- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------Prepared by MERRILL CORPORATION www.edgaradvantage.com SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549------------------------FORM 10-Q
--------------- QUARTERLY REPORT PURSUANT TO SECTIONQuarterly Report Pursuant to Section 13
ORor 15(d)OF THE SECURITIES EXCHANGE ACT OFof the Securities
Exchange Act of 1934FOR THE QUARTERLY PERIOD ENDED MAY 8,
For the Quarterly Period Ended November 6, 1999------------------------Commission File No. 1-13099
THE MAXIM GROUP, INC.
A Delaware Corporation
(IRS Employer Identification No. 58-2060334)
210 TownPark Drive
Kennesaw, Georgia 30144
(678) 355-4000Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
Common Stock, $.001 par value
91/4% Senior Subordinated Notes Due 2007New York Stock Exchange, Inc. 9 1/4% Senior Subordinated Notes Due 2007
New York Stock Exchange, Inc.- -------------------------------------------- -------------------------------------------- (TITLE(TITLE OF EACH CLASS) (NAME(NAME OF EACH EXCHANGE
ON WHICH REGISTERED)Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $.001 par valueIndicate by check mark whether the registrant (1) has filed all reports required to be filed 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_X_/ /Indicate the number of shares outstanding of the registrant's classes of common Stock, as of the latest practicable date:
Common Stock, $.001 par value 19,072,532 - -------------------------------------------- --------------------------------------------
Class19,038,347
Outstanding atNovember 1,December 17, 1999- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------PART
Part 1
FINANCIAL INFORMATION ITEMFinancial Information
Item 1.FINANCIAL STATEMENTS.Financial Statements.THE MAXIM GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)(In thousands, except share data)
MAY 8, JANUARYNovember 6,
1999January 31,
19991999 ----------- ----------- (UNAUDITED)(Unaudited) ASSETS Cash and cash equivalents...................................equivalents$ 46,29664,899 $ 89,901 Current portion of franchiseefranchise license feesreceivable....... 307receivable2,548 2,013 Current portion of notes receivable......................... 2,404receivable2,444 3,405 Receivables................................................. 65,019Receivables 63,479 52,607 Inventories................................................. 64,613Inventories 62,831 58,744 Refundable income taxes..................................... 4,476 --taxes4,766 Deferred income taxes.......................................taxes7,361 7,361 Prepaid expenses............................................ 7,930expenses8,148 6,316 -------- --------Total current assets.................................... 198,406assets216,476 220,347 Property, plant and equipment, net.......................... 80,322net82,829 71,766 Franchise license fees receivable, less current portion..... 4,734portion4,373 2,337 Notes receivable from franchisees, less current portion..... 9,585portion6,825 8,228 Deferred income taxes.......................................taxes1,465 1,065 1,065Intangible assets........................................... 76,836assets83,103 71,341 Other assets................................................ 12,376assets15,180 13,684 -------- --------Total assets................................................ $383,324 $388,768 ======== ========assets$ 410,251 $ 388,768
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt...........................debt$ 17,12342,227 $ 16,952 Senior subordinated notes................................... 95,428notes95,462 99,387 Current portion of capital lease obligations................ 6,589obligations5,245 6,635 Accounts payable............................................ 27,892payable37,101 26,706 Rebates payable to franchisees.............................. 4,540franchisees6,905 749 Deposits.................................................... 18,533Deposits 17,688 14,769 Deferred revenue............................................ 5,215revenue4,170 2,254 Income taxes payable........................................ --payable 2,633 Other accrued liabilities................................... 42,470liabilities43,369 55,827 -------- --------Total current liabilities............................... 217,790liabilities252,167 225,912 -------- --------Long-term debt, less current portion........................ 3,351portion6,410 4 -------- --------Capital lease obligations, less current portion............. 1,391portion1,092 1,469 -------- --------Other long-term liabilities................................. --liabilities 516 -------- --------Stockholders' equity: Common stock-shares issued: 21,326,18421,404,247 and 21,315,664 as ofMay 8,November 6, 1999 and January 31, 1999,respectively.......respectively21 21 Additional paid-in capital................................capital186,553 185,828 Retained earnings......................................... 9,036earnings (deficit)(778 ) 9,836 Unrealized holding loss on investments (396 ) Treasury stock-shares at cost: 2,365,900 as of May 8,November 6, 1999 and January 31, 1999respectively...................... (34,818) (34,818) -------- --------(34,818 ) (34,818 ) Total stockholders' equity.............................. 160,792equity150,582 160,867 -------- --------Total liabilities and stockholders' equity.................. $383,324 $388,768 ======== ========equity$ 410,251 $ 388,768 The accompanying notes are an integral part of these condensed consolidated financial statements.
2
THE MAXIM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED ----------------------- MAY 8, APRIL 30,Three Months Ended Nine Months Ended November 6,
1999October 31,
1998-------- ---------November 6,
1999October 31,
1998Revenues: Sales of floor covering products.......................... $180,568 $80,661products$ 187,278 $ 235,116 $ 559,047 $ 401,934 Fees from franchise services.............................. 11,300 6,857services10,485 4,558 32,223 13,807 Fiber and PET sales....................................... -- 6,965 Other..................................................... 712 2,149 -------- -------sales 8,257 20,431 Other 1,080 1,641 2,659 5,613 Total revenues.......................................... 192,580 96,632revenues198,843 249,572 593,929 441,785 Cost of sales............................................... 118,906 69,564 -------- -------sales120,358 163,599 365,515 305,984 Gross profit.............................................. 73,674 27,068profit78,485 85,973 228,414 135,801 Selling, general and administrative expenses................ 72,685 22,390 -------- -------expenses83,201 77,352 233,856 123,147 Nonrecurring charges 28,531 Operating income.......................................... 989 4,678(loss) income(4,716 ) 8,621 (5,442 ) (15,877 ) Other income (expense): Interest income........................................... 1,167 386income468 345 2,437 763 Interest expense.......................................... (2,799) (2,459)expense(3,179 ) (4,296 ) (9,140 ) (9,681 ) Other, net................................................ 79 (52) -------- -------net304 653 904 (Loss) income before income taxes and extraordinary charge.................................................... (564) 2,553charge(7,123 ) 4,670 (11,492 ) (23,891 ) Benefit (provision) for income taxes........................ 38 (1,235) -------- -------taxes (2,039 ) 1,152 6,240 (Loss) income before extraordinary charge................... (526) 1,318charge(7,123 ) 2,631 (10,340 ) (17,651 ) Extraordinary charge on early retirement of debt, net of tax benefit................................................... (274) -- -------- -------benefit (377 ) (274 ) (377 ) Net (loss) income...........................................income(7,123 ) 2,254 (10,614 ) (18,028 )
Unrealized holding loss on investments
(396
)
(396
)
Comprehensive (loss) income $ (800)(7,519 ) $ 1,318 ======== =======2,254 $ (11,010 ) $ (18,028 ) Basic (loss) earnings per share before extraordinary charge....................................................charge$ (0.03)(0.37 ) $ 0.080.14 $ (0.54 ) $ (1.02 ) Extraordinary charge per share.............................. (0.01) -- -------- -------share (0.02 ) (0.01 ) (0.02 ) Basic (loss) earnings per share.............................share$ (0.04)(0.37 ) $ 0.08 ======== =======0.12 $ (0.55 ) $ (1.04 ) Diluted (loss) earnings per share before extraordinary charge....................................................charge$ (0.03)(0.37 ) $ 0.080.13 $ (0.54 ) $ (1.02 ) Extraordinary charge per share.............................. (0.01) -- -------- -------share (0.02 ) (0.01 ) (0.02 ) Diluted (loss) earnings per share...........................share$ (0.04)(0.37 ) $ 0.08 ======== =======0.11 $ (0.55 ) $ (1.04 )
Weighted average commonshares.............................. 19,153 16,424 ======== =======shares
19,234
19,428
19,234
17,385
Weighted average common shares and equivalents.............. 19,153 17,247 ======== =======equivalents19,234 20,241 19,234 17,385 The accompanying notes are an integral part of these condensed consolidated financial statements.
