Landlord for any liability incurred by Landlord by reason of such conditions.

REPAIRS BY TENANT

14.
Tenant accepts the Premises in their improved condition, a list of such improvements attached as schedule B and as suited for the uses intended by Tenant, and other improvements located thereon, except those repairs.expressly required to be made by Landlord hereunder. Tenant agrees to return the Premises to Landlord at the expiration, or prior to termination of this Lease, in as good condition and repair as when first received, normal wear and tear, damage by storm, fire, lightning, earthquake or other casualty excepted.

ALTERATIONS

15.
Tenant shall not make any alterations, additions, or improvements to the Premises without Landlord's prior written consent. Tenant shall promptly remove any alterations, additions, or improvements constructed in violation of this Paragraph 15 upon Landlord's written request. All approved alterations, additions, and improvements will be accomplished in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor reasonably approved by Landlord, free of any liens or encumbrances. Unless otherwise approved to remain when installed, Landlord may require Tenant to remove any alterations, additions or improvements (whether or not made with Landlord's consent) at the termination of this Lease and to restore the Premises to its prior condition, all at Tenant's expense. All alterations, additions and improvements which Landlord has not required Tenant to remove shall become Landlord's property and shall be surrendered to Landlord upon the termination of this Lease, except that Tenant may remove any of Tenant's machinery or equipment which can .be removed without material damage to the Premises. Tenant shall repair, at Tenant's expense, any damage to the Premises caused by the removal of any such machinery or equipment.

REMOVAL OF FIXTURES

16.
Tenant may (if not in default hereunder) prior to the expiration of this Lease, or any extension or renewal thereof, remove all fixtures and equipment which it has placed in the Premises, provided Tenant repairs all damage to the Premises caused by such removal.

DESTRUCTION OF OR DAMAGE TO PREMISES

17.
If the Premises are totally destroyed by storm, fire, lightning, earthquake or other casualty, of if damaged to such an extent as to prevent, or materially interfere with, Tenant's use thereof, this Lease shall terminate as of the date of such destruction and rental shall be accounted for as between Landlord and Tenant as of that date. If the Premises are damaged but not wholly destroyed by any such casualties, rental shall abate in such proportion as use of the Premises has been destroyed and Landlord shall restore Premises to substantially the same condition as before damage as speedily as is practicable, whereupon full rental shall recommence.




TDG Operations, LLC
Page 4 of 19
·    





GOVERNMENTAL ORDERS

18.
Landlord warrants that the Premises comply with all statutes and regulations related to office and showroom use as of the Commencement Date hereof. Tenant agrees, at his own expense, to comply promptly with any changed in the requirements of any legally constituted public authority or made necessary by reason of Tenant's occupancy of the Premises other than for office and showroom use. Landlord agrees to comply promptly with any such requirements if not made necessary by reason of Tenant's occupancy for office and showroom use. It is mutually agreed, however, between Landlord and Tenant, that if in order to comply with such requirements, the cost to Landlord or Tenant, as the case may be, shall exceed a sum equal to one year's rent, then whichever party hereto is obligated to comply with such requirements may terminate this Lease by giving written notice of termination to the other party by·certified mail, which termination shall become effective sixty (60) days after receipt of such notice and which notice shall eliminate the necessity of compliance with such requirements by giving such notice unless the party given such notice of termination shall, before termination becomes effective, pay to the party giving notice all cost of compliance in excess of one year's rent, or secure payment of said sum in manner satisfactory to the party giving notice.

CONDEMNATION

19.
(a) If, during the term (or any extension or renewal) of this Lease, all or a substantial part of the Premises are taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by private purchase in lieu thereof, and the taking would prevent, or materially interfere with, Tenant's use of the Premises for the purpose for which they are then being used, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease effective on the date physical possession is taken by the condemning authority.

(b) In the event .a portion of the Premises shall be taken for any public or any quasi-public use under any government law, ordinance or regulation, or by right of eminent domain or by private sale In lieu thereof, and this Lease is not terminated as provided in the subparagraph above, Landlord may, at Landlord's sole risk and expense, restore and reconstruct the building and other improvements situated on the Premises to the extent necessary to make it reasonably tenantable for Tenant's use. The rent payable under this Lease during the unexpired portion of the term shall be adjusted during the unexpired portion of the term to such an extent as may be fair and reasonable under the circumstances.

