-----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, RvOW+FJgZu0tLranwyYn0/eDdfW2faQ+o71fYG4kboGftN/7Oe+Ru3LNy4EENs1C q7eyELTdrM1pVIhKjk+c6A== 0000089498-98-000055.txt : 19981222 0000089498-98-000055.hdr.sgml : 19981222 ACCESSION NUMBER: 0000089498-98-000055 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981221 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19981221 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: 8-K/A SEC ACT: SEC FILE NUMBER: 001-06853 FILM NUMBER: 98772834 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 8-K/A 1 AMENDED 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) December 21, 1998 (October 6, 1998) ----------------------------------- Shaw Industries, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Georgia 1-6853 58-1032521 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission File (I.R.S. Employer of incorporation) Number) Identification No.) 616 E. Walnut Avenue, Dalton, Georgia 30720 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (706) 278-3812 ------------------------------ ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. In the Current Report on Form 8-K filed on October 21, 1998 (the "Form 8-K"), Shaw Industries, Inc. (the "Registrant" or "Shaw") reported that it had completed the acquisition of Queen Carpet Corporation ("Queen") pursuant to the merger (the "Queen Merger") of Queen with and into the Registrant. The Queen Merger was effected pursuant to that certain Agreement and Plan of Merger, dated August 13, 1998 (the "Merger Agreement"), among the Registrant, its wholly owned subsidiary, Chessman Acquisition Corp. ("Chessman"), Queen and the shareholders of Queen (the "Queen Shareholders"), as amended by the First Amendment thereto, dated October 6, 1998 (the "First Amendment"), among the Registrant, Chessman, Queen and the Queen Shareholders. As consideration for their shares of Queen stock, in the Queen Merger the Queen Shareholders received from the Registrant (i) 3.15 million shares of the common stock of The Maxim Group, Inc., (ii) 19,444,444 shares of the Registrant's common stock, and (iii) approximately $35.8 million in cash. In addition, in connection with the Queen Merger, the Registrant satisfied certain executive incentive obligations of Queen to certain key Queen employees by making payments consisting of (a) an aggregate of 841,733 shares of the Registrant's common stock and (b) $12.1 million in cash. The Registrant financed the cash portion of the purchase price paid in the Queen Merger, the cash portion of the executive incentive payments and the fees and expenses associated with the Queen Merger, through borrowings under its existing credit facility. In connection with the consummation of the Queen Merger, the Registrant amended its Amended and Restated Credit Agreement, as amended, on October 6, 1998 to allow, among other things, the Registrant to assume certain guaranties and other indebtedness of Queen. The Form 8-K did not include the Condensed Consolidated Financial Data required by Item 7(a) or the Pro Forma Condensed Consolidated Financial Data required by Item 7(b). This Form 8-K/A amends Item 7 of the Form 8-K by including the financial information referred to below. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Businesses Acquired.
QUEEN CARPET CORPORATION AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants F-1 Consolidated Balance Sheets at August 31, 1998, May 30, 1998, and May 31, 1997 F-2 Consolidated Statements of Income and Retained Earnings for the three months ended August 31, 1998 and September 1, 1997, and the years ended May 30, 1998, May 31, 1997 and June 1, 1996 F-3 Consolidated Statements of Cash Flows for the three months ended August 31, 1998 and September 1, 1997, and the years ended May 30, 1998, May 31, 1997 and June 1, 1996 F-4 to F-5 Notes to Consolidated Financial Statements F-6 to F-16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Queen Carpet Corporation and Subsidiary: We have audited the accompanying consolidated balance sheets of Queen Carpet Corporation (a Georgia corporation) and subsidiary as of May 30, 1998 and May 31, 1997 and the related statements of income and retained earnings and cash flows for each of the three years in the period ended May 30, 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 Queen Carpet Corporation and subsidiary as of May 30, 1998 and May 31, 1997 and the results of their operations and their cash flows for each of the three years in the period ended May 30, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Atlanta, Georgia October 9, 1998 F - 1
QUEEN CARPET CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AUGUST 31, 1998, MAY 30, 1998, AND MAY 31, 1997 (In Thousands, Except Share Data) ASSETS August 31, May 30, May 31, 1998 1998 1997 ------------ ----------- ----------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 752 $ 2,735 $ 4,510 Accounts receivable, less allowance for doubtful accounts and cash discounts of $6,049, $5,462, and $5,106 at August 31, 1998, May 30, 1998, and May 31, 1997, respectively 101,708 101,116 91,162 Related-party receivables 1,232 1,012 1,401 Inventories 142,627 136,256 126,498 Other current assets 251 1,079 7,603 ------------ ----------- ----------- Total current assets 246,570 242,198 231,174 PROPERTY, PLANT, AND EQUIPMENT, NET 131,636 120,732 109,962 OTHER ASSETS 19,175 18,533 12,377 ------------ ----------- ----------- Total assets $397,381 $381,463 $353,513 ============ =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt and capital lease obligations $ 10,455 $ 11,861 $ 5,684 Notes payable 19,400 12,150 0 Accounts payable 45,947 61,328 48,822 Accrued liabilities 63,593 30,219 24,381 ------------ ----------- ----------- Total current liabilities 139,395 115,558 78,887 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current maturities 66,177 64,466 107,450 OTHER LIABILITIES 4,473 4,951 3,786 ------------ ----------- ----------- Total liabilities 210,045 184,975 190,123 ------------ ----------- ----------- SHAREHOLDERS' EQUITY: Common stock, $.0012 par value; 1,000,000 Class A voting and 100,000,000 Class B nonvoting shares authorized, 341,250 Class A voting and 33,700,000 Class B nonvoting shares issued and outstanding at August 31, 1998, May 30, 1998, and May 31, 1997, respectively 41 41 41 Retained earnings 187,295 196,447 163,349 ------------ ----------- ----------- Total shareholders' equity 187,336 196,488 163,390 ------------ ----------- ----------- Total liabilities and shareholders' equity $397,381 $381,463 $353,513 ============ =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. F - 2