3
THE MAXIM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)(In thousands)
(Unaudited)
THREE MONTHS ENDED ----------------------- MAY 8, APRIL 30,Nine Months Ended November 6,
1999October 31,
1998-------- ---------CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.........................................loss$ (800)(10,614 ) $ 1,318(18,028 ) Adjustments to reconcile net (loss) incomeloss to net cash (used in) provided by operating activities:Nonrecurring charges 7,540 Depreciation and amortization........................... 2,856 3,372amortization9,739 13,154 Deferred income taxes................................... -- 695taxes(445 ) (6,611 ) Changes in operating assets and liabilities, net of effects of acquisitions: Receivables........................................... (11,407) (6,229) Inventories........................................... (4,189) (4,264)Receivables (6,652 ) (12,800 ) Inventories (1,426 ) (20,023 ) Refundable income taxes............................... (4,476) 572taxes(4,766 ) 693 Prepaid expenses and other assets..................... (410) (4,510)assets(4,878 ) (13,180 ) Accounts payable and other liabilities................ (3,935) (987) -------- -------- Net cash (used in) operating activities..................... (22,361) (10,033) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (9,120) (14,172) Acquisitions, net of cash acquired........................ (8,042) -- -------- -------- Net cash (used in) investing activities..................... (17,162) (14,172) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options................... 325 1,348 Purchase of treasury stock................................ -- (1,760) Long-term debt proceeds................................... -- 17,114 Principal payments on capital lease obligations........... (124) (129) Early extinguishment of debt.............................. (4,283) -- -------- --------liabilities4,045 57,689 Net cash (used in) provided by operating activities (14,997 ) 8,434 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (14,952 ) (46,382 ) Acquisitions, net of cash acquired (14,582 ) (25,354 ) Net cash used in investing activities (29,534 ) (71,736 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 325 3,960 Purchase of treasury stock (19,924 ) Long-term debt proceeds 25,254 128,482 Long-term debt payments (4,283 ) (43,461 ) Principal payments on capital lease obligations (1,767 ) (376 ) Net cash provided by financing activities......... (4,082) 16,573 -------- --------activities19,529 68,681 Net decrease(decrease) increase in cash and cashequivalents................... (43,605) (7,632)equivalents(25,002 ) 5,379 Cash and cash equivalents at beginning of period............period89,901 28,880 -------- --------Cash and cash equivalents at end of period..................period$ 46,29664,899 $ 21,248 ======== ========34,259 The accompanying notes are an integral part of these condensed consolidated financial statements.
4
THE MAXIM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTENote 1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. CONSOLIDATED FINANCIAL STATEMENTSDescription of Business and Summary of Significant Accounting Policies.Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and 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 (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The interim results for the three and nine month periods ended November 6, 1999 are not necessarily indicative of the results to be expected for the fiscal year ending February 5, 2000. These statements should be read in conjunction with the condensed consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1999, as filed with the Securities and Exchange Commission.
Comprehensive
loss,loss/income, as defined by Statement of Financial AccountingStandardStandards ("SFAS") No. 130, "Reporting ComprehensiveIncome," wasIncome" is presented in thesame as net income (loss) for the three months ended May 8, 1999 and April 30, 1998. The resultsCondensed Consolidated Statements ofoperations for the periods presented are not necessarily indicativeOperations.Description of
the operating results for the year. DESCRIPTION OF BUSINESSBusinessThe Maxim Group, Inc. and subsidiaries (the "Company" or "Maxim") are engaged in retail and commercial sales of floor covering products throughout North America through a network of Company-owned retail stores and a network of franchisees. The Company is also engaged in the sale of franchises for the retail floor covering industry and other related products and services to its franchises. Substantially all of the assets of Image Industries, Inc. ("Image"), a wholly owned manufacturing subsidiary of Maxim, were sold on January 29, 1999. Image was engaged in the manufacturing of residential carpet and plastics recycling.
RISK FACTORSRisk Factors
The Company relies on several large floor covering manufacturers for the supply of its floor covering products. While the Company believes there are a number of alternative manufacturers capable of supplying and distributing its products, delays in obtaining alternative sources, if necessary, could have a significant adverse effect on the Company's results of operations.
The Company also has certain other risk factors, which include, but are not limited to, risks associated with integration of acquisitions and new computer systems, litigation, competition, possible economic downturns and changes in laws and regulations.
GOING CONCERNGoing Concern
The accompanying condensed consolidated financial statements of the Company have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As of
May 8,November 6, 1999 and January 31, 1999, the Company was not in compliance with a certain restricted payment covenant contained in the Indenture pursuant to whichreferencesthe Company's$100 million$100,000,000 91/4%1/4% senior subordinated notes (the "Senior Notes").were issued.During the three month period ended October 31, 1998, the Company's restricted payments exceeded that allowed under the Indenture. As of
May 8,November 6, 1999 and January 31, 1999, the Company was5NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED)not in compliance with the terms of the Indenture and as a result, the trustee or the holders of not less than 25% of the aggregate outstanding principal amount of the Senior Notes may declare all unpaid principal plus any accrued interest of all of the Senior Notes due and payable. Accordingly, the Senior Notes are classified as a current liability in the accompanying condensed consolidated balance sheets as ofMay 8,November 6, 1999 and January 31, 1999.As of
November 1,December 17, 1999, the Company's available borrowings under its Senior Credit Facility plus cash on hand were not sufficient to repay the Senior Notes if such Senior Notes were declared due and payable.The Company is currently negotiating with the holders of the Senior Notes to obtain the requisite consent to waive the default. Any such consent may include, among other things, the redemption of a portion of the Senior Notes, the payment of a consent fee by Maxim and a higher interest rate on the Senior Notes which remain outstanding. There can be no assurance that any such waiver will be granted. If a waiver is not obtained by Maxim, repayment of the Senior Notes may be accelerated, as discussed above.
Additionally, the Company is currently in negotiations with its senior lenders to amend or replace its Senior Credit Facility to allow for enhanced availability, an extended maturity date, and improved advance ratios on existing collateral.
NOTENote 2.
NEW ACCOUNTING PRONOUNCEMENTS.New Accounting Pronouncements.During June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement established accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows derivative gains and losses to offset related results on the hedged item in the statements of operations and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, although earlier adoption is permitted. SFAS No. 133 cannot be applied retroactively. The Company does not believe this
statementStatement will have a material impact on the financial statements.NOTENote 3.
ACQUISITIONS.Acquisitions.During the
threenine months endedMay 8,November 6, 1999, the Company acquired715 retail locations for aggregate consideration of approximately$8,530,000. Subsequent to the three months ended May 8, 1999, the Company acquired 8 retail locations for aggregate consideration of approximately $12,170,000.$20,700,000. The related purchase agreementsalsoprovide for additional consideration to be paid based oncertain locationsthe future financialperformance.performance of certain of the acquired locations.Effective August 9, 1998, the Company acquired substantially all of the residential retail store assets of Shaw Industries, Inc. and its wholly owned subsidiary, Shaw Carpet Showplace, Inc. (collectively, "Shaw"). The acquisition has been recorded using the purchase method of accounting. On January 29, 1999, the Company sold substantially all of the assets of its Image subsidiary. The operating results of the retail stores acquired from Shaw are included in the Company's condensed consolidated statements of operations from the date of acquisition. The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the acquisition of the retail store assets of Shaw and the disposition of all
ofthe assets of Image had occurred on February 1, 1998. The pro6NOTE 3. ACQUISITIONS. (CONTINUED)forma expenses include the recurring costs that are directly attributable to the acquisition, such as interest expense and amortization of goodwill, and their related tax effects.
THREE MONTHS ENDED ----------------------- MAY 8, APRIL 30,Three Months Ended Nine Months Ended November 6, 1999 October 31, 1998 (IN THOUSANDS) -------- ---------November 6, 1999 October 31, 1998 (In thousands) Net revenue............................................ $192,580 $185,848revenue$ 198,843 $ 195,148 $ 593,929 $ 563,790 Net loss............................................... (800) (2,048)loss(7,123 ) (211 ) (10,614 ) (26,937 ) Basic loss per share...................................share$ (0.04)(0.37 ) $ (0.10)(0.01 ) $ (0.55 ) $ (1.38 ) Diluted loss per share................................. (0.04) (0.10)share(0.37 ) (0.01 ) (0.55 ) (1.38 ) NOTENote 4.
INVENTORIES.Inventories.Inventories consist of the following:
MAY 8, JANUARYNovember 6,
1999January 31,
19991999 (IN THOUSANDS) -------- -----------(In thousands) Raw materials..........................................materials$ 309 $ 309 Finished goods......................................... 64,304goods62,522 58,435 ------- ------- Total.................................................. $64,613 $58,744 ======= =======Total $ 62,831 $ 58,744 On a segment basis, the Company's inventories consist of the following:
MAY 8, JANUARYNovember 6,
1999January 31,
19991999 (IN THOUSANDS) -------- -----------Retail................................................. $62,796 $56,927 Image..................................................(In thousands) Retail $ 62,522 $ 56,927 Image 309 1,817 1,817 ------- ------- Total.................................................. $64,613 $58,744 ======= =======Total $ 62,831 $ 58,744 NOTENote 5.