ASSIGNMENT AND SUBLETTING

20.
Tenant shall not, without the prior written consent of Landlord assign this Lease or any interest hereunder, or sublet the Premises or any part thereof, or permit the use of the Premises by any party other than the Tenant and its affiliates. Consent to any assignment or sublease shall not impair this provision and all later assignments or subleases shall be made likewise only on the prior written consent of Landlord. The Assignee of Tenant, at option of Landlord, shall become directly liable to Landlord for all obligations of Tenant hereunder, but no sublease or assignment by Tenant shall relieve Tenant of any liability hereunder.

EVENTS OF DEFAULT

21.
The happening of any one or more of the following events (hereinafter any one of which may be referred to as an "Event of Default") during the term of this Lease, or any renewal or extension thereof, shall constitute a breach of this Lease on the part of the Tenant (A) Tenant fails to pay the rental as provided for herein, and such failure continues for ten (10) days after written notice thereof; (B) Tenant abandons or vacates the Premises; (C) Tenant fails to comply with or abide by and perform any other obligation imposed upon Tenant under this Lease, and such failure continues for thirty (30) days after written notice thereof; provided that if such failure cannot be cured within thirty (30) days, such failure shall not constitute a default hereunder if Tenant has commenced such cure within thirty (30) days after written notice and diligently pursues such cure lei completion; (D) Tenant is adjudicated bankrupt; (E) a permanent receiver is appointed for Tenant's property and such receiver is not removed within sixty (60) days after written notice from Landlord to Tenant to obtain such removal; (F) Tenant, either voluntarily or involuntarily, takes advantage of any debt or relief proceedings under the present or future law, whereby the rent or






TDG Operations, LLC
Page 5 of 19
    





any part thereof is, or is proposed to be, reduced or payment thereof deferred; (G) Tenant makes an assignment for benefit of creditors; or (H) Tenant's assets are levied upon or attached under process against Tenant, which is not satisfied or dissolved within thirty (30) days after written notice from Landlord to Tenant to obtain satisfaction thereof.

REMEDIES UPON DEFAULT

22.
Upon the occurrence of an Event of Default, Landlord, in addition to any and all other rights or remedies it may have at law or in equity, shall have the option of pursuing any one or more of the following remedies:

A.
Landlord may terminate this Lease by giving notice of termination, in which event this Lease shall expire and terminate on the date specified in such notice of termination, with the same force and effect as though the date so specified were the date herein originally fixed as the termination date of the term of this Lease, and all rights of Tenant under this Lease and in and to the Premises shall expire and terminate, and Tenant shall remain liable for all obligations under this Lease arising up to the date of such termination and Tenant shall surrender the Premises to Landlord on the date specified in such notice;

B.
Landlord may terminate this Lease as provided in paragraph 22(A) hereof and recover from Tenant all damages Landlord may incur by reason of Tenant's default, including, without limitation, a sum which, at the date of such termination, represents the then value of the excess, if any, of the aggregate reasonable rental value of the Premises (less reasonable brokerage commissions, attorneys' fees and other costs relating to the retelling of the Premises) for the same period, all of which excess sum shall be deemed immediately due and payable;

C.
Landlord may, without terminating this Lease, declare immediately due and payable all monthly rental and additional rent due and coming due under this Lease for the entire remaining term hereof, together with all other amounts previously due, at once; provided, however, that such payment shall not be deemed a penalty or liquidated damages but shall merely constitute payment in advance of rent for the remainder of said term; upon making such payment, Tenant shall be entitled to receive from Landlord all rents received by Landlord from other assignees, tenants and subtenants on account of the Premises during the term of this Lease, provided that the monies to which Tenant shall so become entitled shall in no event exceed the entire amount actually paid by Tenant to Landlord pursuant to this clause less all costs, expenses and attorneys' fees of Landlord incurred in connection with the retelling of the Premises; or

D.
Landlord may, from time to time without terminating this Lease, and without releasing Tenant in whole or in part from Tenant's obligation to pay monthly rental and additional rent and perform all of the covenants, conditions and agreements to be performed by Tenant as provided in this Lease, make such alterations and repairs as may be necessary in order to relet the Premises, and after making such alterations and repairs, Landlord may, but shall not be obligated to, relet the Premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable or acceptable; upon each reletting, all rentals received by Landlord from such reletting shall be applied first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord, second, to the payment of any costs and expenses of such reletting, including brokerage fees and attorneys' fees, and of. costs of such alterations and repairs, third, to the payment of the monthly rental and additional rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied against payments of future monthly rental and additional rent as the same may become due and payable hereunder, in no event shall Tenant be entitled to any excess rental received by Landlord over and above charges that Tenant is obligated to pay hereunder, including monthly rental and additional rent; if such rentals received from such reletting during any month are less that those to be paid during the month by Tenant hereunder, including monthly rental and additional rent, Tenant shall pay any such deficiency to Landlord, which deficiency shall be calculated and paid monthly; Tenant shall also pay Landlord as soon as ascertained and upon demand all costs and expenses incurred by Landlord in connection with such reletting and in making any alterations and repairs which are not covered by the rentals received from such reletting; notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach.