QUEEN CARPET CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND SEPTEMBER 1, 1997, AND THE YEARS ENDED MAY 30, 1998, MAY 31, 1997, AND JUNE 1, 1996 (In Thousands) For the Three Months Ended For the Years Ended ------------------------- -------------------------------- August 31, September 1, May 30, May 31, June 1, 1998 1997 1998 1997 1996 ---------- ------------ --------- --------- --------- (Unaudited) NET SALES $216,034 $184,309 $757,449 $685,613 $596,461 COST OF SALES 156,233 137,702 548,755 516,721 465,210 ---------- ------------ --------- --------- --------- Gross profit 59,801 46,607 208,694 168,892 131,251 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 62,513 33,078 143,072 120,777 109,370 ---------- ------------ --------- --------- --------- Operating (loss) income (2,712) 13,529 65,622 48,115 21,881 INTEREST, net 1,561 2,125 7,301 8,722 9,203 OTHER INCOME 879 90 776 1,443 4,377 ---------- ------------ --------- --------- --------- (Loss) income before income taxes and change in accounting principle (3,394) 11,494 59,097 40,836 17,055 PROVISION FOR INCOME TAXES 510 165 1,300 866 474 ---------- ------------ --------- --------- --------- (Loss) income before change in accounting principle (3,904) 11,329 57,797 39,970 16,581 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of tax benefit 0 0 0 (3,869) 0 ---------- ------------ --------- --------- --------- Net (loss) income (3,904) 11,329 57,797 36,101 16,581 RETAINED EARNINGS, beginning of period 196,447 163,349 163,349 137,626 128,906 DIVIDENDS PAID (5,248) (2,517) (24,699) (10,378) (7,861) ---------- ------------ --------- --------- --------- RETAINED EARNINGS, end of period $187,295 $172,161 $196,447 $163,349 $137,626 ========== ============ ========= ========= ========= The accompanying notes are an integral part of these consolidated statements.
F - 3 PAGE 1 OF 2
QUEEN CARPET CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND SEPTEMBER 1, 1997 AND THE YEARS ENDED MAY 30, 1998, MAY 31, 1997, AND JUNE 1, 1996 (In Thousands) For the Three Months Ended For the Years Ended ------------------------ ------------------------------- August 31, September 1, May 30, May 31, June 1, 1998 1997 1998 1997 1996 ---------- ------------ ------- -------- --------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (3,904) $11,329 $57,797 $36,101 $16,581 ---------- ------------ ------- -------- --------- Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 4,280 4,100 16,995 16,150 15,797 Loss (gain) on disposal of fixed assets (116) (22) 35 (320) (1,881) Deferred income taxes 0 0 (39) 13 (71) Cumulative effect of change in accounting principle 0 0 0 3,869 0 Changes in operating assets and liabilities: Accounts receivable and related-party receivables 292 (7,979) (5,379) (16,399) (16,243) Inventories (6,371) (243) (9,758) (4,652) (2,404) Other assets (918) (3,678) (3,088) 279 (1,634) Accounts payable (15,381) (13,066) 12,506 (1,553) 1,930 Accrued liabilities and other liabilities 32,896 13,832 7,042 6,696 7,547 ---------- ------------ ------- -------- --------- Total adjustments 14,682 (7,056) 18,314 4,083 3,041 ---------- ------------ ------- -------- --------- Net cash provided by operating activities 10,778 4,273 76,111 40,184 19,622 ---------- ------------ ------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed assets 145 64 407 634 2,872 Purchases of property, plant, and equipment (15,213) (1,819) (28,207) (16,414) (12,416) Investments in life insurance contracts 0 (493) (730) (756) (723) ---------- ------------ ------- -------- --------- Net cash used in investing activities (15,068) (2,248) (28,530) (16,536) (10,267) ---------- ------------ ------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on note payable 7,250 1,730 12,150 0 0 Borrowings from financial institutions 10,000 11,400 35,900 22,900 34,800 Repayments to financial institutions (8,281) (10,782) (73,525) (30,688) (34,780) Repayments on bonds 0 0 (325) (300) (275) Other borrowings from related parties 150 513 7,709 5,964 4,927 Other repayments to related parties (1,564) 0 (6,672) (7,903) (6,729) Other borrowings, net 0 0 106 418 0 Dividends paid (5,248) (2,517) (24,699) (10,378) (7,861) ---------- ------------ ------- -------- --------- Net cash provided by (used in) financing activities 2,307 344 (49,356) (19,987) (9,918) ---------- ------------ ------- -------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,983) 2,369 (1,775) 3,661 (563) CASH AND CASH EQUIVALENTS, beginning of period 2,735 4,510 4,510 849 1,412 ---------- ------------ ------- -------- --------- CASH AND CASH EQUIVALENTS, end of period $ 752 $ 6,879 $ 2,735 $ 4,510 $ 849 ========== ============ ======= ======== ========= F - 4 PAGE 2 OF 2 For the Three Months Ended For the Years Ended ------------------------ ------------------------------- August 31, September 1, May 30, May 31, June 1, 1998 1997 1998 1997 1996 ---------- ------------ ------- -------- --------- (Unaudited) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 357 $ 452 $ 5,315 $ 8,536 $ 9,730 ========== ============ ======= ======== ========= Cash paid for income taxes $ 1,848 $ 659 $ 1,365 $ 393 $ 488 ========== ============ ======= ======== ========= Noncash investing and financing activities: Capital lease obligations $ 61 $ 0 $ 587 $ 689 $ 755 ========== ============ ======= ======== =========