NONRECURRING CHARGES.Nonrecurring Charges.During the three month period ended July 31, 1998, the Company reevaluated its business strategy and determined to expand its focus on its retail operations. As a result of the revised retail strategy, the Company amended the franchise agreement for one of its franchised line of retail stores, closed certain Company-owned stores, and wrote down to fair value certain retail assets, including goodwill. The Company estimated that the changes to the franchise agreement would result in franchisee claims brought against the Company. The Company recorded a $28,531,000 charge for these nonrecurring items during the
three monththree-month period ended July 31, 1998. The initial charge was subsequently reduced by $4,818,000, as revised estimates for franchisee claim reserves and store closure costs were less than initially expected. The revised estimates were offset in part by a ten store net increase in the numberof storesto be closed. As ofMay 8,November 6, 1999,$19,365,000 of the$21,633,000 nonrecurring charges were incurred, with$4,348,000$2,080,000 remaining in the reserve, which is included in accrued liabilities on the accompanying condensed consolidated balance sheet.7NOTE 5. NONRECURRING CHARGES. (CONTINUED)The major components of the nonrecurring charge balance
the remainder of which is included in other accrued liabilities on the balance sheet at May 8, 1999 and January 31, 1999are as follows:
JANUARYJanuary 31, MAY 8,
1999AMOUNTAmount
IncurredNovember 6,
1999BALANCE INCURRED BALANCE (IN THOUSANDS) ----------- -------- --------(In thousands) Claim reserves.............................................. $3,195reserves$ (191) $3,0043,195 $ (1,115 ) $ 2,080 Store closure and carrying costs............................costs2,822 (1,478) 1,344 ------ ------- ------ $6,017 $(1,669) $4,348 ====== ======= ======(2,822 ) $ 6,017 $ (3,937 ) $ 2,080 NOTENote 6.
DEBTDebtIn March 1999, the Company purchased the principal amount of $4,000,000 of its Senior Notes in the open market. The amount paid approximated the face amount of the Senior Notes.
NOTE 7. SEGMENT INFORMATION. SFAS No. 131--In an effort to resolve the default under its Senior Notes, Maxim has reached an agreement in principle with an ad hoc committee consisting of Noteholders who own a majority of the principal amount of the outstanding Senior Notes. Pursuant to the agreement in principle, Maxim has commenced an offer to purchase not less than $40,000,000 of Senior Notes at a purchase price of 102%, plus accrued and unpaid interest and other fees and charges. Maxim is required to pay a cash consent fee of $50 per $1,000 principal amount of Senior Notes to those Noteholders who consent to the default waiver and whose Senior Notes are not purchased by Maxim.
Under the terms of the pending offer to purchase and consent solicitation, the following additional terms would apply to Senior Notes which are not purchased by Maxim:
The interest rate would increase from 91/4% per annum to 123/4% per annum and would increase by 25 basis points on October 15, 2000 and further increase every six months thereafter (increasing instead by 50 basis points if the bond rating assigned to the Senior Notes by Standard & Poor's is less than "B-"
Disclosures about Segments);The Senior Notes would be secured by a second lien on certain assets;
Maxim would, on an annual basis beginning on February 7, 2001, be required to consummate an offer to purchase not less than $10,000,000 of outstanding Senior Notes at a purchase price of 102%, plus accrued and unpaid interest and other fees and charges (increasing to 103% if the bond rating assigned to the Senior Notes by Standard & Poor's is less than "B");
Maxim would be required to consummate an offer to purchase any Senior Notes which remain outstanding on October 15, 2002 at a price of 106.375%, plus accrued and unpaid interest and other fees and charges, and
Maxim would be required to maintain a fixed charge coverage ratio to be determined.
Consummation of the transactions contemplated by the agreement in principle is subject to, among other things, negotiation of an
Enterpriseamended or replacement senior credit facility acceptable to Maxim andRelated Information"--became effective forthe Noteholders, receipt of consents from Noteholders representing at least a majority in aggregate principal amount of outstanding Senior Notes, and certain other customary conditions. Maxim expects to complete the transactions contemplated by the offer to purchase and consent solicitation during the fourth quarter of fiscalyear 1999 and for all succeeding interim reporting periods. In accordance with the requirements of SFAS No. 131, the Company has identified three reportable segments through which it conducts its operating activities: retail, manufacturing and franchise services. These three segments reflect an aggregation2000. There can be no assurance that such a waiver will ultimately be granted. If a waiver is not obtained by Maxim, repayment of theoperating segments usedSenior Notes could be accelerated byCompany management for making decisions and assessing performance. Management determines operating segments based primarily upontheoperations' linetrustee or the holders ofbusiness and geographic location. Operating segments were aggregated into reportable segments based upon characteristics such as products and services, operating methods, customers, and distribution methods. The retail segment is comprised of retail floor covering stores and distribution support centers. The manufacturing segment is comprisednot less than 25% of theoperations of Image. With the sale of substantially all the assets of Image on January 29, 1999, Maxim no longer engages in manufacturing operations. The franchise services segment includes store development, marketing, advertising, production, consumer credit, training and product sourcing activities as well as interest expense and corporate non-operating items not directly relating to the manufacturing or retail segments. Intersegment sales and transfers occurred as carpet was transferred from Image to the Company's retail segment. The retail segment purchases advertising, training or product sourcing services from the franchise services segment. Intersegment transactions are accounted for on the same basis as transactions with third parties. 8NOTE 7. SEGMENT INFORMATION. (CONTINUED) Identifiable assets consist of cash, property, plant and equipment used in the operationsaggregate outstanding principal amount of thesegment, as well as inventory, receivables and other assets directly related to the segment. The Company has no assets located outside the United States.
FRANCHISE INTERSEGMENT MANUFACTURING RETAIL SERVICES ELIMINATIONS TOTAL (IN THOUSANDS) ------------- -------- --------- ------------ --------Three Months Ended May 8, 1999: Revenues............................ $ -- $176,769 $ 21,627 $(5,816) $192,580 Operating income (loss)............. -- (3,661) 4,650 -- 989 Interest expense.................... -- 901 2,898 (1,000) 2,799 Income tax benefit (provision)...... -- 122 (84) -- 38 Extraordinary charge................ -- -- 274 -- 274 Net (loss) income................... -- (4,343) 3,543 -- (800) Total assets........................ 7,168 222,507 153,649 -- 383,324 ------- -------- -------- ------- -------- Three Months Ended April 30, 1998: Revenues............................ $48,584 $ 39,799 $ 12,080 $(3,831) $ 96,632 Operating income (loss)............. 4,431 (660) 959 (52) 4,678 Interest expense.................... 1,429 854 2,251 (2,075) 2,459 Income tax benefit (provision)...... (1,216) 856 (875) -- (1,235) Net (loss) income................... 2,070 (1,442) 690 -- 1,318 ------- -------- -------- ------- --------NOTE 8. SUBSEQUENT EVENTS. CREDIT FACILITYSenior Notes.Credit Facility
On May 18, 1999, the Company entered into an amended and restated credit facility, which provides for aggregate commitments of
$75.0 million$75,000,000 (the "Senior Credit Facility"). The Senior Credit Facility consists of a revolving facility that matures May 18, 2002. Borrowings under the Senior Credit Facility are secured by accounts receivable, inventories, certain real and personal property, and certain intangible assets of Maxim and its subsidiaries, as well as the capital stock of all of its subsidiaries. As additional collateral security for the Senior Credit Facility, the Company has established a cash collateral account with the lenders. As ofNovember 10,December 17, 1999 the cash collateral account balance was$42.6 million.approximately $42,600,000. As ofNovember 10,December 17, 1999, the Company had$5.8 millionapproximately $1,200,000 available under the revolver. Amounts outstanding under the Senior Credit Facility bear interest at various variable rates. The Senior Credit Facility contains a number of covenants customary for credit transactions of this type and requires the Company to meet certain financial ratios. Because of the Company's violation of various covenants (principally related to failures to provide required financial information and other documentation), certain events of default exist under the Senior Credit Facility. The Company and its Senior Credit Facility lenders have entered into a forebearance agreement with respect to such events of default, which forebearance currently extends toNovember 15, 1999.January 31, 2000. The Company is currently in discussions with its Senior Credit Facility lenders to amend or replace the Senior Credit Facility. The negotiations involve enhanced credit availability, a new maturity date and improved advance ratios on existing collateral.Amounts outstanding under the Senior Credit Facility bear interest at a variable rate equal to, at the Company's option, (i) the base rate (defined as the greater of the prime rate or the federal funds rate plus one-half of one percent) or (ii) the adjusted LIBOR rate, in each case plus the applicable margin. The applicable margin ranges from 1.25% to 2.50% for loans that bear interest at the adjusted LIBOR rate. The Company is required to pay the lenders under the Senior Credit Facility, on a quarterly basis, a commitment fee ranging from 0.25% to 0.50% of the unused portion of the Senior
9NOTE 8. SUBSEQUENT EVENTS. (CONTINUED)Credit Facility. The Company is required to pay administration fees quarterly. The Senior Credit Facility contains a number of covenants, including, among others, covenants restricting the Company and certain of its subsidiaries with respect to the incurrence of indebtedness (including contingent obligations); the creation of liens; the sale, lease, assignment, transfer, or other disposition of assets; the making of certain investments, loans, advances, and acquisitions; the consummation of certain transactions, such as mergers or consolidations. Further, the Senior Credit Facility contains cross default provisions related to the Company's other indebtedness. The Senior Credit Facility requires the Company to meet certain financial ratios and covenants, including debt to equity, debt to capital, minimum tangible net worth, minimum EBITDAR and fixed charges.SENIOR SUBORDINATED NOTESNote 7. Segment Information.
