-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RrPirWK2HjX9paP77/oXAcD9u4CW5305aGygS5PWoYIdw3rpcVGUM/TC+t/YqcuH o3qZfuUwrQDQcjemmRFG7A== 0000089498-98-000027.txt : 19980403 0000089498-98-000027.hdr.sgml : 19980403 ACCESSION NUMBER: 0000089498-98-000027 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980402 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHAW INDUSTRIES INC CENTRAL INDEX KEY: 0000089498 STANDARD INDUSTRIAL CLASSIFICATION: CARPETS AND RUGS [2273] IRS NUMBER: 581032521 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06853 FILM NUMBER: 98586156 BUSINESS ADDRESS: STREET 1: 616 E WALNUT AVE STREET 2: P O DRAWER 2128 CITY: DALTON STATE: GA ZIP: 30722 BUSINESS PHONE: 7062783812 MAIL ADDRESS: STREET 1: 616 E WALNUT AVE STREET 2: P O DRAWER 2128 CITY: DALTON STATE: GA ZIP: 30720 10-K 1 1997 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended January 3, 1998 OR |_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________ to __________ Commission File Number 1-6853 - -------------------------------------------------------------------------------- Shaw Industries, Inc. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- Georgia 58-1032521 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 616 East Walnut Avenue, Dalton, Georgia 30720 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: 706/278-3812 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange Title of Each Class On Which Registered Common Stock, No Par Value The New York Stock Exchange $1.11 Stated Value The Pacific Stock Exchange Rights to Purchase Series A Participating Preferred Stock The New York Stock Exchange $.50 Stated Value The Pacific Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price on The New York Stock Exchange on March 26, 1998 was: $1,017,328,445 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Title of Each Class Outstanding at March 26, 1998 Common Stock, No Par Value 120,514,104 Shares DOCUMENTS INCORPORATED BY REFERENCE 1997 Annual Report to Shareholders --- Part II. Definitive Proxy Statement for the 1998 Annual Meeting of Shareholders on April 30, 1998 --- Part III. PART I Item I. Business Shaw Industries, Inc. ("Shaw" or the "Company") is the world's largest carpet manufacturer based on both revenue and volume of production. Shaw designs and manufactures approximately 2,600 styles of tufted and woven carpet for residential and commercial use under the PHILADELPHIA, TRUSTMARK, CABIN CRAFTS, SHAW COMMERCIAL CARPETS, STRATTON, NETWORX, SHAWMARK, EVANS BLACK, SALEM, SUTTON, KOSSET, CROSSLEY, ABINGDON, REDBOOK, MINSTER and INVICTA trade names and under certain private labels. The Company's manufacturing operations are fully integrated from the processing of yarns through the finishing of carpet. The Company's carpet is sold in a broad range of prices, patterns, colors and textures with the majority of its sales in the medium to high retail price range. Shaw sells its wholesale products to retailers, distributors and commercial users throughout the United States, Canada, Mexico, Australia and the United Kingdom; through its own residential retail and commercial contract distribution channels to various residential and commercial and end users in the United States; and to a lesser degree, exports to additional overseas markets. On May 31, 1994, the Company formed a joint venture (the "Terza Joint Venture") with Grupo Industrial Alfa, S.A. de C.V. of Monterrey, Mexico, for the manufacture, distribution and marketing of carpets, rugs and related products primarily in Mexico and South America. The Company's investment in the Terza Joint Venture is being accounted for using the equity method. On January 9, 1995, the Company acquired through its wholly owned subsidiary, Carpets International, Plc (U.K.) substantially all the operating assets of the Carpets Division of Coats Viyella Plc for approximately $29,503,000. The acquisition was accounted for as a purchase and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on management's estimate of their fair values as of the acquisition date. In December 1997, the Company entered into an agreement in principle to dispose of its U.K. subsidiary. In December 1995, the Company announced a new retail and contract distribution strategy to acquire several companies which own and franchise residential floorcovering centers throughout the United States, as well as several commercial carpet contractors. During 1997, the Company acquired several additional retail and commercial contractors including The Carpet Exchange, Baker Brothers, Carpet Factory Outlelt, Vulcan Floors, Inc., Morton Floors and several others. In addition, the Company opened 28 residential retail stores and in December 1997 announced a plan to close approximately 100 residential retail stores which contributed negatively to the Company's profitability. Net sales for the Company's retail and commercial contract business totaled $949.1 million in 1997 and at January 3, 1998, the Company has approximately 448 retail and commercial contract locations throughout the United States. The Company believes that by combining the resources of the manufacturer and retailer and developing a contract distribution network, it can provide a full range of products and services to more effectively meet the needs of the end-users of both residential and commercial carpet products at significantly improved margins. As part of this strategy, the Company continues its efforts to develop an alignment program with dealers of both residential and commercial carpet products to provide a collection of services, benefits and programs that will encourage dealers to purchase more from the Company. At January 3, 1998, the Company has approximately 1500 aligned dealers. The Company, based upon its international expansion which began in 1993 and continued into 1995, is now positioned to supply the Australian, Pacific Rim and other markets with high quality products. For 1997, 1996 and 1995, international operations accounted for 9.2, 10.5, and 12.6 percent, respectively, of the Company's net sales. As a result of its foreign expansion, the Company has limited exposure to fluctuations in foreign currency exchange rates on its intercompany payables. The Company may employ foreign currency forward exchange contracts when, in the normal course of business, they are determined to effectively manage and reduce such exposure. Geographical information about the Company's sales, operating profit and identifiable assets is incorporated by reference to page 20 of Exhibit 13 to this report. Products and Marketing Substantially all carpet manufactured by the Company is tufted carpet made from nylon, polypropylene yarn and wool. In the tufting process, yarn is inserted by multiple needles into a synthetic backing, forming loops which may be cut or left uncut, depending on the desired texture or construction. According to industry estimates, tufted carpet accounted for 90.8% of unit volume shipments of carpet manufactured in the United States during 1997. Substantially all carpet manufactured in the United States is made from synthetic fibers, with nylon accounting for 61.6% of the total, polypropylene 32.1%, polyester 5.9% and wool 0.4%. During 1997, the Company processed approximately 97% of its requirements for carpet yarn in its own yarn processing facilities. The Company believes that its significant investment in modern, state-of-the-art equipment has been an important factor in achieving and maintaining its leadership position in the marketplace. During the past five fiscal years, the Company has invested approximately $739 million (including acquisitions) in property additions. The Company continually seeks opportunities for increasing its sales volume and market share. For example, the Company continues to expand its product lines of carpet manufactured from polypropylene fiber, including fibers produced by the Company's own extrusion equipment. The Company also has a manufacturing facility for the production of carpet tiles for the commercial market to facilitate the Company's growing demand for its tile products. The overall level of sales for the Company and the carpet industry is influenced by a number of factors, including consumer confidence and spending for durable goods, interest rates, turnover in housing, the condition of the residential construction industry and the overall strength of the economy. The Company's international operations are also impacted by the markets in which they operate. The marketing of carpet is influenced significantly by current trends in style and fashion, principally color trends. The Company believes it has been a leader in the development of color technology in the carpet industry and that its dyeing facilities are among the most modern and versatile in the industry. The Company maintains an in-house product development department to identify developing color and style trends which are expected to affect its customers' buying decisions. This department is strengthened by the Company's Research and Development Center. This state-of-the-art complex includes a 75,000 square foot pilot plant featuring sample extrusion, yarn processing, tufting, dyeing, coating and shearing equipment, and three fiber and dye development laboratories. Sales and Distribution The Company's wholesale products are marketed domestically by approximately 940 salaried sales personnel in its various marketing divisions directly to retailers and distributors and to large national accounts through the Company's National Accounts Division. The Company's ten (10) regional warehouse facilities and eight (8) redistribution centers, along with its centralized management information system, enable it to provide prompt delivery of its products to both its retail customers and wholesale distributors. The Company's substantial investment in management information systems permits efficient production scheduling and control of inventory levels. The Company sells its wholesale products to approximately 40,620 retailers, distributors and national accounts located throughout the United States, Australia, Mexico, the United Kingdom and Canada. Retailers and national accounts, on a combined basis, accounted for approximately 68.9% of the Company's carpet sales for 1997. Shaw also sells to approximately 70 wholesale distributors. Approximately 4.6% of the Company's carpet sales in 1997 were to distributors. Sales of Shaw products in foreign markets, including the sales of foreign subsidiaries, accounted for approximately 9.2% of total sales in 1997. No single customer accounted for more than 2% of the Company's sales during 1997. The Company's retail and commercial contract business accounted for 26.5% of the Company's total sales for 1997 and was substantially sold through those businesses acquired by the Company in 1996 and 1997. Competition The carpet industry is highly competitive with more than 200 companies engaged in the manufacture and sale of carpet in the United States. Carpet manufacturers also face competition from the hard surface floorcovering industry. According to industry estimates, carpet accounts for approximately 70% of the total United States production of all flooring types. The principal methods of competition within the carpet industry are quality, style, price and service. The Company believes its strategically located regional warehouse facilities and redistribution centers, together with its retail and contract distribution network, provide a competitive advantage by enabling it to supply carpet on a timely basis to customers. The Company's long-standing practice in investing in modern, state-of-the-art equipment contributes significantly to its ability to compete effectively on the basis of quality, style and price. Raw Materials The principal raw materials used by the Company are nylon fiber and filament, and synthetic backing; additional raw materials include polyester, polypropylene and wool fibers and filaments, jute, latex and dye. During 1997, the Company experienced no significant shortages of raw materials. Employees At January 3, 1998, the Company had approximately 29,500 full-time employees. In the opinion of management, employee relations are good. Employees are involved in the Quality Improvement Process, which began in 1985 as a program designed to improve the Company's products and services through education and training. A small number of the Company's retail and commercial contractor employees in the United States are represented by unions. Certain employees of foreign subsidiaries are represented by unions. Environmental Matters Management believes the Company is currently in compliance in all material respects with applicable federal, state and