1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A Amendment No. One to Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended July 31, 1998 Commission File Number 1-13099 THE MAXIM GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 58-2060334 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 210 TownPark Drive, Kennesaw, Georgia 30144 - ---------------------------------------- ------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (678) 355-4000 ----------------------- N/A - -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes No X ----------- -------------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Common Stock, $.001 par value 19,038,347 - -------------------------------------- ----------------------------------- Class Outstanding at October 1, 1999 Explanatory Note: During the course of the fiscal 1999 year-end financial audit process, The Maxim Group, Inc. ("Maxim" or the "Company") recorded certain adjustments to its previously reported interim results. The most significant of the adjustments affecting the quarterly period ended July 31, 1998 related to certain vendor support funds recognized in the Company's operating results during the quarter, reductions to the previously reported nonrecurring charge, and a gain on the sale of equipment. It was determined that certain revenue related to vendor support funds was incorrectly recorded. Certain components of the nonrecurring charge were revised and a gain on the sale of certain equipment previously reflected in the Company's quarter ended April 30, 1998 is recorded in the revised results for the quarter ended July 31, 1998. As a result of the adjustments recorded by the Company, the Company has revised its reported results of operations for the three and six month periods ended July 31, 1998. This Form 10-Q/A reports the effects of these adjustments. The following Items are amended hereby: PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 2 PART I--FINANCIAL INFORMATION ITEM 1--FINANCIAL STATEMENTS THE MAXIM GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Per Share Information) July 31, 1998 (As Restated January 31, Assets See Note 2) 1998 - --------------------------------------------------------------------------- ------------ ----------- (Unaudited) Current assets: Cash and cash equivalents, including restricted cash of $12,618 at July 31, 1998 and $22,786 at January 31, 1998 $ 25,030 $ 28,880 Current portion of franchise license fees receivable, net of allowance for doubtful accounts of $383 at July 31, 1998 and $528 at January 31, 1998 2,791 3,107 Trade accounts receivable, net of allowance for doubtful accounts of $2,594 at July 31, 1998 and $1,917 at January 31, 1998 60,585 56,432 Accounts receivable from officers and employees 1,202 1,593 Current portion of notes receivable from franchisees and related parties, net of allowance for doubtful accounts of $252 at July 31, 1998 and $261 at January 31, 1998 1,562 1,165 Inventories 64,808 54,693 Refundable income taxes 1,986 2,558 Deferred income taxes 5,804 5,714 Prepaid expenses 4,340 3,406 -------- -------- Total current assets 168,108 157,548 Property and equipment, net of accumulated depreciation and amortization of $54,971 at July 31, 1998 and $48,039 at January 31, 1998 157,639 137,207 Franchise license fees receivable, less current portion, net of allowance for doubtful accounts of $210 at July 31, 1998 and January 31, 1998 4,619 2,718 Notes receivable from franchisees, less current portion 4,001 3,506 Intangible assets, net of accumulated amortization of $1,993 at July 31, 1998 and $1,626 at January 31, 1998 11,453 13,640 Other assets 9,279 6,875 -------- -------- $355,099 $321,494 ======== ======== Liabilities And Stockholders' Equity - --------------------------------------------------------------------------- Current liabilities: Current portion of long-term debt $ 150 $ 384 Current portion of capital lease obligations 503 501 Rebates payable to franchisees 3,773 3,975 Accounts payable 19,417 23,376 Accrued expenses 40,037 14,333 Deferred revenue 3,281 1,750 Deposits 5,444 2,897 -------- -------- Total current liabilities 72,605 47,216 Long-term debt, less current portion 169,025 129,349 Capital lease obligations, less current portion 1,174 1,429 Deferred taxes 712 9,725 -------- -------- Total liabilities 243,516 187,719 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value; 1,000 shares authorized, no shares issued or outstanding 0 0 Common stock, $.001 par value; 25,000 shares authorized, 17,577 shares issued at July 31, 1998 and 17,352 shares issued at January 31, 1998 18 17 Additional paid-in capital 121,437 119,264 Retained earnings 9,106 29,388 Treasury stock, 1,455 shares at July 31, 1998 and 1,221 shares at January 31, 1998 (18,978) (14,894) -------- -------- Total stockholders' equity 111,583 133,775 -------- -------- $355,099 $321,494 ======== ======== See accompanying notes to condensed consolidated financial statements. -2- 3 THE MAXIM GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Information) (Unaudited) Three Months Ended Six Months Ended ---------------------------- -------------------------- July 31, July 31, 1998 1998 (As Restated July 31, (As Restated July 31, See Note 2) 1997 See Note 2) 1997 ------------ --------- ------------ --------- Revenues: Sales of floor covering products $ 86,157 $ 76,881 $ 166,818 $ 148,371 Fiber and PET sales 5,209 6,741 12,174 12,513 Fees from franchise services 2,392 7,292 9,249 14,573 Other 1,823 1,329 3,972 3,011 --------- --------- --------- --------- Total revenues 95,581 92,243 192,213 