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" became effective for fiscal year 1999 and for all succeeding interim reporting periods. In accordance with the requirements of SFAS No. 131, the Company has identified three reportable segments through which it conducts its operating activities: retail, manufacturing and franchise services. These three segments reflect an
effort to resolve the pending defaultaggregation of theSenior Notes, Maxim has reached an agreement in principle with an ad hoc committee consistingoperating segments used by Company management for making decisions and assessing performance. Management determines operating segments based primarily upon the operations' line ofNoteholders who own a majoritybusiness and geographic location. Operating segments were aggregated into reportable segments based upon characteristics such as products and services, operating methods, customers, and distribution methods. The retail segment is comprised of retail floor covering stores and distribution support centers. The manufacturing segment is comprised of theprincipal amountoperations of Image. With the sale of substantially all the assets of Image on January 29, 1999, Maxim no longer engages in manufacturing operations. The franchise services segment includes store development, marketing, advertising, production, consumer credit, training and product sourcing activities as well as interest expense and corporate non-operating items not directly relating to the manufacturing or retail segments.Intersegment sales and transfers occured as carpet was transferred from Image to the Company's retail segment. The retail segment purchases advertising, training or product sourcing services from the franchise services segment. Intersegment transactions are accounted for on the same basis as transactions with third parties.
Note 8. Contingencies.
Since the May 18, 1999 announcement that Maxim would be restating financial results for fiscal 1999 and certain of the
outstanding Senior Notes. Pursuantquarters therein, eleven lawsuits claiming to be class actions have been filed against Maxim and certain of its current and former executive officers and directors. In addition, theagreement in principle, MaximSecurities and Exchange Commission ("SEC") has commenced anofferinformal inquiry in connection with the matters relating topurchasethe restatement.Management does not
less than $40.0 millionbelieve that it is feasible to predict or determine the final outcome ofSenior Notes atthe class action lawsuits or the SEC inquiry or their effect on Maxim's financial results, its business or its management. In addition, management does not believe it is feasible to estimate the amounts or potential range of loss with respect thereto. The potential outcomes or resolutions of the class action lawsuits could include apurchase pricejudgement against Maxim or settlements that could require substantial payments by Maxim. Potential outcomes of102%, plus accruedthe SEC inquiry could include administrative or other sanctions being imposed on Maxim and/or certain of its officers. In addition, the timing of the final resolution of these matters is uncertain. Material adverse outcomes with respect to the class action lawsuits or the SEC inquiry could have a material adverse effect on Maxim's financial condition, results of operations andunpaid interestcash flows.Identifiable assets consist of cash, property, plant and equipment used in the operations of the segment, as well as inventory, receivables and other
fees and charges. Maxim is required to pay a cash consent fee of $50 per $1,000 principal amount of Senior Notes to those Noteholders who consentassets directly related to thedefault waiversegment. The Company has no assets located outside the United States.
Manufacturing Retail Franchise
ServicesIntersegment
EliminationsTotal (In thousands) Three Months Ended November 6, 1999: Revenues $ $ 185,388 $ 19,539 $ (6,084 ) $ 198,843 Operating (loss) income (1,296 ) (3,420 ) (4,716 ) Interest expense 142 3,037 3,179 Income tax (provision) benefit Net (loss) income (1,153 ) (5,970 ) (7,123 ) Total assets 530 239,853 169,868 410,251 Three Months Ended October 31, 1998: Revenues $ 54,424 $ 190,625 $ 15,217 $ (10,694 ) $ 249,572 Operating income (loss) 4,994 2,995 (76 ) 708 8,621 Interest expense 1,543 999 4,134 (2,380 ) 4,296 Income tax (provision) benefit (1,117 ) (569 ) (353 ) (2,039 ) Extraordinary charge 377 377 Net (loss) income 2,465 703 (914 ) 2,254 Nine Months Ended November 6, 1999: Revenues $ $ 551,122 $ 61,440 $ (18,633 ) $ 593,929 Operating income (loss) (7,856 ) 2,414 (5,442 ) Interest expense 1,602 9,027 (1,489 ) 9,140 Income tax benefit 54 1,098 1,152 Extraordinary charge 274 274 Net (loss) income (8,796 ) (1,818 ) (10,614 ) Nine Months Ended October 31, 1998: Revenues $ 152,148 $ 273,888 $ 37,740 $ (21,991 ) $ 441,785 Nonrecurring charges 28,531 28,531 Operating income (loss) 13,376 4,139 (31,880 ) (1,512 ) (15,877 ) Interest expense 4,380 2,772 9,152 (6,623 ) 9,681 Income tax (provision) benefit (3,256 ) 150 9,346 6,240 Extraordinary charge 377 377 Net (loss) income 6,039 (732 ) (23,335 ) (18,028 )
Item 2. Management's Discussion and
whose Senior Notes are not purchased by Maxim.Analysis of Financial Condition and Results of Operations.The following
additional terms would apply to Senior Notes which are not purchased by Maxim: - The interest rate will increase from 9 1/4% per annum to 12 3/4% per annum and will increase by 25 basis pointsdiscussion should be read in conjunction with the Condensed Consolidated Financial Statements of Maxim, including the notes thereto contained in this Quarterly Report onOctober 15, 2000 and further increase every six months thereafter (increasing instead by 50 basis points if the bond rating assigned to the Senior Notes by Standard & Poor's is less than "B-"); - The Senior Notes will be secured by a second lien on certain assets; - Maxim will, on an annual basis beginning on February 7, 2001, be required to consummate an offer to purchase not less than $10.0 million of outstanding Senior Notes at a purchase price of 102%, plus accrued and unpaid interest and other fees and charges (increasing to 103% if the bond rating assigned to the Senior Notes by Standard & Poor's is less than "B"); - Maxim will consummate an offer to purchase any Senior Notes which remain outstanding on October 15, 2002 at a price of 106.375%, plus accrued and unpaid interest and other fees and charges, and - Maxim will be required to maintain a fixed charge coverage ratio to be determined. Consummation of the transactions contemplated by the agreement in principle is subject to, among other things, negotiation of an amended or replacement senior credit facility acceptable to Maxim and the Noteholders, receipt of consents from Noteholders representing at least a majority in aggregate principal amount of outstanding Senior Notes, and certain other customary conditions. Maxim expects to complete the transactions contemplated by the agreement in principle during the fourth quarter of fiscal 2000. There can be no assurance that such a waiver will ultimately be granted. If a waiver is not obtained by Maxim, repayment of the Senior Notes may be accelerated. 10ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF MAXIM, INCLUDING THE NOTES THERETO, CONTAINED IN THIS QUARTERLY REPORT ON FORMForm 10-Q.GENERALGeneral
During the year ended January 31, 1999, Maxim acquired the retail store assets of Shaw Industries, Inc. for consideration of 3,150,000 shares of Maxim's common stock valued at $55.2 million, an $18.0 million promissory note,
subsequentlyadjusted to$11.5$10.0 million after the effect of purchase price adjustments, and $25.0 million in cash. These assets were purchased effective August 9, 1998, and included 266 retail floor covering centers. The acquisition of these assets resulted in a substantial increase in the number of Company-owned stores. As reflected in the following discussion, the acquisition of these assets materially impacted Maxim's financial condition and results of operations.The acquired retail stores are currently being integrated into Maxim. Maxim is evaluating the strengths of the acquired brands and is currently making merchandise shifts to maximize the stores' potential. Changes will include rebranding of these stores to the newly established Flooring America brand, adjusting merchandising fixtures and displays, closing or selling certain stores and reviewing current operational practices at each store.