The accompanying notes are an integral part of these consolidated statements. F - 5 QUEEN CARPET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1998, MAY 30, 1998, AND MAY 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Queen Carpet Corporation and subsidiary (the "Company"). All significant intercompany balances and transactions are eliminated in consolidation. Nature of Business The Company manufactures and distributes carpet for residential and commercial use and markets its products to wholesalers and retailers throughout the United States and in certain international markets. Fiscal Period The Company's fiscal year-end is the Saturday closest to May 31. Fiscal year 1998 consisted of 53 weeks, while fiscal years 1997 and 1996 consisted of 52 weeks. Revenue Recognition Revenues are recognized when goods are shipped. Cash and Cash Equivalents The Company considers all investments with an original maturity of three months or less to be cash equivalents. Accounts Receivable Accounts receivable from all customers located in the United Kingdom are factored through a financial institution. The factoring arrangement is without recourse. The balances outstanding under the factoring arrangement are included in accounts receivable in the accompanying balance sheets. F - 6 Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Repair and maintenance costs are expensed in the year incurred. Expenditures for renewals and betterments are generally capitalized. Cost and accumulated depreciation for property retirements are removed from the property, plant, and equipment accounts, with any gain or loss included in other income in the accompanying statements of income and retained earnings. For financial reporting purposes, depreciation is computed using the straight-line method over the estimated useful lives of the assets, 30 to 40 years for buildings and 8 years for machinery and equipment. Accelerated depreciation methods are used for tax purposes. Accrued Liabilities Accrued liabilities include $6,386,000 for returns and allowances at May 30, 1998 and May 31, 1997. Income Taxes The Company elected to be taxed under the provisions of the Internal Revenue Code as an S corporation, whereby shareholders of the Company are taxed on their proportionate shares of the Company's taxable income in lieu of corporate income taxes. The provision for income taxes has been provided for those taxing jurisdictions where S corporation elections are not recognized. Deferred taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Foreign Currency Transactions The Company exports goods to foreign entities, and sales are reflected using the exchange rate at the time of the transaction. On settlement, a foreign currency translation gain or loss is recognized. Accounts receivable from foreign currency transactions have been restated to reflect the spot rate at the balance sheet date. 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. Accounting Change Effective June 2, 1996, the Company changed its method of accounting for the cost of samples from expensing sample costs that exceed estimated net realizable value when they are shipped to expensing samples as they are produced. The change was made to recognize that increasing numbers of samples shipped to customers will not result in future sales. The cumulative effect of the change was to decrease net income for the year ended May 31, 1997 by $3,869,000, net of a tax benefit of $76,000. F - 7 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. The Company does not enter into financial derivatives for speculative or trading purposes. Interim Financial Information The financial statements and related information for the 13-week periods ended August 31, 1998 and September 1, 1997 are unaudited and have been prepared in accordance with the Securities and Exchange Commission's requirements for such interim financial statements. The unaudited interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the Company's financial position, results of operations, and cash flows at the dates and for the periods presented have been included. All such interim adjustments are of a normal recurring nature. 2. INVENTORIES Inventories at May 30, 1998 and May 31, 1997 consisted of the following (in thousands): 1998 1997 ---------- ---------- Raw materials $ 55,288 $ 57,078 Work in process 16,985 17,558 Finished goods 63,983 51,862 ---------- ---------- $ 136,256 $ 126,498 ========== ========== Inventories are stated at the lower of cost or market using the last-in, first-out method. If inventories had been valued using the first-in, first-out method, total inventories would have been $3,200,000 lower and $1,900,000 higher than reported at May 30, 1998 and May 31, 1997, respectively. F - 8 3. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at May 30, 1998 and May 31, 1997 consisted of the following (in thousands): 1998 1997 ---------- ---------- Buildings and leasehold improvements $ 46,600 $ 45,961 Machinery and equipment 163,930 154,589 Vehicles 2,954 3,167 Land 4,651 4,652 Construction in progress 19,905 6,035 ---------- ---------- 238,040 214,404 Less accumulated depreciation (117,308) (104,442) ---------- ---------- $ 120,732 $109,962 ========== ========== Depreciation expense totaled approximately $17,000,000, $16,100,000, and $15,500,000 for the years ended May 30, 1998, May 31, 1997, and June 1, 1996, respectively. 4. OTHER ASSETS Other assets at May 30, 1998 and May 31, 1997 consisted of the following (in thousands): 1998 1997 -------- --------- Deposits with Internal Revenue Service $10,962 $ 3,610 Related-party deferred notes and loans receivable 2,287 2,169 Cash value of life insurance contracts 4,388 3,658 Other assets 896 2,940 -------- --------- $18,533 $12,377 ======== ========= The cash value of life insurance contracts represents assets held for settlement of the Company's two supplemental unfunded executive retirement plans (Note 6). F - 9 5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations at May 30, 1998 and May 31, 1997 consisted of the following (in thousands): 1998 1997 -------- ---------- Private placement notes $50,000 $ 50,000 Notes payable to banks 17,344 54,969 Industrial revenue bonds 4,645 4,970 Capital lease obligations 1,548 1,442 Notes payable to related parties 2,790 1,753 -------- ---------- 76,327 113,134 Current maturities 11,861 5,684 -------- ---------- Long-term maturities $64,466 $107,450 ======== ========== The Company has a $50,000,000 noncancelable secured variable interest rate revolving credit agreement with three financial institutions, with interest determined under a competitive bid process and principal due in full on August 5, 1999. The Company also has cancelable unsecured lines of credit of $50,000,000. At May 30, 1998, a total of $100,000,000 was available for use on the noncancelable and cancelable lines of credit. On November 11, 1994, the Company issued $50,000,000 in private placement notes maturing November 30, 2007. Interest is 8.7% fixed and payable semiannually. Principal is required to be paid in minimum semiannual installments of $2,500,000 beginning May 31, 1998. The Company paid off the entire balance of the