AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5,OCTOBER 23 , 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MOHAWK INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1604305
(State or other jurisdiction(STATE OR OTHER JURISDICTION OF (I.R.S. Employer
of incorporation or organization) Identification Number)EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
160 SOUTH INDUSTRIAL BOULEVARD
CALHOUN, GEORGIA 30701
(706) 629-7721
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DAVID L. KOLB
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MOHAWK INDUSTRIES, INC.
160 SOUTH INDUSTRIAL BOULEVARD
CALHOUN, GEORGIA 30701
(706) 629-7721
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
The Commission is requested to send copies of all communications to:(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
ALEXANDER W. PATTERSON
KRIS F. HEINZELMAN
MICHAEL R. MCALEVEY CRAVATH, SWAINE & MOORE
ALSTON & BIRD LLP
WORLDWIDE PLAZA
ONE ATLANTIC CENTER 825 EIGHTH AVENUE
1201 WEST PEACHTREE STREET
NEW YORK, NEW YORK 10019-7475
ATLANTA, GEORGIA 30309-3424
(212) 474-1000
(404) 881-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicableFrom time to
time after the effective date of this Registration Statement becomes effective.Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box.box: [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [_]box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [X][_]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF PROPOSED MAXIMUM
SHARES PROPOSED MAXIMUM AGGREGATE TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE(1) OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1) REGISTRATION FEE
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Common Stock,
$.01 par
value per
share... 4,500,000 $24.50 $110,250,000 $32,524
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- -------------------------------------------------------------------------------Stock........... 4,900,000 shares $28.71875 $140,721,875 $39,121
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(1) Includes 400,000 sharesEstimated solely for the purpose of Common Stock subject tocalculating the underwriters' over-
allotment option.
(2) Calculatedregistration fee
pursuant to Rule 457(c) based on the average of the high and
low sale price of the Common Stock on the New York Stock Exchange
Composite Tape on February 4, 1998.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICHTHAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN+THE INFORMATION IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR AMENDMENT. ANOT COMPLETE AND MAY BE CHANGED. WE MAY +
+REGISTRATION+NOT SELL THE SECURITIES UNTIL THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMESCOMMISSION IS EFFECTIVE. THIS PROSPECTUS SHALLIS NOT CONSTITUTEAN +
+OFFER TO SELL THE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCHWHERE THE OFFER SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE.IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 5,, 1998
4,100,000 Shares
LOGO
Common Stock
($.01 par value)
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All of the 4,100,000 shares of common stock, par value $.01 per share (the
"Common Stock"),PROSPECTUS
4,900,000 SHARES
MOHAWK INDUSTRIES, INC.
COMMON STOCK
The stockholders of Mohawk Industries, Inc. listed below are offering and
selling approximately 4,900,000 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 Delaware corporation
("Mohawk"wholly owned subsidiary of
Mohawk, with and into World Carpets, Inc. Some or the "Company"), offered hereby (the "Offering") are being
sold by the Selling Stockholder named herein under "The Selling
Stockholder." The Company will not receive anyall of the proceeds fromselling
stockholders expect to sell their shares.
The selling stockholders may offer their Mohawk common stock through public or
private transactions, on or off the sale of shares of the CommonNew York Stock by the Selling Stockholder,
and the Company will bear certain expenses relating to the
registration and sale of the shares of the Common Stock.
The Common StockExchange, at prevailing
market prices, or at privately negotiated prices.
Mohawk stock is listed on the New York Stock Exchange (the "NYSE")and trades under the
symbolticker symbol: "MHK." On February 4,October 22, 1998, the last reported saleclosing price of the
Common Stock on the NYSE Composite Tape was $24.75 per share. See
"Price Rangeone share of
Common Stock and Dividend Policy."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO THE SELLING
PUBLIC COMMISSIONS STOCKHOLDER(1)
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Per Share............................... $ $ $
Total(2)................................ $ $ $
(1) Before deduction of expenses payable by the Selling Stockholder estimated
at $ . The Company will pay expenses relating to the Offering
estimated at $ .
(2) The Selling Stockholder has granted the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase a maximum of
400,000 additional shares solely to cover over-allotments of shares. If the
option is exercised in full, the total Price to Public will be $ ,
Underwriting Discounts and Commissions will be $ and Proceeds to the
Selling Stockholder will be $ . See "The Selling Stockholder."
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that the shares of Common
Stock offered hereby will be ready for delivery on or about February , 1998,
against payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON INVEMED ASSOCIATES, INC.
Prospectus dated February , 1998.
[PICTURES]
[Six pictures containing various residential and commercial products
manufactured and sold by the Company.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-3 (together with
all amendments and exhibits filed or to be filed in connection therewith, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Securities and Exchange Commission (the "Commission").
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in
its entirety by reference to the copy of the applicable document filed with
the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 and at the Commission's regional offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, at prescribed rates.
The Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of that site is
http://www.sec.gov. The Company's Common Stock is listedMohawk common stock on the New York Stock Exchange Inc.,was $30.50.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 3.
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Neither the Securities and reports and other information concerningExchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
Company can
also be inspected atadequacy or accuracy of this prospectus. Any representation to the office of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCEcontrary is
a criminal offense.
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The following documents previously filed by the Company with the Commission
(File No. 0-19826) are incorporated in this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1996, as amended by the Company's Form 10-K/A filed on June 23, 1997.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
September 27, 1997, June 28, 1997 and March 29, 1997.
3. The Company's Current Reports on Form 8-K dated October 23, 1997 and
February 5, 1998.
4. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed on January 29, 1992.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of this Offering shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the respective
dates of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which alsoprospectus is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified and superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom a Prospectus
is delivered, upon written or oral request of such person, a copy of any and
all of the information that has been incorporated by reference in this
Prospectus (excluding exhibits unless such exhibits are specifically
incorporated by reference into such documents). Please direct such requests to
the Secretary, Mohawk Industries, Inc., P. O. Box 12069, 160 South Industrial
Boulevard, Calhoun, Georgia 30701, (706) 624-2253.1998.
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UNTIL , ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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TABLE OF CONTENTS
PAGE
----
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..................................................... 20
Plan of Distribution..................................................... 21
Where You Can Find More Information...................................... 22
Legal Opinions........................................................... 23
Experts.................................................................. 23
Index to Mohawk Supplemental Consolidated Financial Statements........... 25
Index to World Consolidated Financial Statements......................... 25
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[LOGO]
MOHAWK
INDUSTRIES, INC.
COMMON STOCK
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PROSPECTUS
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THE COMPANY
Mohawk Industries, Inc. (together with its subsidiaries, "Mohawk" or the
"Company") is the second largest producer of woven and tufted broadloom carpet and
rugs for residential and commercial applications in the world, with 1997
sales of approximately $1.9 billion. The Company designs, manufacturesworld. We design,
manufacture and marketsmarket broadloom carpet and rugs across a broad range of
colors, textures and patterns, targeting all price points and emphasizing
quality, style, performance and service. The Company is widely recognized through its premier
brand names, including Aladdin, Alexander Smith, American Rug Craftsmen,
Bigelow, Galaxy, Harbinger, Helios, Horizon, Karastan, Mohawk, and Mohawk
Commercial. Products are marketedWe market our products through all
distribution channels, including carpet retailers, home centers, mass
merchandisers, department stores, commercial dealers and some commercial end
users.
Mohawk has implemented a coordinated marketing, operations and acquisition
strategy designed to increase market share and achieve profitable growth
through a focus on high quality, low cost production offered with superior
service and at competitive prices. The key elements of the Company's strategy
are highlighted below:
Marketing Strategy: The Company's marketing strategy includes initiatives
designed to more fully develop and support Mohawk's independent dealer base
and increase demand for Mohawk's products. Key elements of Mohawk's
marketing strategy are: (i) dedicating separate sales forces to each of its
residential and commercial businesses; (ii) developing marketing programs
with fiber manufacturers and carpet and rug dealers; (iii) using
advertising and marketing programs to leverage the substantial brand equity
of its products; and (iv) offering merchandising programs to retailers on a
national level to support product sales and assist in expanding their
businesses. The Company's goal is to be the one-stop supplier of choice for
each of its residential and commercial customers.
Operations Strategy: Mohawk'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 Company's
operating strategy is to be both highly efficient and cost effective in its
manufacturing, marketing, distribution and administrative services. To this
end, management has structured the Company's residential manufacturing
operations (which account for approximately 80% of the Company's total
operations) around a fiber conversion division, a yarn processing division
and a carpet and rug manufacturing division. A new highly advanced
management information system that monitors a transaction from the customer
order through manufacturing to shipment of the finished product has allowed
the Company to operate its separate facilities in a more integrated
fashion, resulting in lower costs and increased operational efficiencies.
In addition, the Company believes it provides superior product selection
and availability and faster delivery through its hub-and-spoke distribution
network consisting of nine regional warehouses and 31 smaller satellite
distribution centers. These distribution centers are supplied and serviced
by the Company's transportation division, which operates approximately 400
trucks and trailers.
Growth and Acquisitions Strategy: The Company continues to explore growth
and acquisition opportunities in both its existing carpet and rug
businesses, as well as into complementary floorcoverings, such as hardwood,
ceramic tile and laminates, where the Company has an opportunity to
leverage its distribution and marketing infrastructure. Since its initial
public offering in 1992 Mohawk has completed six major acquisitions, that
collectively have: (i) broadened price points; (ii) increased vertical
integration efforts; (iii) expanded distribution capabilities; and (iv)
facilitated entry into niche businesses, such as rugs. The acquisitions
have included Horizon Industries, Inc. ("Horizon") in October 1992,
American Rug Craftsmen ("American Rug") in April 1993, the carpet and rug
division of Fieldcrest Cannon, Inc. ("Karastan Bigelow") in July 1993,
Aladdin Mills, Inc. ("Aladdin") in February 1994, Galaxy Carpet Mills, Inc.
("Galaxy") in January 1995 and certain assets of Diamond Rug and Carpet
Mills, Inc. ("Diamond") in July 1997. All of these acquisitions have
contributed to the Company's growth and profitability.
4
Prior to 1995, Mohawk generally operated its acquired companies as separate
divisions of the Company, not fully capturing all of the achievable
manufacturing, marketing, distribution and administrative synergies. In 1995,
the Company began to more fully integrate its residential divisions into one
consolidated operation, focusing on four key areas: (i) enhanced manufacturing
efficiencies, converting plants from a "brand name" orientation to a "product
line" orientation; (ii) enhanced targeted marketing efforts, reorganizing its
sales force to provide rapid response to changing regional customer needs;
(iii) enhanced distribution efficiencies, converting the Company's
distribution strategy to Aladdin's hub-and-spoke distribution infrastructure;
and (iv) reduced administrative overhead, removing duplicative positions and
expenses at the division level and integrating management information systems.
These efforts were largely responsible for the Company's operating margin
improvement from 5.1% of net sales in 1995 to 7.9% of net sales in 1997,
excluding nonrecurring charges.
During the three-year period ended December 31, 1997, the Company spent
approximately $212.2 million on capital expenditures, including $134.0 million
for acquisitions of property, plant and equipment and $78.2 million for
acquisitions of companies. The capital expenditures were incurred primarily to
modernize and expand manufacturing facilities and equipment, emphasizing the
Company's commitment to highest quality, lowest cost production. The Company
anticipates capital expenditures, excluding potential acquisitions, to range
between $60-$70 million per year in 1998 and 1999. The Company's capital
projects are focused on reducing costs, improving productivity and increasing
sales.
On October 23, 1997, the Board of Directors of the Company declared a 3-for-
2 stock split that was paid as a 50% stock dividend on December 4, 1997, to
holders of record on November 4, 1997. Unless otherwise indicated, all share
information in this Prospectus gives effect to this stock split. On December
16, 1997, the Common Stock began trading on the NYSE under the symbol "MHK."
Prior to December 16, 1997, the Common Stock was traded on the Nasdaq Stock
Market's National Market ("NNM") under the symbol "MOHK."
The Company'sOur principal manufacturing facilitiesexecutive offices are located in Georgia,
Tennessee, South Carolina and North Carolina. The Company's headquarters are
located at 160 South Industrial Boulevard, Calhoun, Georgia 30701 and itsour
telephone number is (706) 629-7721.
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This Prospectus containsRECENT ACQUISITIONS.
World Carpets, Inc.
On October 22, 1998, we entered into an agreement to acquire World Carpets,
Inc. from its stockholders, all of whom are selling stockholders named in this
prospectus. World is a leading producer of woven and incorporatestufted broadloom carpet
and rugs for residential and commercial applications. As a result of the
acquisition, World will become our wholly owned subsidiary and we will issue to
the selling stockholders approximately 4.9 million shares of Mohawk common
stock, which are the shares offered hereby. The acquisition of World is
expected to close during the fourth quarter of 1998. The acquisition is
expected to be accounted for as a pooling-of-interests. As a result, our
supplemental consolidated financial statements included in this prospectus have
been restated to include the accounts and results of operations of World as if
the merger had been consummated.
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
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 referencea 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
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 forward-
looking statementsmanufacturing 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
subjectnot Year 2000 compliant. We are reviewing our equipment and software with the
respective vendors from whom we purchased the equipment and software to risksaddress
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
uncertainties. Forward-
looking statements includeprioritize 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
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, concerning futurewe 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 performance,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,
prospectsresults of operations and growth and operating strategies and those
preceded by, followed by or that otherwise includefinancial condition.
