<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 12, 1998
----------------
MOHAWK INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 01-19826 52-1604305
(STATE OR OTHER (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION
INCORPORATION OR NUMBER)
ORGANIZATION)
160 SOUTH INDUSTRIAL BOULEVARD
CALHOUN, GEORGIA 30701
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
(706) 629-7721
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On November 12, 1998, Mohawk Industries, Inc. ("Mohawk") consummated the
acquisition of World Carpets, Inc. ("World") by means of the merger (the
"Merger") of WC Acquisition Corp. ("WC"), a wholly owned subsidiary of Mohawk,
with and into World, with the result that World is the surviving entity
resulting from the Merger and is operating, as a wholly owned subsidiary of
Mohawk, the business in which it engaged prior to the Merger. World is in the
business of manufacturing, designing and selling broadloom carpet.
The Merger was consummated pursuant to an Agreement and Plan of Merger, dated
as of October 22, 1998, by and among Mohawk, WC and World (the "Merger
Agreement"). Pursuant to the Merger Agreement, each outstanding share of
capital stock of World outstanding immediately preceding the Merger, was
converted into shares of common stock, $.01 par value per share ("Mohawk Common
Stock"), of Mohawk. In the Merger, Mohawk issued 4,899,992 shares of Mohawk
Common Stock to World shareholders (and cash in lieu of fractional shares). On
November 12, 1998, the Securities and Exchange Commission declared effective a
registration statement to register for resale all of these shares from time to
time. The Merger will be accounted for under the pooling-of-interests basis of
accounting. The foregoing is qualified in its entirety by reference to the
Merger Agreement, the full text of which is filed as Exhibit 2.1 hereto and
incorporated herein by this reference.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
<TABLE>
<S> <C>
(a) Financial Statements of Business Acquired:
Report of Independent Accountants...................................... 4
Consolidated Balance Sheet as of June 28, 1998......................... 5
Consolidated Statement of Operations for the year ended June 28, 1998.. 6
Consolidated Statement Changes in Shareholders' Equity for the year
ended June 28, 1998................................................... 7
Consolidated Statement of Cash Flows for the year ended June 28, 1998.. 8
Notes to Consolidated Financial Statements............................. 9
(b) Pro Forma Financial Information:
Pro Forma Condensed Consolidated Financial Information................. 18
Pro Forma Condensed Consolidated Balance Sheet as of September 26, 1998
(Unaudited)........................................................... 19
Notes to Pro Forma Condensed Consolidated Balance Sheet................ 20
Pro Forma Condensed Consolidated Statement of Earnings for the nine
months ended September 26, 1998 (Unaudited)........................... 21
Pro Forma Condensed Consolidated Statement of Earnings for the year
ended December 31, 1997 (Unaudited)................................... 22
Pro Forma Condensed Consolidated Statement of Earnings for the year
ended December 31, 1996 (Unaudited)................................... 23
Pro Forma Condensed Consolidated Statement of Earnings for the year
ended December 31, 1995 (Unaudited)................................... 24
Notes to Pro Forma Condensed Consolidated Statements of Earnings....... 25
(c) Exhibits
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION
-------- -----------
<C> <S>
2.1 Merger Agreement (incorporated by reference to Appendix A of
the Mohawk Registration Statement on Form S-3 (Registration
No. 333-66061) as filed with the Securities and Exchange
Commission on October 23, 1998).