private placement notes in September 1998 and incurred approximately $8,500,000 in prepayment penalties related to the payoff. The Company has unsecured installment notes payable to banks of $17,344,000 with variable interest rates (ranging from 5.7% to 6.2% at May 30, 1998) maturing January 8, 2002 and December 1, 2002. Quarterly principal and interest payments total $781,000. The industrial revenue bonds bear interest at variable rates (ranging from 3.9% to 4.0% at May 30, 1998), payable monthly, and mature January 2006 and January 2007. The bonds are collateralized by assets purchased from the proceeds of the bonds and by an automatically renewing irrevocable letter of credit issued by a financial institution. Monthly contributions to a debt service reserve fund are required through June 1999. The variable interest rates on a total of $43,375,000 of the Company's long-term debt has been fixed through various dates at an average rate of 6.2% using interest rate swap agreements. The interest rate swap agreements terminate at various dates through 2007. Capital lease obligations are payable monthly in varying amounts through August 2001 with interest rates ranging from 3.0% to 13.0%. The lease obligations are secured by certain office equipment. F - 10 Notes payable to related parties include various amounts at fixed interest rates and maturing within one year. Additionally, during the current year, the Company entered into term loan agreements totaling $24,200,000 as a guarantor on behalf of related parties. The terms of the loan agreements, private placement notes, and industrial revenue bonds contain covenants which, among other provisions, (i) restrict redemption of capital stock and payment of dividends, (ii) limit the Company's ability to incur indebtedness or assume liens and (iii) require the Company to satisfy certain ratios related to net worth, debt-to-equity, and fixed charge coverage. At May 30, 1998, the Company was in compliance with all financial covenants. Aggregate annual maturities of long-term debt, including capital lease obligations, as of May 30, 1998 are as follows (in thousands): 1999 $11,861 2000 8,733 2001 8,261 2002 12,972 2003 5,000 Thereafter 29,500 -------- Total $76,327 ======== 6. EMPLOYEE RETIREMENT PLANS The Company's retirement and savings plan provides, among other things, for voluntary contributions by employees not to exceed 15% of their gross salaries and wages. The Company provides matching contributions of 50% based on the employee's contribution percentage, not to exceed 5% of the employee's gross salaries and wages. The Company contributed approximately $1,900,000, $1,800,000, and $1,700,000 during the years ended May 30, 1998, May 31, 1997, and June 1, 1996, respectively. The Company has two supplemental unfunded executive retirement plans covering a select group of management employees. The plans provide for benefits at normal retirement (age 65), early retirement (age 55), death, and disability. One plan provides benefits at normal retirement determined at 35% of the participant's compensation in the last full calendar year of employment, excluding bonuses, overtime pay, and commissions, payable for a period of ten years. The second plan provides benefits at normal retirement consisting of the executive's account balance accumulated at 5.5% annual compensation in excess of the Social Security wage base, not to exceed $200,000, payable monthly for ten years. Net periodic pension costs for these plans consist of a service cost component of approximately $560,000, $322,000, and $245,000 for the years ended May 30, 1998, May 31, 1997, and June 1, 1996, respectively, and an interest cost component of $455,000, $147,000, and $115,000 for the years ended May 30, 1998, May 31, 1997, and June 1, 1996, respectively. Assumptions used to determine accruals for periodic pension costs consist of a discount rate of 8.5%, including a percentage factor of 4% for withdrawals prior to retirement and future compensation level increases for ten years. Total pension obligations accrued at May 30, 1998 and May 31, 1997 amounted to approximately $3,200,000 and $2,200,000, respectively. These accrued obligations include vested benefits for retired employees and participants who have reached early retirement age, amounting to approximately $1,600,000 and $1,400,000 at May 30, 1998 and May 31, 1997, respectively. F - 11 7. INCOME TAXES The Company elected to retain its current fiscal year for income tax reporting, and as a result, deposits are required approximating income taxes the shareholders would have paid on the deferral period had the Company changed to a calendar tax year. The deposits are adjusted annually to reflect the income taxes associated with taxable income in the deferral period. These noninterest-bearing deposits are refundable upon a change of year-end or termination of the S corporation election and are included in other assets in the accompanying balance sheets. The provision for income taxes consisted of the following (in thousands): 1998 1997 1996 ------- ----- ----- Currently payable $1,339 $853 $318 Current year deferred (benefit) provision (39) 13 156 ------- ----- ----- $1,300 $866 $474 ======= ===== ===== The net deferred income tax liability at May 30, 1998 and May 31, 1997 consisted of the following (in thousands): 1998 1997 ------ ------ Deferred income tax assets and liabilities: Deferred income tax assets: Current $ 237 $ 175 Deferred 80 132 ------ ------ 317 307 ------ ------ Deferred income tax liabilities: Current (37) (39) Deferred (417) (444) ------ ------ (454) (483) ------ ------ Net deferred income tax liability $(137) $(176) ====== ====== The deferred tax assets and liabilities consist mainly of differences between tax and financial accounting treatment of depreciation, allowance for doubtful accounts, inventory reserves, and certain nondeductible accrued expenses that will be recognized in different years for financial statement and income tax purposes. F - 12 8. RELATED-PARTY TRANSACTIONS The Company leases manufacturing facilities from partnerships principally owned by shareholders of the Company. The Company loaned the partnerships funds for construction costs. The terms of notes due from partnerships are as follows (in thousands): 1998 1997 ----- ----- Unsecured notes receivable maturing June 1, 1998 and June 1, 2003, payable quarterly with