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Article by DailyStocks_admin    (01-09-09 05:44 AM)

Filed with the SEC from Dec 26 to Dec 31:

Dixie Group (DXYN)
RGM Capital has 1.12 million shares (9.57%) after selling 375,600 from Dec. 17 to 22 at prices ranging from $1.70 to $1.85.

BUSINESS OVERVIEW

General

Our business consists principally of marketing, manufacturing and selling carpet and rugs to high-end residential and commercial customers through the Fabrica International, Masland Carpets and the Dixie Home brands. A small portion of our manufacturing capacity is used to process yarns and provide carpet dyeing and finishing services to other carpet manufacturers.


Over the seven year period beginning in 1993, we made eight floorcovering business acquisitions and completed the disposal of the assets of our textile product's business. In 2001 through 2003, we disposed of our lower price point factory-built housing carpet, needlebond and carpet recycling businesses. The sale of these businesses and assets allowed us to substantially reduce our debt, diversify our customer base and focus on the upper-end of the soft floorcovering market where we believe we have strong brands and competitive advantages with our style and design capabilities and customer relationships.


Our business is now concentrated in areas of the soft floorcovering markets where innovative styling, design, color, quality and service, as well as limited distribution, are welcomed and rewarded. Through Masland, Fabrica, and Dixie Home, we have a significant presence in the high-end of the residential and commercial soft floorcovering markets. Our brands are well known, highly regarded and complementary; by being differentiated, we offer meaningful alternatives to the discriminating customer.


Our Business Units


We are in one line of business, Carpet Manufacturing.


Fabrica


Fabrica , founded in 1977, markets and manufactures luxurious residential carpet and custom rugs, at selling prices that we believe are approximately four and one half times the average for the soft floorcovering industry. Its primary customers are interior decorators and designers, selected retailers and furniture stores, luxury home builders and manufacturers of luxury motor coaches and yachts. Fabrica is among the leading premium brands in the domestic marketplace and is known for styling innovation and unique colors and patterns. Fabrica is viewed by the trade as a premier brand and resource for very high-end carpet and enjoys an established reputation as a styling trendsetter and a market leader in the very high-end residential sector. Fabrica accounted for approximately 18% of our sales in 2007.


Masland


Masland Carpets, founded in 1866, markets and manufactures residential and commercial products.


Masland Residential markets and manufactures design-driven specialty carpets and rugs for the high-end residential marketplace. Its residential broadloom carpet products are marketed at selling prices that we believe are approximately three and one half times the average for the soft floorcovering industry. Its products are marketed through the interior design community, as well as to consumers through specialty floorcovering retailers. Masland Residential accounted for approximately 32% of our sales in 2007. Masland Residential has strong brand recognition within the upper-end residential market. Masland Residential competes through innovative styling, color, product design, quality and service.


Masland Contract markets and manufactures broadloom and modular carpet (carpet tiles) for the specified commercial marketplace. Its commercial products are marketed through the architectural and specifier community and directly to commercial end users, as well as to consumers through specialty floorcovering retailers. Masland Contract was started in 1993 and accounted for approximately 27% of our sales in 2007. Masland Contract has strong brand recognition within the upper-end contract market. Masland Contract competes through innovative styling, color, patterns, quality and service.

Dixie Home


We introduced Dixie Home in 2003 as a brand to provide stylishly designed, differentiated products that offer affordable fashion to residential and commercial consumers. Dixie Home markets an array of tufted broadloom residential and commercial carpet to selected retailers and home centers under the Dixie Home and private label brands. Its objective is to make the Dixie Home brand the choice for styling, service and quality in the more moderately priced sector of the high-end broadloom residential and commercial carpet market. Its products are marketed at selling prices which we believe are approximately two times the average for the soft floorcovering industry. Dixie Home's products have been well received in the marketplace and are expected to have significant growth potential. Dixie Home accounted for approximately 18% of our sales in 2007.


Industry


The carpet and rug industry has two primary markets, residential and commercial, with the residential market making up the largest portion of the industry's sales. A substantial portion of industry shipments is made in response to replacement demand. Residential products consist of broadloom carpets and rugs in a broad range of styles, colors and textures. Commercial products consist primarily of broadloom carpet and carpet tiles for a variety of institutional applications such as office buildings, restaurant chains, schools and other commercial establishments. The carpet industry also manufactures carpet for the automotive, recreational vehicle, small boat and other industries.


The Carpet and Rug Institute (the "CRI") is the national trade association representing carpet and rug manufacturers. Information compiled by the CRI suggests that the domestic carpet and rug industry is comprised of fewer than 100 manufacturers, with a significant majority of the industry's production concentrated in a limited number of manufacturers. The industry has continued to consolidate in recent years. We believe that this consolidation provides us with opportunities to capitalize on our competitive strengths in selected markets where innovative styling, design, product differentiation, focused service and limited distribution can add value.


Competition


The floorcovering industry is highly competitive. We compete with other carpet manufacturers and rug manufacturers and other types of floorcoverings. Despite the industry consolidation, a number of smaller manufacturers remain. We believe our products are among the leaders in styling and design in the high-end residential and high-end commercial carpet markets. However, a number of manufacturers produce competitive products and some of these manufacturers have greater financial resources than we do.


We believe the principal competitive factors in our primary floorcovering markets are innovative styling, color, product design, quality and service. In the high-end residential and high-end commercial markets, carpet competes with various other types of floorcoverings, many of which have grown at a faster rate than carpet in recent years.


Nevertheless, we believe we have competitive advantages in several areas. We have an attractive portfolio of brands that we believe are well known, highly regarded by customers and complementary; by being differentiated, we offer meaningful alternatives to the discriminating customer. In addition, we have established longstanding relationships with key suppliers in our industry and customers in most of our markets. Finally, our reputation for innovative design excellence and our experienced management team enhance our competitive position. See "Risk Factors" in Item 1A of this report.


