<PAGE>
FILED PURSUANT TO
RULE 424 (b) (3)
FILE NO: 333-66061
PROSPECTUS
4,899,992 Shares
Mohawk Industries, Inc.
COMMON STOCK
The stockholders of Mohawk Industries, Inc. listed below are offering and
selling 4,899,992 shares of Mohawk's common stock under this prospectus.
The selling stockholders will obtain their shares of Mohawk common stock in
connection with a merger of WC Acquisition Corp., a wholly owned subsidiary of
Mohawk, with and into World Carpets, 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 November 11, 1998, the closing price of one share of
Mohawk common stock on the New York Stock Exchange was $30.0625.
Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page 3.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
The date of this prospectus is November 12, 1998.
<PAGE>
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 in Calhoun, Georgia 30701 and our
telephone number is (706) 629-7721.
Recent Acquisitions.
World Carpets, Inc.
On November 12, 1998, we acquired World Carpets, Inc. from its stockholders,
all of whom are selling stockholders named in this prospectus. World is a
leading producer of woven and tufted broadloom carpet and rugs for residential
and commercial applications. As a result of the acquisition, World has become
our wholly owned subsidiary and we have issued to the selling stockholders
4,899,992 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 World.
American Weavers LLC
On August 10, 1998, we acquired American Weavers LLC, a manufacturer of tufted,
woven and knitted decorative throws, placemats, table runners, kitchen chair
pads and tufted accent, scatter and area rugs. The acquisition was accounted
for as a purchase.
Newmark & James, Inc.
On June 30, 1998, we acquired Newmark & James, Inc., a manufacturer of high-end
cotton washable bath area rugs. The acquisition was accounted for as a
purchase.
2
<PAGE>
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, 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.
3
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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 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, both 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 are reviewing our equipment and software with the
respective vendors from whom we purchased the equipment and software to address
any noncompliance issues. However, we believe that certain Year 2000 issues
exist with respect to our business systems. We have formed a committee of
employees familiar with our information technology systems to assess and
prioritize 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
begun a review of all process control systems, both proprietary and non-
proprietary. This review revealed that certain Year 2000 issues exist. We do
not believe these issues are material and will obtain the necessary technical
resources to assist us in making these systems Year 2000 compliant. Although we
can provide no assurances, we estimate that it will cost no more than
approximately $1,000,000 of incremental costs to make our business systems Year
2000 compliant and that these upgrades will be completed in the second quarter
of 1999.
We have also begun to review our top suppliers and customers to determine their
progress in becoming Year 2000 compliant. This will allow us to determine
whether a Year 2000 problem will impede the ability of our suppliers and
customers to provide goods and services as the Year 2000 is approached and
reached. An initial 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 will
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
4
<PAGE>
do not believe a contingency plan is necessary. We will, however, continue to
evaluate the need for a contingency plan.
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 Mohawk common stock will go to
the selling stockholders who offer and sell their shares. Accordingly, Mohawk
will not receive any proceeds from sales of the shares of Mohawk common stock
offered by this prospectus.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet of
Mohawk gives effect to the merger with World as if the merger took place on
September 26, 1998. The merger has been accounted for as a pooling-of-
interests. All of the outstanding shares of World capital stock have been
exchanged for approximately 4.9 million shares of Mohawk common stock. The
unaudited pro forma condensed consolidated statements of earnings give effect
to the merger as if the merger took place on January 1, 1995. It is expected
that Mohawk and World will incur approximately $12.1 million, after income
taxes, in non-recurring charges related to the merger (primarily legal,
accounting, investment banking, loan termination and employee bonus costs)
during the quarter in which the merger is consummated. These payments will be
recorded as a post-merger charge to the combined statement of earnings of
Mohawk and World in the quarter in which the merger was consummated, but they
have not been included in the pro forma statement of earnings data. The pro
forma information should be read in conjunction with the consolidated financial
statements of Mohawk included in Mohawk's 1997 annual report (which is included
in Mohawk's Form 10-K for the year ended December 31, 1997), Mohawk's quarterly
report on Form 10-Q for the quarter ended September 26, 1998 and the financial
statements of Mohawk and World included elsewhere herein. The pro forma
condensed consolidated financial data are not necessarily indicative of actual
or future operating results or financial position that will occur upon
consummation of the merger.
5
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 26, 1998
(in thousands)
<TABLE>
<CAPTION>
Actual
------------------ Pro Forma Pro Forma
Mohawk World Adjustments Combined
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash........................... $ -- 72 -- 72
Receivables.................... 307,069 53,252 (5,976)(1) 354,345
Inventories.................... 356,266 75,479 -- 431,745
Prepaid expenses............... 4,821 360 -- 5,181
Deferred income taxes.......... 27,670 9,535 -- 37,205
---------- ------- -------- ---------
Total current assets......... 695,826 138,698 (5,976) 828,548
Property, plant and equipment,
net............................. 340,892 72,958 -- 413,850
Other assets..................... 90,401 8,678 -- 99,079
---------- ------- -------- ---------
$1,127,119 220,334 (5,976) 1,341,477
========== ======= ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt.......................... $ 32,209 6,111 -- 38,320
Accounts payable and accrued
expenses...................... 305,521 65,050 7,093 (1)(2) 377,664
---------- ------- -------- ---------
Total current liabilities.... 337,730 71,161 7,093 415,984
Deferred income taxes............ 28,391 1,920 -- 30,311
Long-term debt................... 268,365 72,754 -- 341,119
Other long-term liabilities...... 5,363 969 (969)(1) 5,363
---------- ------- -------- ---------
Total liabilities............ 639,849 146,804 6,124 792,777
---------- ------- -------- ---------
Stockholders' equity:
Capital stock.................. 524 28,120 (28,071)(3) 573
Additional paid-in capital..... 139,593 -- 28,071 (3) 167,664
Retained earnings.............. 347,153 45,410 (12,100)(2) 380,463
---------- ------- -------- ---------
Total stockholders' equity... 487,270 73,530 (12,100) 548,700
---------- ------- -------- ---------
$1,127,119 220,334 (5,976) 1,341,477
========== ======= ======== =========
</TABLE>
6
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) Reflects reclassification of certain of World's reserves from liabilities
to accounts receivable to reflect Mohawk's presentation.
(2) Reflects $12.1 million of after tax, non-recurring charges related to the
merger.
(3) Reflects issuance of approximately 4.9 million shares of Mohawk common
stock in the merger.
7
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PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
For the Nine Months Ended September 26, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Actual
------------------ Pro Forma Pro Forma
Mohawk World Adjustments Combined
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales......................... $1,582,494 331,565 (3,661)(3) 1,910,398
Cost of sales..................... 1,191,644 256,955 4,168 (3) 1,452,767
---------- ------- ------ ---------
Gross profit.................... 390,850 74,610 (7,829) 457,631
Selling, general and
administrative expenses.......... 244,116 59,736 (7,829)(3) 296,023
---------- ------- ------ ---------
Operating income................ 146,734 14,874 -- 161,608
---------- ------- ------ ---------
Other expense:
Interest expense................ 16,338 5,663 -- 22,001
Other expense (income), net..... 1,752 (950) -- 802
---------- ------- ------ ---------
18,090 4,713 -- 22,803
---------- ------- ------ ---------
Earnings before income taxes.... 128,644 10,161 -- 138,805
Income tax expense (benefit)...... 50,815 (716) 5,893(4) 55,992
---------- ------- ------ ---------
Net earnings.................... $ 77,829 10,877 (5,893) 82,813
========== ======= ====== =========
Basic earnings per share.......... $ 1.49 1.45
========== =========
Weighted-average common shares
outstanding...................... 52,310 4,900(2) 57,210
========== ====== =========
Diluted earnings per share........ $ 1.47 1.43
========== =========
Weighted-average common and
dilutive potential common shares
outstanding...................... 53,057 4,900(2) 57,957
========== ====== =========
</TABLE>
8
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PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
For the Year Ended December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Actual
------------------ Pro Forma Pro Forma
Mohawk World Adjustments Combined
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales........................ $1,901,352 430,932 (4,943)(3) 2,327,341
Cost of sales.................... 1,464,697 337,849 5,591 (3) 1,808,137
---------- ------- -------- ---------
Gross profit................... 436,655 93,083 (10,534) 519,204
Selling, general and
administrative expenses......... 286,996 78,066 (10,534)(3) 354,528
Carrying value reduction of
property, plant and equipment
and other assets................ 5,500 -- -- 5,500
Compensation expense for stock
option exercises................ 2,600 -- -- 2,600
---------- ------- -------- ---------
Operating income............... 141,559 15,017 -- 156,576
---------- ------- -------- ---------
Other expense:
Interest expense............... 26,457 8,094 -- 34,551
Other expense (income), net.... 2,656 (2,209) -- 447
---------- ------- -------- ---------
29,113 5,885 -- 34,998
---------- ------- -------- ---------
Earnings before income taxes... 112,446 9,132 -- 121,578
Income tax expense (benefit)..... 44,416 (2,155) 5,893 (4) 48,154
---------- ------- -------- ---------
Net earnings................... $ 68,030 11,287 (5,893) 73,424
========== ======= ======== =========
Basic earnings per share......... $ 1.31 1.29
========== =========
Weighted-average common shares
outstanding..................... 51,912 4,900 (2) 56,812
========== ======== =========
Diluted earnings per share....... $ 1.30 1.28
========== =========
Weighted-average common and
dilutive potential common shares
outstanding..................... 52,403 4,900 (2) 57,303
========== ======== =========
</TABLE>
9
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
For the Year Ended December 31, 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