interest at 6.7% $711 $971 Less current maturities (359) (434) ----- ----- Long-term maturities $352 $537 ===== ===== Long-term balances receivable under these notes are included in other assets in the accompanying balance sheets. Interest earned on the related-party notes for the years ended May 30, 1998, May 31, 1997, and June 1, 1996 was approximately $34,000, $85,000, and $122,000, respectively. Rental expense paid to the partnerships during the years ended May 30, 1998, May 31, 1997, and June 1, 1996 was approximately $2,303,000, $1,102,000, and $1,068,000, respectively. Various related-party loans were made and repaid during the years, with loan receivable balances remaining at May 30, 1998 and May 31, 1997 of approximately $722,000 and $967,000, respectively, included in accounts receivable in the accompanying balance sheets. The balance of notes payable to related parties totaled $2,790,000 and $1,753,000 at May 30, 1998 and May 31, 1997, respectively. Interest expense under these notes amounted to approximately $168,000, $187,000, and $212,000 for the years ended May 30, 1998, May 31, 1997, and June 1, 1996, respectively, and are included in long-term debt and capital lease obligations in the accompanying balance sheets. The Company makes scheduled premium payments on life insurance contracts under several split-dollar agreements with shareholders' trusts. The accumulated loans related to these contracts were $1,935,000 and $1,632,000 at May 30, 1998 and May 31, 1997, respectively, and are included in other assets in the accompanying balance sheets. A shareholder of the Company has a majority interest in yarn manufacturing companies. Materials and supplies acquired during the year ended May 30, 1998 totaled $11,200,000. Liabilities due to those related companies were $919,000 and $706,000 at May 30, 1998 and May 31, 1997, respectively. The Company had sales of $4,800,000 during the year ended May 30, 1998 and receivables due from the related companies of $184,000 at May 30, 1998. All related party amounts were settled concurrent with the acquisition by Shaw Industries, Inc. (Note 11). F - 13 9. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has entered into five interest rate swap agreements with a total notional amount of $43,375,000 to fix the interest rate paid on a portion of the Company's long-term debt. The average fixed rate paid on the interest rate swap agreements was 6.20% while the floating rate received in 1998 averaged 5.75%. The carrying amount and fair value of the interest rate swap agreements were $0 and approximately $617,000 at May 30, 1998. The Company utilizes hedging through foreign currency exchange contracts when they are determined to effectively manage and reduce foreign currency exchange rate fluctuation risk. As of May 30, 1998, the Company had outstanding foreign currency exchange contracts with notional amounts of $4,200,000 and an unrealized gain of $134,000. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: o The carrying amounts of notes and loans receivable approximate their fair values due to interest rates which approximate market rates available at May 30, 1998 and May 31, 1997. o The carrying amounts of notes payable, industrial revenue bonds, and other obligations approximate their fair values due to floating or fixed market interest rates charged on those debts which approximate market rates available at May 30, 1998 and May 31, 1997. 10. COMMITMENTS AND CONTINGENCIES The Company leases equipment and warehouse and manufacturing space under short- and long-term lease agreements. Certain leases have escalation clauses that allow annual increases for property taxes and other items. Assets under capital lease are depreciated on a straight-line basis over the related lease terms. The related obligations are included in long-term debt (Note 5). Equipment under capital lease is included in the accompanying financial statements at May 30, 1998 and May 31, 1997 as follows (in thousands): Machinery and Accumulated Equipment Depreciation ----------- -------------- May 30, 1998 $2,601 $1,149 May 31, 1997 2,006 601 F - 14 At May 30, 1998, future minimum lease payments on operating (including related-party leases) and capital leases exceeding one year were as follows (in thousands):
Capital Operating Total Leases Leases Payments --------- ----------- ---------- 1999 $ 859 $ 3,369 $ 4,228 2000 631 3,254 3,885 2001 139 2,050 2,189 2002 3 1,688 1,691 2003 0 1,422 1,422 --------- ----------- ---------- 1,632 $11,783 $13,415 =========== ========== Less amount representing interest 84 Present value of capitalized lease --------- payments with a weighted average interest rate of 5.4% $1,548 =========
Rental expense under noncancelable operating leases totaled approximately $3,300,000, $2,500,000, and $2,200,000 for the years ended May 30, 1998, May 31, 1997, and June 1, 1996, respectively. At May 30, 1998, the Company had commitments to purchase certain capital assets of approximately $16,700,000. The Company is a party to several lawsuits incidental to its various activities and incurred in the ordinary course of its 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, would have a material adverse effect on the Company. On January 28, 1998, the Company was served with a subpoena for the production of documents in connection with an antitrust litigation. On February 4, 1998, the Company filed objections to this subpoena. The Company has not been served with any motion seeking to enforce this subpoena or with any revised or additional subpoenas. 