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PROSPECTUS
Filed Pursuant to
Rule 424(b)(3)
Registration No. 333-77231
3,149,999 Shares
Mohawk Industries, Inc.
COMMON STOCK
The stockholders of Mohawk Industries, Inc. listed below are offering and
selling 3,149,999 shares of Mohawk's common stock under this prospectus.
The selling stockholders obtained their shares of Mohawk common stock in
connection with the merger of Durkan Acquisition Corp., a wholly owned
subsidiary of Mohawk, with and into Durkan Patterned Carpets, Inc. and the
merger of Nonpareil Acquisition Corp., a wholly owned subsidiary of Mohawk,
with and into Nonpareil Dyeing & Finishing, Inc. Some or all of the selling
stockholders expect to sell their shares.
The selling stockholders may offer their Mohawk common stock through public or
private transactions, on or off the New York Stock Exchange, at prevailing
market prices, or at privately negotiated prices.
Mohawk stock is listed on the New York Stock Exchange and trades under the
ticker symbol: "MHK." On May 12, 1999, the closing price of one share of Mohawk
common stock on the New York Stock Exchange was $36.375.
Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page 3.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
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The date of this prospectus is May 13, 1999.
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THE COMPANY
Mohawk is the second largest producer of woven and tufted broadloom carpet and
rugs for residential and commercial applications in the world. We design,
manufacture and market broadloom carpet and rugs across a broad range of
colors, textures and patterns, targeting all price points and emphasizing
quality, style, performance and service. We market our products through all
distribution channels, including carpet retailers, home centers, mass
merchandisers, department stores, commercial dealers and some commercial end
users.
Our principal executive offices are located at 160 South Industrial Boulevard,
Calhoun, Georgia 30701 and our telephone number is (706) 629-7721.
Recent Acquisitions.
Durkan Patterned Carpets, Inc.
On March 9, 1999, we acquired Durkan Patterned Carpets, Inc. and Nonpareil
Dyeing & Finishing, Inc. from their respective shareholders, all of whom are
selling stockholders named in this prospectus. After the acquisition, the
operations of Nonpareil were merged into Durkan. Throughout this prospectus,
references to Durkan include references to Nonpareil. Durkan is a leading
supplier of commercial carpet to the hospitality market. As a result of the
acquisition, Durkan has become our wholly owned subsidiary and we have issued
to the selling stockholders Three Million One Hundred Forty-Nine Thousand Nine
Hundred Ninety-Nine (3,149,999) shares of Mohawk common stock, which are the
shares offered hereby. The acquisition has been accounted for as a pooling-of-
interests. As a result, our supplemental consolidated financial statements
included in this prospectus reflect the historical consolidated financial
statements which have been restated to include the accounts and results of
operations of Durkan and Nonpareil.
Image Industries, Inc.
On January 29, 1999, we acquired certain assets and assumed certain liabilities
of Image Industries, Inc. and The Maxim Group, Inc. Image was a leading plastic
recycler and carpet manufacturer, which primarily manufactured polyester
residential carpet. Image had vertically integrated its manufacturing process
into the extrusion of polyester fiber from discarded plastic soda bottles and
other sources of post-consumer plastics. We intend to continue those
operations. The acquisition will be accounted for as a purchase.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS WHEN EVALUATING AN INVESTMENT IN SHARES OF
MOHAWK COMMON STOCK.
Risks Related To Acquisitions.
We intend to pursue acquisitions of complementary businesses as part of our
business and growth strategies. Although we regularly evaluate acquisition
opportunities, we cannot offer assurance that we will be able to:
.successfully identify suitable acquisition candidates
.obtain sufficient financing on acceptable terms to fund acquisitions
.complete acquisitions
.integrate acquired operations into our existing operations, or
.profitably manage acquired businesses.
Acquired operations may not achieve levels of sales, operating income or
productivity comparable to those of our existing operations, or otherwise
perform as expected. Acquisitions may also involve a number of special risks,
some or all of which could have a material adverse effect on our business,
results of operations and financial condition, including, among others:
.possible adverse effects on our operating results
.diversion of our management's attention and our resources, and
.dependence on retaining and training acquired key personnel.
The Carpet Industry is Cyclical.
The carpet industry is cyclical and is influenced by a number of general
economic factors. Prevailing interest rates, consumer confidence in spending
for durable goods and disposable income all have an impact on our growth and
profitability. In addition, sales of our principal products are related to the
construction and renovation of commercial and residential buildings. Any
adverse cycle could lessen the overall demand for our products and could, in
turn, impair our growth and profitability.
The Carpet Business is Seasonal.
We are a calendar year end company and our results for the first quarter tend
to be the weakest. Our second, third and fourth quarters typically produce
higher net sales and operating income. These results are primarily due to
consumer residential spending patterns and more carpet being installed during
the spring and summer months.
Our Business is Competitive.
We operate in a highly competitive industry. We and other manufacturers in the
carpet industry compete on the basis of price, style, quality and service. Some
of our competitors have greater financial resources at their disposal. We have
one competitor whose size could allow it certain
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manufacturing cost advantages compared to other industry participants. If our
competitors substantially increase production and marketing of competing
products, then we might be required to lower our prices or spend more on
product development, marketing, and sales, either of which could adversely
affect our profitability.
An Increase in the Costs of Raw Materials Could Negatively Impact Our
Profitability.
The cost of raw materials has a significant impact on the profitability of our
company. In particular, our business requires us to purchase large volumes of
nylon fiber and polypropylene resin, which is used to manufacture fiber. We do
not have any long-term supply contracts for any of these products. While we
generally attempt to match cost increases with price increases, large increases
in the cost of such raw materials could adversely affect our business, results
of operations and financial condition if we are unable to pass these costs
through to our customers.
We May Incur Significant Costs to Make Our Systems "Year 2000" Compliant.
Through our restructuring efforts over the past three years, we have installed
new information technology systems throughout all of our organization, all of
which are Year 2000 compliant. In addition, we have concluded our
identification of all other significant information technology systems that are
not Year 2000 compliant. We have completed our review of our equipment and
software with the respective vendors from whom we purchased the equipment and
software to address any noncompliance issues. We have identified certain Year
2000 issues with respect to our business systems. We have formed a committee of
employees familiar with our information technology systems and they have
assessed and prioritized the need to act, on the basis of each system's
importance to us, to ensure that our business systems will be made Year 2000
compliant. We have also completed a review of all process control systems, both
proprietary and non-proprietary. This review revealed that certain Year 2000
issues exist. Although we can provide no assurances, we estimate that it will
cost no more than approximately $500,000 of incremental costs to make our
business systems Year 2000 compliant. These upgrades have been substantially
completed, and the upgrades that are still in process will be completed in the
second quarter of 1999. Testing of these upgrades is underway and will be
completed in the third quarter of 1999.
We have completed the review of our top suppliers and customers to determine
their progress in becoming Year 2000 compliant. Our review indicated that all
of our major suppliers and customers appear to be in the process of resolving
any of their Year 2000 compliance issues and that they do not foresee any
material problems. We continue to follow-up with all of our suppliers and
customers to insure that all potential problems, including those of our
individual plant locations and local suppliers, are managed correctly.
If we cannot successfully and timely resolve our Year 2000 issues, our
business, results of operations and financial condition could be materially
adversely affected. We have not developed a contingency plan in the event of a
Year 2000 problem, however, based upon the results of our internal review, we
do not believe a contingency plan is necessary. We will, however, continue to
evaluate the need for a contingency plan.
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We May Be Responsible for Environmental Cleanup Costs.
Various federal, state and local environmental laws govern the use of our
facilities. Such laws govern:
. 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 are also 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. Based upon currently
available information, we believe that complying with environmental and safety
and health requirements will not require material capital expenditures in the
foreseeable future. However, we cannot assure you 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.
USE OF PROCEEDS
All net proceeds from the sale of the shares of our common stock will go to the
selling stockholders who offer and sell their shares. Accordingly, we will not
receive any proceeds from sales of the shares of Mohawk common stock offered by
this prospectus.
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SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth the selected financial data of Mohawk for the
periods indicated, derived from Mohawk's consolidated financial statements. On
February 25, 1994, we exchanged 20.3 million shares of common stock for all of
the outstanding shares of Aladdin Mills, Inc. common stock in a transaction
accounted for as a pooling-of-interests. All financial data were restated to
include the accounts and results of operations of Aladdin. On January 13, 1995,
we acquired all of the outstanding capital stock of Galaxy Carpet Mills, Inc.