local statutes and ordinances regulating the discharge of materials into the environment and otherwise relating to the protection of the environment. Management does not believe the Company will be required to expend any material amounts in order to remain in compliance with these laws and regulations or that compliance will materially affect its capital expenditures, earnings or competitive position. The Company continued its commitment to the environment during 1997. Because of this commitment to finding new ways of using mill waste, the Company is agressively pursuing an environmentally friendly use for all of its waste products. For example, future possibilities for use of fiber reinforced concrete include road and bridge construction, military applications, building foundations, tile, brick and concrete blocks. Patents, Trademarks, etc. Patent protection has not been significant to the Company's business, although the Company does hold several patents covering machinery used in a specific carpet coloring process. Item 2. Properties The Company's executive offices are located in Dalton, Georgia. At January 3, 1998, the Company operated additional facilities as follows: Domestic Facilities (wholesale) Alabama Redistribution, yarn spinning and yarn extrusion Michigan Redistribution Missouri Redistribution Florida Redistribution North Carolina Redistribution, primary backing manufacturing Ohio Redistribution Pennsylvania Redistribution Virginia Redistribution California Warehousing Colorado Warehousing Illinois Warehousing Massachusetts Warehousing Minnesota Warehousing New Jersey Warehousing Texas Warehousing Washington Warehousing Georgia Administrative, distribution, carpet manufacturing, yarn processing, yarn spinning, tufting, dyeing, coating, finishing, rug manufacturing, sample manufacturing, warehousing, design center and research and development center. Tennessee Carpet manufacturing, yarn spinning Domestic Facilities (retail - number of locations in parenthesis including locations being closed) Arizona Retail stores (13) California Retail stores, warehousing, administrative (57) Colorado Retail stores, warehousing, administrative (12) Connecticut Retail stores (9) Florida Retail stores, warehousing, administrative (38) Georgia Retail stores, warehousing, administrative (4) Idaho Retail stores (5) Illinois Retail stores, warehousing, administrative (41) Indiana Retail stores, administrative (19) Iowa Retail stores (9) Kansas Retail stores (3) Maryland Retail stores, warehousing, administrative (6) Massachusetts Retail stores, warehousing, administrative (14) Michigan Retail stores, warehousing, administrative (49) Minnesota Retail stores, warehousing, administrative (2) Mississippi Retail stores (1) Missouri Retail stores, warehousing, administrative (12) Montana Retail stores (1) New Hampshire Retail stores (4) New Jersey Retail stores, administrative (13) New Mexico Retail stores (4) New York Retail stores, warehousing, administrative (11) North Carolina Retail stores (23) Ohio Retail stores, warehousing, administrative (13) Oregon Retail stores (3) Pennsylvania Retail stores (13) Rhode Island Retail stores (2) South Carolina Retail Stores (9) Tennessee Retail stores (4) Texas Retail stores, warehousing, administrative (8) Utah Retail stores (1) Virginia Retail stores, warehousing, administrative (22) Washington Retail stores, warehousing, administrative (17) Wisconsin Retail stores (4) Wyoming Retail stores (1) Foreign Facilities (facilities are located in or near the areas listed) Bradford, England Tufting, coating, yarn processing, distribution and administrative offices Gwent, Wales Yarn extrusion, yarn processing Victoria, Australia Yarn extrusion, yarn processing, tufting, dyeing, coating, distribution and administrative offices Donaghadee, N. Ireland Tufting, dyeing and finishing In December 1997, the Company announced a plan to close approximately 100 residential retail store locations which are being phased out. In addition, the Company entered into an agreement in December 1997 to dispose of Carpets International, Plc (the Company's wholly owned U.K. subsidiary) which will be completed in April 1998. The Company maintains leased warehouses and customer service facilities in or near Dallas; Los Angeles (2); Seattle; San Francisco; Chicago; Minneapolis; Boston; and Cranbury, New Jersey. Each leased warehouse facility includes a sales showroom. Substantially all of the Company's retail facilities are leased. The Company believes that current facilities are adequately insured and well maintained, substantially used and provide adequate production capacity for current and anticipated future operations. Item 3. Legal Proceedings The Company is a party to several lawsuits incidental to its various activities and incurred in the ordinary course of business. The Company believes that it has meritorious claims and defenses in each case. After consultation with counsel, it is the opinion of management that, although there can be no assurance given, none of the associated claims, when resolved, will have a material adverse effect upon the Company. From time to time the Company is subject to claims and suits arising in the course of its business. The Company is a defendant in certain litigation alleging personal injury resulting from personal exposure to volatile organic compounds found in carpet produced by the Company. The complaints seek injunctive relief and unspecified money damages on all claims. The Company has denied any liability. The Company believes that is has meritorious defenses and that the litigation will not have a material adverse effect on the Company's financial condition or results of operations. In June 1994, the Company and several other carpet manufacturers received a grand jury subpoena from the Antitrust Division of the United States Department of Justice relating to an investigation of the industry. In October, 1997, the Company received formal notification from the Department of Justice that the investigation has been closed. In December 1995, the Company learned that it was one of six carpet companies named as additional defendants in a pending antitrust suit filed in the United states District Court of Rome, Georgia. The amended complaint alleges price-fixing regarding certain types of carpet products in violation of Section 1 of the Sherman Act. The amount of damages sought is not specified. If any damages were to be awarded, they may be trebled under the applicable statute. The Company has filed an answer to the complaint that denies plaintiffs' allegations and sets forth several defenses. In September 1997, the Court issued an order certifying a nationwide plaintiff class of persons and entities who purchase "mass production" polypropylene carpet directly from any of the defendants from June 1, 1991 through June 30, 1995, excluding, among others, any persons or entities whose only purchases were from any of the Company's retail establishments. Discovery began in November 1997. The Company is also a party to two consolidated lawsuits pending in the Superior Court of the State of California, City and County of San Francisco, both of which were brought on behalf of purported class of indirect purchasers of carpet in the State of California and which seek damages for alleged violations of California antitrust and fair competition laws. The Company believes that it has meritorious defenses to plaintiffs' claims in the lawsuits described in this paragraph and intends to defend these actions vigorously. After consultation with counsel, it is the opinion of management that, although there can be no assurance given, none of the claims described in this paragraph, when resolved, will have a material adverse effect upon the Company. In February 1996, a jury in Greensboro, North Carolina returned a verdict against the Company in litigation brought by four former employees of Salem Carpet Mills, acquired by the Company in 1992, alleging age discrimination and sex discrimination in employment decisions with regard to such employees. The litigation was subsequently settled by the parties. Terms of the settlement were not disclosed. The settlement did not have a material adverse effect on the Company's financial condition or results of operations. The Company is subject to a variety of environmental regulations relating to the use storage, discharge and disposal of hazardous materials used in its manufacturing processes. Failure by the Company to comply with present and future regulations could subject it to future liabilities. In addition, such regulations could require the Company to acquire costly equipment to incur other significant expenses to comply with environmental regulations. The Company is not involved in any material environmental proceedings. At the end of fiscal year 1997, there were no other pending legal proceedings to which the Company was a party or to which any of its property was subject which, in the opinion of management, were likely to have a material adverse effect on the Company's business, financial condition or results of operations. Item 4. Submission of Matters to Vote of Security Holders Not applicable.
Item 4(A). Executive Officers of the Registrant Name Age Officer Position Since Robert E. Shaw 66 1967 Chairman, Chief Executive Officer and Director W. Norris Little 66 1978 President and Chief Operating Officer and Director Vance D. Bell 46 1983 Vice President, Marketing Kenneth G. Jackson 40 1996 Vice President and Chief Financial Officer Carl P. Rollins 54 1991 Vice President, Administration Bennie M. Laughter 46 1986 Vice President, Secretary and General Counsel Douglas H. Hoskins 63 1978 Controller
Officers of the Company are elected annually by the Board of Directors. All of the executive officers of the Company except for Mr. Jackson have served as executive officers for the Company for more than the past five years. Mr. Jackson joined the Company in February 1996. Prior to February 1996, Mr. Jackson had been a partner with Arthur Andersen LLP in Atlanta, Georgia. PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters The high and low sales prices for the Company's common stock as reported by the New York Stock Exchange and the amount of dividends paid by quarter for the last two fiscal years are set forth on page 24 of Exhibit 13. Reference is made to Note 2 of Notes to Consolidated Financial Statements on page 12 of Exhibit 13 for information concerning restrictions on the payment of cash dividends. At March 9, 1998, there were 4,065 holders of record of the Company's common stock. Item 6. Selected Financial Data This information is set forth on page 1 of the Exhibit 13 under the caption "Ten Year Financial Review." Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This information is set forth on pages 2 - 4 of Exhibit 13 to this report. Item 8. Financial Statements and Supplementary Data This information is set forth on pages 5 -24 of Exhibit 13. Item 9. Disagreements on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information concerning directors is incorporated by reference to "Election of Class of Directors" on pages 3-6 of the Proxy Statement for the 1998 Annual Meeting of Shareholders. Reference is also made to Item 4(A) of Part I of this report, "Executive Officers of the Registrant," which information is incorporated herein. Item 11. Executive Compensation This information is incorporated by reference to "Executive Compensation" on pages 3 - 5 of the Proxy Statement for the 1998 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management This information is incorporated by reference to "Voting Rights and Principal Shareholders" and "Election of Directors" on pages 2 and 3 - 4 respectively, of the Proxy Statement for the 1998 Annual Meeting of Shareholders. PART IV Item 13.Certain Relationships and Related Transactions This information is incorporated by reference to "Certain Relationships" on page 4 of the Proxy Statement for the 1998 Annual Meeting of Shareholders. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. Financial Statements Exhibit 13, a copy of which is filed with this Form 10-K, contains the balance sheets as of January 3, 1998 and December 28, 1996, the related statements of income, shareholders' investment and cash flow for each of the three years in the period ended January 3, 1998, and the related report of Arthur Andersen LLP. These financial statements and the report of Arthur Andersen LLP are incorporated herein by reference. The financial statements incorporated by reference include the following: Balance Sheets - January 3, 1998 and December 28, 1996 Statements of Income for the years ended January 3, 1998, December 28, 1996 and December 30, 1995. Statements of Shareholders' Investment for the years ended January 3, 1998, December 28, 1996 and December 30, 1995. Statements of Cash Flow for the years ended January 3, 1998, December 28, 1996 and December 30, 1995. 