USE OF PROCEEDS
All net proceeds from the words "believes,"
"expects," "anticipates," "intends," "estimates" or similar expressions. For
those statements, Mohawk claims the protectionsale of the safe harbor for forward-
looking statements contained inshares of Mohawk common stock will go to
the Private Securities Litigation Reform Actselling stockholders who offer and sell their shares. Accordingly, Mohawk
will not receive any proceeds from sales of 1995.the shares of Mohawk common stock
offered by this prospectus.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following important factors,unaudited pro forma condensed consolidated balance sheet of
Mohawk gives effect to the merger with World as if the merger took place on
June 27, 1998. The merger has been accounted for as a pooling-of-interests. All
of the outstanding shares of World capital stock will be 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 additionnon-
recurring charges related to those discussed
elsewherethe merger (primarily legal, accounting,
investment banking, loan termination and employee bonus costs) during the
quarter in this document and inwhich the documents which are incorporated by
reference, could affectmerger is consummated. These payments will be recorded as
a post-merger charge to the future resultscombined statement of earnings of Mohawk and could cause those
results to differ materially from those expressedWorld
in the forward-looking
statements: materially adverse changesquarter in economic conditions generallywhich the merger is consummated, but they have not been
included in the carpet, rug and floor covering markets served by Mohawk; competition from
other carpet, rug and floorcovering manufacturers; raw material prices; timingpro forma statement of capital expenditures;earnings data. The pro forma information
should be read in conjunction with the successful integrationconsolidated financial statements of
acquisitions includingMohawk included in Mohawk's 1997 annual report (which is included in Mohawk's
Form 10-K for the challenges inherent in divertingyear ended December 31, 1997), Mohawk's management attention and
resources from other strategic matters and from operational mattersquarterly report on
Form 10-Q for an
extended period of time; successful introduction of new products;the quarter ended June 27, 1998 and the continued rationalizationfinancial statements of
existing operations.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
RECENT DEVELOPMENTS
The following table sets forth, for the periods indicated, recent financial
information of the Company:PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 27, 1998
(IN THOUSANDS)
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED DECEMBER 31, DECEMBER 31,
--------------------- ----------------------
1996 1997 1996 1997
--------ACTUAL
------------------ PRO FORMA PRO FORMA
MOHAWK WORLD ADJUSTMENTS COMBINED
---------- ------- ----------- ---------
-----------
(UNAUDITED) (UNAUDITED)
(AMOUNTS IN
ASSETS
Current assets:
Cash........................... $ -- 145 -- 145
Receivables.................... 276,133 53,918 (5,626)(1) 324,425
Inventories.................... 329,162 75,770 -- 404,932
Prepaid expenses............... 4,886 355 -- 5,241
Deferred income taxes.......... 27,670 10,890 -- 38,560
---------- ------- -------- ---------
Total current assets......... 637,851 141,078 (5,626) 773,303
Property, plant and equipment,
net............................. 315,925 71,283 -- 387,208
Other assets..................... 67,378 8,867 -- 76,245
---------- ------- -------- ---------
$1,021,154 221,228 (5,626) 1,236,756
========== ======= ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt.......................... $ 32,209 5,570 -- 37,779
Accounts payable and accrued
expenses...................... 284,202 62,581 7,442 (1)(2) 354,225
---------- ------- -------- ---------
Total current liabilities.... 316,411 68,151 7,442 392,004
Deferred income taxes............ 28,391 1,920 -- 30,311
Long-term debt................... 216,806 78,971 -- 295,777
Other long-term liabilities...... 5,488 968 (968)(1) 5,488
---------- ------- -------- ---------
Total liabilities............ 567,096 150,010 6,474 723,580
---------- ------- -------- ---------
Stockholders' equity:
Capital stock.................. 524 28,120 (28,071)(3) 573
Additional paid-in capital..... 138,848 -- 28,071 (3) 166,919
Retained earnings.............. 314,686 43,098 (12,100)(2) 345,684
---------- ------- -------- ---------
Total stockholders' equity... 454,058 71,218 -- 513,176
---------- ------- -------- ---------
$1,021,154 221,228 (5,626) 1,236,756
========== ======= ======== =========
6
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 non-recurring charges related to the merger.
(3) Reflects issuance of 4.9 million shares of Mohawk common stock in the
merger.
7
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE SIX MONTHS ENDED JUNE 27, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL
------------------ PRO FORMA PRO FORMA
MOHAWK WORLD ADJUSTMENTS COMBINED
---------- ------- ----------- ---------
Net sales......................... $461,505 516,118 1,779,389 1,901,352$1,006,166 216,344 (2,106)(3) 1,220,404
Cost of sales..................... 759,584 167,507 2,740 (3) 929,831
---------- ------- ------ ---------
Gross profit.................... 246,582 48,837 (4,846) 290,573
Selling, general and
administrative expenses.......... 159,428 39,468 (4,846) 194,050
---------- ------- ------ ---------
Operating income--before
nonrecurring items...............income................ 87,154 9,369 -- 96,523
---------- ------- ------ ---------
Other expense:
Interest expense................ 11,316 3,850 -- 15,166
Other expense (income), net..... 859 (655) -- 204
---------- ------- ------ ---------
12,175 3,195 -- 15,370
---------- ------- ------ ---------
Earnings before income taxes.... 74,979 6,174 -- 81,153
Income tax expense (benefit)...... 29,617 (2,391) 5,893 (4) 33,119
---------- ------- ------ ---------
Net earnings.................... $ 33,856 45,352 123,173 149,659
Percentage of net sales.......... 7.3% 8.8% 6.9% 7.9%
Operating income--after
nonrecurring items...............45,362 8,565 (5,893) 48,034
========== ======= ====== =========
Basic earnings per share.......... $ 31,446 37,252 119,413 141,559
Percentage of net sales.......... 6.8% 7.2% 6.7% 7.5%
Net earnings--before nonrecurring
items............................ $ 13,867 24,224 51,280 72,931
Percentage of net sales.......... 3.0% 4.7% 2.9% 3.8%
Net earnings--after nonrecurring
items............................ $ 12,517 19,323 49,050 68,030
Percentage of net sales.......... 2.7% 3.7% 2.8% 3.6%0.87 0.84
========== =========
Weighted-average common shares
outstanding...................... 52,272 4,900 (2) 57,172
======
========== =========
Diluted earnings per share--before
nonrecurring items...............share........ $ 0.27 0.46 0.99 1.390.86 0.83
========== =========
Weighted-average common and
dilutive potential common shares
outstanding...................... 53,026 4,900 (2) 57,926
========== ====== =========
8
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL
------------------
PRO FORMA PRO FORMA
MOHAWK WORLD ADJUSTMENTS COMBINED
---------- ------- ----------- --------- ---
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--after
nonrecurring items...............share... $ 0.24 0.371.30 1.28
========== =========
Weighted-average common and
dilutive potential common
shares outstanding.......... 52,403 4,900 (2) 57,303
========== ======== =========
9
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL
------------------
PRO FORMA PRO FORMA
MOHAWK WORLD ADJUSTMENTS COMBINED
---------- ------- ----------- ---------
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
1.30========== =========
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
========== ====== =========
Net earnings, before nonrecurring charges,10
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL
------------------
PRO FORMA PRO FORMA
MOHAWK WORLD ADJUSTMENTS COMBINED
---------- ------- ----------- ---------
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 54,085
========== =========
Diluted earnings per share........ $ 0.13 4,900 (2) 0.18
========== ====== =========
Weighted-average common and
dilutive potential common shares
outstanding...................... 50,435 4,900 (2) 55,335
========== ====== =========
11
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 fourth quarter of 1997
increased approximately 75% to $24.2 million, or $0.46 diluted earnings per
share, from net earnings, before nonrecurring charges, of $13.9 million, or
$0.27 diluted earnings per share,six-month period ended June 28, 1998 were combined with Mohawk's
financial statements for the fourth quarter of 1996. After the
nonrecurring charges, net earnings were $19.3 million, or $0.37 diluted
earnings per share, in 1997 as compared to $12.5 million or $0.24 diluted
earnings per share in 1996. This quarter-to-quarter improvement in net
earnings is primarily attributable to higher sales, lower selling, generalsix-month period ended June 27, 1998 and
administrative expenses and lower interest expense. Net salesWorld's financial statements for the fourth
quarter ofyears ended June 28, 1998, June 29,
1997 increased 12% to $516.1 million from net sales of $461.5
millionand June 30, 1996 were combined with Mohawk's financial statements for
the fourth quarter of 1996. The quarter-to-quarter net sales
comparison was favorably affected by strong customer acceptance of new product
introductions, expansion of residential warehousing operationsyears ended December 31, 1997, 1996 and further
refinement of the sales organization to achieve better regional customer
focus, all of which the Company believes resulted in an overall gain in market
share. Gross profit for the fourth quarter of 1997 increased 10% to $119.4
million, or 23.1% of net sales, from gross profit of $108.1 million, or 23.4%
of net sales, for the fourth quarter of 1996. Selling, general and
administrative expenses were $74.1 million, or 14.4% of net sales, in 1997 as
compared to $74.2 million, or 16.1% of net sales, in 1996. The improvement in
selling, general and administrative expenses is primarily attributable to
lower administrative, bad debt and sample expenses. Interest expense was lower
in 1997 as a result of reduced levels of debt.
Net earnings, before nonrecurring charges, in 1997 increased 42% to $72.9
million, or $1.39 diluted earnings per share, from net earnings, before
nonrecurring charges, of $51.3 million, or $0.99 diluted earnings per share,
in 1996. After nonrecurring charges, net earnings were $68.0 million, or $1.30
diluted earnings per share, in 1997 as compared to $49.1 million or $0.95
diluted earnings per share in 1996. This year-to-year improvement in net
earnings is primarily attributable to higher sales, lower selling, general and
administrative expenses and lower interest expense. Net sales in 1997
increased 7% to $1.9 billion from net sales of $1.8 billion in 1996. The year-
to-year net sales comparison was favorably affected by strong customer
acceptance of new product introductions, expansion of residential warehousing
operations, further refinement of the sales organization to achieve better
regional customer focus and competitive changes in the retail segment of the
industry, all of which the Company believes resulted in an overall gain in
market share. Gross profit in 1997 increased to $436.7 million, or 23.0% of
net sales, from gross profit of $407.4 million, or 22.9% of net sales, in
1996. Selling, general and administrative expenses were $287.0 million, or
15.1% of net sales, in 1997 as compared to $284.2 million, or 16.0% of net
sales, in 1996. The improvement in selling, general and administrative
expenses is primarily attributable to lower administrative, bad debt and
sample expenses. Interest expense was lower in 1997 as a result of reduced
levels of debt.
6
The nonrecurring charges in 1997 included a charge of $5.5 million related
to a write-down of the carrying value of assets held for sale and a charge of
$2.6 million for income tax reimbursements to certain executives related to
the exercise of stock options pursuant to certain stock option agreements
executed in 1988 and 1989. The nonrecurring charges in 1996 included a charge
of $3.1 million ($1.7 million in the fourth quarter) related to a write-down
of the carrying value of assets held for sale and a fourth quarter charge of
$700,000 for restructuring costs.
THE SELLING STOCKHOLDER1995, respectively.
(2) All of the outstanding shares of Common Stock offered hereby are being sold by Aladdin
Partners, L.P. ("Aladdin Partners") in order to meet diversification and
estate planning objectives. Aladdin Partners is a Georgia limited partnership
that was formed to holdWorld capital stock will be converted into
approximately 4.9 million shares of Common Stock received by certain former
shareholdersMohawk common stock.
(3) Reflects the reclassification of Aladdin in connection with the mergerWorld freight expense to net sales and
World cut order department expense to cost of Aladdin with the
Company in 1994 (the "Aladdin Merger"). Mr. Alan Lorberbaum, a director of the
Company since 1994,sales to conform to Mohawk's
presentation.
(4) Adjustment to reverse World's deferred tax asset valuation allowance which
is a director of and owns 72.3% of ASL Management Corp.,
the majority general partner of Aladdin Partners. As of February 2, 1998
Aladdin Partners owned 27.6% of the Common Stock outstanding. Upon completion
of the Offering, Aladdin Partners will own 10,300,000 shares of Common Stock,
representing approximately 19.7% of the total shares of Common Stock
outstanding. See "Principal and Selling Stockholders." If the Underwriters'
over-allotment option is exercised in full, Aladdin Partners will own
9,900,000 shares of Common Stock, representing approximately 19.0% of the
total shares of Common Stock outstanding.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
On December 16, 1997, the Common Stock began tradingnot required based on the NYSE under the
symbol "MHK." From the time of the Company's initial public offering in April
1992 until December 15, 1997, the Common Stock was listed on the NNM under the
symbol "MOHK." The table below sets forth, for the fiscal quarters indicated,
the high and low sale prices of the Common Stock as reported on either the NNM
or the NYSE Composite Tape, as applicable.
HIGH LOW
------ ------
1996
First Quarter................................................ $11.00 8.33
Second Quarter............................................... 12.25 8.83
Third Quarter................................................ 17.42 10.92
Fourth Quarter............................................... 18.58 13.75
1997
First Quarter................................................ $18.67 13.92
Second Quarter............................................... 17.33 12.92
Third Quarter................................................ 18.29 14.58
Fourth Quarter............................................... 22.00 17.75
1998
First Quarter (through February 4, 1998)..................... $24.88 20.50
On February 4, 1998, the last reported sale price of the Common Stock was
$24.75. As of February 4, 1998, there were approximately 430 holders of record
of the Common Stock.
The Company has not paid or declared any cash dividends on shares of its
Common Stock since completing its initial public offering. The Company's
policy isMohawk's ability to retain alluse World's net earnings for reinvestment in the development of
its business, and it does not anticipate paying cash dividends on the Common
Stock in the foreseeable future. The payment of future cash dividends will be
at the sole discretion of the Company's Board of Directors and will depend
upon the Company's profitability, financial condition, cash requirements,
future prospects and other factors deemed relevant by the Board of Directors.
The payment of cash dividends is limited by certain covenants in various of
the Company's loan agreements.
7operating
loss carryforwards.