Backlog


Sales order backlog is not material to an understanding of our business, due to relatively short lead times for order fulfillment in the markets for the vast majority of our products.


Trademarks


Our floorcovering businesses own a variety of trademarks under which our products are marketed. Among such trademarks, the names "Masland" "Fabrica" and "Dixie Home" are of greatest importance to our business. We believe that we have taken adequate steps to protect our interest in all significant trademarks.

Seasonality


Our sales volumes historically have normally reached their highest levels in the fourth quarter (approximately 28% of our annual sales) and their lowest levels in the first quarter (approximately 22% of our annual sales), with the remaining sales being distributed relatively equally between the second and third quarters. Working capital requirements have normally reached their highest levels in the second and third quarters of the year.


Environmental


Our operations are subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. The costs of complying with environmental protection laws and regulations have not had a material adverse impact on our financial condition or results of operations in the past and are not expected to have a material adverse impact in the future. See "Risk Factors” in Item 1A of this report.


Raw Materials


We obtain our raw materials from a number of domestic suppliers. Man-made yarns are purchased from major chemical companies. Where possible, we pass raw material price increases through to our customers; however, there can be no assurance that price increases can be passed through to customers and that increases in raw material prices will not have an adverse effect on our profitability. See "Risk Factors” in Item 1A of this report. We purchase a significant portion of our raw materials (nylon yarn) from one supplier. We believe there are other sources of nylon yarn; however, an unanticipated termination or interruption of our supply arrangements could adversely affect our supply arrangements and could be material. See "Risk Factors” in Item 1A of this report.


Utilities


We use electricity as our principal energy source, with oil or natural gas used in some facilities for finishing operations as well as heating. We have not experienced any material problem in obtaining adequate supplies of electricity, natural gas or oil. Energy shortages of extended duration could have an adverse effect on our operations, and price volatility could negatively impact future earnings. See "Risk Factors” in Item 1A of this report.


Working Capital


We are required to maintain significant levels of inventory in order to provide the enhanced service levels demanded by the nature of our business and our customers, and to ensure timely delivery of our products. Consistent and dependable sources of liquidity are required to maintain such inventory levels. Failure to maintain appropriate levels of inventory could materially adversely affect our relationships with our customers and adversely affect our business.


Employment Level


We employ approximately 1,500 associates in our operations.

Available Information


Our internet address is www.thedixiegroup.com. We make the following reports filed by us with the Securities and Exchange Commission available, free of charge, on our website under the heading "Investor Relations":


1. annual reports on Form 10-K;
2. quarterly reports on Form 10-Q;
3. current reports on Form 8-K; and
4. amendments to the foregoing reports.

The contents of our website are not a part of this report.

CEO BACKGROUND

J. Don Brock , Ph. D., age 69, is the Chairman of the Board, Chief Executive Officer and President of Astec Industries, Inc., a manufacturer of asphalt and paving equipment headquartered in Chattanooga, Tennessee. Dr. Brock also serves as a director for New Enterprises Stone. He has been a director of the Company since 1997. Dr. Brock is a member of the Company’s Audit Committee and a member of the Company’s Executive Committee.

Daniel K. Frierson , age 66, is Chairman of the Board of the Company, a position he has held since 1987. He also has been Chief Executive Officer of the Company since 1980 and a director of the Company since 1973. Mr. Frierson serves as a director of Astec Industries, Inc., a manufacturer of asphalt and paving equipment headquartered in Chattanooga, Tennessee; and Louisiana-Pacific Corporation, a manufacturer and distributor of building materials headquartered in Nashville, Tennessee. Mr. Frierson is Chairman of the Company’s Executive Committee and Chairman of the Company’s Retirement Plans Committee.

Paul K. Frierson , age 70, served as Vice President of the Company and President of the Company’s Candlewick Yarns subsidiary from 1989 to 2003. He has been a director of the Company since 1988. Mr. Frierson is a member of the Company’s Retirement Plans Committee.

Walter W. Hubbard. , age 64, served as President and CEO of Honeywell Nylon, Inc., a wholly-owned subsidiary of Honeywell International, a manufacturer of nylon products from 2003 until his retirement in 2005. Prior to becoming President of Honeywell Nylon, Mr. Hubbard served as Group Vice President, Fiber Products of BASF Corporation from 1994 until 2003. He has been a director of the Company since 2005. Mr. Hubbard is a member of the Company’s Audit Committee and Compensation Committee.

Lowry F. Kline , age 67, has served as a director of Coca-Cola Enterprises, Inc. since April 2000, serving as Chairman from April 2003 until February, 2008, and as Vice Chairman from April 2000 to April 2003. Mr. Kline served as Chief Executive Officer of Coca-Cola Enterprises, Inc. from April 2001 to December 2003, and from November 2005 to April 2006. Prior to becoming Chief Executive Officer for Coca-Cola Enterprises, Inc., he held a number of positions with such company, including Chief Administrative Officer, Executive Vice President and General Counsel. Mr. Kline is a member of the Board of Directors of Jackson Furniture Industries, Inc., headquartered in Cleveland, Tennessee, and the American Beverage Association, and is a member of the Executive Committee of the Metro Atlanta Chamber of Commerce. He is also a member of the Board of Trustees of the Woodruff Arts Center. He has been a director of the Company since 2004. Mr. Kline is Chairman of the Compensation Committee and a member of the Audit Committee and the Executive Committee.

John W. Murrey, III , age 65, is an Assistant Professor of Law at the Appalachian School of Law. He previously served as a Senior Member of the law firm of Witt, Gaither & Whitaker, P.C. in Chattanooga, Tennessee until June 30, 2001. He has been a director of the Company since 1997. Mr. Murrey has served as a director of Coca-Cola Bottling Co. Consolidated, a Coca-Cola bottler headquartered in Charlotte, North Carolina since 1993 and has served on its Audit Committee. He also served as a director of U.S. Xpress Enterprises, Inc., a truckload carrier headquartered in Chattanooga, Tennessee, from 2003 until 2007, and was Chairman of its Audit Committee. Mr. Murrey is Chairman of the Company’s Audit Committee and a member of the Company’s Compensation Committee.