2. Financial Statement Schedules Report of Independent Public Accountants on Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts for the Years Ended January 3, 1998, December 28, 1996 and December 30, 1995. 3. Exhibits incorporated by reference or filed with this report. Number Description 3(a) Amended and Restated Articles of Incorporation. [Incorporated herein by reference to Exhibit 3(a) to Registrant's Registration Statement filed with the commission on December 28, 1993 (File No. 33-51719).] 3(b) Bylaws. [Incorporated herein by reference to Exhibit 3(b) to Registrant's Registration Statement filed with the commission on December 28, 1993 (File No. 33-51714).] 4(a) Specimen form of Common Stock Certificate. [Incorporated herein by reference to Exhibit 2 to Registrant's Report on Form 8-A filed with the Securities and Exchange Commission on May 12, 1989 (File No. 1-6853).] 4(b) Restated Articles of Incorporation, filed as Exhibit 3(a), and the Bylaws of Registrant, filed as Exhibit 3(b), are incorporated herein by reference. 4(c) Rights Agreement dated as of April 10, 1989, between Registrant and Citizens and Southern Trust Company (Georgia), N.A., as Rights Agent. [Incorporated herein by reference to Exhibit 1 to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 1989 (File No. 1-6853).] 10(a) Reserved 10(b)* Deferred Compensation Plan and form of Deferred Compensation Agreement of Registrant as adopted in April, 1980. [Incorporated herein by reference to the Registrant's July 2, 1994 Form 10-K filed with the Securities and Exchange Commission (File No. 1-6853).] 10(c), 10(d), 10(e) and 10(f) Reserved 10(g)Credit Agreement dated March 26, 1997, between Registrant and Nationsbank of Georgia, National Association, regarding a $900,000,000 revolving credit facility. [Incorporated herein by reference to the Registrant's December 31, 1994 Form 10-K filed with the Securities and Exchange Commission (File No. 1-6853).] 10(h)* 1987 Incentive Stock Option Plan of the Registrant. [Incorporated herein by reference to Exhibit A to Registrant's 1987 Proxy Statement, dated September 22, 1987 (File No. 1-6853).] 10(i) Reserved 10(j)* 1989 Discounted Stock Option Plan of the Registrant. [Incorporated herein by reference to Exhibit A to Registrant's 1989 Proxy Statement, dated September 21, 1989 (File No. 1-6853).] 10(k)* 1992 Incentive Stock Option Plan of the Registrant. [Incorporated herein by reference to Exhibit A to Registrant's 1992 Proxy (File No. 1-6853).] Statement, dated September 18, 1992 (File No.1-6853).] 13 Items Incorporated by Reference from the 1997 Annual Report to Shareholders. 21 List of Subsidiaries. 23 Consent of independent public accountants. 27 Financial Data Schedule. *Compensatory plan or management contract required to be filed as an exhibit to Item 14 (c) of Form 10-K. Shareholders may obtain copies of Exhibits without charge upon written request to the Corporate Secretary, Shaw Industries, Inc., Mail drop 061-18, P.O. Drawer 2128, Dalton, Georgia 30722-2128. (b) No reports on Form 8-K were filed during the last quarter of fiscal 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SHAW INDUSTRIES, INC. Date: March 31, 1998 By:/s/ ROBERT E. SHAW ------------------ Robert E. Shaw Chairman, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 31, 1998 /s/ ROBERT E. SHAW ------------------ Robert E. Shaw Chairman, Chief Executive Officer and Director (Principal Executive Officer) Date: March 31, 1998 /s/ KENNETH G. JACKSON ---------------------- Kenneth G. Jackson Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 31, 1998 /s/ J. C. SHAW -------------- J.C. Shaw Chairman Emeritus and Director Date: March 31, 1998 /s/ W. NORRIS LITTLE -------------------- W. Norris Little President and Chief Operating Officer and Director Date: March 31, 1998 /s/ WILLIAM C. LUSK, JR. ----------------------- William C. Lusk, Jr. Director Date: March 31, 1998 /s/ ROBERT R. HARLIN -------------------- Robert R. Harlin Director Date: March 31, 1998 /s/ THOMAS G. COUSINS --------------------- Thomas G. Cousins Director Date: March 31, 1998 /s/ TUCKER GRIGG ---------------- S. Tucker Grigg Director Date: March 31, 1998 /s/ ROBERT J. LUNN ------------------ Robert J. Lunn Director Date: March 31, 1998 /s/ J. HICKS LANIER ------------------- J. Hicks Lanier Director Date: March 31, 1998 /s/ R. JULIAN McCAMY -------------------- R. Julian McCamy Director REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders of Shaw Industries, Inc.: We have audited in accordance with generally accepted auditing standards the financial statements of SHAW INDUSTRIES, INC. included in the Annual Report to Shareholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 20, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia February 20, 1998
SCHEDULE II SHAW INDUSTRIES, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 $ in thousands Additions Balance at Charged to Beginning Costs and Balance at of Year Expenses Deductions End of Year ---------- ---------- ------------ ----------- YEAR ENDED DECEMBER 30, 1995: Allowance for doubtful accounts and discounts ......................... $ 17,925 $ 110,541 $ 113,720 * $ 14,746 ========== ========== ============ ========== YEAR ENDED DECEMBER 28, 1996: Allowance for doubtful accounts and discounts ......................... $ 14,746 $ 108,610 $ 106,689 $ 16,667 ========== ========== ============ ========== YEAR ENDED JANUARY 3, 1998: Allowance for doubtful accounts and discounts ......................... $ 16,667 $ 117,271 $ 117,655 $ 16,283 ========== ========== ============ ==========
* Deductions for December 30, 1995 include $1,018,000 related to the deconsolidation of the Terza Joint Venture. EX-13 2 EXHIBIT 13, 1997 FORM 10-K
Ten-Year Financial Review (Dollars in 000s except share data) 1997 1996 1995 1994 1993 =================================================================================== Net Sales .................................... $ 3,575,774 $ 3,201,554 $ 2,869,828 $ 2,788,527 $ 2,476,282 Cost of Sales ................................ 2,680,472 2,485,068 2,319,894 2,187,439 1,963,206 Selling, General and Administrative Expenses ................................... 722,590 541,338 393,868 366,189 301,790 Pre-opening Expenses, Retail Operations ...... 3,953 13,595 -- -- -- Charge to Record Store Closing Costs ......... 36,787 -- -- -- -- Nonrecurring Charges ......................... -- 29,139 6,967 -- -- Write-down of U.K. Assets .................... 47,952 -- -- -- -- Restructuring Costs .......................... -- 19,963 -- -- -- Interest, Net ................................ 60,769 42,442 41,901 30,022 24,107 Other Expense (Income), Net .................. (7,032) (3,609) 443 (4,922) (2,530) Income Before Income Taxes, Equity in Income of Joint Venture, Extraordinary Item and Accounting Change ..................... 30,283 73,618 106,755 209,799 189,709 As a Percentage of Net Sales ............ 0.8% 2.3% 3.7% 7.5% 7.7% Effective Tax Rate ........................... 18.4% 59.0% 40.8% 37.9% 38.0% Income Before Equity in Income of Joint Venture, Extraordinary Item and Accounting Change .................................... 24,697 30,155 63,152 130,389 117,636 Equity in Income of Joint Venture ............ 4,262 3,868 1,229 -- -- Extraordinary Item ........................... -- -- -- (3,363) -- Accounting Change ............................ -- -- (12,077) -- -- Net Income ................................... 28,959 34,023 52,304 127,026 117,636 As a Percentage of Net Sales ............... 0.8% 1.1% 1.8% 4.6% 4.8% As a Percentage of Average Total Assets .... 1.5% 1.9% 3.1% 8.1% 8.8% As a Percentage of Average Invested Capital 1.9% 2.4% 3.9% 10.7% 12.1% As a Percentage of Average Shareholders' Investment ................ 4.4% 4.9% 7.4% 17.7% 17.5% Earnings Per Share: Basic ..................................... 0.22 0.25 0.38 0.90 0.82 Diluted ................................... 0.22 0.25 0.38 0.89 0.81 Cash Dividends Per Share ..................... 0.30 0.30 0.30 0.22 0.18 Property Additions (including acquisitions) .. 106,728 177,062 93,805 187,045 174,635 Depreciation and Amortization ................ 94,954 90,906 91,083 84,898 82,416 Weighted Average Shares Outstanding: Basic ..................................... 133,523,380 135,731,360 135,872,432 141,431,607 142,946,223 Diluted ................................... 133,714,496 135,915,308 136,378,159 142,483,067 144,922,741 At Year-End: Working Capital ........................... 740,959 670,344 641,445 617,338 437,445 Current Ratio ............................. 3.3 2.6 3.5 3.0 2.2 Property, Plant and Equipment, Net ........ 624,379 655,141 631,990 656,178 551,873 Total Assets .............................. 1,967,614 1,984,398 1,662,783 1,697,378 1,454,266 Total Long-Term Debt ...................... 930,424 825,280 627,130 612,061 317,914 Shareholders' Investment .................. 637,534 671,711 710,189 713,025 723,830 Total Invested Capital* ................... 1,567,958 1,496,991 1,337,319 1,325,086 1,041,744 Shareholders' Investment Per Share ........ $ 4.86 $ 5.06 $ 5.22 $ 5.20 $ 5.04
1992 1991 1990 1989 1988 =================================================================================== Net Sales .................................... $ 2,035,962 $ 1,618,923 $ 1,658,771 $ 1,266,142 $ 1,120,163 Cost of Sales ................................ 1,641,404 1,341,312 1,348,808 1,017,084 905,305 Selling, General and Administrative Expenses ................................... 240,192 188,363 179,381 138,708 126,500 Pre-opening Expenses, Retail Operations ...... -- -- -- -- -- Charge to Record Store Closing Costs ......... -- -- -- -- -- Nonrecurring Charges ......................... -- -- -- -- -- Write-down of U.K. Assets .................... -- -- -- -- -- Restructuring Costs .......................... -- -- -- -- -- Interest, Net ................................ 26,083 30,973 35,026 20,828 23,776 Other Expense (Income), Net .................. 324 (74) (483) (640) (145) Income Before Income Taxes, Equity in Income of Joint Venture, Extraordinary Item and Accounting Change ..................... 127,959 58,349 96,039 90,162 64,727 As a Percentage of Net Sales ............ 6.3% 3.6% 5.8% 7.1% 5.8% Effective Tax Rate ........................... 38.5% 38.3% 38.0% 38.4% 37.8% Income Before Equity in Income of Joint Venture, Extraordinary Item and Accounting Change .................................... 78,695 35,985 59,515 55,567 40,285 Equity in Income of Joint Venture ............ -- -- -- -- -- Extraordinary Item ........................... -- -- -- -- -- Accounting Change ............................ -- -- -- -- -- Net Income ................................... 78,695 35,985 59,515 55,567 40,285 As a Percentage of Net Sales ............... 3.9% 2.2% 3.6% 4.4% 3.6% As a Percentage of Average Total Assets .... 7.7% 4.5% 8.0% 9.4% 8.1% As a Percentage of Average Invested Capital 10.5% 6.2% 11.1% 12.7% 10.7% As a Percentage of Average Shareholders' Investment ................ 16.1% 12.8% 29.1% 29.4% 25.4% Earnings Per Share: Basic ..................................... 0.61 0.32 0.51 0.46 0.33 Diluted ................................... 0.59 0.31 0.49 0.45 0.32 Cash Dividends Per Share ..................... 0.15 0.125 0.125 0.10 0.083 Property Additions (including acquisitions) .. 191,830 48,230 116,739 144,308 30,362 Depreciation and Amortization ................ 67,414 62,075 60,734 38,600 41,866 Weighted Average Shares Outstanding: Basic ..................................... 129,742,222 111,850,981 117,330,116 120,084,604 123,377,560 Diluted ................................... 132,422,292 115,260,162 120,616,219 122,533,553 123,983,538 At Year-End: Working Capital ........................... 448,089 290,305 260,644 224,443 199,458 Current Ratio ............................. 2.6 2.5 2.4 2.3 3.0 Property, Plant and Equipment, Net ........ 453,276 344,182 341,266 293,030 192,194 Total Assets .............................. 1,223,439 816,874 790,935 690,202 496,374 Total Long-Term Debt ...................... 281,742 235,424 376,499 292,763 205,775 Shareholders' Investment .................. 619,977 358,643 201,667 207,434 170,309 Total Invested Capital* ................... 901,719 594,067 578,166 500,197 376,084 Shareholders' Investment Per Share ........ $ 4.38 $ 2.89 $ 1.87 $ 1.73 $ 1.39 *The sum of shareholders' investment and long-term debt. NOTE:All share data have been adjusted for two-for-one stock splits effected in the form of stock dividends in December 1993, March 1992 and May 1989.