The operating results of Galaxy are included in the 1995 consolidated statement
of earnings from the date of its acquisition. On July 23, 1997, we acquired
certain assets of Diamond Rug & Carpet Mills, Inc. and other assets owned by
Diamond's principal shareholders. The acquisitions of Galaxy and Diamond were
accounted for as purchases. On November 12, 1998, we acquired all of the
outstanding capital stock of World Carpets, Inc. in exchange for approximately
4.9 million shares of the Company's common stock. On November 12, 1998, the
Securities and Exchange Commission declared effective a shelf registration
statement to register for resale approximately 4.9 million shares of Company
common stock issued in connection with the merger. The historical consolidated
financial statements have been restated to give retroactive effect to the World
merger. The World merger has been accounted for as a pooling-of-interests in
the accompanying consolidated financial statements. On January 29, 1999, we
acquired certain assets and assumed certain liabilities of Image. This
acquisition will be accounted for as a purchase and its results will be
included in our consolidated financial statements from the date of acquisition.
On March 9, 1999, we acquired all of the capital stock of Durkan in exchange
for approximately 3.1 million shares of our common stock. The Durkan merger is
being accounted for as a pooling-of-interests in the accompanying supplemental
consolidated financial statements and the historical consolidated financial
statements have been restated to give retroactive effect to the Durkan merger.
On April 28, 1999 the Company filed a shelf registration statement with the
Securities and Exchange Commission to register for resale approximately 3.1
million shares of Company common stock issued in connection with the Durkan
merger. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and notes
thereto included and incorporated by reference elsewhere herein.
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<TABLE>
<CAPTION>
At or for the Years ended December 31,
--------------------------------------------------
1994 1995 1996 1997 1998
---------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of earnings data:
Net sales................... $1,778,068 2,041,865 2,239,471 2,429,085 2,745,000
Cost of sales(a)............ 1,380,689 1,594,050 1,726,765 1,869,221 2,060,816
---------- --------- --------- --------- ---------
Gross profit............... 397,379 447,815 512,706 559,864 684,184
Selling, general and admin-
istrative expenses......... 284,156 348,278 367,251 383,523 435,254
Restructuring costs(b)...... -- 8,439 700 -- --
Carrying value reduction of
property, plant and
equipment and other
assets(c).................. -- 23,711 3,060 5,500 2,900
Compensation expense for
stock option exercises(d).. -- 4,000 -- 2,600 --
---------- --------- --------- --------- ---------
Operating income........... 113,223 63,387 141,695 168,241 246,030
---------- --------- --------- --------- ---------
Interest expense............ 32,798 42,398 39,772 36,474 31,023
Acquisition costs--Aladdin
and World Mergers(e)....... 10,201 -- -- -- 17,700
Other expense, net.......... 697 1,170 4,586 338 2,501
---------- --------- --------- --------- ---------
43,696 43,568 44,358 36,812 51,224
---------- --------- --------- --------- ---------
Earnings before income
taxes...................... 69,527 19,819 97,337 131,429 194,806
Income taxes(f)............. 28,352 8,022 40,395 51,866 79,552
---------- --------- --------- --------- ---------
Net earnings............... $ 41,175 11,797 56,942 79,563 115,254
========== ========= ========= ========= =========
Basic earnings per
share(g)................... $ 0.73 0.21 0.96 1.33 1.91
========== ========= ========= ========= =========
Weighted-average common
shares outstanding(g)...... 56,718 57,235 59,310 59,962 60,393
========== ========= ========= ========= =========
Diluted earnings per
share(g)................... $ 0.71 0.20 0.95 1.32 1.89
========== ========= ========= ========= =========
Weighted-average common and
dilutive potential common
shares outstanding(g)...... 58,111 58,485 59,899 60,453 61,134
========== ========= ========= ========= =========
Balance sheet data:
Working capital............. $ 353,354 305,370 390,889 389,378 422,911
Total assets................ 1,038,947 1,110,438 1,226,959 1,233,361 1,388,942
Short-term note payable..... -- 50,000 21,200 -- --
Long-term debt (including
current portion)........... 473,902 435,940 486,952 402,854 377,089
Stockholders' equity........ 327,426 343,452 409,616 493,841 611,059
</TABLE>
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(a) Certain of Mohawk's facilities suffered damage during a March 1993
blizzard, and we finalized settlement of the insurance claim during the
first quarter of 1994. We recorded a reduction of $6.0 million in cost of
sales in 1994 for reimbursements of business interruption costs.
(b) During 1995 and 1996, we recorded pre-tax restructuring costs of $8.4
million and $0.7 million, respectively, related to certain mill closings
whose operations have been consolidated into other Mohawk facilities.
(c) During 1995, Mohawk adopted FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as of
January 1, 1995. A charge of $23.7 million was recorded for the reduction
of the carrying value of property, plant and equipment at certain mills.
During 1996, we recorded a charge of $3.1 million arising from the write-
down of property, plant and equipment to be disposed of related to the
closing of a manufacturing facility in 1996 and a revision in the estimate
of fair value of certain property, plant and equipment based on current
market conditions related to mill closings in 1995. During 1997, we
recorded a charge of $5.5 million arising from a revision in the estimated
fair value of certain property, plant and equipment held for sale based on
current appraisals and other market information related to a mill closing
in 1995. During 1998, we recorded a charge of $2.9 million for the write-
down of assets to be disposed of relating to the acquisition of World.
(d) Charges of $4.0 million and $2.6 million were recorded in 1995 and 1997,
respectively, for income tax reimbursements to be made to certain
executives related to the exercise of stock options granted in 1988 and
1989 in connection with Mohawk's 1988 leveraged buyout.
(e) Mohawk recorded a one-time charge of $10.2 million and $17.7 million in
1994 and 1998 for transaction expenses related to the Aladdin and World
mergers, respectively.
(f) During 1994, we reduced income tax expense by $2.0 million to reflect a
reduction in our effective tax rate and certain other changes in our
federal and state income tax status.
(g) Our board of directors declared a 3-for-2 stock split on October 23, 1997,
which was paid on December 4, 1997 to holders of record on November 4,
1997. Earnings per share and weighted-average common share data have been
restated to reflect the split.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Since January 1, 1996, we continued to experience significant growth both
internally and through acquisitions. On July 23, 1997, we acquired certain
assets of Diamond and other assets owned by Diamond's principal shareholders
for $36.0 million, including acquisition costs, which consisted of $19.6
million in cash, at closing, $7.0 million in cash over the six-month period
following closing and a $9.4 million note payable in seven annual installments
of principal plus interest at 6.0%. The Diamond acquisition was accounted for
as a purchase. On November 12, 1998, the Company acquired all of the
outstanding capital stock of World in exchange for approximately 4.9 million
shares of the Company's common stock. The World merger was accounted for as a
pooling-of-interests in the consolidated financial statements of Mohawk. On
January 29, 1999, we acquired certain assets of Image for approximately $193
million, including acquisition costs and the assumption of $30 million of tax
exempt debt. On March 9, 1999, we acquired all of the outstanding capital stock
of Durkan in exchange for approximately 3.1 million shares of the Company's
common stock. On April 28, 1999 a registration statement was filed with the
Securities and Exchange Commission to register for resale approximately 3.1
million shares of Mohawk common stock issued in connection with the Durkan
merger. The supplemental consolidated financial statements have been restated
to give retroactive effect to the Durkan merger. The Durkan merger is being
accounted for as a pooling-of-interests in the consolidated financial
statements of Mohawk.
These acquisitions have created and will create opportunities to enhance
Mohawk's operations by (i) broadening price points, (ii) increasing vertical
integration efforts, (iii) expanding distribution capabilities and (iv)
facilitating entry into niche businesses, such as rugs.
Through our restructuring efforts over the past three years, we have installed
new information technology systems throughout all of our organization, all of
which are Year 2000 compliant. In addition, we have concluded our
identification of all other significant information technology systems that are
not Year 2000 compliant. We have completed our review of our equipment and
software with the respective vendors from whom we purchased the equipment and
software to address any noncompliance issues. We have identified certain Year
2000 issues with respect to our business systems. We have formed a committee of
employees familiar with our information technology systems and they have
assessed and prioritized the need to act, on the basis of each system's
importance to us, to ensure that our business systems will be made Year 2000
compliant. We have also completed a review of all process control systems, both
proprietary and non-proprietary. This review revealed that certain Year 2000
issues exist. Although we can provide no assurances, we estimate that it will
cost no more than approximately $500,000 of incremental costs to make our
business systems Year 2000 compliant. These upgrades have been substantially
completed, and the upgrades that are still in process will be completed in the
second quarter of 1999. Testing of these upgrades is underway and will be
completed in the third quarter of 1999.
We have completed the review of our top suppliers and customers to determine
their progress in becoming Year 2000 compliant. Our review indicated that all
of our major suppliers and customers appear to be in the process of resolving
any of their Year 2000 compliance issues and that they do
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not foresee any material problems. We continue to follow-up with all of our
suppliers and customers to insure that all potential problems, including those
of our individual plant locations and local suppliers, are managed correctly.