Daniel K. Frierson and Paul K. Frierson are brothers. D. Kennedy Frierson, Jr., the Company’s Vice President and President, Masland Residential, is the son of Daniel K. Frierson and the nephew of Paul K. Frierson. No other director, nominee, or executive officer of the Company has any family relationship, not more remote than first cousin, to any other director, nominee, or executive officer.

The Board of Directors recommends that the Company’s shareholders vote FOR setting the number of directors at six (6) and electing the six (6) nominees for director.

Meetings of the Board of Directors

The Board of Directors of the Company met seven (7) times in 2007.

Committees, Attendance, and Directors’ Fees

The Company has a standing Executive Committee, Audit Committee, Retirement Plans Committee, and Compensation Committee. As described in detail below, pursuant to provisions in their respective charters, the Company’s Audit Committee performs the functions of a nominating committee, and the Company’s Compensation Committee performs the functions of a corporate governance committee.

Members of the Executive Committee are Daniel K. Frierson, Chairman, J. Don Brock and Lowry F. Kline. Except as otherwise limited by law or by resolution of the Board of Directors, the Committee has and may exercise all of the powers and authority of the Board of Directors for the management of the business and affairs of the Company, which power the Committee exercises between the meetings of the full Board of Directors. The Executive Committee met once in 2007.

Members of the Audit Committee are John W. Murrey, III, Chairman, J. Don Brock, Walter W. Hubbard, and Lowry F. Kline. All of the members of the Audit Committee are “independent directors” as that term is defined by the applicable rule of the National Association of Securities Dealers, Inc. (“NASD”). The Audit Committee evaluates audit performance, handles relations with the Company’s independent auditors, and evaluates policies and procedures relating to internal accounting functions and controls. The Committee has the authority to engage the independent accountants for the Company. The Audit Committee operates pursuant to an Audit Committee Charter adopted by the Board of Directors. The Audit Committee has implemented pre-approval policies and procedures related to the provision of audit and non-audit services performed by the independent auditors. Under these procedures, the Committee approves the type of services to be provided and the estimated fees related to those services. Effective March 4, 2008, the Committee formally amended its Charter to include duties of a nominating committee. These duties are described in detail, below. The Committee met five (5) times in 2007.

Members of the Retirement Plans Committee are Daniel K. Frierson, Chairman, and Paul K. Frierson. The Retirement Plans Committee administers the Company’s retirement plans. The committee met two (2) times in 2007.

Members of the Compensation Committee are Lowry F. Kline, Chairman, Walter W. Hubbard, and John W. Murrey, III. The Compensation Committee administers the Company’s compensation plans, reviews and may establish the compensation of the Company’s officers, and makes recommendations to the Board of Directors concerning such compensation and related matters. The Compensation Committee met once (1) in 2007. Effective March 4, 2008, a written Charter for the Committee was adopted by the Board of Directors. The written Charter formalized Committee responsibilities that had previously been set out in a resolution adopted by the Company’s Board of Directors, and included the responsibilities of a corporate governance committee.

In accordance with that resolution and its Charter, the Committee has the authority to review and establish compensation for each of the Company’s executive officers and directors and may recommend to the Board, for its approval, and for shareholder approval, when required, compensation plans and compensation amounts for such executive officers.

The Committee may request recommendations from the Company’s management concerning the types and levels of compensation to be paid to the Company’s executive officers. Additionally, the Committee is authorized to engage compensation consultants and may review and consider information and recommendations of compensation consultants otherwise engaged by the Company or the Board of Directors in connection with the assessment, review and structuring of compensation plans and compensation levels. For a description of the Committee actions with respect to Compensation of Executive Officers in 2007, see Compensation Discussion and Analysis—Compensation for 2007.

Annually, the Compensation Committee will review the performance of the Chief Executive Officer against the Company’s goals and objectives as part of the process of determining his compensation level. The Committee will report to the Board on its performance review.

As noted above, the Audit Committee, amended its Charter on March 4, 2008, to include the responsibilities of a nominating committee.

The Board selects nominees for election as director from persons approved and recommended by a majority of the members of the Audit Committee. In selecting nominees for director, the independent directors that constitute the Audit Committee operate pursuant to provisions in its charter that address the nominations process. Each member of the committee is independent, as defined by the applicable rule of the NASD.

The committee may recommend director nominees to the full Board for approval. Only nominees approved by a majority of the committee are recommended to the full Board. In selecting and approving director nominees, the independent directors will consider, among other factors, the existing composition of the Board and their evaluation of the mix of Board members appropriate for the perceived needs of the Company. The independent directors believe continuity in leadership and board tenure increase the Board’s ability to exercise meaningful board oversight. Because qualified incumbent directors provide stockholders the benefit of continuity of leadership and seasoned judgment gained through experience as a director of the Company, the committee will generally consider as potential candidates those incumbent directors interested in standing for re-election who have satisfied director performance expectations, including regular attendance at, preparation for and meaningful participation in Board and committee meetings.

The independent directors of the Board also consider the following in selecting the proposed nominee slate:


•

at all times, at least a majority of directors must be “independent” in the opinion of the Board as determined in accordance with Nasdaq standards;


•

at all times at least three members of the Board must satisfy heightened standards of independence for Audit Committee members; and


•

at all times the Board should have at least one member who satisfies the criteria to be designated by the Board as an “audit committee financial expert.”

Generally, the Board will consider stockholder recommendations of proposed director nominees if such recommendations are serious and timely received. To be timely for next year’s annual meeting, recommendations must be received in writing at the principal executive offices of the Company no later than November 12, 2008. In addition, any stockholder director nominee recommendation must include the following information:


•

the proposed nominee’s name and qualifications and the reason for such recommendation;


•

the name and record address of the stockholder(s) proposing such nominee;


•

the number of shares of stock of the Company which are beneficially owned by such stockholder(s); and


•

a description of any financial or other relationship between the stockholder(s) and such nominee or between the nominee and the Company or any of its subsidiaries.