12
USE OF PROCEEDS
The Company will not receive any proceeds from the sale by the Selling
Stockholder of the shares of Common Stock in the Offering.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 27, 1997. This presentation should be read in conjunction
with the Consolidated Financial Statements and Notes thereto incorporated by
reference herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
AS OF
SEPTEMBER 27, 1997
------------------
(IN THOUSANDS)
(UNAUDITED)
Short-term debt (including current portion of long-term
debt).................................................. $ 21,772
--------
Long-term debt (excluding current portion):
Revolving credit facility.............................. 80,000
8.46% senior notes..................................... 100,000
7.14-7.23% senior notes................................ 66,111
8.48% term loans....................................... 28,572
7.58% senior notes..................................... 7,143
Other debt............................................. 21,090
--------
Total long-term debt.................................. 302,916
--------
Stockholders' equity.................................... 384,946
--------
Total capitalization.................................. $709,634
========
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATAINFORMATION
The following table sets forth the selected financial data of the CompanyMohawk for the
periods indicated, derived from theMohawk's consolidated financial statements
of the Company. The Company's consolidated financial statements as of and for
the years ended December 31, 1992, 1993, 1994, 1995 and 1996 have been audited
by KPMG Peat Marwick LLP, independent certified public accountants. The
information as of and for the nine-month periods ended September 28, 1996 and
September 27, 1997 has been derived from the unaudited financial statements
which, in the opinion of management, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
of operations for the unaudited interim periods. The results of operations for
the nine-month periods ended September 28, 1996 and September 27, 1997 are not
necessarily indicative of the results of operations for a full year. On
October 23, 1992, the Company acquired all of the outstanding common stock of
Horizon. The operating results of Horizon are included in the Company's 1992
consolidated statement of earnings from the date of its acquisition.statements. On
April 30, 1993, the Companywe acquired all of the common stock of American Rug.Rug Craftsmen,
Inc. On July 30, 1993, the Companywe 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. Each of theThe acquisitions of Horizon, American Rug and Karastan Bigelow was recorded using the purchase method of accounting.were
accounted for as purchases. On February 25, 1994, the Companywe exchanged 20,343,33620.3 million
shares of Common Stockcommon stock for all of the outstanding shares of Aladdin Mills, Inc.
common stock in a transaction recorded using the pooling-of-interests basis of accounting.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, the Companywe acquired all of the outstanding capital
stock of Galaxy.Galaxy Carpet Mills, Inc. The operating results of Galaxy are included
in the
Company's 1995 consolidated statement of earnings from the date of its
acquisition. The acquisition of Galaxy was recorded
8
using the purchase method of accounting. On July 23, 1997, the Companywe acquired certain assets of Diamond Rug &
Carpet Mills, Inc. and other assets owned by Diamond's principal shareholders.
The resultsacquisitions of Galaxy and Diamond are includedwere accounted for as purchases. On
October 22, 1998, we signed an agreement to acquire all of the outstanding
capital stock of World in exchange for approximately 4.9 million shares of the
Company's common stock. This transaction is expected to close in the Company's
1997fourth
quarter of 1998. On October 23, 1998, the Company filed a shelf registration
statement with the Securities and Exchange Commission to register for resale
the 4.9 million shares of Company common stock to be issued in connection with
the merger. The consolidated statementfinancial statements give retroactive effect to
the merger as if the merger has been closed prior to the filing of earnings from the
date of its acquisition.registration statement. The acquisition wasMerger is being accounted for underas a pooling-of-
interests in the purchase method of accounting.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 elsewhere orand incorporated
by reference elsewhere herein.
13
AT OR FOR THE NINE
MONTHS ENDED
-------------------SIX
AT OR FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------- SEPT.MONTHS ENDED
--------------------------------------------------- -------------------
JUNE 28, SEPT.JUNE 27,
1992
1993 1994 1995 1996 1996 1997 --------1997 1998
---------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
STATEMENT OF EARNINGS
DATA:
Net sales............... $760,954 1,188,186 1,437,540 1,648,517 1,779,389 1,317,884 1,385,234$1,459,980 1,712,112 1,965,374 2,153,016 2,327,341 1,087,129 1,220,404
Cost of sales (a)....... 585,698 917,824 1,107,890 1,281,887 1,372,022 1,018,590 1,067,999
--------sales(a)........ 1,145,208 1,341,703 1,545,796 1,675,221 1,808,137 849,810 929,831
---------- --------- --------- --------- --------- --------- ---------
Gross profit........... 175,256 270,362 329,650 366,630 407,367 299,294 317,235314,772 370,409 419,578 477,795 519,204 237,319 290,573
Selling, general and administrative
expenses............... 114,102 185,135 231,184 282,451 284,194 209,977 212,928ad-
ministrative expenses.. 220,002 265,044 325,276 340,770 354,528 169,040 194,050
Restructuring costs (b). --costs(b).. 2,363 -- 8,439 700 -- -- --
Carrying value reduction
of property, plant and
equipment (c).......... --and other
assets(c).............. -- -- 23,711 3,060 1,3505,500 -- --
Compensation expense for
stock option
exercises (d).......... --exercises(d)........... -- -- 4,000 -- 2,600 -- --
------------------ --------- --------- --------- --------- --------- ---------
Operating income....... 61,154 82,864 98,466 48,029 119,413 87,967 104,307
--------92,407 105,365 58,152 133,265 156,576 68,279 96,523
---------- --------- --------- --------- --------- --------- ---------
Interest expense........ 9,222 18,029 27,112 34,998 31,486 25,126 21,54321,744 31,210 39,981 37,522 34,551 18,551 15,166
Acquisition costs--
Aladdin pooling (e)....Merger(e)...... -- 10,201 -- 10,201 -- -- -- --
Other expense, net...... 1,242 2,659 2,987 2,570 5,202 2,464 2,256868 689 1,206 4,080 447 856 204
Gain on insurance
claim
(a).................... --claim(a)............... (4,746) -- -- -- -- -- ----------
---------- --------- --------- --------- --------- --------- ---------
10,464 15,942 40,300 37,568 36,688 27,590 23,799
--------17,866 42,100 41,187 41,602 34,998 19,407 15,370
---------- --------- --------- --------- --------- --------- ---------
Earnings before income
taxes and
extraordinary charge.. 50,690 66,922 58,166 10,461 82,725 60,377 80,508taxes.................. 74,541 63,265 16,965 91,663 121,578 48,872 81,153
Income taxes (f)........ 20,312 27,399 25,159 4,049 33,675 23,844 31,801
-------- --------- --------- --------- --------- --------- ---------
Earnings before
extraordinary charge.. 30,378 39,523 33,007 6,412 49,050 36,533 48,707
Extraordinary charge
(g).................... 3,568 -- -- -- -- -- --
--------taxes(f)......... 30,027 26,599 6,951 38,285 48,154 18,858 33,119
---------- --------- --------- --------- --------- --------- ---------
Net earnings........... 26,810 39,523 33,007 6,412 49,050 36,533 48,707
Preferred stock
dividends.............. 132 -- -- -- -- -- --
-------- --------- --------- --------- --------- --------- ---------
Net earnings after
preferred stock
dividends............. $ 26,678 39,523 33,007 6,412 49,050 36,533 48,707
========44,514 36,666 10,014 53,378 73,424 30,014 48,034
========== ========= ========= ========= ========= ========= =========
EarningsBasic earnings per
common and
common equivalent share
before extraordinary
charge (h) (i).........share(g)............... $ 0.70 0.80 0.66 0.130.86 0.68 0.19 0.95 0.71 0.93
========1.29 0.53 0.84
========== ========= ========= ========= ========= ========= =========
Net earnings perWeighted-average common
and common equivalent
share (h) (i).......... $ 0.62 0.80 0.66 0.13 0.95 0.71 0.93
========shares outstanding(g).. 52,014 53,568 54,085 56,160 56,812 56,692 57,172
========== ========= ========= ========= ========= ========= =========
Weighted averageDiluted earnings per
share(g)............... $ 0.82 0.67 0.18 0.94 1.28 0.53 0.83
========== ========= ========= ========= ========= ========= =========
Weighted-average common
and dilutive potential
common equivalent
shares
outstanding (h)
(i).................... 42,911 49,664 50,061 50,435 51,849 51,719 52,316
========outstanding(g)......... 54,564 54,961 55,335 56,749 57,303 57,145 57,926
========== ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA:
Working capital......... $143,831 198,735 292,163 244,800 311,698 340,634 319,067$ 252,633 351,346 301,790 387,067 382,108 -- 393,399
Total assets............ 477,669 776,424 854,779 903,152 954,349 1,024,893 992,764910,718 996,999 1,061,826 1,177,510 1,176,557 -- 1,236,756
Short-term note
payable. --payable................ -- -- 50,000 21,200 21,200-- -- --
Long-term debt
(including current
portion)............... 175,347 328,469 399,377 353,037 366,380 421,533 324,688368,734 448,442 405,100 458,741 377,738 -- 333,556
Stockholders' equity.... 147,938 229,992 264,018 274,903 333,199 319,867 384,946284,480 321,984 336,447 399,047 477,133 -- 525,276
- --------
Notes on following page
9
(a) Certain of the Company'sMohawk's facilities suffered damage during a March 1993
blizzard, and the Companywe finalized settlement of the insurance claim during the
first quarter of 1994. The CompanyWe 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, the Companywe recorded pre-tax restructuring costs of $8.4
million and $0.7 million, respectively, related to certain mill closings
of
certain mills which had theirwhose operations have been consolidated into other Mohawk facilities.
During 1993, the Companywe 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, the CompanyMohawk 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, the Companywe recorded a charge of $3.1 million ($1.4 million in the third quarter) arising from the write-downwrite-
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. (d) The CompanyDuring 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 Company'sMohawk's 1988 leveraged buy-out.buyout.
(e) The CompanyMohawk recorded a one-time charge of $10.2 million in 1994 for transaction
expenses related to the Aladdin Mergermerger that were incurred during the first
quarter of 1994.
(f) During 1994, the Companywe reduced income tax expense by $2.0 million to reflect a
reduction in itsour effective tax rate and certain other changes in the Company'sour
federal and state income tax status.
(g) The extraordinary charge in 1992 relates to (i) redemption premiums and
prepayment penalties on certain indebtedness that was redeemed or repaid
with the proceeds from the Company's initial public offering and (ii) the
write-offOur board of deferred loan costs associated with the former credit
agreement, which was replaced with a new credit agreement after the
initial public offering.
(h) The Board of Directorsdirectors declared a 3-for-2 stock split on October 23, 1997,
thatwhich was paid as a 50% stock dividend on December 4, 1997 to holders of record on November 4,
1997. Earnings per common share and weighted averageweighted-average common share data have been
restated to reflect the stock split.
(i) The Company adopted FAS No. 128, "Earnings per Share" in the fourth
quarter of 1997. The statement requires the Company to present basic
earnings per share and diluted earnings per share in its financial
statements and to restate prior periods to conform to the new
presentation. The periods presented in the Selected Financial Data have
not been restated to conform to FAS No. 128
1014
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
During the three-year period ended December 31, 1996 and the nine-month
period ended September 27, 1997, the CompanySince January 1, 1995, we continued to experience significant growth both
internally and through acquisitions. In February 1994,
the Company exchanged approximately 20.4 million shares of Common Stock,
valued at $386.5 million (based upon the closing price of the Common Stock at
December 3, 1993, the date the agreement was entered into by Mohawk, Aladdin
and the shareholders of Aladdin), for all of the outstanding shares of Aladdin
common stock in a merger accounted for using the pooling-of-interests basis of
accounting. All financial data included in the Company's historical
consolidated financial statements were restated to include the accounts and
results of operations of Aladdin. In January 1995, the Companywe acquired all of the
issued and outstanding capital stock of Galaxy for $42.2 million in cash,
in a business combination accounted for using the purchase method of
accounting.including acquisition costs. On July 23, 1997, the Companywe acquired certain assets of
Diamond and other assets owned by Diamond's principal shareholders for approximately $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%. The
acquisition was accomplished throughBoth the Galaxy and the Diamond acquisitions were accounted for
as purchases. On October 22, 1998, the Company signed a plan of reorganization filed by Diamond
under Chapter 11definitive agreement to
acquire all of the United States Bankruptcy Codeoutstanding capital stock of World in exchange for
approximately 4.9 million shares of the Company's common stock. This
transaction is expected to be consummated on or around November 30, 1998. On
October 23, 1998, we filed a registration statement to register for resale the
4.9 million shares of Mohawk common stock to be issued in connection with the
merger. The consolidated financial statements give retroactive effect to the
merger of Mohawk and was financed
primarily through existing credit facilities.World as if the merger had been consummated. The merger is
being accounted for as a pooling-of-interests in the consolidated financial
statements of Mohawk.
These acquisitions have created otherand will create opportunities to enhance
Mohawk's operations by:by (i) broadening price points;points, (ii) increasing vertical
integration efforts;efforts, (iii) expanding distribution capabilities;capabilities and (iv)
facilitating entry into niche businesses, such as rugs.
On October 23, 1997,Through our restructuring efforts over the Boardpast three years, we have installed
new information technology systems throughout all of Directorsour 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
Company declaredrespective 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 3-for-
2 stock splitcommittee 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 was paidour 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
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 50% stock dividend on December 4, 1997contingency 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
holders of record on November 4, 1997. Unless otherwise indicated, all share
information included in this Prospectus gives effect to this stock split.evaluate the need for a contingency plan.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
net sales of certain items in the Company's consolidated statements of
earnings:
YEARS ENDED DECEMBER 31 NINE MONTHS ENDED
------------------------- -------------------
SEPT.Six Months Ended June 27, 1998 As Compared With Six Months Ended June 28, SEPT. 27,
1994 1995 1996 1996 1997
------- ------- ------- --------- ---------
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 77.1 77.8 77.1 77.3 77.1
------- ------- ------- ----- -----
Gross profit.................. 22.9 22.2 22.9 22.7 22.9
Selling, general and administra-
tive expenses.................. 16.1 17.1 15.9 15.9 15.4
Restructuring costs............. -- 0.5 0.1 -- --
Carrying value reduction of
property, plant & equipment.... -- 1.4 0.2 0.1 --
Compensation expense for stock
option exercises............... -- 0.3 -- -- --
------- ------- ------- ----- -----
Operating income.............. 6.8 2.9 6.7 6.7 7.5
Interest expense................ 1.9 2.1 1.8 1.9 1.5
Acquisition costs-Aladdin pool-
ing............................ 0.7 -- -- -- --
Other expense, net.............. 0.2 0.2 0.3 0.2 0.2
------- ------- ------- ----- -----
Earnings before income taxes.. 4.0 0.6 4.6 4.6 5.8
Income taxes.................... 1.7 0.2 1.8 1.8 2.3
------- ------- ------- ----- -----
Net earnings.................. 2.3% 0.4% 2.8% 2.8% 3.5%
======= ======= ======= ===== =====
11
NINE MONTHS ENDED SEPTEMBER 27, 1997 AS COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 28, 1996
Net sales for the first ninesix months ended SeptemberJune 27, 19971998 were $1,385.2$1,220.4 million,
which represented an increase of 5%12% from the $1,317.9$1,087.1 million reported for the
first ninesix months of 1996.1997. This sales increase resulted from
incremental sales from the acquisition of certain assets of Diamondwas attributable to favorable
industry conditions and a gain in market share which the Company believes resultedresulting from continued
strong
support ofemphasis on supporting its independent dealer basedealers and strong overall acceptance of Mohawknew products.