If we cannot successfully and timely resolve our Year 2000 issues, our
business, results of operations and financial condition could be materially
adversely affected. We have not developed a contingency plan in the event of a
Year 2000 problem, however, based upon the results of our internal review, we
do not believe a contingency plan is necessary. We will, however, continue to
evaluate the need for a contingency plan.
Results of Operations
Year Ended December 31, 1998 As Compared With Year Ended December 31, 1997
Net sales for the year ended December 31, 1998 were $2,745.0 million,
reflecting an increase of $315.9 million, or approximately 13.0%, over the
$2,429.1 million reported in the year ended December 31, 1997. All major
product categories achieved sales increases in 1998 as compared to 1997. These
sales increases were impacted by continued favorable industry conditions and a
gain in the Company's market share which the Company believes primarily
resulted from continued emphasis on supporting its dealers and strong customer
acceptance of new product introductions.
Quarterly net sales and the percentage changes in net sales by quarter for
1998 versus 1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 Change
---------- --------- ------
<S> <C> <C> <C>
First Quarter....................................... $ 537,145 589,521 9.8%
Second Quarter...................................... 607,059 689,369 13.6
Third Quarter....................................... 626,751 718,899 14.7
Fourth Quarter...................................... 658,130 747,211 13.5
---------- --------- ----
Total Year........................................ $2,429,085 2,745,000 13.0%
========== ========= ====
</TABLE>
Gross profit for 1998 was $684.2 million (24.9% of net sales) and represented
an increase over the gross profit of $559.9 million (23.0% of net sales) for
1997. Gross profit dollars for the current year were impacted favorably by
better absorption of fixed costs through higher production volume and continued
improvements in manufacturing efficiencies from restructuring efforts.
Selling, general and administrative expenses for 1998 were $435.3 million
(15.9% of net sales) compared to $383.5 million (15.8% of net sales) for 1997.
Selling, general and administrative expenses as a percentage of net sales
increased primarily due to higher sample expenses due to the introduction of
new products in 1998.
During the fourth quarter of 1998, the Company recorded a charge of $2.9
million for the write-down of fixed assets to be disposed of in connection with
the World acquisition. Also, a $17.7 million charge was recorded for non-
recurring costs associated with the World acquisition.
During the fourth quarter of 1997, the Company revised its estimate of the
fair value of certain property, plant and equipment held for sale. The revision
resulted in a $5.5 million write-down to the
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carrying value of those assets. The revision was based upon current appraisals
and other market information. In addition, a $2.6 million charge was recorded
for additional income tax reimbursements to be made to certain executives for
the exercise of stock options. The income tax reimbursements were recorded in
connection with stock options granted in 1988 and 1989 related to the Company's
1988 leveraged buyout.
Interest expense for the current year was $31.0 million compared to $36.5
million in 1997. The primary factor contributing to the decrease was a
significant reduction in debt levels.
In the current year, income tax expense was $79.6 million, or 40.8% of
earnings before income taxes. In 1997, income tax expense was $51.9 million,
representing 39.5% of earnings before income taxes. The primary reason for the
increase in the 1998 effective income tax rate is that certain costs included
in the non recurring pre-tax charge of $17.7 million related to the World
acquisition are not deductible for income tax purposes.
Year Ended December 31, 1997 As Compared With Year Ended December 31, 1996
Net sales for the year ended December 31, 1997 were $2,429.1 million,
reflecting an increase of $189.6 million, or approximately 9.0%, over the
$2,239.5 million reported in the year ended December 31, 1996. All major
product categories achieved sales increases in 1997 as compared to 1996. These
sales increases were attributable to an improvement in our market share which
we believe primarily resulted from competitive changes in the retail segment of
the industry, strong customer acceptance of new product introductions,
expansion of residential warehousing operations, and further refinement of the
sales organization to achieve better regional customer focus.
Quarterly net sales and the percentage changes in net sales by quarter for 1997
versus 1996 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 Change
---------- --------- ------
<S> <C> <C> <C>
First Quarter.................................... $ 488,549 537,145 9.9%
Second Quarter................................... 577,866 607,059 5.1
Third Quarter.................................... 579,814 626,751 8.1
Fourth Quarter................................... 593,242 658,130 10.9
---------- --------- ----
Total Year..................................... $2,239,471 2,429,085 8.5%
========== ========= ====
</TABLE>
Gross profit for 1997 was $559.9 million (23.0% of net sales) and represented
an increase over the gross profit of $512.7 million (22.9% of net sales) for
1996. Gross profit dollars for 1997 were impacted favorably by manufacturing
improvements from restructuring and consolidating the residential operations,
higher production levels resulting in better absorption of fixed costs and a
reduction in certain raw material prices.
Selling, general and administrative expenses for 1997 were $383.5 million
(15.8% of net sales) compared to $367.3 million (16.4% of net sales) for 1996.
Selling, general and administrative expenses as a percentage of net sales
decreased primarily due to lower administrative, bad debt and sample expenses.
During the fourth quarter of 1997, we revised our estimate of the fair value of
certain property, plant and equipment held for sale. The revision resulted in a
$5.5 million write-down to the carrying value
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of those assets. The revision was based upon current appraisals and other
market information. In addition, a $2.6 million charge was recorded for
additional income tax reimbursements to be made to certain executives for the
exercise of stock options. The income tax reimbursements were recorded in
connection with stock options granted in 1988 and 1989 related to our 1988
leveraged buyout.
During 1996, we recorded nonrecurring charges of (i) $3.1 million which
included $0.9 million, primarily to reduce the carrying value of certain
assets, related to the decision to close a spinning mill in Belton, South
Carolina and $2.2 million primarily arising from a revision in the estimate of
the fair value of certain land and buildings that were recently sold and (ii)
$0.7 million related to restructuring costs for the Belton spinning mill
closing.
Interest expense for 1997 was $36.5 million compared to $39.8 million in 1996.
The primary factor contributing to the decrease was a significant reduction in
debt levels.
In 1997, income tax expense was $51.9 million, or 39.5% of earnings before
income taxes. In 1996, income tax expense was $40.4 million, representing 41.5%
of earnings before income taxes.
Liquidity and Capital Resources
Our primary capital requirements are for working capital, capital expenditures
and acquisitions. Our capital needs are met through a combination of
internally-generated funds, bank credit lines and credit terms from suppliers.
The level of accounts receivable increased from $299.5 million at the beginning
of 1998 to $331.6 million at the end of 1998. The $32.1 million increase is
attributable to strong sales growth. Inventories increased from $377.9 million
at the beginning of 1998 to $423.8 million at the end of 1998, due primarily to
acquisitions and the need for a higher level of inventory to meet the increased
sales volume.
Capital expenditures totaled $83.2 million during 1998, and the Company spent
an additional $36.6 million related to the acquisitions of Newmark & James Inc.
and American Weavers, LLC. The capital expenditures made during 1998 were
incurred primarily to modernize and expand manufacturing facilities and
equipment. The Company's capital projects are primarily focused on increasing
capacity, improving productivity and reducing costs. Capital expenditures for
Mohawk, including the $21.2 million of equipment used for the extrusion of
polypropylene yarn that was acquired in a noncash transaction in 1996 and $72.8
million for acquisitions, have totaled $280.5 million over the past three
years. Capital spending during 1999 is expected to range from $145 million to
$155 million, the majority of which will be used to purchase equipment to
increase production capacity and productivity. This amount excludes the $193
million that was paid in January 1999 to purchase Image.
On January 28, 1999, the Company amended and restated its revolving credit
agreement to increase total availability to $450 million, comprised of the
Tranche A commitment of $250 million due on January 28, 2004 and the Tranche B
commitment of $200 million due on January 27, 2000.
Impact of Inflation
Inflation affects our manufacturing costs and operating expenses. The carpet
industry has experienced moderate inflation in the prices of raw materials and
outside processing for the last three years. We have generally passed along
nylon fiber price increases to our customers.
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Seasonality
The carpet business is seasonal, with our second, third and fourth quarters
typically producing higher net sales and operating income than the first
quarter. This seasonality is primarily attributable to consumer residential
spending patterns and higher installation levels during the spring and summer
months.
Forward-Looking Information
Certain of the matters discussed in the preceding pages, particularly regarding
anticipating future financial performance, business prospects, growth and
operating strategies, proposed acquisitions, new products, Year 2000 compliance
and similar matters, and those preceded by, followed by or that otherwise
include the words "believes," "expects," "anticipates," "intends," "estimates,"
or similar expressions constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended. For those
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve a number of risks and uncertainties. The
following important factors, in addition to those discussed elsewhere in this
document, affect our future results and could cause those results to differ
materially from those expressed in the forward-looking statements: materially
adverse changes in economic conditions generally in the carpet, rug and
floorcovering markets served by us; failure of our vendors, customers and
suppliers to timely identify and adequately address Year 2000 compliance
issues; competition from other carpet, rug and floorcovering manufacturers, raw
material prices, timing and level of capital expenditures, the successful
integration of acquisitions including the challenges inherent in diverting our
management attention and resources from other strategic matters and from
operational matters for an extended period of time, the successful introduction
of new products, the successful rationalization of existing operations, and
other risks identified from time to time in our SEC reports and public
announcements.