EXHIBIT 13, PAGE 1 Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company's business, as well as the U.S. carpet industry in general, is cyclical in nature and is significantly affected by general economic conditions. The level of domestic carpet sales tends to reflect fluctuations in consumer spending for durable goods and, to a lesser extent, fluctuations in interest rates and new housing starts. The Company's international operations are also impacted by the economic climates in the markets in which they operate (primarily the United Kingdom, Australia and Mexico). During 1997, the Company acquired additional residential retailers and commercial contractors including The Carpet Exchange, Baker Brothers, Carpet Factory Outlet, Vulcan Floors, Inc., Morton Floors, Inc. and others for cash and common stock totaling $53.9 million and resulting in goodwill of $38.8 million which is being amortized over 20 years. In addition, the Company opened 28 residential retail stores in 1997 and incurred pre-opening expenses of $3,953,000. In the fourth quarter of 1997, the Company announced a plan to close approximately 100 residential retail store locations which had combined net sales of $90 million but contributed negatively to the Company's profitability. Net sales for the Company's retail and commercial contract business totaled $949.1 million in 1997 compared to $499.2 million in 1996. At January 3, 1998, the Company had approximately 450 retail and commercial contract locations throughout the United States, including the residential retail stores scheduled to close. The Company believes that by combining the resources of the manufacturer and retailer and developing a commercial contract distribution network, it can provide a full range of products and services to more effectively meet the needs of the end user of both residential and commercial carpet products at significantly improved margins. As part of this strategy, the Company continues its efforts to develop an alignment program with dealers of both residential and commercial carpet products to provide a collection of services, benefits and programs that will encourage dealers to increase their purchases from the Company. At January 3, 1998, the Company had approximately 1,500 aligned dealers. Liquidity and Capital Resources At January 3, 1998, the Company had working capital of $741.0 million, an increase of $70.7 million over working capital of $670.3 million at December 28, 1996. Cash and cash equivalents decreased $6.0 million to $43.6 million at January 3, 1998 from $49.6 million at December 28, 1996. The Company's operations generated cash flow of $139.3 million in 1997, principally from net income of $29.0 million adjusted for depreciation and amortization of $95.0 million, a charge to record store closing costs of $36.8 million, a write-down of U.K. assets of $48.0 million and decreases in accounts receivable and inventories of $74.3 million, offset in part by decreases in accounts payable and accrued liabilities of $95.7 million. The Company's operations provided cash flow in 1996 of $166.3 million, principally from net income of $34.0 million adjusted for depreciation and amortization of $90.9 million and nonrecurring charges of $29.1 million and restructuring costs of $20.0 million. In 1997, the Company invested cash in additions to property, plant and equipment of $78.0 million, net of retirements of $31.9 million and acquisitions of business assets of $28.7 million compared to additions of $106.8 million, net of retirements of $2.6 million, and acquisitions of $70.2 million in 1996. The Company expended cash in financing activities during 1997 for payments on notes payable of $39.4 million, cash dividends of $40.0 million and repurchases of 3,820,000 shares of common stock for $46.1 million, funded in part by an increase in long-term debt of $330.0 million, offset by payments of debt of $243.6 million. In 1996, financing activities provided cash flow through an increase in long-term debt of $231.6 million, offset by payments on debt of $75.0 million, cash dividends of $40.8 million and repurchases of 7,676,800 shares of common stock for $87.8 million. The Company has continued to maintain a strong working capital position. Effective use of capital and the Company's ability to generate cash flow from operations have enabled it to invest in technologies which reduce production costs, generate operating margins that have historically exceeded industry averages, implement its retail strategy and fund repurchases of common stock. Capital expenditures for property, plant and equipment necessary to upgrade and maintain the Company's facilities in a modern state-of-the-art condition were $109.9 million. Management anticipates total capital expenditures and capitalized lease obligations of approximately $50 million in 1998 to expand and upgrade its manufacturing and distribution equipment to meet anticipated increases in sales volume, to improve efficiency and to upgrade its current retail operations. In January 1998, the Company announced no further cash dividends would be paid in fiscal 1998 subsequent to the quarterly dividend on February 27, 1998 to shareholders of record on February 16, 1998. On February 9, 1998, the Company commenced a "dutch auction" tender offer to acquire up to approximately 10,600,000 shares of its common stock, representing approximately 8.1 percent of its currently outstanding shares. Under the terms of the offer, the Company's shareholders may tender their shares at a price within a range of $11.00 to $14.00 per share for a period of 20 business days. The Company's primary source of financing is an unsecured revolving credit facility with a banking syndicate, which provides for borrowings of up to $950.0 million and expires in March 2002. Interest on borrowings under this facility is currently based on LIBOR and was 6.41 percent at January 3, 1998. At January 3, 1998, borrowings outstanding under this credit facility were $774.0 million. During 1997, the Company amended its interest rate swap agreements with notional amounts totaling $300.0 million whereby the Company agreed to pay interest at a fixed rate of 5.95 percent. As a result, the interest on approximately one-third of the Company's unsecured revolving credit facility has been fixed. The interest rate swap agreements expire in 2000. The Company does not use interest rate swap agreements or any other derivatives for speculative trading purposes. In February 1998, the Company received commitments from a group of financial institutions for a new $1.0 billion unsecured revolving credit facility which will replace the facility outstanding at January 3, 1998 and provide for borrowings to fund stock repurchases under the "dutch auction" tender offer. The terms and interest rates of the new facility are expected to be comparable to the current facility. The Company has a multicurrency credit facility in the United Kingdom with a banking syndicate which provides for borrowings up to $131.3 million and expires in 2001. Interest on borrowings under this facility is based on LIBOR and approximated 8.28 percent at January 3, 1998. Borrowings outstanding under this credit facility were $80.0 million at January 3, 1998. The Company expects to terminate this facility upon consummation of the disposal of the U.K. operations discussed below. In addition, the Company maintains a revolving credit facility in Australia of $57.9 million with $46.2 million outstanding and $11.7 million available at January 3, 1998. The Company believes that available borrowings under its existing and committed credit agreements, available cash and internally generated funds will be sufficient to support its working capital, capital expenditures, stock repurchases and debt service requirements for the foreseeable future. In addition, the Company believes it could further expand its revolving credit and long-term bank facilities, if necessary. EXHIBIT 13, PAGE 2 Inflation The Company's manufacturing costs and operating expenses are affected by price changes. The costs of fiber and other raw materials decreased approximately 3 percent in 1997 after having increased slightly in 1996 and 1995. The Company has historically mitigated inflationary effects by passing price changes along to its customers and by continually developing and implementing more cost effective manufacturing and other operational procedures. The Company's ongoing ability to mitigate the effect of price changes will depend on market factors. Year 2000 Compliance The Company has assessed the impact of the year 2000 on its reporting systems and operations. The Company believes its plans, which are expected to be fully implemented by the end of 1998, will adequately resolve year 2000 compliance issues and will result in an immaterial impact on the Company's results of operations. Results of Operations 1997 Compared to 1996 Net sales increased $374.2 million, or 11.7 percent, to $3,575.8 million in 1997. The increase was primarily attributable to incremental net sales of $449.9 million related to the residential retail and commercial contract business, offset by slight declines in net sales prices and volumes for the Company's wholesale manufacturing operations in both the domestic and international markets. Gross margin as a percent of net sales increased 2.6 percent to 25.0 percent for 1997, compared to 22.4 percent for 1996, primarily due to the incremental impact of the Company's residential retail and commercial contract business and higher margins for the wholesale manufacturing operations in both the domestic and international markets. Domestic and international wholesale manufacturing margins improved .8 percent and 11.1 percent, respectively, in 1997 compared to 1996 primarily due to improved sales product mix and lower raw material costs. Selling, general and administrative expenses for 1997 were $722.6 million, or 20.2 percent of net sales, compared to $541.3 million, or 16.9 percent of net sales, in 1996. The increase of $181.3 million, or 3.3 percent of net sales, was primarily due to increased advertising and other selling and administrative expenses associated with the Company's continued expansion into the residential retail and commercial contract business. Pre-opening expenses related to the retail operations totaled $4.0 million in 1997 compared to $13.6 million in 1996. Interest expense, net, increased to $60.8 million in 1997 from $42.4 million in 1996 as a result of higher borrowings and an overall increase in interest rates. Results for 1997 include a charge to record residential retail store closing costs of $36.8 million ($23.3 million, net of tax benefit, or $.17 per share) and a reduction in the carrying value of the assets of Carpets International, Plc (U.K.) of $48.0 million ($20.3 million, net of tax benefit, or $.15 per share). Net income before these charges was $72.1 million, or $.54 per share, compared to 1996 net income of $84.7 million, or $.62 per share, before nonrecurring charges of $29.1 million ($26.5 million, net of tax benefit, or $.19 per share) and restructuring costs of $36.1 million ($24.2 million, net of tax benefit, or $.18 per share). Net income after the charge to record store closing costs and reduction in the carrying value of the assets in the U.K. was $29.0 million, or $.22 per share, in 1997 compared to net income of $34.0 million, or $.25 per share, after nonrecurring charges and restructuring costs in 1996. The effective income tax rate for 1997 was 18.4 percent, compared to 59.0 percent in 1996, as a result of lower taxable income created by the tax benefit related to the reduction in the carrying value of the U.K. assets. 1996 Compared to 1995 Net sales increased $331.8 million, or 11.5 percent, to $3,201.6 million in 1996. The increase was primarily attributable to incremental net sales of $498.6 million related to the residential retail and commercial contract business, offset by declines in net sales prices and volumes for the Company's wholesale manufacturing operations in both the domestic and international markets. Gross margin as a percent of net sales increased 3.2 percent to 22.4 percent for 1996, compared to 19.2 percent for 1995, primarily due to higher margins for retail sales, offset in part by slightly higher raw material costs. Domestic and international wholesale manufacturing margins improved 1.5 percent and 1.9 percent, respectively, in 1996 compared to 1995 primarily due to improved sales product mix and increases in the efficiency relationships of volume and fixed costs which outweighed slightly higher raw material costs. Selling, general and administrative expenses for 1996 were $541.3 million, or 16.9 percent of net sales, compared to $393.9 million, or 13.7 percent of net sales, in 1995. The increase of $147.4 million, or 3.2 percent of net sales, was primarily due to increased advertising and other selling and administrative expenses associated with the Company's entrance into the residential retail and commercial contract business. Pre-opening expenses related to the retail operations totaled $13.6 million in 1996. Interest expense, net, increased to $42.4 million in 1996 from $41.9 million in 1995 as a result of higher borrowings, offset in part by an overall reduction in interest rates. Results for 1996 included nonrecurring charges of $29.1 million ($26.5 million net of tax benefit, or $.19 per share) for the reduction in the carrying value of certain goodwill, property, plant and equipment at its international operations and a provision for the disposal of certain other assets, and restructuring costs of $36.1 million ($24.2 million net of tax benefit, or $.18 per share) related to woolen and Axminster production in the United Kingdom, of which $16.1 million was charged to cost of sales. Net income before nonrecurring charges and restructuring costs was $84.7 million, or $.62 per share, compared to $68.7 million, or $.50 per share, in 1995. Net income after nonrecurring charges and restructuring costs was $34.0 million, or $.25 per share, in 1996 compared to net income of $52.3 million, or $.38 per share, in 1995, after recording a change in accounting for samples and plant shutdown costs of $16.4 million, or $.12 per share in 1995. The effective income tax rate for 1996 was 59.0 percent, compared to 40.8 percent in 1995, as a result of lower taxable income and increases in permanent tax differences primarily as a result of nondeductible goodwill included in the nonrecurring charges. EXHIBIT 13, PAGE 3 Charge to Record Store Closing Costs and Write-Down of U.K. Assets In December 1997, the Company announced a plan to close approximately 100 residential retail stores which resulted in a charge of $36.4 million ($22.8 million, net of tax benefit, or $.17 per share) consisting primarily of reductions in the carrying value of long-lived assets of approximately $13,430,000 and reserves for exit costs and employee termination benefits of approximately $17,440,000 and $5,530,000, respectively. Prior to this charge, the Company recorded store closing costs of $.4 million ($.3 million, net of tax benefit) in 1997 which had no effect on earnings per share. In December 1997, the Company entered into an agreement in principle to dispose of Carpets International, Plc (the Company's wholly owned U.K. subsidiary) and as a result of this agreement, recorded a reduction in the carrying value of certain U.K. assets of $48.0 million ($20.3 million, net of tax benefit, or $.15 per share) in 1997. Foreign Operations The Company's primary foreign operations are conducted through its United Kingdom and Australian subsidiaries, where the functional currencies are British pounds and Australian dollars, respectively. Fluctuations in the value of foreign currencies create exposures which can impact the Company's operating results. The Company may employ foreign currency forward exchange contracts when, in the normal course of business, they are determined to effectively manage and reduce such exposure. The Company does not enter into foreign currency forward exchange contracts for speculative trading purposes. EXHIBIT 13, PAGE 4
Consolidated Statements of Income For Years Ended January 3, 1998, December 28, 1996 and December 30, 1995 1997 1996 1995 ---------------- ---------------- ---------------- Net Sales ................................................ $3,575,774,000 $ 3,201,554,000 $ 2,869,828,000 Costs and Expenses: Cost of sales ........................................ 2,680,472,000 2,485,068,000 2,319,894,000 Selling, general and administrative .................. 722,590,000 541,338,000 393,868,000 Pre-opening expenses ................................. 3,953,000 13,595,000 -- Charge to record store closing costs ................. 36,787,000 -- -- Restructuring costs .................................. -- 19,963,000 -- Write-down of U.K. assets ............................ 47,952,000 -- -- Nonrecurring charges ................................. -- 29,139,000 6,967,000 Interest, net ........................................ 60,769,000 42,442,000 41,901,000 Other (income) expense, net .......................... (7,032,000) (3,609,000) 443,000 ---------------- ---------------- ---------------- Income Before Income Taxes ............................... 30,283,000 73,618,000 106,755,000 Provision for Income Taxes ............................... 5,586,000 43,463,000 43,603,000 ---------------- ---------------- ---------------- Income Before Equity in Income of Joint Venture, and Accounting Change ................................... 24,697,000 30,155,000 63,152,000 Equity in Income of Joint Venture ........................ 4,262,000 3,868,000 1,229,000 ---------------- ---------------- ---------------- Income Before Accounting Change .......................... 28,959,000 34,023,000 64,381,000 Cumulative Effect of Accounting Change, net of tax benefit -- -- (12,077,000) ---------------- ---------------- ---------------- Net Income ............................................... $ 28,959,000 $ 34,023,000 $ 52,304,000 ================ ================ ================ Earnings Per Common Share (Basic and Diluted): Before Accounting Change ............................ $ 0.22 $ 0.25 $ 0.47 Cumulative Effect of Accounting Change .............. -- -- (0.09) ---------------- ---------------- ---------------- Net Income .......................................... $ 0.22 $ 0.25 $ 0.38 ================ ================ ================ Weighted Average Shares Outstanding: Basic ............................................... 133,523,380 135,731,360 135,872,432 Diluted ............................................. 133,714,496 135,915,308 136,378,159 The accompanying notes are an integral part of these consolidated financial statements.