Additionally, much of the sales increase can be attributed to responsive
customer service, leadership in product quality and competitive pricing of
products.
Gross profit for the first ninesix months of 1997the current year was $317.2$290.6 million
(22.9%(23.8% of net sales). In the first ninesix months of 1996,1997, gross profit was $299.3$237.3
million (22.7%(21.8% of net sales). Much of the increase in gross profit can be
attributed to favorable product mix, improved productivity, lower material
costs and better leveraging of expenses with higher sales volume. Many of these
improvements are primarily attributable to restructuring improvements we have
made since 1996.
Selling, general and administrative expenses for the first nine months of
1997current period were $212.9$194.1
million (15.4%(15.9% of net sales) compared to $210.0$169.0 million (15.9%(15.5% of net sales)
for the prior year's first nine months of 1996. The percentage
decrease was primarily due to lower sample and bad debt expense in the first
nine months of 1997.six months.
Interest expense for the first ninesix months of 19971998 was $21.5$15.2 million compared to
$25.1$18.6 million in the first ninesix months of 1996.1997. The primary factor for the
decrease was a reduction in debt levels in the first nine monthshalf of 1997 as1998 compared to
the first nine monthshalf of 1996.1997.
In the first nine months of 1997,current period, income tax expense was $31.8$33.1 million, compared to $23.8$18.9
million in the first ninesix months of 1996,1997, or 39.5%40.8% and 38.6% of earnings before
income taxes, for both periods.
YEAR ENDED DECEMBERrespectively.
Year Ended December 31, 1997 As Compared With Year Ended December 31, 1996
AS COMPARED WITH YEAR ENDED DECEMBERNet sales for the year ended December 31, 1997 were $2,327.3 million,
reflecting an increase of $174.3 million, or approximately 8%, 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
Quarterly net sales and the percentage changes in net sales by quarter for 1997
versus 1996 were as follows (dollars in thousands):
1996 1997 CHANGE
---------- --------- ------
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%
========== ========= ====
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 $1,779.4$2,153.0 million,
reflecting an increase of $130.9$187.6 million, or 8%approximately 10%, over the
$1,648.5$1,965.4 million reported in the year ended December 31, 1995. This sales
increase was attributable to an improvement in the Company'sour market share
17
which the Company
believeswe believe primarily resulted from competitive changes in the distributionretail
segment of the industry, Mohawk'sour realignment of its residential sales forces under
a regional structure, and Mohawk'sour strong product lines. The CompanyWe 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 19951996
versus 19961995 were as follows (dollars in thousands):
1995 1996 CHANGE
---------- --------- ------
First Quarter.......................................Quarter.................................... $ 378,761 380,478 0.5%458,077 466,201 1.8%
Second Quarter...................................... 429,241 470,867 9.7Quarter................................... 506,265 555,671 9.8
Third Quarter....................................... 425,594 466,539 9.6Quarter.................................... 500,430 557,724 11.4
Fourth Quarter...................................... 414,921 461,505 11.2Quarter................................... 500,602 573,420 14.5
---------- --------- ----
Total Year.......................................... $1,648,517 1,779,389 8.0%Year..................................... $1,965,374 2,153,016 9.5%
========== ========= ====
Gross profit for 1996 was $407.4$477.8 million (22.9%(22.2% of net sales) and represented
an increase over the gross profit of $366.6$419.6 million (22.2%(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 materialmaterials prices and manufacturing improvements in
other divisions. The manufacturing consolidations includeincluded the closing of five
residential manufacturing facilities during 1995 as well as the realignment of
the remaining residential mills to better useutilize the strengths of each mill. The Company's integration of
its manufacturing, distribution and information systems areas progressed as
planned and contributed to the margin improvement.
Selling, general and administrative expenses for 1996 were $284.2$340.8 million
(16.0%(15.8% of net sales) compared to $282.5$325.3 million (17.1%(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.
12
During 1996, the Companywe 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 Companyafter-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, the Companywe adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
LivedLong-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 $0.29$0.27 per diluted share.
18
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 the Company'sour 1988 leveraged buyout. The
agreements allow the Companyallowed us to receive an income tax benefit on itsour 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 $31.5$37.5 million compared to $35.0$40.0 million in 1995.
The primary factors contributing to the decrease were a reduction in debt
levels and lower interest rates on the Company'sour revolving credit agreement.
In 1996, income tax expense was $33.7$38.3 million, or 40.7%41.8% of earnings before
income taxes. In 1995, income tax expense was $4.0$7.0 million, representing 38.7%41.0%
of earnings before income taxes.
The primary reason for the lower effective
tax rate in 1995 was certain nonrecurring deductions that were treated as
permanent differences in 1995.
YEAR ENDED DECEMBER 31, 1995 AS COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Net sales for the year ended December 31, 1995 were $1,648.5 million,
reflecting an increase of $211.0 million, or 14.7%, over the $1,437.5 million
reported in the year ended December 31, 1994. This sales increase was
attributable primarily to increased unit shipments of broadloom carpet and
rugs during 1995 as a result of the acquisition of Galaxy as well as internal
growth by Aladdin and American Rug. The sales volume increase was partially
offset by a decrease in average net selling prices resulting from soft market
conditions, related to slow housing starts and resales in 1995, all of which
increased competitive pressures in the industry.
Quarterly net sales and the percentage changes in net sales by quarter for
1994 versus 1995 were as follows (dollars in thousands):
1994 1995 CHANGE
---------- --------- ------
First Quarter....................................... $ 327,025 378,761 15.8%
Second Quarter...................................... 370,749 429,241 15.8
Third Quarter....................................... 377,484 425,594 12.7
Fourth Quarter...................................... 362,282 414,921 14.5
---------- --------- ----
Total Year........................................ $1,437,540 1,648,517 14.7%
========== ========= ====
Gross profit for 1995 was $366.6 million (22.2% of net sales) and
represented an increase over the gross profit of $329.7 million (22.9% of net
sales) for 1994. Gross profit dollars for 1995 were impacted favorably by the
acquisition of Galaxy and the internal growth of Aladdin and American Rug. The
Company's gross profit
13
was negatively impacted during 1995 as a result of industry-wide raw material
price increases in polypropylene-based materials. In addition to the cost
pressures, soft market conditions increased competitive pressures in the
industry during 1995. The Company recorded a pre-tax reduction of $6.0 million
in cost of sales in 1994 for the final reimbursement of business interruption
costs related to the insurance claim for property damage suffered in a March
1993 blizzard.
Selling, general and administrative expenses for 1995 were $282.5 million
(17.1% of net sales) compared to $231.2 million (16.1% of net sales) for 1994.
Selling, general and administrative expenses in dollars and as a percentage of
net sales increased primarily due to higher bad debt expense resulting from
the write-off of some large customers that filed for protection under
bankruptcy laws in 1995, and increased sample costs.
The Company recorded restructuring costs of $8.4 million during 1995 related
to certain mill closings whose operations have been consolidated into other
Mohawk facilities. The after-tax effect of these costs was $5.2 million or
$0.10 per share.
During 1995, the Company adopted Financial Accounting Standards 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 $0.29 per share.
The Company recorded a charge of $4.0 million 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 the Company's 1988 leveraged
buyout. The agreements allow 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 exercise of these options. Such income tax benefit resulted
in a direct increase in stockholders' equity.
Interest expense for 1995 was $35.0 million compared to $27.1 million in
1994. Factors causing the increased interest expense were additional debt
required to finance capital expenditures in 1995 to expand production
capacity, and additional debt that was incurred in January 1995 to finance the
acquisition of Galaxy.
During 1994, the Company recorded a one-time non-operating charge of $10.2
million for transaction expenses related to the acquisition of Aladdin.
In 1995, income tax expense was $4.0 million, or 38.7% of earnings before
income taxes. In 1994, income tax expense was $25.2 million, representing
43.3% of earnings before income taxes. The Company did not record an income
tax benefit for a significant portion of the $10.2 million one-time charge
resulting in a higher effective tax rate during 1994. During 1994, the Company
reduced income tax expense by $2.0 million to reflect a reduction in its
effective tax rate and certain other changes in the Company's federal and
state income tax status.
LIQUIDITY AND CAPITAL RESOURCES
The Company'sOur primary capital requirements are for working capital, capital expenditures
and acquisitions. The Company's workingOur capital needs are met through a combination of
internally generatedinternally-generated funds, bank credit lines and credit terms from suppliers.
The level of accounts receivable increased from $215.6$286.9 million at the beginning
of 19971998 to $253.8$324.4 million at SeptemberJune 27, 1997.1998. The $38.2$37.6 million increase resulted primarily fromis
attributable to seasonally higherhigh sales volume in the thirdsecond quarter as compared
to the end of 1996.December. Inventories roseincreased from $302.8$367.1 million at the beginning of 19971998
to $316.3$404.9 million at SeptemberJune 27, 1997,1998, due primarily to requirements to meet
seasonal customer demand.
Capital expenditures totaled $63.3$35.3 million in the first half of 1998 and $55.6were
incurred primarily to modernize and expand manufacturing facilities and
equipment. Our capital projects are primarily focused on increasing capacity,
improving productivity and reducing costs. Capital spending during 1998 is
expected to range from $45 million to $50 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
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
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.
SHARES SHARES
OWNED PRIOR TO SHARES BEING OWNED AFTER
SELLING STOCKHOLDER THE OFFERING(1) OFFERED THE OFFERING(1)
- ------------------- --------------- ------------ ---------------
Shaheen A. Shaheen................ 0
Piera B. Shaheen.................. 0
David M. Shaheen.................. 0
Revocable Trust of John A.
Shaheen, dated July 12, 1996...... 0
David M. Shaheen and John A.
Shaheen, as Co-Trustees pursuant
to that certain Voting Trust
Agreement dated April 30, 1992... 0
Shaheen A. Shaheen Trust, dated
12/15/72.......................... 0
Piera B. Shaheen Trust, dated
12/8/76........................... 0
Shaheen A. and Piera B. Shaheen
Trust, dated 12/10/74............. 0
Shaheen A. and Piera B. Shaheen
Trust, dated 12/8/76.............. 0
John A. Shaheen Trust (J-1), dated
12/8/76........................... 0
John A. Shaheen Trust (J-2), dated
12/8/76........................... 0
John A. Shaheen Family Trust,
dated 12/30/80.................... 0
Irrevocable Trust of John A.
Shaheen (J-6), dated 12/27/82..... 0
Irrevocable Trust of John A.
Shaheen (J-7), dated 12/27/82..... 0
Irrevocable Trust of John A.
Shaheen (J-8), dated 3/24/83...... 0
Irrevocable Trust of John A.
Shaheen (J-9), dated 3/24/83...... 0
Irrevocable Trust of John A.
Shaheen (J-10), dated 12/7/87..... 0
- --------
(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.
21
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
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
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 and June 27, 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
INDEX TO MOHAWK SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports............................................. F-1
Consolidated Balance Sheets as of December 31, 1996 and 1997 and June 27,
1998..................................................................... F-3
Consolidated Statements of Earnings for the Years Ended December 31, 1995,
1996 and 1997 and the Six Months Ended June 28, 1997 and June 27, 1998... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended Decem-
ber 31, 1995, 1996 and 1997 and the Six Months Ended June 27, 1998....... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Six Months Ended June 28, 1997 and June 27,
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
25
WHEN THE TRANSACTION REFERRED TO IN NOTE 2 OF THE NOTES TO SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A
POSITION TO RENDER THE FOLLOWING REPORT.
/s/ KPMG Peat Marwick LLP
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 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.
Atlanta, Georgia
October 21, 1998, except as to
Note 2, which is as of ...
F-1
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
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-------------------- JUNE 27,
1996 1997 1998
---------- --------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash........................................ $ 898 145 145
Receivables................................. 269,241 286,871 324,425
Inventories................................. 380,828 367,076 404,932
Prepaid expenses............................ 18,794 15,547 5,241
Deferred income taxes....................... 30,654 39,082 38,560
---------- --------- ---------
Total current assets...................... 700,415 708,721 773,303
Property, plant and equipment, net............ 393,270 391,101 387,208
Other assets.................................. 83,825 76,735 76,245
---------- --------- ---------
$1,177,510 1,176,557 1,236,756
========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and note
payable.................................... $ 47,089 41,529 37,779
Accounts payable and accrued expenses....... 266,259 285,084 342,125
---------- --------- ---------
Total current liabilities................. 313,348 326,613 379,904
Deferred income taxes......................... 27,530 30,311 30,311
Long-term debt, less current portion.......... 432,852 336,209 295,777
Other long-term liabilities................... 4,733 6,291 5,488
---------- --------- ---------
Total liabilities......................... 778,463 699,424 711,480
---------- --------- ---------
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 57,251 shares issued in
1996, 1997 and 1998, respectively.......... 566 571 573
Additional paid-in capital.................. 159,459 164,140 166,919
Retained earnings........................... 239,022 312,422 357,784
---------- --------- ---------
Total stockholders' equity................ 399,047 477,133 525,276
Commitments and contingencies (Notes 10 and
13)..........................................