12
<PAGE>
SELLING STOCKHOLDERS
Under an Escrow Agreement among Mohawk and the selling stockholders, which was
executed at the closing of the merger by us and the selling stockholders, a
portion of the shares of Mohawk common stock issued to the selling stockholders
was placed in escrow with an escrow agent. We may use the escrowed shares to
satisfy our indemnification claims if there is a breach of certain
representations and warranties made in the merger agreement.
We agreed to use our reasonable best efforts to register the shares of Mohawk
common stock issued to the selling stockholders in connection with the Durkan
merger and to use our reasonable efforts to keep the registration statement
effective until the second anniversary of the effective time of the merger or
until all the shares are sold under the registration statement or otherwise,
whichever comes first. Our registration of the shares of Mohawk common stock
does not necessarily mean that the selling stockholders will sell all or any of
the shares. However, we expect some or all of the selling stockholders to sell
their shares.
The following list of selling stockholders includes all of the stockholders
that received shares of Mohawk common stock in connection with the Durkan
merger. The shares listed below represent all of the shares that each selling
stockholder currently owns, including the shares held in escrow.
<TABLE>
<CAPTION>
Shares Shares
Owned Prior to Shares Being Owned After
Selling Stockholder the Offering(1) Offered the Offering(1)
- ------------------- --------------- ------------ ---------------
<S> <C> <C> <C>
Durkan Family Partnership Ltd.
L.P. ........................... 1,231,560 1,231,560 0
Durkan Development, L.P.......... 528,439 528,439 0
Patricia Durkan(2)............... 374,621 374,621 0
Thomas R. Durkan, III(2)......... 374,621 374,621 0
Tara Durkan-Simonds.............. 374,621 374,621 0
Thomas R. Durkan, II(2).......... 266,137 266,137 0
</TABLE>
- --------
(1) Assumes that all of the shares of Mohawk common stock held by the selling
stockholders and being offered under this prospectus are sold, and that the
selling stockholders acquire no additional shares of Mohawk common stock
prior to the completion of this offering.
(2) Prior to the Durkan merger, Thomas R. Durkan, II was the Chairman and Chief
Executive Officer of Durkan, Patricia Durkan was a co-President and the
Chief Operating Officer of Durkan and Thomas R. Durkan, III was a co-
President of Durkan. Currently, Thomas R. Durkan, II is the Chief Executive
Officer of Durkan, Patricia Durkan is a President and the Chief Operating
Officer and Thomas R. Durkan, III is the President-International and
Commercial Divisions.
13
<PAGE>
PLAN OF DISTRIBUTION
We are registering the shares of Mohawk common stock on behalf of the Selling
Stockholders. For purposes of this discussion regarding the plan of
distribution, "Selling Stockholders" includes donees and pledgees selling
shares received from a named Selling Stockholder after the date of this
prospectus. We will bear all costs, expenses and fees in connection with the
registration of the shares of Mohawk common stock offered hereby. The Selling
Stockholders will bear brokerage commissions and similar selling expenses, if
any, attributable to the sale of shares of Mohawk common stock. The Selling
Stockholders may sell shares of Mohawk common stock from time to time in one or
more types of transactions (which may include block transactions):
.on the NYSE
.in the over-the-counter market
.in negotiated transactions
.through put or call options transactions relating to the shares of Mohawk
common stock, and
.through short sales or a combination of such methods of sale.
Such transactions may be made at market prices prevailing at the time of sale
or at negotiated prices, and may or may not involve brokers or dealers. The
Selling Stockholders have advised Mohawk that they have not entered into any
agreements, understandings or arrangements with any underwriters or broker-
dealers regarding the sale of their securities, nor is there an underwriter or
coordinating broker acting in connection with the proposed sale of shares of
Mohawk common stock by the Selling Stockholders.
The Selling Stockholders may sell shares of Mohawk common stock directly to
purchasers or to or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Stockholders and/or the
purchasers of shares of Mohawk common stock for whom such broker-dealers may
act as agents or to whom they sell as principal, or both. Any compensation as
to a particular broker-dealer might be in excess of customary commissions.
The Selling Stockholders and any broker-dealers that act in connection with the
sale of shares of Mohawk common stock might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act. Any commissions
received by such broker-dealers and any profit on the resale of the shares of
Mohawk common stock sold by them while acting as principals might be deemed to
be underwriting discounts or commissions under the Securities Act. We have
agreed to indemnify each Selling Stockholder against certain liabilities,
including liabilities arising under the Securities Act. The Selling
Stockholders may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of the shares of Mohawk common
stock against certain liabilities, including liabilities arising under the
Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the Selling Stockholders will
be subject to the prospectus delivery requirements of the Securities Act. Those
delivery requirements may include delivery through the facilities of the NYSE
pursuant to Rule 153 under the Securities Act. We have informed the Selling
14
<PAGE>
Stockholders that the anti-manipulative provisions of Regulation M promulgated
under the Exchange Act may apply to their sales in the market.
Selling Stockholders also may resell all or a portion of the shares of Mohawk
common stock in open market transactions in reliance upon Rule 144 under the
Securities Act, providing they meet the criteria and conform to the
requirements of Rule 144.
If we are notified by a Selling Stockholder that any material arrangement has
been entered into with a broker-dealer for the sale of shares of Mohawk common
stock through:
. a block trade,
. a special offering,
. an exchange distribution,
. a secondary distribution or
. a purchase by a broker or dealer,
then a supplement to this prospectus will be filed, if required, pursuant to
Rule 424(b) under the Act, disclosing:
. the name of each such selling stockholder and of the participating
broker-dealer(s),
. the number of shares involved,
. the price at which such shares were sold,
. the commissions paid or discounts or concessions allowed to such broker-
dealer(s), where applicable,
. that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this prospectus,
and
. other facts material to the transaction.
In addition, upon our being notified by a Selling Stockholder that a donee or
pledgee intends to sell more than 500 shares, a supplement to this prospectus
will be filed.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from the SEC's Internet site at "http://www.sec.gov."
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
15
<PAGE>
incorporate by reference the documents listed below and any future filings,
including any filings after the date of initial filing and prior to the
effectiveness of the registration statement of which this prospectus is a part,
we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act:
1. Mohawk's Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
2. Mohawk's Current Reports on Form 8-K filed with the SEC on February 1, 1999,
February 2, 1999, February 4, 1999, February 19, 1999 and April 22, 1999;
and
3. The description of Mohawk's common stock contained in Mohawk's Registration
Statement on Form 8-A filed on January 29, 1992.
You may request a copy of these filings and any future filings incorporated
herein, at no cost, by writing or telephoning Ms. Barbara Lance, Secretary, at
the following address:
Mohawk Industries, Inc.
160 South Industrial Boulevard
Calhoun, Georgia 30701
(706) 629-7721
This prospectus is part of a registration statement we filed with the SEC. You
should rely only on the information or representations provided in this
prospectus. We have authorized no one to provide you with different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.
LEGAL OPINION
The validity of the shares of Mohawk common stock offered hereby will be passed
upon for the Company by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The supplemental consolidated and consolidated financial statements and
schedules of Mohawk Industries, Inc. and subsidiaries as of December 31, 1998
and 1997, and for each of the years in the three-year period ended December 31,
1998 have been included or incorporated by reference herein and in the
registration statement in reliance upon the reports of KPMG LLP, independent
auditors, appearing elsewhere herein or incorporated by reference, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of World Carpets, Inc. and Subsidiary as of June 28,
1998 and for the years ended June 28, 1998 and June 29, 1997, not separately
presented in this prospectus, have been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report thereon appears herein. Such financial
statements, to the extent they have been included in the financial statements
of Mohawk Industries, Inc. and subsidiaries, have been so included in reliance
on the report of such independent accountants given on the authority of said
firm as experts in auditing and accounting.
16
<PAGE>
Index to Mohawk Supplemental Consolidated Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Reports............................................. F-1
Consolidated Balance Sheets as of December 31, 1997 and 1998 ............. F-3
Consolidated Statements of Earnings for the Years Ended December 31, 1996,
1997 and 1998 ........................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended Decem-
ber 31, 1996, 1997 and 1998 ............................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998 ..................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
17
<PAGE>
Independent Auditors' Report
The Board of Directors
Mohawk Industries, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Mohawk Industries, Inc. and subsidiaries as of December 31, 1997 and 1998, and
the related supplemental consolidated statements of earnings, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audits. We did not audit the consolidated financial statements of World
Carpets, Inc. and Subsidiary, a wholly owned subsidiary, as of June 28, 1998
and for each of the years in the two-year period ended June 28, 1998 (not
presented herein), which financial statements have been combined with those of
Mohawk Industries, Inc. and subsidiaries as of December 31, 1997 and for each
of the years in the two-year period ended December 31, 1997, respectively. The
consolidated financial statements of World Carpets, Inc. and Subsidiary reflect
total assets constituting 18 percent as of December 31, 1997 and total net
sales constituting 17 percent and 18 percent for each of the years in the two-
year period ended December 31, 1997, respectively, of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for World Carpets, Inc. and Subsidiary, is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Mohawk Industries, Inc. and Durkan Patterned Carpets, Inc. which
has been accounted for as a pooling of interests as described in Note 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation. However, they will become the
historical consolidated financial statements of Mohawk Industries, Inc. and
subsidiaries after financial statements covering the date of consummation of
the business combination are issued.