Tenant acknowledges that the Premises are to be used for commercial purposes, and Tenant expressly waives the protections and rights set forth in Georgia statutes related to residential leases.





TDG Operations, LLC
Page 6 of 19






E XT E RIOR SIGNS

23.
Tenant shall place no signs upon the outside walls or roof of the Premises except with the w r itten consent of the Landlord. Landlord acknowledges that Tenant shall have the right to place a pylon sign at the entrance to th e driveway and a sign on the exterior of the building in which the Premises are located, but such shall be subject to the prior approval of Landlord, which shall not be unreasonably withheld or delayed . Any and all signs placed on the Premises by Tenant shall be maintain e d in compliance with governmental rules and regulations governing such signs and Tenant shall be responsible to Landlord for any damage caused by installation, use or maintenance of said signs, and all damage incidents to such removal.      ·

LANDLORD'S ENTRY OF PREMISES

24.
Landlord may card the Premises "For Rent'' or "For Sale" sixty (60) days before the termination of this Lease. Landlord may enter the Premises at reasonable hours to exhibit the Premises to inspect the Premises to see that Tenant is complying with all of its obligations hereunder, and to make repairs required of Landlord under the terms hereof or to make repairs to Landlord's adjoining property, if any; provided that Landlord shall not unreasonably interfere with Tenant's business . Upon at least one (1) business day prior notice, in which the name of the prospective purchas e r or tenants shall be disclosed to Tenant, Landlord shall also have the right to enter the Premises during normal business hours to show the Premises to prospective purchasers or tenants; provided that Tenant shall have the right to deny access to prospective purchasers or tenants who compete with Tenant.

EFFECT OF TERMINATION OF LEASE

25.
No termination of this Lease prior to the normal ending thereof, by lapse of time or otherwise, shall affect Landlord's right to collect rent for the period prior to termination thereof.

SUBORDINATION

26.
At the option of Landlord, Tenant agrees that this Lease shall remain subject and subordinate to all present and future mortgages, deeds to secure debt or other security instruments (the " Security Deeds") affecting the Building or the Premises , and Tenant shall promptly execute and deliver to Landlord such certificate or certificates in writing as Landlord may request, showing the subordination of the Lease · to such Security Deeds ; provided the lender executes an acceptable non-disturbance and attornment agreement, Tenant shall upon request from Landlord at any time and from time to time execute, acknowledge and deliver to Landlord a written statement certifying as follows: (A) that this Lease is unmodified and in full force and effect (or if there has been modification thereof, that the same is in full force and effect as modified and stating the nature thereof) ; (B) that to the best of its knowledge there are no uncured defaults on the part of Landlord (or if any such default exists, the specific nature and extent thereof); (C) the date to which any rent and other charges have been paid in advance, if any; and (D) such other matters as Landlord may reasonably request.

QUIET ENJOYMENT

27.
So long as Tenant observes and performs the covenants c:1nd agreements contained herein, it shall at all times during the Lease term peacefully and quietly have and enjoy possession of the Premises, but always subject to the terms hereof .

MEMORANDUM OF LEASE

28.
Upon the request of either party hereto, both parties shall execute a Memorandum of Lease, in recordable form , to give record notice of the basic terms of this Lease.

HOLDING OVER

29.
If Tenant remains in possession of the Pr e mises after expiration of the term hereof, with Landlord's acquiescence
and without any express agreement of the parties, Tenant shall be a tenant at will at a rate equal to 110% of





TDG Operations, LLC
Page 7 of 19






the rate in effect at end of this Lease and there shall be no renewal of this Lease by operation of law. If Tenant remains in possession of the Premises after expiration of the term hereof without Landlord's acquiescence, then Tenant shall be a tenant at sufferance.