EXHIBIT 13, PAGE 5
Consolidated Balance Sheets January 3, 1998 and December 28, 1996 1997 1996 --------------- --------------- Assets Current Assets: Cash and cash equivalents .................................. $ 43,571,000 $ 49,581,000 --------------- --------------- Accounts receivable, less allowance for doubtful accounts and discounts of $16,283,000 in 1997 and ................ $16,667,000 in 1996 ..................................... 374,516,000 393,983,000 --------------- --------------- Inventories- Raw materials ............................................ 235,820,000 251,262,000 Work-in-process .......................................... 23,584,000 26,070,000 Finished goods ........................................... 270,655,000 279,453,000 --------------- --------------- 530,059,000 556,785,000 --------------- --------------- Other current assets ....................................... 118,267,000 81,056,000 --------------- --------------- Total current assets ..................................... 1,066,413,000 1,081,405,000 --------------- --------------- Property, Plant and Equipment, at cost: Land and land improvements ................................. 27,827,000 29,584,000 Buildings and leasehold improvements ....................... 299,090,000 293,072,000 Machinery and equipment .................................... 987,561,000 969,601,000 Construction in progress ................................... 69,345,000 45,289,000 --------------- --------------- 1,383,823,000 1,337,546,000 Less-Accumulated depreciation and amortization ............. 759,444,000 682,405,000 --------------- --------------- 624,379,000 655,141,000 --------------- --------------- Goodwill, net of amortization .................................. 236,209,000 212,398,000 --------------- --------------- Investment in Joint Venture .................................... 21,269,000 18,302,000 --------------- --------------- Other Assets ................................................... 19,344,000 17,152,000 --------------- --------------- Total Assets ............................................. $1,967,614,000 $1,984,398,000 =============== ===============
EXHIBIT 13, PAGE 6
1997 1996 --------------- --------------- Liabilities and Shareholders' Investment Current Liabilities: Notes payable .............................................. $ 10,000 $ 35,084,000 Current maturities of long-term debt ....................... 2,752,000 17,431,000 Accounts payable ........................................... 161,964,000 195,347,000 Accrued liabilities ........................................ 160,728,000 163,199,000 --------------- --------------- Total current liabilities ................................ 325,454,000 411,061,000 --------------- --------------- Long-Term Debt, less current maturities ........................ 930,424,000 825,280,000 --------------- --------------- Deferred Income Taxes .......................................... 61,689,000 63,453,000 --------------- --------------- Other Liabilities .............................................. 12,513,000 12,893,000 --------------- --------------- Commitments and Contingencies Shareholders' Investment: Preferred stock, 250,000 shares authorized, no shares issued -- -- Common stock, no par, $1.11 stated value, authorized 500,000,000 shares; issued and outstanding: 131,118,065 shares at January 3, 1998 and 132,772,548 shares at December 28, 1996 145,542,000 147,379,000 Paid-in capital ............................................ 54,745,000 72,335,000 Cumulative translation adjustment .......................... (620,000) 3,058,000 Retained earnings .......................................... 437,867,000 448,939,000 --------------- --------------- Total shareholders' investment ........................... 637,534,000 671,711,000 --------------- --------------- Total Liabilities and Shareholders' Investment ........... $1,967,614,000 $1,984,398,000 =============== =============== The accompanying notes are an integral part of these consolidated financial statements.
EXHIBIT 13, PAGE 7
Consolidated Statements of Shareholders' Investment For Years Ended January 3, 1998, December 28, 1996 and December 30, 1995 Cumulative Common Stock Paid-In Translation Retained Shares Amount Capital Adjustment Earnings - ---------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 ... 137,017,402 $ 152,090,000 $ 118,635,000 $(1,815,000) $ 444,115,000 Net income ............... -- -- -- -- 52,304,000 Purchase and retirement of common stock ............ (1,384,200) (1,537,000) (19,053,000) -- -- Exercise of stock options 323,400 360,000 2,136,000 -- -- Cumulative translation adjustment ................. -- -- -- 3,710,000 -- Cash dividends paid ($.30 per share) ........... -- -- -- -- (40,756,000) - ---------------------------------------------------------------------------------------------------------------- Balance, December 30, 1995 ... 135,956,602 150,913,000 101,718,000 1,895,000 455,663,000 Net income ............... -- -- -- -- 34,023,000 Issuance of stock in acquisitions ............... 4,379,646 4,862,000 49,207,000 -- Purchase and retirement of common stock ............ (7,676,800) (8,521,000) (79,275,000) -- -- Exercise of stock options 113,100 125,000 685,000 -- -- Cumulative translation adjustment ................. -- -- -- 1,163,000 -- Cash dividends paid ($.30 per share) ........... -- -- -- -- (40,747,000) - ---------------------------------------------------------------------------------------------------------------- Balance, December 28, 1996 ... 132,772,548 147,379,000 72,335,000 3,058,000 448,939,000 Net income ............... -- -- -- -- 28,959,000 Issuance of stock in acquisitions ............... 2,112,517 2,344,000 23,336,000 -- -- Issuance of stock to directors .................. 7,000 8,000 83,000 -- -- Purchase and retirement of common stock ............ (3,820,000) (4,240,000) (41,822,000) -- -- Exercise of stock options 46,000 51,000 504,000 -- -- Tax benefit on disposition of stock options ........... -- -- 309,000 -- -- Cumulative translation adjustment .................. -- -- -- (3,678,000) -- Cash dividends paid ($.30 per share) ........... -- -- -- -- (40,031,000) - ---------------------------------------------------------------------------------------------------------------- Balance, January 3, 1998 ..... 131,118,065 $ 145,542,000 $ 54,745,000 $ (620,000) $ 437,867,000 ================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. EXHIBIT 13, PAGE 8
Consolidated Statements of Cash Flow For Years Ended January 3, 1998, December 28, 1996 and December 30, 1995 1997 1996 1995 -------------- -------------- -------------- Operating Activities: Net Income ........................................................ $ 28,959,000 $ 34,023,000 $ 52,304,000 -------------- -------------- -------------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization ................................... 94,954,000 90,906,000 91,083,000 Provision for doubtful accounts ................................. 9,318,000 10,777,000 8,629,000 Deferred income taxes ........................................... (1,841,000) 12,120,000 5,028,000 Charge to record store closing costs ............................ 36,787,000 -- -- Nonrecurring charges ............................................ -- 29,139,000 -- Write-down of U.K. assets ....................................... 47,952,000 -- -- Restructuring costs ............................................. -- 19,963,000 -- Cumulative effect of accounting change .......................... -- -- 12,077,000 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ......................................... 35,166,000 1,937,000 (21,137,000) Inventories ................................................. 39,111,000 2,250,000 2,456,000 Accounts payable ............................................ (60,360,000) 22,427,000 (32,899,000) Accrued liabilities ......................................... (35,371,000) (16,703,000) 28,277,000 Other, net .................................................. (55,397,000) (40,560,000) 15,429,000 -------------- -------------- -------------- Total Adjustments ......................................... 110,319,000 132,256,000 108,943,000 -------------- -------------- -------------- Net Cash Provided by Operating Activities ................... 139,278,000 166,279,000 161,247,000 -------------- -------------- -------------- Investing Activities: Additions to property, plant and equipment ........................ (109,883,000) (109,454,000) (73,851,000) Retirements from property, plant and equipment, net ............... 31,882,000 2,606,000 6,594,000 Acquisitions of business assets ................................... (28,727,000) (70,214,000) (29,503,000) Investment in joint venture ....................................... -- -- (3,500,000) Deconsolidation of joint venture .................................. -- -- (3,828,000) -------------- -------------- -------------- Net Cash Used in Investing Activities ....................... (106,728,000) (177,062,000) (104,088,000) -------------- -------------- -------------- Financing Activities: Borrowings under revolving credit agreements ...................... 330,000,000 155,000,000 30,000,000 Repayment of revolving credit agreements .......................... (220,702,000) (75,000,000) (35,000,000) Borrowings on other long-term debt ................................ -- 76,644,000 3,779,000 Repayment of long-term debt ....................................... (22,937,000) -- -- Net payments on short-term debt ................................... (39,383,000) -- -- Purchase and retirement of common stock ........................... (46,062,000) (87,796,000) (20,590,000) Payment of cash dividends ......................................... (40,031,000) (40,747,000) (40,756,000) Proceeds from exercise of stock options ........................... 555,000 810,000 2,496,000 -------------- -------------- -------------- Net Cash (Used in) Provided by Financing Activities ................... (38,560,000) 28,911,000 (60,071,000) -------------- -------------- -------------- Cash and Cash Equivalents: Net change ........................................................ (6,010,000) 18,128,000 (2,912,000) Beginning of period ............................................... 49,581,000 31,453,000 34,365,000 -------------- -------------- -------------- End of period ..................................................... $ 43,571,000 $ 49,581,000 $ 31,453,000 ============== ============== ============== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for- Interest ........................................................ $ 66,223,000 $ 39,997,000 $ 41,751,000 Income taxes .................................................... $ 51,619,000 $ 63,696,000 $ 36,874,000 Noncash capital lease obligations ................................. $ -- $ 1,540,000 $ 3,450,000 Acquisition of business assets by assuming liabilities ............ $ 40,328,000 $ 121,670,000 $ -- The accompanying notes are an integral part of these consolidated financial statements.