Actual
------------------ Pro Forma Pro Forma
Mohawk World Adjustments Combined
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales......................... $1,779,389 377,811 (4,184)(3) 2,153,016
Cost of sales..................... 1,372,022 298,691 4,508 (3) 1,675,221
---------- ------- ------ ---------
Gross profit.................... 407,367 79,120 (8,692) 477,795
Selling, general and
administrative expenses.......... 284,194 65,268 (8,692)(3) 340,770
Restructuring costs............... 700 -- -- 700
Carrying value reduction of
property, plant and equipment and
other assets..................... 3,060 -- -- 3,060
---------- ------- ------ ---------
Operating income................ 119,413 13,852 -- 133,265
---------- ------- ------ ---------
Other expense:
Interest expense................ 31,486 6,036 -- 37,522
Other expense (income), net..... 5,202 (1,122) -- 4,080
---------- ------- ------ ---------
36,688 4,914 -- 41,602
---------- ------- ------ ---------
Earnings before income taxes.... 82,725 8,938 -- 91,663
Income tax expense (benefit)...... 33,675 (1,778) 6,388 (4) 38,285
---------- ------- ------ ---------
Net earnings.................... $ 49,050 10,716 (6,388) 53,378
========== ======= ====== =========
Basic earnings per share.......... $ 0.96 0.95
========== =========
Weighted-average common shares
outstanding...................... 51,260 4,900 (2) 56,160
========== ====== =========
Diluted earnings per share........ $ 0.95 0.94
========== =========
Weighted-average common and
dilutive potential common shares
outstanding...................... 51,849 4,900 (2) 56,749
========== ====== =========
</TABLE>
10
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
For the Year Ended December 31, 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
Actual
------------------ Pro Forma Pro Forma
Mohawk World Adjustments Combined
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales......................... $1,648,517 319,591 (2,734)(3) 1,965,374
Cost of sales..................... 1,281,887 261,141 2,768 (3) 1,545,796
---------- ------- ------ ---------
Gross profit.................... 366,630 58,450 (5,502) 419,578
Selling, general and
administrative expenses.......... 282,451 48,327 (5,502)(3) 325,276
Restructuring costs............... 8,439 -- -- 8,439
Carrying value reduction of
property, plant and equipment and
other assets..................... 23,711 -- -- 23,711
Compensation expense for stock
options.......................... 4,000 -- -- 4,000
---------- ------- ------ ---------
Operating income................ 48,029 10,123 -- 58,152
---------- ------- ------ ---------
Other expense:
Interest expense................ 34,998 4,983 -- 39,981
Other expense (income), net..... 2,570 (1,364) -- 1,206
---------- ------- ------ ---------
37,568 3,619 -- 41,187
---------- ------- ------ ---------
Earnings before income taxes.... 10,461 6,504 -- 16,965
Income taxes...................... 4,049 491 2,411 (4) 6,951
---------- ------- ------ ---------
Net earnings.................... $ 6,412 6,013 (2,411) 10,014
========== ======= ====== =========
Basic earnings per share.......... $ 0.13 0.19
========== =========
Weighted-average common shares
outstanding...................... 49,185 4,900 (2) 54,085
========== ====== =========
Diluted earnings per share........ $ 0.13 0.18
========== =========
Weighted-average common and
dilutive potential common shares
outstanding...................... 50,435 4,900 (2) 55,335
========== ====== =========
</TABLE>
11
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(1) Mohawk's fiscal year ends on December 31. Prior to the merger, World's
fiscal year ended on the Sunday closest to June 30. In recording the pro
forma pooling-of-interests combination, World's financial statements for
the nine-month period ended September 27, 1998 were combined with Mohawk's
financial statements for the nine-month period ended September 26, 1998 and
World's financial statements for the years ended June 28, 1998, June 29,
1997 and June 30, 1996 were combined with Mohawk's financial statements for
the years ended December 31, 1997, 1996 and 1995, respectively.
(2) All of the outstanding shares of World capital stock have been converted
into approximately 4.9 million shares of Mohawk common stock.
(3) Reflects the reclassification of World freight expense to net sales and
World cut order department expense to cost of sales to conform to Mohawk's
presentation.
(4) Adjustment to reverse World's deferred tax asset valuation allowance which
is not required based on Mohawk's ability to use World's net operating loss
carryforwards.
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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
April 30, 1993, we acquired all of the common stock of American Rug Craftsmen,
Inc. On July 30, 1993, we purchased the net assets of Karastan Bigelow. The
operating results of American Rug and Karastan Bigelow are included in the
Company's 1993 consolidated statement of earnings from their respective
acquisition dates. The acquisitions of American Rug and Karastan Bigelow were
accounted for as purchases. 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 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 merger. The merger is being accounted for as a
pooling-of-interests in the accompanying consolidated financial statements. 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.
13
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<TABLE>
<CAPTION>
At or for the Nine
At or for the Years ended December 31, Months Ended
--------------------------------------------------- -------------------
Sept. 27, Sept. 26,
1993 1994 1995 1996 1997 1997 1998
---------- --------- --------- --------- --------- --------- ---------
(In thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of earnings
data:
Net sales............... $1,459,980 1,712,112 1,965,374 2,153,016 2,327,341 1,693,730 1,910,398
Cost of sales(a)........ 1,145,208 1,341,703 1,545,796 1,675,221 1,808,137 1,319,723 1,452,767
---------- --------- --------- --------- --------- --------- ---------
Gross profit........... 314,772 370,409 419,578 477,795 519,204 374,007 457,631
Selling, general and ad-
ministrative expenses.. 220,002 265,044 325,276 340,770 354,528 260,758 296,023
Restructuring costs(b).. 2,363 -- 8,439 700 -- -- --
Carrying value reduction
of property, plant and
equipment and other
assets(c).............. -- -- 23,711 3,060 5,500 -- --
Compensation expense for
stock option
exercises(d)........... -- -- 4,000 -- 2,600 -- --
---------- --------- --------- --------- --------- --------- ---------
Operating income....... 92,407 105,365 58,152 133,265 156,576 113,249 161,608
---------- --------- --------- --------- --------- --------- ---------
Interest expense........ 21,744 31,210 39,981 37,522 34,551 27,484 22,001
Acquisition costs--
Aladdin Merger(e)...... -- 10,201 -- -- -- -- --
Other expense, net...... 868 689 1,206 4,080 447 614 802
Gain on insurance
claim(a)............... (4,746) -- -- -- -- -- --
---------- --------- --------- --------- --------- --------- ---------
17,866 42,100 41,187 41,602 34,998 28,098 22,803
---------- --------- --------- --------- --------- --------- ---------
Earnings before income
taxes.................. 74,541 63,265 16,965 91,663 121,578 85,151 138,805
Income taxes(f)......... 30,027 26,599 6,951 38,285 48,154 32,626 55,992
---------- --------- --------- --------- --------- --------- ---------
Net earnings........... $ 44,514 36,666 10,014 53,378 73,424 52,525 82,813
========== ========= ========= ========= ========= ========= =========
Basic earnings per
share(g)............... $ 0.86 0.68 0.19 0.95 1.29 0.93 1.45
========== ========= ========= ========= ========= ========= =========
Weighted-average common
shares outstanding(g).. 52,014 53,568 54,085 56,160 56,812 56,740 57,210
========== ========= ========= ========= ========= ========= =========
Diluted earnings per
share(g)............... $ 0.82 0.67 0.18 0.94 1.28 0.92 1.43
========== ========= ========= ========= ========= ========= =========
Weighted-average common
and dilutive potential
common shares
outstanding(g)......... 54,564 54,961 55,335 56,749 57,303 57,216 57,957
========== ========= ========= ========= ========= ========= =========
Balance sheet data:
Working capital......... $ 252,633 351,346 301,790 387,067 382,108 -- 424,664
Total assets............ 910,718 996,999 1,061,826 1,177,510 1,176,557 -- 1,341,477
Short-term note
payable................ -- -- 50,000 21,200 -- -- --
Long-term debt
(including current
portion)............... 368,734 448,442 405,100 458,741 377,738 -- 379,439
Stockholders' equity.... 284,480 321,984 336,447 399,047 477,133 -- 560,800
</TABLE>
- --------
(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 reductions of $6.0 million in cost of
sales in each of the years 1993 and 1994 for reimbursements of business
interruption costs and $4.7 million in other income in 1993 related to
gains on fixed asset replacements.
(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.
During 1993, we recorded pre-tax restructuring costs of $2.4 million
related to the closing of a woven carpet manufacturing operation and the
relocation and consolidation of this operation with a facility acquired in
the purchase of Karastan Bigelow.
(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.
(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 the Mohawk's 1988 leveraged buyout.
(e) Mohawk recorded a one-time charge of $10.2 million in 1994 for transaction
expenses related to the Aladdin merger that were incurred during the first
quarter of 1994.
(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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Since January 1, 1995, we continued to experience significant growth both
internally and through acquisitions. In January 1995, we acquired all of the
issued and outstanding capital stock of Galaxy for $42.2 million in cash,
including acquisition costs. 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%. Both the Galaxy and the Diamond acquisitions were accounted
for as purchases. 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. On November 12, 1998 the Securities and
Exchange Commission declared effective a registration statement to register for
resale approximately 4.9 million shares of Mohawk common stock issued in
connection with the merger. The historical consolidated financial statements
have been restated to give retroactive effect to the merger of Mohawk and
World. The 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 are reviewing our equipment and software with the
respective vendors from whom we purchased the equipment and software to address
any noncompliance issues. However, we believe that certain Year 2000 issues
exist with respect to our business systems. We have formed a committee of
employees familiar with our information technology systems to assess and
prioritize 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
begun a review of all process control systems, both proprietary and non-
proprietary. This review revealed that certain Year 2000 issues exist. We do
not believe these issues are material and will obtain the necessary technical
resources to assist us in making these systems Year 2000 compliant. Although we
can provide no assurances, we estimate that it will cost no more than
approximately $1,000,000 of incremental costs to make our business systems Year
2000 compliant and that these upgrades will be completed in the second quarter
of 1999.
