1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q10-Q/A
AMENDMENT NO. ONE TO
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
COMMISSION FILE NUMBER 1-13099
THE MAXIM GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2060334
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
210 Town ParkTownPark Drive, Kennesaw, Georgia 30144
- ---------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (678) 355-4000
------------------
N/A
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate 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 last 90 days.
Yes No X No
----------- -----------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, $.001 par value 18,880,01819,038,347
--------------------------------- ----------------------------------
Class Outstanding at December 7,October 1, 1999
Explanatory Note:
During the course of the fiscal 1999 year-end financial audit process, The Maxim
Group, Inc. ("Maxim" or the "Company") recorded certain adjustments to its
previously reported interim results. The most significant of the adjustments
affecting the quarterly period ended October 31, 1998 related to certain vendor
support funds recognized in the Company's operating results during the quarter.
It was determined that certain revenue related to vendor support funds was
incorrectly recorded, a portion of which will be recognized in future periods.
As a result of the adjustments recorded by the Company, the Company has revised
its reported results of operations for the three and nine month periods ended
October 31, 1998. This Form 10-Q/A reflects the effects of these adjustments.
The following Items are amended hereby:
PART I -- FINANCIAL INFORMATION:
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
2
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Information)
(Unaudited)
October 31,
1998
(As Restated January 31,
Assets 1998See Note 2) 1998
- ------------------------------------------------------------------------------- ----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents, including restricted cash of $8,881 at
October 31, 1998 and $22,786 at January 31, 1998 $ 34,15234,259 $ 28,880
Current portion of franchise license fees receivable, net of allowance
for doubtful accounts of $417 at October 31, 1998 and $528 at
January 31, 1998 2,735 3,107
Trade accounts receivable, net of allowance for doubtful accounts of
$4,219 at October 31, 1998 and $1,917 at January 31, 1998 96,46082,461 56,432
Accounts receivable from officers and employees 1,8621,533 1,593
Current portion of notes receivable from franchisees and related
parties, net of allowance for doubtful accounts of $132 at
October 31, 1998 and $261 at January 31, 1998 2,255 1,165
Inventories 112,450108,015 54,693
Refundable income taxes 1,865 2,558
Deferred income taxes 6,666 5,714
Prepaid expenses 15,06014,788 3,406
-------- ----------------- ---------
Total current assets 273,505254,577 157,548
Property and equipment, net of accumulated depreciation and
amortization of $58,715$58,797 at October 31, 1998 and $48,039 at
January 31, 1998 188,446188,781 137,207
Franchise license fees receivable, less current portion, net of allowance
for doubtful accounts of $210 at October 31, 1998 and January 31, 1998 4,620 2,718
Notes receivable from franchisees, less current portion 4,251 3,506
Intangible assets, net of accumulated amortization of $1,891 at
October 31, 1998 and $1,626 at January 31, 1998 51,60659,050 13,640
Other assets 13,66713,416 6,875
-------- --------
$536,095 $321,494
======== ========
See accompanying notes to condensed consolidated financial statements.
-2-
3
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(In Thousands, Except Per Share Information)
(Unaudited)
--------- ---------
$ 524,695 $ 321,494
========= =========
October 31, January 31,
Liabilities And Stockholders' Equity
1998 1998
- ---------------------------------------------------------------------- ----------- -----------
Current liabilities:
Current portion of long-term debt $ 110,902 $ 384
Current portion of capital lease obligations 504 501
Rebates payable to franchisees 4,886 3,975
Accounts payable 61,89234,942 23,376
Accrued expenses 53,03482,059 14,333
Deferred revenue 2,5613,615 1,750
Deposits 5,443 2,897
--------- ---------
Total current liabilities 239,222242,351 47,216
Long-term debt, less current portion 116,041 129,349
Capital lease obligations, less current portion 1,050 1,429
Deferred taxes 9,0074,066 9,725
--------- ---------
Total liabilities 365,320363,508 187,719
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000 shares authorized, no
shares issued or outstanding 0 0-- --
Common stock, $.001 par value; 25,00075,000 shares authorized,
21,143 shares issued at October 31, 1998 and 17,352
shares issued at January 31, 1998 21 17
Additional paid-in capital 184,401184,624 119,264
Retained earnings 21,17111,360 29,388
Treasury stock, 2,366 shares at October 31, 1998 and 1,221
shares at January 31, 1998 (34,818) (14,894)
--------- ---------
Total stockholders' equity 170,775161,187 133,775
--------- ---------
$ 536,095524,695 $ 321,494
========= =========
See accompanying notes to condensed consolidated financial statements.
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THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Information)
(Unaudited)
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
October 31, October 31,
1998 1998
(As Restated October 31, (As Restated October 31,
See Note 2) 1997 See Note 2) 1997
------------ ----------- ------------ ----------
Revenues:
Sales of floor covering products $ 235,116 $ 81,017 $ 401,934 $ 229,388
Fiber and PET sales 8,257 7,213 20,431 19,726
Fees from franchise services 4,558 8,695 13,807 23,268
Other 1,641 1,403 5,613 4,414
--------- --------- --------- ---------
Total revenues 249,572 98,328 441,785 276,796
Cost of sales 163,599 66,852 305,984 189,078
--------- --------- --------- ---------
Gross profit 85,973 31,476 135,801 87,718
Selling, general, and administrative expenses 77,352 21,655 123,147 62,818
Interest income (345) (212) (763) (437)
Interest expense 4,296 1,589 9,681 4,252
Other -- (208) (904) (292)
Nonrecurring charges -- -- 28,531 --
--------- --------- --------- ---------
Earnings (loss) before income tax expense (benefit)
and extraordinary charge 4,670 8,652 (23,891) 21,377
Income tax expense (benefit) 2,039 3,470 (6,240) 8,359
--------- --------- --------- ---------
Earnings (loss) before extraordinary charge 2,631 5,182 (17,651) 13,018
Extraordinary charge--early retirement of debt,
net of income tax benefit 377 785 377 785
--------- --------- --------- ---------
Net earnings (loss) $ 2,254 $ 4,397 $ (18,028) $ 12,233
========= ========= ========= =========
Earnings (loss) per common share:
Basic:
Earnings (loss) before extraordinary charge $ 0.14 $ 0.32 $ (1.02) $ 0.81
Extraordinary charge (0.02) (0.05) (0.02) (0.05)
--------- --------- --------- ---------
Basic earnings (loss) $ 0.12 $ 0.27 $ (1.04) $ 0.76
========= ========= ========= =========
Diluted:
Earnings (loss) before extraordinary charge $ 0.13 $ 0.31 $ (1.02) $ 0.78
Extraordinary charge (0.02) (0.05) (0.02) (0.05)
--------- --------- --------- ---------
Diluted earnings (loss) $ 0.11 $ 0.26 $ (1.04) $ 0.73
========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic 19,428 16,164 17,385 16,189
========= ========= ========= =========
Diluted 20,241 16,922 17,385 16,723
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
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4
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Information)
(Unaudited)
Three Months Ended
-----------------------------
October 31, October 31,
1998 1997
----------- -----------
Revenues:
Sales of floorcovering products $ 235,116 $ 81,017
Fiber and PET sales 8,257 7,213
Fees from franchise services 13,698 8,695
Other 1,641 1,403
--------- ---------
Total revenues 258,712 98,328
Cost of sales 165,707 66,852
--------- ---------
Gross profit 93,005 31,476
Selling, general, and administrative expenses 79,211 21,655
Interest income (345) (212)
Interest expense 3,717 1,589
Other 0 (208)
--------- ---------
Earnings before income tax expense and extraordinary charge 10,422 8,652
Income tax expense 4,016 3,470
--------- ---------
Earnings before extraordinary charge 6,406 5,182
Extraordinary charge--early retirement of debt, net of income tax benefit 377 785
--------- ---------
Net earnings $ 6,029 $ 4,397
========= =========
Earnings per common share:
Basic:
Earnings before extraordinary charge $ 0.33 $ 0.32
Extraordinary charge (0.02) (0.05)
--------- ---------
Basic earnings $ 0.31 $ 0.27
========= =========
Diluted:
Earnings before extraordinary charge $ 0.32 $ 0.31
Extraordinary charge (0.02) (0.05)
--------- ---------
Diluted earnings $ 0.30 $ 0.26
========= =========
Weighted average number of common shares outstanding:
Basic 19,428 16,164
========= =========
Diluted 20,241 16,922
========= =========
See accompanying notes to condensed consolidated financial statements.
