<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE MAXIM GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 5713 58-2060334
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or Classification Code Number) Identification
organization) Number)
210 TOWNPARK DRIVE
KENNESAW, GEORGIA 30144
(770) 590-9369
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
A. J. NASSAR, PRESIDENT
210 TOWNPARK DRIVE
KENNESAW, GEORGIA 30144
(770) 590-9369
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
ROBERT T. MOLINET, ESQ. G. DONALD JOHNSON, ESQ.
SMITH, GAMBRELL & RUSSELL WOMBLE CARLYLE SANDRIDGE & RICE, PLLC
SUITE 1800 SUITE 700
3343 PEACHTREE ROAD, N.E. 1275 PEACHTREE STREET, N.E.
ATLANTA, GA 30326 ATLANTA, GEORGIA 30319
(404) 264-2620 (404) 872-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions precedent to the merger of a wholly-owned subsidiary of the
Registrant with and into Image Industries, Inc. have been satisfied or waived as
described in the Proxy Statement/ Prospectus.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE OFFERING PRICE REGISTRATION
BE REGISTERED REGISTERED (1) PER UNIT (2) (2) FEE (3)
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per 5,266,285
share............................. shares $12.50 $65,828,562 $22,700
</TABLE>
(1) To be issued in the Merger (as defined herein) assuming the conversion of
all outstanding shares of Common Stock of Image Industries, Inc. as of the
record date ("Image Common Stock") into Common Stock of the Registrant.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1) based upon the average of the high and low prices of the
Image Common Stock as reported on the Nasdaq National Market for July 23,
1996.
(3) Calculated pursuant to Rule 457(f)(1); a filing fee of $14,414 was paid at
the time of filing of the preliminary proxy materials for this transaction
on July 3, 1996 and, therefore, pursuant to Securities Exchange Act Rule
0-11(a)(2), an additional $8,286 is being paid with the filing of this
Registration Statement.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE MAXIM GROUP, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM
NUMBER CAPTION IN FORM S-4 CAPTION IN PROSPECTUS
- ----------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.................... Cross Reference Sheet; Proxy Statement/ Prospectus
Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Available Information; Incorporation of Certain
Documents by Reference; Table of Contents
3. Risk Factors, Ratios of Earnings to Fixed Charges
and Other Information............................. Summary; Certain Considerations
4. Terms of the Transaction........................... Summary; Introduction; The Meetings; Terms of the
Merger; Background of and Reasons for the Merger;
Certain Considerations
5. Pro Forma Financial Information.................... Unaudited Pro Forma Condensed Combined Financial
Information
6. Material Contacts with the Company Being
Acquired.......................................... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters..... Not Applicable
8. Interests of Named Experts and Counsel............. Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.... Not Applicable
10. Information With Respect to S-3 Registrants........ Not Applicable
11. Incorporation of Certain Information by
Reference......................................... Not Applicable
12. Information With Respect to S-2 or S-3
Registrants....................................... Summary; Information Regarding Maxim; Maxim
Management's Discussion and Analysis; Maxim
Consolidated Financial Statements
13. Incorporation of Certain Information by
Reference......................................... Incorporation of Certain Documents by Reference
14. Information With Respect to Registrants Other Than
S-3 or S-2 Registrants............................ Not Applicable
15. Information With Respect to S-3 Companies.......... Not Applicable
16. Information With Respect to S-2 or S-3 Companies... Incorporation of Certain Documents by Reference;
Summary; Information Regarding Image; Image
Management's Discussion and Analysis; Image
Financial Statements
17. Information With Respect to Companies Other Than
S-2 or S-3 Companies.............................. Not Applicable
18. Information if Proxies, Consents or Authorizations
Are to be Solicited............................... Incorporation of Certain Documents by Reference;
Summary; Introduction; The Meetings; Terms of the
Merger; Maxim Annual Meeting Matters
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer... Not Applicable
</TABLE>
<PAGE>
[LETTERHEAD]
July 29, 1996
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders (the
"Maxim Annual Meeting") of The Maxim Group, Inc. ("Maxim") to be held on
Thursday, August 29, 1996 at the principal offices of Maxim, located at 210
TownPark Drive, Kennesaw, Georgia 30144, commencing at 10:00 a.m. local time. At
this important meeting you will be asked to consider and vote upon a proposal to
approve the Agreement and Plan of Reorganization, dated as of May 31, 1996 (the
"Merger Agreement"), among Maxim, TMG-II Merger, Inc., a wholly-owned subsidiary
of Maxim (the "Merger Subsidiary") and Image Industries, Inc. ("Image"), and to
approve the merger (the "Merger") of Image and the Merger Subsidiary pursuant to
which the Merger Subsidiary will be merged into Image, with Image thereby
becoming a wholly-owned subsidiary of Maxim, and in which each issued and
outstanding share of Image Common Stock will be converted into the right to
receive one share of Maxim Common Stock.