ATTORNEY'S FEES

30.
In the event Tenant defaults in the performance of any of the terms, covenants, agreements or conditions contained in this Lease, and Landlord places the enforcement of all or any part of this Lease, the collection of any rent due or to become due or recovery of the possession of the leased premises in the hands of an attorney, Tenant agrees to pay Landlord reasonable attorney's fees for the services of the attorney, whether suit is actually filed or not. If suit is filed, the prevailing party shall reimburse the prevailing party for its reasonable attorney's fees and court costs.

RIGHTS CUMULATIVE

31.
All rights, powers and privileges conferred hereunder upon parties hereto shall be cumulative and not restrictive of those given by law.

WAIVER OF RIGHTS

32.
No failure of Landlord to exercise any power given Landlord hereunder or to insist upon strict compliance by Tenant of its obligations hereunder and no custom or practice of the parties at variance with the terms hereof shall constitute a waiver of Landlord's right to demand exact compliance with the terms hereof.

ENVIRONMENTAL LAWS

33.
Landlord represents to the best of its knowledge and belief, (A) the Premises are in compliance with all applicable environmental laws, and (B) there are not excessive levels (as defined by the Environmental Protection Agency) of radon, toxic waste or hazardous substances on the Premises. Before and during the term of this Lease, Landlord agrees to provide Tenant with copies of all environmental reports on the Property in order to confirm the status of any environmental issues relating to the Property as of commencement of this Lease. Tenant represents and warrants that Tenant shall comply with all applicable environmental laws and that Tenant shall not permit any of its employees, contractors or subcontractors, or any person present on the Premises to generate, manufacture, store, dispose or release on, about, or under the Premises any toxic waste or hazardous substances which would result in the Premises not complying with any applicable environmental laws.

TIME OF ESSENCE

34.
Time is of the essence of this Lease.

DEFINITIONS

35.
"Landlord" as used in this Lease shall include the undersigned, its heirs, legal representatives, assigns and successors in title to the Premises. "Tenant" shall include the undersigned and its assigns and successors, and if this Lease shall be validly assigned or sublet, shall include also Tenant's assignees or subtenants as to the Premises covered by such assignment or sublease. "Landlord" and "Tenant'' include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties.

NOTICES

36.
All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by
U.S. Certified Mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered or sent to the address shown below, except that upon Tenant's taking possession of the Premises, then the Premises shall be Tenant's address for notice purposes. Notices to Landlord and Broker shall be delivered or sent to the address hereinafter stated, to wit:





TDG Operations, LLC
Page 8 of 19





Landlord:      Thornton Edge LLC P.O. Box 185 . Lookout Mountain TN 37350
Tenant:     TDG Operations LLC 2208 S . Hamilton Street Extension, Dalton, GA 30721-4974

All notices shall be effective upon delivery. Any party may change his notice address upon written notice to the other parties.

ENTIRE AGREEMENT

37.
This Lease, along with the Exhibits hereto contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or o t herwise, between the parties, not embodied herein, shall be of by force or effect. No subsequent alteration, amendment, change or addition to this Lease, except as to the changes or additions to the Rules and Regulations described in paragraph 7, shall be binding upon Landlord or Tenant unless reduced to writing and signed by Landlord and Tenant.

SUCCESSORS

38.
This Lease shall be binding and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors and assigns . It is hereby covenanted and agreed that should Landlord's interest in the Premises cease to exist for any reason during the term of the Lease, then notwithstanding the happening of such event this Lease nevertheless shall remain unimpaired and in full force and effect and Tenant hereunder agrees to attorn to the then owner of the Premises.

LANDLORD'S LIEN

39.
As security for Tenant's payment of rent, damages and all other payments required to be made by this Lease, Tenant, hereby grants to Landlord a lien upon all property of Tenant now or subsequently located upon the Premises, subject to any prior lien Tenant has given to its existing or future lender(s), and subject to the terms of a Landlord subordination agreement, substantially in the form attached herfeto as Exhibit D ("Landlord Agreement"). Tenant's obligations under this Lease are subject to approval by its existing lender, but execution by such lender of the Landlord Agreement ·shall confirm such lender's approval. . If Tenant abandons or vacates any substantial portion of the Premises or is in default in the payment of any rentals, . damage or other payments required to be made by this Lease, subject to the terms of any Landlord subordination agreement mentioned above, Landlord may · enter upon the Premises, by force if necessary, and take possession · of all or any part of the personal property, and may sell all or any part of the personal property at a public or private sale, in one or successive sales, with or without further notice, to the highest bidder for cash, and, on behalf of Tenant, sell and convey all or part of the personal property to the highest bidder, delivering to the highest bidder all of the Tenant's title and Interest in the personal property sold to him . The proceeds of the sale of the personal property shall be applied by Landlord toward the cost of the sale and then towc1rd the payment of all sums then due by Tenant to Landlord under the terms of this Lease.

