QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2002

Commission File Number: 0-2585



                 THE DIXIE GROUP, INC.                 
(Exact name of registrant as specified in its charter)

THE DIXIE GROUP, INC.
INDEX

  PART I -- ITEM 1
FINANCIAL INFORMATION

The following is presented to update the discussion of results of operations and financial condition included in the Company's 2001 annual report (dollar amounts in thousands, except per share data).

Net income for the quarter ended June 29,2002 was $3,036, or $0.25 per diluted share, compared with net income of $188 or $0.02 per diluted share for the second quarter of 2001. Net income for the first six months of 2002 was $3,532, or $0.30 per diluted share, compared with a net loss of $2,513, or $0.22 per diluted share, for the first six months of 2001.

The second quarter and six months of 2002 included pre-tax gains of approximately $6,900 principally from the sale of the Company's carpet yarn extrusion facility, pre-tax charges of $4,087, principally related to long-lived asset impairments, and a $2,769 write-off of deferred financing costs associated with replacement of the Company's senior credit facility in May 2002. These unusual gains and losses were offsetting and had no significant net effect on the Company's operating results. The first six months of 2001 included charges of $1,453 ($900 after-tax), or $0.08 per diluted share, related to workforce reductions and asset write-offs.

The Company's operations are segmented based on product similarities. Accordingly, its two reportable segments are carpet manufacturing and floorcovering base materials. The Company's carpet manufacturing segment is a leading carpet and rug manufacturer and supplier to higher-end residential and commercial customers through Masland Carpets and Fabrica International, to consumers through major retailers under Bretlin, Globaltex and Alliance brands, and to the factory-built housing and recreational vehicle markets through Carriage Carpets. The Company's floorcovering base materials segment operates as a cost center related to supplying carpet yarns to the Company's carpet manufacturing segment, and to a lesser extent, sells specialty carpet yarn to external customers at prevailing market prices.

The profit performance measure of the Company's business segments is internal EBIT (earnings before interest, taxes and non-segment items). Costs of the Company's accounts receivable securitization program, were treated as expenses of the Company's business segments. For a reconciliation of internal EBIT to consolidated income (loss) before income taxes, see Note I to the Company's consolidated financial statements.

The following table reflects selected operating data related to the Company's two business segments. The effects of the unusual items described above have been reported separately in order to more clearly understand the operations of each segment.

Sales of the Company's carpet manufacturing segment declined 1.6% in the quarter ended June 29, 2002 and 2.7% for the first half of 2002, compared with the same periods in the prior year. Carpet sales in 2002 were soft in our home center / mass merchant and commercial markets. Sales to higher-end residential markets were consistent with the prior year. Sales to the factory-built and modular-housing markets improved, compared with 2001 levels, although the pace of growth has slowed from that experienced in the first quarter of 2002. The Company's sales to The Home Depot, while behind the 2001 levels for the first half of 2002, showed positive comparisons in the second quarter 2002. Sales in the Company's Floorcovering base materials segment were down 23.8% in the quarter ended June 29, 2002 and 28.4% for the first half of 2002, compared with the same periods in 2001. The lower floorcovering base materials sales reflect the Company's strategy to de-emphasize its external carpet yarn business in favor of produc tion to support its carpet operations, softness in external carpet yarn markets and, to a lesser extent, sales associated with the Company's extrusion business which was sold in May 2002.

Despite softness in sales, operating results significantly improved in both the Company's carpet manufacturing and floorcovering base materials segments. The improved results are principally attributable to lower manufacturing and administrative costs that reflect the effects in its cost structure of consolidating its North Georgia carpet operations. This consolidation improved efficiencies and asset utilization and allowed the Company to reduce its workforce by 27% and its inventories by 22%. The improved margins also reflect an increase in the sales of higher margin products.

Excluding the effects of severance recorded in the first quarter of 2001, selling and administrative expenses decreased $596 and $1,320, respectively in the quarter and six months ended June 29, 2002, compared with the same reporting periods in 2001. These costs as a percentage of sales were slightly higher in 2002 as a result of lower sales.

"Other (income) expense - net" reflected an improvement of $1,711 in the six months ended June 29, 2002 compared with the six months 2001 principally due to net gains from asset sales and impairment losses in 2002, as previously discussed, and asset impairment losses in 2001.