The Shaw retail stores incurred significant losses in periods prior to their acquisition by Maxim. These stores historically operated at a lower profit level than those typical in the retail flooring industry. To the extent such conditions continue before and after Maxim's integration of these stores, such conditions may affect not only the operation of the acquired stores, but also the consolidated results of operations of Maxim. Moreover, the acquired stores' geographic areas and product lines overlapped with the Company's existing stores in certain areas causing the need to close or remodel certain stores.
In order to focus its full efforts and resources on the growth and efficiency of the retail operations, Maxim sold
itsthe carpet manufacturing operations of its Image subsidiary in January 1999 for total consideration of $210.7 million which included thesubsidiaryassumption of $48.1 million in debt and short-term liabilities. With this sale of Maxim's manufacturing assets, management believes that Maxim is positioned as one of the leading speciality retailers of flooringproduct on an exclusive basis.products. As of November 1, 1999, Maxim's retail network consisted of 323 Company-owned stores and 1,035 franchise centers/locations.During the three and nine months ended
May 8,November 6, 1999, Maxim operated two reportable segments: retail and franchise services. During the three and nine months endedApril 30,October 31, 1998, Maxim operated a third reportable segment, manufacturing. The retail segment is a chain of stores and support centers. The franchise services segment includes franchise fees and related activities, general corporate charges, interest expense and corporate non-operating items not directly relating to the manufacturing or retail segments. See Note 7 to Maxim's Condensed Consolidated Financial Statements for certain financial information relating to these three segments.11On February 1, 1999, Maxim changed its fiscal year end from January 31 to the first Saturday following January 31. Accordingly, the
firstthird quarter of the fiscal year ending February 5, 2000 consists of the14-week13-week period endedMay 8, 1999 compared to a 13-week period in the prior year.November 6, 1999. Financial results for the threemonthsand nine month endedApril 30,October 31, 1998 have not been restated to reflect the effects of the change in fiscal year.RESULTS OF OPERATIONS THREE MONTHS ENDED MAY 8,Results of Operations
Three Months Ended November 6, 1999
COMPARED TO THREE MONTHS ENDED APRIL 30,Compared to Three Months Ended October 31, 1998TOTAL REVENUES.Total Revenues. Total revenues
increased 99.3%decreased 20.3% to$192.6$198.8 million for the three months endedMay 8,November 6, 1999 from$96.6$249.6 million for the three months endedApril 30,October 31, 1998. The components of total revenues, exclusive of the effect ofintersegmentintercompany eliminations, are discussed below. Intersegment eliminations, which totaled$5.8$6.1 million for the three months endedMay 8,November 6, 1999 and$3.8$10.7 million for the three months endedApril 30,October 31, 1998, include certain intercompany allocations.RETAIL REVENUE.
Retail Revenue. Retail revenue consists of sales of floor covering products by Maxim's retail stores. Retail revenues
increased 344.2%decreased 2.7% to$176.8$185.4 million for the three months endedMay 8,November 6, 1999 from$39.8$190.6 million for the three months endedApril 30,October 31, 1998. Thegrowthdecrease in retail sales of floor covering products was primarily due to less demand in theimpact of the acquisition of the retail store assets of Shawcommercial andto a lesser extent, to internal growth. FRANCHISE SERVICES REVENUE.builder sectors in certain markets.Franchise Services Revenue. Franchise services revenue is generated from three primary sources: (i) one-time franchise fees from new
franchisees (revenue recognized at time of franchise agreement signing),franchisees; (ii) brokerage fees and/or royalties on certain floor covering products purchased by the franchisee; and (iii) franchise service fees for services and products such as advertising, which are offered to franchisees. Franchise services revenue increased79.0%28.4% to$21.6$19.5 million for the three months endedMay 8,November 6, 1999 from$12.1$15.2 million for the three months endedApril 30,October 31, 1998. The increase in franchise services revenue is due to, among other things, increases innational accounts revenue,rebates from floor covering vendors and growth in the demand for franchiseservices, particularlyservices.Manufacturing Revenue. Manufacturing revenue of $54.4 million for the
MAXCare franchise. MANUFACTURING REVENUE: Manufacturing revenuethree months ended October 31, 1998 included the sale of manufactured carpet and polyethylene tereptalate ("PET"), fiber and flake.Manufacturing revenueWith the sale of substantially all the assets of Image in January 1999, Maxim no longer engages in manufacturing operations.Gross Profit. Gross profit decreased 8.7% to $78.5 million for the three months ended
April 30,November 6, 1999 from $86.0 million for the three months ended October 31, 1998. As a percentage of total revenue, gross profit was 39.5% for the three months ended November 6, 1999 compared to 34.4% for the three months ended October 31, 1998 as a result of the sale of the manufacturing segment in January 1999. The manufacturing segment experienced a lower gross margin percentage than Maxim's retail and franchise services segments.Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 7.6% to $83.2 million for the three months ended November 6, 1999 from $77.4 million for the three months ended October 31, 1998. As a percentage of total revenue, selling, general and administrative expenses increased to 41.8% for the three months ended November 6, 1999 from 31.0% for the three months ended October 31, 1998. The increase in selling, general and administrative expenses, both as a percentage of revenues and operating expenses reflected Maxim's changing revenue mix, increased advertising cost and certain one-time professional fees. Selling, general and administrative expenses of Maxim's retail segment, which operates on a higher cost basis than the manufacturing segment, increased as a percentage of revenue. With the sale of Maxim's manufacturing operations in January 1999, the retail segment comprises a substantial portion of Maxim's operations in future periods. Also contributing to the increase in selling, general and administrative expenses were one-time charges for professional and legal fees of approximately $3.7 million, along with increases in consulting fees of $1.2 million for costs associated with Year 2000 remediation. The one-time charges for professional and legal fees are related to the restatement of fiscal 1999 financial results.
Operating Income/Loss. Operating income/loss decreased to a loss of $4.7 million for the three months ended November 6, 1999 from income of $8.6 million for the three months ended October 31, 1998. The components of operating income/loss, exclusive of the effect of intersegment eliminations, are discussed below. Intersegment eliminations totaled $708,000 for the three months ended October 31, 1998.
Retail Operating Income/Loss. Retail operating income/loss decreased to a loss of $1.3 million for the three months ended November 6, 1999 from income of $3.0 million for the three months ended October 31, 1998. This decrease was primarily due to a decrease in revenue, as well as, higher selling, general and administrative expense related to advertising.
Franchise Services Operating Income/Loss. Franchise services operating loss increased to $3.7 million for the three months ended November 6, 1999 from a loss of $76,000 for the three months ended October 31, 1998. This increased loss was due to higher selling, general and administrative expenses, including professional and legal fees, incurred during the three months ended November 6, 1999.
Manufacturing Operating Income/Loss. Manufacturing operating income was $5.0 million for the three months ended October 31, 1998. With the sale of substantially all the assets of Image in January 1999, Maxim no longer engages in manufacturing operations.
Interest Expense. Interest expense decreased 26.0% to $3.2 million for the three months ended November 6, 1999 from $4.3 million for the three months ended October 31, 1998, due principally to a reduction in debt levels. See "Liquidity and Capital Resources."
Income Tax Benefit. Maxim recorded no income taxes for the three months ended November 6, 1999 compared to a $2.0 million benefit for the three months ended October 31, 1998. An income tax benefit was not recorded for the three months ended November 6, 1999 due to fully utilizing the carry back potential of the deferred tax assets on Maxim's condensed consolidated balance sheet in prior quarters. Maxim has also not reflected a benefit for the potential loss carry forward for future periods.
Nine Months Ended November 6, 1999 Compared to Nine Months Ended October 31, 1998
Total Revenues. Total revenues increased 34.4% to $593.9 million for the nine months ended November 6, 1999, from $441.8 million for the nine months ended October 31, 1998. The components of total revenues, exclusive of the effect of intercompany eliminations, are discussed below. Intersegment eliminations, which totaled $18.6 million for the nine months ended November 6, 1999 and $22.0 million for the nine months ended October 31, 1998, include certain intercompany allocations.
Retail Revenue. Retail revenues increased 101.2% to $551.0 million for the nine months ended November 6, 1999 from $273.9 million for the nine months ended October 31, 1998. The growth in retail sales of floor covering products was primarily due to the impact of the acquisition of the retail store assets of Shaw.