In order to be considered by the Board, any candidate proposed by one or more stockholders will be required to submit appropriate biographical and other information equivalent to that required of all other director candidates.

During 2007, no director attended fewer than 75% of the total number of meetings of the Board of Directors and any Committee of the Board of Directors on which he served. All directors are invited and encouraged to attend the annual meeting of shareholders. In general, all directors attend the annual meeting of shareholders unless they are unable to do so due to unavoidable commitments or intervening events. All six (6) incumbent directors attended the 2007 annual meeting of shareholders.

Directors who are employees of the Company do not receive any additional compensation for their services as members of the Board of Directors. Non-employee directors receive an annual retainer of $12,000 cash and $12,000 in value of Performance Units under the Directors Stock Plan. In addition to the annual retainer, directors who are not employees of the Company receive $1,500 for each Board meeting attended and $1,000 for each committee meeting attended ($1,500 for the Committee Chairman). Fees for attending telephonic meetings are one-half those for in-person meetings, such that each non-employee director receives $750 per telephonic board meeting and $500 per committee meeting ($750 for the Chairman of the Committee). For an additional discussion of Director Compensation, see the tabular information below under the heading, “Director Compensation.”

Executive Sessions of the Independent Directors

The Company’s independent directors meet in executive session at each regularly scheduled quarterly meeting of the Board, with the chair of the Compensation Committee serving as chair of such executive sessions.

Limit on Number of Board Memberships

While the Company recognizes that its Board members benefit from service on the board of other companies and such service is encouraged, the Board believes it is critical that directors be able to dedicate sufficient time to their service on the Company’s board. To that end, the Company’s directors shall serve on no more than three public company boards in addition to the Company’s board.

Directors Who Change Their Present Job Responsibility

Individual directors who retire or otherwise change significantly the principal position they held when they were elected to the Board must tender in writing an offer of resignation from the Board as of the date of retirement or change in position. The Board does not believe that a director in this circumstance should necessarily be required to leave the Board. There should, however, be an opportunity for the independent directors to review each situation based on the individual circumstances and needs of the Board and to make a recommendation to the Board as to whether the offer of resignation should be accepted.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, and regulations of the Securities and Exchange Commission (“SEC”) thereunder, require the Company’s executive officers and directors and persons who beneficially own more than 10% of the Company’s Common Stock, as well as certain affiliates of such persons, to file initial reports of such ownership and monthly transaction reports covering any changes in such ownership with the SEC and the National Association of Securities Dealers. Executive officers, directors and persons owning more than 10% of the Company’s Common Stock are required by SEC regulations to furnish the Company with all such reports they file. Based on its review of the copies of such reports received by it, the Company believes that, during fiscal year 2007, all filing requirements applicable to its executive officers, directors, and owners of more than 10% of the Company’s Common Stock were complied with.

Management Succession

At least annually, the Board reviews a succession plan, developed by management, addressing the policies and principles for selecting a successor to the CEO. The succession plan includes an assessment of the experience, performance and skills believed to be desirable for possible successors to the CEO.

Certain Transactions Between the Company and Directors and Officers

The Company’s Audit Committee has adopted written policies and procedures concerning the review, approval or ratification of all transactions required to be disclosed under the SEC’s Regulation S-K, Rule 404. These policies and procedures cover all related party transactions required to be disclosed under the SEC’s rules as well as all material conflict of interest transactions as defined by relevant state law and the rules and regulations of NASDAQ that are applicable to the Company, and require that all such transactions be identified by management and disclosed to the Company’s Audit Committee for review. If required and appropriate under the circumstances, the Audit Committee will consider such transactions for approval or ratification. Full disclosure of the material terms of any such transaction must be made to the Committee, including:


•

the parties to the transaction and their relationship to the Company, its directors and officers;


•

the terms of the transaction, including all proposed periodic payments; and


•

the direct or indirect interest of any related parties or any director, officer or associate in the transaction.

To be approved or ratified, the Committee must find any such transaction to be fair to the Company. Prior approval of such transactions must be obtained generally, if they are material to the Company. If such transactions are immaterial, such transactions may be ratified and prior approval is not required. Ordinary employment transactions may be ratified.

D. Kennedy Frierson, Jr., the son of Daniel K. Frierson, the Company’s Chief Executive Officer and Chairman of the Board, and the nephew of director Paul K. Frierson, is employed as President of Masland Residential and is a Vice President of the Company. Mr. Frierson received an annual base salary of $230,000 in 2007 and an $8,200 cash incentive award under the Company’s Incentive Compensation Plan. Pursuant to the plan, on February 28, 2008, Mr. Frierson was granted restricted stock awards of 9,511 Long-Term Incentive Shares and 5,248 Career Shares. Pursuant to Mr. Frierson’s election, 14,136 shares were awarded as shares of Class B Common Stock. Such shares vest in accordance with the terms of the plan as described below under Compensation Discussion and Analysis, Primary Long-Term Incentive Shares and Career Shares. Mr. Frierson will participate in the Company’s incentive compensation program established for 2008. Under the terms of the Plan for 2008, Mr. Frierson will have the opportunity to earn a Cash Incentive Award, a Long-Term Incentive Award, and Career Shares.



MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report.


OVERVIEW


Our business is concentrated in areas of the soft floorcovering market where innovative styling, design, color, quality and service as well as selected distribution are welcomed and rewarded. Through our Fabrica, Masland Residential, Masland Contract and Dixie Home brands, we have a significant presence in the high-end of the soft floorcovering market. A small portion of our manufacturing capacity is used to process plied and heat-set filament yarns and provides carpet dyeing and finishing services for other carpet manufacturers.