We have also begun to review our top suppliers and customers to determine their
progress in becoming Year 2000 compliant. This will allow us to determine
whether a Year 2000 problem will impede the ability of our suppliers and
customers to provide goods and services as the Year 2000 is approached and
reached. An initial 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
15
<PAGE>
not foresee any material problems. We will 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
Nine Months Ended September 26, 1998 As Compared With Nine Months Ended
September 27, 1997
Net sales for the first nine months ended September 26, 1998 were $1,910.4
million, which represented an increase of 13.0% from the $1,693.7 million
reported for the first nine months of 1997. We believe this sales increase was
impacted by continued favorable industry conditions and a gain in market share
resulting from continued emphasis on supporting its dealers and strong
acceptance of new products. In addition, the acquisitions of Newmark & James
and American Weavers contributed to the current quarter increase in net sales.
Gross profit for the first nine months of the current year was $457.6 million
(24.0% of net sales). In the first nine months of 1997, gross profit was $374.0
million (22.1% of net sales). The improvement in gross profit resulted from
better absorption of fixed manufacturing costs through higher production volume
and continued improvements in manufacturing efficiencies from restructuring
efforts since 1996.
Selling, general and administrative expenses for the current period were $296.0
million (15.5% of net sales) compared to $260.8 million (15.4% of net sales)
for the prior year's first nine months.
Interest expense for the current period was $22.0 million compared to $27.5
million in the first nine months of 1997. The primary factor for the decrease
was a reduction in debt levels in the third quarter of 1998 as compared to the
third quarter of 1997.
In the current period, income tax expense was $56.0 million, compared to $32.6
million in the first nine months of 1997, or 40.3% compared to 38.3% of
earnings before income taxes, respectively.
Year Ended December 31, 1997 As Compared With Year Ended December 31, 1996
Net sales for the year ended December 31, 1997 were $2,327.3 million,
reflecting an increase of $174.3 million, or approximately 8.0%, over the
$2,153.0 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.
16
<PAGE>
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.................................... $ 466,201 514,993 10.5%
Second Quarter................................... 555,671 581,539 4.7
Third Quarter.................................... 557,724 600,843 7.7
Fourth Quarter................................... 573,420 629,966 9.9
---------- --------- ----
Total Year..................................... $2,153,016 2,327,341 8.1%
========== ========= ====
</TABLE>
Gross profit for 1997 was $519.2 million (22.3% of net sales) and represented
an increase over the gross profit of $477.8 million (22.2% of net sales) for
1996. Gross profit dollars for the current year 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 $354.5 million
(15.2% of net sales) compared to $340.8 million (15.8% 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 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. The after-tax effect of these
charges was $4.9 million, or $0.09 per diluted share.
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. The after-tax effect of these charges was $2.2 million, or $0.04 per
diluted share.
Interest expense for the current year was $34.6 million compared to $37.5
million in 1996. The primary factor contributing to the decrease was a
significant reduction in debt levels.
In the current year, income tax expense was $48.2 million, or 39.6% of earnings
before income taxes. In 1996, income tax expense was $38.3 million,
representing 41.8% of earnings before income taxes.
Year Ended December 31, 1996 As Compared With Year Ended December 31, 1995
Net sales for the year ended December 31, 1996 were $2,153.0 million,
reflecting an increase of $187.6 million, or approximately 10.0%, over the
$1,965.4 million reported in the year ended December 31, 1995. This sales
increase was attributable to an improvement in our market share
17
<PAGE>
which we believe primarily resulted from competitive changes in the retail
segment of the industry, our realignment of its residential sales forces under
a regional structure, and our strong product lines. We experienced a
significant increase in unit shipments as a result of these factors with
average net selling prices remaining flat as compared to 1995.
Quarterly net sales and the percentage changes in net sales by quarter for 1996
versus 1995 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996 Change
---------- --------- ------
<S> <C> <C> <C>
First Quarter.................................... $ 458,077 466,201 1.8%
Second Quarter................................... 506,265 555,671 9.8
Third Quarter.................................... 500,430 557,724 11.4
Fourth Quarter................................... 500,602 573,420 14.5
---------- --------- ----
Total Year..................................... $1,965,374 2,153,016 9.5%
========== ========= ====
</TABLE>
Gross profit for 1996 was $477.8 million (22.2% of net sales) and represented
an increase over the gross profit of $419.6 million (21.3% of net sales) for
1995. Gross profit dollars for 1996 were impacted favorably by manufacturing
improvements from restructuring and consolidating the residential operations,
higher production levels resulting in better absorption of fixed costs, a
reduction in certain raw materials prices and manufacturing improvements in
other divisions. The manufacturing consolidations included the closing of five
residential manufacturing facilities during 1995 as well as the realignment of
the remaining residential mills to better utilize the strengths of each mill.
Selling, general and administrative expenses for 1996 were $340.8 million
(15.8% of net sales) compared to $325.3 million (16.6% of net sales) for 1995.
Selling, general and administrative expenses as a percentage of net sales
decreased primarily due to better control of discretionary spending and better
leveraging of costs on strong sales growth.
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 sold in 1996 and (ii)
$0.7 million related to restructuring costs for the Belton spinning mill
closing. The after-tax effect of these charges was $2.2 million, or $0.04 per
diluted share.
We recorded restructuring costs of $8.4 million during 1995 related to certain
mill closings whose operations were consolidated into other Mohawk facilities.
The after-tax effect of these costs was $5.2 million or $0.10 per diluted
share.
During 1995, we adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (FAS No. 121) as of January 1, 1995. An impairment loss of
$23.7 million was recorded for the write-down of property, plant and equipment
at certain mills. The after-tax effect of the impairment loss was $14.5
million, or $0.27 per diluted share.
18
<PAGE>
A one-time charge of $4.0 million was recorded during 1995 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 our 1988 leveraged buyout. The
agreements allowed us to receive an income tax benefit on our tax return for
the tax effect of the taxable compensation provided to the individuals upon
exercise of these options. Such income tax benefit resulted in a direct
increase in stockholders' equity. The after-tax effect of the charge was $2.5
million, or $0.05 per diluted share.
Interest expense for 1996 was $37.5 million compared to $40.0 million in 1995.
The primary factors contributing to the decrease were a reduction in debt
levels and lower interest rates on our revolving credit agreement.
In 1996, income tax expense was $38.3 million, or 41.8% of earnings before
income taxes. In 1995, income tax expense was $7.0 million, representing 41.0%
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 $286.9 million at the beginning
of 1998 to $354.3 million at September 26, 1998. The $67.5 million increase is
attributable to seasonally high sales volume in the third quarter as compared
to December. Inventories increased from $367.1 million at the beginning of 1998
to $431.7 million at September 26, 1998, due primarily to requirements to meet
seasonal demand.
Capital expenditures totaled $95.9 million in the first nine months of 1998
(including amounts paid for the Newmark & James and American Weavers
acquisitions) and were incurred primarily to modernize and expand manufacturing
facilities and equipment. Our capital projects are primarily focused on
increasing capacity, improving productivity and reducing costs. Additional
capital spending during 1998 is expected to range from $15 million to $20
million, the majority of which will be used to purchase equipment to increase
production capacity and productivity.
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 its customers.
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.
19
<PAGE>
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.
20
<PAGE>
SELLING STOCKHOLDERS
Under an Escrow Agreement among Mohawk and certain selling stockholders, which
will be executed at the closing of the merger by us and those selling
stockholders, a portion of the shares of Mohawk common stock issued to those
selling stockholders will be 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 register the shares of Mohawk common stock issued to the selling
stockholders in connection with the World merger and to use our reasonable
efforts to keep the registration statement effective for 24 months 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 World
merger. The shares listed below represent all of the shares that each selling
stockholder currently owns, or which each selling stockholder may own, upon the
release of the shares from 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>
Shaheen A. Shaheen(2)............. 249,446 249,446 0
Piera B. Shaheen(3)............... 253,771 253,771 0
David M. Shaheen.................. 2,195,197 2,195,197 0
Revocable Trust of John A.
Shaheen, dated July 12, 1996...... 1,107,655 1,107,655 0
David M. Shaheen and John A.
Shaheen, as Co-Trustees pursuant
to that certain Voting Trust
Agreement dated April 30,
1992(4).......................... 6,386 6,386 0
Shaheen A. Shaheen Trust, dated
12/15/72.......................... 734,820 734,820 0
Piera B. Shaheen Trust, dated
12/8/76........................... 18,664 18,664 0
Shaheen A. and Piera B. Shaheen
Trust, dated 12/10/74............. 32,835 32,835 0
Shaheen A. and Piera B. Shaheen
Trust, dated 12/8/76.............. 32,835 32,835 0
John A. Shaheen Trust (J-1), dated
12/8/76........................... 20,392 20,392 0
John A. Shaheen Trust (J-2), dated
12/8/76........................... 20,392 20,392 0
John A. Shaheen Family Trust,
dated 12/30/80.................... 30,761 30,761 0
Irrevocable Trust of John A.
Shaheen (J-6), dated 12/27/82..... 42,962 42,962 0
Irrevocable Trust of John A.
Shaheen (J-7), dated 12/27/82..... 66,811 66,811 0
Irrevocable Trust of John A.
Shaheen (J-8), dated 3/24/83...... 10,127 10,127 0
Irrevocable Trust of John A.
Shaheen (J-9), dated 3/24/83...... 10,127 10,127 0
Irrevocable Trust of John A.
Shaheen (J-10), dated 12/7/87..... 66,811 66,811 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) Excludes 3,193 shares held of record by David M. Shaheen and John A.
Shaheen, as Co-Trustees pursuant to that certain Voting Trust Agreement
dated April 30, 1992, which are beneficially owned by Shaheen A. Shaheen.