Interest expense decreased in the quarter and six months ended June 29, 2002 compared with the same periods in 2001 due to lower levels of debt.

The Company's effective income tax rate was 38.6% and 38.3% for the three and six month periods ended June 29, 2002, respectively, and 51.4% and a benefit of 35.6% for the three and six month periods ended June 30, 2001, respectively. The decrease in the effective tax rates for the 2002 reporting periods is principally the result of non-deductible goodwill amortization during 2001 reporting periods.

In August 2002, several factory-built housing manufacturers announced plans to reduce their workforces, close manufacturing and retail sales facilities and incur significant restructuring charges and write-offs due to a number of factors. The industry appears to continue to be negatively impacted by soft sales, financing issues for sales at retail, high percentages of repossessed homes, a weak economy and difficult access to capital. The Company believes it is the largest supplier of carpet to the factory-built housing industry, with approximately 20% of the Company's total net sales being made to customers in that industry. In light of these announcements, the Company has re-evaluated the adequacy of its provision for credit losses. Based on this review, the Company believes it has adequately provided for its credit risk at June 29, 2002; however, continued deterioration of the factory-built housing industry could have a negative impact on our operations and increase credit losses.

LIQUIDITY AND CAPITAL RESOURCES

On May 14, 2002, the Company entered into a secured revolving credit and term-loan facility with a new group of lenders to replace the Company's 1998 senior credit facility and its accounts receivable securitization program. The new credit facility provides revolving credit of up to $110,000 through a five-year commitment period and a $40,000 term-loan. The level of the Company's accounts receivables and inventories limit borrowing availability under the revolving credit facility. The term-loan is payable in quarterly installments of $1,429 beginning August 1, 2002 and is due in May 2007. Interest rates available under the new credit facility may be selected by the Company from a number of options that effectively allow for borrowing at rates ranging from the lender's prime rate to the lender's prime rate plus 1.0% for base rate loans, or at rates ranging from LIBOR plus 2.25% to LIBOR plus 3.5% for LIBOR loans. Commitment fees, ranging from .375% to .50% per annum are payable on the average daily unu sed balance of the revolving credit facility. On June 29, 2002, the borrowing availability of the revolving credit facility was $18,286.

During the first six months of 2002, the Company's operating activities generated $11,894 of funds (excluding $29,951 associated with termination of the Company's accounts receivable securitization program in May 2002). These funds and $31,516 of proceeds from asset sales, were used to repay $29,951 advanced under the Company's accounts receivables securitization program, finance $4,324 of capital expenditures, and decrease debt by $4,819.

During the first six months of 2002, capital expenditures were $4,324 while depreciation and amortization was $11,932. The Company expects capital expenditures to be below $12,500 during the fiscal year 2002, while depreciation and amortization is expected to be approximately $22,000.

A major focus of the Company's strategy has been debt reduction. Since the high point of the Company's debt on August 11, 2000, through June 29, 2002, the Company reduced debt, including amounts advanced under its accounts receivable securitization program, by $101,447. In May 2002, the Company sold its extrusion manufacturing facility for $30,800 and entered into a three-year supply agreement with the purchaser of the facility. Net proceeds from the sale were used to reduce debt.

The purchase agreement for the July 2000 acquisition of Fabrica International provides for an additional $50,000 of consideration if Fabrica's cumulative gross sales exceed certain levels for the thirty-nine month period beginning April 1, 2000. Fabrica's sales through June 29, 2002 reached the levels that required the Company to accrue the contingent consideration due on April 1, 2003. Accordingly, the Company treated the additional acquisition cost as goodwill and recorded a current liability in its balance sheet at June 29, 2002.

The agreement also provides for an additional contingent amount of up to $2,500 to be paid in April 2005 if Fabrica's cumulative earnings before interest and taxes for the five-year period beginning January 2000 exceed certain levels. The Company expects that any contingent payments that may become due under the cumulative earnings test would be treated as additional costs of the acquisition.


The acquisition of the Company's interest in Chroma Systems Partners in 2000 is subject to an adjustment generally equal to the Company's share of Chroma's income or loss for the three years ending June 30, 2003, less $1,800. A significant portion of the amounts due by the Company as a result of this adjustment is paid monthly.