23 Consent of Independent Accountants.
</TABLE>
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of World Carpets, Inc. and its subsidiary (the "Company") at June 28, 1998, and
the results of their operations and their cash flows for the year ended June
28, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Atlanta, GA
September 21, 1998
4
<PAGE>
WORLD CARPETS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 28,
1998
--------
<S> <C>
ASSETS
Current assets
Cash and restricted cash........................................... $ 145
Accounts receivable, less allowance for doubtful accounts of
$1,777............................................................ 53,918
Inventories........................................................ 75,770
Prepaid expenses................................................... 355
Deferred income taxes.............................................. 10,890
--------
Total current assets............................................. 141,078
Property, plant and equipment, net................................... 71,283
Other assets......................................................... 8,867
--------
$221,228
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Book overdraft..................................................... $ 6,712
Current maturities of long-term debt............................... 5,570
Accounts payable................................................... 36,078
Accrued liabilities................................................ 15,133
Estimated product claims........................................... 4,658
--------
Total current liabilities........................................ 68,151
Long-term debt, less current maturities.............................. 78,971
Estimated product claims............................................. 968
Deferred income taxes................................................ 1,920
--------
150,010
SHAREHOLDERS' EQUITY
Class A Preferred Stock, voting, 8% cumulative, $100 par value,
1,000,000 shares authorized; 3,000 shares issued and outstanding.... 300
Class B Preferred Stock, nonvoting, 10% noncumulative, $100 par val-
ue,
100,000,000 shares authorized; 190,080 shares issued; 151,280 shares
outstanding......................................................... 19,008
Class C Common Stock, nonvoting, no par value, $100 stated value,
100,000,000 shares authorized; 126,920 shares issued and outstand-
ing................................................................. 12,692
Retained earnings.................................................... 43,098
--------
75,098
Less treasury stock, 38,800 shares of Class B Preferred Stock, at
cost................................................................ (3,880)
--------
71,218
--------
Commitments and contingencies........................................ --
--------
$221,228
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
WORLD CARPETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 28,
1998
----------
<S> <C>
Net sales............................................................ $430,932
--------
Costs and expenses
Cost of goods sold................................................. 337,849
Selling, warehousing and distribution expenses..................... 60,562
General and administrative expenses................................ 17,504
--------
415,915
--------
Income from operations............................................... 15,017
Interest expense..................................................... (8,094)
Other income, net.................................................... 2,209
--------
Income before income taxes........................................... 9,132
Benefit from income taxes............................................ 2,155
--------
Net income........................................................... $ 11,287
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
WORLD CARPETS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------- --------------- ---------------
RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT EARNINGS STOCK TOTAL
-------- ------- ------- ------- ------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 29,
1997.................. 3,000 $ 300 190,080 $19,008 126,920 $12,692 31,835 (3,880) 59,955
-------- ------- ------- ------- ------- ------- ------ ------ ------
Dividends paid......... (24) (24)
Net income............. 11,287 11,287
-------- ------- ------- ------- ------- ------- ------ ------ ------
Balance at June 28,
1998.................. 3,000 $ 300 190,080 $19,008 126,920 $12,692 43,098 (3,880) 71,218
======== ======= ======= ======= ======= ======= ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
WORLD CARPETS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 28,
1998
----------
<S> <C>
Cash flows from operating activities
Net income........................................................ $11,287
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation..................................................... 8,059
Amortization..................................................... 1,030
Deferred income taxes............................................ (2,395)
Gain on disposal of property, plant and equipment................ (662)
Changes in operating assets and liabilities
Accounts receivable............................................. 2,165
Inventories..................................................... 2,291
Other assets.................................................... (1,633)
Cash overdraft.................................................. (984)
Accounts payable................................................ (6,758)
Accrued liabilities and estimated product claims................ 2,045
-------
Net cash provided by operating activities..................... 14,445
-------
Cash flows from investing activities
Collections on note receivable from shareholder................... 895
Refund from business acquisition.................................. 1,859
Proceeds from sale of property, plant and equipment............... 1,109
Purchases of property, plant and equipment........................ (11,217)
-------
Net cash used in investing activities......................... (7,354)
-------
Cash flows from financing activities
Proceeds from issuance of long-term debt.......................... 1,311
Payments of long-term debt........................................ (9,131)
Dividends paid.................................................... (24)
-------
Net cash used in financing activities......................... (7,844)
-------
Net decrease in cash................................................ (753)
Cash and restricted cash, beginning of year......................... 898
-------
Cash and restricted cash, end of year............................... $ 145
=======
Cash paid for interest............................................ $ 8,287
=======
Cash paid for taxes............................................... $ 956
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
WORLD CARPET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
World Carpets, Inc. and its wholly owned subsidiary, World Commercial
Carpets, Inc. (the "Company") is a manufacturer of residential and
commercial carpet sold principally throughout the United States. The
Company designs, manufactures and markets carpet and rugs in a broad range
of colors, textures and patterns. The Company is widely recognized through
its premier brand names, some of which are "WundaWeave," "CustomWeave,"
"Zenith" and "Sunrise", and markets its products primarily through carpet
retailers, home centers, mass merchandisers, department stores, commercial
dealers and commercial end users. The Company's operations are vertically
integrated from the extrusion of resin into fiber, to the conversion of
fiber into yarn and to the manufacture and shipment of finished carpet and
rugs.