---------- --------- ---------
$1,177,510 1,176,557 1,236,756
========== ========= =========
See accompanying notes to consolidated financial statements.
F-3
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------ -------------------
JUNE 28, JUNE 27,
1995 1996 1997 1997 1998
---------- --------- --------- --------- ---------
(UNAUDITED)
Net sales................... $1,965,374 2,153,016 2,327,341 1,087,129 1,220,404
Cost of sales............... 1,545,796 1,675,221 1,808,137 849,810 929,831
---------- --------- --------- --------- ---------
Gross profit.............. 419,578 477,795 519,204 237,319 290,573
Selling, general and admin-
istrative expenses......... 325,276 340,770 354,528 169,040 194,050
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 68,279 96,523
---------- --------- --------- --------- ---------
Other expense:
Interest expense.......... 39,981 37,522 34,551 18,551 15,166
Other expense, net........ 1,206 4,080 447 856 204
---------- --------- --------- --------- ---------
41,187 41,602 34,998 19,407 15,370
---------- --------- --------- --------- ---------
Earnings before income
taxes.................... 16,965 91,663 121,578 48,872 81,153
Income taxes................ 6,951 38,285 48,154 18,858 33,119
---------- --------- --------- --------- ---------
Net earnings.............. $ 10,014 53,378 73,424 30,014 48,034
========== ========= ========= ========= =========
Basic earnings per share.... $ 0.19 0.95 1.29 0.53 0.84
========== ========= ========= ========= =========
Weighted-average common
shares outstanding......... 54,085 56,160 56,812 56,692 57,172
========== ========= ========= ========= =========
Diluted earnings per share.. $ 0.18 0.94 1.28 0.53 0.83
========== ========= ========= ========= =========
Weighted-average common and
dilutive potential common
shares outstanding......... 55,335 56,749 57,303 57,145 57,926
========== ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND SIX MONTHS ENDED JUNE 27, 1998
(IN THOUSANDS)
COMMON STOCK
-------------
ADDITIONAL TOTAL
PAID-IN RETAINED TREASURY STOCK STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK OPTIONS EQUITY
------ ------ ---------- -------- -------- ------- -------------
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.............. 184 2 2,653 -- -- -- 2,655
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............ -- -- -- 48,034 -- -- 48,034
------ ---- ------- ------- ---- ---- -------
BALANCES AT JUNE 27,
1998 (unaudited)....... 57,251 $573 166,919 357,784 -- -- 525,276
====== ==== ======= ======= ==== ==== =======
See accompanying notes to consolidated financial statements.
F-5
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------
----------------------------- JUNE 28, JUNE 27,
1995 1996 1997 1997 1998
-------- -------- --------- -------- --------
(UNAUDITED)
Cash flows from operating
activities:
Net earnings............... $ 10,014 53,378 73,424 30,014 48,034
Adjustments to reconcile
net earnings to net cash
provided by operating
activities:
Depreciation and
amortization............. 58,643 62,281 68,377 34,144 37,293
Deferred income taxes..... (7,924) 4,348 (3,440) 447 3,498
Provision for doubtful
accounts................. 9,649 13,213 8,434 3,660 5,383
(Gain) loss on sale of
property, plant and
equipment................ 209 1,302 (396) -- --
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) (39,743) (44,606)
Inventories.............. (3,475) (12,662) 25,725 (30,029) (37,589)
Accounts payable and
accrued expenses........ 19,511 3,359 26,607 34,848 56,760
Other assets and prepaid
expenses................ (2,444) (7,291) 1,941 4,737 9,728
Other liabilities........ (1,678) 4,868 (2,571) (2,380) (803)
-------- -------- --------- -------- --------
Net cash provided by
operating activities... 122,989 56,296 176,947 35,698 77,698
-------- -------- --------- -------- --------
Cash flows from investing
activities:
Proceeds from sale of
property, plant and
equipment and other
assets.................... 7,339 3,284 2,092 -- --
Additions to property,
plant and equipment....... (49,413) (49,985) (42,953) (17,010) (35,330)
Acquisitions............... (51,622) (2,122) (34,141) (2,122) 25
Other...................... 134 159 895 12 --
-------- -------- --------- -------- --------
Net cash used in
investing activities... (93,562) (48,664) (74,107) (19,120) (35,305)
-------- -------- --------- -------- --------
Cash flows from financing
activities:
Net change in revolving
line of credit............ (2,843) (27,179) (83,131) 18,802 (49,616)
Payment of note payable.... -- -- (21,200) (21,200) --
Payments on term loans..... (5,081) (13,754) (20,337) (6,255) (3,750)
Redemption of Galaxy
indebtedness.............. (44,487) -- -- -- --
Proceeds from new loan..... 8,218 24,681 10,661 -- --
Proceeds from Industrial
Revenue Bonds and other,
net of payments........... -- -- 11,593 3,694 5,288
Change in outstanding
checks in excess of cash.. 10,381 (391) (5,841) (12,094) 2,924
Dividends paid............. (24) (24) (24) (24) --
Common stock transactions.. 4,472 9,246 4,686 833 2,781
-------- -------- --------- -------- --------
Net cash used in
financing activities... (29,364) (7,421) (103,593) (16,244) (42,373)
-------- -------- --------- -------- --------
Net change in cash...... 63 211 (753) 334 20
Cash, beginning of period... 624 687 898 562 125
-------- -------- --------- -------- --------
Cash, end of period......... $ 687 898 145 896 145
======== ======== ========= ======== ========
See accompanying notes to consolidated financial statements.
F-6
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 AND JUNE 28, 1997 AND JUNE 27, 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 October 22, 1998, the Company signed a definitive agreement
to acquire 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"). This transaction is expected to be consummated on or around
November 30, 1998. On October 23, 1998, the Company filed a shelf registration
statement with the Securities and Exchange Commission to register for resale
the 4,900 shares of Company common stock to be issued in connection with the
Merger. The Merger Agreement requires that this shelf registration statement be
declared effective as a condition of closing. The consolidated financial
statements give retroactive effect to the Merger as if the Merger has been
consummated prior to filing the registration statement. 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
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
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
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 October 22, 1998, the Company signed a definitive agreement to acquire all
of the outstanding capital stock of World in exchange for approximately 4,900
shares of the Company's common stock. This transaction is expected to be
consummated on or around November 30, 1998. 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 a 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:
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------ -------------------
JUNE 28, JUNE 27,
1995 1996 1997 1997 1998
---------- --------- --------- --------- ---------
(UNAUDITED)
Net sales:
Mohawk................. $1,648,517 1,779,389 1,901,352 884,416 1,006,166
World.................. 316,857 373,627 425,989 202,713 214,238
---------- --------- --------- --------- ---------
Combined............. $1,965,374 2,153,016 2,327,341 1,087,129 1,220,404
========== ========= ========= ========= =========
Net earnings:
Mohawk................. $ 6,412 49,050 68,030 27,854 45,362
World.................. 3,602 4,328 5,394 2,160 2,672
---------- --------- --------- --------- ---------
Combined............. $ 10,014 53,378 73,424 30,014 48,034
========== ========= ========= ========= =========
F-10
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 six
months ended June 28, 1998 and June 29, 1997 have been combined with Mohawk's
financial statements for the six months ended June 27, 1998 and June 28, 1997,
respectively. An adjustment has been made to stockholders' equity in the six
months ended June 27, 1998 to eliminate the effect of including World's results
of operations for the six months ended June 28, 1998 in the Company's
consolidated financial statements for the six months ended June 27, 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:
AS OF DECEMBER
31,
---------------- AS OF JUNE 27,
1996 1997 1998
-------- ------- --------------
(UNAUDITED)
Customers, trade........................... $307,146 337,520 379,142
Other...................................... 2,095 956 1,783
-------- ------- -------
309,241 338,476 380,925
Less allowance for discounts, returns,
claims and doubtful accounts.............. 40,000 51,605 56,500
-------- ------- -------
Net receivables........................ $269,241 286,871 324,425
======== ======= =======
(4) INVENTORIES
The components of inventories are as follows:
AS OF DECEMBER
31,
---------------- AS OF JUNE 27,
1996 1997 1998
-------- ------- --------------
(UNAUDITED)
Finished goods............................... $183,634 185,162 206,468
Work in process.............................. 54,380 53,892 61,585
Raw materials................................ 142,814 128,022 136,879
-------- ------- -------
Total inventories........................ $380,828 367,076 404,932
======== ======= =======
F-11
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:
AS OF DECEMBER
31,
---------------- AS OF JUNE 27,
1996 1997 1998
-------- ------- --------------
(UNAUDITED)
Land....................................... $ 11,912 12,746 12,346
Buildings and improvements................. 153,000 153,486 148,674
Machinery and equipment.................... 474,157 527,218 541,120
Furniture and fixtures..................... 20,236 18,590 15,155
Leasehold improvements..................... 2,573 3,256 2,715
Construction in progress................... 12,901 20,666 41,228
-------- ------- -------
674,779 735,962 761,238
Less accumulated depreciation and
amortization.............................. 281,509 344,861 374,030
-------- ------- -------
Net property, plant and equipment........ $393,270 391,101 387,208
======== ======= =======
Property, plant and equipment includes capitalized interest of $2,169, $1,180
and $799 in 1995, 1996 and the nine-month period ended September 27, 1997, respectively.
Capital expendituresDuring 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, include $21.2 millionthe 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:
AS OF DECEMBER
31,
-------------- AS OF JUNE 27,
1996 1997 1998
------- ------ --------------
(UNAUDITED)
Goodwill, net of accumulated amortization of
$6,195, $8,266 and $9,010, respectively.... $60,479 59,823 59,079
Other assets................................ 23,346 16,912 17,166
------- ------ ------
Total other assets........................ $83,825 76,735 76,245
======= ====== ======
F-12
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, acquired from Fiber One
in a noncash transactionvalued at $21,200 in exchange for a promissory
note due in April 1997. The promissory note paid interest at a 14
variable rate
that ranged from 0.25% to 0.875% above LIBOR andLIBOR. The note was paid in full in
January 1997.
Capital expenditures forOn April 15, 1997, include $36.0 million for
the purchase of certain assets from Diamond. The capital expenditures made
during 1996 and 1997 were incurred primarily to modernize and expand
manufacturing facilities and equipment. The Company's capital projects are
primarily focused on increasing capacity, improving productivity and reducing
costs. Capital expenditures for Mohawk, including the $21.2 million of
polypropylene extrusion equipment purchased from Fiber One, have totaled
$180.3 million over the three years ended December 31, 1996. Capital spending
for the remainder of 1997 is expected to range from $10.0 million to $15.0
million, the majority of which will be used to purchase equipment to increase
production capacity and productivity.
On June 6, 1996, the Company amended and restated its revolving credit
agreement to decrease its credit availability from $300 million to $250
million due to decreasing external financing needs. At December 31, 1996, the
Company had $127.2 million of unused credit availability under its revolving
credit line. The credit agreement's interest rate either (i) ranges from 0.25%
to 0.875% above LIBOR, depending upon the Company's performance measured
against specific coverage ratios, or (ii) is the prime rate. The credit
agreement contains customary financial and other covenants and restricts
cumulative dividend payments to $10.0 million 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.
On April 15, 1997, the Company further amended and restated its revolving 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 September 27,December 31, 1997, the Company had
$170.0 millioncredit availability of unused credit
availability$250,000 under its revolving credit line.
IMPACT OF INFLATION
Inflation affectsline 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 manufacturing costsperformance and operating expenses.
The carpet industry has experienced moderate inflation in the prices of raw
materials and outside processing for the last three years.dividend payments. The Company
has
generally passed along nylon fiber price increasesmust pay an annual facility fee ranging from .0015 to its customers.
SEASONALITY
The carpet business is seasonal, with.0025 of the total credit
commitment, depending upon the Company's second, third and fourth
quarters typically producing higher net sales and operating income. By
comparison, results forperformance measured against specific
coverage ratios, under the first quarter tend to be the weakest. This
seasonality is primarily attributable to consumer residential spending
patterns and higher installation levels during the spring and summer months.
15
PRINCIPAL AND SELLING STOCKHOLDERSrevolving credit line.
The following table sets forth, ascapital stock of February 2, 1998, certain information
with respect to the beneficial ownership of the Common Stock prior to the
Offering and after the Offering (assuming no exercise of the Underwriters'
over-allotment option), by (i) each person who is known by the Company
beneficially to own more than five percent of the outstanding shares of the
Common Stock, (ii) 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
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt consists of the following:
1996 1997
-------- -------
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
======== =======
The aggregate maturities of long-term debt as of December 31, 1997 are as
follows:
1998.............................................................. $ 41,529
1999.............................................................. 37,029
2000.............................................................. 36,723
2001.............................................................. 101,615
2002.............................................................. 81,240
Thereafter........................................................ 79,602
--------
$377,738
========
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are as follows:
AS OF
AS OF DECEMBER 31, JUNE 27,
1996 1997 1998
--------- --------------------
(UNAUDITED)
Outstanding checks in excess of cash........ $ 39,496 33,655 36,579
Accounts payable, trade..................... 129,363 138,699 165,851
Accrued expenses............................ 59,976 70,986 100,372
Accrued compensation........................ 37,424 41,744 39,323
--------- -------- -------
Total accounts payable and accrued ex-
penses................................... $266,259 285,084 342,125
========= ======== =======
F-14
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 (iii)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 Chief
Executive Officerdate of
grant and become exercisable at such dates and at prices as determined by the
Company's four most highly compensated officers
other than the Chief Executive Officer who were serving as executive officers
at the end of the most recently completed fiscal year and (iv) allCompensation 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 executive officersawards. 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:
1995 1996 1997
----------- ---------- ----------
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
=========== ========== ==========
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
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
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:
CURRENT DEFERRED TOTAL
-------- -------- ------
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
======== ====== ======
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:
1995 1996 1997
------ ------ ------
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
====== ====== ======
F-17
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:
1996 1997
-------- --------
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
======== ========
At December 31, 1997, as a group. Unless otherwise
indicated,result of the holders listed below have sole votingWorld and investment power with
respectGalaxy 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 all sharesoffset future taxable income, if any, and begin expiring in 2005 and
continue to expire through 2009. Utilization of Common Stock beneficially owned by them.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:
SHARES SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIORYEARS ENDING DECEMBER 31,
-------------------------
1998.............................................................. $19,165
1999.............................................................. 13,176
2000.............................................................. 11,781
2001.............................................................. 8,016
2002.............................................................. 5,307
Thereafter........................................................ 7,433
-------
Total minimum lease payments...................................... $64,878
=======
Rental expense under operating leases was $18,488, $17,677 and $20,475 in 1995,
1996 and 1997, respectively.