EXHIBIT 13, PAGE 9 Notes to Consolidated Financial Statements January 3, 1998, December 28, 1996 and December 30, 1995 Note 1 Summary of Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Shaw Industries, Inc. and subsidiaries (the "Company"). All significant intercompany balances and transactions are eliminated in consolidation. Nature of Business The Company manufactures and distributes carpet in a broad range of prices, patterns, colors and textures for residential and commercial use. The Company markets its products through wholesale distribution channels to floor covering retailers, distributors and contractors throughout the United States, Canada, Australia, Mexico and the United Kingdom and through residential retail and commercial contract distribution channels to various residential and commercial end users in the United States. The Company also distributes hard surface floor covering products through its retail distribution channels. Fiscal Period The Company's fiscal year-end is the Saturday closest to December 31. Fiscal 1997 consisted of 53 weeks while fiscal years 1996 and 1995 consisted of 52 weeks. Use of Estimates 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. Revenue Recognition Revenues are recognized when goods are shipped for wholesale sales and generally as installed for residential retail and commercial contract sales. Cash and Cash Equivalents The Company considers all investments with an original maturity of three months or less to be cash equivalents. Accounts Receivable The Company accounts for receivables sold to a financial institution under its private label credit card financing program in accordance with Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Approximately $43,296,000 of accounts receivable sold under this program was outstanding at January 3, 1998. The Company has recorded approximately $3,816,000 of liability for recourse provisions under the financing program. Inventory Valuation Inventories are stated at the lower of cost or market. Cost includes materials, direct and indirect labor and factory overhead. Market with respect to raw materials is replacement cost and for work-in-process and finished goods is net realizable value. The Company uses the last-in, first-out (LIFO) method of valuing certain of its domestic inventories to more properly match current costs against current revenues, thereby reducing the effects of price changes on earnings. If LIFO inventories were valued at current costs, the inventory amounts would have been $11,707,000 and $1,643,000 lower than those reported at January 3, 1998 and December 28, 1996, respectively. Although current replacement cost for inventories was less than LIFO carrying value at January 3, 1998, the Company's management believes that the carrying value will be recovered through profit margins on future sales. The Company's foreign and certain of its finished goods inventories, representing approximately 28 percent of total inventories, are valued at the lower of first-in, first-out (FIFO) cost or market for 1997 and 1996. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Renewals and betterments are capitalized; maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of property retired or otherwise disposed of are removed from the accounts, and any gains or losses thereon are included in income. For financial reporting purposes, depreciation is computed using the straight-line method over the estimated useful lives of the assets, 15 to 39 years for buildings and 5 to 14 years for machinery and equipment. Leasehold improvements are amortized over the terms of the related leases. EXHIBIT 13, PAGE 10 Goodwill Costs in excess of the fair value of net assets of businesses acquired are recorded as goodwill and are amortized using the straight-line method over a period not to exceed 40 years for acquisitions of domestic and foreign manufacturing operations and 20 years for acquisitions of residential retail and commercial contract operations. The recoverability of goodwill is periodically reviewed by management based on current and anticipated conditions. The amount of goodwill considered realizable, however, could be reduced in the near term if changes occur in anticipated conditions. Accumulated amortization was $17,858,000, $11,485,000 and $6,210,000 at January 3, 1998, December 28, 1996 and December 30, 1995, respectively. Accrued Liabilities Accrued liabilities include $33,597,000 and $30,599,000 for workers' compensation claims and $25,446,000 and $32,918,000 for returns and allowances at January 3, 1998 and December 28, 1996, respectively. Employee Benefits The Company's Retirement Savings Plan provides, among other things, for voluntary contributions by domestic employees not to exceed 15 percent of their gross salaries and wages. The Company provides matching contributions of 25 to 50 percent based on the employee's contribution percentage. At January 3, 1998, $5,241,000, or 2.0% of the Plan's assets consisted of shares of the Company's common stock as elected by plan participants. During 1997, 1996 and 1995, the Company contributed $11,987,000, $9,960,000 and $9,356,000, respectively, under the plan. The Company has a Deferred Compensation Plan for key personnel. The plan provides, among other things, for certain deferred compensation to become payable on the employee's death, retirement or total disability as set forth in the plan. During 1997, 1996 and 1995, the Company provided $1,546,000, $2,008,000 and $1,425,000, respectively, under the plan. The actuarial present value of obligations of the plan has been recorded as other liabilities in the accompanying balance sheets. The Company has a defined benefit plan covering certain employees of its United Kingdom operations which provides for the payment of specific periodic payments upon retirement based on years of service. The projected benefit obligation was $80,400,000 and $64,800,000 as of January 3, 1998 and December 28, 1996, respectively, and the fair value of plan assets was $73,500,000 and $65,900,000 as of January 3, 1998 and December 28, 1996, respectively. Net pension cost recognized by the Company during 1997, 1996 and 1995 was $3,518,000, $3,800,000 and $3,595,000, respectively. Earnings Per Share The Company adopted SFAS No. 128, "Earnings per Share," effective January 3, 1998. Earnings per share have been computed based upon the weighted average shares and dilutive potential common shares outstanding during the year. All prior period earnings per share amounts have been restated to comply with SFAS No. 128. Foreign Currency Translation The financial statements of the Company's foreign subsidiaries are translated into United States currency in accordance with SFAS No. 52, "Foreign Currency Translation." Assets and liabilities are translated into United States dollars at period-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of shareholders' investment. Gains and losses which result from foreign currency transactions are included in the accompanying statements of income. Derivative Financial Instruments The Company uses interest rate swaps to fix interest rates on current and anticipated borrowings to reduce exposure to interest rate fluctuations. Under existing accounting literature, these interest rate swaps are accounted for as hedging activities. The net cash paid or received on interest rate hedges is included in interest expense. The Company may also employ foreign currency exchange contracts when, in the normal course of business, they are determined to effectively manage and reduce foreign currency exchange fluctuation risk. At January 3, 1998, the Company had no foreign currency exchange contracts outstanding. The Company does not enter into financial derivatives for speculative or trading purposes. Accounting Change Effective January 1, 1995, the Company changed its method of accounting for sample costs from expensing sample costs that exceed estimated net realizable value when shipped to expensing that portion of sample costs as they are produced. This change was made in recognition of an increasing number of samples placed with customers that do not result in future sales. The cumulative effect of the change was to decrease net income for the year ended December 30, 1995 by $12,077,000, or $.09 per share, net of tax benefit of $7,885,000. Reclassifications Certain prior year amounts have been reclassified to conform to the 1997 presentation. EXHIBIT 13, PAGE 11 Note 2 Long-Term Debt
Long-term debt presented in the accompanying consolidated balance sheets at January 3, 1998 and December 28, 1996 consisted of the following (000s omitted): 1997 1996 - --------------------------------------------------------------------------------- ---------- ---------- Revolving credit facility, United States, at LIBOR-based rate, due in fiscal 2002 $ 774,000 $ 599,000 Revolving multi-currency credit facility, United Kingdom, at LIBOR-based rate, due in fiscal 2001 ....................... 80,033 128,294 Revolving loan facility, Australia, at LIBOR-based rate, due in fiscal 1999 ..... 46,207 63,648 Other ........................................................................... 25,281 40,029 Capitalized leases .............................................................. 7,655 11,740 - --------------------------------------------------------------------------------- ---------- ---------- 933,176 842,711 Less: current maturities ........................................................ (2,752) (17,431) - --------------------------------------------------------------------------------- ---------- ---------- $ 930,424 $ 825,280 ================================================================================= ========== ==========
The domestic revolving credit facility which was amended in March 1997 provides for borrowings of up to $950,000,000. Borrowings bear interest at variable rates equal to the London Interbank Offered Rate (LIBOR) plus margins ranging from 0.150 percent to 0.475 percent, depending on the Company's consolidated funded debt to earnings ratio, as defined. The LIBOR-based rate at January 3, 1998 was 6.41 percent. Fees associated with the domestic revolving credit agreement include a facility fee on the committed amount ranging from 0.10 percent to 0.15 percent. The LIBOR-based variable interest rate on a total of $300,000,000 of the domestic revolving credit facility has been fixed through December 29, 2000 at 5.95 percent using interest rate swap agreements. The counterparty to these interest rate swap agreements has the right but not the obligation to terminate the agreements on December 31, 1999. The Company also has revolving loan facilities through which its foreign subsidiaries obtain funds necessary for operations including a multicurrency revolving credit facility in the United Kingdom which provides for borrowings up to $131.3 million. The borrowings bear interest at a LIBOR-based rate which was 8.28 percent at January 3, 1998. The repayment of these revolving loan facilities for its foreign subsidiaries is guaranteed by the Company. The amended domestic revolving credit agreement contains covenants which, among other provisions, (i) limit the Company's ability to incur indebtedness or assume liens, (ii) limit the payment of cash dividends and repurchases of common stock, (iii) limit new indebtedness and lease obligations and (iv) require the Company to satisfy certain ratios related to net worth, debt-to-equity and interest coverage. The foreign revolving loan facilities have covenants that are no more restrictive than those of the domestic revolving credit agreement. At January 3, 1998, the Company was out of compliance with certain of the financial ratios of these agreements for which it has obtained appropriate waivers. The aggregate annual maturities of long-term debt, including capitalized lease obligations, as of January 3, 1998 are as follows: 1998 - $2,752,000; 1999 - - $73,213,000; 2000 - $1,796,000; 2001 - $80,691,000; 2002 - $774,139,000; thereafter - $585,000. The following is presented with respect to the revolving credit facilities for 1997 and 1996 (000s omitted): 1997 1996 Revolving Credit: - ---------------------------------------- ----------- ----------- Available at year-end .................. $1,132,850 $ 819,102 Unused at year-end ..................... 232,610 28,160 EXHIBIT 13, PAGE 12 Note 3 Shareholders' Investment Under the Company's 1987 and 1992 Incentive Stock Option Plans, 8 million and 6 million shares of common stock, respectively, are reserved for issuance at a price no less than the market value on the date granted. These options are exercisable over five to ten years. The following is a summary of stock option information for the 1987 and 1992 Incentive Stock Option Plans: 1997 1996 - ---------------------------------------------- ---------- ---------- Options outstanding, beginning of year ....... 5,465,200 4,300,100 Options granted .............................. 2,930,300 1,510,800 Options exercised ............................ (46,000) (113,100) Options canceled ............................. (296,000) (232,600) Options outstanding, end of year ............. 8,053,500 5,465,200 Option price per share range ................. $10.625-$17.02 $11.975-$17.02 Options exercisable, end of year ............. 4,543,900 2,456,800 Options available for grant .................. 