The more significant accounting policies followed by the Company are
summarized below:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
World Carpets, Inc. and its wholly-owned subsidiary, World Commercial
Carpets, Inc. All significant transactions are eliminated in consolidation.
ACCOUNTS RECEIVABLE
For trade accounts, an allowance for doubtful accounts is provided based
upon industry average, historical bad debt experience and periodic
evaluations of the aging of accounts. Receivables are written off when
deemed to be uncollectible and recoveries are credited to the allowance
account when received. Accounts receivable also includes reserves for
discounts, returns and other items which are determined based on historical
experience and specific activity where applicable.
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out (FIFO) method for valuing substantially all of its
inventories.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Additions and
improvements are capitalized while maintenance and repairs are charged to
expense as incurred.
The Company computes depreciation using the straight-line method over the
estimated useful lives of the assets which range from three to forty years.
The cost and accumulated depreciation of property retired or otherwise
disposed of are removed from the accounts and any gains or losses are
included in income. The Company evaluates impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. Measurement of impairment
losses is based on the fair value of the applicable assets.
9
<PAGE>
WORLD CARPET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company capitalizes leased property and equipment meeting certain
criteria. The accompanying balance sheet reflects all capitalized leased
machinery and equipment as assets and the related obligations are included
in the current and non-current portion of long-term debt. Capital lease
assets are amortized on a straight-line basis over the lease terms.
Amortization of the capital lease assets is included in depreciation
expense in the accompanying financial statements.
OTHER ASSETS
Other assets consist principally of the cash surrender value of life
insurance, deferred financing costs, and goodwill. Deferred financing costs
are amortized over the term of the related loans. Goodwill, representing
the excess of the purchase cost over the fair value of net assets acquired
in the acquisitions of certain assets of Wunda Weve Carpets, Inc. and
Sunrise Carpet Industries, Inc. & Affiliates, is being amortized over 15
years on a straight-line basis. The Company periodically reviews goodwill
to assess recoverability. Any significant impairment would be recognized in
operating results if a permanent decline in value were to occur.
BOOK OVERDRAFT
Book overdraft represents outstanding checks written which have not been
presented to the bank for payment.
ESTIMATED PRODUCT CLAIMS
The estimated cost of future product claims is determined based on
historical claim percentages incurred by the Company. The amount is
classified as a current liability if expected to be settled within one
year, with the balance being classified as a long-term liability.
INCOME TAXES
The Company reports the effects of income taxes in accordance with
Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting
for Income Taxes." This asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the carrying amounts and
the tax bases of existing assets and liabilities. In estimating future tax
consequences, FAS 109 generally considers all expected future events other
than enactments of changes in the tax laws or rates.
FISCAL YEAR
The Company's operations are reported on a fifty-two, fifty-three week
basis with the fiscal year ending on the Sunday nearest June 30. Fiscal
year 1998 included 52 weeks.
FAIR VALUE OF FINANCIAL INSTRUMENTs
The carrying amount reported in the balance sheet for cash and restricted
cash, accounts receivable, shareholder receivable and accounts payable
approximate fair value because of the short-term maturity of these
financial instruments.
10
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying amount reported for long-term debt approximates fair value as
significantly all of the underlying instruments are variable rate notes
that reprice frequently.