At the Maxim Annual Meeting, you will also be asked to: (i) approve an
amendment to the Certificate of Incorporation of Maxim to (A) increase the
number of authorized shares of Common Stock from 15,000,000 shares to 25,000,000
shares, (B) provide for the election and removal of directors and for the
classification of the Board of Directors into three classes, (C) prohibit action
by written consent of shareholders without a meeting and (D) authorize the Board
of Directors to amend the By-Laws without action by shareholders (collectively
referred to as the "Maxim Charter Amendments"); (ii) elect directors of Maxim;
(iii) approve an amendment to the 1993 Stock Option Plan of Maxim to increase
the number of shares available for grant thereunder from 1,000,000 shares to
2,000,000 shares; and (iv) transact such other business as may properly come
before the Maxim Annual Meeting or any adjournments or postponements thereof
(the matters referred to in clauses (i) through (iv) above are referred to as
the "Maxim Annual Meeting Proposals").
PLEASE REVIEW CAREFULLY THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS. This
document contains a detailed description of the Merger Agreement, its terms and
conditions and the transactions contemplated by the Merger Agreement, as well as
a description of the other matters to be acted upon at the Maxim Annual Meeting.
MAXIM'S BOARD OF DIRECTORS BELIEVES THE MERGER AND THE MAXIM ANNUAL MEETING
PROPOSALS ARE IN THE BEST INTERESTS OF MAXIM'S SHAREHOLDERS, HAS UNANIMOUSLY
APPROVED THE MERGER AND EACH OF THE MAXIM ANNUAL MEETING PROPOSALS AND
RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AND THE MAXIM
ANNUAL MEETING PROPOSALS.
YOUR VOTE IS IMPORTANT! The affirmative vote of the holders of a majority of
the outstanding shares of Maxim Common Stock is necessary to approve the Maxim
Charter Amendments, while the affirmative vote of the holders of a majority of
the shares of Maxim Common Stock present and voting at the Maxim Annual Meeting
is necessary to approve the Merger, elect each of the directors and approve the
amendment to the 1993 Stock Option Plan. As of the date hereof, Maxim's
directors and executive officers have indicated that they intend to vote their
shares for each proposal. These persons beneficially own approximately 39% of
Maxim's outstanding shares. Whether or not you plan to attend the Maxim Annual
Meeting, please complete, sign and date the enclosed proxy and return it in the
enclosed postage prepaid envelope. If you attend the meeting, you may vote in
person if you wish, even though you previously have returned your proxy card.
Your prompt action will be greatly appreciated.
Very truly yours,
A.J. NASSAR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
210 TOWNPARK DRIVE . KENNESAW, GEORGIA . 30144 . PHONE 770.590.9369 . FASCIMILE
770.590.8141
<PAGE>
[LETTERHEAD]
July 29, 1996
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Image Special Meeting") of Image Industries, Inc. ("Image") to be held on
Thursday, August 29, 1996 at Image's executive offices located at 1112 Georgia
Highway 140, Armuchee, Georgia 30105, commencing at 10:00 a.m. local time. At
this important meeting you will be asked to consider and vote upon a proposal to
merge with The Maxim Group, Inc. ("Maxim") pursuant to the Agreement and Plan of
Reorganization, dated as of May 31, 1996 (the "Merger Agreement"), among Image,
TMG-II Merger, Inc., a wholly-owned subsidiary of Maxim (the "Merger
Subsidiary") and Maxim, and to approve the merger (the "Merger") of Image and
the Merger Subsidiary pursuant to which the Merger Subsidiary will be merged
into Image, with Image thereby becoming a wholly-owned subsidiary of Maxim, and
in which each issued and outstanding share of Image Common Stock will be
converted into the right to receive one share of Maxim Common Stock.
PLEASE REVIEW CAREFULLY THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS. This
document contains a detailed description of the Merger Agreement, its terms and
conditions and the transactions contemplated by the Merger Agreement, as well as
a description of the other matters to be acted upon at the Image Special
Meeting.
IMAGE'S BOARD OF DIRECTORS BELIEVES THE MERGER IS IN THE BEST INTERESTS OF
IMAGE'S SHAREHOLDERS, HAS UNANIMOUSLY APPROVED THE MERGER AND RECOMMENDS THAT
SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER.
YOUR VOTE IS IMPORTANT! The affirmative vote of the holders of a majority of
the outstanding shares of Image Common Stock is necessary to approve the Merger.
As of the date hereof, Image's directors and executive officers have indicated
that they intend to vote their shares for the Merger. These persons beneficially
own approximately 8.6% of Image's outstanding shares. Whether or not you plan to
attend the Image Special Meeting, please complete, sign and date the enclosed
proxy and return it in the enclosed postage prepaid envelope. If you attend the
meeting, you may vote in person if you wish, even though you previously have
returned your proxy card. Your prompt action will be greatly appreciated.
Very truly yours,
LARRY M. MILLER
CHAIRMAN OF THE BOARD OF DIRECTORS
AND SECRETARY
H. STANLEY PADGETT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
THE MAXIM GROUP, INC.