508,700 3,143,000 - ---------------------------------------------- ---------- ---------- The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation was recognized in 1997, 1996 and 1995 for its incentive stock option plans. The Company applies SFAS No. 123, "Accounting for Stock-Based Compensation," as required for disclosure purposes. For SFAS No. 123 purposes, the fair value of each incentive stock option grant for 1997, 1996 and 1995 has been estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 6.04 percent, 6.64 percent and 6.21 percent; dividend yields of 2.70 percent, 2.29 percent and 1.80 percent; expected volatilities of 34 percent, 35 percent and 35 percent; and expected life of five years for all years. Using these assumptions, the fair value of the stock option grants for 1997, 1996 and 1995 was $9.3 million, or $3.63 per option granted, $8.9 million, or $4.82 per option granted, and $13.7 million, or $7.07 per option granted, respectively. Had compensation cost been determined under SFAS No. 123 utilizing the assumptions detailed above, the Company's net income and net income per common share would have been reduced to the following pro forma amounts: 1997 1996 1995 - -------------------------------------------------------------------------------- Net income (in thousands): As reported ................................ $ 28,959 $ 34,023 $ 52,304 Pro forma .................................. 23,382 30,080 51,694 Net income per common share (basic and diluted): As reported ................................ $ .22 $ .25 $ .38 Pro forma .................................. .18 .22 .38 - -------------------------------------------------------------------------------- During March 1989, the Company adopted a Shareholder Rights Plan and pursuant thereto declared a dividend of one Right for each outstanding share of common stock. When exercisable, each Right will entitle its holder to buy one one-hundredth of a share of Series A Participating Preferred Stock at a price of $12.50 per share (the "Purchase Price"). If a person or group acquires or makes a tender or exchange offer to acquire 20% or more of the Company's common stock without the consent of the Company (an "Acquiring Shareholder"), the Rights will become exercisable and each Right will entitle the holder, other than the Acquiring Shareholder, to receive, upon payment of the Purchase Price, in lieu of preferred stock, a number of shares of common stock of the Company having a market value equal to twice the Purchase Price. The Rights may be redeemed by the Company under certain circumstances at a price of $.01 per Right. The Rights have no voting power and, until exercised, no dilutive effect on net income per common share. If not previously redeemed, the Rights will expire in April 1999. The Company has designated 200,000 shares, of the 250,000 shares of preferred stock authorized, as Series A Participating Preferred Stock for issuance upon exercise of the Rights. The Company's board of directors approved a stock repurchase plan in 1996 whereby the Company's management is authorized to repurchase additional shares of the Company's common stock. For the year ended January 3, 1998, a total of 3,820,000 shares of the Company's common stock had been purchased and retired at a cost of $46,062,000. During the year ended December 28, 1996, a total of 7,676,800 shares were repurchased and retired at a cost of $87,796,000. At January 3, 1998, the Company has authority to repurchase up to 3,916,000 shares of the Company's common stock under the stock repurchase plan. In 1995, the Company's board of directors approved a dividend reinvestment plan whereby all holders of record of the Company's common stock are eligible to participate. The plan provides a method of investing cash dividends and optional cash payments in shares of the Company's common stock. All costs associated with administering the plan are paid by the Company. EXHIBIT 13, PAGE 13 Note 4 Income Taxes The provision for income taxes consisted of the following (000s omitted): 1997 1996 1995 - -------------------------------------------------------------------------------- Current: Federal ............................ $ (8,568) $ 51,429 $ 45,579 State ............................... (1,918) 7,824 6,907 - -------------------------------------------------------------------------------- (10,486) 59,253 52,486 Foreign operating loss carryforwards .... 17,860 (8,268) (10,688) Deferred ................................ (1,788) (7,522) 1,805 - -------------------------------------------------------------------------------- $ 5,586 $ 43,463 $ 43,603 ================================================================================
The differences between the federal statutory income tax rate and the Company's effective tax rate were as follows: 1997 1996 1995 - --------------------------------------------------------------------------------------- Federal statutory rate .................................... 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit ............ 4.9 4.6 4.4 Abandonment of stock of U.K. subsidiary ................... (28.1) -- -- Nondeductible goodwill .................................... 7.2 13.2 .8 Difference in foreign tax rates versus U.S. statutory rates 1.0 5.2 1.6 Other, net ................................................ (1.6) 1.0 (1.0) - --------------------------------------------------------------------------------------- 18.4% 59.0% 40.8% =======================================================================================
Components of the net deferred income tax liability at January 3, 1998 and December 28, 1996 are shown below (000s omitted): 1997 1996 - --------------------------------------------------------------------------------------- Deferred income tax assets: Accrued advertising expenses not currently deductible .... $ 2,705 $ 2,253 Reserve for cash discounts and bad debts ................. 5,793 5,179 Employee benefit accruals not currently deductible ....... 21,455 19,672 Reserve for returns and allowances ....................... 9,976 12,082 Foreign net operating loss carryforwards ................. 4,938 24,491 Reorganization provision ................................. 7,180 10,950 Other .................................................... 2,885 2,586 - --------------------------------------------------------------------------------------- 54,932 77,213 - --------------------------------------------------------------------------------------- Deferred income tax liabilities: Book basis of inventory over tax basis ................... (13,896) (10,708) Sample costs ............................................. (1,884) -- Book basis of property, plant and equipment over tax basis (58,619) (69,307) Other .................................................... (2,214) (1,114) - --------------------------------------------------------------------------------------- (76,613) (81,129) - --------------------------------------------------------------------------------------- $(21,681) $ (3,916) =======================================================================================
Income tax carryforwards of $17,860,000 were reversed at January 3, 1998 related to the abandonment of the stock of Carpets International, Plc in the United Kingdom and $1,693,000 was utilized in 1997. Realization of the remaining deferred tax benefit of $4,938,000 at January 3, 1998 is dependent on generating sufficient future taxable income at the related foreign operations. Although realization is not assured, management believes it is more likely than not that all of the remaining deferred tax asset is realizable; however, it could be reduced in the near term if estimates of future taxable income decreased. EXHIBIT 13, PAGE 14 Note 5 Commitments and Contingencies The Company is a party to several lawsuits incidental to its various activities and incurred in the ordinary course of business. The Company believes that it has meritorious claims and defenses in each case. After consultation with counsel, it is the opinion of management that, although there can be no assurance given, none of the associated claims, when resolved, will have a material adverse effect upon the Company. From time to time, the Company is subject to claims and suits arising in the course of its business. The Company is a defendant in certain litigation alleging personal injury resulting from personal exposure to volatile organic compounds found in carpet produced by the Company. The complaints seek injunctive relief and unspecified money damages on all claims. The Company has denied any liability. The Company believes that it has meritorious defenses and that the litigation will not have a material adverse effect on the Company's financial condition or results of operations. In June 1994, the Company and several other carpet manufacturers received a grand jury subpoena from the Antitrust Division of the United States Department of Justice relating to an investigation of the industry. In October, 1997, the Company received formal notification from the Department of Justice that the investigation has been closed. In December 1995, the Company learned that it was one of six carpet companies named as additional defendants in a pending antitrust suit filed in the United States District Court of Rome, Georgia. The amended complaint alleges price-fixing regarding certain types of carpet products in violation of Section 1 of the Sherman Act. The amount of damages sought is not specified. If any damages were to be awarded, they may be trebled under the applicable statute. The Company has filed an answer to the complaint that denies plantiffs' allegations and sets forth several defenses. In September 1997, the Court issued an order certifying a nationwide plaintiff class of persons and entities who purchase "mass production" polypropylene carpet directly from any of the defendants from June 1, 1991 through June 30, 1995, excluding, among others, any persons or entities whose only purchases were from any of the Company's retail establishments. Discovery began in November 1997. The Company is also a party to two consolidated lawsuits pending in the Superior Court of the State of California, City and County of San Francisco, both of INDUSTRIES, INC. #to Consolidated Financial Statements (continued) 5 Commitments and Contingencies (continued) which were brought on behalf of a purported class of indirect purchasers of carpet in the State of California and which seek damages for alleged violations of California antitrust and fair competition laws. The Company believes that it has meritorious defenses to plaintiffs' claims in the lawsuits described in this paragraph and intends to defend these actions vigorously. After consultation with counsel, it is the opinion of management that, although there can be no assurance given, none of the claims described in this paragraph, when resolved, will have a material adverse effect upon the Company. In February 1996, a jury in Greensboro, North Carolina, returned a verdict against the Company in litigation brought by four former employees of Salem Carpet Mills, acquired by the Company in 1992, alleging age discrimination and sex discrimination in employment decisions made with regard to such employees. The judgment is being appealed by both parties. The Company believes that the litigation will not have a material adverse effect on the Company's financial condition or results of operations. The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous materials used in its manufacturing processes. Failure by the Company to comply with present and future regulations could subject it to future liabilities. In addition, such regulations could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The Company is not involved in any material environmental proceedings. The Company has entered into several capitalized leases for machinery and equipment, including computer equipment, at a cost of $55,734,000 at January 3, 1998 and $61,746,000 at December 28, 1996. These assets are amortized on a straight-line basis over the lease terms and amortization is included in depreciation expense. Accumulated amortization of capital lease cost was $49,760,000 and $52,389,000 at January 3, 1998 and December 28, 1996, respectively. The related obligations are included in long-term debt (Note 2). The Company also leases warehouses and showroom space, customer service centers and certain equipment under operating leases.
At January 3, 1998, future minimum lease payments for all capital and operating leases exceeding one year were as follows (000s omitted): Capital Operating Total Future Leases Leases Payments - -------------------------------------------------------------------------------------- 1998 ............................................. $ 3,124 $ 65,391 $ 68,515 1999 ............................................. 2,704 57,762 60,466 2000 ............................................. 1,863 51,689 53,552 2001 ............................................. 639 42,691 43,330 2002 ............................................. 73 23,170 23,243 2003 and thereafter .............................. 160 54,449 54,609 - -------------------------------------------------------------------------------------- Total Payments ................................... 8,563 $295,152 $303,715 Less: amount representing interest ............... 908 ===================== - --------------------------------------------------- Present value of capitalized lease payments with a weighted average interest rate of 11.9% ..... $ 7,655 =============================================================
Rental payments under noncancelable operating leases were $74,718,000, $44,667,000 and $32,187,000 in 1997, 1996 and 1995, respectively. At January 3, 1998, the Company had commitments to purchase certain capital assets of approximately $30,400,000. EXHIBIT 13, PAGE 15 Note 6 Earnings Per Share Income before accounting change, cumulative effect of accounting change and net income amounts presented in the accompanying consolidated statements of income represent amounts available or related to shareholders.