Over the last two years, tightening credit conditions, higher energy costs and other factors have considerably reduced the levels of new residential housing construction and sales of existing homes. The housing and credit markets issues have negatively impacted the carpet industry, where sales have fallen significantly in both units and dollars over the last two years and the industry's sales volume is now running well below its high point in 2005. We have not seen signs of near-term improvement in the industry’s markets. Despite the market weakness, our carpet business has continued growing. Our total carpet sales grew 1.7% during the two years ended December 29, 2007, with carpet sales up 4.7% in fiscal 2006 and down 2.8% in fiscal 2007. Over the last five years, our carpet sales have grown at a compounded annual growth rate of 9.2%, significantly faster than the industry’s compounded annual rate of growth, which was 2.1% during this same period. We believe our focus on high-end residential and commercial markets and our dedication to the development and marketing of new and differentiated products has contributed to our growth and will allow us to continue to grow at a rate that is faster than the industry.


CRITICAL ACCOUNTING POLICIES


Certain estimates and assumptions are made when preparing our financial statements. These estimates and assumptions affect various matters, including:


•

Amounts reported for assets and liabilities in our Consolidated Balance Sheets at the dates of the financial statements, and


•

Amounts reported for revenues and expenses in our Consolidated Statements of Operations during the reporting periods presented.


Estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict. As a result, actual amounts could differ from estimates made when our financial statements are prepared.


The Securities and Exchange Commission requires management to identify its most critical accounting policies, defined as those that are both most important to the portrayal of our financial condition and operating results and the application of which requires our most difficult, subjective, and complex judgments. Although our estimates have not differed materially from our experience, such estimates pertain to inherently uncertain matters that could result in material differences in subsequent periods.


We believe application of the following accounting policies require significant judgments and estimates and represent our critical accounting policies. Other significant accounting policies are discussed in Note A to our Consolidated Financial Statements.


•

Revenue recognition. Revenues, including shipping and handling amounts, are recognized when the following criteria are met: there is persuasive evidence that a sales agreement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collection is reasonably assured. Delivery is not considered to have occurred until the customer takes title to products shipped and assumes the risks and rewards of ownership, which is generally on the date of shipment. At the time revenue is recognized, we record a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions.

Accounts receivable . We provide allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical experience and periodic evaluations of the financial condition of our customers. If the financial conditions of our customers were to significantly deteriorate, or other factors impair their ability to pay their debts, credit losses could differ from allowances recorded in our Consolidated Financial Statements.


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Customer claims and product warranties. We provide product warranties related to manufacturing defects and specific performance standards for our products. We record reserves for the estimated costs of defective products and failure to meet applicable performance standards. The levels of reserves are established based primarily upon historical experience and our evaluation of pending claims. Because our evaluations are based on historical experience and conditions at the time our financial statements are prepared, actual results could differ from the reserves in our Consolidated Financial Statements.


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Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out method (LIFO), which generally matches current costs of inventory sold with current revenues, for substantially all inventories. Reserves are also established to adjust inventories that are off-quality, aged or obsolete to their estimated net realizable value. Additionally, rates of recoverability per unit of off-quality, obsolete or excessive inventory are estimated based on historical rates of recoverability and other known conditions or circumstances that may affect future recoverability. Actual results could differ from assumptions used to value our inventory.


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Goodwill. Goodwill is subject to annual impairment testing. This test is based on the fair value of the underlying assets and businesses to which the goodwill applies based on estimates of future cash flows, which require judgments and assumptions about future economic factors that are difficult to predict. Changes in our judgments and assumptions about future economic factors could materially change our estimate of values and could materially impact the value of goodwill and our Consolidated Financial Statements.


•

Self-insured accruals . We estimate costs required to settle claims related to our self-insured medical, dental and workers' compensation plans. These estimates include costs to settle known claims, as well as incurred and unreported claims. The estimated costs of known and unreported claims are based on historical experience. Actual results could differ from assumptions used to estimate these accruals.


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Deferred income tax assets and liabilities. We recognize deferred income tax assets and liabilities for the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using statutory income tax rates that are expected to be applicable in future periods when temporary differences are expected to be recovered or paid. The effect on deferred income tax assets and liabilities of changes in income tax rates is recognized in earnings in the period that a change in income tax rates is enacted. Taxing jurisdictions could disagree with our tax treatment of various items in a manner that could affect the tax treatment of such items in the future. Accounting rules require these future effects to be evaluated using existing laws, rules and regulations, each of which is subject to change.


SHARE-BASED COMPENSATION


We adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based Payments" effective January 1, 2006. Prior to January 1, 2006, we accounted for share-based payments using Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), as permitted by SFAS No. 123, and accordingly, did not record compensation expense for stock options since our options are issued at market value on the grant date.


We did not modify existing stock-based awards prior to adoption of the new accounting standard and used the modified prospective method to account for compensation expense for share-based payments for periods after the date of adoption for (a) all unvested stock-based awards granted prior to January 1, 2006, based on the awards' estimated grant-date fair value in accordance with previous guidance, and (b) all stock-based awards granted after December 31, 2005, based on the awards' estimated grant-date fair value in accordance with the new provisions. All stock-based awards granted prior to adoption of the new standard, and some of the awards granted after the adoption of the new standard, were not subject to a market condition. Accordingly, we used the Black-Scholes option-pricing model to determine the grant-date fair value of awards that are not subject to a market condition, both prior to and after adoption of the new statement. The grant-date fair value of awards that are subject to a market condition were determined using a binomial model. Because the modified prospective method was used to adopt the new standard and we used the estimated forfeiture method under SFAS No. 123 prior to the adoption of SFAS No. 123(R), there was no cumulative effect on our Consolidated Financial Statements as a result of the adoption of SFAS 123(R).