(3) Excludes 3,193 shares held of record by David M. Shaheen and John A.
Shaheen, as Co-Trustees pursuant to that certain Voting Trust Agreement
dated April 30, 1992, which are beneficially owned by Piera B. Shaheen.
(4) Includes 3,193 shares beneficially owned by Shaheen A. Shaheen and 3,193
shares beneficially owned by Piera B. Shaheen.
21
<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
22
<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
23
<PAGE>
incorporate by reference the documents listed below and any future filings 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,
1997;
2. Mohawk's Quarterly Reports on Form 10-Q for the quarters ended March 28,
1998, June 27, 1998 and September 26, 1998;
3. Mohawk's Current Report on Form 8-K dated February 5, 1998;
4. Mohawk's Current Report on Form 8-K dated October 23, 1998; and
5. 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 OPINIONS
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, 1997
and 1996, and for each of the years in the three-year period ended December 31,
1997 have been included or incorporated by reference herein and in the
registration statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein or
incorporated by reference, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of World Carpets, Inc. and Subsidiary as
of June 28, 1998 and June 29, 1997 and for each of the three years in the
period ended June 28, 1998 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
24
<PAGE>
Index to Mohawk Supplemental Consolidated Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Reports............................................ F-1
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
September 26, 1998...................................................... F-3
Consolidated Statements of Earnings for the Years Ended December 31,
1995, 1996 and 1997 and the Nine Months Ended September 27, 1997 and
September 26, 1998...................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and the Nine Months Ended September 26,
1998.................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Nine Months Ended September 27, 1997 and
September 26, 1998...................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Index to World Consolidated Financial Statements
Report of Independent Accountants........................................ F-21
Consolidated Balance Sheet as of June 28, 1998........................... F-22
Consolidated Statement of Operations for the Year Ended June 28, 1998.... F-23
Consolidated Statement of Changes in Stockholders' Equity for the Year
Ended June 28, 1998..................................................... F-24
Consolidated Statement of Cash Flows for the Year Ended June 28, 1998.... F-25
Notes to Consolidated Financial Statements............................... F-26
</TABLE>
25
<PAGE>
Independent Auditor's 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, 1996 and 1997, and
the related supplemental consolidated statements of earnings, stockholders'
equity, and cash flows for each of the years the three-year period ended
December 31, 1997. 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 financial statements of World Carpets, Inc. and
Subsidiary, a subsidiary of Mohawk Industries, Inc., which statements reflect
total assets constituting 18 percent in 1996 and 1997 and total net sales
constituting 16 percent in 1995 and 19 percent in 1996 and 1997 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 World Carpets, Inc. and Subsidiary
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, 1996 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, 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 Peat Marwick LLP
Atlanta, Georgia
October 21, 1998, except as to
Note 2, which is as of November 12, 1998
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Shareholders of
World Carpets, Inc.
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of changes in shareholder's 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 June 29,
1997, and the results of their operations and their cash flows for the years
ended June 28, 1998, June 29, 1997 and June 30, 1996 (the statements of the
earlier two years 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,
-------------------- September 26,
1996 1997 1998
---------- --------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 898 145 72
Receivables............................... 269,241 286,871 354,345
Inventories............................... 380,828 367,076 431,745
Prepaid expenses.......................... 18,794 15,547 5,181
Deferred income taxes..................... 30,654 39,082 37,205
---------- --------- ---------
Total current assets.................... 700,415 708,721 828,548
Property, plant and equipment, net.......... 393,270 391,101 413,850
Other assets................................ 83,825 76,735 99,079
---------- --------- ---------
$1,177,510 1,176,557 1,341,477
========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and note
payable.................................. $ 47,089 41,529 38,320
Accounts payable and accrued expenses..... 266,259 285,084 365,564
---------- --------- ---------
Total current liabilities............... 313,348 326,613 403,884
Deferred income taxes....................... 27,530 30,311 30,311
Long-term debt, less current portion........ 432,852 336,209 341,119
Other long-term liabilities................. 4,733 6,291 5,363
---------- --------- ---------
Total liabilities....................... 778,463 699,424 780,677
---------- --------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 60 shares
authorized; no shares issued............. -- -- --
Common stock, $.01 par value; 150,000
shares authorized;
56,607, 57,067 and 57,304 shares issued
in 1996, 1997 and 1998, respectively..... 566 571 573
Additional paid-in capital................ 159,459 164,140 167,664
Retained earnings......................... 239,022 312,422 392,563
---------- --------- ---------
Total stockholders' equity.............. 399,047 477,133 560,800
Commitments and contingencies (Notes 10 and
13)........................................
---------- --------- ---------
$1,177,510 1,176,557 1,341,477
========== ========= =========
</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, Nine Months Ended
------------------------------ ---------------------------
September 27, September 26,
1995 1996 1997 1997 1998
---------- --------- --------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $1,965,374 2,153,016 2,327,341 1,693,730 1,910,398
Cost of sales........... 1,545,796 1,675,221 1,808,137 1,319,723 1,452,767
---------- --------- --------- --------- ---------
Gross profit.......... 419,578 477,795 519,204 374,007 457,631
Selling, general and
administrative
expenses............... 325,276 340,770 354,528 260,758 296,023
Restructuring costs..... 8,439 700 -- -- --
Carrying value reduction
of property, plant and
equipment and other
assets................. 23,711 3,060 5,500 -- --
Compensation expense for
stock option
exercises.............. 4,000 -- 2,600 -- --
---------- --------- --------- --------- ---------
Operating income...... 58,152 133,265 156,576 113,249 161,608
---------- --------- --------- --------- ---------
Other expense:
Interest expense...... 39,981 37,522 34,551 27,484 22,001
Other expense, net.... 1,206 4,080 447 614 802
---------- --------- --------- --------- ---------
41,187 41,602 34,998 28,098 22,803
---------- --------- --------- --------- ---------
Earnings before income
taxes................ 16,965 91,663 121,578 85,151 138,805
Income taxes............ 6,951 38,285 48,154 32,626 55,992
---------- --------- --------- --------- ---------
Net earnings.......... $ 10,014 53,378 73,424 52,525 82,813
========== ========= ========= ========= =========
Basic earnings per
share.................. $ 0.19 0.95 1.29 0.93 1.45
========== ========= ========= ========= =========
Weighted-average common
shares outstanding..... 54,085 56,160 56,812 56,740 57,210
========== ========= ========= ========= =========
Diluted earnings per
share.................. $ 0.18 0.94 1.28 0.92 1.43
========== ========= ========= ========= =========
Weighted-average common
and dilutive potential
common shares
outstanding............ 55,335 56,749 57,303 57,216 57,957
========== ========= ========= ========= =========
</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, 1995, 1996 and 1997 and Nine Months Ended September
26, 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,
1994................... 51,456 $515 118,478 145,832 (164) (643) 264,018
Pooling of World
Carpets, Inc. ......... 4,900 49 28,071 29,846 -- -- 57,966
Stock options
exercised.............. 135 1 742 -- 49 -- 792
Dividends paid.......... -- -- -- (24) -- -- (24)
Tax benefit from
exercise of stock
options................ -- -- 3,355 -- -- -- 3,355
Amortization of deferred
compensation........... -- -- -- -- -- 326 326
Net earnings............ -- -- -- 10,014 -- -- 10,014
------ ---- ------- ------- ---- ---- -------
Balances at December 31,
1995................... 56,491 565 150,646 185,668 (115) (317) 336,447
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............ -- -- -- 53,378 -- -- 53,378
------ ---- ------- ------- ---- ---- -------
Balances at December 31,
1996................... 56,607 566 159,459 239,022 -- -- 399,047
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............ -- -- -- 73,424 -- -- 73,424
------ ---- ------- ------- ---- ---- -------
Balances at December 31,
1997................... 57,067 571 164,140 312,422 -- -- 477,133
Stock options
exercised.............. 237 2 3,398 -- -- -- 3,400
Tax benefit from
exercise of stock
options................ -- -- 126 -- -- -- 126
Adjustments to conform
fiscal year end of
World Carpets, Inc. ... -- -- -- (2,672) -- -- (2,672)
Net earnings............ -- -- -- 82,813 -- -- 82,813
------ ---- ------- ------- ---- ---- -------
Balances at September
26, 1998 (unaudited)... 57,304 $573 167,664 392,563 -- -- 560,800
====== ==== ======= ======= ==== ==== =======
</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>
Nine Months Ended
Years Ended December 31, ---------------------------
----------------------------- September 27, September 26,
1995 1996 1997 1997 1998
-------- -------- --------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net earnings........... $ 10,014 53,378 73,424 52,525 82,813
Adjustments to
reconcile net earnings
to net cash provided
by operating
activities:
Depreciation and
amortization......... 58,643 62,281 68,377 51,641 55,584
Deferred income
taxes................ (7,924) 4,348 (3,440) 447 4,853
Provision for doubtful
accounts............. 9,649 13,213 8,434 5,584 8,057
(Gain) loss on sale of
property, plant and
equipment............ 209 1,302 (396) (610) 17
Carrying value
reduction of
property, plant and
equipment and other
assets............... 23,711 3,060 5,500 -- --
Compensation expense
for stock option
exercises............ 4,000 -- 2,600 -- --
Changes in assets and
liabilities, net of
effects of
acquisitions:
Receivables.......... 12,773 (69,560) (29,254) (57,773) (68,491)
Inventories.......... (3,475) (12,662) 25,725 (14,333) (49,285)
Accounts payable and
accrued expenses.... 19,511 3,359 26,607 68,624 63,487
Other assets and
prepaid expenses.... (2,444) (7,291) 1,941 9,770 10,105
Other liabilities.... (1,678) 4,868 (2,571) (2,489) (1,213)
-------- -------- --------- -------- --------
Net cash provided by
operating
activities......... 122,989 56,296 176,947 113,386 105,927
-------- -------- --------- -------- --------
Cash flows from
investing activities:
Proceeds from sale of
property, plant and
equipment and other
assets................ 7,339 3,284 2,092 957 --
Additions to property,
plant and equipment... (49,413) (49,985) (42,953) (25,415) (95,913)
Acquisitions........... (51,622) (2,122) (34,141) (38,122) 25
Other.................. 134 159 895 110 --
-------- -------- --------- -------- --------
Net cash used in
investing
activities......... (93,562) (48,664) (74,107) (62,470) (95,888)
-------- -------- --------- -------- --------
Cash flows from
financing activities:
Net change in revolving
line of credit........ (2,843) (27,179) (83,131) (21,857) 18,256
Payment of note
payable............... -- -- (21,200) (21,200) --
Payments on term
loans................. (5,081) (13,754) (20,337) (14,623) (30,244)
Redemption of
acquisition
indebtedness.......... (44,487) -- -- -- (19,517)
Proceeds from new
loan.................. 8,218 24,681 10,661 9,350 --
Proceeds from
Industrial Revenue
Bonds and other, net
of payments........... -- -- 11,593 6,554 9,596
Change in outstanding
checks in excess of
cash.................. 10,381 (391) (5,841) (11,885) 8,291
Dividends paid......... (24) (24) (24) (24) --
Common stock
transactions.......... 4,472 9,246 4,686 3,040 3,526
-------- -------- --------- -------- --------
Net cash used in
financing
activities......... (29,364) (7,421) (103,593) (50,645) (10,092)
-------- -------- --------- -------- --------
Net change in cash.. 63 211 (753) 271 (53)
Cash, beginning of
period................. 624 687 898 125 125
-------- -------- --------- -------- --------
Cash, end of period..... $ 687 898 145 396 72
======== ======== ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997 and September 27, 1997 and September 26, 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 ("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 Merger. The historical
consolidated financial statements have been restated to give retroactive effect
to the Merger. The 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.