11. SUBSEQUENT EVENTS On June 1, 1998, 33,000,000 nonvoting Class B shares were issued in the form of a stock dividend. In accordance with generally accepted accounting principles, the stock dividends were accounted for as a stock split and are reflected as such in the accompanying financial statements. On August 10, 1998, the board of directors declared a cash dividend in the amount of $131,000,000 payable to shareholders of record as of the declaration date. The dividend was contingently payable within ten days of the date a new credit facility was obtained to fund the dividend distribution. Concurrently, the board of directors approved up to $30,000,000 in bonuses to be paid to members of management. This amount is included in accrued liabilities at August 31, 1998 in the accompanying financial statements. F - 15 Effective October 6, 1998, the Company was acquired by Shaw Industries, Inc. ("Shaw") for approximately $603,000,000, including $36,000,000 in cash, approximately 19,500,000 shares of Shaw common stock, 3,150,000 shares of third-party stock, assumption of $216,000,000 in debt and $24,000,000 in additional liabilities. The acquisition was accounted for under the purchase method of accounting. On October 21, 1998, the Company was named as a defendant in a class action antitrust lawsuit related to the sale of nylon carpet. The amount of damages sought has not been specified. No additional motions have been filed related to this case. F - 16 Item 7. (b) Pro Forma Financial Information. On April 3, 1998, the Registrant disposed of all of the issued and outstanding capital stock of Carpets International (U.K.) Limited and Kosset Carpets Limited, its indirect wholly owned subsidiaries. On August 9, 1998, the Registrant disposed of substantially all of the assets of Shaw Carpet Showplace, Inc., its wholly owned residential retail subsidiary (collectively, the "Prior Dispositions"). On October 6, 1998, the Registrant acquired the outstanding capital of Queen Carpet Corporation (the "Acquisition"). The Unaudited Pro Forma Condensed Consolidated Balance Sheet dated as of October 3, 1998 includes the effect of the Acquisition and excludes the Prior Dispositions, which occurred prior to October 3, 1998. The Unaudited Pro Forma Condensed Consolidated Statements of Income for the year ended January 3, 1998 and the nine months ended October 3, 1998 include the effect of the Prior Dispositions and the Acquisition. The following Unaudited Pro Forma Condensed Consolidated Balance Sheet as of October 3, 1998 was prepared as if the Acquisition had occurred on such date, the Prior Dispositions having already been reflected in the Shaw balance sheet. The Unaudited Pro Forma Condensed Consolidated Balance Sheet reflects the preliminary allocation of the purchase price to Queen's tangible and intangible assets and liabilities. The final allocation of such purchase price and the resulting amortization expense in the accompanying Unaudited Pro Forma Condensed Consolidated Statements of Income will differ from the preliminary estimates due to the final allocation being based on: (a) estimations of value of certain loss contingencies, primarily related to environmental and litigation contingencies, and (b) actual values of property, plant and equipment and any identifiable intangible assets. The following Unaudited Pro Forma Condensed Consolidated Statements of Income give effect to the Prior Dispositions and the Acquisition as if they had occurred at the beginning of each respective period. The unaudited pro forma financial data are based on the historical financial statements of the Registrant and Queen and the assumptions and adjustments described in the accompanying notes. The Unaudited Pro Forma Condensed Consolidated Statements of Income do not purport to represent what the Registrant's results of operations actually would have been if the Acquisition and the Prior Dispositions had occurred as of the date indicated or what such results will be for any future periods. The unaudited pro forma financial data are based upon assumptions that the Registrant believes are reasonable and should be read in conjunction with the financial statements of Queen and the accompanying notes thereto included elsewhere in this Form 8-K/A and the Registrant's Form 10-K for the year ended January 3, 1998.
Shaw Industries, Inc. Pro Forma Condensed Consolidated Balance Sheet As of October 3, 1998 (Unaudited) (Dollars in thousands) - ------------------------------------------------------------------------------------------------------------------------- Acquisition Shaw Queen (a) Adjustments Pro Forma --------------- -------------- ------------------ -------------- Assets Cash $ 3,807 $ 752 $ - $ 4,559 Accounts receivable 219,004 102,392 - 321,396 Inventories 528,076 142,627 (3,144) (b) 667,559 Other current assets 119,013 799 (28,495) (c) 91,317 --------------- -------------- -------------- -------------- Total current assets 869,900 246,570 (31,639) 1,084,831 --------------- -------------- -------------- -------------- Property, plant and equipment 1,331,436 253,229 (121,593) (d) 1,463,072 Accumulated depreciation (765,022) (121,593) 121,593 (d) (765,022) --------------- -------------- -------------- -------------- Net property, plant and equipment 566,414 131,636 - 698,050 --------------- -------------- -------------- -------------- Goodwill, net 100,506 - 307,831 (b) 408,337 Investment in joint venture 21,124 - - 21,124 Other assets 69,385 19,175 - 88,560 --------------- -------------- -------------- -------------- Total assets $1,627,329 $ 397,381 $ 276,192 $2,300,902 =============== ============== ============== ============== Liabilities and Shareholders' Equity Notes Payable - 19,400 (19,400) (e) - Current maturities of long-term debt 8 10,455 (10,455) (e) 8 Accounts payable 162,128 45,947 - 208,075 Accrued liabilities 229,618 63,593 1,822 (b) 295,033 --------------- -------------- -------------- -------------- Total current liabilities 391,754 139,395 (28,033) 503,116 --------------- -------------- -------------- -------------- Long-term debt 709,015 66,177 205,636 (e) 980,828 Deferred income taxes 57,707 454 7,831 (f) 65,992 Other liabilities 11,582 4,019 - 15,601 --------------- -------------- -------------- -------------- Total liabilities 1,170,058 210,045 185,434 1,565,537 Common stock 148,171 41 7,004 (g) 155,216 Paid-in capital 80,672 - 96,099 (h) 176,771 Unrealized loss on equity securities (11,950) - 11,950 (i) - Cumulative translation adjustment (5,186) - - (5,186) Retained earnings 421,934 187,295 (200,665) (i) 408,564 --------------- -------------- -------------- -------------- 633,641 187,336 (85,612) 735,365 Less - Treasury stock, at cost 176,370 - (176,370) (h) - --------------- -------------- -------------- -------------- Total shareholders' equity 457,271 187,336 90,758 735,365 --------------- -------------- -------------- -------------- Total liabilities and shareholders' equity $1,627,329 $ 397,381 $ 276,192 $2,300,902 =============== ============== ============== ==============
Footnotes to Pro Forma Condensed Consolidated Balance Sheet As of October 3, 1998 (Dollars in thousands except per share amounts) (a) Dated as of August 31, 1998.