178,468 Cost of sales 72,821 63,071 142,385 122,226 --------- --------- --------- --------- Gross profit 22,760 29,172 49,828 56,242 Selling, general, and administrative expenses 23,405 20,725 45,795 41,163 Interest income (32) (131) (418) (225) Interest expense 2,926 1,262 5,385 2,663 Other (956) (49) (904) (84) Nonrecurring charges 28,531 0 28,531 0 --------- --------- --------- --------- (Loss) earnings before income (31,114) 7,365 (28,561) 12,725 tax (benefit) expense Income tax (benefit) expense (9,514) 2,780 (8,279) 4,889 --------- --------- --------- --------- Net (loss) earnings $ (21,600) $ 4,585 $ (20,282) $ 7,836 ========= ========= ========= ========= (Loss) earnings per common share: Basic $ (1.32) $ 0.28 $ (1.24) $ 0.48 ========= ========= ========= ========= Diluted $ (1.32) $ 0.28 $ (1.24) $ 0.47 ========= ========= ========= ========= Weighted average number of common shares outstanding: Basic 16,305 16,294 16,364 16,202 ========= ========= ========= ========= Diluted 16,305 16,615 16,364 16,623 ========= ========= ========= ========= See accompanying notes to condensed consolidated financial statements. -3- 4 THE MAXIM GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) Six Months Ended ------------------------ July 31, 1998 (As Restated July 31, See Note 2) 1997 ------------ -------- Cash flows from operating activities: Net (loss) earnings $(20,282) $ 7,836 -------- -------- Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities: Nonrecurring charges 7,540 0 Depreciation and amortization 7,447 5,845 Deferred income taxes (9,103) 3,293 Changes in assets and liabilities: Increase in receivables (6,170) (8,557) Increase in inventories (10,515) (4,884) Decrease in refundable income taxes 572 334 Increase in prepaid expenses and other assets (2,808) (3,847) Increase in rebates and accounts payable, accrued expenses, deferred revenue, and deposits 23,357 411 -------- -------- Total adjustments 10,320 (7,405) -------- -------- Net cash (used in) provided by operating activities (9,962) 431 -------- -------- Cash flows from investing activities: Capital expenditures (28,878) (11,837) Acquisitions, net of cash acquired (2,289) (977) -------- -------- Net cash used in investing activities (31,167) (12,814) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock, net 0 47,240 Proceeds from exercise of options, net 2,174 463 Purchase of treasury stock (4,084) (10,938) Borrowings under revolving credit agreement 39,442 0 Repayments of revolving credit agreement 0 (25,642) Principal payments on capital lease obligations (253) (254) -------- -------- Net cash provided by financing activities 37,279 10,869 -------- -------- Net decrease in cash (3,850) (1,514) Cash, beginning of period 28,880 6,439 -------- -------- Cash, end of period $ 25,030 $ 4,925 ======== ======== Supplemental disclosures of cash flow information: Cash paid during period for: Interest $ 5,052 $ 4,067 ======== ======== Income taxes $ 145 $ 1,346 ======== ======== Supplemental disclosure of noncash investing and financing activities: Common stock issued in connection with acquisitions $ 0 $ 3,000 ======== ======== See accompanying notes to condensed consolidated financial statements. -4- 5 THE MAXIM GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Information) (Unaudited) 1. Consolidated Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 Form 10-K as filed with the Securities and Exchange Commission. The results of operations for the periods presented are not necessarily indicative of the operating results for the full year. 2. Restatement During the course of the fiscal 1999 year-end financial audit process, the Company recorded certain adjustments to its previously reported interim results. The most significant of the adjustments affecting the quarterly period ended July 31, 1998 related to certain vendor support funds recognized in the Company's operating results during the quarter, reductions to the previously reported nonrecurring charge, and a gain on the sale of equipment. It was determined that certain revenue related to vendor support funds was incorrectly recorded. Certain components of the nonrecurring charge were revised and a gain on the sale of certain equipment previously reflected in the Company's quarter ended April 30, 1998 is recorded in the revised results for the quarter ended July 31, 1998. As a result of the adjustments recorded by the Company, the Company has revised its reported results of operations for the three and six month periods ended July 31, 1998. This Form 10-Q/A reports the effects of these adjustments. Three Months Ended Six Months Ended July 31, 1998 July 31, 1998 -------------------- -------------------- As As Previously Previously Reported Restated Reported Restated Sales of floor covering products $ 86,849 $ 86,157 $167,985 $166,818 Fees from franchise services 11,995 2,392 21,282 9,249 Total revenues 105,876 95,581 205,413 192,213 Cost of sales 73,425 72,821 143,200 142,385 Gross profit 32,451 22,760 62,213 49,828 Selling, general, and administrative expenses 22,097 23,405 44,299 45,795 Interest expense 2,836 2,926 5,200 5,385 Other (income) (120) (956) (307) (904) Nonrecurring charges 33,000 28,531 33,000 28,531 (Loss) earnings before income tax (benefit) expense (25,330) (31,114) (19,561) (28,561) Income tax (benefit) (7,540) (9,514) (5,315) (8,279) Net (loss) earnings (17,790) (21,600) (14,246) (20,282) Earnings per common share: Basic $ (1.09) $ (1.32) $ (0.87) $ (1.24) Diluted (1.09) (1.32) (0.87) (1.24) July 31, 1998 ---------------------- As Previously Reported Restated Trade