------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 29, 1996
---------------------
To the Shareholders of
The Maxim Group, Inc.
Notice is hereby given that the Annual Meeting of Shareholders (the "Maxim
Annual Meeting") of The Maxim Group, Inc. ("Maxim") will be held at the
principal office of Maxim, located at 210 TownPark Drive, Kennesaw, Georgia
30144 on Thursday, August 29, 1996, at 10:00 a.m., local time, for the following
purposes:
(1) To consider and vote upon a proposal to adopt the Agreement and Plan
of Reorganization, dated as of May 31, 1996 (the "Merger Agreement"), among
Maxim, TMG-II Merger, Inc., a wholly-owned subsidiary of Maxim (the "Merger
Subsidiary") and Image Industries, Inc. ("Image"), and to approve the merger
(the "Merger") of Image and the Merger Subsidiary, pursuant to which the
Merger Subsidiary will be merged into Image, with Image thereby becoming a
wholly-owned subsidiary of Maxim, and in which each issued and outstanding
share of Image Common Stock will be converted into the right to receive one
share of Maxim Common Stock;
(2) To approve an amendment to the Certificate of Incorporation of Maxim
to increase the number of authorized shares of Common Stock from 15,000,000
shares to 25,000,000 shares;
(3) to approve an amendment to the Certificate of Incorporation of Maxim
to (A) provide for the election and removal of directors and for the
classification of the Board of Directors into three classes, (B) prohibit
actions by written consent of shareholders without a meeting and (C)
authorize the Board of Directors to amend the By-Laws without action by
shareholders (the matters referred to in items 2 and 3 are collectively
referred to as the "Maxim Charter Amendments");
(4) If the Maxim Charter Amendments referred to in item 3, above, are
adopted, to elect eight (8) directors to constitute the Board of Directors
of Maxim to be divided into three classes and to serve until their
successors are duly elected and shall have qualified; otherwise, such
directors are to be elected to serve for the ensuing year and until their
successors are duly elected and shall have qualified;
(5) To approve an amendment to the 1993 Stock Option Plan of Maxim to
increase the number of shares available for grant thereunder from 1,000,000
shares to 2,000,000 shares; and
(6) To transact such other business incidental to the conduct of the
Maxim Annual Meeting as may properly come before the Maxim Annual Meeting or
any adjournments or postponements thereof.
The Merger Agreement and the other proposals referred to above are more
completely described in the accompanying Proxy Statement/Prospectus and a copy
of the Merger Agreement is attached as Appendix A to the accompanying Proxy
Statement/Prospectus.
Only holders of record of Maxim Common Stock, as indicated on the stock
transfer books of Maxim at the close of business on July 15, 1996 will be
entitled to notice of, and to vote at, the Maxim Annual Meeting or any
adjournments or postponements thereof. THE AFFIRMATIVE VOTE OF THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF MAXIM COMMON STOCK IS REQUIRED FOR
APPROVAL OF THE MAXIM CHARTER AMENDMENTS, WHILE THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE SHARES OF MAXIM COMMON STOCK PRESENT AND VOTING AT THE MAXIM
ANNUAL MEETING IS NECESSARY TO APPROVE THE MERGER, ELECT DIRECTORS AND APPROVE
THE AMENDMENT TO THE 1993 STOCK OPTION PLAN.
<PAGE>
WHETHER OR NOT YOU PLAN TO ATTEND THE MAXIM ANNUAL MEETING IN PERSON, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE PREPAID ENVELOPE. YOUR PROXY MAY BE REVOKED AT ANY TIME BEFORE
IT IS VOTED BY SIGNING AND RETURNING A LATER DATED PROXY WITH RESPECT TO THE
SAME SHARES, BY FILING WITH THE SECRETARY OF MAXIM A WRITTEN REVOCATION BEARING
A LATER DATE, OR BY ATTENDING AND VOTING AT THE MAXIM ANNUAL MEETING.
By Order of the Board of Directors
A.J. NASSAR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Kennesaw, Georgia
July 29, 1996
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE
COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD.
<PAGE>
IMAGE INDUSTRIES, INC.
------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 29, 1996
---------------------
To the Shareholders of
Image Industries, Inc.
Notice is hereby given that a Special Meeting of Shareholders (the "Image
Special Meeting") of Image Industries, Inc. ("Image") will be held at Image's
executive offices located at 1112 Georgia Highway 140, Armuchee, Georgia 30105
on Thursday, August 29, 1996, at 10:00 a.m., local time, for the following
purposes:
(1) To consider and vote upon a proposal to adopt the Agreement and Plan
of Reorganization, dated as of May 31, 1996 (the "Merger Agreement"), among
Image, The Maxim Group, Inc. ("Maxim") and TMG-II Merger, Inc., a
wholly-owned subsidiary of Maxim (the "Merger Subsidiary") and to approve
the merger (the "Merger") of Image and the Merger Subsidiary, pursuant to
which the Merger Subsidiary will be merged into Image, with Image thereby
becoming a wholly-owned subsidiary of Maxim, and in which each issued and
outstanding share of Image Common Stock will be converted into the right to
receive one share of Maxim Common Stock; and
(2) To transact such other business incidental to the conduct of the
Image Special Meeting as may properly come before the Image Special Meeting
or any adjournments or postponements thereof.