(b) The Acquisition will be accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations." The purchase price is being allocated first to the tangible and identifiable intangible assets and liabilities of Queen based on preliminary estimates of their fair values, with the remainder allocated to goodwill. The total purchase price and allocation are as follows: Purchase Price: Shares of Shaw common stock (19,444,444 shares at $14.375 each) $279,514 Shares of The Maxim Group common stock (3,150,000 shares at $15.25 each) $ 48,038 Cash $ 35,781 ---------------- Consideration paid $363,333 Acquisition expenses $ 750 ---------------- $364,083 ---------------- Book Value of Net Assets Acquired: Book value of net assets acquired before reflecting certain Queen transactions $ 187,336 Queen transactions occuring immediately prior to acquisition: Dividend paid to shareholders $(131,000) Extraordinary loss on early retirement of debt and credit facility fee payment $ (8,250) ----------------- $ 48,086 ---------------- Increase in Basis $315,997 ================ Allocation of Increase in Basis: Adjustment to record inventory at fair value $ (3,144) Adjustment to mark derivative financial instruments to market $ (1,822) Adjustment to record deferred taxes: Current deferred tax assets $ 21,905 Long-term deferred tax liabilities $ (8,773) Goodwill $307,831 ---------------- $315,997 ================ (c) Reflects the following: Disposition of The Maxim Group common stock as part of the purchase consideration in the Acquisition (reflected at recorded value at October 3, 1998) $ (50,400) Recording current deferred tax assets of Queen $ 21,905 ---------------- $ (28,495) ================ (d) Reflects the initial recording of acquired fixed assets at net book value as a preliminary estimate of fair value. (e) Reflects the following: Borrowings made by Queen prior to the Acquisition for the following: Payment of dividend to shareholders $ 131,000 Repayment of notes payable $ 19,400 Repayment of current debt $ 10,455 Payment of prepayment penalty and new facility fee $ 8,250 $169,105 ----------------- Borrowings made by Shaw to fund cash portion of purchase price and Acquisition expenses $ 36,531 ---------------- $205,636 ================ (f) Reflects the following: Recording long-term deferred tax liabilities of Queen $ 8,773 Recording income tax benefit from realized loss on sale of The Maxim Group common stock $ (942) ---------------- $ 7,831 ================ (g) Reflects the following: Surrender of Queen common stock $ (41) Issuance of Shaw common stock, net of treasury shares $ 7,045 ---------------- $ 7,004 ================ (h) Reflects the following: Value of shares of Shaw common stock issued in Acquisition $279,514 Less: value of shares in treasury $(176,370) stated value of shares issued in Acquisition, net of treasury shares $ (7,045) ---------------- $ 96,099 ================ (i) Reflects the following: Adjustments to Queen net assets prior to Acquisition: Payment of dividend to shareholders $(131,000) Payment of prepayment penalty and new facility fee $ (8,250) ----------------- $(139,250) Reversal of book value of net assets acquired, net of capital surrendered $ (48,045) Recording realized loss on sale of shares of The Maxim Group common stock, as follows: Previously recorded unrealized loss $ (11,950) Loss realized from October 3, 1998 to date of Acquisition, as follows: Recorded value at October 3, 1998 $ 50,400 Value at date of Acquisition $ 48,038 ----------------- Pre-tax loss $ (2,362) Income tax benefit $ 942 ----------------- After-tax loss (1,420) ---------------- $(200,665) ================
Shaw Industries, Inc. Pro Forma Condensed Consolidated Statement of Income For the Twelve Months Ended January 3, 1998 (Unaudited) (In thousands except per share amounts) - ------------------------------------------------------------------------------------------------------------------------------- Prior Dispositions Acquisition -------------------------- ----------------------------- Residential Carpets Int'l Acquisition Shaw Retail (a) U.K. Queen (b) Adjustments Pro Forma ------------ ------------ ------------ ------------ --------------- ------------ Net Sales $3,575,774 $ 643,012 $ 210,158 $ 708,446 $ - $3,431,050 Costs and expenses: Cost of sales 2,680,472 398,100 177,653 523,036 - 2,627,755 Selling, general and administrative 722,590 302,845 28,889 131,088 7,696 (c) 529,640 Pre-opening expenses 3,953 3,516 - - - 437 Charge to record store closing costs 36,787 36,787 - - - - Write-down of U.K. assets 47,952 - 47,952 - - - Interest, net 60,769 2,957 8,246 8,361 8,265 (d) 66,192 Other (income) expense, net (7,032) 190 - 1,764 - (5,458) ------------ ------------ ------------ ------------ ------------ ------------ Income before income taxes 30,283 (101,383) (52,582) 44,197 (15,961) 212,484 Provision for income taxes 5,586 (39,722) (28,901) 680 14,329 (e) 89,218 ------------ ------------ ------------ ------------ ------------ ------------ Income before equity in income of joint venture 24,697 (61,661) (23,681) 43,517 (30,290) 123,266 Equity in income of joint venture 4,262 - - - - 4,262 ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 28,959 $ (61,661) $ (23,681) $ 43,517 $ (30,290) $ 127,528 ============ ============ ============ ============ ============ ============ Earnings per common share: Basic $ 0.22 $ (0.46) $ (0.18) $ 0.83 Diluted $ 0.22 $ (0.46) $ (0.18) $ 0.83 Weighted average shares outstanding: Basic 133,523 19,444 152,967 Diluted 133,714 19,444 153,158