At December 29, 2007, the weighted average vesting period for unvested stock options and restricted stock awards was four and one half years. On February 28, 2008 restricted stock, with a grant-date fair value of approximately $1.6 million was granted under our 2006 stock incentive plan. These restricted stock awards are expected to vest over the next 2 years to 19 years.


RESULTS OF OPERATIONS


Our discussion and analysis of financial condition and results of operations is based on our Consolidated Financial Statements that were prepared in accordance with U. S. generally accepted accounting principles. The following table sets forth certain elements of our continuing operations as a percentage of net sales for the periods indicated: Fiscal Year Ended December 29, 2007 Compared with Fiscal Year Ended December 30, 2006


Net Sales. Net sales for the year ended December 29, 2007 decreased 3.1% to $320.8 million. Continued weakness in residential carpet markets had a negative impact on the sales of the industry and our business. Nevertheless, our sales continued to significantly outpace the sales of the industry, which reported that total carpet sales declined 8.0%, with residential carpet sales down 13.1% and commercial carpet sales improving 1.6%, compared with the prior year. Our 2007 year-over-year carpet sales comparison reflected a 2.8% decline in total carpet sales, with net sales of residential carpet down 9.1% and net sales of commercial carpet growing 10.5%. In addition to difficult conditions in the industry, over 95% of the decline in our total carpet sales was a result of lower sales of residential carpet to one large home center customer. Revenue from carpet yarn processing and carpet dyeing and finishing services decreased 8.2% in 2007, compared with 2006.


Cost of Sales. The 1.4 percentage point decrease in cost of sales as a percentage of sales in 2007, compared with 2006 was principally attributable to higher selling prices, improved product mix and operational performance. The year-over-year comparison was also affected by LIFO inventory liquidations that reduced cost of sales by $297 thousand in 2006.


Gross Profit. Despite lower net sales and higher raw material and other costs, gross profit improved $1.4 million in 2007, compared with 2006. The improved results of our modular/carpet tile operation and the items described above that decreased cost of sales as a percentage of sales, more than offset the effect of lower sales volume.


Selling and Administrative Expenses. Selling and administrative expenses increased $2.9 million in 2007, compared with 2006. The higher level of these expenses is principally attributable to investments in our sales and marketing infrastructure, information systems and inflationary cost increases. As a percentage of net sales, these expenses also increased due to lower net sales volume. Other Operating Income. Other operating income decreased $171 thousand in 2007 primarily due to insurance settlements and refunds in 2006 that did not repeat in 2007 which more than offset higher levels of miscellaneous income in 2007.


Other Operating Expense. Other operating expense decreased $60 thousand in 2007, compared with 2006 due to lower asset retirement and impairment losses and higher levels of miscellaneous expense.


Defined Benefit Pension Plan Merger/Termination Expenses . In 2007, $1.5 million of expenses were incurred to merge our one remaining defined benefit pension plan into a multi-employer plan. These expenses principally consisted of non-cash, previously unrecognized actuarial losses. In 2006, $3.2 million of expenses were incurred to terminate our legacy defined benefit pension plan. Approximately $2.9 million of these 2006 expenses related to the settlement of pension benefits for employees of our discontinued textile business segment and the remaining expenses related to the settlement of pension benefits for employees of our ongoing floorcovering business segment.


Operating Income. Operating income was $16.7 million, or 5.2% of sales in 2007, compared with $16.6 million, or 5.0% of sales in 2006.


Interest Expense. Interest expense decreased $866 thousand in 2007 due to lower levels of debt, lower interest rates and higher levels of capitalized interest.


Other Income. Other income decreased $291 thousand in 2007 principally as a result of a dispute settled in 2006 that did not repeat in 2007.


Other Expense. Other expense was not significant in 2007 or 2006.


Income Tax Provision. Our effective income tax rate was 35.3% in 2007, compared with 18.4% in 2006. The change in the effective tax rates is principally due to reductions in our tax contingency reserve in 2006 as a result of the resolution of federal and state tax examinations and expirations of tax statutes of limitations. We also were able to utilize more state and federal income tax credits in 2006.


Net Income. Income from continuing operations was $6.8 million, or $0.52 per diluted share in 2007, compared with $7.9 million, or $0.61 per diluted share in 2006. Our discontinued operations reflected a loss of $512 thousand, or $0.04 per diluted share, in 2007, compared with a loss of $188 thousand, or $0.02 per diluted share, in 2006. Including discontinued operations, net income was $6.3 million, or $0.48 per diluted share in 2007, compared with $7.7 million, or $0.59 per diluted share, in 2006.


Fiscal Year Ended December 30, 2006 (52 weeks), Compared with Fiscal Year Ended December 31, 2005 (53 weeks)


Net Sales. Net sales for the year ended December 30, 2006 increased 3.9% to $331.1 million. Net sales of our carpet products increased 4.7% and net sales related to our carpet yarn and carpet dyeing and finishing services decreased 7.4%. Compared with 2005, net sales of residential carpet increased 4.1% and net sales of commercial carpet increased 5.9%. Our 2006 net sales were negatively affected by significant weakness in the carpet industry, particularly during the last half of the year and one less operating week in 2006, compared with 2005. Adjusting for the extra operating week in 2005, our net sales of carpet products rose 6.7% in dollars and 7.9% in units in 2006, compared to the previous year. Our carpet sales continued to outpace the carpet industry, where 2006 sales of carpet declined 0.6% in dollars and 6.5% in units, compared with the prior year.


We believe the improvement in our net sales is principally attributable to our focus on high-end markets and our continuing development of new and differentiated products. Our carpet yarn processing and carpet dyeing and finishing services are not significant to our core business and their decrease had less than a 0.5% effect on our total net sales.


Cost of Sales. The increase in cost of sales as a percentage of sales in 2006, compared with 2005, was principally attributable to costs related to start-up of new tufting and modular/carpet tile operations and higher levels of off-quality production during the first half of the year. A significant portion of the quality issues were related to outsourcing of tufting production prior to June when our new tufting facility began operating on a full schedule. The year-over-year comparison was also affected by LIFO inventory liquidations that reduced cost of sales by $297 thousand in 2006 and $389 thousand in 2005.