HOLD HARMLESS

40.
Landlord shall not be liable to Tenant's employees, agents, invitees, licensees or visitors, or to any . other person, for any injury to person or damage to property on or about the Premises caused by the negligence or misconduct of Tenant, its agents, servants or employees, or of any other person entering upon the Premises under express or implied invitation by Tenant, or caused by the building and improvements located on the Premises becoming out of repair, or caused by leakage of gas, oil, water or steam or by electricity emanating from the Premises , or clue to any other cause, unless caused by Landlord's gross negligence or willful misconduct. Subject to the waiver set forth in paragraph 12 above, Tenant agrees to indemnify and hold harmless Landlord of and from any loss, attorney's fees, expenses or claims arising out of any such damage or injury.

SPECIAL STIPULATIONS

41.
Any special stipulations are set forth below. Insofar as said Special Stipulations conflict with any of the foregoing provisions, said Special Stipulations shall control:





TDG Operations, LLC
Page 9 of 19
        





A.
Tenant will provide carpet tiles and rugs for the Premises to Landlord. Landlord is to install carpet tiles at no cost to Tenant.
B.
Dumpster: Tenant will supply and contract for its own dumpster & trash removal and place in an area designated by Landlord.
C.
Tenant, at its own cost and expense shall pay all charges for janitorial services including trash removal performed in the Premises during the term of this Lease.
D.
Storage trailers are not allowed on the Premises.
E.
Tenant is to pay its prorated share of 44.8 % of CAM, as identified on Exhibit E attached hereto. Such CAM, including taxes and insurance, shall be $44,322 for the first 12 month period. The Landlord warrants that the real estate taxes will not increase by more than 10% per year above the base estimate of $26,500.00. There will not be a cap on the property insurance. The CAM will be capped at 5% increase per year.
F.
Tenant must maintain the generator system connected to its electrical service. Landlord to put computer room on transfer switch (if not already on one) for generator. Tenant will provide a generator if current generator is insufficient in size.
G.
Tenant to allow Landlord access to Tenant's internet connection for fire alarm and elevator.
H.
Landlord shall be responsible for all costs of making the changes to the Premises as highlighted in yellow on the preliminary floor plan drawings attached hereto as Exhibit C, subject to Tenant's review and approval of final floor plan drawings, which will not be unreasonably withheld or delayed.
I.
Tenant and Landlord agree to retain a qualified electrical contractor for installation of Cat GE wiring in the Premises at locations identified by Tenant. Tenant shall be responsible for the labor portion of such contract, and Landlord shall be responsible for the materials portion of such contract.
J.
Tenant will pay for the kitchen appliances; Landlord will provide bathrooms and kitchens fixtures, cabinets and interior and install Tenant- provided icemakers, refrigerators and dishwashers.

K.
Provided Tenant is not in default under this Lease and no circumstances exist which, but for the passage of time would constitute an event of default by Tenant hereunder, Tenant s.hall have the right ("Right of First Offer'') to lease additional space located in the Building (the "Additional Space") if at any time during the Lease Term, Landlord receives a bona fide written offer ("an Offer'') from an unrelated third party 'to lease all or any part of the Additional Space. If Landlord receives an Offer, Landlord shall notify Tenant and the Tenant shall have (10) days after Tenant's receipt of such notice from Landlord in which to notify Landlord in writing that it elects to exercise its Right of First Offer to Lease with respect to such Additional Space and to accept such Additional Space on the same terms, conditions, and rental rate as if such expansion space were included within this original Lease, so that the term of the Additional Space shall be coterminous with the Lease Term, as well as the Landlord shall provide space in a condition consistent with the Premises delivered hereunder as defined by Exhibits B and C, proportionally reduced based on the number of months remaining in the Lease Term. If Tenant exercises such Right of First Offer in accordance with the provisions hereof, Landlord and Tenant shall thereupon execute an amendment to this Lease adding the Additional Space to this Lease in accordance with the provisions of this Section 41.K. If Tenant fails to execute said amendment within Ten (10) days after Landlord furnishes same to Tenant, then Tenant shall be deemed to have waived its Right of First Offer relative to such Additional Space. If Tenant elects not, or is deemed to have elected not, to exercise its Offer of First Offer within the time herein specified, and thereafter the lease of Additional Space to said third party is consummated substantially in accordance with the Offer presented to Landlord by said third party, said Right of First Offer shall automatically and without notice be extinguished with respect to such Additional Space identified in the Offer but not with respect to any other remaining Additional Space, and all remaining terms, covenants and conditions of this Lease shall continue in full force and effect.