The Merger Agreement is more completely described in the accompanying Proxy
Statement/Prospectus and a copy of the Merger Agreement is attached as Appendix
A to the accompanying Proxy Statement/ Prospectus.
Only holders of record of Image Common Stock, as indicated on the stock
transfer books of Image at the close of business on July 19, 1996 will be
entitled to notice of, and to vote at, the Image Special Meeting or any
adjournments or postponements thereof. THE AFFIRMATIVE VOTE OF THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF IMAGE COMMON STOCK IS REQUIRED FOR
APPROVAL OF THE MERGER.
WHETHER OR NOT YOU PLAN TO ATTEND THE IMAGE SPECIAL MEETING IN PERSON,
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN
THE ENCLOSED POSTAGE PREPAID ENVELOPE. YOUR PROXY MAY BE REVOKED AT ANY TIME
BEFORE IT IS VOTED BY SIGNING AND RETURNING A LATER DATED PROXY WITH RESPECT TO
THE SAME SHARES, BY FILING WITH THE SECRETARY OF IMAGE A WRITTEN REVOCATION
BEARING A LATER DATE, OR BY ATTENDING AND VOTING AT THE IMAGE SPECIAL MEETING.
By Order of the Board of Directors
LARRY M. MILLER
CHAIRMAN OF THE BOARD OF DIRECTORS
AND SECRETARY
Armuchee, Georgia
July 29, 1996
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE
COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD.
<PAGE>
JOINT PROXY STATEMENT
THE MAXIM GROUP, INC. IMAGE INDUSTRIES, INC.
FOR ANNUAL MEETING FOR SPECIAL MEETING
OF SHAREHOLDERS OF SHAREHOLDERS
TO BE HELD ON TO BE HELD ON
AUGUST 29, 1996 AUGUST 29, 1996
------------------------
PROSPECTUS
THE MAXIM GROUP, INC.
------------------
This Joint Proxy Statement/Prospectus (this "Proxy Statement/Prospectus") is
being furnished to shareholders of The Maxim Group, Inc. ("Maxim") and Image
Industries, Inc. ("Image") in connection with the solicitation of proxies by the
respective Boards of Directors of such corporations for use at the Annual
Meeting of Shareholders of Maxim (the "Maxim Annual Meeting") and the Special
Meeting of Shareholders of Image (the "Image Special Meeting") (including any
adjournments or postponements thereof) each to be held on August 29, 1996. This
Proxy Statement/Prospectus relates to a proposal to adopt the Agreement and Plan
of Reorganization, dated as of May 31, 1996 (the "Merger Agreement"), among
Maxim, TMG-II Merger, Inc., a wholly-owned subsidiary of Maxim (the "Merger
Subsidiary") and Image, and to approve the merger (the "Merger") of Image and
the Merger Subsidiary, pursuant to which the Merger Subsidiary will be merged
into Image, with Image thereby becoming a wholly-owned subsidiary of Maxim, and
in which each issued and outstanding share of Image Common Stock will be
converted into the right to receive one share of Maxim Common Stock. A copy of
the Merger Agreement is attached hereto as Appendix A.
At the Maxim Annual Meeting, the shareholders of Maxim will also be asked to
consider and vote upon proposals to: (i) amend Maxim's Certificate of
Incorporation to (A) increase the number of authorized shares of Maxim Common
Stock from 15,000,000 shares to 25,000,000 shares, (B) provide for the election
and removal of directors and for the classification of the Board of Directors
into three classes, (C) prohibit actions by written consent of shareholders
without a meeting and (D) authorize the Board of Directors to amend the By-Laws
without action by shareholders (collectively referred to as the "Maxim Charter
Amendments"); (ii) elect directors of Maxim; (iii) approve an amendment to the
1993 Stock Option Plan of Maxim to increase the number of shares of Common Stock
available for grant thereunder from 1,000,000 shares to 2,000,000 shares; and
(iv) such other business as may properly come before the Maxim Annual Meeting or
any adjournments or postponements thereof (the matters referred to in clauses
(i) through (iv) above are referred to as the "Maxim Annual Meeting Proposals").
This Proxy Statement/Prospectus also constitutes the Prospectus of Maxim
relating to the shares of Maxim Common Stock issuable to Image shareholders in
connection with the Merger.
FOR CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE MERGER, SEE
"CERTAIN CONSIDERATIONS."
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to shareholders of Maxim and Image on or about July 29, 1996.
NEITHER THIS TRANSACTION NOR THE SECURITIES COVERED BY THIS PROXY STATEMENT/
PROSPECTUS HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION. NEITHER THE SECURITIES AND
EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED
UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY
OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JULY 26, 1996.