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
RESEARCH AND DEVELOPMENT COSTS
Product development costs are expensed by the Company as incurred. These
costs approximated $2,642,000 for the year ended June 28, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997 and 1998, the Financial Accounting Standards Board issued Statement
No. 130, (FAS 130) "Reporting Comprehensive Income", Statement No. 131,
(FAS 131) "Disclosures and Segments of an Enterprise and Related
Information", Statement No. 132, (FAS 132) "Employers' Disclosures about
Pensions and Other Postretirement Benefits" and Statement No. 133, (FAS
133) "Accounting for Derivative Instruments and Hedging Activities". FAS
130, FAS 131 and FAS 132 are effective for fiscal years beginning after
December 15, 1997. FAS 133 is effective for fiscal years beginning after
July 15, 1999. FAS 130 establishes standards for the reporting and display
of comprehensive income and its components in financial statements. FAS 131
requires companies to report certain financial and descriptive information
about their reportable operating segments, including related disclosures
about products and services, geographic areas and major customers. FAS 132
suggests combined formats for presentation for pension and other
postretirement benefit disclosures. FAS 132 also permits reduced
disclosures for non public entities. FAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company does not believe the implementation of FAS 130, FAS 131, FAS 132 or
FAS 133 will have a material effect on its consolidated financial
statements.
2. NOTE RECEIVABLE FROM SHAREHOLDER
A note receivable from shareholder was prepaid December 19, 1997, which
included $774,000 of principal and $13,000 of interest. The note receivable
from shareholder totaled $895,000 at June 29, 1997 and called for bi-weekly
principal and interest, at 7.6% instalments through 2007.
11
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Finished goods.............................................. $31,103
Work-in-progress............................................ 9,313
Raw materials and other..................................... 35,354
-------
$75,770
=======
</TABLE>
4.PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Land and improvements....................................... $ 4,085
Buildings and leasehold improvements........................ 35,140
Machinery and equipment..................................... 107,265
Equipment under capital leases.............................. 4,980
Construction in progress.................................... 3,728
--------
155,198
Less accumulated depreciation and amortization.............. (83,915)
--------
$ 71,283
========
</TABLE>
Included in land and improvements and buildings and leasehold improvements
are nonoperating assets with a net book value of approximately $1,687,000.
Certain of these assets are leased by the Company to third parties under
short-term operating lease agreements. Rental income from the lease
agreements totaling $324,000, for year ended June 28, 1998, is included as
other income in the accompanying statement of operations.
12
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5.OTHER ASSETS
Other assets consist of the followings:
<TABLE>
<CAPTION>
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Goodwill.................................................... $ 8,821
Loan origination fees....................................... 871
Other....................................................... 593
-------
10,285
Accumulated amortization.................................... (1,418)
-------
Less accumulated depreciation and amortization.............. $ 8,867
=======
</TABLE>
6.ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Payroll and related withholdings............................ $ 4,814
Professional fees and settlement............................ 2,593
Self-insurance reserves..................................... 3,246
Other....................................................... 4,480
-------
$15,133
=======
</TABLE>
7.LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Revolving line of credit.................................... $58,872
Term loans.................................................. 21,857
Capital lease obligations................................... 3,812
-------
84,541
Less current maturities..................................... (5,570)
-------
$78,971
=======
</TABLE>
Under the amended terms of the Company's revolving and term loan facility,
the Company can borrow up to $102 million, based on eligible accounts
receivable and inventory balances. Interest on the revolving credit
facility is payable monthly at a rate equal to the prime rate minus .25% or
the London Interbank Offering Rate ("LIBOR") plus 2% (8.25% at June 28,
1998). Interest on the term loans is payable monthly at a rate equal to the
prime rate plus .25 % or LIBOR plus 2.5% (8.5% at June 28, 1998). The line
of credit expires February 7, 2002. The term loans are payable in sixty
equal monthly principal installments of approximately $321,000,
13
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
plus interest at the rate stated above. The loans are secured by
substantially all accounts receivable, inventory and property, plant and
equipment of the Company.
Under the terms of the revolving line of credit agreement, the Company
incurs a fee equal to 3/8% per year on the unused balance of the revolving
line of credit. The fee is payable monthly.
The loan agreement requires that the Company maintain certain levels of
working capital and net worth during the term of the loans. The agreement
also limits capital expenditures, the payment of dividends and imposes
certain financing restrictions. The Company violated a financial covenant
requiring that a specified portion of capital expenditures be financed
during the year ended June 28, 1998. The Company has obtained a waiver for
this condition of default.