In our opinion, based on our audits and the report of the other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mohawk Industries,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
/s/ KPMG LLP
Atlanta, Georgia
April 6, 1999
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Shareholders of
World Carpets, Inc.
In our opinion, the 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 years ended June 28,
1998 and June 29, 1997 (not presented separately herein), 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 audits. We conducted our
audits 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
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of the Company for any period
subsequent to June 28, 1998.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
September 21, 1998
F-2
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................... $ 220 2,384
Receivables............................................. 299,482 331,574
Inventories............................................. 377,888 423,837
Prepaid expenses........................................ 15,767 21,605
Deferred income taxes................................... 39,082 52,304
---------- ---------
Total current assets.................................. 732,439 831,704
Property, plant and equipment, net........................ 423,024 454,897
Other assets.............................................. 77,898 102,341
---------- ---------
$1,233,361 1,388,942
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and note payable...... $ 43,506 44,424
Accounts payable and accrued expenses................... 299,555 364,369
---------- ---------
Total current liabilities............................. 343,061 408,793
Deferred income taxes..................................... 30,820 31,045
Long-term debt, less current portion...................... 359,348 332,665
Other long-term liabilities............................... 6,291 5,380
---------- ---------
Total liabilities..................................... 739,520 777,883
---------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 60 shares authorized;
no shares issued....................................... -- --
Common stock, $.01 par value; 150,000 shares authorized;
60,217 and 60,533 shares issued in 1997 and 1998,
respectively........................................... 603 606
Additional paid-in capital.............................. 167,388 172,045
Retained earnings....................................... 325,850 438,408
---------- ---------
Total stockholders' equity............................ 493,841 611,059
Commitments and contingencies (Notes 10 and 13)...........
---------- ---------
$1,233,361 1,388,942
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1997 1998
---------- --------- ---------
<S> <C> <C> <C>
Net sales...................................... $2,239,471 2,429,085 2,745,000
Cost of sales.................................. 1,726,765 1,869,221 2,060,816
---------- --------- ---------
Gross profit................................. 512,706 559,864 684,184
Selling, general and administrative expenses... 367,251 383,523 435,254
Restructuring costs............................ 700 -- --
Carrying value reduction of property, plant and
equipment and other assets.................... 3,060 5,500 2,900
Compensation expense for stock option
exercises..................................... -- 2,600 --
---------- --------- ---------
Operating income............................. 141,695 168,241 246,030
---------- --------- ---------
Other expense:
Interest expense............................. 39,772 36,474 31,023
Acquisition costs--World Merger.............. -- -- 17,700
Other expense, net........................... 4,586 338 2,501
---------- --------- ---------
44,358 36,812 51,224
---------- --------- ---------
Earnings before income taxes................. 97,337 131,429 194,806
Income taxes................................... 40,395 51,866 79,552
---------- --------- ---------
Net earnings................................. $ 56,942 79,563 115,254
========== ========= =========
Basic earnings per share....................... $ 0.96 1.33 1.91
========== ========= =========
Weighted-average common shares outstanding..... 59,310 59,962 60,393
========== ========= =========
Diluted earnings per share..................... $ 0.95 1.32 1.89
========== ========= =========
Weighted-average common and dilutive potential
common shares outstanding..................... 59,899 60,453 61,134
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
Common stock
-------------
Additional Total
paid-in Retained Treasury Stock stockholders'
Shares Amount capital earnings stock options equity
------ ------ ---------- -------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... 56,491 $565 150,646 185,668 (115) (317) 336,447
Pooling of Durkan....... 3,150 32 3,248 3,725 -- -- 7,005
Stock options
exercised.............. 116 1 1,207 -- 115 -- 1,323
Dividends paid.......... -- -- -- (24) -- -- (24)
Tax benefit from
exercise of stock
options................ -- -- 7,606 -- -- -- 7,606
Amortization of deferred
compensation........... -- -- -- -- -- 317 317
Net earnings............ -- -- -- 56,942 -- -- 56,942
------ ---- ------- ------- ---- ---- -------
Balances at December 31,
1996................... 59,757 598 162,707 246,311 -- -- 409,616
Stock options
exercised.............. 460 5 3,631 -- -- -- 3,636
Dividends paid.......... -- -- -- (24) -- -- (24)
Tax benefit from
exercise of stock
options................ -- -- 1,050 -- -- -- 1,050
Net earnings............ -- -- -- 79,563 -- -- 79,563
------ ---- ------- ------- ---- ---- -------
Balances at December 31,
1997................... 60,217 603 167,388 325,850 -- -- 493,841
Stock options
exercised.............. 316 3 4,414 -- -- -- 4,417
Dividends paid.......... -- -- -- (24) -- -- (24)
Tax benefit from
exercise of stock
options................ -- -- 243 -- -- -- 243
Adjustments to conform
fiscal year end of
World.................. -- -- -- (2,672) -- -- (2,672)
Net earnings............ -- -- -- 115,254 -- -- 115,254
------ ---- ------- ------- ---- ---- -------
Balances at December 31,
1998................... 60,533 $606 172,045 438,408 -- -- 611,059
====== ==== ======= ======= ==== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings..................................... $56,942 79,563 115,254
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization................... 66,277 72,893 72,591
Deferred income taxes........................... 4,340 (3,109) (13,420)
Provision for doubtful accounts................. 13,070 8,458 13,173
(Gain) loss on sale of property, plant and
equipment...................................... 1,827 (440) 2,121
Carrying value reduction of property, plant and
equipment and other assets..................... 3,060 5,500 2,900
Compensation expense for stock option
exercises...................................... -- 2,600 --
Changes in assets and liabilities, net of
effects of acquisitions:
Receivables.................................... (68,896) (33,720) (36,523)
Inventories.................................... (13,508) 23,610 (31,083)
Accounts payable and accrued expenses.......... 3,291 29,953 57,295
Other assets and prepaid expenses.............. (7,632) 1,479 (8,427)
Other liabilities.............................. 4,868 (2,571) (1,673)
------- -------- --------
Net cash provided by operating activities..... 63,639 184,216 172,208
------- -------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and
equipment and other assets...................... 4,192 2,168 --
Additions to property, plant and equipment....... (55,652) (47,625) (83,180)
Acquisitions..................................... (2,122) (34,141) (36,574)
Other............................................ 159 895 --
------- -------- --------
Net cash used in investing activities......... (53,423) (78,703) (119,754)
------- -------- --------
Cash flows from financing activities:
Net change in revolving line of credit........... (26,428) (83,376) 83,658
Payment of note payable.......................... -- (21,200) --
Payments on term loans........................... (16,133) (22,896) (38,554)
Redemption of acquisition indebtedness........... -- -- (102,201)
Proceeds from new loan........................... 24,681 10,661 --
Proceeds from Industrial Revenue Bonds and other,
net of payments................................. (1,000) 11,593 11,329
Change in outstanding checks in excess of cash... (391) (5,841) (6,486)
Dividends paid................................... (24) (24) (24)
Common stock transactions........................ 9,246 4,686 1,988
------- -------- --------
Net cash used in financing activities......... (10,049) (106,397) (50,290)
------- -------- --------
Net change in cash............................ 167 (884) 2,164
Cash, beginning of year........................... 937 1,104 220
------- -------- --------
Cash, end of year................................. $ 1,104 220 2,384
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of Mohawk
Industries, Inc. and its subsidiaries (the "Company" or "Mohawk"). All
significant intercompany balances and transactions have been eliminated in
consolidation. On November 12, 1998, the Company acquired all of the
outstanding capital stock of World Carpets, Inc. ("World") in exchange for
approximately 4,900 shares of the Company's common stock ("World Merger"). On
November 12, 1998, the Securities and Exchange Commission declared effective a
shelf registration statement to register for resale approximately 4,900 shares
of Company common stock issued in connection with the World Merger. The
historical consolidated financial statements have been restated to give
retroactive effect to the World Merger. The World Merger is being accounted for
as a pooling-of-interests in the accompanying consolidated financial
statements. On March 9, 1999, the Company acquired all of the capital stock of
Durkan Patterned Carpets, Inc. ("Durkan") for approximately 3,150 shares of the
Company's common stock ("Durkan Merger"). On April 28, 1999 a shelf
registration statement was filed with the Securities and Exchange Commission to
register for resale approximately 3,150 shares of the Company's common stock in
connection with the Durkan Merger. The historical consolidated financial
statements have been restated to give retroactive effect to the Durkan Merger.