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY MAXIM OR IMAGE. THIS PROXY STATEMENT/ PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF MAXIM OR
IMAGE SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES HEREOF OR THEREOF.
AVAILABLE INFORMATION
Each of Maxim and Image is subject to the information and reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the regional
offices of the Commission located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such information can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such
reports, proxy statements and other information concerning Maxim and Image can
be inspected at the offices of The Nasdaq Stock Market, Inc., 9513 Key West
Avenue, Rockville, Maryland 20850.
This Proxy Statement/Prospectus is filed as part of a Registration Statement
on Form S-4 (together with any exhibits and amendments thereto, the
"Registration Statement") filed by Maxim with the Commission under the
Securities Act of 1933, as amended (the "Securities Act") and does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. The Registration Statement and any amendments thereto, including
exhibits filed as a part thereof, are available for inspection and copying as
set forth above.
ii
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by Maxim (File No. 0-22232) with
the Commission pursuant to the Exchange Act are incorporated herein by this
reference:
(1) Maxim's Transition Report on Form 10-K for the ten months ended January
31, 1996;
(2) Maxim's Quarterly Report on Form 10-Q for the quarter ended April 30,
1996; and
(3) Maxim's Current Report on Form 8-K dated May 31, 1996.
The following documents previously filed by Image (File No. 0-21954) with
the Commission pursuant to the Exchange Act are incorporated herein by this
reference:
(1) Image's Annual Report on Form 10-K for the year ended July 1, 1995;
(2) Image's Quarterly Report on Form 10-Q for the quarter ended September
30, 1995;
(3) Image's Quarterly Report on Form 10-Q for the quarter ended December 30,
1995;
(4) Image's Quarterly Report on Form 10-Q for the quarter ended March 30,
1996;
(5) Image's Current Report on Form 8-K dated June 30, 1995;
(6) Image's Current Report on Form 8-K/A-1 dated September 12, 1995
(amendment to Current Report on Form 8-K dated June 30, 1995); and
(7) Image's Current Report on Form 8-K dated May 31, 1996.
Any statements contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which also is incorporated by reference
herein) modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed to constitute a part hereof except as so modified
or superseded. All information appearing in this Proxy Statement/Prospectus is
qualified in its entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated herein by reference,
except to the extent set forth in the immediately preceding statement.
This Proxy Statement/Prospectus incorporates by reference certain documents
concerning Maxim and Image that are not presented herein or delivered herewith.
Copies of any such documents, other than exhibits to such documents that are not
specifically incorporated by reference therein, are available without charge to
any person, including any beneficial owner, to whom this Proxy
Statement/Prospectus is delivered upon written or oral request, as follows: (i)
with respect to Maxim documents, to the Secretary, The Maxim Group, Inc., 210
TownPark Drive, Kennesaw, Georgia 30144; and (ii) with respect to Image
documents, to the Assistant Secretary, Image Industries, Inc., 1112 Georgia
Highway 140, Armuchee, Georgia 30105. In order to ensure timely delivery of the
documents, any request should be made before August 22, 1996.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... iii
SUMMARY................................................................... 1
The Parties............................................................. 1
The Meetings............................................................ 1
Terms of the Merger..................................................... 3
Selected Historical Financial Data of Maxim............................. 7
Selected Historical Financial Data of Image............................. 9
Selected Unaudited Pro Forma Combined Financial Data.................... 11
Comparative Per Share Data.............................................. 12
Comparative Per Share Market and Dividend Information................... 13
INTRODUCTION.............................................................. 15
THE MEETINGS.............................................................. 15
Date, Time and Place.................................................... 15
Purpose of Meetings..................................................... 15
Record Date; Shares Entitled to Vote.................................... 15
Quorum; Vote Required................................................... 16
Voting; Solicitation and Revocation of Proxies.......................... 16
BACKGROUND OF AND REASONS FOR THE MERGER.................................. 17
Background of the Merger................................................ 17
Reasons for the Merger; Recommendation of Boards of Directors........... 20
Opinion of Maxim's Financial Advisor.................................... 22
Opinion of Image's Financial Advisor.................................... 26
TERMS OF THE MERGER....................................................... 31
General................................................................. 31
Conversion of Image Common Stock in the Merger.......................... 31
Exchange of Certificates in the Merger.................................. 32
Representations and Warranties.......................................... 32
Conduct of Maxim's Business Pending the Merger.......................... 32
Conduct of Image's Business Pending the Merger.......................... 33
Confidentiality; Standstill............................................. 34
No Solicitation......................................................... 34
Conditions to the Merger; Waiver of Conditions.......................... 35
Amendment and Termination............................................... 37
Termination Fee......................................................... 38
Expenses................................................................ 39
Effective Time of the Merger............................................ 39
Hart-Scott-Rodino Act................................................... 39
No Appraisal Rights..................................................... 39
Resale of Maxim Common Stock Issued in the Merger; Affiliates........... 39
Accounting Treatment.................................................... 39
Certain Federal Income Tax Consequences................................. 40
Interests of Certain Persons in the Merger.............................. 40