F-18
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:
FOR THE BEING OWNED AFTERYEARS ENDED FOR THE OFFERING OFFERED OFFERING
------------------ --------- ------------------
NAME NUMBER PERCENT NUMBER PERCENT
---- ----------SIX
DECEMBER 31, MONTHS ENDED
--------------------- ---------------------
JUNE 28, JUNE 27,
1995 1996 1997 1997 1998
------- ---------------- ------ -------- --------
(UNAUDITED)
Net cash paid during the period
for:
Interest........................ $41,292 37,949 35,926 17,536 15,133
======= ====== ====== ====== ======
Income taxes.................... $ 3,163 23,721 52,368 20,460 23,695
======= ====== ====== ====== ======
F-19
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The supplemental quarterly financial data are as follows:
QUARTERS ENDED
--------------------------------
MARCH JUNE SEPT. DEC.
30, 29, 28, 31,
1996 1996 1996 1996
-------- ------- ------- -------
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
QUARTERS ENDED
--------------------------------
MARCH JUNE SEPT. DEC.
29, 28, 27, 31,
1997 1997 1997 1997
-------- ------- ------- -------
Alan S. Lorberbaum(a).......... 18,292,979 35.1% 4,100,000 14,192,979 27.2%
Aladdin Partners(b)............ 14,400,000 27.6 4,100,000 10,300,000 19.7
399 Venture Partners, Inc.(c).. 6,828,787 13.1
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
QUARTERS ENDED
----------------
MARCH JUNE
28, 27,
1998 1998
-------- -------
Net sales................................... $559,963 560,441
Gross profit................................ 124,867 165,706
Net earnings................................ 14,595 33,495
Basic earnings per share.................... 0.26 0.58
Diluted earnings per share.................. 0.25 0.58
F-20
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
WORLD CARPETS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS EXCEPT FOR SHARE AMOUNTS)
JUNE 28,
1998
--------
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........................................ --
6,828,787 13.1
The Equitable Companies Incor-
porated, et al(d)............. 6,447,900 12.4 -- 6,447,900 12.4
David L. Kolb(e)............... 1,135,471 2.2 -- 1,135,471 2.2
Jeffrey S. Lorberbaum(f)....... 647,126 1.2 -- 647,126 1.2
Frank A. Procopio(g)........... 391,462 * -- 391,462 *
Bruce C. Bruckmann(h).......... 270,871 * -- 270,871 *
John D. Swift(i)............... 108,875 * -- 108,875 *
Leo Benatar(j)................. 25,975 * -- 25,975 *
William B. Kilbride(k)......... 18,225 * -- 18,225 *
Larry W. McCurdy(j)............ 19,431 * -- 19,431 *
Robert N. Pokelwaldt(j)........ 19,431 * -- 19,431 *
All directors--------
$221,228
========
The accompanying notes are an integral part of these financial statements.
F-22
WORLD CARPETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
YEAR ENDED
JUNE 28,
1998
----------
Net sales............................................................ $430,932
--------
Costs and executive
officers as a group
(10 persons).................. 20,929,846 40.1 4,100,000 16,829,846 32.3expenses
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
========
- --------
* Less than one percent.
(a) The addressaccompanying notes are an integral part of Mr. Alan Lorberbaumthese financial statements.
F-23
WORLD CARPETS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS EXCEPT FOR SHARE AMOUNTS)
CLASS A CLASS B CLASS C
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------- --------------- ---------------
RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT EARNINGS STOCK TOTAL
-------- ------- ------- ------- ------- ------- -------- -------- ------
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
======== ======= ======= ======= ======= ======= ====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-24
WORLD CARPETS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEAR ENDED
JUNE 28,
1998
----------
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
=======
The accompanying notes are an integral part of these financial statements.
F-25
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 2001 Antioch Road, Dalton, Georgia
30721. Includes 14,400,000 shares held by Aladdin Partners priora 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 Offeringconversion of
fiber into yarn and 10,300,000 shares heldto the manufacture and shipment of finished carpet and
rugs.
The more significant accounting policies followed by Aladdin Partners after the Offering
with respect to which Mr. Lorberbaum may beCompany 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 share votingbe uncollectible and investment power. Mr. Lorberbaumrecoveries 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 a directorrecorded at cost. Additions and
owner of 72.3% of ASL
Management Corp.,improvements are capitalized while maintenance and repairs are charged to
expense as incurred.
The Company computes depreciation using the majority general partner of Aladdin Partners. Mr.
Lorberbaum disclaims beneficial ownershipstraight-line method over the
estimated useful lives of the shares heldassets 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
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 Aladdin
Partners.
(b)the Company. The address of Aladdin Partnersamount is
822 Atkinson Drive, Dalton, Georgia
30720. ASL Management Corp. is the majority general partner of Aladdin
Partners and shares voting and investment power with respect to these
shares. The address of ASL Management Corp. is 822 Atkinson Drive, Dalton,
Georgia 30720. Mrs. Shirley Lorberbaum is a director and owner of 27.7% of
ASL Management Corp., and,classified as a result of such positions, maycurrent liability if expected to be deemed to
share voting and investment powersettled within one
year, with respect to these shares.
Mrs. Lorberbaum is the wife of Mr. Alan Lorberbaum. The address of Mrs.
Lorberbaum is 2001 Antioch Road, Dalton, Georgia 30721. Mr. Barry L.
Hoffman is a director of ASL Management Corp. and,balance being classified as a resultlong-term liability.
INCOME TAXES
The Company reports the effects of such
position, may be deemed to share votingincome taxes in accordance with
Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting
for Income Taxes." This asset and investment powerliability 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 respect
to these shares. Excludes 4,500 shares owned of record by Mr. Hoffmanthe 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 his individual capacity. The business address of Mr. Hoffman is Joseph
Decosimo & Company, 1100 Tallman Building, The Union Square, Chattanooga,
Tennessee 37402. Each of ASL Management Corp., Mrs. Lorberbaumthe balance sheet for cash and Mr.
Hoffman disclaim beneficial ownershiprestricted
cash, accounts receivable, shareholder receivable and accounts payable
approximate fair value because of the shares held by Aladdin
Partners.
(c)short-term maturity of these
financial instruments.
F-27
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The address of 399 Venture Partners, Inc. is 399 Park Avenue, New York,
New York 10043.
(d) Based upon an amended Schedule 13G dated May 12, 1997 jointly filed with
the Commission by The Equitable Companies Incorporated; AXA Assurances
I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle,
16
Alpha Assurances I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle, AXA
Courtage Assurance Mutuelle,carrying amount reported for long-term debt approximates fair value as
a group (the "Mutuelles AXA"); and AXA. The
address of The Equitable Companies Incorporated is 787 Seventh Avenue, New
York, New York 10019. Eachsignificantly all of the Mutuelles AXA,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 group,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 AXA
disclaim beneficial ownership$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
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORIES
Inventories consist of the following:
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
Finished goods.............................................. $31,103
Work-in-progress............................................ 9,313
Raw materials and other..................................... 35,354
-------
$75,770
=======
4.PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
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
========
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 shares.
(e) Includes 22,500 shares issuable uponassets are leased by the exerciseCompany 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 currently vested
optionsoperations.
F-29
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5.OTHER ASSETS
Other assets consist of the followings:
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
Goodwill.................................................... $ 8,821
Loan origination fees....................................... 871
Other....................................................... 593
-------
10,285
Accumulated amortization.................................... (1,418)
-------
Less accumulated depreciation and amortization.............. $ 8,867
=======
6.ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
Payroll and related withholdings............................ $ 4,814
Professional fees and settlement............................ 2,593
Self-insurance reserves..................................... 3,246
Other....................................................... 4,480
-------
$15,133
=======
7.LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
Revolving line of credit.................................... $58,872
Term loans.................................................. 21,857
Capital lease obligations................................... 3,812
-------
84,541
Less current maturities..................................... (5,570)
-------
$78,971
=======
Under the amended terms of the Company's revolving and 146 shares owned pursuantterm 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 Company's 401(k) plan.
(f) Includes 30,000 shares issuable uponprime rate minus .25% or
the exercise of currently vested
options. Excludes 14,400,000 shares held by Aladdin Partners priorLondon 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
Offeringprime 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
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 10,300,000 shares held by Aladdin Partners after the
Offering. Mr. Jeffrey Lorberbaum is a minority general partner of Aladdin
Partners. Mr. Lorberbaum disclaims beneficial ownershipproperty, plant and
equipment of the shares held
by Aladdin Partners.
(g) Includes 3,000 shares issuableCompany.
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:
CAPITAL
LEASE
FISCAL YEAR DEBT OBLIGATIONS TOTAL
----------- ------- ----------- ------
(IN THOUSANDS OF DOLLARS)
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
======= ===== ======
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 exerciseterms of currently vested
options.
(h) Includes 15,750 shares issuable upon the exercisePlan, the Company may match
employee contributions up to a maximum of currently vested
options2% of the employee's salary and
1,300 shares held jointly with his spouse.
(i) Includes 8,000 shares owned pursuantemployees 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 Company's 401(k) plan.
(j) Includes 15,750 shares issuable uponPlan.
F-31
WORLD CARPETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The components of the exercise of currently vested
options.
(k) Includes 18,000 shares issuable uponincome tax benefit are as follows:
YEAR ENDED
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
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:
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
-------------
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)%
======
The deferred tax assets and deferred tax liabilities recorded on the
exercise of currently vested
options.
SHARES ELIGIBLE FOR FUTURE SALEbalance sheet are as follows:
DEFERRED TAX
ASSETS (LIABILITIES)
JUNE 28,
1998
(IN THOUSANDS
OF DOLLARS)
--------------------
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
======
As of February 2,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
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:
FISCAL YEAR (IN THOUSANDS)
----------- --------------
1999....................................................... $ 226
2000....................................................... 107
2001....................................................... 107
2002....................................................... 107
2003 and thereafter........................................ 2,090
------
$2,637
======
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 52,182,907 sharespreferred 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
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 Offering will not affectClass
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 outstanding
shares. AllClass 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 4,100,000 shares sold in the Offering (4,500,000 shares if
the Underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act,
unless acquired by "affiliates" of the Company.
In addition to the 52,182,907 shares of Common StockCompany's outstanding 73,500 shares are
subject to currently vested options held by certain executives of
the Company. The acquisition of these shares is subject to a registration
statement on Form S-8, and, consequently, these shares may be sold from time
to time, subject to the volume limitation and other requirements of Rule 144
described below. In addition, of the 52,182,907 shares of Common Stock
outstanding, 8,438,199 shares were acquired by existing stockholders without
registration under the Securities Act in reliance upon an exemption from
registration and are "restricted securities" for purposes of the Securities
Act. These shares may not be sold unless they are registered under the
Securities Act or unless an exemption from registration, such as the exemption
provided by Rule 144 under the Securities Act, is available. Pursuant to Rule
144, such shares are eligible for sale, subject to the volume limitation and
other requirements described below.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) including an affiliate who has
beneficially owned "restricted securities" for at least one year, and any
affiliate of the Company who owns shares that are not restricted securities,
is entitled to sell within any three-month period a number of shares that does
not exceed the greater of 1% of the outstanding shares of Common Stock
(521,829 shares both before and after the Offering) or the average weekly
trading volume in the Common Stock on the NYSE during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. A stockholder
(or stockholders whose shares are aggregated) who is not an affiliate of the
Company for at least 90 days prior to a proposed transaction and who has
beneficially owned "restricted securities" for at least two years is entitled
to sell such shares under Rule 144 without regard to the limitations described
above.
In connection with the Aladdin Merger, the former shareholders of Aladdin
received 20,343,336 shares of Common Stock and executed a registration rights
agreement (the "1994 Registration Rights Agreement") giving such shareholders
various rights related to the registration of Common Stock owned by them while
the 1994 Registration Rights Agreement is in effect. Pursuant to the 1994
Registration Rights Agreement the Company granted demand registration rights
to the former shareholders of Aladdin. These demand registration rights permit
17
the former shareholders of Aladdin holding securities having a market value of
at least $25 million (or, if less, all remaining registrable securities then
outstanding, so long as the market value of such remaining securities is at
least $5 million) to require Mohawk to effect up to two registered offerings
per year. The Offering will count as one of two underwritten offerings the
former Aladdin shareholders may require Mohawk to effect within the 365-day
period during which the Offering is effected. The Company will bear all the
expenses incurred in this Offering, except that underwriting discounts and
commissions and the fees and disbursements of counsel for the Selling
Stockholder shall be paid by the Selling Stockholder. The 1994 Registration
Rights Agreement also grants incidental or "piggyback" registration rights to
the former shareholders of Aladdin.