The Durkan Merger is being accounted for as a pooling-of-interests in the
accompanying consolidated financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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 those estimates.
(b) Accounts Receivable and Revenue Recognition
The Company is a broadloom carpet and rug manufacturer and sells carpet and
rugs throughout the United States for principally residential use. The Company
grants credit to customers, most of whom are retail carpet dealers, under
credit terms that are customary in the industry.
Revenues are recognized when goods are shipped. The Company provides allowances
for expected cash discounts, returns, claims and doubtful accounts based upon
historical bad debt and claims experience and periodic evaluations of the aging
of the accounts receivable.
(c) Inventories
Inventories are stated at the lower of cost or market (net realizable value).
Cost is determined using the last-in, first-out (LIFO) method, which matches
current costs with current revenues, for substantially all inventories and the
first-in, first-out (FIFO) method for the remaining inventories.
F-7
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(d) Property, Plant and Equipment
Property, plant and equipment is stated at cost, including interest on funds
borrowed to finance the acquisition or construction of major capital additions.
Depreciation is calculated on a straight-line basis over the estimated
remaining useful lives of the respective assets.
(e) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(f) Earnings per Share ("EPS")
The Company applies the provisions of Financial Accounting Standards Board
("FASB") FAS No. 128, Earnings per Share, which requires companies to present
basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company.
The Company's weighted-average common and dilutive potential common shares
outstanding have been adjusted for the 3-for-2 stock split approved by the
Board of Directors on October 23, 1997 and paid on December 4, 1997 to holders
of record on November 4, 1997 and the World and Durkan mergers. Dilutive common
stock options are included in the diluted EPS calculation using the treasury
stock method. Common stock options that were not included in the diluted EPS
computation because the options' exercise price was greater than the average
market price of the common shares for the periods presented are immaterial.
(g) Financial Instruments
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, notes payable and long-term debt. The carrying
amount of cash, accounts receivable, accounts payable and notes payable
approximates their fair value because of the short-term maturity of such
instruments. Interest rates that are currently available to the Company for
issuance of long-term debt with similar terms and remaining maturities are used
to estimate the fair value of the Company's long-term debt. The estimated fair
value of the Company's long-term debt at December 31, 1997 and 1998 was
$413,964 and $384,242, compared to a carrying amount of $402,854 and $377,089,
respectively.
F-8
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(h) Fiscal Year
The Company ends its fiscal year on December 31. Each of the first three
quarters in the fiscal year ends on the Saturday nearest the calendar quarter
end.
(i) Goodwill
Goodwill arises in connection with business combinations accounted for as
purchases. Goodwill is amortized primarily on a straight-line basis over 40
years. Amortization charged to earnings was $2,047 in 1996, $2,518 in 1997 and
$2,437 in 1998.
(j) Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of. Under FAS No. 121, the Company evaluates
impairment of long-lived assets on a business unit basis, rather than on an
aggregate entity basis, whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. If the sum of
the expected future undiscounted cash flows is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets is based on the fair value of the asset.
(k) Effect of Accounting Pronouncement Not Yet Adopted
In 1997, the FASB issued FAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which supersedes FAS No. 14, Financial
Reporting for Segments of a Business Enterprise. This statement, which the
Company was required to adopt in fiscal year 1998, requires public 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. The implementation of FAS No. 131 did not
have a material effect on the Company's consolidated financial statements.
(l) Reclassifications
Certain prior period financial statement balances have been reclassified to
conform with the current period's presentation.
(2) Acquisitions
On July 23, 1997, the Company acquired certain assets of Diamond Rug & Carpet
Mills, Inc. ("Diamond") and other assets owned by Diamond's principal
shareholders for approximately $36,000, including acquisition costs, which
consisted of $19,600 in cash, at closing, $7,000 in cash over the six-month
period following closing and a $9,350 note payable in seven annual installments
of principal plus interest at 6%. The acquisition was accomplished through a
plan of reorganization filed by Diamond under Chapter 11 of the United States
Bankruptcy Code.
F-9
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company completed its acquisitions of Newmark & James, Inc. and American
Weavers, LLC on June 30, 1998 and August 10, 1998, respectively. Both of these
acquisitions have been accounted for under the purchase method of accounting
and their results are included in the Company's 1998 consolidated statement of
earnings from the respective dates of acquisition.
On November 12, 1998, the Company acquired all of the outstanding capital stock
of World in exchange for approximately 4,900 shares of the Company's common
stock. The acquisition of World has been accounted for under the pooling-of-
interests basis of accounting and, accordingly, the Company's historical
consolidated financial statements have been restated to include the accounts
and results of operations of World. The Company incurred before tax,
nonrecurring charges aggregating $20,600 in 1998 related to the World Merger,
of which $17,700 of the charge is recorded as non-operating expense and $2,900
of the charge is recorded as a writedown of World computer equipment that will
be disposed of.
On March 9, 1999, the Company acquired all of the outstanding capital stock of
Durkan in exchange for approximately 3,150 shares of the Company's common
stock. The acquisition of Durkan has been accounted for under the pooling-of-
interests basis of accounting and, accordingly, the Company's historical
consolidated financial statements have been restated to include the accounts
and results of operations of Durkan.
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying consolidated financial
statements are presented below:
<TABLE>
<CAPTION>
Years Ended December
31,
--------------------
Nine Months Ended
September 26,
1996 1997 1998
---------- --------- -----------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales:
Mohawk.......................... $1,779,389 1,901,352 1,582,493
World........................... 373,627 425,989 333,694
Durkan.......................... 86,455 101,744 81,602
---------- --------- ---------
Combined...................... $2,239,471 2,429,085 1,997,789
========== ========= =========
Net earnings:
Mohawk.......................... $ 49,050 68,030 77,829
World........................... 4,328 5,394 4,984
Durkan.......................... 3,564 6,139 7,329
---------- --------- ---------
Combined...................... $ 56,942 79,563 90,142
========== ========= =========
</TABLE>
Prior to the combination, World's fiscal year ended on the Sunday closest to
June 30. In recording the pooling-of-interests combination, World's financial
statements for the year ended December 31, 1998 were combined with Mohawk's
consolidated financial statements for the same period. World's financial
statements for the years ended June 29, 1997 and June 28, 1998 were combined
with Mohawk's financial statements for the years ended December 31, 1996 and
1997, respectively. An adjustment has been made to stockholders' equity in the
year ended
F-10
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 to eliminate the effect of including World's results of
operations for the six months ended June 28, 1998 in the Company's consolidated
financial statements for the years ended December 31, 1997 and 1998. There were
no significant intercompany transactions between Mohawk and World prior to the
combination.
Prior to the combination, Durkan's fiscal year ended on the Saturday nearest
February 28. In recording the pooling-of-interests combination, Durkan's
financial statements for the years ended March 1, 1997, February 28, 1998 and
February 27, 1999,were combined with Mohawk's financial statements for the
years ended December 31, 1996, 1997 and 1998, respectively.
On January 29, 1999, the Company acquired certain assets of Image Industries,
Inc. for approximately $193,000, including acquisition costs and the assumption
of $30,000 of tax exempt debt. The acquisition will be accounted for using the
purchase method of accounting.
(3) Receivables
Receivables are as follows:
<TABLE>
<CAPTION>
As of December
31,
----------------
1997 1998
-------- -------
<S> <C> <C>
Customers, trade.......................................... $350,277 385,768
Other..................................................... 1,440 3,687
-------- -------
351,717 389,455
Less allowance for discounts, returns, claims and doubtful
accounts................................................. 52,235 57,881
-------- -------
Net receivables....................................... $299,482 331,574
======== =======
</TABLE>
(4) Inventories
The components of inventories are as follows:
<TABLE>
<CAPTION>
As of December
31,
----------------
1997 1998
-------- -------
<S> <C> <C>
Finished goods.............................................. $188,328 219,776
Work in process............................................. 56,597 60,266
Raw materials............................................... 132,963 143,795
-------- -------
Total inventories....................................... $377,888 423,837
======== =======
</TABLE>
F-11
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Property, Plant and Equipment
Following is a summary of property, plant and equipment:
<TABLE>
<CAPTION>
As of December
31,
----------------
1997 1998
-------- -------
<S> <C> <C>
Land........................................................ $ 13,617 14,330
Buildings and improvements.................................. 167,611 177,330
Machinery and equipment..................................... 562,531 610,338
Furniture and fixtures...................................... 20,679 33,667
Leasehold improvements...................................... 4,267 5,040
Construction in progress.................................... 21,282 43,237
-------- -------
789,987 883,942
Less accumulated depreciation and amortization.............. 366,963 429,045
-------- -------
Net property, plant and equipment......................... $423,024 454,897
======== =======
</TABLE>
Property, plant and equipment includes capitalized interest of $1,180, $799 and
$1,661 in 1996, 1997 and 1998, respectively.