Franchise Services Revenue. Franchise services revenue increased 62.8% to $61.4 million for the nine months ended November 6, 1999 from $37.7 million for the nine months ended October 31, 1998. The increase in franchise services revenue is due to, among other things, increases in rebates from floor covering vendors, advertizing, distribution and growth in the demand for franchise services.
Manufacturing Revenue. Manufacturing revenue for the nine months ended October 31, 1998 was
$48.6$152.1 million. With the sale of substantially all the assets of Image in January 1999, Maxim no longer engages in manufacturing operations.GROSS PROFIT.Gross Profit. Gross profit increased
172.2%68.2% to$73.7$228.4 million for thethreenine months endedMay 8,November 6, 1999 from$27.1$135.8 million for thethreenine months endedApril 30,October 31, 1998. As a percentage of total revenue, gross profit was38.3%38.5% for thethreenine months endedMay 8,November 6, 1999 compared to28.0%30.7% for thethreenine months endedApril 30,October 31, 1998 as a result of the sale in January 1999 of the manufacturing segmentin January 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.which had lower gross margins.Selling, General and Administrative Expenses. Selling, general and administrative expenses increased
224.6%89.9% to$72.7$233.9 million for thethreenine months endedMay 8,November 6, 1999 from$22.4$123.1 million for thethreenine months endedApril 30,October 31, 1998. The increase in selling, general and administrative expenses reflects an overall growth in the size of Maxim's retail base, including the retail store assets acquired from Shaw. These stores incurred higher levels of advertising costs than other Maximstores.Brands. These acquired stores also incurred selling, general and administrative expense relating to the integration of these stores into Maxim. As a percentage of total revenue, selling, general and administrative expenses increased to37.7%39.4% for thethreenine months endedMay 8,November 6, 1999 from23.2%27.9% for thethreenine months endedApril 30,October 31, 1998. The increase in selling, general and administrative expenses, both as a percentage of revenues and operating expensesreflectedreflect Maxim's changing revenuemix.mix and increased consulting and professional fees. Selling, general and administrative expenses of Maxim's retail segment, which operates on a higher cost basis than the manufacturing segment, increased as a percentage of revenue due to the purchase of Shaw's retail store assets in August 1998. With the sale of Maxim's manufacturing operations in January 1999, the retail segment12comprises a substantial portion of Maxim's operations in future periods. Increases in consulting/advertising and certain one-time professional feeslegal and bad debt expensesalso contributed to theoverallincrease in total selling, general and administrativeexpenses in the three months ended May 8, 1999. OPERATING INCOME/LOSS.expenses.Operating
incomeIncome/Loss. Operating loss decreased to$989,000 for the three months ended May 8, 1999, from $4.7$5.4 million for thethreenine months endedApril 30,November 6, 1999 from a loss of $15.9 million for the nine months ended October 31, 1998. The components of operatingincome,income/loss, exclusive of the effect of intersegment eliminations, are discussed below. Intersegment eliminations totaled$52,000 in$1.5 million for thethreenine months endedApril 30,October 31, 1998.RETAIL OPERATING INCOME/LOSS.
Retail Operating Income/Loss. Retail operating income/loss
increaseddecreased to a loss of$3.7$7.9 million for thethreenine months endedMay 8,November 6, 1999 fromlossincome of$660,000$4.1 million for thethreenine months endedApril 30,October 31, 1998. Thisincreasedecrease was primarily due to the impact of the acquisition of the retail store assets ofShaw.Shaw, as well as a decrease in revenue of these retail stores for the three months ended November 6, 1999. These stores have higher selling, general and administrative expense related to advertising, as well as, higher costs related to the remodeling of these stores.FRANCHISE SERVICES OPERATING INCOME/LOSS.Franchise Services Operating Income/Loss. Franchise services operating
incomeincome/loss increased to$4.7income of $2.0 million for thethreenine months endedMay 8,November 6, 1999 from$1.0a loss of $31.9 million for thethreenine months endedApril 30,October 31, 1998.This $3.7The loss incurred in 1998 was primarily due to $28.5 millionincrease was a resultofincreased revenue duringnonrecurring charges related to thethree months ended May 8, 1999. MANUFACTURING OPERATING INCOME/LOSS.re-evaluation of the Company's business strategy.Manufacturing Operating Income/Loss. Manufacturing operating income was $13.4 million for the
threenine months endedApril 30, 1998 was $4.4 million.October 31, 1998. With the sale of substantially all the assets of Image in January 1999, Maxim no longer engages in manufacturing operations.INTEREST EXPENSE.Interest Expense. Interest expense
increased 13.8%decreased 5.6% to$2.8$9.1 million for thethreenine months endedMay 8,November 6, 1999 from$2.5$9.7 million for thethreenine months endedApril 30,October 31, 1998 dueprincipallytoa higher interest ratelower debt levels duringthe three months ended May 8,fiscal 1999. See "Liquidity and Capital Resources."INCOME TAX (PROVISION) BENEFIT.Income Tax Benefit. Maxim recorded an income tax benefit of
$38,000$1.2 million for thethreenine months endedMay 8,November 6, 1999 compared to a$1.2$6.2 millionprovisionbenefit for thethreenine months endedApril 30,October 31, 1998. The decrease in incometaxestax benefit is due to Maxim recording less of apre-taxlossinfor thethreenine months endedMay 8,November 6, 1999.EXTRAORDINARY CHARGE.Extraordinary Charge. The extraordinary charge recorded in the
threenine months endedMay 8,November 6, 1999 resulted from the repurchase of $4.0 million principal amount Senior Notes and the write-off of unamortized financing fees anddiscount associated with the purchase of the Senior Notes.discounts. The total charge amounted to $295,000, which was tax effected by $21,000and discountfor thethreenine months endedMay 8,November 6, 1999.LIQUIDITY AND CAPITAL RESOURCES GENERAL.Liquidity and Capital Resources
General. Maxim's primary capital requirements are for new store openings and working capital. Maxim historically has met its capital requirements through a combination of cash flow provided by operations, net proceeds from the sale of equity and debt securities, bank lines of credit, disposition of assets, and standard payment terms from suppliers.
STOCK REPURCHASE PROGRAM.Stock Repurchase Program. In March 1997, the Board of Directors of Maxim authorized a stock repurchase program pursuant to which Maxim has periodically repurchased shares of its common stock in the open market. As of
November 1,December 17, 1999, Maxim had repurchased an aggregate of 2.4 million shares of common stock in the open market for $34.8 million. These purchases were financed from borrowings under Maxim's revolving credit facility and cash balances. As discussed below, the ability of Maxim to repurchase its common shares is limited by certain restrictions contained in theindentureIndenture relating to Maxim's senior subordinated notes. See"--Senior"Senior Subordinated Notes."CREDIT FACILITY.Credit Facility. On May 18, 1999, Maxim entered into an amended and restated credit facility, which provides for aggregate commitments of $75.0
million. The credit facilitymillion (the "Senior Credit Facility")This. The Senior Credit Facility consists of a revolving facility that matures May 18, 2002. Borrowings under the13Senior Credit Facility are secured by accounts receivable, inventories, certain real and personal property, and certain intangible assets of Maxim and its subsidiaries, as well as the capital stock of all of its subsidiaries. As additional collateral security for its obligations under the Senior Credit Facility, the amended credit facility,Maxim established a cash collateral account with the lenders. As ofNovember 10,December 17, 1999, the cash collateral account balance was $42.6 million. As ofNovember 10,December 17, 1999, the Company had$5.8$1.2 million available under the Senior Credit Facility. Amounts outstanding under the Senior Credit Facility bear interest at various variable rates. The Senior Credit Facility contains a number of covenants customary for credit transactions of this type and requires Maxim to meet certain financial ratios. Because of Maxim's violation of various covenants (principally related to failures to provide required financial information and other documentation), certain events of default exist under the Senior Credit Facility. Maxim and its Senior Credit Facility lenders have entered into a forbearance agreement with respect to such events of default, which forbearance currently extends toNovember 15, 1999.January 31, 2000. Maxim is currently in discussions with its Senior Credit Facility lenders to amend or replace such facility. The negotiations involve enhanced credit availability, a new maturity date and improved advance ratios on existing collateral.SENIOR SUBORDINATED NOTES.Senior Subordinated Notes. On October 16, 1997, Maxim issued $100 million of 9
1/4%1/4% Senior Subordinated Notes due 2007 (the "Senior Notes"). The proceeds to Maxim from the offering of the Senior Notes wereapproximately $96$96.0 million net of an initial issue discount,andfees and related costs. Maxim used the net proceeds from the offering of the Senior Notes to repay all borrowings then outstanding under its revolving credit facility of approximately $82.7 million and for general corporate purposes, including capital expenditures.Each of Maxim's operating subsidiaries has fully and unconditionally guaranteed the Senior Notes on a joint and several basis. The guarantor subsidiaries comprise all of the direct and indirect operating subsidiaries of Maxim. Maxim has not presented separate financial statements and other disclosures concerning the guarantor subsidiaries because management has determined that such information is not material to investors. There are no significant restrictions on the ability of the guarantor subsidiaries to make distributions to Maxim.