The unaudited interim financial information reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods presented.
(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 residential and commercial 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")
In 1997, the Financial Accounting Standards Board ("FASB") issued FAS No. 128,
Earnings per Share, which supersedes APB No. 15, Earnings per Share. This
statement, which the Company was required to adopt in the fourth quarter of
1997, requires companies to replace the presentation of primary EPS and fully
diluted EPS with 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 implementation of FAS No. 128 did not have a material effect on the
Company's consolidated financial statements for the periods presented.
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. Dilutive common stock options are included in
the diluted EPS calculation using the treasury stock method. Dilutive potential
common shares outstanding for the fourth quarter of 1995 (1,368 potential
shares) are excluded from the diluted EPS computation for 1995 as the effect on
loss per share for such quarter would have been antidilutive. 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
F-8
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1996 and 1997 was
$485,297 and $388,848, compared to a carrying amount of $479,941 and $377,738,
respectively.
(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 $1,781 in 1995, $2,047 in 1996 and
$2,518 in 1997.
(j) Impairment of Long-Lived Assets
In 1995, the Company 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. 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 is 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 Company does not believe the
implementation of FAS No. 131 will have a material effect on its consolidated
financial statements.
(l) Reclassifications
Certain prior period financial statement balances have been reclassified to
conform with the current period's presentation.
F-9
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Acquisitions
On January 13, 1995, the Company acquired all of the issued and outstanding
capital stock of Galaxy Carpet Mills, Inc. ("Galaxy") for $42,232 in cash,
including acquisition costs. Galaxy was a manufacturer and distributor of
broadloom carpet, primarily for the residential market. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on the estimated fair values at the date of acquisition. The fair values
allocated were $112,583 for the assets acquired and $70,351 for the liabilities
assumed. Galaxy's results of operations are included in the Company's 1995
consolidated statement of earnings from the date of acquisition.
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.
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 will incur an after tax,
nonrecurring charge of approximately $12,100 related to the Merger with World.
The charge will be recorded as non-operating expense in the fourth quarter of
1998.
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 27, September 26,
1995 1996 1997 1997 1998
---------- --------- --------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales:
Mohawk......... $1,648,517 1,779,389 1,901,352 1,385,234 1,582,494
World.......... 316,857 373,627 425,989 308,496 327,904
---------- --------- --------- --------- ---------
Combined..... $1,965,374 2,153,016 2,327,341 1,693,730 1,910,398
========== ========= ========= ========= =========
Net earnings:
Mohawk......... $ 6,412 49,050 68,030 48,707 77,829
World.......... 3,602 4,328 5,394 3,818 4,984
---------- --------- --------- --------- ---------
Combined..... $ 10,014 53,378 73,424 52,525 82,813
========== ========= ========= ========= =========
</TABLE>
F-10
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 years ended June 28, 1998, June 29, 1997 and June 30, 1996
were combined with Mohawk's financial statements for the years ended December
31, 1997, 1996 and 1995, respectively. World's financial statements for the
nine months ended September 27, 1998 and September 28, 1997 have been combined
with Mohawk's financial statements for the nine months ended September 26, 1998
and September 27, 1997, respectively. An adjustment has been made to
stockholders' equity in the nine months ended September 26, 1998 to eliminate
the effect of including World's results of operations for the nine months ended
September 27, 1998 in the Company's consolidated financial statements for the
nine months ended September 26, 1998 and the year ended December 31, 1997.
There were no significant intercompany transactions between Mohawk and World
prior to the combination.
(3) Receivables
Receivables are as follows:
<TABLE>
<CAPTION>
As of As of
December 31, September 26,
---------------- -------------
1996 1997 1998
-------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Customers, trade............................ $307,146 337,520 413,658
Other....................................... 2,095 956 2,199
-------- ------- -------
309,241 338,476 415,857
Less allowance for discounts, returns,
claims and doubtful accounts............... 40,000 51,605 61,512
-------- ------- -------
Net receivables......................... $269,241 286,871 354,345
======== ======= =======
</TABLE>
(4) Inventories
The components of inventories are as follows:
<TABLE>
<CAPTION>
As of As of
December 31, September 26,
---------------- -------------
1996 1997 1998
-------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Finished goods................................ $183,634 185,162 224,722
Work in process............................... 54,380 53,892 62,684
Raw materials................................. 142,814 128,022 144,339
-------- ------- -------
Total inventories......................... $380,828 367,076 431,745
======== ======= =======
</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, As of
---------------- September 26,
1996 1997 1998
-------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Land........................................ $ 11,912 12,746 13,001
Buildings and improvements.................. 153,000 153,486 152,637
Machinery and equipment..................... 474,157 527,218 564,588
Furniture and fixtures...................... 20,236 18,590 15,758
Leasehold improvements...................... 2,573 3,256 7,718
Construction in progress.................... 12,901 20,666 50,022
-------- ------- -------
674,779 735,962 803,724
Less accumulated depreciation and
amortization............................... 281,509 344,861 389,874
-------- ------- -------
Net property, plant and equipment......... $393,270 391,101 413,850
======== ======= =======
</TABLE>
Property, plant and equipment includes capitalized interest of $2,169, $1,180
and $799 in 1995, 1996 and 1997, respectively.
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. The after-tax effect of the charge for the year was $3,328, or
$0.06 diluted earnings per share.
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. The after-tax effect of the charge
for the year was $1,815, or $0.03 diluted earnings per share.
In connection with the adoption of FAS No. 121 in 1995, the Company recorded
impairment losses of $21,000 for the write-down of property, plant and
equipment to be held and used at certain mills and $2,711 for the write-down of
property, plant and equipment to be disposed of related to these mill closings.
The after-tax effect of these impairment losses for the year was $14,535, or
$0.26 diluted earnings per share. The Company primarily used a discounted cash
flow analysis to estimate the fair value of these assets.
(6) Other Assets
The components of other assets are summarized below:
<TABLE>
<CAPTION>
As of
December 31, As of
-------------- September 26,
1996 1997 1998
------- ------ -------------
(unaudited)
<S> <C> <C> <C>
Goodwill, net of accumulated amortization of
$6,195, $8,266 and $9,882, respectively..... $60,479 59,823 75,749
Other assets................................. 23,346 16,912 23,330
------- ------ ------
Total other assets......................... $83,825 76,735 99,079
======= ====== ======
</TABLE>
F-12
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Note Payable and Long-Term Debt
In June 1996, the Company acquired certain equipment, primarily used for the
extrusion of polypropylene yarn, valued at $21,200 in exchange for a promissory
note due in April 1997. The promissory note paid interest at a variable rate
that ranged from 0.25% to 0.875% above LIBOR. The note was paid in full in
January 1997.
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, 1997, the Company had
credit availability of $250,000 under its revolving credit line of which
$201,200 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 can borrow up to $102,000, based on
eligible accounts receivable and inventory balances. Interest on the revolving
credit facility is payable monthly at a rate equal to the prime rate minus .25%
or LIBOR plus 2% (8.25% and 8.5% at June 28, 1998 and June 29, 1997,
respectively). Interest on the term loans is payable monthly at a rate equal to
the prime rate plus .25% or LIBOR plus 2.5% (8.5% and 9.00% at June 28, 1998
and June 29, 1997, respectively). The line of credit expires February 7, 2002.
The term loans are payable in sixty equal monthly principal instalments of
approximately $321, plus interest at the rate stated above. The loans are
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 incurs a fee equal to 3/8% per year on the unused balance of
the revolving line of credit. The fee is payable monthly.