accounts receivable, net $ 69,461 $ 60,585 Prepaid expenses 4,444 4,340 Property and equipment, net 156,662 157,639 Accounts payable 19,369 19,417 Accrued expenses 40,367 40,037 Deferred revenue 2,554 3,281 Deferred taxes, long-term liability 3,676 712 Additional paid-in capital 121,214 121,437 Retained earnings 15,142 9,106 3. Inventories Inventories consisted of the following (in thousands): July 31, January 31, 1998 1998 -------- --------- Raw materials $16,339 $14,809 Work in process 4,139 3,363 Finished goods 44,330 36,521 ------- ------- $64,808 $54,693 ======= ======= 4. Senior Subordinated Notes On October 16, 1997, the Company completed the sale of $100 million of 9-1/4% Senior Subordinated Notes ("Notes") due 2007, to institutional buyers in a private offering under Rule 144A promulgated under the Securities Act of 1933. The net proceeds to the Company from the offering of the Notes were approximately $96 million, net of an issue discount and fees and related costs. The Company used the net proceeds from the offering of the Notes to repay all borrowings outstanding under its revolving credit agreements of -5- 6 approximately $82.7 million and for general corporate purposes, including capital expenditures. Each of the Company's operating subsidiaries has fully and unconditionally guaranteed the Notes on a joint and several basis. The guarantor subsidiaries comprise all of the direct and indirect subsidiaries of the Company. The Company has not presented separate financial statements and other disclosures concerning the guarantor subsidiaries because management has determined that such information is not material to investors. There are no significant restrictions on the ability of the guarantor subsidiaries to make distributions to the Company. 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. 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 certain 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 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. -6- 7 The major components of the nonrecurring charges are as follows: CHARGE TO INITIAL RELATED REMAINING CHARGE ASSETS 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 10,700 700 10,000 Write-down of goodwill 4,200 4,200 0 ------- ------- ------- $28,531 $ 7,831 $20,700 ======= ======= ======= 6. Acquisitions On July 14, 1998 the Company executed a non-binding letter of intent to purchase the stock of CarpetsPlus of America, LLC, a floor covering buying group. The acquisition is expected to close by October 31, 1998. 7. Subsequent Event 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 floorcovering 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. Subsequent to July 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, the financial statements in this Quarterly Report on Form 10-Q/A should be read in conjunction with the Company's Annual Report on Form 10-K filing for the fiscal year ended January 31, 1999 as filed with the Securities and Exchange Commission. -7- 8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Total Revenues. Total revenues increased 3.6% to $95.6 million for the three months ended July 31, 1998 from $92.2 million for the three months ended July 31, 1997. Total revenues increased 7.7% to $192.2 million for the six months ended July 31, 1998 from $178.5 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 12.1% to $86.2 million for the three months ended July 31, 1998 from $76.9 million for the three months ended July 31, 1997, and increased 12.4% to $166.8 million for the six months ended July 31, 1998 from $148.4 million in the prior year period. Sales of floor covering products in Company-owned stores increased 10.4% to $40.2 million for the three months ended July 31, 1998 from $36.4 million for the three months ended July 31, 1997, and increased 14.1% to $76.3 million for the six months ended July 31, 1998 from $66.9 million in the prior year period. The growth in retail sales of floor covering products was primarily due to internal growth. Sales of manufactured carpet increased 10.7% to $41.5 million for the three months ended July 31, 1998 from $37.5 million for the three months ended July 31, 1997, and increased 8.5% to $81.8 million for the six-months ended July 31, 1998 from $75.4 million in the prior year period. Unit sales of manufactured carpet increased 21.0% to 7.5 million square yards for the three months ended July 31, 1998 from 6.2 million square yards for the three months ended July 31, 1997, and increased 14.1% to 14.6 million square yards for the six months ended July 31, 1998 from 12.8 million square yards in the prior year period. Sales from the Company's two distribution centers amounted to $4.5 million for the three months ended July 31, 1998 and $3.0 million for the three months ended July 31, 1997, and $8.7 million for the six months ended July 31, 1998 and $6.1 million in the prior year period, largely representing sales to the Company's franchisees. Fees From Franchise Services. Fees from franchise services, which include franchise license fees and royalties, brokering of floor covering products, and advertising, decreased 67.2% to $2.4 million for the three months ended July 31, 1998 from $7.3 million for the three months ended July 31, 1997, and decreased 36.5% to $9.2 million for the six months ended July 31, 1998 from $14.6 million in the prior year period. -8- 9 Fiber and PET Sales. Sales of fiber and polyethylene terephthalate ("PET") decreased 22.7% to $5.2 million for the three months ended July 31, 1998 from $6.7 million for the three months ended July 31, 1997, and