Maxim is currently in default of the restricted payment covenant contained in the Indenture (the "Indenture") pursuant to which the Senior Notes were issued. The default occurred on September 3, 1998 when Maxim repurchased shares of its common stock in the open market pursuant to its ongoing stock repurchase program.
On November 12, 1998, Maxim notified the Trustee under the Indenture of its default of the restricted payment covenant in the Indenture. In accordance with the terms of the Indenture, the Trustee on November 17, 1998 notified Maxim that such default would become an event of default on December 17, 1998 (30 days after the date of the Trustee's notice to Maxim) if not cured or waived prior to that date. To date, Maxim has not been able to obtain the consent of the Noteholders for a waiver of this covenant violation. Accordingly, the Trustee or the holders of not less than 25% in aggregate principal amount of Senior Notes outstanding may declare all unpaid principal of, premium, if any, and accrued and unpaid interest
ofon all such Senior Notes to be due and payable.Because either the Trustee or the holders of not less than 25% in aggregate principal amount of Senior Notes outstanding may accelerate payment of the Senior Notes, the Senior Notes are classified as a current liability on
the accompanying condensed unauditedMaxim's November 6, 1999 balancesheet.sheets. If Maxim receives the requisite consent to the waiver from the Senior Noteholders, however, the Senior Notes will again be classified as long-term debt of Maxim.In an effort to resolve the
pendingdefaultof theunder its Senior Notes, Maxim has reached an agreement in principle with an ad hoc committee consisting of Noteholders who own a majority of the principal amount of the outstanding Senior Notes. Pursuant to the agreement in principle, Maxim has commenced an offer to purchase not less than $40.0 million of Senior Notes at a purchase price of 102%, plus accrued and unpaid interest and other fees and charges. Maxim is required to pay a cash consent14fee of $50 per $1,000 principal amount of Senior Notes to those Noteholders who consent to the default waiver and whose Senior Notes are not purchased by Maxim. TheUnder the terms of the pending offer to purchase and consent solicitation, the following additional terms would apply to Senior Notes which are not purchased by Maxim:
-
The interest rate
willwould increase from 91/4%1/4% per annum to 123/4%3/4% per annum andwillwould increase by 25 basis points on October 15, 2000 and further increase every six months thereafter (increasing instead by 50 basis points if the bond rating assigned to the Senior Notes by Standard&& Poor's is less than "B-");-The Senior Notes
willwould be secured by a second lien on certain assets;-Maxim
will,would, on an annual basis beginning on February 7, 2001, be required to consummate an offer to purchase not less than $10.0 million of outstanding Senior Notes at a purchase price of 102%, plus accrued and unpaid interest and other fees and charges (increasing to 103% if the bond rating assigned to the Senior Notes by Standard&& Poor's is less than "B");-Maxim
willwould be required to consummate an offer to purchase any Senior Notes which remain outstanding on October 15, 2002 at a price of 106.375%, plus accrued and unpaid interest and other fees and charges, and-Maxim
willwould be required to maintain a fixed charge coverage ratio to be determined.Consummation of the transactions contemplated by the agreement in principle is subject to, among other things, negotiation of an amended or replacement senior credit facility acceptable to Maxim and the Noteholders, receipt of consents from Noteholders representing at least a majority in aggregate principal amount of outstanding Senior Notes, and certain other customary conditions. Maxim expects to complete the transactions contemplated by the
agreement in principleoffer to purchase and consent solicitation during the fourth quarter of fiscal 2000. There can be no assurance that such a waiver will ultimately be granted. If a waiver is not obtained by Maxim, repayment of the Senior Notesmaycould be acceleratedas discussed above. SYNTHETIC LEASE FINANCING.by the trustee or the holders of not less than 25% of the aggregate outstanding principal amount of the Senior Notes.Synthetic Lease Financing. Maxim has established a $10.0 million synthetic lease facility with a lending group with amounts outstanding of approximately $5.0 million as of
November 1,December 17, 1999. Under the synthetic lease facility, which is scheduled to mature no later than November 2003, Maxim has the ability to direct the lender group to make loans to First Security Bank, National Association, in its capacity as the co-owner-trustee under theFacility. The loan proceedsfacility. These loans maythenbe used for acquisition, development or expansion of Maxim's flooring center locations, which financed locations are then leased back by the co-owner-trustee to Maxim or a designated subsidiary. Maxim has guaranteed repayment of the amounts outstanding under the facility. The facility contains various financial and nonfinancial covenants. As ofMay 8,January 31, 1999, Maxim was not in compliance with certain of these covenants and Maxim obtained a waiver from the lenders under the synthetic lease facility. These lenders have waived such noncompliance and any right to accelerate payment of amounts outstanding under the facility because of such noncompliance.GOING CONCERN.Going Concern The accompanying condensed consolidated financial statements of the Company have been presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As of
May 8,November 6, 1999 and January 31, 1999, the Company was not in compliance with a certain restricted payment covenant contained in the Indenture which references the Senior Notes.During the three month period ended October 31, 1998, the Company's restricted payments exceeded that allowed under the Indenture. As of
May 8,November 6, 1999 and January 31, 1999, the Company was not in compliance with the terms of the Indenture and as a result, the trustee or the holders of not less than 25% of the Senior Notes may declare all unpaid principal plus any accrued interest of all of the Senior Notes due and payable. Accordingly, the Senior Notes are classified as a current liability in the accompanying condensed consolidated balancesheetsheets as ofMay 8,November 6, 1999 and January 31, 1999.15As of
November 1,December 17, 1999, the Company's available borrowings under its Senior Credit Facility plus cash on hand were not sufficient to repay the Senior Notes if declared due and payable.As described above, the Company is currently negotiating with the holders of the Senior Notes to obtain the requisite consent to waive the default. Any such consent may include, among other things, the redemption of a portion of the Senior Notes, the payment of a consent fee by Maxim and a higher interest rate on the Senior Notes which remain outstanding. There can be no assurance that such waiver will be granted. If a waiver is not obtained by Maxim, repayment of the Senior Notes may be accelerated, as discussed above.
Additionally, the Company is currently in negotiations with its senior lenders to amend or replace its Senior Credit Facility to allow for enhanced availability, an extended maturity date, and improved advance ratios on existing collateral.
CONTINGENCIES.Contingencies. Since the May 18, 1999 announcement that Maxim would be restating financial results for fiscal 1999 and certain of the quarters therein, eleven lawsuits claiming to be class actions have been filed against Maxim and certain of its current and former executive officers and directors. In addition, the Securities and Exchange Commission ("SEC") has commenced an informal inquiry in connection with the matters relating to the restatement.
Management does not believe that it is feasible to predict or determine the final outcome of the class action lawsuits or the SEC inquiry
onor their effect on Maxim's financial results, its business or its management. In addition, management does not believe it is feasible to estimate the amounts or potential range of loss with respect thereto. The potential outcomes or resolutions of the class action lawsuits could include ajudgmentjudgement against Maxim or settlements that could require substantial payments by Maxim. Potential outcomes of the SEC inquiry could include administrative or other sanctions being imposed on Maxim and/or certain of its officers. In addition, the timing of the final resolution of these matters is uncertain. Material adverse outcomes with respect to the class action lawsuits or the SEC inquiry could have a material adverse effect on Maxim's financial condition, results of operations and cash flows.CASH FLOWS.Cash Flows. During the
threenine months endedin May 8,November 6, 1999, operating activities used$22.4$15.0 million compared to$10.0providing $8.4 millionused infor thethreenine months endedApril 30,October 31, 1998. The increase in cash used in operating activities resulted primarily from an increase in accountsreceivable and inventories.receivable. The increase in accounts receivableand inventorieswas mainly due to higher sales of floor covering products to franchisees and other carpet retailers.During the
threenine months endedMay 8,November 6, 1999, investing activities used$17.2$29.5 million compared to using$14.2$71.7 millioninfor thethree monthsnine endedApril 30,October 6, 1998. Thechangedecrease in cash used is primarily due to the reducedlevelslevel of capital expendituresoffset by increased funds used to purchase additional retail locations.and reduced level of acquisitions.During the
threenine months endedMay 8,November 6, 1999, financing activitiesused $4.1provided $19.5 million compared toproviding $16.6$68.7 million provided for thethreenine months endedApril 30,October 31, 1998. Thischange resulted from the early extinguishment ofdecrease is primarily due to a reduction in long-term debtfor the three months ended May 8, 1999 as compared to the increase in of debt during the three months ended April 30, 1998. CAPITAL EXPENDITURES.proceeds.Capital Expenditures. Maxim anticipates that it will require approximately
$30.0$20.0 million for capital expenditures during fiscal 2000, of which approximately$20.0$15.0 million has been spent through November1,6, 1999, to (i) rebrand certain of its various retail formats under thesingularFlooring America name, including signage and interior store changes, (ii) reconfigure existing stores including certain of the stores acquired from Shaw, and (iii) upgrade its management information systems.SEASONALITYSeasonality
Historically, Maxim's retail floor covering sales are subject to some seasonal fluctuation, which Maxim believes is typical to the floor covering industry. Higher sales
occurredoccur in the summer and fall months during Maxim's second and third quarters, and lower salesoccurredoccur during the fourth quarter holiday season. Increases16occur in the second quarter asdue to historically greater home constructionschedules increaseactivity during the summer, and the largest increase occurs in the third quarter due toofa combination of ongoing home construction and pre-Christmas homeremodeling. YEARremodeling projects.Year 2000
Maxim has conducted an assessment of its computer systems to identify the systems that could be affected by the "Year 2000" issue, which results from computer programs being written using two digits rather than four to define the applicable year.