L.
Expansion. During the Lease Term provided Tenant is not in default under this Lease and no circumstances exists which, but for the passage of time, would constitute an event of default by Tenant hereunder. Tenant shall have the option to expand into additional space of unleased and available space in the Building upon fair market value of similar space with not less than three (3) months' prior written notice to Landlord.

M.
Right of First Refusal to Purchase. Provided that Tenant is not in default under this Lease and no circumstances exist which, but for the passage of time would constitute an event of default by Tenant hereunder,, Landlord hereby grants to Tenant a right of first refusal to purchase the entirely of the Property on which the Premises is located (the"Purchase Right of First Refusal"). If at any time during the Lease Term, as such may be extended, Landlord








TDG Operations, LLC
Page 10 of 19






receives or solicits a bona fid e offer from a third party to purchase the Property on terms acceptable to Landlord, or if the Property is offered for sale by foreclosure or any other forced sale, Landlord shall give Tenant written notice of its receipt of each said offer or sale and its material terms and conditions and a statement that Landlord is acting in good faith, i s prepared to accept th e t e rms of the third party offer (the "Purchase Notice ' ). Tenant shall then give Landlord writt e n notice within Fifteen (15) business days of the receipt of the Purchase Notice of its election to either exercise or decline to e x ercis e its Purchase Right of First Refusal at the price and pursuant to the material terms and conditions of the bona fide offer contained in the Purchase Notice. Notwithstanding anything to the contrary contained herein, in no event shall Tenant have the right to terminate the Lease following Tenant's notice to Landlord that it intends to _ e x er c ise the Purchase Right of First Refusal. This Purchase Right of First Refusal shall not apply to a transfer by Landlo r d to an Affiliate of Landlord, or to any heir or trust establ i shed by the controlling owner of Landlord .

N.
Landlord Improvements and renovations to building, as set forth on Exhibits · att a ched hereto, are to be complet e d by Landlord prior to September 1, 2015 .

O.
Tenant renovations , as identified in the drawings attached hereto as Exhibit C, are to be completed by Landlord prior to September 1, 2015.

P.
Commissions. Landlord agrees to pay any and all real estate broker's fees due on this Leas e to NAI Chart e r Real Estate under a separate agreement dated September 22, 2014 . The parties indemnify and hold each other harmless for any damages, cost, loss or injury, including attorney fees , suffered by either party as a result of the non-disclosure of any other broker representing the other party to this Lease . Tenant acknowledges L a ndlord has agreed to pay NAI Charter Real Estate a commission for any renewals of this Lease, or negotiate on behalf of Landlord at the time of any renewal; e x pansion, option or new lease, and that any su c h commissions shall be Landlord's sole cost a nd expense; provided, in the event Tenant exercises the Purchase Right of First Refusal granted above , Landlord shall be responsible for any commissions due from such sale, and NAI Charter Real Estate shall thereafter have no further rights to any commissions relative to the property purchased by Tenant.

































TDG Operations, LLC
Page 11 of 19






Tenant acknowledges that Tenant has read and understands the terms of this Lease and has received a copy of it.

IN WITN E SS WHER E OF, the parties herein have hereunto set their hands and seals, in triplicate .



 /s/ PEGGY BIGHAM    
    
LANDLORD:
Witness
 
Thornton Edge, LLC
 
 
 /s/ CHARLES WHITENER

 
 
Managing Member Charles Whitener
 
 
 
 
 
TENANT:
 
 
TDG Operations, LLC
 /s/ PEGGY BIGHAM    

 
 /s/ JON FAULKNER

Witness
 
Jon Faulkner, President



    


































TDG Operations, LLC
Page 12 of 19






BUILDING RULES AND REGULATIONS

1. No additional locks shall be placed on the doors of the any premises by any tenant, nor shall any existing locks be changed unless Landlord-is i mmediately furnished with two keys thereto. Landlord will without charge furnishes t enant with two keys for each lock existing upon the entrance doors when tenant assumes possession with the understanding that at the termination of the Lease these keys shall be returned.