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THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Information)
(Unaudited)
Nine Months Ended
-----------------------------
October 31, October 31,
1998 1997
----------- -----------
Revenues:
Sales of floorcovering products $ 403,101 $ 229,388
Fiber and PET sales 20,431 19,726
Fees from franchise services 34,980 23,268
Other 5,613 4,414
--------- ---------
Total revenues 464,125 276,796
Cost of sales 308,907 189,078
--------- ---------
Gross profit 155,218 87,718
Selling, general, and administrative expenses 123,510 62,818
Interest income (763) (437)
Interest expense 8,917 4,252
Other (307) (292)
Nonrecurring charges 33,000 0
--------- ---------
(Loss) earnings before income tax (benefit) expense and extraordinary
charge (9,139) 21,377
Income tax (benefit) expense (1,299) 8,359
--------- ---------
(Loss) earnings before extraordinary charge (7,840) 13,018
Extraordinary charge--early retirement of debt, net of income tax benefit 377 785
--------- ---------
Net (loss) earnings $ (8,217) $ 12,233
========= =========
(Loss) earnings per common share:
Basic:
(Loss) earnings before extraordinary charge $ (0.45) $ 0.81
Extraordinary charge (0.02) (0.05)
--------- ---------
Basic (loss) earnings $ (0.47) $ 0.76
========= =========
Diluted:
(Loss) earnings before extraordinary charge $ (0.45) $ 0.78
Extraordinary charge (0.02) (0.05)
--------- ---------
Diluted (loss) earnings $ (0.47) $ 0.73
========= =========
Weighted average number of common shares outstanding:
Basic 17,385 16,189
========= =========
Diluted 17,385 16,723
========= =========
See accompanying notes to condensed consolidated financial statements.
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6
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, Except Per Share Information)Thousands)
(Unaudited)
Nine Months Ended
---------------------------
October 31,
1998
(As Restated October 31,
1998See Note 2) 1997
------------------------ -----------
Cash flows from operating activities:
Net (loss) earnings $ (8,217)(18,028) $ 12,233
----------- --------------------- ----------
Adjustments to reconcile net (loss) earnings to net cash provided by (used in)
operating activities:
Nonrecurring charges 33,0007,540 0
Depreciation and amortization 12,08213,154 8,722
Deferred income taxes (1,670)(6,611) (479)
Changes in assets and liabilities:
Increase in receivables (31,525)(12,800) (18,934)
Increase in inventories (19,294)(20,023) (2,975)
Decrease in refundable income taxes 693 784
Increase in prepaid expenses and other assets (14,247)(13,180) (5,766)
Increase in rebates and accounts payable, accrued expenses, deferred
revenue, and deposits 37,36157,689 2,903
----------- -------------------- ----------
Total adjustments 16,40026,462 (15,745)
----------- -------------------- ----------
Net cash provided by (used in) operating activities 8,1838,434 (3,512)
----------- -------------------- ----------
Cash flows from investing activities:
Capital expenditures (46,015)(46,382) (26,769)
Acquisitions, net of cash acquired (25,354) (1,738)
----------- -------------------- ----------
Net cash used in investing activities (71,369)(71,736) (28,507)
----------- -------------------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 0 47,240
Proceeds from exercise of options, net 3,7373,960 1,000
Purchase of treasury stock (19,924) (14,043)
Borrowings under revolving credit agreement 128,481128,482 33,199
Repayments of revolving credit agreement (43,461) 0--
Principal payments on capital lease obligations (375)(376) (590)
----------- -------------------- ----------
Net cash provided by financing activities 68,45868,681 66,806
----------- -------------------- ----------
Net increase in cash 5,2725,379 34,787
Cash, beginning of period 28,880 6,439
----------- -------------------- ----------
Cash, end of period $ 34,15234,259 $ 41,226
=========== ==================== ==========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 11,601 $ 4,283
=========== ==================== ==========
Income taxes $ 242 $ 3,312
=========== ==================== ==========
Supplemental disclosure of noncash investing and financing activities:
Common stock issued in connection with acquisitions $ 61,400 $ 3,000
=========== ==================== ==========
Note payable issued in connection with acquisition $ 11,00011,496 $ 0
=========== ===========--
========= ==========
See accompanying notes to condensed consolidated financial statements.
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75
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In(In Thousands, Except Per Share Information)
(Unaudited)
1. 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 accruals) considered necessary for a fair
presentation have been included. These statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's 1998 Annual Report on Form 10-K as
filed with the Securities and Exchange Commission.
The results of operations for the periods presented are not necessarily
indicative of the operating results to be expected for the full year.
2. Restatement
During the course of the fiscal 1999 year-end financial audit process,
the Company recorded certain adjustments to its previously reported
interim results. The most significant of the adjustments affecting the
quarterly period ended October 31, 1998 related to certain vendor
support funds recognized in the Company's operating results during the
quarter. It was determined that certain revenue related to vendor
support funds was incorrectly recorded, a portion of which will be
recognized in future periods.
As a result of the adjustments recorded by the Company, the Company has
revised its reported results of operations for the three and nine month
periods ended October 31, 1998. This Form 10-Q/A reflects the effects
of these adjustments.
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6
Three Months Ended October 31, 1998 Nine Months Ended October 31, 1998
----------------------------------- ----------------------------------
As As
Previously Previously
Reported Restated Reported Restated
---------- -------- ---------- --------
Sales of floor covering products $235,116 $235,116 $403,101 $401,934
Fees from franchise services 13,698 4,558 34,980 13,807
Total revenues 258,712 249,572 464,125 441,785
Cost of sales 165,707 163,599 308,907 305,984
Gross profit 93,005 85,973 155,218 135,801
Selling, general, and administrative expenses 79,211 77,352 123,510 123,147
Interest expense 3,717 4,296 8,917 9,681
Other expense (income) -- -- (307) (904)
Nonrecurring charges -- -- 33,000 28,531
Earnings (loss) before income tax
expense (benefit) and extraordinary charge 10,422 4,670 (9,139) (23,891)
Income tax expense (benefit) 4,016 2,039 (1,299) (6,240)
Earnings (loss) before extraordinary charge 6,406 2,631 (7,840) (17,651)
Net earnings (loss) 6,029 2,254 (8,217) (18,028)
Earnings per common share:
Basic:
Earnings (loss) before extraordinary charge $ 0.33 $ 0.14 $ (0.45) $ (1.02)
Basic earnings (loss) 0.31 0.12 (0.47) (1.04)
Diluted:
Earnings (loss) before extraordinary charge $ 0.32 $ 0.13 $ (0.45) $ (1.02)
Diluted earnings (loss) 0.30 0.11 (0.47) (1.04)
October 31, 1998
-----------------------------------
As
Previously
Reported Restated
---------- --------
Cash $ 34,152 $ 34,259
Trade accounts receivable, net 96,460 82,461
Inventories 112,450 108,015
Prepaid expenses 15,060 14,788
Property and equipment, net 188,446 188,781
Intangible assets 51,606 59,050
Other assets 13,667 13,416
Accounts payable 61,892 34,942
Accrued expenses 53,034 82,059
Deferred revenue 2,561 3,615
Deferred taxes, long-term liability 9,007 4,066
Additional paid-in capital 184,401 184,624
Retained earnings 21,171 11,360
3. Inventories
Inventories consisted of the following (in thousands):
October 31, January 31,
1998 1998
----------- -----------
Raw materials $ 21,289 $ 14,809
Work in process 3,755 3,363
Finished goods 87,40682,971 36,521
-------- --------
$112,450$108,015 $ 54,693
======== ========
3.4. Senior Subordinated Notes
On October 16, 1997, the Company completed the sale of $100 million of
9-1/4% Senior Subordinated Notes ("Notes") due 2007, to institutional
buyers in a private offering under Rule 144A promulgated under the
Securities Act of 1933. The net proceeds to the Company from the
offering of the Notes were approximately $96 million, net of an issue
discount and fees and related costs. The Company used the net proceeds
from the offering of the Notes to repay all borrowings outstanding
under its revolving credit agreements of approximately $82.7 million
and for general corporate purposes, including capital expenditures.
-7--6-
87
Each of the Company's operating subsidiaries has fully and
unconditionally guaranteed the Notes on a joint and several basis. The
guarantor subsidiaries comprise all of the direct and indirect
subsidiaries of the Company. The Company 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 the
Company.
The Company is currently in default of the restricted payment covenant
contained in the Indenture (the "Indenture") pursuant to which the
Notes were issued. The default occurred on September 3, 1998 when the
Company repurchased shares of its common stock in the open market
pursuant to its ongoing stock repurchase program. At the time of this
stock repurchase, the Company believed that it had sufficient funds
available under the restricted payments provision of the Indenture to
make the repurchase.
The Company, however, excluded from the
calculation of its restricted payment availability, nonrecurring
charges totaling $33 million taken in the quarter ended July 31, 1998,
believing such charges to be excluded from consolidated net income of
the Company, as defined in the Indenture, and thus not effecting a
reduction in the Company's restricted payments availability thereunder.
By the time the Company realized that its treatment of this
nonrecurring charge was impermissible under the Indenture, it had
purchased additional shares of common stock in the open market in
violation of the terms of the Indenture.
On November 12, 1998, the Company 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 the Company that such default shall
become an event of default on December 17, 1998 (30 days after the date
of the Trustee's notice to the Company). If this default is not cured
by the Company prior to December 17, 1998, the Trustee or the holders
of not less than 25% in aggregate principal amount of Notes outstanding
may declare all unpaid principal of, premium, if any, and accrued
interest of all Notes to be due and payable. The Company will seek the
consent of the Note holders for a waiver of these inadvertent
violations of
the restricted payment convenant of the Indenture. In order
to be effective, holders of a majority in aggregate principal
amount of all outstanding Notes must consent to the waiver.
Because either the Trustee or the holders of not less than 25% in
aggregate principal amount of Notes outstanding may accelerate payment
of the Notes beginning on December 17, 1998, the Notes are classified
as current liabilities of the Company on the accompanying October 31,
1998 balance sheet. Once the Company receives the requisite consent to
the waiver from the holders of Notes, however, the Notes will again be
classified as long-term debt of the Company.
4.5. Nonrecurring Charges
During the period ended July 31, 1998, the Company reevaluated its
retail strategy. As a result of the assessment, the Company made the
determination that it would amend its franchise agreement, close
certain Company-owned stores, and write downwrite-down the value of certain
retail assets including goodwill.
-8--7-
98
The Company recorded a $33$28.5 million charge for certain nonrecurring
items during the period ended July 31,1998.31, 1998. On June 1, 1998 the
Company amended its franchise agreement with the majority of its
members, whereby the Company established certain requirements for more
uniformity in the appearance and merchandising of the franchise stores.
As part of the amended franchise agreement, the number of vendors
available to franchise members through the Company, to buy from and
earn rebates, has been reduced. The Company has recorded allowances forwrote-off receivables due
from vendors replaced in the amended franchise
agreement and has also established a reserve to settle claims from
certain parties. In addition, the Company has written down to fair
value certain assets made obsolete by the new franchise agreement. The
Company also accrued for the costs of closing 1415 Company-owned retail
stores. The Company anticipatesanticipated all stores willwould be closed within nine
months.
As part of the Company's reevaluation of its retail strategy, the
acquisition of the retail store assets of Shaw Industries, Inc. was
considered and consummated.
In connection with the reevaluation of the Company's retail strategy
described above, the Company analyzed the performance of its CompanyCompany-
owned retail regions. This analysis indicated that significant
strategic and operational changes would be necessary in some stores,
including changes in the customer mix, location, store design, and
merchandising. These factors also caused management to assess the
realizability of the goodwill recorded for these regions.
The determination of goodwill impairment was made by comparing the
unamortized goodwill balance for each region to the estimate of the
related region's undiscounted future cash flows. The assumptions used
reflected earnings, market and industry conditions, as well as current
operating plans. The assessment indicated a permanent impairment of
goodwill related to certain of the regions, therefore such goodwill was
written down to fair market value which resulted in a write-off
totaling $4.2 million.
The major components of the nonrecurring charges are as follows:
CHARGED
TO
INITIAL RELATED REMAINING
CHARGE ACCOUNTS BALANCE
------- -------- ---------
Vendors' receivable allowancesWrite-off of vendor receivables $ 5,3002,439 $ 5,3002,439 $ 0
ClaimsClaim reserves 10,700 0 10,700
Write-down of equipment 2,200 2,200492 492 0
Store closure and carrying costs 10,600 93310,700 1,033 9,667
Write-down of goodwill 4,200 4,200 0
------- ------- -------
$33,000 $12,633$28,531 $ 8,164 $20,367
======= ======= =======
-9--8-
10
5.9
6. Earnings Per Share
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which
specifies the computation, presentation and disclosure requirements for
earnings per share. Basic earnings per share is computed by dividing
net earnings by the weighted average number of common shares
outstanding during each period. Diluted earnings per common share
assumes the exercise of outstanding stock options and the conversion
into common stock during the periods outstanding.
A reconciliation of net earnings (loss) and the weighted average number
of common shares outstanding used to calculate basic and diluted
earnings (loss) per common share for the three and nine months ended
October 31, 1998 and 1997 is as follows:
Three Months Ended Nine Months Ended
October 31 October 31
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Basic earnings (loss) per common
share:
Earnings (loss) before
extraordinary charge $ 6,4062,631 $ 5,182 $ (7,840)$(17,651) $ 13,018
Extraordinary charge 377 785 377 785
-------- -------- -------- --------
Net earnings (loss) $ 6,0292,254 $ 4,397 $ (8,217)$(18,028) $ 12,233
======== ======== ======== ========
Weighted average number of
common shares outstanding 19,428 16,164 17,385 16,189
======== ======== ======== ========
Basic earnings (loss) per common
share:
Earnings (loss) before
extraordinary charge $ 0.330.14 $ 0.32 $ (0.45)(1.02) $ 0.81
Extraordinary charge (0.02) (0.05) (0.02) (0.05)
-------- -------- -------- --------
Basic earnings (loss) $ 0.310.12 $ 0.27 $ (0.47)(1.04) $ 0.76
======== ======== ======== ========
Diluted earnings (loss) per
common share:
Earnings (loss) before
extraordinary charge $ 6,4062,631 $ 5,182 $ (7,840)$(17,651) $ 13,018
Extraordinary charge 377 785 377 785
-------- -------- -------- --------
Net earnings (loss) $ 6,0292,254 $ 4,397 $ (8,217)$(18,028) $ 12,233
======== ======== ======== ========
-10--9-
1110
Three Months Ended Nine Months Ended
October 31 October 31
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Weighted average number of
common shares outstanding 19,428 16,164 17,385 16,189
Shares issuable from assumed
exercise of outstanding stock
options 813 758 N/A(a) 534
-------- -------- -------- --------
Weighted average number of
common and common
equivalent shares 20,241 16,922 17,385 16,723
======== ======== ======== ========
Diluted earnings (loss) per
common share:
Earnings (loss) before
extraordinary charge $ 0.320.13 $ 0.31 $ (0.45)(1.02) $ 0.78
Extraordinary charge (0.02) (0.05) (0.02) (0.05)
-------- -------- -------- --------
Diluted earnings (loss) $ 0.300.11 $ 0.26 $ (0.47)(1.04) $ 0.73
======== ======== ======== ========
(a) Common equivalent shares are antidilutive for the
nine months ended October 31, 1998.
6.7. Acquisitions
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"),
pursuant to an Agreement and Plan of Merger dated as of June 23, 1998.
These assets include 266 retail stores with annual revenues of
approximately $584 million and are being operated through the Company's
newly organized Maxim Retail Stores, Inc. subsidiary. The Company
intends to continue operating the residential retail stores acquired
from Shaw as retail floorcoveringfloor covering stores. Under the terms of the
Merger Agreement, the Company issued to Shaw 3,150,000 shares of common
stock of the Company and a one-year note in the principal amount of $18
million (adjusted to $11$11.5 million after giving effect to purchase
price adjustments) and, paid Shaw $25 million in cash.cash and assumed certain
liabilities. The acquisition has been reflected on a purchase basis of
accounting. The purchase price has been allocated to the assets
acquired and liabilities assumed based upon estimates of the fair
values at the date of acquisition. The allocation has been based on
preliminary estimates and studies which may be revised at a later date.
The operating results of the retail stores acquired from Shaw are
included in the Company's consolidated statement of operations from the
date of acquisition. The following unaudited pro forma summary presents
the consolidated results of operations as if the acquisition of the
retail store assets of Shaw (which occurred on August 8, 1998) had occurred on February 1, 1997. The pro
forma expenses include the recurring costs which are directly
attributable to the acquisition, such as interest expense and
amortization of goodwill and their related tax effects.
-11--10-
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Three Months Ended Nine Months Ended
October 31, October 31,
------------------------ ------------------------
1998 1997 1998 1997
-------- ---------- -------- --------
Net revenues $258,712$249,572 $ 229,956 $737,081$714,741 $656,024
======== ========== ======== ========
Net earnings (loss) $ 6,0292,254 $ 573 $(12,343)$(22,154) $ 8,862
======== ========== ======== ========
Basic earnings (loss) per common share $ .310.12 $ .050.05 $ (.63)(1.14) $ .460.46
======== ========== ======== ========
Diluted earnings (loss) per common share $ .300.11 $ .050.05 $ (.63)(1.14) $ .450.45
======== ========== ======== ========
Effective September 25, 1998, the Company acquired CarpetsPlus of
America, LLC, a floorcoveringfloor covering buying group with approximately 200
member stores. The acquisition has been reflected on a purchase basis
of accounting at a price of approximately $9.2 million, consisting of a
cash payment of $2.3 million, and the issuance of $6.9 million in
stock. In addition to the consideration received at closing, the
shareholders of CarpetsPlus of America may receive up to $2.3 million
of shares of common stock of the Company based on the profitability of
the acquired company during the two-year period ending January 31,
2001.
7.8. Subsequent EventEvents
On November 12, 1998, the Company executed a definitive agreement to
sell substantially all of the assets of its Image Industries, Inc.
subsidiary to a subsidiary of Mohawk Industries, Inc. Under the terms
of the agreement, total consideration is $232approximately $211 million,
which includes the assumption of approximately $52$48 million in related
debt and short-term liabilities. The transaction is expectedclosed on January 29,
1999.
Subsequent to closeOctober 31, 1998, the Company has amended its senior
credit facility, consummated significant acquisitions and dispositions,
and has been named as a party to legal and regulatory proceedings.
Accordingly, the financial statements in this Quarterly Report on or
aboutForm
10-Q/A should be read in conjunction with the Company's form 10-K
filing for the year ended January 22, 1999.
-12-31, 1999, filed with the Securities
and Exchange Commission.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
During the three months ended October 31, 1998, the Company acquired
the retail store assets of Shaw Industries, Inc. ("Shaw"). These assets
include 266 retail floorcoveringfloor covering stores which, effective on August 9,
1998, were owned and operated by the Company. The acquisition of these
assets resulted in a 254.7% increase in the number of Company-owned
stores. As reflected in the following discussion, the acquisition of
these assets materially impacted the Company's financial condition and
results of operations as of and for the three-three and nine-monthnine month periods
ended October 31, 1998.
Total Revenues. Total revenues increased 163.1%153.8% to $258.7$249.6 million for
the three months ended October 31, 1998 from $98.3 million for the
three months ended October 31, 1997. Total revenues increased 67.7%59.6% to
$464.1$441.8 million for the nine months ended October 31, 1998 from $276.8
million reported in the prior year period. The components of total
revenues are discussed below:
Sales of FloorcoveringFloor covering Products. Sales of floorcoveringfloor covering
products increased 190.3%190.2% to $235.1 million for the three
months ended October 31, 1998 from $81.0 million for the three
months ended October 31, 1997, and increased 75.7%75.2% to $403.1$401.9
million for the nine months ended October 31, 1998 from $229.4
million in the prior year period. Sales of floorcoveringfloor covering
products in Company-owned stores increased 414.6% to $186.8
million for the three months ended October 31, 1998 from $36.3
million for the three months ended October 31, 1997, and
increased 154.9% to $263.1 million for the nine months ended
October 31, 1998 from $103.2 million in the prior year period.
The growth in retail sales of floorcoveringfloor covering products was
primarily due to the impact of the acquisition of the retail
store assets of Shaw and, to a lesser extent, to internal
growth. Sales of manufactured carpet increased 6.9% to $43.3
million for the three months ended October 31, 1998 from $40.5
million for the three months ended October 31, 1997, and
increased 8.6%7.9% to $125.8$125.0 million for the nine-months ended
October 31, 1998 from $115.8 million in the prior year period.
Unit sales of manufactured carpet remained constant at 7.2
million square yards for the three months ended October 31,
1998 and October 31, 1997, and increased 6.0% to 21.2 million
square yards for the nine months ended October 31, 1998 from
20.0 million square yards in the prior year period. Sales from
the Company's two retail distribution centers amounted to $4.6
million for the three months ended October 31, 1998 compared
to $4.2 million for the three months ended October 31, 1997,
and $13.7$13.3 million for the nine months ended October 31, 1998
compared to $10.7 million in the prior year period, largely
representing sales to the Company's franchisees.
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1413
Fees From Franchise Services. Fees from franchise services,
which include franchise license fees and royalties, brokering
of floorcoveringfloor covering products, and advertising, increased 57.5%decreased 47.6%
to $13.7$4.6 million for the three months ended October 31, 1998
from $8.7 million for the three months ended October 31, 1997,
and increased 50.2%decreased 40.7% to $35.0$13.8 million for the nine months ended
October 31, 1998 from $23.3 million in the prior year period.
This increase was attributable to increases in brokering
activity generated from new CarpetMAX and GCO franchisees,
growth in demand for franchise services from existing
CarpetMAX and GCO franchisees, greater utilization of
advertising and other services offered to franchisees, and an
expansion of advertising services offered by the Company.
Fiber and PET Sales. Sales of fiber and polyethylene
terephthalate ("PET") increased 15.3%14.5% to $8.3 million for the
three months ended October 31, 1998 from $7.2 million for the
three months ended October 31, 1997, and increased 4.1%3.6% to
$20.4 million for the nine months ended October 31, 1998 from
$19.7 million in the prior year period. Unit sales increased
1.8% to 17.2 million pounds for the three months ended October
31, 1998 from 16.9 million pounds for the three months ended
October 31, 1997, and decreased 7.7% to 45.7 million pounds
for the nine months ended October 31, 1998 from 49.5 million
pounds in the prior year period. The unit sales decrease was
the result of increased demand from the Company's carpet
operations. The average selling price per pound of fiber and
PET for the nine months ended October 31, 1998 increased by
11% compared to the prior year period.
Gross Profit. Gross profit increased 195.2%173.1% to $93.0$86.0 million for the
three months ended October 31, 1998 from $31.5 million for the three
months ended October 31, 1997, and increased 77.0%54.8% to $155.2$135.8 million
for the nine months ended October 31, 1998 from $87.7 million in the
prior year period. As a percentage of revenues, gross profit was 36.0%34.4%
for the three months ended October 31, 1998 compared to 32.0% for the
three months ended October 31, 1997 and 33.4%30.7% for the nine months ended
October 31, 1998 compared to 31.7% in the prior year period.
Contributing to the increase in gross profit as a percentage of
revenues for the quarter was the continuing change in the business mix
of the Company to a revenue base consisting principally of the net
sales of floorcoveringfloor covering products, which change was accelerated by the
acquisition of the retail store assets of Shaw in August 1998.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased 265.0%257.2% to $79.2$77.4 million for the three
months ended October 31, 1998 from $21.7 million for the three months
ended October 31, 1997, and increased 96.7%96.0% to $123.5$123.1 million for the
nine months ended October 31, 1998 from $62.8 million in the prior year
period. Increases in operating expenses on an absolute basis reflects
an overall growth in the size of the Company's operations required to
serve a growing retail base, including the retail store assets acquired
from Shaw, as well as increased selling costs at Image related to newly
created territories. As a percentage of revenues, selling, general, and
administrative expenses increased to 30.6%31.0% for the three months ended
October 31, 1998 from 22.0% for the three months ended October 31, 1997
and increased to 26.6%27.9% from 22.7% for the nine months ended October 31,
1998 as compared to the prior year period.
Interest Expense. Interest expense increased 131.3%170.4% to $3.7$4.3 million for
the three months ended October 31, 1998 from $1.6 million for the three
months ended October 31, 1997, and
-14--13-
1514
increased 107.0%127.7% to $8.9$9.7 million for the nine months ended October 31,
1998 from $4.3 million in the prior year period, due principally to the
Company having a higher debt balance and a higher interest rate during
the nine months ended October 31, 1998 as compared to the prior year
period. In October 1997, the Company issued $100 million of 9-1/4%
senior subordinated notes. See "Liquidity and Capital Resources."
Nonrecurring Charges. During the three months ended July 31, 1998, the
Company reevaluated its retail strategy. As a result of the assessment,
the Company made the determination that it would amend its franchise
agreement, close certain Company-owned stores, and write downwrite-down the
value of certain retail assets including goodwill. The Company recorded
a $33$28.5 million charge for certain nonrecurring items during the period
ended July 31, 1998. On June 1, 1998, the Company amended its franchise
agreement with the majority of its members, whereby the Company
established certain requirements for more uniformity in the appearance
and merchandising of the franchise stores. As part of the amended
franchise agreement, the number of vendors available to franchise
members through the Company, to buy from and earn rebates, has beenwas reduced.
The Company has recorded allowances forwrote-off receivables due from vendors replaced in the amended franchise agreement and has also
established a reserve to settle claims from certain parties.
In addition, the Company has written down to fair value certain assets
made obsolete by the amended franchise agreement. The Company also
accrued for the costs of closing 1415 Company-owned retail stores. The
Company anticipatesanticipated all stores willwould be closed within ninesix months.
In connection with the reevaluation of the Company's retail strategy
described above, the Company analyzed the performance of its
Company-owned retail regions. This analysis indicated that significant
strategic and operational changes would be necessary in some stores,
including changes in the customer mix, location, store design, and
merchandising. These factors also caused management to assess the
realizability of the goodwill recorded for these regions.
The determination of goodwill impairment was made by comparing the
unamortized goodwill balance for each region to the estimate of the
related region's undiscounted future cash flows. The assumptions used
reflected the earnings, market, and industry conditions, as well as
current operating plans. The assessment indicated a permanent
impairment of goodwill related to certain of the regions, therefore
such goodwill was written down to fair market value which resulted in a
write-off totaling $4.2 million.
Income Tax Expense. The Company recorded income tax expense of $4.0$2.0
million for the three months ended October 31, 1998 compared to a $3.5
million expense for the three months ended October 31, 1997, and a $1.3$6.2
million tax benefit for the nine months ended October 31, 1998 compared
to $8.4 million expense in the prior year period. The decrease in
income tax expense is due to the Company recording a loss from athe
nonrecurring chargecharges for the nine months ended October 31, 1998, as
compared to the prior year period.
Extraordinary Charges. The extraordinary charges recorded in the three
months ended October 31, 1998 and 1997 resulted from the write-off of
unamortized financing fees associated with former revolving credit
facilities. The resultant charges amounted to
-15--14-
1615
$377,000, net of an income tax benefit of $236,000 for the three months
ended October 31, 1998 and amounted to $785,000, net of an income tax
benefit of $523,000,$546,000, for the three months ended October 31, 1997.
Net Earnings. As a result of the foregoing factors, the Company
recorded net earnings of $6.0$2.3 million for the three months ended
October 31, 1998 compared to net earnings of $4.4 million for the three
months ended October 31, 1997, and a net loss of $8.2$18.0 million for the
nine months ended October 31, 1998 compared to net earnings of $12.2
million in the prior year period.
Liquidity and Capital Resources
General. The Company's primary capital requirements are for new store
openings, investments in the manufacturing operations, working capital,
and acquisitions. The Company historically has met its capital
requirements through a combination of cash flow from operations, net
proceeds from the sale of equity and debt securities, bank lines of
credit, and standard payment terms.
In March 1997, the Board of Directors of the Company authorized a stock
repurchase program pursuant to which the Company has periodically
repurchased shares of its common stock in the open market. As of
December 7, 1998, the Company had repurchased an aggregate of 2,365,900
shares of its common stock in the open market for a total of $34.8
million. These purchases were, and any future purchases will be,
financed from borrowings under the Company's revolving credit facility
and cash balances. As discussed below, the ability of the Company to
repurchase its common shares is limited by certain restrictions
contained in the Indenture relating to the Company's Senior Notes.
See "Senior Notes."
On November 12, 1998, the Company entered into an agreement to sell
substantially all the assets of its Image Industries, Inc. subsidiary
("Image") to Aladdin Manufacturing Corporation ("Aladdin"), a wholly
owned subsidiary of Mohawk Industries, Inc. ("Mohawk"). The transaction
iswas valued at approximately $232$211 million, including the assumption by
Aladdin of approximately $52$48 million of Image liabilities. The Company
expects to apply the cash proceeds from this transaction, which is
expected to close on or about January 22, 1999, to repay debt.
Credit Facility. On November 25, 1998, the Company established credit
facilities providing for aggregate commitments of $141 million (the
"Credit Facility"). The Credit Facility consists of (i) $110 million of
revolving credit, of which $19.3 million was available for borrowings
on December 7, 1998 and (ii) a special-purpose letter of credit in the
amount of up to $31 million for use as credit support for the
Summerville Loan (defined below) to be used to finance the expansion of
Image's fiber extrusion capabilities at its plant in Summerville,
Georgia. As of December 7, 1998, the Company had $84.9 million
outstanding under the revolving portion of the Credit Facility and had
$1.5 million outstanding on the letter of credit. The Company's
obligations under the letter of credit will be assumed by Mohawk in
connection with Aladdin's purchase of Image and the Company will be
released from all obligations thereunder. Amounts outstanding under the
Credit Facility bear interest at a variable rate based on LIBOR or the
prime rate, at the Company's option. The Credit Facility contains
customary covenants. As of December 7, 1998, the Company was in
compliance with all covenants under the Credit Facility.
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1716
Summerville Loan. Effective September 1, 1997, the Development
Authority of the city of Summerville, Georgia (the "Authority"), issued
Exempt Facility Revenue Bonds in an aggregate principal amount of $30
million (the "Facility Revenue Bonds"). On September 17, 1997, the
Authority loaned (the "Summerville Loan") the proceeds from the sale of
the Facility Revenue Bonds to Image to finance, in whole or in part,
the expansion of Image's fiber extrusion capabilities at its plant in
Summerville, Georgia. The Facility Revenue Bonds and the interest
thereon are special, limited obligations of the Authority, payable
solely from the revenues and income derived from a loan agreement
between Image and the Authority, which payment thereof and funds which
may be drawn under the special-purpose letter of credit described
above. The Facility Revenue Bonds and the Summerville Loan will mature
on September 1, 2017, and the interest rate of the Facility Revenue
Bonds is to be determined from time to time based on the minimum rate
of interest that would be necessary to sell the Facility Revenue Bonds
in a secondary market at the principal amount thereof. The interest
rate on the Summerville Loan equals the interest rate on the Facility
Revenue Bonds. Image's obligations under the Summerville Loan will be
assumed by Aladdin in connection with Aladdin's purchase of Image and
Image will be released from all obligations thereunder.
Senior Notes. On October 16, 1997, the Company completed the sale of
$100 million of 9-1/4% senior subordinated notes ("Senior Notes") due
2007. Each of the Company'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 subsidiaries of the Company. The Company 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 the Company.
The Company 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 the Company repurchased shares of its common stock in the open
market pursuant to its ongoing stock repurchase program. At the time of
this stock repurchase, the Company believed that it had sufficient
funds available under the restricted payments provision of the
Indenture to make the repurchase.
The Company, however, excluded from
the calculation of its restricted payment availability, nonrecurring
charges totaling $33 million taken in the quarter ended July 31, 1998,
believing such charges to be excluded from consolidated net income of
the Company, as defined in the Indenture, and thus not effecting a
reduction in the Company's restricted payments availability thereunder.
By the time the Company realized that its treatment of this
nonrecurring charge was impermissible under the Indenture, it had
purchased additional shares of common stock in the open market in
violation of the terms of the Indenture.
On November 12, 1998, the Company 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 the Company that such default shall
become an event of default on December 17, 1998 (30 days after the date
of the Trustee's notice to the Company). If this default is not cured
by the Company prior to December 17, 1998, the Trustee or the holders
of not less than 25% in aggregate principal
-17--16-
1817
amount of Senior Notes outstanding may declare all unpaid principal of,
premium, if any, and accrued interest of all Senior Notes to be due and
payable. The Company will seek the consent of the Senior Note holders
for a waiver of these inadvertent violations of the restricted payment convenantcovenant of
the Indenture. In order to be effective, holders of a majority in
aggregate principal amount of all outstanding Senior Notes must consent
to the waiver.
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 beginning on December 17, 1998, the Senior
Notes are classified as current liabilities of the Company on the
accompanying October 31, 1998 balance sheet. Once the Company receives
the requisite consent to the waiver from the holders of Senior Notes,
however, the Senior Notes will again be classified as long-term debt of
the Company.
Although the Company believes that it will be able to obtain a default
waiver from the holders of the Senior Notes, there can be no assurance
that such waiver will be granted. If a waiver is not obtained by the
Company, repayment of the Senior Notes may be accelerated, as discussed
above. Any such acceleration, as well as the failure of the Company to
obtain a default waiver from the Senior Note holders by January 31,
1999, will constitute an event of default under the Credit Facility.
There can be no assurance that the Company will be able to obtain
alternative sources of financing if repayment of either the Senior
Notes or the Credit Facility is accelerated.
Cash Flows. During the nine months ended October 31, 1998, operating
activities provided $8.2$8.4 million of cash compared to $3.5 million of
cash used in the nine months ended October 31, 1997. The increase in
cash provided by operating activities resulted primarily from an
increase in trade liabilities. The increase in trade liabilities,
partially offset by an increase in inventories and accounts receivable,
was due to increased product purchases and higher sales of floorcoveringfloor
covering products to franchisees and other carpet retailers.
During the nine months ended October 31, 1998, investing activities
used cash of $71.4$71.7 million compared to $28.5 million for the nine
months ended October 31, 1997. The increase is primarily due to an
increase in capital expenditures relating to manufacturing operations
and the acquisition of the retail store assets of Shaw.
During the nine months ended October 31, 1998, financing activities
provided cash of $68.5$68.7 million compared to $66.8 million in the nine
months ended October 31, 1997. This increase is primarily due to
borrowings under the Company's revolving credit agreement.
Capital Expenditures. The Company anticipates that it will require
approximately $10 million for the remainder of fiscal 1999 to (i) open
approximately two new Gallery stores (assuming approximately 50% of
such stores will be located on Company-owned property and the remainder
on leased property), (ii) reconfigure eight existing CarpetMAX stores,
and (iii) upgrade its management information systems. The actual costs
that the Company will incur in opening new Gallery stores cannot be
predicted with precision because the opening costs will vary based upon
geographic location, the size of the store, the amount of supplier
contributions and the extent of the buildout required at the selected
site. The Company anticipates that it will require approximately $3
million during the remainder of fiscal 1999 for capital expenditures at
Image, including the expansion of Image's polyester fiber production
capacity.
The Company believes that borrowings under the Credit Facility,
proceeds from the sale of Image, and cash flows from operating
activities will be adequate to meet the Company's working capital
needs, planned capital expenditures, and debt service obligations
through fiscal 2000. As the Company's debt matures, or is accelerated,
as described above, the Company may need to refinance such debt. There
can be no assurance that such debt can be refinanced or, if so, whether
it can be refinanced on terms acceptable to the Company. If the Company
is unable to service its indebtedness, it will be required to adopt
-18--17-
1918
alternative strategies, which may include actions such as reducing or
delaying capital expenditures, selling assets, restructuring, or
refinancing its indebtedness or seeking additional equity capital.
There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all.
Recent Accounting Pronouncements. Effective with the three months ended
April 30, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS
130 establishes standards for reporting and display of comprehensive
income and its components in financial statements. SFAS 130 did not
have an impact on the Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an
Enterprise and Related Information", which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes reporting
standards for public companies concerning operating segments and
related disclosures about products and services, geographic areas and
major customers. SFAS 131 will be adopted with the Company's Annual
Report for the fiscal year ending January 31, 1999.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use". SOP
98-1 requires capitalization of certain costs of internal-use software.
Maxim adopted this statement in the first quarter of fiscal 2000, and
has determined that it will have no material impact on the financial
statements.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments
and Hedging Activities", which is effective for fiscal years beginning
after June 15, 1999.2000. Early adoption is encouraged. SFAS 133 establishes
accounting and reporting standards for derivative instruments and
transactions involving hedge accounting. The Company does not
anticipate this statement will have an impact on its financial
statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
of Start-Up Activities", which is effective for fiscal years beginning
after December 15, 1998. SOP 98-5 requires entities to expense certain
start-up costs and organization costs as they are incurred. The Company
does not anticipate that this statement will have an impact on its
financial statements.
Subsequent Events. Subsequent to October 31, 1998, the Company has
amended its senior credit facility, consummated significant
acquisitions and dispositions, defaulted a certain restricted payment
covenant contained in the indenture which references the Company's $100
million Senior Subordinated Notes due October 2007 and other debt
instruments including its senior credit facility and certain leases,
and has been named as a party to legal and regulatory proceedings.
Accordingly, this Quarterly Report on Form 10-Q/A should be read in
conjunction with 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.
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19
Year 2000. The year 2000Maxim has conducted an assessment of its computer systems to
identify the systems that could be affected by the "Year 2000" issue, is the result ofwhich
results from computer programs being written using two digits rather than
four to define the applicable year.
AnyMaxim's Year 2000 readiness efforts are being 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 teams are
performing 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. Maxim is
utilizing predominantly internal resources to reprogram, replace, or test
Maxim's software for Year 2000 compliance. Maxim believes the readiness
effort related to critical systems will be completed by the end of the
Company's computer programs that have time-sensitive
software may recognize a date using "00" asthird 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 has initiated formal communications with all of its significant
suppliers to determine the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causingextent 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 of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Based on the assessment of the Company's information technology
systems, managementare 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 yearYear 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 Company is inmanual processes have been documented and tested with no
significant revenue loss anticipated.
Maxim currently believes the processcosts to remediate Year 2000 issues are
approximately $2.8 million, of conducting an
inventorywhich $189,000 had been expensed as of
January 31, 1999, and business risk assessment at its noninformation technology
systems. These noninformation technology systems include items suchapproximately $1.6 million remains to be spent as embedded technology, including microcontrollers used in the Company's
manufacturing processes. The Company will develop remediation plans for
such noninformation technology systems if its business risk assessment
indicates such is warranted.of
October 1, 1999. All costs associated with -19-
20
analyzing the yearYear 2000 issue or
making conversions to existing systemssoftware are being expensed as incurred. The
Company is planning formal communications with all of its
significant suppliers of goods and services to determine the extent to
which the Company's operations and systems are vulnerable to those
third parties' failure to remediate their own year 2000 issues. There
can be no guarantee that the systems of other companies on which the
Company's operations and systems rely will be timely converted and will
not have an adverse effect on the Company's results of operations. The
Company will utilize predominately internal resources to reprogram, or
replace, and test the Company's software for year 2000 compliance by
June 1999, which is prior to any anticipated impact on its operating
systems. Management has not estimated a total cost of the year 2000
issues; however, such costs are not expected to have a material effect
on the results of operations during any quarterly or annual reporting
period.
The costs to the CompanyMaxim of yearYear 2000 compliance and the date on which the CompanyMaxim believes
it will complete the yearYear 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-partythird
party modification plans and other factors. However, there can be no assurance that these estimatesA Business Contingency Plan has
been developed utilizing five professional project managers to implement
the plan. A Business Systems Implementation schedule lists all issues
related to the Year 2000. The issues include identification of changes
needed, costs, completion dates and staffing. The plan is in the final
stages of completion and will be achieved, and actual results could differ materially from those
anticipated. Specific factors that might cause such material
differencesresult in minimal Year 2000 effect on the
Company's operations.
Risks include but are not limited to, 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.
Forward-Looking Statements. This Report 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. Those statements appear in a number of places in this Report and
include statements regarding the intent, belief or current expectations of
the Company, its directors or its officers with respect to, among other
things: (i) the timing, magnitude and costs of the roll-out of the Gallery
Stores; (ii) potential acquisitions by the Company; (iii) the Company's
financing plans; (iv) trends affecting the Company's financial condition or
results of operations; (v) the Company's business and growth strategies;
and (vi) the declaration and payment of dividends. Any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and actual results may differ materially from those
projected in the forward-looking statements as a result of various factors.
The accompanying information contained in this Report, including without
limitation the information set forth under the headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
identifies important factors that could cause such differences.
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ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
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PART II--OTHER INFORMATION
ITEM 3--DEFALTS UPON SENIOR SECURITIES.
The Company is currently in default of the restricted payment covenant
contained in the Indenture (the "Indenture") pursuant to which the 9 1/4% Senior
Subordinated Notes due October 15, 2007 (the "Notes") of the Company were
issued. The default occurred on September 3, 1998 when the Company repurchased
shares of its common stock in the open market pursuant to its ongoing stock
repurchase program. At the time of this stock repurchase, the Company believed
that it had sufficient funds available under the restricted payments provision
of the Indenture to make the repurchase. The Company, however, excluded from the
calculation of its restricted payment availability nonrecurring charges totaling
$33.0 million taken in the quarter ended July 31, 1998, believing such charges
to be excluded from Consolidated Net Income of the Company, as defined in the
Indenture, and thus not effecting a reduction in the Company's restricted
payments availability thereunder. By the time the Company realized that its
treatment of this nonrecurring charge was impermissible under the Indenture, it
had purchased additional shares of common stock in the open market in violation
of the terms of the Indenture.
On November 12, 1998, the Company 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 the Company that such default shall
become an Event of Default on December 17, 1998 (30 days after the date
of the Trustee's notice to the Company). If this default is not cured
by the Company prior to December 17, 1998, the Trustee or the holders
of not less than 25% in aggregate principal amount of Notes outstanding
may declare all unpaid principal of, premium, if any, and accrued
interest on all Notes to be due and payable. The Company will seek the
consent of the Note holders for a waiver of these inadvertent
violations of the restricted payment covenant of the Indenture. In
order to be effective, holders of a majority in aggregate principal
amount of all outstanding Notes must consent to the waiver.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
10.23 Credit Agreement among the Company, the Domestic Subsidiaries
of the Company, as Guarantors, the Lenders identified therein,
NationsBank, N.A., as Administrative Agent, SunTrust Bank,
Atlanta, as Documentation Agent, and Fleet National Bank, as
Co-Agent, dated as of November 25, 1998, in the aggregate
principal amount of $126 million.*
10.24 364-Day Credit Agreement among Maxim Retail Stores, Inc., as
Borrower, the Domestic Subsidiaries of the Borrower, as
Guarantors, the Lenders identified therein and NationsBank,
N.A., as Agent, dated as of November 25,1998, in the
aggregate principal amount of $15 million.
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11 Statements Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule for nine month period ended
October 31, 1998 (for SEC use only)
27.2 Restated Financial Data Schedule for nine month period
ended October 31, 1997 (for SEC use only)*
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* Previously Filed
(B) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
October 31, 1998: Current Report on Form 8-K dated August 9, 1998
(reporting that the Company had acquired substantially all the
residential retail store assets of Shaw Industries, Inc. and its wholly
owned subsidiary, Shaw Carpet Showplace, Inc., pursuant to an Agreement
and Plan of Merger dated June 23, 1998).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MAXIM GROUP, INC.
Dated: December 7, 1998October 18, 1999 By: /s/ A. J. Nassar
----------------------------------------
A. J. Nassar, President and Chief
Executive Officer
Dated: December 7, 1998October 18, 1999 By: /s/ Gary BruglieraStephen P. Coburn
----------------------------------------
Gary Brugliera, Chief FinancialStephen P. Coburn, Principal Accounting
Officer
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