As of June 28, 1998, debt maturities, including capital lease obligations,
net of imputed interest, for the next five fiscal years are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASE
FISCAL YEAR DEBT OBLIGATIONS TOTAL
----------- ------- ----------- ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
1999.............................................. $ 3,857 1,713 5,570
2000.............................................. 3,857 963 4,820
2001.............................................. 3,857 657 4,514
2002.............................................. 69,158 248 69,406
2003.............................................. -- 231 231
------- ----- ------
$80,729 3,812 84,541
======= ===== ======
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company maintains the World Carpet Savings Retirement Plan (the
"Plan"), a defined contribution 401(k) plan covering substantially all
employees. Employees are eligible to participate upon completion of one
year of service. Under the terms of the Plan, the Company may match
employee contributions up to a maximum of 2% of the employee's salary and
employees vest in the contributions based on years of credited service. For
the year ended June 28, 1998, the Company contributed approximately
$698,000, to the Plan.
14
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Current
Federal................................................. $ (146)
State................................................... (94)
------
(240)
Deferred
Federal................................................. 2,275
State................................................... 120
------
$2,155
======
The difference between the U.S. federal statutory tax rate and the
Company's effective tax rate are as follows:
<CAPTION>
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Federal statutory tax rate................................ 34 %
State income taxes (net of federal federal income tax ben-
efit).................................................... 3.8
Reduction in valuation of reserve for deferred tax as-
sets..................................................... (64.5)
Other..................................................... 2.5
------
Effective (benefit) tax rate.............................. (24.2)%
======
</TABLE>
The deferred tax assets and deferred tax liabilities recorded on the
balance sheet are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX
ASSETS (LIABILITIES)
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
--------------------
<S> <C>
Accounts receivable reserves......................... $3,051
Depreciation and amortization........................ (4,478)
Accrued liabilities.................................. 5,656
Inventories.......................................... 1,332
Allowance for bad debts.............................. 693
Loss carryforwards................................... 2,057
Tax credit carryforwards............................. 659
------
$8,970
======
</TABLE>
As of June 28, 1998, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $6,049,000 available
to reduce taxable income. The Company's net operating loss carryforwards
begin expiring in 2005 and will continue to expire
15
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
through 2006. During the year ended June 28, 1998, the Company utilized
approximately $6,897,000 of its net operating loss carryforwards to offset
current taxable income and reduced its valuation allowance by $5,893,000.
Under the Tax Reform Act of 1986, if certain substantial changes in the
Company's ownership were to occur in the future, there would be an annual
limitation on the amount of operating loss carryforwards which could be
used to offset future taxable income.
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases warehouses and certain equipment under noncancelable
operating leases with terms in excess of one year. At June 28, 1998, future
minimum annual lease payments required by these operating leases
approximate the following:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
----------- --------------
<S> <C>
1999....................................................... $ 226
2000....................................................... 107
2001....................................................... 107
2002....................................................... 107
2003 and thereafter........................................ 2,090
------
$2,637
======
</TABLE>
Total rent expense charged to operations approximated $652,000, for the
year ended June 28, 1998. Substantially all operating lease agreements have
provisions for escalation in rents based on changes in the consumer price
index.
LITIGATION AND OTHER MATTERS
The Company recorded $925,000 in fiscal year 1998 to record final
settlement amounts for certain litigation. Management does not anticipate
any additional costs from this matter. There are other claims pending
against the Company with respect to workers' compensation, product
liability, sales taxes and other matters arising out of the ordinary
conduct of business. The ultimate result of these claims is not
determinable at June 28, 1998. However, in the opinion of management,
adequate provision for anticipated costs has been made in the financial
statements. Management does not anticipate any additional costs from this
matter.
11. PREFERRED AND COMMON STOCK
The Company has two classes of issued and outstanding preferred stock.
Class A Preferred Stock shareholders are entitled to receive dividends at
8% of the par value from current or retained earnings when declared by the
Board of Directors. Dividends on the Class A Preferred Stock are cumulative
and are payable before any dividends may be paid on the Class B Preferred
Stock or the Class C Common Stock. During fiscal 1998, the Company paid
$24,000
16
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of dividends in arrears for Class A preferred stock. The liquidation
preference for Class A Preferred Stock is its par value plus accumulated,
unpaid dividends.