During 1998, the Company recorded a charge of $2,900 related to a write-down of
computer equipment acquired in the World acquisition that will be disposed of.
During 1997, the Company recorded a charge of $5,500 arising from a revision in
the estimated fair value of certain property, plant and equipment held for sale
based on current appraisals and other market information related to a mill
closing in 1995.
During 1996, the Company recorded a charge of $3,060 arising from (a) the
write-down of property, plant and equipment to be disposed of related to the
closing of a manufacturing facility in 1996 and (b) a revision in the estimate
of fair value of certain property, plant and equipment based on current market
conditions related to mill closings in 1995.
(6) Other Assets
The components of other assets are summarized below:
<TABLE>
<CAPTION>
As of December
31,
---------------
1997 1998
------- -------
<S> <C> <C>
Goodwill, net of accumulated amortization of $8,266 and
$10,363, respectively.................................... $59,823 85,972
Other assets.............................................. 18,075 16,369
------- -------
Total other assets...................................... $77,898 102,341
======= =======
</TABLE>
F-12
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Long-Term Debt
On April 15, 1997, the Company amended and restated its credit agreement to
provide for an interest rate of either (i) LIBOR plus 0.2% to 0.5%, depending
upon the Company's performance measured against certain financial ratios, or
(ii) the prime rate less 1.0%. Additionally, the termination date of the credit
agreement was extended to May 15, 2002. At December 31, 1998, the Company had
credit availability of $250,000 under its revolving credit line of which
$121,078 was unused. The credit agreement contains customary financial and
other covenants and restricts cumulative dividend payments to $10,000 as
adjusted based on the Company's performance and dividend payments. The Company
must pay an annual facility fee ranging from .0015 to .0025 of the total credit
commitment, depending upon the Company's performance measured against specific
coverage ratios, under the revolving credit line.
The capital stock of each of the Company's subsidiaries has been pledged as
collateral under the credit agreement, the term loans and the senior notes.
On February 7, 1997, World amended the terms of its revolving and term loan
facility. Under the amended terms, World could borrow up to $102,000, based on
eligible accounts receivable and inventory balances. Interest on the revolving
credit facility was payable monthly at a rate equal to the prime rate minus
.25% or LIBOR plus 2% (8.25% at June 28, 1998). Interest on the term loans was
payable monthly at a rate equal to the prime rate plus .25% or LIBOR plus 2.5%
(8.5% at June 28, 1998). The term loans were payable in sixty equal monthly
principal installments of approximately $321, plus interest at the rate stated
above. The loans were secured by substantially all accounts receivable,
inventory and property, plant and equipment of World. Under the terms of the
revolving line of credit agreement, World incurred a fee equal to 3/8% per year
on the unused balance of the revolving line of credit. The revolving and term
loan facility was paid in full in 1998.
On January 28, 1999, the Company amended and restated its credit agreement to
increase the total availability to $450,000, comprised of the Tranche A
commitment of $250,000 due on January 28, 2004 and the Tranche B commitment of
$200,000 due on January 27, 2000.
F-13
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
Revolving line of credit, due May 15, 2002................. $ 48,800 128,922
World revolving line of credit, due February 7, 2002....... 58,872 --
World term loans........................................... 21,857 --
Durkan term loans, interest payable at prime or LIBOR plus
1.5% to 3.0%, payable in monthly installments of $207..... 14,228 11,696
Durkan revolving line of credit, interest payable at LIBOR
plus 1.25% to 2.75%, due November 1999.................... 4,967 3,277
Note payable to Durkan officer, interest payable at 8.5%,
due February 2000 5,400 5,400
8.46% senior notes, payable in annual principal
installments beginning in 1998, due September 16, 2004,
interest payable quarterly................................ 100,000 85,714
7.14%-7.23% senior notes, payable in annual principal
installments beginning in 1997, due September 1, 2005,
interest payable semiannually............................. 75,556 66,111
8.48% term loans, payable in annual principal installments
beginning in 1996, due October 26, 2002, interest payable
quarterly................................................. 28,571 22,857
9.5% senior notes, payable in annual principal
installments, due April 1, 1998, interest payable
semiannually.............................................. 3,750 --
7.58% senior notes, payable in annual principal
installments beginning in 1997, due July 30, 2003,
interest payable semiannually............................. 8,571 7,143
6% term note, payable in annual principal and interest
installments beginning in 1998, due July 23, 2004......... 9,350 8,014
Industrial Revenue Bonds and other......................... 22,932 37,955
-------- -------
Total long-term debt..................................... 402,854 377,089
Less current portion....................................... 43,506 44,424
-------- -------
Long-term debt, excluding current portion................ $359,348 332,665
======== =======
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999.............................................................. $ 44,424
2000.............................................................. 44,534
2001.............................................................. 33,396
2002.............................................................. 162,277
2003.............................................................. 27,435
Thereafter........................................................ 65,023
--------
$377,089
========
</TABLE>
F-14
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses are as follows:
<TABLE>
<CAPTION>
As of December 31,
1997 1998
--------- ---------
<S> <C> <C>
Outstanding checks in excess of cash...................... $ 33,655 26,894
Accounts payable, trade................................... 147,131 158,929
Accrued expenses.......................................... 74,867 126,702
Accrued compensation...................................... 43,902 51,844
--------- --------
Total accounts payable and accrued expenses............. $299,555 364,369
========= ========
</TABLE>
(9) Stock Options and Stock Compensation
Under the Company's 1992 and 1993 stock option plans, options may be granted to
directors and key employees through 2002 and 2003 to purchase a maximum of
2,250 and 675 shares of common stock, respectively. During 1998, options to
purchase 165 and 9 shares, respectively, were granted under these plans.
Options granted under each of these plans expire ten years from the date of
grant and become exercisable at such dates and at prices as determined by the
Compensation Committee of the Company's Board of Directors.
During 1996, the Company adopted the 1997 Non-Employee Director Stock
Compensation Plan. The plan provides for awards of common stock of the Company
for non-employee directors to receive in lieu of cash for their annual
retainers. During 1998, a total of 3 shares were awarded to the non-employee
directors under the plan.
During 1997, the Board of Directors adopted the 1997 Long-Term Incentive Plan
whereby the Company reserved 2,550 shares of common stock for issuance in
connection with options and awards. During 1998, a total of 21 shares were
awarded under this plan.
Additional information relating to the Company's stock option plans follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
Options outstanding at beginning of
year............................... 3,839 2,142 1,568
Options granted..................... 621 65 174
Options exercised................... (2,069) (460) (316)
Options canceled.................... (249) (179) (39)
----------- ---------- -----------
Options outstanding at end of year.. 2,142 1,568 1,387
=========== ========== ===========
Options exercisable at end of year.. 655 742 686
=========== ========== ===========
Option prices per share:
Options granted during the year..... $9.94-11.33 5.67-19.38 17.23-32.31
=========== ========== ===========
Options exercised during the year... $ .01-14.50 .02-19.17 5.67-19.38
=========== ========== ===========
Options canceled during the year.... $5.67-19.17 5.67-19.17 5.67-31.94
=========== ========== ===========
Options outstanding at end of year.. $ .03-19.17 5.61-19.38 5.61-32.31
=========== ========== ===========
</TABLE>
F-15
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A charge of $2,600 was recorded in the fourth quarter of 1997, for income tax
reimbursements to be made to certain executives for the exercise of stock
options. The income tax reimbursements were recorded in connection with stock
options granted in 1988 and 1989 related to the Company's 1988 leveraged
buyout. The agreements allowed the Company to receive an income tax benefit on
its tax return for the tax effect of the taxable compensation provided to the
individuals upon the exercise of these options. Such income tax benefit
resulted in a direct increase in stockholders' equity of $7,606 in 1996
primarily from the exercise of these options.
FAS No. 123, Accounting for Stock-Based Compensation, established a new method
of accounting for stock-based compensation arrangements with an entity's
employees. The new method is a fair value based method rather than the
intrinsic value based method prescribed by APB No. 25, Accounting for Stock
Issued to Employees. FAS No. 123 allows entities to retain the current approach
set forth in APB No. 25 for recognizing stock-based compensation expense in the
basic financial statements. Entities electing to apply the provisions of APB
No. 25 are required to make pro forma disclosures of net earnings and earnings
per share as if the fair value based method had been used. The Company
continues to apply the provisions of APB No. 25 for purposes of measuring
compensation cost in adopting FAS No. 123. The effect of the pro forma
disclosures on the Company's results of operations for the years presented is
immaterial.