Footnotes to Pro Forma Condensed Consolidated Statement of Income For the Twelve Months Ended January 3, 1998 (Amounts in thousands) (a) Reflects the elimination of the results of residential retail operations for the year ended January 3, 1998, the reduction in interest expense resulting from the application of the $25,000 cash proceeds against Shaw's revolving credit facility and the interest income on the $18,000 promissory note from The Maxim Group. (b) For the year ended November 30, 1997. (c) Reflects the increase in amortization expense for the amortization of goodwill recorded in the Acquisition over 40 years. (d) Reflects the increase in interest expense related to additional borrowings made by Queen prior to the Acquisition and by Shaw to consummate the transaction,net of interest expense reduction caused by lower interest rates paid by Shaw. (e) Reflects the net increase in income tax provision resulting from 1) converting Queen to C corporation tax reporting status, and 2) the income tax benefit of all Acquisition adjustments (except for the goodwill amortization adjustment as the amortization of goodwill resulting from the Acquisition will not be deductible for tax purposes).
Shaw Industries, Inc. Pro Forma Condensed Consolidated Statement of Income For the Nine Months Ended October 3, 1998 (Unaudited) (In thousands except per share amounts) - --------------------------------------------------------------------------------------------------------------------------- Prior Dispositions Acquisition ------------------------- ----------------------------- Residential Carpets Int'l Acquisition Shaw Retail (a) U.K. (b) Queen (c) Adjustments Pro Forma ------------ ----------- ------------ ------------ --------------- ----------- Net Sales $2,589,768 $ 341,514 $ 57,899 $ 594,205 $ - $2,784,560 Costs and expenses: Cost of sales 1,921,523 212,327 49,183 427,779 - 2,087,792 Selling, general and administrative 464,553 147,670 6,645 136,481 5,772 (d) 452,491 Pre-opening expenses 232 158 - - - 74 Charge to record sale of residential retail 141,526 141,526 - - - - Interest, net 45,548 1,581 1,602 4,809 7,173 (e) 54,347 Other (income) expense, net 3,853 161 - (97) - 3,595 ------------ ----------- ------------ ------------ ----------- ----------- Income before income taxes 12,533 (161,909) 469 25,233 (12,945) 186,261 Provision for income taxes 19,314 (51,473) 157 1,169 7,199 (f) 78,998 ------------ ----------- ------------ ------------ ----------- ----------- Income before equity in income of joint venture (6,781) (110,436) 312 24,064 (20,144) 107,263 Equity in income of joint venture 682 - - - - 682 ------------ ----------- ------------ ------------ ----------- ----------- Net income (loss) $ (6,099) $ (110,436) $ 312 $ 24,064 $ (20,144) $ 107,945 ============ =========== ============ ============ =========== =========== Earnings per common share: Basic $ (0.05) $ (0.89) $ 0.00 $ 0.75 Diluted $ (0.05) $ (0.88) $ 0.00 $ 0.74 Weighted average shares outstanding: Basic 124,006 19,444 143,450 Diluted 125,738 19,444 145,182
Footnotes to Pro Forma Condensed Consoldated Statement of Income For the Nine Months Ended October 3, 1998 (Amounts in thousands) (a) Reflects the elimination of the results of residential retail operations for the seven months ended August 8, 1998 prior to disposition, the reduction in interest expense resulting from the application of the $25,000 cash proceeds against Shaw's revolving credit facility, and the interest income on the $18,000 promissory note from The Maxim Group. (b) For the three months ended April 3, 1998 prior to disposition. (c) For the nine months ended August 31, 1998. (d) Reflects the increase in amortization expense for the amortization of goodwill recorded in the Acquisition over 40 years. (e) Reflects the increase in interest expense related to additional borrowings made by Queen prior to the Acquisition and by Shaw to consummate the Acquisition,net of interest expense reduction caused by lower interest rates paid by Shaw. (f) Reflects the net increase in income tax provision resulting from 1) converting Queen to C corporation tax reporting status, and 2) the income tax benefit of all Acquisition adjustments (except for the goodwill amortization adjustment as the amortization of goodwill resulting from the Acquisition will not be deductible for tax purposes). SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SHAW INDUSTRIES, INC. By: /s/ Bennie M. Laughter ----------------------------------- Bennie M. Laughter Vice President, Secretary and General Counsel Dated: December 21, 1998 -----END PRIVACY-ENHANCED MESSAGE-----