Management and Operations After the Merger.............................. 41
Description of Maxim Capital Stock...................................... 42
Certain Differences in Rights of Shareholders........................... 44
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CERTAIN CONSIDERATIONS.................................................... 46
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.............. 48
Introduction............................................................ 48
Unaudited Pro Forma Condensed Combined Balance Sheet.................... 49
Unaudited Pro Forma Condensed Combined Statements of Income............. 50
Notes to Unaudited Pro Forma Condensed Combined Financial Statements.... 51
Unaudited Pro Forma Condensed Combined Statement of Income Adjusted for
the Purchase of Pharr Yarns by Image................................... 52
INFORMATION REGARDING MAXIM............................................... 53
General................................................................. 53
Retail Floorcovering Industry........................................... 53
History of Maxim........................................................ 54
Business Strategy....................................................... 55
Growth Strategy......................................................... 55
Company Operations...................................................... 57
Store and Franchise Operations.......................................... 59
Competition............................................................. 61
Trademarks, Service Marks, Trade Names and Commercial Symbols........... 61
Employees............................................................... 62
Governmental Regulation................................................. 62
Properties.............................................................. 63
Legal Proceedings....................................................... 63
MAXIM MANAGEMENT'S DISCUSSION AND ANALYSIS................................ 64
General................................................................. 64
Results of Operations................................................... 65
Liquidity and Capital Resources......................................... 68
INFORMATION REGARDING IMAGE............................................... 70
Introduction............................................................ 70
Recycling Operations.................................................... 70
Carpet Operations....................................................... 73
Backlog................................................................. 74
Employees............................................................... 75
Patents................................................................. 75
Trademarks.............................................................. 75
Environmental Matters................................................... 75
Properties.............................................................. 75
Legal Proceedings....................................................... 76
IMAGE MANAGEMENT'S DISCUSSION AND ANALYSIS................................ 77
General................................................................. 77
Results of Operations................................................... 77
Liquidity and Capital Resources......................................... 85
MAXIM ANNUAL MEETING MATTERS.............................................. 86
Proposal to Approve Common Stock Amendment.............................. 86
Proposal to Approve Other Maxim Charter Amendments...................... 87
Election of Directors................................................... 95
Compliance with Section 16(a) of the Securities Exchange Act of 1934.... 97
Meetings of the Board of Directors and Committees of the Board.......... 97
Proposal to Amend 1993 Stock Option Plan................................ 98
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Maxim Executive Compensation............................................ 103
Employment Agreements................................................... 103
Compensation of Directors............................................... 104
Compensation Committee Interlocks and Insider Participation............. 104
Stock Option Plan....................................................... 104
Employee Retirement Savings Plan........................................ 106
Report of Compensation and Stock Option Committees on Executive
Compensation........................................................... 106
Stockholder Return Performance Graph.................................... 108
Certain Relationships and Related Transactions.......................... 109
Security Ownership of Certain Beneficial Owners and Management of
Maxim.................................................................. 110
TRANSITION REPORT ON FORM 10-K............................................ 111
LEGAL MATTERS............................................................. 111
INDEPENDENT PUBLIC ACCOUNTANTS............................................ 111
EXPERTS................................................................... 111
PROPOSALS BY MAXIM SHAREHOLDERS........................................... 112
PROPOSALS BY IMAGE SHAREHOLDERS........................................... 112
OTHER MATTERS............................................................. 112
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
APPENDIX A -- Agreement and Plan of Reorganization, dated as of May 31, 1996,
among The Maxim Group, Inc., TMG-II Merger, Inc. and Image
Industries, Inc.
APPENDIX B -- Opinion of Prudential Securities Incorporated
APPENDIX C -- Opinion of The Robinson-Humphrey Company, Inc.
APPENDIX D -- Maxim Charter Amendments
APPENDIX E -- Maxim By-law Amendments
vi
<PAGE>
SUMMARY
CERTAIN SIGNIFICANT MATTERS DISCUSSED IN THIS PROXY STATEMENT/PROSPECTUS ARE
SUMMARIZED BELOW. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED
IN ALL RESPECTS BY REFERENCE TO THE MORE DETAILED INFORMATION CONTAINED
ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS, THE APPENDICES HERETO AND THE
DOCUMENTS REFERRED TO AND INCORPORATED BY REFERENCE HEREIN.
THE PARTIES
<TABLE>
<S> <C>
The Maxim Group, Inc................... Maxim, through its 60 company-owned retail stores
and approximately 545 franchise stores, operates
one of the largest retail floorcovering networks
in North America. Maxim operates and franchises
two distinct retail floorcovering concepts: the
CARPETMAX division's full-service format and the
Georgia Carpet Outlet ("GCO") division's
cash-and-carry discount format. The mailing
address of Maxim's principal executive offices is
210 TownPark Drive, Kennesaw, Georgia 30144, and
its telephone number is (770) 590-9369. See
"INFORMATION REGARDING MAXIM."