Gross Profit. The 1.4 percentage point decline in gross profit as a percent of sales was attributable to the cost increases described above.


Selling and Administrative Expenses . Selling and administrative expenses decreased $864 thousand in 2006, compared with 2005, due to tight control of discretionary spending. The decrease of these expenses as a percentage of net sales to 22.9% in 2006, compared with 24.1% in 2005, reflects the lower levels of spending and higher net sales in 2006.


Other Operating Income. Other operating income increased $78 thousand in 2006 due to insurance settlements and refunds that more than offset lower gains from the sale of operating assets.


Other Operating Expense. Other operating expense increased $298 thousand in 2006 primarily as a result of losses recognized from the impairment of certain operating assets.


Defined Benefit Pension Plan Termination Expenses. Expenses to terminate our legacy defined benefit pension plan were $3.2 million in 2006. Approximately $2.9 million of these expenses related to the settlement of pension benefits for employees of our discontinued textile business segment. These employees were terminated in 1999 and prior years. The remaining expenses related to the settlement of pension benefits for employees of our ongoing floorcovering business segment.


Operating Income. Operating income was $16.6 million, or 5.0% of sales in 2006, compared with $19.8 million, or 6.2% of sales in 2005.


Interest Expense . Interest expense increased $1.3 million in 2006 primarily as a result of higher levels of debt.


Other Income. Other income decreased $157 thousand in 2006 principally as a result of a gain on the sale of real estate in 2005 that did not repeat in 2006.


Other Expense. Other expense was not significant in 2006 or 2005.


Income Tax Provision. Our effective income tax rate was 18.4% in 2006, compared with 30.9% in 2005. The change in the effective tax rates is principally due to reductions in our tax contingency reserve due to the resolution of federal and state income tax examinations and expirations of tax statutes of limitations. We also were able to utilize more state and federal income tax credits in 2006.


Net Income. Income from continuing operations was $7.9 million, or $0.61 per diluted share in 2006, compared with $10.0 million, or $0.77 per diluted share in 2005. Our discontinued operations reflected a loss of $188 thousand, or $0.02 per diluted share in 2006, compared to income of $178 thousand, or $0.02 per diluted share, in 2005. Including discontinued operations, net income was $7.7 million, or $0.59 per diluted share in 2006, compared with $10.1 million, or $0.79 per diluted share, in 2005.


LIQUIDITY AND CAPITAL RESOURCES


During the year ended December 29, 2007, cash generated from operating activities was $19.8 million. These funds were supplemented by $6.0 million of borrowings to finance equipment purchases and $381 thousand of funds from the exercise of employee stock options. These funds were used to support our operations, purchase $16.7 million of property, plant and equipment, retire $6.4 million of debt, purchase $1.6 million of our Common Stock and reduce outstanding checks in excess of cash by $1.7 million. Working capital increased $2.3 million in 2007 principally due to higher levels of inventories and accounts receivable in excess of the increase in the levels of accounts payable and accrued expenses. Accounts receivable increased $1.8 million, inventories increased $6.3 million and accounts payable and accrued expenses increased $4.7 million. The increase in inventory is primarily due to higher levels of raw material.


During the year ended December 30, 2006, cash generated from operating activities was $19.4 million. These funds were supplemented by $6.5 million of borrowings to finance equipment purchases, $1.1 million of funds received from the exercise of employee stock options and a $2.3 million increase in outstanding checks in excess of cash. These funds were used to finance $16.5 million of purchases of property, plant and equipment, retire $12.2 million of debt and increase cash and cash equivalents by $538 thousand. Working capital decreased $2.4 million in 2006 principally as a result of lower levels of accounts receivable, inventories and income tax refunds receivable which more than offset lower levels of accounts payable and accrued expenses.


CONF CALL

Daniel K. Frierson

Welcome everyone to our fourth quarter and year end conference call. I have with me Gary Harmon our chief financial officer and Gene Lasater our corporate controller. Our Safe Harbor statement is incorporated by reference. It is both in the press release and posted on our website. The industry continues to suffer from a dramatic decline in new housing and home resales as well as the general tightening of credit availability. The result has been another year of declines in units and dollars for the carpet industry. The industry reported carpet sales declined 6.5% in the fourth quarter and 8% for the year. During the same period our sales continued to outperform those of the industry with year-over-year carpet sales comparisons that were flat for the fourth quarter and down 2.8% for the full year. We are pleased that gross margins improved in both dollars and a percent of sales for the fourth quarter and full year. We believe it is also significant that without the pension merger expense incurred in the fourth quarter and the abnormally low tax rates in the fourth quarter a year ago, our fourth quarter 2007 operating income and income from continuing operations were better than those of the prior year.

Gary Harmon will review our financial results after which I will speak to our market segments and current business conditions.

Gary A. Harmon

Fourth quarter sales were $79.5 million down less than 1%. For the year sales were $320.8 million down 3.1%. Fourth quarter carpet sales were relatively flat in total with residential products down 5.4%, commercial products were up 11% and our carpet tile sales were $2.7 million. The industry during the fourth quarter showed residential sales down 11.1% and commercial sales up 1.4%. For the fiscal year 2007 carpet sales were down 2.8% with residential products being down 9.1%, commercial products grew 10.5% during this period. The industry reflected residential sales down 13.1% and commercial up 1.6%.

Gross margin improved $600,000 in the fourth quarter, the percentage comparison was 31% versus 30%. For fiscal 2 07, the gross margin improved $1.4 million, the percentage comparison was 30.3 versus 28.9%. Gross margin dollars and percents improved due to our carpet tile operations which was profitable in the fourth quarter, higher selling prices, better product mix and operational improvements. Our suppliers increased raw material costs in early February this year. We increased our selling prices to pass along higher raw material and other costs. The higher cost will negatively affect our margins for several months until the new selling prices are fully implemented. The first quarter will also be affected by seasonally low sales that normally occur in the first quarter of each year.