F-13
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Revolving line of credit, due May 15, 2002................. $122,800 48,800
World revolving line of credit, due February 7, 2002....... 62,739 58,872
World term loans........................................... 25,714 21,857
8.46% senior notes, payable in annual principal
installments beginning in 1998, due September 16, 2004,
interest payable quarterly................................ 100,000 100,000
7.14%-7.23% senior notes, payable in annual principal
installments beginning in 1997, due September 1, 2005,
interest payable semiannually............................. 85,000 75,556
8.48% term loans, payable in annual principal installments
beginning in 1996, due October 26, 2002, interest payable
quarterly................................................. 34,286 28,571
9.5% senior notes, payable in annual principal
installments, due April 1, 1998, interest payable
semiannually.............................................. 7,500 3,750
7.58% senior notes, payable in annual principal
installments beginning in 1997, due July 30, 2003,
interest payable semiannually............................. 10,000 8,571
6% term note, payable in annual principal and interest
installments beginning in 1998, due July 23, 2004......... -- 9,350
Industrial Revenue Bonds and other......................... 10,702 22,411
-------- -------
Total long-term debt..................................... 458,741 377,738
Less current portion....................................... 25,889 41,529
-------- -------
Long-term debt, excluding current portion................ $432,852 336,209
======== =======
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $ 41,529
1999.............................................................. 37,029
2000.............................................................. 36,723
2001.............................................................. 101,615
2002.............................................................. 81,240
Thereafter........................................................ 79,602
--------
$377,738
========
</TABLE>
(8) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses are as follows:
<TABLE>
<CAPTION>
As of
December 31, As of
---------------- September 26,
1996 1997 1998
-------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Outstanding checks in excess of cash........ $ 39,496 33,655 42,379
Accounts payable, trade..................... 129,363 138,699 176,420
Accrued expenses............................ 59,976 70,986 101,268
Accrued compensation........................ 37,424 41,744 45,497
-------- ------- -------
Total accounts payable and accrued
expenses................................. $266,259 285,084 365,564
======== ======= =======
</TABLE>
F-14
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 1997, options to
purchase 43 and 22 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 1997, a total of 5 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. As of December 31, 1997, no options or
awards were granted under the plan.
Additional information relating to the Company's stock option plans follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Options outstanding at beginning of
year................................ 4,838 3,839 2,142
Options granted...................... 155 621 65
Options exercised.................... (951) (2,069) (460)
Options canceled..................... (203) (249) (179)
----------- ---------- ----------
Options outstanding at end of year... 3,839 2,142 1,568
=========== ========== ==========
Options exercisable at end of year... 2,367 655 742
=========== ========== ==========
Option prices per share:
Options granted during the year...... $9.33-12.17 9.94-11.33 5.67-19.38
=========== ========== ==========
Options exercised during the year.... $ .01- 6.67 .01-14.50 .02-19.17
=========== ========== ==========
Options canceled during the year..... $5.67-19.17 5.67-19.17 5.67-19.17
=========== ========== ==========
Options outstanding at end of year... $ .01-19.17 .03-19.17 5.61-19.38
=========== ========== ==========
</TABLE>
Charges of $4,000 and $2,600 were recorded in the fourth quarter of 1995 and
1997, respectively, 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.
In 1995, the FASB issued FAS No. 123, Accounting for Stock-Based Compensation,
which establishes a new method of accounting for stock-based compensation
arrangements with an entity's
F-15
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 disclosure requirements of FAS
No. 123 were effective for 1996 and 1997, but 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 $7,105 and $2,245 in 1995, $6,499 and
$2,132 in 1996 and $9,334 and $3,075 in 1997, 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 $1,875, $2,130 and $991 for the years ended December
31, 1995, 1996 and 1997, respectively.
World maintains the World Carpet Savings Retirement Plan (the "Plan"), a
defined contribution 401(k) plan covering substantially all employees.
Employees are eligible to participate upon completion of one year of service.
Under the terms of the Plan, 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, 1995, 1996
and 1997, the Company contributed approximately $574, $629 and $698 to the
Plan, respectively.
(11) Restructuring Costs
During 1995, the Company closed five residential manufacturing facilities, the
operations of which are being consolidated into other Mohawk facilities. During
the year ended December 31, 1995, the Company recorded restructuring costs of
$8,439 related to employee termination benefits, environmental clean-up and
other costs associated with the mill closings. The amount of termination
benefits accrued and charged to expense was $2,250 for the year ended December
31, 1995. The benefits accrued were for 945 employees, who were principally
involved in manufacturing operations. The amount of actual termination benefits
paid and charged against the liability as of December 31, 1995 was $2,186,
covering approximately 930 employees. The after-tax effect of the restructuring
costs for the year was $5,173, or $0.09 diluted earnings per share.
Additionally, in 1995
F-16
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company made payments of $2,308 and reclassed $7,372 to other liability or
reserve accounts in connection with mill closings in 1995 and prior years.
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, or $0.01
diluted earnings per share. 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, 1995, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- ------
<S> <C> <C> <C>
1995:
U.S. federal....................................... $11,587 (6,382) 5,205
State and local.................................... 3,288 (1,542) 1,746
------- ------ ------
$14,875 (7,924) 6,951
======= ====== ======
1996:
U.S. federal....................................... $31,363 955 32,318
State and local.................................... 2,574 3,393 5,967
------- ------ ------
$33,937 4,348 38,285
======= ====== ======
1997:
U.S. federal....................................... $42,994 (2,800) 40,194
State and local.................................... 8,600 (640) 7,960
------- ------ ------
$51,594 (3,440) 48,154
======= ====== ======
</TABLE>
Income tax expense attributable to earnings before income taxes differs from
the amounts computed by applying the U.S. federal income tax rate of 35% for
Mohawk and 34% for World to earnings before income taxes as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense...................... $5,872 31,993 42,461
State and local income taxes, net of federal income
tax benefit......................................... 955 2,377 4,810
Stock offering....................................... (987) -- --
Amortization of goodwill............................. 524 519 472
Other, net........................................... 587 3,396 411
------ ------ ------
$6,951 38,285 48,154
====== ====== ======
</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, 1996
and 1997 are presented below:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable.................................... $ 14,743 19,387
Inventories............................................ -- 969
Accrued expenses....................................... 11,853 18,451
Purchased net operating loss carryforwards............. 10,427 6,025
Other.................................................. 2,012 1,385
-------- --------
Gross deferred tax assets............................ 39,035 46,217
-------- --------
Deferred tax liabilities:
Plant and equipment.................................... (29,388) (32,946)
Inventories............................................ (1,665) --
Other.................................................. (4,858) (4,500)
-------- --------
Gross deferred tax liabilities....................... (35,911) (37,446)
-------- --------
Net deferred tax asset .............................. $ 3,124 8,771
======== ========
</TABLE>
At December 31, 1997, as a result of the World and Galaxy acquisitions, the
Company had net operating loss carryforwards for income tax purposes of $6,049
and $10,046, respectively. These net operating loss carryforwards are available
to offset future taxable income, if any, and begin expiring in 2005 and
continue to expire through 2009. Utilization of the net operating loss
carryforwards is subject to certain limitations under the Internal Revenue
Code.
(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, 1997
are:
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1998.............................................................. $19,165
1999.............................................................. 13,176
2000.............................................................. 11,781
2001.............................................................. 8,016
2002.............................................................. 5,307
Thereafter........................................................ 7,433
-------
Total minimum lease payments...................................... $64,878
=======
</TABLE>
Rental expense under operating leases was $18,488, $17,677 and $20,475 in 1995,
1996 and 1997, respectively.
F-18
<PAGE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1994, the Company and several other carpet manufacturers received
subpoenas to produce documents from a grand jury of the United States District
Court in Atlanta. The subpoenas were requested by the Antitrust Division of the
U.S. Department of Justice in connection with an investigation of the industry.
In October 1997, the Company was notified by the U.S. Department of Justice
that such investigation by the grand jury has been closed.
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 Company believes both of these lawsuits are without merit
and intends to vigorously defend against them. 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.
(14) Consolidated Statements of Cash Flows Information
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
For the Years Ended For the Nine
December 31, Months Ended
--------------------- ---------------------------
September 27, September 26,
1995 1996 1997 1997 1998
------- ------ ------ ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net cash paid during the
period for:
Interest.................. $41,292 37,949 35,926 27,984 24,163
======= ====== ====== ====== ======
Income taxes.............. $ 3,163 23,721 52,368 32,770 46,718
======= ====== ====== ====== ======
</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 30, June 29, Sept. 28, Dec. 31,
1996 1996 1996 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales.............................. $466,201 555,671 557,724 573,420
Gross profit........................... 100,441 127,836 119,512 130,006
Net earnings........................... 7,067 17,079 12,927 16,305
Basic earnings per share............... 0.13 0.30 0.23 0.29
Diluted earnings per share............. 0.13 0.30 0.23 0.29
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------
March 29, June 28, Sept. 27, Dec. 31,
1997 1997 1997 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales.............................. $514,993 581,539 600,843 629,966
Gross profit........................... 109,881 129,852 136,231 143,240
Net earnings........................... 8,731 18,899 22,184 23,610
Basic earnings per share............... 0.15 0.33 0.39 0.41
Diluted earnings per share............. 0.15 0.33 0.39 0.41
<CAPTION>
Quarters Ended
----------------------------
March 28, June 27, Sept. 26,
1998 1998 1998
--------- -------- ---------
<S> <C> <C> <C>
Net sales.............................. $559,963 660,441 689,994
Gross profit........................... 124,867 165,706 167,058
Net earnings........................... 14,595 33,495 34,723
Basic earnings per share............... 0.26 0.58 0.61
Diluted earnings per share............. 0.25 0.58 0.60
</TABLE>
F-20
<PAGE>
Report of Independent Accountants
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of World Carpets, Inc. and its subsidiary (the "Company") at June 28, 1998, and
the results of their operations and their cash flows for the year ended June
28, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Atlanta, GA
September 21, 1998
F-21
<PAGE>
WORLD CARPETS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands of dollars except for share amounts)
<TABLE>
<CAPTION>
June 28,
1998
--------
<S> <C>
ASSETS
Current assets
Cash and restricted cash........................................... $ 145
Accounts receivable, less allowance for doubtful accounts of
$1,777............................................................ 53,918
Inventories........................................................ 75,770
Prepaid expenses................................................... 355
Deferred income taxes.............................................. 10,890
--------
Total current assets............................................. 141,078
Property, plant and equipment, net................................... 71,283
Other assets......................................................... 8,867
--------
$221,228
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities..................................................