decreased 2.7% to $12.2 million for the six months ended July 31, 1998 from $12.5 million in the prior year period. Unit sales decreased 29.1% to 12.2 million pounds for the three months ended July 31, 1998 from 17.2 million pounds for the three months ended July 31, 1997, and decreased 12.6% to 28.5 million pounds for the six months ended July 31, 1998 from 32.6 million pounds in the prior year period. The unit sales decrease was the result of increased demand from the Company's carpet operations. Gross Profit. Gross profit decreased 22.0% to $22.8 million for the three months ended July 31, 1998 from $29.2 million for the three months ended July 31, 1997, and decreased 11.4% to $49.8 million for the six months ended July 31, 1998 from $56.2 million in the prior year period. As a percentage of sales, gross profit was 23.8% for the three months ended July 31, 1998 compared to 31.6% for the three months ended July 31, 1997 and 25.9% for the six months ended July 31, 1998 compared to 31.5% in the prior year period. Contributing to the decrease in gross profit as a percentage of sales was the continuing change in the retail business mix of the Company to a revenue base consisting principally of the net sales of floor covering products and a higher cost of raw materials at the Company's manufacturing subsidiary, Image Industries, Inc. ("Image"). Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased 12.9% to $23.4 million for the three months ended July 31, 1998 from $20.7 million for the three months ended July 31, 1997, and increased 11.3% to $45.8 million for the six months ended July 31, 1998 from $41.2 million in the prior year period. Increases in operating expenses on an absolute basis reflect an overall growth in the size of the Company's operations required to serve a growing retail base 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 24.5% for the three months ended July 31, 1998 from 22.5% for the three months ended July 31, 1997 and increased to 23.8% from 23.1% for the six months ended July 31, 1998 as compared to the prior year period. Interest Expense. Interest expense increased 131.9% to $2.9 million for the three months ended July 31, 1998 from $1.3 million for the three months ended July 31, 1997, and increased 102.2% to $5.4 million for the six months ended July 31, 1998 from $2.7 million in the prior year period, due principally to the Company having a higher debt balance and a higher interest rate during the six months ended July 31, 1998 as compared to the prior year period. In October 1997, the Company sold $100 million of 9-1/4% senior subordinated notes, see "Liquidity and Capital Resources." Nonrecurring Charges. The Company recorded a $28.5 million charge for certain nonrecurring items for the period ending 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. -9- 10 As part of the amended franchise agreement, the number of vendors available 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 anticipates all stores will 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 an income tax benefit of $9.5 million for the three months ended July 31, 1998 compared to a $2.8 million expense for the three months ended July 31, 1997, and a $8.3 million tax benefit for the six months ended July 31, 1998 compared to $4.9 million expense in the prior year period. The decrease in income tax expense is due to the Company recording a loss for the three and six months ended July 31, 1998, as compared to the prior year periods. Net Earnings. As a result of the foregoing factors, the Company recorded a net loss of $21.6 million for the three months ended July 31, 1998 compared to net earnings of $4.6 million for the three months ended July 31, 1997, and a net loss of $20.3 million for the six months ended July 31, 1998 compared to net earnings of $7.8 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. -10- 11 In March 1997, the Board of Directors of the Company authorized management to repurchase up to one million shares of common stock of the Company. In October 1997, the Board of Directors of the Company authorized management to repurchase up to an additional one million shares of the common stock of the Company. As of September 8, 1998, the Company had repurchased 1,528,300 shares of its common stock in the open market for a total of $20.4 million. These purchases were, and any future purchases will be, financed from borrowings under the Company's revolving credit facility. Credit Facility. On August 26, 1997 (as amended on September 24, 1997 and August 7, 1998), the Company established a credit facility providing for aggregate commitments of $141 million (the "Credit Facility"). The Credit Facility consists of (i) a $110 million revolving credit facility, of which $39.8 million was available for borrowings on September 8, 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 September 8, 1998, the Company had $70.2 million outstanding under the revolving credit facility. No amounts have been drawn on the letter of credit. 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 September 8, 1998, the Company was in compliance with, or had obtained waivers of all violations of, all covenants under the Credit Facility. The Credit Facility, as amended, expires on October 6, 1998. The Company has accepted a $141 million committed credit facility ("Committed Facility") to refinance the current Credit Facility at maturity. The Committed Facility consists of (i) a $95 million five-year revolving credit facility, (ii) a $15 million 364 day line of credit, and (iii) a $31 million letter of credit to support the Summerville Loan. 