2. Tenant will refer all contractors, contractor's representatives and installation technicians, rendering any service on or to the premises for tenant , to Landlord's approval and supervision before performance of any contractual service, This provision shall apply to all work performed in the Building including installation of telephones, computer equipment, electrical devices and attachments and installations of any nature affecting floors , walls, woodwork, trim, windows, ceilings, equipment or any other physical portion of the Building .     

3. No Tenant shall at any time occupy any part of the Building as sleeping or lodging quarters.

4. Tenant shall not place, install or operate on demised premises or in any part of Building, any engine, stove or machinery or conduct mechanical operations or cook thereon or therein (except for microwaves) , or place or use in or about premises any explosives, gasoline, kerosene, oil acids, caustics, or any other flammable, explosive, or hazardous material without written consent of Landlord .

5. Landlord will not be responsible for lost or stolen personal property, equipment, money or jewelry from Tenant's area or public rooms regardless of whether such loss occurs when area is locked against entry or not.

6. Tenant shall not a t any time display a "For Rent" signs upon the demised premises for rent.

7. Safes and other unusually heavy objects shall be placed by the Tenant only in such places as may be approved by Landlord.

8. Windows facing on corridors shall at all times be wholly clear and uncovered (except for such signs as Landlord may approve) so that a full unobstructed view of the Interior of the demised premises may be had from the corridors.

9. Landlord will not permit entrance to Tenant's offices by use of pass key controlled by Landlord, to any person at any time without written permission by Tenant, except employees, contractors, or service personnel directly supervised by Landlord, and then only for Landlord's permitted purposes .

10. None of the entries, passages, doors, or hallways shall be blocked or obstructed, or any rubbish, litter, trash, or material of any nature placed, emptied or thrown into these areas, including any alleyways to the rear of the leased promises or such areas be used at any time except for ingress or egress by Tenant, Tenant's agents, emp l oyees or invitees.

11. The water closets and other water fixtures shall not be used for any purpose other than those for which they were constructed, and any damages resulting to them from misuse, or the defacing or injury of any part of the Building shall be borne by the person who shall occasion it, No person shall waste water by interfering with the faucets or otherwise .

12. No vehicles or animals shall be brought into the building .

13. No sign, tag, label, picture, advertisement, or notice (other than price tags of customary size used In marking samples) shall be displayed, distributed, inscribed, painted or affixed by Tenant on any part of the outside or inside of the building or of the demised premises without the prior written consent of the Landlord.

14. In the event Landlord should advance upon the request, or for the account of the Tenant, any amount for labor, material, packing, shipping, postage , freight or express upon articles delivered to the demised premises or for the safety, care, and cleanliness of the demised premises, the amount so paid shall be regarded as additional rent and shall be due and payable forthwith to the Landlord from the Tenant.





TDG Operations, LLC
Page 13 of 19






15. Tenant shall not do or permit to be done within the demised premises anything which would unreasonably annoy or interfere with the rights of other Tenant 's of the building.

16. During t he sixty days prior to the expiration of this Lease, Landlord may show the demised premises to prospective tenants and may place upon the windows or doors th e reon one or more "For Rent" signs of reasonable dimensions.


















































TDG Operations, LLC
Page 14 of 19




Exhibit 10.2

It is agreed between the parties that this Lease Amendment shall be of no force and affect whatsoever unless it shall have been executed by the Landlord and an executed copy delivered to the Tenant. The delivery of this document to the Tenant unsigned by Landlord does not constitute an offer.




FIRST LEASE AMENDMENT

This First Lease Amendment is dated as of the 20 th day of July 2015, and is by and between Lessor, Thornton Edge LLC, and Lessee, TOG Operations LLC pertaining to the Lease for the Office Space located at 475 Reed Road Dalton, GA 30720


WITNESSETH:



In consideration of the various covenants contained herein; contained in the original Lease dated April 1, 2015 (the "Lease"); the parties agree that the foregoing instruments are amended and superseded as follows:

1.
The rentable square ft. under the Lease is hereby increased by 5,091 square feet for the additional space identified as "Lease Amendment I" space on Exhibit A attached hereto (the "Additional Space"), so that the total Premises will consist of forty seven thousand eight hundred eighty-one (47,881) sq. ft.

2.
The annual rent will be Three Hundred Thirty Five Thousand One Hundred Sixty Seven Dollars ($335,167.00), which shall be payable i n advance on the first (1st) day of each calendar month during the term, beginning on the later of date the Premises, the original space and the Additional Space each treated individually for the commencement of rent, are delivered to Tenant or September 1, 2015, at the monthly rate of Twenty Seven Thousand Nine Hundred Thirty and 58/100 Dollars ($27,930.58).