Image Industries, Inc.................. Image produces residential carpet, polyester fiber,
pellet and PET (polyethylene terephthalate) flake
and pellets made from recycled post consumer PET.
Image is vertically integrated from the purchase
of curbside collected bottles through complete
manufacturing of polyester fiber, PET flake,
pellet and carpet products. The mailing address of
Image's principal executive offices is 1112
Georgia Highway 140, Armuchee, Georgia 30105, and
its telephone number is (706) 235-8444. See
"INFORMATION REGARDING IMAGE."
TMG-II Merger, Inc..................... The Merger Subsidiary is a wholly-owned subsidiary
of Maxim (having the same mailing address and
telephone number as Maxim) formed for the purpose
of effecting the Merger as set forth in the Merger
Agreement.
THE MEETINGS
Date, Time and Place of the Meetings... MAXIM. The Annual Meeting of Maxim shareholders is
to be held on Thursday, August 29, 1996 at 10:00
a.m., local time, at the principal office of
Maxim, located at 210 TownPark Drive, Kennesaw,
Georgia 30144 (together with any adjournments or
postponements thereof, the "Maxim Annual
Meeting"). See "THE MEETINGS -- Date, Time and
Place."
IMAGE. The Special Meeting of Image shareholders
is to be held on Thursday, August 29, 1996 at
10:00 a.m., local time, at Image's executive
offices located at 1112 Georgia Highway 140,
Armuchee, Georgia 30105 (together with any
adjournments or postponements thereof, the "Image
Special Meeting"). See "THE MEETINGS -- Date, Time
and Place."
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Purpose of the Meetings................ MAXIM. The purpose of the Maxim Annual Meeting is
to consider and vote upon a proposal to adopt the
Merger Agreement and to approve the Merger. At the
Maxim Annual Meeting, the shareholders of Maxim
will also be asked to consider and vote upon
proposals to: (i) amend Maxim's Certificate of
Incorporation to (A) increase the number of
authorized shares of Maxim Common Stock from
15,000,000 shares to 25,000,000 shares, (B)
provide for the election and removal of directors
and for the classification of the Board of
Directors into three classes, (C) prohibit actions
by written consent of shareholders without a
meeting and (D) authorize the Board of Directors
to amend the By-Laws without action by
shareholders (collectively referred to as the
"Maxim Charter Amendments"); (ii) elect directors
of Maxim; (iii) approve an amendment to the 1993
Stock Option Plan of Maxim to increase the number
of shares of Common Stock available for grant
thereunder from 1,000,000 shares to 2,000,000
shares; and (iv) transact such other business as
may properly come before the Maxim Annual Meeting
or any adjournments or postponements thereof (the
matters referred to in clauses (i) through (iv)
above are referred to as the "Maxim Annual Meeting
Proposals"). See "THE MEETINGS -- Purpose of
Meetings."
IMAGE. The purpose of the Image Special Meeting is
to consider and vote upon a proposal to adopt the
Merger Agreement and to approve the Merger and
such other business as may properly come before
the Image Special Meeting or any adjournments or
postponements thereof. See "THE MEETINGS --
Purpose of the Meetings."
Record Date............................ MAXIM. Only holders of record of shares of Maxim
Common Stock at the close of business on July 15,
1996 (the "Maxim Record Date") are entitled to
notice of and to vote at the Maxim Annual Meeting.
On that date, 7,205,995 shares of Maxim Common
Stock were outstanding and entitled to vote. See
"THE MEETINGS -- Shares Entitled to Vote."
IMAGE. Only holders of record of shares of Image
Common Stock at the close of business on July 19,
1996 (the "Image Record Date") are entitled to
notice of and to vote at the Image Special
Meeting. On that date, 5,266,285 shares of Image
Common Stock were outstanding and entitled to
vote. See "THE MEETINGS -- Shares Entitled to
Vote."
Votes Required......................... MAXIM. The affirmative vote of the holders of a
majority of the outstanding shares of Maxim Common
Stock is required for approval of the Maxim
Charter Amendments. The affirmative vote of the
holders of a
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
majority of the shares of Maxim Common Stock
present and voting at the Maxim Annual Meeting is
necessary to approve the Merger, elect each of the
directors and approve the amendment to the 1993
Stock Option Plan. Directors and executive
officers of Maxim beneficially owned as of July
15, 1996, 2,811,794 shares of Maxim Common Stock
(approximately 39% of the shares then
outstanding). All directors and executive officers
of Maxim have indicated that they intend to vote
all shares of Maxim Common Stock over which they
have voting power in favor of the Merger and the
Maxim Annual Meeting Proposals. See "THE MEETINGS
-- Quorum; Vote Required."
IMAGE. The affirmative vote of the holders of a
majority of the outstanding shares of Image Common
Stock is required for approval of the Merger
Agreement. Directors and executive officers of
Image beneficially owned as of July 16, 1996,
453,658 shares of Image Common Stock
(approximately 8.6% of the shares then
outstanding). All directors and executive officers
of Image have indicated that they intend to vote
all shares of Image Common Stock over which they
have voting power in favor of the Merger. See "THE
MEETINGS -- Quorum; Vote Required."