Pursuant to a registration rights agreement (the "1992 Registration Rights
Agreement") among the Company, Citicorp Investments, Inc. ("CII") (now known
as 399 Venture Partners, Inc.) and certain members of the Company's
management, CII has been granted certain demand registration rights. In
addition, pursuant to the 1992 Registration Rights Agreement, CII and certain
other members of management have incidental or "piggyback" registration rights
with respect to certain offerings of shares of Common Stock. In connection
with the Aladdin Merger, the 1992 Registration Rights Agreement was amended so
that to the extent that any provision of the 1992 Registration Rights
Agreement is inconsistent with the 1994 Registration Rights Agreement, the
terms of the 1994 Registration Rights Agreement will control. CII and members
of the Company's management have agreed to waive their registration rights in
connection with the Offering.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized by its Restated Certificate of Incorporation, as
amended (the "Certificate of Incorporation"), to issue up to 75,060,000 shares
of capital stock, consisting of (i) 75,000,000 shares of Common Stock and (ii)
60,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock")
(none of which have been issued). The holders of shares of Common Stock are
entitled to one vote per share on all matters submitted to a vote of the
stockholders, including the election of directors, and the holders of such
shares exclusively possess all voting power. The Certificate of Incorporation
does not provide for cumulative voting for the election of directors. The
holders of shares of Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors from funds legally
available therefor, and are entitled to receive pro rata all assets of Mohawk
available for distribution to such holders upon liquidation. No shares of
Common Stock have any preemptive, redemption or conversion rights, or the
benefits of any sinking fund. The Certificate of Incorporation authorizes the
Board of Directors, without further stockholder approval, to issue Preferred
Stock and to fix, with respect to any series of Preferred Stock, the dividend
rights and terms, conversion rights, voting rights, redemption rights and
terms, liquidation preferences, sinking funds and any other rights,
preferences, privileges and restrictions applicable to each series of
Preferred Stock issued.
18
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated February , 1998 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters") have severally but not jointly
agreed to purchase from the Selling Stockholder the following respective
numbers of shares of Common Stock:
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Credit Suisse First Boston Corporation............................
Invemed Associates, Inc...........................................
---------
Total........................................................... 4,100,000
=========
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of Common Stock offered hereby (other
than those shares covered by the over-allotment option described below) if any
are purchased. The Underwriting Agreement provides that, in the event of a
default by an Underwriter, in certain circumstances the purchase commitments
of the non-defaulting Underwriter may be increased or the Underwriting
Agreement may be terminated.
The Selling Stockholder has granted to the Underwriters an option,
exercisable by Credit Suisse First Boston Corporation, expiring at the close
of business on the 30th day after the date of this Prospectus, to purchase up
to 400,000 additional shares at the public offering price less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as it was obligated to purchase pursuant to the
Underwriting Agreement.
The Company and the Selling Stockholder have been advised by the
Underwriters that the Underwriters propose to offer the shares of Common Stock
to the public initially at the public offering price set forth on the cover
page of this Prospectus and, through the Underwriters, to certain dealers at
such price less a concession of $ per share, and the Underwriters and such
dealers may allow a discount of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the Underwriters.
The Company, the Selling Stockholder, certain other major stockholders and
the executive officers and directors of the Company have agreed that they will
not offer, sell, contract to sell, announce an intention to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
any shares of the Company that are substantially similar to the Common Stock,
including but not limited to any securities convertible into or exchangeable
or exercisable for any shares of the Company or enter into any swap or other
arrangement that transfers any of the economic consequences of ownership of
any shares of Common Stock without the prior written consent of Credit Suisse
First Boston Corporation for a period of 90 days after the date of this
Prospectus, except for the conversion or exchange of convertible or
exchangeable securities outstanding on the date hereof or any Common Stock
sold to the Company.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or contribute to payments which the Underwriters may be
required to make in respect thereof.
Credit Suisse First Boston Corporation, on behalf of the Underwriters, may
engage in over-allotment, stabilizing transactions, syndicate-covering
transactions and penalty bids in accordance with Regulation M under the
Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a
19
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate-covering transactions involve purchases of the Common Stock
in the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriter to reclaim a
selling concession from a syndicate member when the shares of Common Stock
originally sold by such syndicate member are purchased in a syndicate-covering
transaction to cover syndicate short positions. Such stabilizing transaction,
syndicate-covering transactions and penalty bids may cause the price of the
Common Stock to be higher than it would be in the absence of such
transactions. These transactions may be effected on the NYSE or otherwise and,
if commenced, may be discontinued at any time.
The Underwriters and certain of their affiliates have provided from time to
time, and may provide in the future, various investment banking services for
the Company and the Selling Stockholder, for which such Underwriters have
received and may receive customary fees and commissions.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholder prepare and file a prospectus with the securities
regulatory authorities in each province where trades of Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made
in accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholder and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities
laws to purchase such Common Stock without the benefit of a prospectus
qualified under such securities laws, (ii) where required by law, that such
purchaser is purchasing as principal and not as agent and (iii) such purchaser
has reviewed the text above under "--Resale Restrictions."
RIGHT OF ACTION FOR ONTARIO PURCHASERS
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts and the
Selling Stockholder named herein may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or such persons outside of Canada.
20
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisers with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by such purchasers under relevant Canadian
legislation.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock
applicable to Non-U.S. Holders, as defined below. For purposes of this
discussion, the term "U.S. Holder" means a holder that for United States
federal income tax purposes is an individual or entity that is (i) a citizen
or individual resident of the United States, (ii) a corporation or
partnership, including any entity treated as a corporation or a partnership
for U.S. Federal income tax purposes, created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) an
estate the income of which is subject to U.S. federal income taxation
regardless of its source or (iv) a trust if both (A) a U.S. court is able to
exercise primary supervision over the administration of the trust and (B) one
or more U.S. persons have the authority to control all substantial decisions
of the trust, or (v) an entity otherwise subject to United States federal
income tax on a net income basis in respect of its worldwide taxable income. A
"Non-U.S. Holder" is any person or entity that is not a "U.S. Holder."
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed Treasury regulations promulgated
thereunder and administrative and judicial interpretations as of the date
hereof, all of which are subject to change, possibly with retroactive effect.
This discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant to the Holders in light of their particular
circumstances (including tax consequences applicable to financial
institutions, insurance companies, tax-exempt organizations, securities
dealers or pass-through entities) and does not address any tax consequences to
the Holders arising under the laws of any state, local or foreign
jurisdiction. This discussion also does not address any estate tax
consequences to the U.S. Holders arising under any federal, state, local or
foreign laws. Prospective Holders should consult their tax advisors with
respect to the particular tax consequences to them of owning and disposing of
Common Stock, including the consequences under the laws of any state, local or
foreign jurisdiction.
DIVIDENDS
Dividends, if any, paid to a Non-U.S. Holder generally will be subject to
withholding of United States federal income tax at a 30% rate, or such lower
rate as may be provided by an income tax treaty between the United States and
a foreign country if the Non-U.S. Holder is treated as a resident of such
foreign country within the meaning of the applicable treaty, unless (i) the
dividends are effectively connected with the conduct of a trade or business of
the Non-U.S. Holder within the United States and the Non-U.S. Holder provides
the payor with proper documentation or (ii) if an income tax treaty applies,
the dividends are attributable to a United States permanent establishment
maintained by the Non-U.S. Holder. Dividends that are effectively connected
with the conduct of a trade or business within the United States and, if a tax
treaty applies, are attributable to such a United States permanent
establishment, are subject to United States federal income tax on a net income
basis (that is, after allowance for applicable deductions) at applicable
graduated individual or corporate rates. Any such effectively connected
dividends received by a foreign corporation may, under certain circumstances,
be subject to an additional "branch profits tax" at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty.
21
Dividends paid before January 1, 1999 to an address outside the United
States will be presumed to be paid to a resident of the country of such
address for purposes of the withholding tax rules discussed above (unless the
payor has knowledge to the contrary) and, under the current interpretation of
United States Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. However, under newly issued Treasury
regulations, in the case of dividends paid after December 31, 1998, a Non-U.S.
Holder generally will be subject to United States back up withholding tax at a
31% rate under the backup withholding rules described below, rather than at a
30% rate or a reduced rate under an income tax treaty, as described above,
unless certain Internal Revenue Service ("IRS") certification procedures (or,
in the case of payments made outside the United States with respect to an
offshore account, certain IRS documentary evidence procedures) are complied
with. Further, in order to claim the benefit of an applicable tax treaty rate
for dividends paid after December 31, 1998, a Non-U.S. Holder must comply with
IRS certification requirements. Certain IRS certification and disclosure
requirements must be complied with in order to be exempt from withholding
under the effectively connected income exemption. The new regulations also
provide special rules for dividend payments made to foreign intermediaries.
U.S. or foreign wholly owned entities that are disregarded for U.S. federal
income tax purposes and entities that are treated as fiscally transparent in
the United States, the applicable income tax treaty jurisdiction, or both.
Prospective investors should consult with their own tax advisers concerning
the effect, if any, of the adoption of these new Treasury regulations on an
investment in the Common Stock.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder will generally not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) (a) the gain is effectively connected with a trade or
business conducted by the Non-U.S. Holder within the United States, and (b) if
a tax treaty applies, the gain is attributable to a United States permanent
establishment maintained by the Non-U.S. Holder, (ii) in the case of a Non-
U.S. Holder who is a non-resident alien and holds the Common Stock as a
capital asset, such holder is present in the United States for 183 or more
days in the taxable year of the sale or other disposition and certain other
conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to
certain provisions of the Code applicable to United States expatriates or (iv)
the Company is or has been a "U.S. real property holding corporation" for
United States federal income tax purposes at any time within the shorter of
the five-year period preceding such disposition or the period such Non-U.S.
Holder held the Common Stock (the "applicable period"), and the Non-U.S.
Holder owns at any time during the applicable period more than the five
percent (5%) of the Common Stock. A corporation is generally treated as a U.S.
real property holding corporation if the fair market value of its United
States real property interests equals or exceeds fifty percent (50%) of the
sum of the fair market value of its worldwide real property interests plus its
other assets used or held for use in a trade or business. The Company is not,
and does not anticipate becoming, a "U.S. real property holding corporation."
Even if the Company were to become a U.S. real property holding corporation,
any gain recognized by a Non-U.S. Holder, on the disposition of the Common
Stock, still would not be subject to U.S. tax if the shares were considered to
be "regularly traded" (as per the meaning of the applicable United States
Treasury regulations) on an established securities market (e.g., New York
Stock Exchange) and the Non-U.S. Holder did not own, actually, constructively,
directly, or indirectly, at any time during the five year period ending on the
date of the disposition, more than five percent (5%) of the Common Stock.
If a Non-U.S. Holder who is an individual falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale of
Common Stock under regular graduated United States federal income tax rates.
If an individual Non-U.S. Holder falls under clause (ii) above, such
individual generally will be subject to a flat 30% tax on the gain derived
from a sale, which may be offset by certain United States capital losses
(notwithstanding the fact that such individual is not considered a resident
alien of the United States). Thus, individual Non-U.S. Holders who have spent
(or expect to spend) more than a de minimis period of time in the United
States in the taxable year in which they contemplate a sale of Common Stock
are urged to consult their tax advisers prior to the sale as to the U.S. tax
consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it generally will be taxed on its net gain under regular graduated
United States federal income tax rates and, in addition, will be subject to
the
22
branch profits tax equal to 30% of its "effectively connected earnings and
profits," within the meaning of the Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Generally, the Company must report to the IRS the amount of any dividends
paid, the name and address of the recipient, and the amount, if any, of tax
withheld with respect to such payments. A similar report is sent to the
holders of the Common Stock. Pursuant to tax treaties or certain other
agreements, the U.S. Internal Revenue Service may also make its reports
available to tax authorities in the recipient's country of residence.
Dividends paid to U.S. Holders may be subject to backup withholding at the
rate of 31% unless such U.S. Holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the applicable
requirements of the backup withholding rules.
Under United States Treasury regulations, the Company must report annually
to the IRS and to each holder the amount of dividends paid on the Common Stock
in each calendar year to such holder and the tax withheld, if any, with
respect to such dividends. These information reporting requirements apply even
if withholding was not required because the dividends were effectively
connected with a trade or business in the United States of the Non-U.S. Holder
or withholding was reduced or eliminated by an applicable income tax treaty.
Copies of the information returns reporting such dividends and withholding may
also be made available to the tax authorities in the country in which the Non-
U.S. Holder is a resident under the provisions of an applicable income tax
treaty orshareholders' agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting
requirements) generally will not apply (i) to dividends paid to Non-U.S.
Holders that are subject to the 30% withholding discussed above (or that are
not so subject because a tax treaty applies that reduces or eliminates such
30% withholding) or (ii) before January 1, 1999, to dividends paid to a Non-
U.S. Holder at an address outside of the United States. However, under newly
issued Treasury regulations, in the case of dividends paid after December 31,
1998, a Non-U.S. Holder generally will be subject to backup withholding at a
31% rate, unless certain IRS certification procedures (or, in the case of
payments made outside the United States with respect to an offshore account,
certain IRS documentary evidence procedures) are complied with, directly or
through an intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.
Under current United States federal income tax law, information reporting
and backup withholding imposed at a rate of 31% will apply to the proceeds of
a disposition of Common Stock paid to or through a U.S. office of a broker
unless the disposing holder certifies as to its non-U.S. status or otherwise
establishes an exemption. In general, backup withholding and information
reporting will not apply to a payment of the gross proceeds of a sale of
Common Stock effected at a foreign office of a broker. Before January 1, 1999,
however, if such broker is, for United States federal income tax purposes, a
U.S. person, a controlled foreign corporation or a foreign person, 50% or more
of whose gross income for certain periods is derived from activities that are
effectively connected with the conduct of a trade or business in the United
States, such payments will not be subject to backup withholding but will be
subject to information reporting, unless (i) such broker has documentary
evidence in its records that the beneficial owner is a Non-U.S. Holder and
certain other conditions are met or (ii) the beneficial owner otherwise
establishes an exemption. Further after December 31, 1998, under the newly
issued Treasury regulations referred to above, information reporting and
backup withholding may apply to payments of the gross proceeds from the sale
or redemption of Common Stock effected through foreign offices of brokers
having any of a broader class of connections with the United States unless
certain IRS certification requirements are complied with. Prospective
investors should consult with their own tax advisers regarding these Treasury
regulations, and in particular with respect to whether the use of a particular
broker would subject the investor to these rules.