3.
Upon the execution of this Amendment, Tenant agrees to pay to Landlord an additional deposit of Two Thousand Nine Hundred Sixty Nine and 75/100 Dollars ($2,969.75) and additional rent for the third month of the term of Two Thousand Nine Hundred Sixty Nine and 75/100 Dollars ($2,969.75). The total due at the signing of this amendment is Five Thousand Nine Hundred Thirty Nine and 50/100 Dollars ($5,939.50).

4.
The Additional Space will be built-out within 90 days after the amendment is executed. Pursuant to the terms under the original lease.










All other terms and conditions of the Lease Agreement shall remain and continue in effect, and shall be deemed unchanged except as modified herein.

IN WITNESS WHEREOF, the undersigned caused its duly authorized representatives to set their hands and affix i its seal as of the day and year first above written

                    
LESSOR:
Thornton Edge, LLC
 /s/ CHARLES WHITENER

Date: July 20, 2015
 
TENANT:
TDG Operations, LLC
 /s/ JON FAULKNER

Date: July 20, 2015






Exhibit 10.3

It is agreed between the parties that this Lease Amendment shall be of no force and affect whatsoever unless it shall have been executed by the Lessor and an executed copy delivered to the Lessee. The delivery of this document to the Lessee unsigned by Lessor does not constitute an offer.




SECOND LEASE AMENDMENT

This Second Lease Amendment is dated as of the 23 rd day of July 2015, and is by and between Lessor, Thornton Edge LLC, and Lessee, TDG Operations LLC pertaining to the Lease for the Office Space located at 475 Reed Road Dalton, GA 30720


WITNESSETH



In consideration of the various covenants contained herein; contained in the original Lease dated April 1, 2015, as amended by First Lease Amendment dated July 20, 2015 (the "First Amendment", and collectively, the "Lease"); the parties agree that the foregoing instruments are amended and superseded as follows:

1.
Pursuant to the First Amendment, the rentable square feet under the Lease was increased to forty seven thousand eight hundred eighty-one (47,881) sq. ft.

2.
Due to the change in square footage under the Lease, Lessee's prorated share of CAM is hereby increased to 50.1%, as identified in the revised Exhibit E attached hereto Such CAM, including taxes and insurance, is hereby be amended to $49,566.44 for the first 12 month period, adjusted for the time period the additional space is made available. Lessor warrants that the real estate taxes wilI not increase by more than l0% per year above the base estimate of $26,500 . 00 . There will not be a cap on the property insurance other than Lessee's portion of the total CAM will be capped at 5% increase per year



All other terms and conditions of the Lease Agreement shall remain and continue in effect, and shall be deemed unchanged except as modified herein.

IN WITNESS WHEREOF, the undersigned caused its duly authorized representatives to set their hands and affix its seal as of the day and year first above written.


                        
LESSOR:
Thornton Edge, LLC
 /s/ CHARLES WHITENER

Date: July 23, 2015
 
TENANT:
TDG Operations, LLC
 /s/ JON FAULKNER

Date: July 23, 2015





EXHIBIT 31.1

Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Daniel K. Frierson, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of The Dixie Group, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: November 4, 2015
    
  /s/ DANIEL K. FRIERSON                         
 
 
Daniel K. Frierson
 
 
Chief Executive Officer
 
 
The Dixie Group, Inc.





EXHIBIT 31.2

Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jon A. Faulkner, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of The Dixie Group, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 4, 2015
 
  /s/ JON A. FAULKNER                      
 
 
Jon A. Faulkner
 
 
Chief Financial Officer
 
 
The Dixie Group, Inc.







EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Dixie Group, Inc. (the "Company") on Form 10-Q for the quarter ended September 26, 2015, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel K. Frierson, the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ DANIEL K. FRIERSON
Daniel K. Frierson, Chief Executive Officer
Date: November 4, 2015



A signed original of this written statement required by Section 906 has been provided to The Dixie Group, Inc. and will be retained by The Dixie Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.







EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Dixie Group, Inc. (the "Company") on Form 10-Q for the quarter ended September 26, 2015, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jon A. Faulkner, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ JON A. FAULKNER
Jon A. Faulkner, Chief Financial Officer
Date: November 4, 2015
 


A signed original of this written statement required by Section 906 has been provided to The Dixie Group, Inc. and will be retained by The Dixie Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.