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. 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 -11- 12 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. Cash Flows. During the six months ended July 31, 1998, operating activities used $10.0 million of cash compared to $431,000 cash provided in the six months ended July 31, 1997. The decrease in cash provided by operating activities resulted primarily from an increase in inventories and accounts receivable. The increase in inventories and accounts receivable was partially due to higher sales of floor covering products to franchisees and other carpet retailers. During the six months ended July 31, 1998, investing activities used cash in the amount of $31.2 million compared to $12.8 million for the six months ended July 31, 1997. The increase is primarily due to an increase in capital expenditures relating to manufacturing operations and the expansion of the retail business. During the six months ended July 31, 1998, financing activities provided cash of $37.3 million compared to $10.9 million in the six months ended July 31, 1997. This increase is primarily due to proceeds received from borrowings under the Company's revolving credit agreement. Capital Expenditures. The Company anticipates that it will require approximately $15 million for the remainder of fiscal 1999 to (i) open approximately 10 new Gallery stores (assuming approximately 50% of such stores will be located on Company-owned property and the remainder on leased property), (ii) reconfigure three existing CarpetMAX stores, and (iii) upgrade its management information systems. The actual costs that the Company will incur in opening new Gallery stores cannot be predicted with precision because the opening costs will vary based upon geographic location, the size of the store, the amount of supplier contributions and the extent of the buildout required at the selected site. The Company anticipates that it will require approximately $10 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 the net proceeds from the Notes Offering, borrowings under the Credit Facility, the Summerville Loan, 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 1999. As the Company's debt matures, 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 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 ("FAS 130"), Reporting Comprehensive Income." FAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. FAS 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 ("FAS 131"), "Disclosures About Segments of an Enterprise and Related Information", which is effective for fiscal years beginning after December 15, 1997. FAS 131 establishes reporting standards for public companies concerning operating segments and related disclosures about products and services, geographic areas and major customers. FAS 131 will be adopted with the Company's Annual Report for the fiscal year ending January 31, 1999. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires capitalization of certain costs of internal-use software. Maxim adopted this statement in the first quarter of fiscal 2000, and has determined that it will have no material impact on the financial statements. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after June 15, 2000. Early adoption is encouraged. FAS 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 July 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. -12- 13 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 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. 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 million remains to be spent as of October 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 including identification of changes needed, costs, completion dates and staffing. The plan is in the final stages of completion and will result in minimal Year 2000 effect on the company's operations. 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. This Report contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Those statements appear in a number of places in this Report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the timing, magnitude and costs of the roll-out of the Gallery Stores; (ii) potential acquisitions by the Company; (iii) the Company's financing plans; (iv) trends affecting the Company's financial condition or results of operations; (v) the Company's business and growth strategies; and (vi) the declaration and payment of dividends. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The accompanying information contained in this Report, including without limitation the information set forth under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations," identifies important factors that could cause such differences. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK N/A -13- 14 PART II--OTHER INFORMATION ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 11 Statements Regarding Computation of Per Share Earnings 27.1 Financial Data Schedule for six month period ended July 31, 1998 (for SEC use only) 27.2 Restated Financial Data Schedule for six month period ended July 31, 1997 (for SEC use only)* --------------- * Previously Filed -14- 15 (B) Reports on Form 8-K The following report on Form 8-K was filed during the quarter ended July 31, 1998: Current Report on Form 8-K dated June 23, 1998 (reporting agreement to acquire substantially all of the residential retail store assets of Shaw Industries, Inc.) -15- 16 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, 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 -16-