Book overdraft..................................................... $ 6,712
Current maturities of long-term debt............................... 5,570
Accounts payable................................................... 36,078
Accrued liabilities................................................ 15,133
Estimated product claims........................................... 4,658
--------
Total current liabilities........................................ 68,151
Long-term debt, less current maturities.............................. 78,971
Estimated product claims............................................. 968
Deferred income taxes................................................ 1,920
--------
150,010
SHAREHOLDERS' EQUITY
Class A Preferred Stock, voting, 8% cumulative, $100 par value,
1,000,000 shares authorized; 3,000 shares issued and outstanding.... 300
Class B Preferred Stock, nonvoting, 10% noncumulative, $100 par val-
ue,
100,000,000 shares authorized; 190,080 shares issued; 151,280 shares
outstanding......................................................... 19,008
Class C Common Stock, nonvoting, no par value, $100 stated value,
100,000,000 shares authorized; 126,920 shares issued and outstand-
ing................................................................. 12,692
Retained earnings.................................................... 43,098
--------
75,098
Less treasury stock, 38,800 shares of Class B Preferred Stock, at
cost................................................................ (3,880)
--------
71,218
--------
Commitments and contingencies........................................ --
--------
$221,228
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
WORLD CARPETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of dollars)
<TABLE>
<CAPTION>
Year ended
June 28,
1998
----------
<S> <C>
Net sales............................................................ $430,932
--------
Costs and expenses
Cost of goods sold................................................. 337,849
Selling, warehousing and distribution expenses..................... 60,562
General and administrative expenses................................ 17,504
--------
415,915
--------
Income from operations............................................... 15,017
Interest expense..................................................... (8,094)
Other income, net.................................................... 2,209
--------
Income before income taxes........................................... 9,132
Benefit from income taxes............................................ 2,155
--------
Net income........................................................... $ 11,287
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
WORLD CARPETS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars except for share amounts)
<TABLE>
<CAPTION>
Class A Class B Class C
Preferred Stock Preferred Stock Common Stock
----------------- --------------- --------------- Retained Treasury
Shares Amount Shares Amount Shares Amount Earnings Stock Total
-------- ------- ------- ------- ------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 29,
1997.................. 3,000 $ 300 190,080 $19,008 126,920 $12,692 31,835 (3,880) 59,955
-------- ------- ------- ------- ------- ------- ------ ------ ------
Dividends paid......... (24) (24)
Net income............. 11,287 11,287
-------- ------- ------- ------- ------- ------- ------ ------ ------
Balance at June 28,
1998.................. 3,000 $ 300 190,080 $19,008 126,920 $12,692 43,098 (3,880) 71,218
======== ======= ======= ======= ======= ======= ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
WORLD CARPETS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Year ended
June 28,
1998
----------
<S> <C>
Cash flows from operating activities
Net income........................................................ $11,287
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation..................................................... 8,059
Amortization..................................................... 1,030
Deferred income taxes............................................ (2,395)
Gain on disposal of property, plant and equipment................ (662)
Changes in operating assets and liabilities
Accounts receivable............................................. 2,165
Inventories..................................................... 2,291
Other assets.................................................... (1,633)
Cash overdraft.................................................. (984)
Accounts payable................................................ (6,758)
Accrued liabilities and estimated product claims................ 2,045
-------
Net cash provided by operating activities..................... 14,445
-------
Cash flows from investing activities
Collections on note receivable from shareholder................... 895
Refund from business acquisition.................................. 1,859
Proceeds from sale of property, plant and equipment............... 1,109
Purchases of property, plant and equipment........................ (11,217)
-------
Net cash used in investing activities......................... (7,354)
-------
Cash flows from financing activities
Proceeds from issuance of long-term debt.......................... 1,311
Payments of long-term debt........................................ (9,131)
Dividends paid.................................................... (24)
-------
Net cash used in financing activities......................... (7,844)
-------
Net decrease in cash................................................ (753)
Cash and restricted cash, beginning of year......................... 898
-------
Cash and restricted cash, end of year............................... $ 145
=======
Cash paid for interest............................................ $ 8,287
=======
Cash paid for taxes............................................... $ 956
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
WORLD CARPET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Accounting Policies
World Carpets, Inc. and its wholly owned subsidiary, World Commercial
Carpets, Inc. (the "Company") is a manufacturer of residential and
commercial carpet sold principally throughout the United States. The Company
designs, manufactures and markets carpet and rugs in a broad range of
colors, textures and patterns. The Company is widely recognized through its
premier brand names, some of which are "WundaWeave," "CustomWeave," "Zenith"
and "Sunrise", and markets its products primarily through carpet retailers,
home centers, mass merchandisers, department stores, commercial dealers and
commercial end users. The Company's operations are vertically integrated
from the extrusion of resin into fiber, to the conversion of fiber into yarn
and to the manufacture and shipment of finished carpet and rugs.
The more significant accounting policies followed by the Company are
summarized below:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
World Carpets, Inc. and its wholly-owned subsidiary, World Commercial
Carpets, Inc. All significant transactions are eliminated in consolidation.
Accounts receivable
For trade accounts, an allowance for doubtful accounts is provided based
upon industry average, historical bad debt experience and periodic
evaluations of the aging of accounts. Receivables are written off when
deemed to be uncollectible and recoveries are credited to the allowance
account when received. Accounts receivable also includes reserves for
discounts, returns and other items which are determined based on historical
experience and specific activity where applicable.
Inventories
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out (FIFO) method for valuing substantially all of its
inventories.
Property, plant and equipment
Property, plant and equipment is recorded at cost. Additions and
improvements are capitalized while maintenance and repairs are charged to
expense as incurred.
The Company computes depreciation using the straight-line method over the
estimated useful lives of the assets which range from three to forty years.
The cost and accumulated depreciation of property retired or otherwise
disposed of are removed from the accounts and any gains or losses are
included in income. The Company evaluates impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. Measurement of impairment
losses is based on the fair value of the applicable assets.
F-26
<PAGE>
WORLD CARPET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company capitalizes leased property and equipment meeting certain
criteria. The accompanying balance sheet reflects all capitalized leased
machinery and equipment as assets and the related obligations are included
in the current and non-current portion of long-term debt. Capital lease
assets are amortized on a straight-line basis over the lease terms.
Amortization of the capital lease assets is included in depreciation expense
in the accompanying financial statements.
Other assets
Other assets consist principally of the cash surrender value of life
insurance, deferred financing costs, and goodwill. Deferred financing costs
are amortized over the term of the related loans. Goodwill, representing the
excess of the purchase cost over the fair value of net assets acquired in
the acquisitions of certain assets of Wunda Weve Carpets, Inc. and Sunrise
Carpet Industries, Inc. & Affiliates, is being amortized over 15 years on a
straight-line basis. The Company periodically reviews goodwill to assess
recoverability. Any significant impairment would be recognized in operating
results if a permanent decline in value were to occur.
Book overdraft
Book overdraft represents outstanding checks written which have not been
presented to the bank for payment.
Estimated product claims
The estimated cost of future product claims is determined based on
historical claim percentages incurred by the Company. The amount is
classified as a current liability if expected to be settled within one year,
with the balance being classified as a long-term liability.
Income taxes
The Company reports the effects of income taxes in accordance with Statement
of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes." This asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
existing assets and liabilities. In estimating future tax consequences, FAS
109 generally considers all expected future events other than enactments of
changes in the tax laws or rates.
Fiscal year
The Company's operations are reported on a fifty-two, fifty-three week basis
with the fiscal year ending on the Sunday nearest June 30. Fiscal year 1998
included 52 weeks.
Fair value of financial instruments
The carrying amount reported in the balance sheet for cash and restricted
cash, accounts receivable, shareholder receivable and accounts payable
approximate fair value because of the short-term maturity of these financial
instruments.
F-27
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The carrying amount reported for long-term debt approximates fair value as
significantly all of the underlying instruments are variable rate notes that
reprice frequently.
Risks and uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Research and development costs
Product development costs are expensed by the Company as incurred. These
costs approximated $2,642,000 for the year ended June 28, 1998.
New accounting pronouncements
In 1997 and 1998, the Financial Accounting Standards Board issued Statement
No. 130, (FAS 130) "Reporting comprehensive Income", Statement No. 131, (FAS
131) "Disclosures and Segments of an Enterprise and Related Information",
Statement No. 132, (FAS 132) "Employers' Disclosures about Pensions and
Other Postretirement Benefits" and Statement No. 133, (FAS 133) "Accounting
for Derivative Instruments and Hedging Activities". FAS 130, FAS 131 and FAS
132 are effective for fiscal years beginning after December 15, 1997. FAS
133 is effective for fiscal years beginning after July 15, 1999. FAS 130
establishes standards for the reporting and display of comprehensive income
and its components in financial statements. FAS 131 requires companies to
report certain financial and descriptive information about their reportable
operating segments, including related disclosures about products and
services, geographic areas and major customers. FAS 132 suggests combined
formats for presentation for pension and other postretirement benefit
disclosures. FAS 132 also permits reduced disclosures for non public
entities. FAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. The Company does not believe
the implementation of FAS 130, FAS 131, FAS 132 or FAS 133 will have a
material effect on its consolidated financial statements.