The following table reconciles the denominator of the basic and diluted earnings per share computations: 1997 1996 1995 - ------------------------------------------------------------------------------------ Weighted average common shares .......... 133,523,380 135,731,360 135,872,432 Incremental shares from assumed conversions of options under 1987 and 1992 incentive stock option plans ... 191,116 183,948 505,727 - ------------------------------------------------------------------------------------ Weighted average common shares and dilutive potential common shares .... 133,714,496 135,915,308 136,378,159 - ------------------------------------------------------------------------------------
EXHIBIT 13, PAGE 16 Note 7 Derivative Financial Instruments and Fair Value of Financial Instruments The Company has entered into two interest rate swap agreements with a total notional amount of $300,000,000 to fix the interest rate paid on a portion of the domestic revolving credit facility. The fixed interest rate paid on the two interest rate swap agreements was 5.99 percent while the floating rate received in 1997 averaged 5.62 percent. The carrying amount and fair value of the Company's financial instruments are as follows (000s omitted): January 3, 1998 December 28, 1996 Carrying Fair Carrying Fair Amount Value Amount Value - -------------------------------------------------------------------------------- Debt: Revolving credit facilities . $900,240 $900,240 $790,942 $790,942 Other obligations ........... 32,936 32,936 51,769 51,769 Interest rate swap agreements -- 2,207 -- 814 - -------------------------------------------------------------------------------- The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Revolving Credit Facilities The carrying values of the revolving credit facilities approximate their fair values due to the floating market interest rates charged on those facilities. Other Obligations The carrying values of other obligations approximate their fair values due to the interest rates charged on those agreements: either floating market rates or fixed rates which approximated market rates available at January 3, 1998 and December 28, 1996. Interest Rate Swap Agreements The fair values of the interest rate swap agreements were estimated by obtaining quotes from brokers. EXHIBIT 13, PAGE 17 Note 8 - Acquisitions and Agreement in Principle to Dispose of Carpets International, Plc Acquisitions In January 1995, the Company increased its operations in the United Kingdom by acquiring substantially all of the operating assets of the Carpets Division of Coats Viyella Plc for approximately $29,503,000. During 1996, the Company acquired certain residential retail and commercial contractors in order to develop and expand its presence in the retail distribution channel. To complete the acquisitions, the Company paid $70,214,000 in cash and issued 4,379,646 shares of common stock at an aggregate value of $54,069,000, notes payable of $35,000,000 due January 15, 1997, and notes payable of $24,000,000 due June 1999 convertible to 1,500,000 shares of the Company's common stock at the option of the note holders. As a result of these acquisitions, the Company recorded goodwill of $132,756,000. During 1997, the Company further expanded its retail distribution channel by acquiring certain residential retail and commercial contractors. To complete the acquisitions, the Company paid $28,727,000 in cash, net of cash acquired, and issued 2,112,517 shares of common stock at an aggregate value of $25,680,000. As a result of these acquisitions, the Company recorded goodwill of $38,773,000. Agreement in Principle to Dispose of Carpets International, Plc In December 1997, the Company entered into an agreement in principle to dispose of Carpets International, Plc (the Company's wholly owned U.K. subsidiary) and as a result of this agreement, recorded a reduction in the carrying value of certain U.K. assets of $47,952,000 ($20,300,000, net of tax benefit, or $.15 per share) in 1997. EXHIBIT 13, PAGE 18 Note 9 - Nonrecurring Charges, Restructuring Costs and Charge to Record Store Closing Costs Nonrecurring Plant Shutdown Costs During 1995, the Company closed two of its domestic yarn spinning mills and one yarn spinning mill in Australia. As a result, the Company recorded a charge of $4,360,000 related to the domestic plant closings and $2,607,000 related to the foreign plant closing. These charges related primarily to termination benefits and to recording affected property, plant and equipment at net realizable value. Long-Lived Asset and Goodwill Impairment In March 1996, the Company recorded nonrecurring charges of $29,139,000 ($26,519,000, net of tax benefit, or $.19 per share) for the reduction of the carrying value of certain goodwill and property, plant and equipment at its international operations as required under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and a provision for the disposal of other assets. Restructuring Costs In December 1996, the Company recorded $36,078,000 ($24,172,000 net of tax benefit, or $.18 per share), of restructuring costs related to woolen yarn operations and the discontinuance of Axminster carpet production in the United Kingdom. The restructuring costs include $16,115,000 of markdowns of inventory to estimated realizable value which have been recorded as a charge to cost of sales. Charge to Record Store Closing Costs In December 1997, the Company announced a plan to close approximately 100 residential retail stores which resulted in a charge to operations of $36,349,000 ($22,817,000, net of tax benefit, or $.17 per share) consisting primarily of reductions in the carrying value of long-lived assets of approximately $13,430,000 and reserves for exit costs and employee termination benefits of approximately $17,440,000 and $5,530,000, respectively. The stores to be closed had combined net sales of approximately $90,000,000 in 1997, but contributed negatively to the Company's profitability. Prior to this charge, the Company recorded store closing costs of $438,000 ($263,000, net of tax benefit) which had no effect on earnings per share. EXHIBIT 13, PAGE 19 Note 10 Foreign Operations
The following information is presented regarding the Company's consolidated foreign operations for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 (000s omitted): 1997 Adjustments and Domestic Foreign Eliminations Consolidated - -------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 3,248,014 $ 327,760 $ -- $ 3,575,774 - -------------------------------------------------------------------------------------------- Operating profit (loss) ....... $ 122,986 $ (38,966) $ -- $ 84,020 - -------------------------------------------------------------------------- Interest expense, net ......... (60,769) Miscellaneous income, net ..... 7,032 ------------- Income before income taxes $ 30,283 ------------- Identifiable assets ........... $ 1,876,788 $ 223,990 $ (133,164) $ 1,967,614 - -------------------------------------------------------------------------------------------- 1996 Adjustments and Domestic Foreign Eliminations Consolidated - -------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 2,865,737 $ 335,817 $ -- $ 3,201,554 - -------------------------------------------------------------------------------------------- Operating profit (loss) ....... $ 170,734 $ (58,283) $ -- $ 112,451 - -------------------------------------------------------------------------- Interest expense, net ......... (42,442) Miscellaneous income, net ..... 3,609 ------------- Income before income taxes $ 73,618 ------------- Identifiable assets ........... $ 1,725,668 $ 310,732 $ (52,002) $ 1,984,398 - -------------------------------------------------------------------------------------------- 1995 Adjustments and Domestic Foreign Eliminations Consolidated - -------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 2,509,443 $ 360,385 $ -- $ 2,869,828 - -------------------------------------------------------------------------------------------- Operating profit (loss) ....... $ 168,500 $ (19,401) $ -- $ 149,099 - -------------------------------------------------------------------------- Interest expense, net ......... (41,901) Miscellaneous expense, net .... (443) ------------- Income before income taxes $ 106,755 ------------- Identifiable assets ........... $ 1,440,153 $ 357,453 $ (134,823) $ 1,662,783 - --------------------------------------------------------------------------------------------
Sales and transfers between geographic areas and export sales are not material. Operating profit is total revenue less operating expenses. In computing operating profit, none of the following items have been added or deducted: net interest expense, net miscellaneous income, income taxes, equity in income of joint venture or the cumulative effect of an accounting change. Identifiable assets are those assets of the Company that are identified with the operations in each geographic area, including goodwill. EXHIBIT 13, PAGE 20 Note 11 Quarterly Financial Data (Unaudited) Summarized quarterly financial data for 1997, 1996 and 1995 is as follows (000s except per share amounts): 1997 Quarters First Second Third Fourth* - ---------------------------------------------------------------------------- Net Sales ................ $ 808,653 $ 915,232 $ 922,997 $ 928,892 Gross Profit ............. 200,090 236,992 236,235 221,985 Net Income (Loss) ........ 10,748 25,231 25,335 (32,355) Earnings (Loss) Per Share- Basic and Diluted .... 0.08 0.19 0.19 (0.24) - ---------------------------------------------------------------------------- 1996 Quarters First** Second Third Fourth*** - ---------------------------------------------------------------------------- Net Sales ................ $ 657,856 $ 785,957 $ 881,760 $ 875,981 Gross Profit ............. 129,920 171,965 208,158 206,443 Net Income (Loss) ........ (15,584) 28,099 24,179 (2,671) Earnings (Loss) Per Share- Basic and Diluted***** (0.11) 0.21 0.18 (0.02) - ---------------------------------------------------------------------------- 1995 Quarters First**** Second Third Fourth - ---------------------------------------------------------------------------- Net Sales ................ $ 676,550 $ 738,326 $ 748,364 $ 706,588 Gross Profit ............. 117,081 144,516 142,716 145,621 Net Income (Loss) ........ (7,600) 18,673 21,905 19,326 Earnings (Loss) Per Share- Basic and Diluted .... (0.06) 0.14 0.16 0.14 - ---------------------------------------------------------------------------- * The fourth quarter net income and per share amounts for 1997 include store closing costs of $22,817,000, or $.17 per share, and a write-down of certain U.K. assets of $20,300,000, or $.15 per share. ** The first quarter net income and per share amount for 1996 include nonrecurring charges of $26,519,000, or $.19 per share, net of tax benefit, for the reduction in the carrying value of certain goodwill and property, plant and equipment at its international operations and a provision for the disposal of certain other assets. *** The fourth quarter net income and per share amounts for 1996 included restructuring costs of $24,172,000, or $.18 per share, net of tax benefit, related to woolen and Axminster production in the United Kingdom. ***** The first quarter net income and per share amounts for 1995 include a charge of $12,077,000, or $.09 per share, net of tax benefit, from the cumulative effect of a change in the method of accounting for sample costs. **** The sum of the 1996 quarterly earnings per share amounts is different from the annual earnings per share amounts because of differences in the weighted average number of common shares outstanding used in the quarterly and annual computations. EXHIBIT 13, PAGE 21 Note 12 Subsequent Event On February 9, 1998, the Company commenced a "dutch auction" tender offer to acquire up to approximately 10,600,000 shares of its common stock, representing approximately 8.1 percent of its currently outstanding shares. Under the terms of the offer, the Company's shareholders may tender their shares at a price within a range of $11.00 to $14.00 per share for a period of 20 business days. In addition, the Company announced no further cash dividends would be paid in fiscal 1998 subsequent to the quarterly dividend on February 27, 1998 to shareholders of record on February 16, 1998. EXHIBIT 13, PAGE 22 Report of Independent Public Accountants To The Shareholders of Shaw Industries, Inc.: We have audited the accompanying consolidated balance sheets of Shaw Industries, Inc. (a Georgia corporation) and subsidiaries as of January 3, 1998 and December 28, 1996 and the related consolidated statements of income, shareholders' investment and cash flow for each of the three years in the period ended January 3, 1998. 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 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 provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shaw Industries, Inc. and subsidiaries as of January 3, 1998 and December 28, 1996 and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Atlanta, Georgia February 20, 1998 EXHIBIT 13, PAGE 23
Stock Information High and low stock prices and cash dividends paid by fiscal quarter 1997 1996 1995 Dividends Paid High Low High Low High Low 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- 1st Quarter ...... 14 1/8 11 7/8 14 7/8 10 3/4 17 1/8 12 7.50 cents 7.50 cents 7.50 cents 2nd Quarter ...... 13 10 1/2 13 3/4 11 1/8 17 3/8 12 1/4 7.50 cents 7.50 cents 7.50 cents 3rd Quarter ...... 12 7/8 10 1/2 15 3/8 11 1/2 17 1/4 14 1/4 7.50 cents 7.50 cents 7.50 cents 4th Quarter ...... 13 7/16 10 7/8 13 3/8 11 16 3/8 12 5/8 7.50 cents 7.50 cents 7.50 cents - ---------------------------------------------------------------------------------------------------------------------- Total 30.00 cents 30.00 cents 30.00 cents ---------------------------------------------
EXHIBIT 13, PAGE 24 EX-21 3 EXHIBIT 21, 1997 FORM 10-K EXHIBIT 21 Wholly-owned subsidiaries of the Registrant are Shaw Financial Services, Inc., a Georgia corporation; Shaw Transport, Inc., a Georgia corporation; Shaw Industries Australia, Pty., Ltd., an Australian corporation; Carpets International, PLC., a United Kingdom corporation; Shaw Contract Flooring Services, Inc., a Georgia corporation; Shaw Carpet Showplace, Inc., a Georgia corporation; Shaw Retail Properties, Inc., a Georgia corporation; Shaw Contract Properties, Inc., a Georgia corporation; New York Carpet World, Inc., a Michigan corporation; Carpetland USA, Inc., an Indiana corporation; G & S Investments, Inc., a Washington corporation. The Company also has a 49% owned subsidiary, Terza, S.A. de CV., a Mexican corporation. EX-23 4 EXHIBIT 23, 1997 FORM 10-K EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements file no. 33-45089, file no. 333-04247, file no. 333-17303 and file no. 333-33489. ARTHUR ANDERSEN LLP Atlanta, Georgia March 30, 1998 EX-27 5 FDS 1997
5 This schedule contains summary information extracted from the consolidated balance sheet of Shaw Industries, Inc. and subsidiaries as of January 3, 1998 and the related consolidated statements of income, shareholders' investment and cash flows for the year ended January 3, 1998, and is qualified in its entirety by reference to such financial statements. Note: Earnings Per Share (E.P.S.) have been calculated in accordance with FASB 128. YEAR JAN-03-1998 JAN-03-1998 43,571,000 0 374,516,000 16,283,000 530,059,000 1,066,413,000 1,383,823,000 759,444,000 1,967,614,000 325,454,000 0 0 0 145,542,000 491,992,000 1,967,614,000 3,575,774,000 3,575,774,000 2,680,472,000 2,680,472,000 794,932,000 9,318,000 60,769,000 30,283,000 5,586,000 24,697,000 0 0 0 28,959,000 .22 .22
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