Class B Preferred Stock shareholders are entitled to receive dividends at
10% of the par value from current or retained earnings when declared by the
Board of Directors. Dividends on the Class B Preferred Stock are
noncumulative and are payable before any dividends may be paid on the Class
C Common Stock. The liquidation preference for Class B Preferred Stock is
its par value.
Shares of Class B Preferred Stock are convertible by their original holders
to Class C Common Stock. At the conversion date, each Class B Preferred
Stock share may be exchanged for the number of Class C Common Stock shares
which have a fair market value of $100 with fair market value determined by
an independent third party.
Any sales, transfers or purchases of the Company's outstanding shares are
subject to shareholders' agreement.
17
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet of
Mohawk gives effect to the merger with World as if the merger took place on
September 26, 1998. The merger has been accounted for as a pooling-of-
interests. All of the outstanding shares of World capital stock have been
exchanged for approximately 4.9 million shares of Mohawk common stock. The
unaudited pro forma condensed consolidated statements of earnings give effect
to the merger as if the merger took place on January 1, 1995. It is expected
that Mohawk and World will incur approximately $12.1 million, after income
taxes, in non-recurring charges related to the merger (primarily legal,
accounting, investment banking, loan termination and employee bonus costs)
during the quarter in which the merger is consummated. These payments will be
recorded as a post-merger charge to the combined statement of earnings of
Mohawk and World in the quarter in which the merger was consummated, but they
have not been included in the pro forma statement of earnings data. The pro
forma information should be read in conjunction with the consolidated financial
statements of Mohawk included in Mohawk's 1997 annual report (which is included
in Mohawk's Form 10-K for the year ended December 31, 1997), Mohawk's quarterly
report on Form 10-Q for the quarter ended September 26, 1998 and the financial
statements of Mohawk and World included elsewhere herein. The pro forma
condensed consolidated financial data are not necessarily indicative of actual
or future operating results or financial position that will occur upon
consummation of the merger.
18
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 26, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACTUAL
------------------ PRO FORMA PRO FORMA
MOHAWK WORLD ADJUSTMENTS COMBINED
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash........................... $ -- 72 -- 72
Receivables.................... 307,069 53,252 (5,976)(1) 354,345
Inventories.................... 356,266 75,479 -- 431,745
Prepaid expenses............... 4,821 360 -- 5,181
Deferred income taxes.......... 27,670 9,535 -- 37,205
---------- ------- -------- ---------
Total current assets......... 695,826 138,698 (5,976) 828,548
Property, plant and equipment,
net............................. 340,892 72,958 -- 413,850
Other assets..................... 90,401 8,678 -- 99,079
---------- ------- -------- ---------
$1,127,119 220,334 (5,976) 1,341,477
========== ======= ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt.......................... $ 32,209 6,111 -- 38,320
Accounts payable and accrued
expenses...................... 305,521 65,050 7,093 (1)(2) 377,664
---------- ------- -------- ---------
Total current liabilities.... 337,730 71,161 7,093 415,984
Deferred income taxes............ 28,391 1,920 -- 30,311
Long-term debt................... 268,365 72,754 -- 341,119
Other long-term liabilities...... 5,363 969 (969)(1) 5,363
---------- ------- -------- ---------
Total liabilities............ 639,849 146,804 6,124 792,777
---------- ------- -------- ---------
Stockholders' equity:
Capital stock.................. 524 28,120 (28,071)(3) 573
Additional paid-in capital..... 139,593 -- 28,071 (3) 167,664
Retained earnings.............. 347,153 45,410 (12,100)(2) 380,463
---------- ------- -------- ---------
Total stockholders' equity... 487,270 73,530 (12,100) 548,700
---------- ------- -------- ---------
$1,127,119 220,334 (5,976) 1,341,477
========== ======= ======== =========
</TABLE>
19
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) Reflects reclassification of certain of World's reserves from liabilities
to accounts receivable to reflect Mohawk's presentation.
(2) Reflects $12.1 million of after tax, non-recurring charges related to the
merger.