23
Payment by a United States office of a broker of the proceeds of a sale of
Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
Non-U.S. Holder or otherwise establishes an exemption. Backup withholding is
not an additional tax. Any amounts withheld under the backup withholding rules
will be allowed as a refund or a credit against such holder's United States
federal income tax liability provided the required information is furnished to
the IRS.
FEDERAL ESTATE TAX
An individual Non-U.S. Holder who at the time of death is treated as the
owner of, or has made certain lifetime transfers of, an interest in the Common
Stock will be required to include the value thereof in his gross estate for
U.S. federal estate tax purposes, and may be subject to U.S. federal estate
tax unless an applicable estate tax treaty provides otherwise. Estates of non-
resident aliens are generally allowed a credit that is equivalent to an
exclusion of $60,000 of assets from the estate for United States Federal
estate tax purposes.
LEGAL MATTERS
The validity of the Common Stock will be passed upon for the Company by
Alston & Bird LLP, Atlanta, Georgia. Certain legal matters in connection with
the Offering will be passed upon for the Selling Stockholder by King &
Spalding, Atlanta, Georgia, and for the Underwriters by Cravath, Swaine &
Moore, New York, New York.
EXPERTS
The consolidated financial statements of the Company and its subsidiaries as
of December 31, 1996, and 1995, and for each of the years in the three-year
period ended December 31, 1996 and the related consolidated financial
statement schedule have been incorporated by reference in the Registration
Statement of which this Prospectus is a part in reliance upon the reports of
KPMG Peat Marwick LLP, independent certified public accountants, incorporated
by reference herein, and upon the authority of said firm as an expert in
accounting and auditing.
24
[Picture of Company's logo, surrounded by various Company brand name logos.]
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UN-
LAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. 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 SUBSE-
QUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
------------
TABLE OF CONTENTS
PAGE
----
Available Information..................................................... 3
Incorporation of Certain Documents by Reference........................... 3
The Company............................................................... 4
Recent Developments....................................................... 6
The Selling Stockholder................................................... 7
Price Range of Common Stock and Dividend Policy........................... 7
Use of Proceeds........................................................... 8
Capitalization............................................................ 8
Selected Financial Data................................................... 8
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 11
Principal and Selling Stockholders........................................ 16
Shares Eligible for Future Sale........................................... 17
Description of Capital Stock.............................................. 18
Underwriting.............................................................. 19
Notice to Canadian Residents.............................................. 20
Certain U.S. Federal Tax Considerations For Non-United States Holders..... 21
Legal Matters............................................................. 24
Experts................................................................... 24
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOGO
[Logo of Mohawk Industries, Inc. appears here]
4,100,000 Shares
Common Stock
($.01 par value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
INVEMED ASSOCIATES, INC.
- -------------------------------------------------------------------------------F-34
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. The Registrant is paying all of these
expenses in connection with the issuance and distribution of the securities, other than fees and disbursements of counsel for the Selling
Stockholder.securities.
SEC registration fee............................................fee............................................... $ 32,524
NASD filing fee................................................. 11,52539,121
Accountants' fees and expenses.................................. 20,000expenses..................................... 15,000
Legal fees and expenses......................................... 60,000expenses............................................ 50,000
Printing, materials and postage................................. 50,000postage.................................... 20,000
Blue Sky fees and expenses...................................... 10,000expenses......................................... 2,500
Transfer agent feefees and expenses................................. 5,000
Miscellaneous...................................................expenses................................... 2,500
Miscellaneous...................................................... 5,000
--------
Total....................................................... $194,049Total............................................................ $134,121
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XII of the Amended and Restated Bylaws of the Registrant sets forth the
extent to which the Registrant's directors and officers may be indemnified
against liabilities they may incur while serving in such capacities. Such
indemnification will be provided to the fullest extent allowed by the Delaware
General Corporation Law, as amended from time to time. Under these
indemnification provisions, the Registrant is required to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, (other than an action by or in
the right of the Registrant) by reason of the fact that he is or was a director
or officer of the Registrant or, being at the time a director or Board-elected
officer of the Registrant, is or was serving at the request of the Registrant
as a director, trustee, officer, employee or agent of another corporation,
partnership, limited liability company, joint venture, trust, or other
enterprise (all such persons, together with any officer or director, hereafter
referred to as an "Agent"), against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
Registrant is also required to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed judicial
action or suit brought by or in the right of the Registrant to procure a
judgment in its favor by reason of the fact that he was an Agent, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant, except that no indemnification will be
required in respect of any claim, issue or matter as to which such person shall
II-1
have been adjudged to be liable to the Registrant unless and only to the extent
that the Court of Chancery of the State of Delaware or the court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity of such expenses
which the Court of Chancery or other such court shall deem proper.
Notwithstanding the foregoing, to the extent that an Agent has been successful
on the merits or otherwise in defense of any action, suit or proceeding
referred to herein or in defense of any claim, issue or matter therein, such
Agent shall be indemnified against all expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith. Subject to
certain conditions, the Registrant may also provide advancement of expenses
incurred by an Agent in defending any action, suit or proceeding upon receipt
of an undertaking by or on behalf II-1
of such Agent to repay such amount in the
event that it is ultimately determined that such person is not entitled to
indemnification under the Amended and Restated Bylaws of the Registrant.
The Registrant's Restated Certificate of Incorporation, as amended, contains a
provision which limits, to the fullest extent permitted by law, director
liability for monetary damages for breaches of the duty of care or any other
duty as a director.
The Registrant maintains an insurance policy insuring the Registrant and
directors and officers of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933.
ITEM 16. EXHIBITS.
A. Exhibits (SeeSee exhibit index immediately preceding the exhibits for the page number where
each exhibit can be found)found.
EXHIBIT
NUMBER DESCRIPTION
OF EXHIBITS
------- --- -----------------------
-----------
1* -- Form2 Agreement and Plan of Underwriting AgreementMerger by and among the Registrant, WC
Acquisition Corp., World Carpets, Inc. and the Selling Stockholder, and Credit Suisse First Boston Corporation
and Invemed Associates,shareholders of
World Carpets, Inc., dated as Underwriters.of October 22, 1998
3.1 Restated Certificate of Incorporation of the Registrant
(Incorporated herein by reference to Exhibit 3.1 in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
3.2 Amendment to the Restated Certificate of Incorporation of the
Registrant adopted on May 21, 1998 by the Registrant's
stockholders.
4.1 -- See Article 4 of the Restated Certificate of Incorporation, as
amended, of the Registrant.Registrant (Incorporated herein by reference to
Exhibit 4.1 in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.)1996).
4.2 -- See Articles 2, 6 and 9 of the Amended and Restated Bylaws of the
Registrant.Registrant (Incorporated herein by reference to Exhibit 4.2 in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.)1996).
5 -- Opinion of Alston & Bird LLP, including consent.
10.1 -- Letter dated as of October 17, 1997 of the Sixth Modification
to the Consolidated, Amended And Restated Note Agreement dated
September 3, 1993 among Mohawk, Aladdin Manufacturing
Corporation (f/k/a Mohawk Manufacturing Corporation and prior
to that k/a Mohawk Carpet Corporation) and The Prudential
Insurance Company of America.
10.2 -- Letter dated as of October 17, 1997 of the Fourth Modification
to the Note Purchase Agreement dated as of September 16, 1994
for $100 million of Senior Notes due September 16, 2004 among
Mohawk, Aladdin Manufacturing Corporation (f/k/a Mohawk
Manufacturing Corporation and prior to that k/a Mohawk Carpet
Corporation), The Prudential Insurance Company of America,
Principal Mutual Life Insurance Company, John Hancock Mutual
Life Insurance Company of America, Massachusetts Mutual Life
Insurance Company, Alexander Hamilton Life Insurance Company of
America and The Franklin Life Insurance Company.
10.3 -- Seventh Amendment Agreement dated as of October 17, 1997 for
$85 million Senior Notes due September 1, 2005 among Mohawk,
Aladdin Manufacturing Corporation (f/n/a Mohawk Manufacturing
Corporation and prior to that k/a Mohawk Carpet Corporation),
Mohawk Marketing, Inc., Mohawk Mills, Inc., Mohawk Carpet
Corporation (f/n/a Mohawk Limited), John Hancock Mutual Life
Insurance Company, John Hancock Variable Life Insurance
Company, John Hancock Life Insurance Company of America,
Principal Mutual Life Insurance Company, The Prudential
Insurance Company of America and The Franklin Life Insurance
Company.
10.4 -- Seventh Amendment Agreement dated as of October 17, 1997 for
9.5% Senior Notes due April 1, 1998 among Mohawk, Aladdin
Manufacturing Corporation (f/n/a Mohawk Manufacturing
Corporation and prior to that k/a Mohawk Carpet Corporation),
Mohawk Marketing, Inc., Mohawk Mills, Inc., Mohawk Carpet
Corporation (f/n/a Mohawk Limited), Alexander Hamilton Life
Insurance Company of America, Massachusetts Mutual Life
Insurance Company, The Franklin Life Insurance Company and
Principal Mutual Life Insurance Company.
II-2
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- --- -----------------------
*
23(a) -- Consent of Alston & Bird LLP (contained in Exhibit 5).*
23(b) -- Consent of KPMG Peat Marwick LLP.
23(c) Consent of PricewaterhouseCoopers LLP.
24 -- Power of Attorney (included on pagepages II-4 and II-5 of this
Registration Statement).Statement.
- --------
* To be filed by amendment.Be Filed By Amendment
II-2
ITEM 17. UNDERTAKINGS.
(b) The undersigned Registrantregistrant hereby undertakesundertakes:
(1) To file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement (other than as provided in
the proviso and instructions to Item 512(a) of Regulation S-K): (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the
"Securities Act"); (ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities Act,
of 1933, each filing of the Registrant'sregistrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934)(the "Exchange Act") that
is incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the Registrantregistrant
pursuant to the foregoing provisions described in Item 15 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrantregistrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether or not such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(i) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act ofPURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on FormTHE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Calhoun, and State of Georgia, on February 5,AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CALHOUN, AND STATE OF GEORGIA, ON OCTOBER 23 , 1998.
MOHAWK INDUSTRIES, INC.
/s/ David L. Kolb
By___________________________________By: _________________________________
DAVID L. KOLB
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act ofPURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on February 5,THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON OCTOBER 23, 1998. Each person whose signature appears
below hereby constitutes and appoints David L. Kolb and John D. Swift, or
either of them, as such person's true and lawful attorney-in-fact and agent
with full power of substitution for such person and in such person's name,
place and stead, in any and all capacities, to sign and to file with the
Securities and Exchange Commission, any and all amendments and post-effective
amendments to this Registration Statement, including any Registration
Statement filed pursuant to Rule 462(b) of the Securities Act, as amended,
with exhibits thereto and other documents in connection therewith, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any substitute therefor, may lawfully do or
cause to be done by virtue thereof.
SIGNATURES TITLE
/s/ David L. Kolb Chairman of the Board and Chief
- ------------------------------------- Executive Officer (principalEACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY
CONSTITUTES AND APPOINTS DAVID L. KOLB executive officer)
/s/ John D. Swift Vice President-Finance and Chief
- ------------------------------------- Financial Officer (principalAND JOHN D. SWIFT, financial and accounting officer)
/s/ Leo Benatar Director
- -------------------------------------
LEO BENATAR
/s/ Bruce C. Bruckmann Director
- -------------------------------------OR EITHER OF THEM, AS
SUCH PERSON'S TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT WITH FULL POWER OF
SUBSTITUTION FOR SUCH PERSON AND IN SUCH PERSON'S NAME, PLACE AND STEAD, IN ANY
AND ALL CAPACITIES, TO SIGN AND TO FILE WITH THE SECURITIES AND EXCHANGE
COMMISSION, ANY AND ALL AMENDMENTS AND POST-EFFECTIVE AMENDMENTS TO THIS
REGISTRATION STATEMENT, INCLUDING ANY REGISTRATION STATEMENT FILED PURSUANT TO
RULE 462(B) OF THE SECURITIES ACT, AS AMENDED, WITH EXHIBITS THERETO AND OTHER
DOCUMENTS IN CONNECTION THEREWITH, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND
AGENTS FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL
INTENTS AND PURPOSES AS SUCH PERSON MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR ANY
SUBSTITUTE THEREFOR, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE THEREOF.
SIGNATURE TITLE
--------- -----
/s/ David L. Kolb Chairman of the Board and Chief
______________________________________ Executive Officer (principal
DAVID L. KOLB executive officer)
/s/ John D. Swift Vice President-Finance and Chief
______________________________________ Financial Officer (principal
JOHN D. SWIFT financial and accounting officer)
/s/ Leo Benatar Director
______________________________________
LEO BENATAR
/s/ Bruce C. Bruckmann Director
______________________________________
BRUCE C. BRUCKMANN
/s/ Alan S. Lorberbaum Director
- -------------------------------------
ALAN S. LORBERBAUM
/s/ Jeffrey S. Lorberbaum Director, President and Chief
- ------------------------------------- Operating Officer
JEFFREY S. LORBERBAUM
Director
- -------------------------------------
LARRY W. MCCURDY
/s/ Robert N. Pokelwaldt Director
- -------------------------------------
II-4
SIGNATURE TITLE
--------- -----
/s/ Alan S. Lorberbaum Director
______________________________________
ALAN S. LORBERBAUM
/s/ Jeffrey S. Lorberbaum Director; President and Chief
______________________________________ Operating Officer
JEFFREY S. LORBERBAUM
/s/ Larry W. McCurdy Director
______________________________________
LARRY W. MCCURDY
/s/ Robert N. Pokelwaldt Director
______________________________________
ROBERT N. POKELWALDT
II-4
II-5