(10) Employee Benefit Plans
The Company has a 401(k) retirement savings plan (the "Plan") open to
substantially all of its employees who have completed one year of eligible
service. The Company contributes $0.50 for every $1.00 of employee
contributions up to a maximum of 4% of the employee's salary. Employee and
employer contributions to the Plan were $6,499 and $2,132 in 1996, $9,334 and
$3,075 in 1997 and $12,345 and $4,213 in 1998, respectively.
A portion of the employees who were not eligible to participate in the Plan
participated in a defined contribution profit sharing plan through June 1997.
After June 1997, the employee balances in the profit sharing plan were rolled
over into the 401(k) retirement savings plan. Contributions were discretionary
and the Company expensed $2,130 and $991 for the years ended December 31, 1996
and 1997, respectively.
World maintains the World Carpet Savings Retirement Plan (the "World Plan"), a
defined contribution 401(k) plan covering substantially all World employees.
Employees are eligible to participate upon completion of one year of service.
Under the terms of the World Plan, World 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 years ended December
31, 1996, 1997 and 1998, World contributed approximately, $629, $698 and $703
to the World Plan, respectively.
Durkan maintains a 401(k) retirement savings plan (the "Durkan Plan") open to
substantially all of Durkan's employees, Durkan contributes $0.50 for every
$1.00 of employee contributions up to a maximum of 6% of eligible wages. For
the years ended December 31, 1996, 1997 and 1998, Durkan contributed
approximately $211, $265 and $328 to the Durkan Plan, respectively.
F-16
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Restructuring Costs
During the fourth quarter of 1996, the Company decided to close a spinning mill
in Belton, South Carolina, the operations of which are being consolidated into
other Mohawk facilities. For the year ended December 31, 1996, the Company
recorded restructuring costs of $700 related to employee termination benefits,
environmental clean-up and other costs associated with the mill closing. The
after-tax effect of the restructuring costs for the year was $415.
Additionally, in 1996 the Company made payments of $1,125 and reclassed $5,266
to other liability or reserve accounts in connection with mill closings in 1996
and prior years.
(12) Income Taxes
Income tax expense attributable to earnings before income taxes for the years
ended December 31, 1996, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- ------
<S> <C> <C> <C>
1996:
U.S. federal....................................... $33,139 949 34,088
State and local.................................... 2,912 3,395 6,307
------- ------- ------
$36,051 4,344 40,395
======= ======= ======
1997:
U.S. federal....................................... $45,921 (2,540) 43,381
State and local.................................... 9,077 (592) 8,485
------- ------- ------
$54,998 (3,132) 51,866
======= ======= ======
1998:
U.S. federal....................................... $75,985 (11,485) 64,500
State and local.................................... 17,761 (2,709) 15,052
------- ------- ------
$93,746 (14,194) 79,552
======= ======= ======
</TABLE>
Income tax expense attributable to earnings before income taxes differs from
the amounts computed by applying the statutory U.S. federal income tax rate to
earnings before income taxes as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense...................... $33,979 45,909 68,182
State and local income taxes, net of federal income
tax benefit......................................... 2,377 4,810 9,784
Amortization of goodwill............................. 519 472 746
Other, net........................................... 3,520 675 840
------- ------ ------
$40,395 51,866 79,552
======= ====== ======
</TABLE>
F-17
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997
and 1998 are presented below:
<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable..................................... $ 19,511 16,845
Inventories............................................. 990 6,946
Accrued expenses........................................ 18,674 28,583
Purchased net operating loss carryforwards.............. 6,025 --
Other................................................... 1,386 1,990
-------- -------
Gross deferred tax assets............................. 46,586 54,364
-------- -------
Deferred tax liabilities:
Plant and equipment..................................... (33,824) (33,105)
Other................................................... (4,500) --
-------- -------
Gross deferred tax liabilities........................ (38,324) (33,105)
-------- -------
Net deferred tax asset ............................... $ 8,262 21,259
======== =======
</TABLE>
Based upon the level of historical and projected taxable income over periods
which the deferred tax assets are deductible, the Company's management believes
it is more likely than not the Company will realize the benefits of these
deductible differences at December 31, 1998.
(13) Commitments and Contingencies
The Company is obligated under various operating leases for office and
manufacturing space, machinery and equipment.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) at December 31, 1998
are:
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1999.............................................................. $18,517
2000.............................................................. 16,101
2001.............................................................. 12,067
2002.............................................................. 8,251
2003.............................................................. 6,675
Thereafter........................................................ 5,066
-------
Total minimum lease payments...................................... $66,677
=======
</TABLE>
Rental expense under operating leases was $18,172, $20,970 and $27,347 in 1996,
1997 and 1998, respectively.
F-18
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1995, the Company and four other carpet manufacturers were added as
defendants in a purported class action lawsuit, In re Carpet Antitrust
Litigation, pending in the United States District Court for the Northern
District of Georgia, Rome Division. The amended complaint alleges price fixing
regarding polypropylene products in violation of Section One of the Sherman
Act. In September 1997, the Court determined that the plaintiffs met their
burden of establishing the requirements for class certification and granted the
plaintiffs' motion to certify the class. The Company is a party to two
consolidated lawsuits captioned Gaehwiler v. Sunrise Carpet Industries, Inc.
et. al. and Patco Enterprises, Inc. v. Sunrise Carpet Industries, Inc. et. al.;
both of which were filed in the Superior Court of the State of California, City
and County of San Francisco in 1996. Both complaints were brought on behalf of
a purported class of indirect purchasers of carpet in the State of California
and seek damages for alleged violations of California antitrust and unfair
competition laws. The complaints filed do not specify any amount of damages but
do request for any unlawful conduct to be enjoined and treble damages plus
reimbursement for fees and costs. In October 1998, two plaintiffs, on behalf of
an alleged class of purchasers of nylon carpet products, filed a complaint in
the United States District Court for the Northern District of Georgia against
the Company and two of its subsidiaries as well as a competitor and one of its
subsidiaries. The complaint alleges that the Company acted in concert with
other carpet manufacturers to restrain competition in the sale of certain nylon
carpet products. The Company has filed an answer and denied the allegations in
the complaint and set forth its defenses. In February 1999, a similar complaint
was filed in the Superior Court of the State of California, City and County of
San Francisco, on behalf of a purported class based on indirect purchases of
nylon carpet in the State of California and alleges violations of California
antitrust and unfair competition laws. The complaints described above do not
specify any specific amount of damages but do request injunctive relief and
treble damages plus reimbursement for fees and costs. The Company believes it
has meritorious defenses and intends to vigorously defend against these
actions.
(14) Consolidated Statements of Cash Flows Information
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Net cash paid during the year for:
Interest................................................ $40,207 37,849 30,852
======= ====== ======
Income taxes............................................ $25,946 55,882 75,640
======= ====== ======
</TABLE>
F-19
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Quarterly Financial Data (Unaudited)
The supplemental quarterly financial data are as follows:
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------
March 29, June 28, Sept. 27, Dec. 31,
1997 1997 1997 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales.............................. $537,145 607,059 626,751 658,130
Gross profit........................... 118,336 140,857 146,270 154,401
Net earnings........................... 9,617 21,514 23,514 24,918
Basic earnings per share............... 0.16 0.36 0.39 0.41
Diluted earnings per share............. 0.16 0.36 0.39 0.41
<CAPTION>
Quarters Ended
-------------------------------------
March 28, June 27, Sept. 26, Dec. 31,
1998 1998 1998 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales.............................. $589,521 689,369 718,899 747,211
Gross profit........................... 136,743 177,933 178,579 190,929
Net earnings........................... 17,135 35,947 37,060 25,112
Basic earnings per share............... 0.28 0.60 0.61 0.42
Diluted earnings per share............. 0.28 0.59 0.61 0.41
</TABLE>
F-20
<PAGE>
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No dealer, salesperson, or other person has been authorized to give any
information or to make any representations not contained in this prospectus. If
any such information is given or any such representations are made, they must
not be relied upon as having been authorized by Mohawk or the selling
stockholders. This prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy any of the shares of Mohawk common stock
offered hereby, to any person in any jurisdiction in which such offer or
solicitation is unlawful. Neither the delivery of this prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in the affairs of Mohawk since such date.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
The Company.............................................................. 2
Risk Factors............................................................. 3
Use of Proceeds.......................................................... 5
Selected Supplemental Consolidated Financial Information................. 6
Management's Discussion and Analysis of Supplemental Financial Condition
and Results of Operations............................................... 8
Selling Stockholders..................................................... 13
Plan of Distribution..................................................... 14
Where You Can Find More Information...................................... 15
Legal Opinion............................................................ 16
Experts.................................................................. 16
Index to Supplemental Consolidated Financial Statements.................. 17
</TABLE>
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MOHAWK
INDUSTRIES, INC.
Common Stock
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PROSPECTUS
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