2. Note Receivable from Shareholder
A note receivable from shareholder was prepaid December 19, 1997, which
included $774,000 of principal and $13,000 of interest. The note receivable
from shareholder totaled $895,000 at June 29, 1997 and called for bi-weekly
principal and interest, at 7.6% instalments through 2007.
F-28
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 28,
1998
(In thousands
of dollars)
-------------
<S> <C>
Finished goods.............................................. $31,103
Work-in-progress............................................ 9,313
Raw materials and other..................................... 35,354
-------
$75,770
=======
</TABLE>
4.Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
June 28,
1998
(In thousands
of dollars)
-------------
<S> <C>
Land and improvements....................................... $ 4,085
Buildings and leasehold improvements........................ 35,140
Machinery and equipment..................................... 107,265
Equipment under capital leases.............................. 4,980
Construction in progress.................................... 3,728
--------
155,198
Less accumulated depreciation and amortization.............. (83,915)
--------
$ 71,283
========
</TABLE>
Included in land and improvements and buildings and leasehold improvements
are nonoperating assets with a net book value of approximately $1,687,000.
Certain of these assets are leased by the Company to third parties under
short-term operating lease agreements. Rental income from the lease
agreements totaling $324,000, for year ended June 28, 1998, is included as
other income in the accompanying statement of operations.
F-29
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Other Assets
Other assets consist of the followings:
<TABLE>
<CAPTION>
June 28,
1998
(In thousands
of dollars)
-------------
<S> <C>
Goodwill.................................................... $ 8,821
Loan origination fees....................................... 871
Other....................................................... 593
-------
10,285
Accumulated amortization.................................... (1,418)
-------
Less accumulated depreciation and amortization.............. $ 8,867
=======
</TABLE>
6. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
June 28,
1998
(In thousands
of dollars)
-------------
<S> <C>
Payroll and related withholdings............................ $ 4,814
Professional fees and settlement............................ 2,593
Self-insurance reserves..................................... 3,246
Other....................................................... 4,480
-------
$15,133
=======
</TABLE>
7. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 28,
1998
(In thousands
of dollars)
-------------
<S> <C>
Revolving line of credit.................................... $58,872
Term loans.................................................. 21,857
Capital lease obligations................................... 3,812
-------
84,541
Less current maturities..................................... (5,570)
-------
$78,971
=======
</TABLE>
Under the amended terms of the Company's revolving and term loan facility,
the Company can borrow up to $102 million, based on eligible accounts
receivable and inventory balances. Interest on the revolving credit facility
is payable monthly at a rate equal to the prime rate minus .25% or the
London Interbank Offering Rate ("LIBOR") plus 2% (8.25% at June 28, 1998).
Interest on the term loans is payable monthly at a rate equal to the prime
rate plus .25 % or LIBOR plus 2.5% (8.5% at June 28, 1998). The line of
credit expires February 7, 2002. The term loans are payable in sixty equal
monthly principal installments of approximately $321,000,
F-30
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
plus interest at the rate stated above. The loans are secured by
substantially all accounts receivable, inventory and property, plant and
equipment of the Company.
Under the terms of the revolving line of credit agreement, the Company
incurs a fee equal to 3/8% per year on the unused balance of the revolving
line of credit. The fee is payable monthly.
The loan agreement requires that the Company maintain certain levels of
working capital and net worth during the term of the loans. The agreement
also limits capital expenditures, the payment of dividends and imposes
certain financing restrictions. The Company violated a financial covenant
requiring that a specified portion of capital expenditures be financed
during the year ended June 28, 1998. The Company has obtained a waiver for
this condition of default.
As of June 28, 1998, debt maturities, including capital lease obligations,
net of imputed interest, for the next five fiscal years are as follows:
<TABLE>
<CAPTION>
Capital
lease
Fiscal year Debt obligations Total
----------- ------- ----------- ------
(In thousands of dollars)
<S> <C> <C> <C>
1999.............................................. $ 3,857 1,713 5,570
2000.............................................. 3,857 963 4,820
2001.............................................. 3,857 657 4,514
2002.............................................. 69,158 248 69,406
2003.............................................. -- 231 231
------- ----- ------
$80,729 3,812 84,541
======= ===== ======
</TABLE>
8. Employee Benefit Plan
The Company maintains the World Carpet Savings Retirement Plan (the "Plan"),
a defined contribution 401(k) plan covering substantially all employees.
Employees are eligible to participate upon completion of one year of
service. Under the terms of the Plan, the Company may match employee
contributions up to a maximum of 2% of the employee's salary and employees
vest in the contributions based on years of credited service. For the year
ended June 28, 1998, the Company contributed approximately $698,000, to the
Plan.
F-31
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
The components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
Year ended
June 28,
1998
(In thousands
of dollars)
-------------
<S> <C>
Current
Federal................................................. $ (146)
State................................................... (94)
------
(240)
Deferred
Federal................................................. 2,275
State................................................... 120
------
$2,155
======
The difference between the U.S. federal statutory tax rate and the Company's
effective tax rate are as follows:
<CAPTION>
June 28,
1998
(In thousands
of dollars)
-------------
<S> <C>
Federal statutory tax rate................................ 34 %
State income taxes (net of federal federal income tax ben-
efit).................................................... 3.8
Reduction in valuation of reserve for deferred tax as-
sets..................................................... (64.5)
Other..................................................... 2.5
------
Effective (benefit) tax rate.............................. (24.2)%
======
</TABLE>
The deferred tax assets and deferred tax liabilities recorded on the balance
sheet are as follows:
<TABLE>
<CAPTION>
Deferred tax
assets (liabilities)
June 28,
1998
(In thousands
of dollars)
--------------------
<S> <C>
Accounts receivable reserves......................... $3,051
Depreciation and amortization........................ (4,478)
Accrued liabilities.................................. 5,656
Inventories.......................................... 1,332
Allowance for bad debts.............................. 693
Loss carryforwards................................... 2,057
Tax credit carryforwards............................. 659
------
$8,970
======
</TABLE>
As of June 28, 1998, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $6,049,000 available
to reduce taxable income. The Company's net operating loss carryforwards
begin expiring in 2005 and will continue to expire
F-32
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
through 2006. During the year ended June 28, 1998, the Company utilized
approximately $6,897,000 of its net operating loss carryforwards to offset
current taxable income and reduced its valuation allowance by $5,893,000.
Under the Tax Reform Act of 1986, if certain substantial changes in the
Company's ownership were to occur in the future, there would be an annual
limitation on the amount of operating loss carryforwards which could be used
to offset future taxable income.
10. Commitments and Contingencies
Lease commitments
The Company leases warehouses and certain equipment under noncancelable
operating leases with terms in excess of one year. At June 28, 1998, future
minimum annual lease payments required by these operating leases approximate
the following:
<TABLE>
<CAPTION>
Fiscal Year (in thousands)
----------- --------------
<S> <C>
1999....................................................... $ 226
2000....................................................... 107
2001....................................................... 107
2002....................................................... 107
2003 and thereafter........................................ 2,090
------
$2,637
======
</TABLE>
Total rent expense charged to operations approximated $652,000, for the year
ended June 28, 1998. Substantially all operating lease agreements have
provisions for escalation in rents based on changes in the consumer price
index.
Litigation and other matters
The Company recorded $925,000 in fiscal year 1998 to record final settlement
amounts for certain litigation. Management does not anticipate any
additional costs from this matter. There are other claims pending against
the Company with respect to workers' compensation, product liability, sales
taxes and other matters arising out of the ordinary conduct of business. The
ultimate result of these claims is not determinable at June 28, 1998.
However, in the opinion of management, adequate provision for anticipated
costs has been made in the financial statements. Management does not
anticipate any additional costs from this matter.
11. Preferred and Common Stock
The Company has two classes of issued and outstanding preferred stock. Class
A Preferred Stock shareholders are entitled to receive dividends at 8% of
the par value from current or retained earnings when declared by the Board
of Directors. Dividends on the Class A Preferred Stock are cumulative and
are payable before any dividends may be paid on the Class B Preferred Stock
or the Class C Common Stock. During fiscal 1998, the Company paid $24,000
F-33
<PAGE>
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of dividends in arrears for Class A preferred stock. The liquidation
preference for Class A Preferred Stock is its par value plus accumulated,
unpaid dividends.
Class B Preferred Stock shareholders are entitled to receive dividends at
10% of the par value from current or retained earnings when declared by the
Board of Directors. Dividends on the Class B Preferred Stock are
noncumulative and are payable before any dividends may be paid on the Class
C Common Stock. The liquidation preference for Class B Preferred Stock is
its par value.
Shares of Class B Preferred Stock are convertible by their original holders
to Class C Common Stock. At the conversion date, each Class B Preferred
Stock share may be exchanged for the number of Class C Common Stock shares
which have a fair market value of $100 with fair market value determined by
an independent third party.
Any sales, transfers or purchases of the Company's outstanding shares are
subject to shareholders' agreement.
F-34
<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.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Company.............................................................. 2
Risk Factors............................................................. 3
Use of Proceeds.......................................................... 5
Pro Forma Condensed Consolidated Financial Information................... 5
Selected Supplemental Consolidated Financial Information................. 13
Management's Discussion and Analysis of Supplemental Financial Condition
and Results of Operations............................................... 15
Selling Stockholders..................................................... 21
Plan of Distribution..................................................... 22
Where You Can Find More Information...................................... 23
Legal Opinions........................................................... 24
Experts.................................................................. 24
Index to Mohawk Supplemental Consolidated Financial Statements........... 25
Index to World Consolidated Financial Statements......................... 25
</TABLE>
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[LOGO OF MOHAWK INDUSTRIES APPEARS HERE]
MOHAWK
INDUSTRIES, INC.
Common Stock
---------------
PROSPECTUS
---------------
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