The Company's interest in Fabrica and Chroma secures the Company's obligation to make the contingent payments.

The Company believes its operating cash flows and credit availability under the new senior credit facility are adequate to finance the Company's normal liquidity requirements. However, the Fabrica purchase contingency due in April 2003, will require supplemental financing or other sources of funding. The Company's improved operating results and lower debt levels have enhanced its financial flexibility and created financing options that were not available to it earlier in the year. The Company is considering various financing alternatives. The availability and pricing of any such alternatives , however, will be subject to future market conditions and there can be no assurance that other sources of funding can be obtained or will be obtained on terms favorable to the Company.

The Company has completed its analysis of goodwill under Statement of Financial Standard No. 142. The analysis indicates that the enterprise value for each of its operating units exceeds their related carrying value and therefore there was no impairment of goodwill at June 29, 2002. Goodwill and intangible assets are subject to annual impairment testing which are based on determining the fair value of the specified reporting units. Management judgments and assumptions are used to derive the fair values of the respective reporting units. These judgments and assumptions could materially change the value of the specified reporting units and therefore could materially impact the Company's consolidated financial statements.

A prolonged decline in any of these cyclical industries could have a material adverse effect on the Company's business, financial condition and results of operations. The level of activity in these industries is significantly affected by numerous factors, all of which are beyond the Company's control, including:

• consumer confidence;
• housing demand;
• financing availability;
• national and local economic conditions;
• interest rates;
• employment levels;
• changes in disposable income;
• commercial rental vacancy rates; and
• federal and state income tax policies.

The Company believes it is the largest producer of carpeting for the factory-built housing industry, with approximately 20% of the Company's total net sales being made to customers in that industry. Production in the factory-built housing industry significantly declined during the years 2000 and 2001 and there are indications that conditions in the industry could further deteriorate before they improve. The U.S. construction, factory-built housing and other industries have experienced significant downturns in the past, which have adversely affected suppliers to these industries, including suppliers of floorcoverings. These industries could experience similar downturns in the future, which could have a negative impact on the Company's business, financial condition and results of operations.

The floorcovering industry is highly competitive. The Company faces competition from a number of domestic manufacturers and independent distributors of floorcovering products and, in certain product areas, foreign manufacturers. There has been a significant consolidation within the industry during recent years which has caused a number of the Company's existing and potential competitors to be larger and have greater resources and access to capital than it does. Maintaining the Company's competitive position may require it to make substantial investments in its product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for its products and in the loss of market share. In addition, the Company faces, and will continue to face, pressure on sales prices of its products from competitors, as well as from large customers, such as The Home Depot to whom the Company makes approximately 15% of its dollar volume of sales. As a result of any of these factors, there could be a material adverse effect on the Company's sales and profitability.

The cost of raw materials has a significant impact on the Company's profitability. In particular, the Company's business requires the purchase of large volumes of nylon fiber, filament, synthetic backing, polyester, polypropylene, wool fibers, latex and dye. Increases in the cost of these raw materials could materially adversely affect our business, results of operations and financial condition if we are unable to pass these increases through to our customers. Price increases have been announced for many raw materials used by the Company. The Company believes it has been successful in increasing prices to pass along raw material costs; however, it could take several months to recoup these increases in the marketplace. There can be no assurance that the Company will successfully recover such raw material increases.

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

• Discharges 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 asbestos and noise standards and regulate the use of hazardous 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 insure that complying with these environmental or health and safety laws and requirements will not adversely affect our business, results of operations and financial condition. Future laws, ordinances or regulations could give rise to additional compliance or remediation costs, which could have a material adverse affect on our business, results of operations and financial condition.

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q 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 such as "expects," "estimated," "projects," "believes," "anticipates," "intends," and similar terms and phrases. Such terms or phrases relate to, among other matters, the Company's future financial performance, business prospects, growth, strategies or liquidity. The following important factors may affect the future results of the Company and could cause those results to differ materially from its historical results either expressed or implied by the forward-looking statements. These risks include, among others, 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 grou p of customers, materially adverse changes in economic conditions generally in carpet, rug and floorcovering markets served by the Company and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission.