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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
AMENDMENT NO. ONE TO10-Q
---------------
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 NUMBERMAY 8, 1999
------------------------
Commission File No. 1-13099
THE MAXIM GROUP, INC.
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(Exact name of registrant as specified in its charter)A Delaware 58-2060334
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(State or other jurisdiction of (I.R.S.Corporation
(IRS Employer Identification No.)
incorporation or organization) 58-2060334)
210 TownPark Drive
Kennesaw, Georgia 30144
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (678) 355-4000
------------------
N/A
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(Former name, former address, and former fiscal year, if changed since last
report)Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
Common Stock, $.001 par value New York Stock Exchange, Inc.
9 1/4% Senior Subordinated Notes Due 2007 New York Stock Exchange, Inc.
- -------------------------------------------- --------------------------------------------
(TITLE OF EACH CLASS) (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 value
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 lastpast 90 days. Yes ____ No X
----------- -----------_X_
Indicate the number of shares outstanding of each of the registrant's classes of common
stock,Stock, as of the latest practicable date:
Common Stock, $.001 par value 19,038,347
--------------------------------- ----------------------------------
Class Outstanding at October
Common Stock, $.001 par value 19,072,532
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Class Outstanding at November 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:
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PART I --1 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 STATEMENTS1. FINANCIAL STATEMENTS.
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Information)(IN THOUSANDS, EXCEPT SHARE DATA)
OctoberMAY 8, JANUARY 31,
1998
(As Restated January 31,
Assets See Note 2) 1998
- -------------------------------------------------------------------------------1999 1999
----------- -----------
(UNAUDITED)
(Unaudited)
Current assets:ASSETS
Cash and cash equivalents, including restricted cash of $8,881 at
October 31, 1998 and $22,786 at January 31, 1998equivalents................................... $ 34,25946,296 $ 28,88089,901
Current portion of franchisefranchisee 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 82,461 56,432
Accounts receivable from officers and employees 1,533 1,593receivable....... 307 2,013
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 108,015 54,693receivable......................... 2,404 3,405
Receivables................................................. 65,019 52,607
Inventories................................................. 64,613 58,744
Refundable income taxes 1,865 2,558taxes..................................... 4,476 --
Deferred income taxes 6,666 5,714taxes....................................... 7,361 7,361
Prepaid expenses 14,788 3,406
--------- ---------expenses............................................ 7,930 6,316
-------- --------
Total current assets 254,577 157,548assets.................................... 198,406 220,347
Property, plant and equipment, net of accumulated depreciation and
amortization of $58,797 at October 31, 1998 and $48,039 at
January 31, 1998 188,781 137,207net.......................... 80,322 71,766
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 2,718portion..... 4,734 2,337
Notes receivable from franchisees, less current portion 4,251 3,506portion..... 9,585 8,228
Deferred income taxes....................................... 1,065 1,065
Intangible assets, net of accumulated amortization of $1,891 at
October 31, 1998 and $1,626 at January 31, 1998 59,050 13,640assets........................................... 76,836 71,341
Other assets 13,416 6,875
--------- ---------
$ 524,695 $ 321,494
========= =========
Liabilities And Stockholders' Equity
- ----------------------------------------------------------------------
Current liabilities:assets................................................ 12,376 13,684
-------- --------
Total assets................................................ $383,324 $388,768
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debtdebt........................... $ 110,90217,123 $ 38416,952
Senior subordinated notes................................... 95,428 99,387
Current portion of capital lease obligations 504 501obligations................ 6,589 6,635
Accounts payable............................................ 27,892 26,706
Rebates payable to franchisees 4,886 3,975
Accounts payable 34,942 23,376
Accrued expenses 82,059 14,333franchisees.............................. 4,540 749
Deposits.................................................... 18,533 14,769
Deferred revenue 3,615 1,750
Deposits 5,443 2,897
--------- ---------revenue............................................ 5,215 2,254
Income taxes payable........................................ -- 2,633
Other accrued liabilities................................... 42,470 55,827
-------- --------
Total current liabilities 242,351 47,216liabilities............................... 217,790 225,912
-------- --------
Long-term debt, less current portion 116,041 129,349portion........................ 3,351 4
-------- --------
Capital lease obligations, less current portion 1,050 1,429
Deferred taxes 4,066 9,725
--------- ---------portion............. 1,391 1,469
-------- --------
Other long-term liabilities................................. -- 516
-------- --------
Stockholders' equity:
Common stock-shares issued: 21,326,184 and 21,315,664 as
of May 8, 1999 and January 31, 1999, respectively....... 21 21
Additional paid-in capital................................ 186,553 185,828
Retained earnings......................................... 9,036 9,836
Treasury stock-shares at cost: 2,365,900 as of May 8, 1999
and January 31, 1999, respectively...................... (34,818) (34,818)
-------- --------
Total stockholders' equity.............................. 160,792 160,867
-------- --------
Total liabilities 363,508 187,719
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000 shares authorized, no
shares issued or outstanding -- --
Common stock, $.001 par value; 75,000 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 184,624 119,264
Retained earnings 11,360 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 161,187 133,775
--------- ---------
$ 524,695 $ 321,494
========= =========equity.................. $383,324 $388,768
======== ========
SeeThe accompanying notes toare an integral part of these condensed consolidated
financial statements.
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3
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Information)
(Unaudited)(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
October 31, October 31,THREE MONTHS ENDED
-----------------------
MAY 8, APRIL 30,
1999 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 $ 229,388products.......................... $180,568 $80,661
Fees from franchise services.............................. 11,300 6,857
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
--------- --------- --------- ---------sales....................................... -- 6,965
Other..................................................... 712 2,149
-------- -------
Total revenues 249,572 98,328 441,785 276,796revenues.......................................... 192,580 96,632
Cost of sales 163,599 66,852 305,984 189,078
--------- --------- --------- ---------sales............................................... 118,906 69,564
-------- -------
Gross profit 85,973 31,476 135,801 87,718profit.............................................. 73,674 27,068
Selling, general and administrative expenses 77,352 21,655 123,147 62,818expenses................ 72,685 22,390
-------- -------
Operating income.......................................... 989 4,678
Other income (expense):
Interest income (345) (212) (763) (437)income........................................... 1,167 386
Interest expense 4,296 1,589 9,681 4,252expense.......................................... (2,799) (2,459)
Other, -- (208) (904) (292)
Nonrecurring charges -- -- 28,531 --
--------- --------- --------- ---------
Earnings (loss)net................................................ 79 (52)
-------- -------
(Loss) income before income tax expense (benefit)taxes 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)charge.................................................... (564) 2,553
Benefit (provision) for income taxes........................ 38 (1,235)
-------- -------
(Loss) income before extraordinary charge................... (526) 1,318
Extraordinary charge 2,631 5,182 (17,651) 13,018
Extraordinary charge--earlyon early retirement of debt, net of income tax
benefit 377 785 377 785
--------- --------- --------- ---------benefit................................................... (274) --
-------- -------
Net (loss) income........................................... $ (800) $ 1,318
======== =======
Basic (loss) earnings (loss) $ 2,254 $ 4,397 $ (18,028) $ 12,233
========= ========= ========= =========
Earnings (loss) per common share:
Basic:
Earnings (loss)share before extraordinary
chargecharge.................................................... $ 0.14(0.03) $ 0.32 $ (1.02) $ 0.810.08
Extraordinary charge (0.02) (0.05) (0.02) (0.05)
--------- --------- --------- ---------per share.............................. (0.01) --
-------- -------
Basic (loss) earnings per share............................. $ (0.04) $ 0.08
======== =======
Diluted (loss) $ 0.12 $ 0.27 $ (1.04) $ 0.76
========= ========= ========= =========
Diluted:
Earnings (loss)earnings per share before extraordinary
chargecharge.................................................... $ 0.13(0.03) $ 0.31 $ (1.02) $ 0.780.08
Extraordinary charge (0.02) (0.05) (0.02) (0.05)
--------- --------- --------- ---------per share.............................. (0.01) --
-------- -------
Diluted (loss) earnings (loss)per share........................... $ 0.11(0.04) $ 0.26 $ (1.04) $ 0.73
========= ========= ========= =========0.08
======== =======
Weighted average number ofcommon shares.............................. 19,153 16,424
======== =======
Weighted average common shares outstanding:
Basic 19,428 16,164 17,385 16,189
========= ========= ========= =========
Diluted 20,241 16,922 17,385 16,723
========= ========= ========= =========and equivalents.............. 19,153 17,247
======== =======
SeeThe accompanying notes toare an integral part of these condensed consolidated
financial statements.
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4
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
---------------------------
October 31,THREE MONTHS ENDED
-----------------------
MAY 8, APRIL 30,
1999 1998
(As Restated October 31,
See Note 2) 1997
------------- ------------------- ---------
Cash flows from operating activities:CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earningsincome......................................... $ (18,028)(800) $ 12,233
---------- ----------1,318
Adjustments to reconcile net (loss) earningsincome to net cash provided by
(used in) operating activities:
Nonrecurring charges 7,540 0
Depreciation and amortization 13,154 8,722amortization........................... 2,856 3,372
Deferred income taxes (6,611) (479)taxes................................... -- 695
Changes in operating assets and liabilities:
Increase in receivables (12,800) (18,934)
Increase in inventories (20,023) (2,975)
Decrease in refundableliabilities, net of
effects of acquisitions:
Receivables........................................... (11,407) (6,229)
Inventories........................................... (4,189) (4,264)
Refundable income taxes 693 784
Increase in prepaidtaxes............................... (4,476) 572
Prepaid expenses and other assets (13,180) (5,766)
Increase in rebatesassets..................... (410) (4,510)
Accounts payable and accounts payable, accrued expenses, deferred
revenue, and deposits 57,689 2,903
--------- ----------
Total adjustments 26,462 (15,745)
--------- ----------other liabilities................ (3,935) (987)
-------- --------
Net cash provided by (used in) operating activities 8,434 (3,512)
--------- ----------
Cash flows from investing activities:activities..................... (22,361) (10,033)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (46,382) (26,769)expenditures...................................... (9,120) (14,172)
Acquisitions, net of cash acquired (25,354) (1,738)
--------- ----------acquired........................ (8,042) --
-------- --------
Net cash used in(used in) investing activities (71,736) (28,507)
--------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 0 47,240activities..................... (17,162) (14,172)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options, net 3,960 1,000stock options................... 325 1,348
Purchase of treasury stock (19,924) (14,043)
Borrowings under revolving credit agreement 128,482 33,199
Repayments of revolving credit agreement (43,461)stock................................ -- (1,760)
Long-term debt proceeds................................... -- 17,114
Principal payments on capital lease obligations (376) (590)
--------- ----------obligations........... (124) (129)
Early extinguishment of debt.............................. (4,283) --
-------- --------
Net cash (used in) provided by financing activities 68,681 66,806
--------- ----------activities......... (4,082) 16,573
-------- --------
Net increasedecrease in cash 5,379 34,787and cash equivalents................... (43,605) (7,632)
Cash and cash equivalents at beginning of periodperiod............ 89,901 28,880
6,439
--------- ------------------ --------
Cash and cash equivalents at end of periodperiod.................. $ 34,25946,296 $ 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 $ 11,496 $ --
========= ==========21,248
======== ========
SeeThe accompanying notes toare an integral part of these condensed consolidated
financial statements.
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5
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Information)
(Unaudited)NOTE 1. 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 accruals)adjustments)
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 for the fiscal year ended January 31, 1999, as filed with the
Securities and Exchange Commission.
Comprehensive loss, as defined by Statement of Financial Accounting Standard
("SFAS") No. 130, "Reporting Comprehensive Income," was the same as net income
(loss) for the three months ended May 8, 1999 and April 30, 1998.
The results of operations for the periods presented are not necessarily
indicative of the operating results to be expected for the full year.
2. RestatementDESCRIPTION OF BUSINESS
The 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 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 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, 1999 and January 31, 1999, the Company was not in compliance
with a certain restricted payment covenant contained in the Indenture which
references the Company's $100 million 9 1/4% senior subordinated notes (the
"Senior Notes").
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
quarterlythree month period ended October 31, 1998, the Company's
restricted payments exceeded that allowed under the Indenture. As of May 8, 1999
and January 31, 1999, the Company was
5
NOTE 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 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 consolidated balance sheets as of May 8, 1999 and January 31, 1999.
As of November 1, 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 its Senior Credit Facility to allow for enhanced availability,
an extended maturity date, and improved advance ratios on existing collateral.
NOTE 2. 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 statement will have a material impact on the
financial statements.
NOTE 3. ACQUISITIONS.
During the three months ended May 8, 1999, the Company acquired 7 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. The related purchase
agreements, also provide for additional consideration to be paid based on
certain vendor
support funds recognizedlocations future financial performance.
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 operatingconsolidated statements of operations from the date of acquisition.
The following unaudited pro forma summary presents the consolidated results duringof
operations of the quarter. It wasCompany as if the acquisition of the retail store assets of
Shaw and the disposition of all of the assets of Image had occurred on
February 1, 1998. The pro
6
NOTE 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,
1999 1998
(IN THOUSANDS) -------- ---------
Net revenue............................................ $192,580 $185,848
Net loss............................................... (800) (2,048)
Basic loss per share................................... $ (0.04) $ (0.10)
Diluted loss per share................................. (0.04) (0.10)
NOTE 4. INVENTORIES.
Inventories consist of the following:
MAY 8, JANUARY 31,
1999 1999
(IN THOUSANDS) -------- -----------
Raw materials.......................................... $ 309 $ 309
Finished goods......................................... 64,304 58,435
------- -------
Total.................................................. $64,613 $58,744
======= =======
On a segment basis, the Company's inventories consist of the following:
MAY 8, JANUARY 31,
1999 1999
(IN THOUSANDS) -------- -----------
Retail................................................. $62,796 $56,927
Image.................................................. 1,817 1,817
------- -------
Total.................................................. $64,613 $58,744
======= =======
NOTE 5. NONRECURRING CHARGES.
During the three month period ended July 31, 1998, the Company reevaluated
its business strategy and determined that certain revenue related to vendor
support funds was incorrectly recorded, a portion of which will be
recognized in future periods.expand its focus on its retail
operations. As a result of the adjustmentsrevised 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 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 number of
stores to be closed. As of May 8, 1999, $19,365,000 of the nonrecurring charges
were incurred, with $4,348,000 remaining in the reserve, which is included in
accrued liabilities on the accompanying condensed balance sheet.
7
NOTE 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, 1999 are as follows:
JANUARY 31, MAY 8,
1999 AMOUNT 1999
BALANCE INCURRED BALANCE
(IN THOUSANDS) ----------- -------- --------
Claim reserves.............................................. $3,195 $ (191) $3,004
Store closure and carrying costs............................ 2,822 (1,478) 1,344
------ ------- ------
$6,017 $(1,669) $4,348
====== ======= ======
NOTE 6. DEBT
In 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--"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 revisedidentified three reportable segments through which it conducts
its reported resultsoperating activities: retail, manufacturing and franchise services. These
three segments reflect an aggregation of the operating segments used by Company
management for making decisions and assessing performance. Management determines
operating segments based primarily upon the operations' line of business 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 the operations 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 threesame basis as transactions
with third parties.
8
NOTE 7. SEGMENT INFORMATION. (CONTINUED)
Identifiable assets consist of cash, property, plant and nine month
periods ended October 31, 1998. This Form 10-Q/A reflectsequipment used in
the effectsoperations of these adjustments.
-5-
6the segment, as well as inventory, receivables and other
assets directly related to the segment. The Company has no assets located
outside the United States.
Three Months Ended October 31, 1998 Nine Months Ended October 31, 1998
----------------------------------- ----------------------------------
As As
Previously Previously
Reported Restated Reported Restated
----------FRANCHISE INTERSEGMENT
MANUFACTURING RETAIL SERVICES ELIMINATIONS TOTAL
(IN THOUSANDS) ------------- -------- ------------------- ------------ --------
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
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 3,717 4,296 8,917 9,681
Other expense (income)expense.................... -- 901 2,898 (1,000) 2,799
Income tax benefit (provision)...... -- 122 (84) -- 38
Extraordinary charge................ -- -- (307) (904)
Nonrecurring charges274 -- 274
Net (loss) income................... -- 33,000 28,531
Earnings(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) before income tax
expense (benefit) and extraordinary charge 10,422 4,670 (9,139) (23,891)............. 4,431 (660) 959 (52) 4,678
Interest expense.................... 1,429 854 2,251 (2,075) 2,459
Income tax expense (benefit) 4,016 2,039 (1,299) (6,240)
Earningsbenefit (provision)...... (1,216) 856 (875) -- (1,235)
Net (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)income................... 2,070 (1,442) 690 -- 1,318
------- -------- -------- ------- --------
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
InventoriesNOTE 8. SUBSEQUENT EVENTS.
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 (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 established a cash collateral account
with the lenders. As of November 10, 1999, the cash collateral account balance
was $42.6 million. As of November 10, 1999, the Company had $5.8 million
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 to November 15,
1999. 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
9
NOTE 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 NOTES
In an effort to resolve the pending default of the 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 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.
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 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 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.
10
ITEM 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 FORM 10-Q.
GENERAL
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
subsequently adjusted to $11.5 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 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 its carpet manufacturing
operations of its Image subsidiary in January 1999 for total consideration of
$210.7 million which included the subsidiary assumption 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 retailers of
flooring product on an exclusive basis. As of November 1, 1999, Maxim's retail
network consisted of 323 Company-owned stores and 1,035 franchise
centers/locations.
During the three months ended May 8, 1999, Maxim operated two reportable
segments: retail and franchise services. During the three months ended
April 30, 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
Consolidated Financial Statements for certain financial information relating to
these three segments.
11
On February 1, 1999, Maxim changed its fiscal year from January 31 to the
first Saturday following (in thousands):
October 31, January 31,
1998 1998
----------- -----------
Raw materials $ 21,289 $ 14,809
Work in process 3,755 3,363
Finished goods 82,971 36,521
-------- --------
$108,015 $ 54,693
======== ========
4.January 31. Accordingly, the first quarter of the
fiscal year ending February 5, 2000 consists of the 14-week period ended May 8,
1999 compared to a 13-week period in the prior year. Financial results for the
three months ended April 30, 1998 have not been restated to reflect the effects
of the change in fiscal year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 8, 1999 COMPARED TO THREE MONTHS ENDED APRIL 30, 1998
TOTAL REVENUES. Total revenues increased 99.3% to $192.6 million for the
three months ended May 8, 1999 from $96.6 million for the three months ended
April 30, 1998. The components of total revenues, exclusive of the effect of
intersegment eliminations, are discussed below. Intersegment eliminations, which
totaled $5.8 million for the three months ended May 8, 1999 and $3.8 million for
the three months ended April 30, 1998, include certain intercompany allocations.
RETAIL REVENUE. Retail revenue consists of sales of floor covering
products by Maxim's retail stores. Retail revenues increased 344.2% to
$176.8 million for the three months ended May 8, 1999 from $39.8 million for
the three months ended April 30, 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 and, to a lesser extent, to internal growth.
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), (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
increased 79.0% to $21.6 million for the three months ended May 8, 1999 from
$12.1 million for the three months ended April 30, 1998. The increase in
franchise services revenue is due to, among other things, increases in
national accounts revenue, rebates from floor covering vendors and growth in
the demand for franchise services, particularly the MAXCare franchise.
MANUFACTURING REVENUE: Manufacturing revenue included the sale of
manufactured carpet and polyethylene tereptalate ("PET"), fiber and flake.
Manufacturing revenue for the three months ended April 30, 1998 was
$48.6 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 increased 172.2% to $73.7 million for the three
months ended May 8, 1999 from $27.1 million for the three months ended
April 30, 1998. As a percentage of total revenue, gross profit was 38.3% for the
three months ended May 8, 1999, compared to 28.0% for the three months ended
April 30, 1998, as a result of the sale of the manufacturing segment in
January 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 224.6% to $72.7 million for the three months
ended May 8, 1999, from $22.4 million for the three months ended April 30, 1998.
The increase in selling 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
Maxim stores. 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 to 37.7% for the three months ended May 8, 1999, from 23.2% for the
three months ended April 30, 1998. The increase in selling, general and
administrative expenses, both as a percentage of revenues and operating expenses
reflected Maxim's changing revenue mix. 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 segment
12
comprises a substantial portion of Maxim's operations in future periods.
Increases in consulting/professional fees, legal and bad debt expenses also
contributed to the overall increase in selling, general and administrative
expenses in the three months ended May 8, 1999.
OPERATING INCOME/LOSS. Operating income decreased to $989,000 for the three
months ended May 8, 1999, from $4.7 million for the three months ended
April 30, 1998. The components of operating income, exclusive of the effect of
intersegment eliminations, are discussed below. Intersegment eliminations
totaled $52,000 in the three months ended April 30, 1998.
RETAIL OPERATING INCOME/LOSS. Retail operating loss increased to a loss
of $3.7 million for the three months ended May 8, 1999 from loss of $660,000
for the three months ended April 30, 1998. This increase was primarily due
to the impact of the acquisition of the retail store assets of Shaw. 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 increased to $4.7 million for the three months ended May 8, 1999 from
$1.0 million for the three months ended April 30, 1998. This $3.7 million
increase was a result of increased revenue during the three months ended
May 8, 1999.
MANUFACTURING OPERATING INCOME/LOSS. Manufacturing operating income for
the three months ended April 30, 1998 was $4.4 million. With the sale of
substantially all the assets of Image in January 1999, Maxim no longer
engages in manufacturing operations.
INTEREST EXPENSE. Interest expense increased 13.8% to $2.8 million for the
three months ended May 8, 1999, from $2.5 million for the three months ended
April 30, 1998 due principally to a higher interest rate during the three months
ended May 8, 1999. See "Liquidity and Capital Resources."
INCOME TAX (PROVISION) BENEFIT. Maxim recorded an income tax benefit of
$38,000 for the three months ended May 8, 1999, compared to a $1.2 million
provision for the three months ended April 30, 1998. The decrease in income
taxes is due to Maxim recording of a pre-tax loss in the three months ended
May 8, 1999.
EXTRAORDINARY CHARGE. The extraordinary charge recorded in the three months
ended May 8, 1999, resulted from the repurchase of $4.0 million principal amount
Senior Notes and the write-off of unamortized financing fees and discount
associated with the purchase of the Senior Notes. The total charge amounted to
$295,000, which was tax effected by $21,000 and discount for the three months
ended May 8, 1999.
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. 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,
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 the indenture relating to Maxim's senior
subordinated notes. See "--Senior Subordinated NotesNotes."
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 facility (the "Senior Credit Facility") This Senior consists
of a revolving facility that matures May 18, 2002. Borrowings under the
13
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 its obligations under the Senior Credit
Facility the amended credit facility, Maxim established a cash collateral
account with the lenders. As of November 10, 1999, the cash collateral account
balance was $42.6 million. As of November 10, 1999, the Company had
$5.8 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 to
November 15, 1999. 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. On October 16, 1997, the Company completed the sale ofMaxim issued $100 million
of 9-1/9 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 "Senior Notes"). The net proceeds to the CompanyMaxim from the
offering of the Senior Notes were approximately $96 million net of an initial
issue discount and fees and related costs. The CompanyMaxim used the net proceeds from the
offering of the Senior Notes to repay all borrowings then outstanding under its
revolving credit agreementsfacility of approximately $82.7 million and for general
corporate purposes, including capital expenditures.
-6-
7
Each of the Company'sMaxim'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
the Company. The CompanyMaxim. 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 the
Company.
The CompanyMaxim.
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 the
CompanyMaxim 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.
On November 12, 1998, the CompanyMaxim 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 CompanyMaxim that
such default shallwould 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 isMaxim) if not cured by the Companyor waived prior to
December 17, 1998,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 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 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.
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-down the value of certain
retail assets including goodwill.
-7-
8
The Company recorded a $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 been reduced. The Company wrote-off receivables due
from vendors 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 15 Company-owned retail
stores. The Company anticipated all stores would 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 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 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
------- -------- ---------
Write-off of vendor receivables $ 2,439 $ 2,439 $ 0
Claim reserves 10,700 0 10,700
Write-down of equipment 492 492 0
Store closure and carrying costs 10,700 1,033 9,667
Write-down of goodwill 4,200 4,200 0
------- ------- -------
$28,531 $ 8,164 $20,367
======= ======= =======
-8-
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 $ 2,631 $ 5,182 $(17,651) $ 13,018
Extraordinary charge 377 785 377 785
-------- -------- -------- --------
Net earnings (loss) $ 2,254 $ 4,397 $(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 $ 0.14 $ 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) per
common share:
Earnings (loss) before
extraordinary charge $ 2,631 $ 5,182 $(17,651) $ 13,018
Extraordinary charge 377 785 377 785
-------- -------- -------- --------
Net earnings (loss) $ 2,254 $ 4,397 $(18,028) $ 12,233
======== ======== ======== ========
-9-
10
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 $ 0.13 $ 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
======== ======== ======== ========
(a) Common equivalent shares are antidilutive for the
nine months ended October 31, 1998.
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 floor 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 $11.5 million after giving effect to purchase
price adjustments), paid Shaw $25 million in 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 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.
-10-
11
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------ ------------------------
1998 1997 1998 1997
-------- ---------- -------- --------
Net revenues $249,572 $ 229,956 $714,741 $656,024
======== ========== ======== ========
Net earnings (loss) $ 2,254 $ 573 $(22,154) $ 8,862
======== ========== ======== ========
Basic earnings (loss) per common share $ 0.12 $ 0.05 $ (1.14) $ 0.46
======== ========== ======== ========
Diluted earnings (loss) per common share $ 0.11 $ 0.05 $ (1.14) $ 0.45
======== ========== ======== ========
Effective September 25, 1998, the Company acquired CarpetsPlus of
America, LLC, a floor 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.
8. Subsequent Events
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 approximately $211 million,
which includes the assumption of approximately $48 million in related
debt and short-term liabilities. The transaction closed on January 29,
1999.
Subsequent to October 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 Form
10-Q/A should be read in conjunction with the Company's form 10-K
filing for the year ended January 31, 1999, filed with the Securities
and Exchange Commission.
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12
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 floor 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 and nine month periods
ended October 31, 1998.
Total Revenues. Total revenues increased 153.8% to $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 59.6% to
$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 Floor covering Products. Sales of floor covering
products increased 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 75.2% to $401.9
million for the nine months ended October 31, 1998 from $229.4
million in the prior year period. Sales of floor 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 floor 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 7.9% to $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 $13.3 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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13
Fees From Franchise Services. Fees from franchise services,
which include franchise license fees and royalties, brokering
of floor covering products, and advertising, decreased 47.6%
to $4.6 million for the three months ended October 31, 1998
from $8.7 million for the three months ended October 31, 1997,
and decreased 40.7% to $13.8 million for the nine months ended
October 31, 1998 from $23.3 million in the prior year period.
Fiber and PET Sales. Sales of fiber and polyethylene
terephthalate ("PET") increased 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 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 173.1% to $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 54.8% to $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 34.4%
for the three months ended October 31, 1998 compared to 32.0% for the
three months ended October 31, 1997 and 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 floor 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 257.2% to $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 96.0% to $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 31.0% for the three months ended
October 31, 1998 from 22.0% for the three months ended October 31, 1997
and increased to 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 170.4% to $4.3 million for
the three months ended October 31, 1998 from $1.6 million for the three
months ended October 31, 1997, and
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14
increased 127.7% to $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-down the
value of certain retail assets including goodwill. The Company recorded
a $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, was reduced.
The Company wrote-off receivables due from vendors 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 15 Company-owned retail stores. The
Company anticipated all stores would be closed within six 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 $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 $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 the
nonrecurring charges 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
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15
$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 $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 $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 $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
was valued at approximately $211 million, including the assumption by
Aladdin of approximately $48 million of Image liabilities.
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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16
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.
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
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17 amount of Senior Notes
outstanding may declare all unpaid principal of, premium, if any, and accrued
and unpaid interest of all such Senior Notes to be due and payable. The Company will seek the consent of the Senior Note holders
for a waiver of these 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 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 a current liabilitiesliability on the
accompanying condensed unaudited balance sheet. 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 pending default of the 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 consent
14
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.
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 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 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, as
discussed above.
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, 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 the Facility. The
loan proceeds may then be 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 of May 8, 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. The accompanying condensed consolidated financial statements
of the Company have been presented on a going concern basis which contemplates
the accompanyingrealization of assets and the satisfaction of liabilities in the normal
course of business.
As of May 8, 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, balance sheet.
Althoughthe Company's
restricted payments exceeded that allowed under the Indenture. As of May 8, 1999
and January 31, 1999, the Company believes that it will be ablewas 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 consolidated balance sheet
as of May 8, 1999 and January 31, 1999.
15
As of November 1, 1999, the Company's available borrowings under its Senior
Credit Facility plus cash on hand were not sufficient to obtain a default
waiver fromrepay the Senior Notes
if declared due and payable.
As described above, the Company is currently negotiating with the holders of
the Senior Notes thereto 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 the
Company,Maxim, repayment of
the Senior Notes may be accelerated, as discussed above.
Any such acceleration, as well asAdditionally, the failureCompany is currently in negotiations with its senior
lenders to amend its Senior Credit Facility to allow for enhanced availability,
an extended maturity date, and improved advance ratios on existing collateral.
CONTINGENCIES. Since the May 18, 1999 announcement that Maxim would be
restating financial results for fiscal 1999 and certain of the Companyquarters therein,
eleven lawsuits claiming to obtain a default waiver frombe class actions have been filed against Maxim and
certain of its current and former executive officers and directors. In addition,
the Senior Note holders by January 31,
1999, will constituteSecurities and Exchange Commission has commenced an eventinformal 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 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
Notesclass action lawsuits or the Credit FacilitySEC inquiry on their effect on
Maxim's financial results, its business or its management. In addition,
management does not believe it is accelerated.
Cash Flows.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 a judgment 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. During the ninethree months ended October 31, 1998,in May 8, 1999, operating
activities provided $8.4used $22.4 million of cash compared to $3.5$10.0 million of
cash used in the ninethree months
ended October 31, 1997.April 30, 1998. The increase in cash provided byused in operating activities resulted
primarily from an increase in trade liabilities.accounts receivable and inventories. The increase
in trade liabilities,
partially offset by an increase in inventories and accounts receivable and inventories was mainly due to increased product purchases and higher sales of floor
covering products to franchisees and other carpet retailers.
During the ninethree months ended October 31, 1998,May 8, 1999, investing activities used
cash of $71.7$17.2 million compared to $28.5using $14.2 million forin the ninethree months ended
October 31, 1997.April 30, 1998. The increasechange is primarily due to an
increase inreduced levels of capital
expenditures relatingoffset by increased funds used to manufacturing operations
and the acquisition of thepurchase additional retail
store assets of Shaw.locations.
During the ninethree months ended October 31, 1998,May 8, 1999, financing activities provided cash of $68.7used
$4.1 million compared to $66.8providing $16.6 million infor the ninethree months ended
October 31, 1997.April 30, 1998. This change resulted from the early extinguishment of debt for
the three months ended May 8, 1999 as compared to the increase is primarily due to
borrowings underin of debt during
the Company's revolving credit agreement.
Capital Expenditures. The Companythree months ended April 30, 1998.
CAPITAL EXPENDITURES. Maxim anticipates that it will require approximately
$10$30.0 million for the remainderfiscal 2000, of fiscalwhich approximately $20.0 million has been
spent through November 1, 1999, to (i) open
approximately two new Gallery stores (assuming approximately 50% of
such stores will be located on Company-owned propertyrebrand its various retail formats under
the singular Flooring America name, including signage and the remainder
on leased property),interior store
changes, (ii) reconfigure eight existing CarpetMAX stores including certain of the stores
acquired from Shaw, and (iii) upgrade its management information systems.
The actual costs
thatSEASONALITY
Historically, Maxim's retail floor covering sales are subject to some
seasonal fluctuation typical to the Company will incurfloor covering industry. Higher sales
occurred in opening new Gallery stores cannot be
predicted with precision because the opening costs will vary based upon
geographic location,summer and fall months during Maxim's second and third quarters,
and lower sales occurred during the size offourth quarter holiday season. Increases
16
occur in the store,second quarter as construction schedules increase during the
amount of supplier
contributionssummer, 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
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18
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 statementlargest increase occurs in the firstthird quarter due to of fiscala
combination of ongoing construction and pre-Christmas home remodeling.
YEAR 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, 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.
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 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 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 has initiated 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 Initiativevendor 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 $189,000 had been expensed as of
January 31, 1999, and approximately $1.6$1.5 million remains to be
spent as of OctoberNovember 1, 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. A 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 datesThere can be no assurance that these
estimates will be achieved and staffing. The plan is in the final
stages of completion and will result in minimal Year 2000 effect on the
Company's operations.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.
Forward-Looking Statements.17
FORWARD-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. ThoseThese
statements appear in a number of places in this Report and include statements
regarding the intent, belief or current expectations of the Company,Maxim, its directors or
its officers with respect to, among other things:
(i)- 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 the Gallery
Stores; (ii) potential acquisitions by the Company; (iii) the Company'snew flooring centers,
and
- Maxim'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. Anyplans.
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 customer 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 including without
limitationon Form 10-K for the information set forth underyear ended
January 31, 1999. You are urged to carefully consider such factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY. Maxim has limited exposure to market volatility
in interest rates. As of May 8, 1999, exposure from interest rates was not
material to Maxim's financial position, results of operations, or cash flows, as
$95.4 million of Maxim's $115.9 million of debt consisting of it Senior Notes
has been fixed at a rate of 9 1/4% until 2007. In the headings "Management'sevent that the 9 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 Company also had two interest rate swap agreements
for a total notional amount of less than $2.5 million. These swap agreements
were terminated in May 1999. Based on Maxim's low overall floating interest rate
exposure at May 8, 1999, a
18
near-term 100 basis point change in interest rates would not materially effect
Maxim's financial statements.
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, 1999, there was no
exposure to foreign currency exchange rate volatility.
19
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Maxim is currently in default of the restricted payment covenant contained
in the indenture pursuant to which the 9 1/4% Senior Subordinated Notes of Maxim
were issued. See "Part 1. Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations,"
identifies important factors that could cause such differences.
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20Operations--Liquidity and Capital
Resources--Senior Subordinated Notes" included elsewhere herein for additional
information concerning this default.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
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21
PART II--OTHER INFORMATION
ITEM 6--EXHIBITS6. 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.*
-21-8-Q
(A) Exhibits
10.23.4 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.
20
22
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)*
- --------------------
* 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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23
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: October 18,
THE MAXIM GROUP, INC.
By: /s/ A. J. NASSAR
-----------------------------------------
A. J. Nassar,
President and Chief Executive Officer
Dated: November 12, 1999
By: /s/ STEPHEN P. COBURN
-----------------------------------------
Stephen P. Coburn,
Principal Accounting Officer
Dated: November 12, 1999
By: /s/ A. J. Nassar
----------------------------------------
A. J. Nassar, President and Chief
Executive Officer
Dated: October 18, 1999 By: /s/ Stephen P. Coburn
----------------------------------------
Stephen P. Coburn, Principal Accounting
Officer
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