(3) Reflects issuance of approximately 4.9 million shares of Mohawk common
stock in the merger.
20
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
------------------ PRO FORMA PRO FORMA
MOHAWK WORLD ADJUSTMENTS COMBINED
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales......................... $1,582,494 331,565 (3,661)(3) 1,910,398
Cost of sales..................... 1,191,644 256,955 4,168 (3) 1,452,767
---------- ------- ------ ---------
Gross profit.................... 390,850 74,610 (7,829) 457,631
Selling, general and
administrative expenses.......... 244,116 59,736 (7,829)(3) 296,023
---------- ------- ------ ---------
Operating income................ 146,734 14,874 -- 161,608
---------- ------- ------ ---------
Other expense:
Interest expense................ 16,338 5,663 -- 22,001
Other expense (income), net..... 1,752 (950) -- 802
---------- ------- ------ ---------
18,090 4,713 -- 22,803
---------- ------- ------ ---------
Earnings before income taxes.... 128,644 10,161 -- 138,805
Income tax expense (benefit)...... 50,815 (716) 5,893(4) 55,992
---------- ------- ------ ---------
Net earnings.................... $ 77,829 10,877 (5,893) 82,813
========== ======= ====== =========
Basic earnings per share.......... $ 1.49 1.45
========== =========
Weighted-average common shares
outstanding...................... 52,310 4,900(2) 57,210
========== ====== =========
Diluted earnings per share........ $ 1.47 1.43
========== =========
Weighted-average common and
dilutive potential common shares
outstanding...................... 53,057 4,900(2) 57,957
========== ====== =========
</TABLE>
21
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
------------------
PRO FORMA PRO FORMA
MOHAWK WORLD ADJUSTMENTS COMBINED
---------- ------- ----------- --------- ---
<S> <C> <C> <C> <C> <C>
Net sales.................... $1,901,352 430,932 (4,943)(3) 2,327,341
Cost of sales................ 1,464,697 337,849 5,591 (3) 1,808,137
---------- ------- -------- ---------
Gross profit............... 436,655 93,083 (10,534) 519,204
Selling, general and
administrative expenses..... 286,996 78,066 (10,534)(3) 354,528
Carrying value reduction of
property, plant and
equipment and other assets.. 5,500 -- -- 5,500
Compensation expense for
stock option exercises...... 2,600 -- -- 2,600
---------- ------- -------- ---------
Operating income........... 141,559 15,017 -- 156,576
---------- ------- -------- ---------
Other expense:
Interest expense........... 26,457 8,094 -- 34,551
Other expense (income),
net....................... 2,656 (2,209) -- 447
---------- ------- -------- ---------
29,113 5,885 -- 34,998
---------- ------- -------- ---------
Earnings before income
taxes..................... 112,446 9,132 -- 121,578
Income tax expense
(benefit)................... 44,416 (2,155) 5,893 (4) 48,154
---------- ------- -------- ---------
Net earnings............... $ 68,030 11,287 (5,893) 73,424
========== ======= ======== =========
Basic earnings per share..... $ 1.31 1.29
========== =========
Weighted-average common
shares outstanding.......... 51,912 4,900 (2) 56,812
========== ======== =========
Diluted earnings per share... $ 1.30 1.28
========== =========
Weighted-average common and
dilutive potential common
shares outstanding.......... 52,403 4,900 (2) 57,303
========== ======== =========
</TABLE>
22
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
------------------
PRO FORMA PRO FORMA
MOHAWK WORLD ADJUSTMENTS COMBINED
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales......................... $1,779,389 377,811 (4,184)(3) 2,153,016
Cost of sales..................... 1,372,022 298,691 4,508 (3) 1,675,221
---------- ------- ------ ---------
Gross profit.................... 407,367 79,120 (8,692) 477,795
Selling, general and
administrative expenses.......... 284,194 65,268 (8,692)(3) 340,770
Restructuring costs............... 700 -- -- 700
Carrying value reduction of
property, plant and equipment and
other assets..................... 3,060 -- -- 3,060
---------- ------- ------ ---------
Operating income................ 119,413 13,852 -- 133,265
---------- ------- ------ ---------
Other expense:
Interest expense................ 31,486 6,036 -- 37,522
Other expense (income), net..... 5,202 (1,122) -- 4,080