Selling and administrative expenses as a percentage of sales were 24% versus 23.5% for the fourth quarter and 24.6% versus 22.9% for the year. Despite the softness in our business we have continued to invest in new products, information systems and our selling and marketing infrastructure. While these investments should benefit the future they increased selling and administrative expenses in 2007.

Operating income was 5% of sales in the fourth quarter of 2007 and was reduced by 1.9 percentage points due to the pension plan merger versus 6.2% a year ago. The yearly comparison was 5.2% versus 5%. Pension merger and termination expenses reduced our operating income by one half of a percentage point in 2007 and one percentage point in 2006. In the fourth quarter of 2007 we recorded $1.5 million of principally non-cash prior services expenses related to the merger of our only remaining defined benefit pension plan. In the second quarter of 2006 we recorded $3.2 million of expenses to terminate a legacy defined benefit pension plan. As a result of the merger and termination we are no longer responsible for any defined benefit retirement plans. Ongoing contributions for pensions are expected to be less than $300,000 annually or about $200,000 below our average pension cost for the last two years.

Interest expense was down $198,000 in the fourth quarter and $866,000 for the year due to lower levels of debt, lower interest rates and a higher level of capitalized interest in 2007. Interest expense for 2008 is expected to be approximately $6.2 million. Our effective income tax rate was 32.5% in the fourth quarter of 2 07 and 35.3% for fiscal 2007 compared with 9.8% in the fourth quarter of 2006 and 18.4% for fiscal 2 06. The effective income tax rates in 2 06 were well below normal rates we expect principally due to adjustments to our tax contingency reserves for federal and state income tax examinations including an expired statute of limitations. The effect of the income tax adjustments increased income from continuing operations from diluted share in 2006 by $0.06 for the fourth quarter and $0.13 for the year. We expect the effective income tax rate to be between 35 and 36% in 2008.

The diluted earnings per share from continuing operations, a fourth quarter comparison was $0.14 per share versus $0.25. The yearly comparison was $0.52 versus $0.61. Pension, merger and termination expenses and income tax adjustments negatively affected the comparison of diluted earnings per share by $0.14 in the fourth quarter and $0.05 for the fiscal year. Looking at our balance sheet we ended 2007 with $88.6 million of total debt or 38.4% total capitalization. That’s down from $89 million or 39.6% of total capitalization at the end of 2006. Total debt is expected to increased $7 to $10 million in the first and second quarters of this year and decline to the mid to low $80 million range by the end of 2008.

Capital expenditure was $16.7 million in 2007 and depreciation and amortization was $12.9 million. We expect 2008 capital expenditures to be in the $12 to $14 million range while depreciation and amortization is expected to be slightly below $14 million. In the fourth quarter of 2007 we repurchased 78,000 shares of our common stock at an average price per share of $9.29. For fiscal 2007 a 157,000 shares were repurchased at an average price of $9.91. This year through February 22nd we had repurchased another 69,000 shares at an average price of $8.14 bringing our total purchases since the inception of the stock repurchase program to 226,000 shares at an average price of $9.38 per share.

Daniel K. Frierson

As the industry has continued to weaken we have continued to invest in the future. We believe this will position us well when better conditions arrive. The residential market has been particularly difficult and it is still unclear when it will begin to rebound. The first quarter could be the low point for the industry in sales and profitability because the retail business is normally slower in the first quarter than the rest of the year. The higher raw material and other costs will also impact us negatively and the carpet price increases will not be fully implemented until later in the year. The first quarter and 2008 will be a challenging period for the residential carpet business. Despite these difficulties we believe we can continue to grow our market share. At Fabrica and Masland we have introduced new wool collections in addition to our normal nylon introductions. At Dixie Home we introduced our new lifestyle collection and are currently shipping samples in to the field. We are also selectively adding to our sales force to increase market penetration. We believe our continued investment in new technology, new products and people will help separate us from the competition in the residential market.

The commercial market grew again in 2007 and is off to a good start this year. Our commercial business grew 10.5% last year and we’re optimistic about 2008. We have placed more new broadloom product into the field and our tile business is gaining momentum. It is now a contributor to our bottom line.

Our capital expenditures are planned to be at a lower level this year but will continue to be focused on equipment and processes that enable us to differentiate ourselves in the marketplace. Our margin improvement is a reflection of our ability to develop and market desirable products for the markets we serve and also the result of better operational and cost control. We continue to have confidence that the upper end of the market will perform better than the market in general and plan to be positioned to take advantage of market opportunities as they arise.

We invested $16.7 million in capital expenditures in 2007, almost $4 million higher than depreciation and amortization. We also purchased a 157,000 shares of our common stock for $1.6 million. With the merger of our only remaining defined benefit retirement plan into a multi employer plan late last year we no longer sponsor any defined benefit retirement plans. Thus, despite the downturn we strengthened our balance sheet, grew stockholders’ equity to $142.1 million, reduced total debt to $88.6 million or 38.4% of total capitalization.

Looking forward although the industry is experiencing a difficult period and the first quarter will certainly be trying, we are encouraged by several factors namely, we had consistently favorable sales comparisons to the industry, we’ve had positive market reception to our new products, our tile products obviously are beginning to take hold, Dixie Home & Office is off the ground and doing well, the wool collections from Masland and Fabrica are also being well received and our new lifestyles collection from Dixie Home is beginning to get into the marketplace. We also are encouraged by the average selling prices in 2007 being up 4% over the previous year and we’ve increased prices in the first quarter of this year to recoup raw material and other cost increases. We had higher gross margins last year at 30.3% up from 28.9% in 2006 and we continue to see operational improvements in the area of quality, manufacturing and distribution efficiencies and material utilization.

At this time we would like to open up the call for your questions.

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