Maxim's Year 2000 readiness efforts
are beinghave been undertaken on a project team basis with centralized oversight from an external project management firm. Each project team has developed and is implementing a plan to minimize the risk of a significant negative impact on its operations. The teamsare performingperformed an inventory of Year 2000 components (software, hardware and other equipment), assessing which components may expose Maxim to business interruptions, reprogramming or replacing components as necessary, testing each component, and returning each component to production. Maximis utilizingutilized predominantly internal resources to reprogram, replace, or test Maxim's software for Year 2000 compliance. Maxim believes the readiness effort related to critical systemswill be completed bywas substantially complete at the end of the third fiscal quarter ending November 6, 1999, which is prior to any anticipated impact on its operating systems. Maxim believes its other systems will be Year 2000 compliant by December 31, 1999.Maxim
hasinitiated formal communications with all of its significant suppliers to determine the extent to which Maxim's operations and systems are vulnerable to third parties' failure. Key vendor initiative documentation has been received from vendors addressing all Year 2000 compliance issues. No significant business disruptions are expected. Maxim presently believes that with the planned conversion to new software and hardware and the planned modifications to existing software and hardware, the effects of the Year 2000 issue will be timely resolved. All other equipment, machinery and systems have been identified, replaced or upgraded as needed.Maxim's contingency plans at the retail store level include the temporary use of manual processes, which Maxim occasionally utilizes during system maintenance. The manual processes have been documented and tested with no significant revenue loss anticipated. A business contingency plan has been developed utilizing five professional project managers to implement the plan. The plan includes a business systems implementation schedule listing all issues related to the Year 2000. The issues include identification of changes needed, costs, completion dates and staffing.
Maxim currently believes the costs to remediate Year 2000 issues are approximately $2.8 million, of which approximately
$1.5 million$350,000 remains to be spent as ofNovember 1,December 17, 1999. All costs associated with analyzing the Year 2000 issue or making conversions to existing software are being expensed as incurred. The costs to Maxim of Year 2000 compliance and the date on which Maxim believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. There can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated.Risks include the availability and cost of personnel trained in this area, the ability to locate and correct all relevant hardware, software, computer codes and similar uncertainties. Such risks could result in a system failure of miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Also, there is the risk that the systems of other companies upon which Maxim's operations and systems rely will not be converted timely and will have an adverse effect on Maxim's results of operations.
17FORWARD-LOOKING STATEMENTSForward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements appear in a number of places in this Report and include statements regarding the intent, belief or current expectations of Maxim, its directors or its officers with respect to, among other things:
-
trends affecting Maxim's financial condition or results of operations,
-potential acquisitions by Maxim,
-Maxim's business and growth strategies,
-Maxim's ability to successfully integrate acquired businesses,
-the timing, magnitude and costs of the roll-out of new flooring centers, and
-Maxim's financing plans.
You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Among others, factors that could adversely affect actual results and performance include:
-
local and regional economic conditions in the areas served by Maxim,
-the level of
customerconsumer spending for floor covering products,-competition among floor covering retailers and carpet manufacturers,
-changes in merchandise mixes, site selection and related traffic and demographic patterns,
-availability of financing,
-inventory management and turnover levels,
-realization of cost savings,
-Maxim's success in integrating recent and potential future acquisitions, and
-the resolution or outcome of the pending litigation and government inquiry relating to the restatement of previously announced financial results for fiscal 1999 and for each of the quarters therein.
The accompanying information contained in this Form 10-Q, as well as in Maxim's other 1934 Act filings, identifies important additional factors that could adversely affect actual results and performance. See "Item 1. Business-Risk Factors" in Maxim's Annual Report on Form 10-K for the year ended January 31, 1999. You are urged to carefully consider such factors.
ITEMItem 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE SENSITIVITY.Quantitative and Qualitative Disclosures about Market RiskInterest Rate Sensitivity. Maxim has limited exposure to market volatility
infor interest rates. As ofMay 8,November 6, 1999, exposure from interest rates was not material to Maxim's financial position, results of operations, or cash flows, as$95.4$95.5 million of Maxim's$115.9$144.1 million of debtconsisting of it Senior Noteshas been fixed at a rate of 91/4%1/4% until 2007. In the event that the 91/4%1/4% notes are called by the noteholders or the Company elects to purchase the Senior Notes, the Company will be subject to interest rate volatility based on the market's forward curve. The Companyalso had twocurrently has no interest rateswap agreements for a total notional amount of less than $2.5 million. These swap agreements were terminated in May 1999.agreements. Based on Maxim's low overall floating interest rate exposure atMay 8,November 6, 1999, a18near-term 100 basis point change in interest rates would not materially effect Maxim's financial statements. COMMODITY PRICE AND FOREIGN CURRENCY SENSITIVITY.Commodity Price and Foreign Currency Sensitivity. Increases or decreases in the market price of carpet, hardwood and vinyl flooring may affect the valuation of Maxim's inventories and purchases and, accordingly, Maxim's earnings. Maxim does not use futures or options contracts to manage volatility with respect to this exposure. The potential increase in cost of inventories and purchases based on commodity activity is generally also reflected as a corresponding increase in Maxim's prices, and therefore, is not material to Maxim's financial position and results of operations.
The majority of Maxim's sales and purchases are denominated in U.S. dollars and it is Maxim's policy to eliminate short-term exchange rate volatility in the event foreign currency transactions occur. As of
May 8,November 6, 1999, there was no exposure to foreign currency exchange rate volatility.19PARTPart II.
OTHER INFORMATION ITEMOther InformationItem 3.
DEFAULTS UPON SENIOR SECURITIESDefaults upon Senior SecuritiesMaxim is currently in default of the restricted payment covenant contained in the indenture pursuant to which
theits 91/4%1/4% Senior Subordinated Notesof Maximwere issued. See "Part1.I. Item 2. Management's Discussion and Analysis of Financial Condition and Results ofOperations--LiquidityOperationsLiquidity and CapitalResources--SeniorResourcesSenior Subordinated Notes" included elsewhere herein for additional information concerning this default.ITEMItem 6.
EXHIBITS AND REPORTS ON FORM 8-Q
(A) Exhibits10.23.4 Fourth Amendment to Credit Agreement, dated October 21, 1999, among the Company, as Borrower, the Domestic Subsidiaries of the Company, as Guarantors, Bank of America (formerly NationsBank, N.A.), as Administrative Agent, and the Lenders party thereto. 27.1 Financial Data Schedule for (for SEC use only) (B) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended May 8, 1999.20Exhibits and Reports on Form 8-K
- (A)
- Exhibits
- 27.1
- Financial Data Schedule (For SEC use only)
- (B)
- Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended November 6, 1999.
SIGNATURES
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 thereunto duly authorized.
THE MAXIM GROUP , INC.
Dated: December 21, 1999
By:
/s/ A. J. NASSAR-----------------------------------------
A. J. Nassar,
President and Chief Executive Officer
Dated:November 12,December 21, 1999
By:
/s/STEPHEN P. COBURN ----------------------------------------- Stephen P. Coburn, Principal AccountingLEONARD H. THILL
Leonard H. Thill,
Chief Financial OfficerDated: November 12, 1999