---------- ------- ------ ---------
36,688 4,914 -- 41,602
---------- ------- ------ ---------
Earnings before income taxes.... 82,725 8,938 -- 91,663
Income tax expense (benefit)...... 33,675 (1,778) 6,388 (4) 38,285
---------- ------- ------ ---------
Net earnings.................... $ 49,050 10,716 (6,388) 53,378
========== ======= ====== =========
Basic earnings per share.......... $ 0.96 0.95
========== =========
Weighted-average common shares
outstanding...................... 51,260 4,900 (2) 56,160
========== ====== =========
Diluted earnings per share........ $ 0.95 0.94
========== =========
Weighted-average common and
dilutive potential common shares
outstanding...................... 51,849 4,900 (2) 56,749
========== ====== =========
</TABLE>
23
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
------------------
PRO FORMA PRO FORMA
MOHAWK WORLD ADJUSTMENTS COMBINED
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales......................... $1,648,517 319,591 (2,734)(3) 1,965,374
Cost of sales..................... 1,281,887 261,141 2,768 (3) 1,545,796
---------- ------- ------ ---------
Gross profit.................... 366,630 58,450 (5,502) 419,578
Selling, general and
administrative expenses.......... 282,451 48,327 (5,502)(3) 325,276
Restructuring costs............... 8,439 -- -- 8,439
Carrying value reduction of
property, plant and equipment and
other assets..................... 23,711 -- -- 23,711
Compensation expense for stock
options.......................... 4,000 -- -- 4,000
---------- ------- ------ ---------
Operating income................ 48,029 10,123 -- 58,152
---------- ------- ------ ---------
Other expense:
Interest expense................ 34,998 4,983 -- 39,981
Other expense (income), net..... 2,570 (1,364) -- 1,206
---------- ------- ------ ---------
37,568 3,619 -- 41,187
---------- ------- ------ ---------
Earnings before income taxes.... 10,461 6,504 -- 16,965
Income taxes...................... 4,049 491 2,411 (4) 6,951
---------- ------- ------ ---------
Net earnings.................... $ 6,412 6,013 (2,411) 10,014
========== ======= ====== =========
Basic earnings per share.......... $ 0.13 0.19
========== =========
Weighted-average common shares
outstanding...................... 49,185 4,900 (2) 54,085
========== ====== =========
Diluted earnings per share........ $ 0.13 0.18
========== =========
Weighted-average common and
dilutive potential common shares
outstanding...................... 50,435 4,900 (2) 55,335
========== ====== =========
</TABLE>
24
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(1) Mohawk's fiscal year ends on December 31. Prior to the merger, World's
fiscal year ended on the Sunday closest to June 30. In recording the pro
forma pooling-of-interests combination, World's financial statements for
the nine-month period ended September 27, 1998 were combined with Mohawk's
financial statements for the nine-month period ended September 26, 1998 and
World's financial statements for the years ended June 28, 1998, June 29,
1997 and June 30, 1996 were combined with Mohawk's financial statements for
the years ended December 31, 1997, 1996 and 1995, respectively.
(2) All of the outstanding shares of World capital stock have been converted
into approximately 4.9 million shares of Mohawk common stock.
(3) Reflects the reclassification of World freight expense to net sales and
World cut order department expense to cost of sales to conform to Mohawk's
presentation.
(4) Adjustment to reverse World's deferred tax asset valuation allowance which
is not required based on Mohawk's ability to use World's net operating
loss carryforwards.
25
<PAGE>
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, hereunto duly authorized.
MOHAWK INDUSTRIES, INC.
_____________________________________
(Registrant)
Date November 20, 1998 /s/ Frank H. Boykin
_____________________________________
Frank H. Boykin
Corporate Controller
26
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-66061) of
Mohawk Industries, Inc. of our report dated September 21, 1998 relating to the
consolidated financial statements of World Carpets, Inc., which appears in the
Current Report on Form 8-K of Mohawk Industries, Inc. dated November 20, 1998.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
November 19, 1998