TERMS OF THE MERGER
General................................ Upon consummation of the Merger, the Merger
Subsidiary will be merged into Image, with Image
thereby becoming a wholly-owned subsidiary of
Maxim. Image shareholders will become shareholders
of Maxim, as each share of Image Common Stock
issued and outstanding immediately prior to the
effective time of the Merger will be converted
into the right to receive one share of Maxim
Common Stock. See "TERMS OF THE MERGER."
Recommendations of the Board of
Directors............................ MAXIM. The Board of Directors of Maxim believes
that the Merger and the Maxim Annual Meeting
Proposals are in the best interests of Maxim and
its shareholders and has approved the Merger and
the Maxim Annual Meeting Proposals. The Board of
Directors of Maxim unanimously recommends that
Maxim shareholders approve the Merger and the
Maxim Annual Meeting Proposals. The Board of
Directors' recommendation is based upon a number
of factors discussed in this Proxy
Statement/Prospectus. See "BACKGROUND OF AND
REASONS FOR THE MERGER -- Reasons for the Merger;
Recommendation of Boards of Directors" and "MAXIM
ANNUAL MEETING MATTERS."
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
IMAGE. The Board of Directors of Image believes
that the Merger is in the best interests of Image
and its shareholders and has approved the Merger.
The Board of Directors of Image unanimously
recommends that Image shareholders adopt the
Merger Agreement and approve the Merger. The Board
of Directors' recommendation is based upon a
number of factors discussed in this Proxy
Statement/Prospectus. See "BACKGROUND OF AND
REASONS FOR THE MERGER -- Reasons for the Merger;
Recommendation of Boards of Directors."
Opinions of Financial Advisers......... MAXIM. Prudential Securities Incorporated
("Prudential Securities") has delivered its
opinion to the Board of Directors of Maxim that,
as of May 31, 1996, the financial terms of the
Merger are fair, from a financial point of view,
to the shareholders of Maxim. A copy of the
opinion of Prudential Securities, setting forth
the assumptions made, the matters considered and
the limitations on the review undertaken in
rendering such opinion, is attached to this Proxy
Statement/Prospectus as Appendix B and should be
read in its entirety. See "BACKGROUND OF AND
REASONS FOR THE MERGER -- Opinion of Maxim's
Financial Advisor."
IMAGE. The Robinson-Humphrey Company, Inc.
("Robinson-Humphrey") has delivered its opinion to
the Board of Directors of Image that, as of May
31, 1996, the financial terms of the Merger are
fair, from a financial point of view, to the
shareholders of Image. A copy of the opinion of
Robinson-Humphrey, setting forth the assumptions
made, the matters considered and the limitations
on the review undertaken in rendering such
opinion, is attached to this Proxy
Statement/Prospectus as Appendix C and should be
read in its entirety. See "BACKGROUND OF AND
REASONS FOR THE MERGER -- Opinion of Image's
Financial Advisor."
Management and Operations after the
Merger............................... MANAGEMENT. Following consummation of the Merger,
the Board of Directors of Maxim will be expanded
by three members (the Maxim Board is currently
comprised of eight members) to include Larry M.
Miller (the Chairman of the Board of Image), H.
Stanley Padgett (the President and Chief Executive
Officer of Image), and one additional outside
member designated by Messrs. Miller and Padgett
and reasonably acceptable to Maxim. Messrs. Miller
and Padgett will also be elected Senior Executive
Vice Presidents of Maxim, with Mr. Miller
continuing to serve as Chairman of the Image Board
and President of its Image Carpets Division, and
Mr. Padgett continuing
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
to serve as President and Chief Executive Officer
of Image (which will be a wholly-owned subsidiary
of Maxim). See "TERMS OF THE MERGER -- Management
and Operations After the Merger."
OPERATIONS. Following the Merger, Image will be a
wholly-owned subsidiary of Maxim and will continue
to operate its present business as a carpet
manufacturer and PET recycler. See "TERMS OF THE
MERGER -- Management and Operations After the
Merger."
Interests of Certain Persons in the
Merger............................... Upon consummation of the Merger, the employment
agreements of Larry M. Miller and H. Stanley
Padgett will be amended and extended for a term
expiring on July 30, 1998. See "TERMS OF THE
MERGER -- Interests of Certain Persons in the
Merger" and "-- Management and Operations After
the Merger."
Effective Time of the Merger........... If the Merger Agreement is approved by the
requisite vote of shareholders of Maxim and Image
and the other conditions to the Merger are
satisfied or waived, the Merger will be
consummated and become effective on the date and
at the time of the filing of a Certificate of
Merger with the Secretary of State of the State of
Delaware (the "Effective Time"). Assuming all
other conditions of the Merger are satisfied or
waived, the Merger is expected to become effective
promptly after approval of the Merger by the
shareholders of Maxim and Image. See "TERMS OF THE
MERGER -- Effective Time of the Merger."
Governmental and Regulatory Matters.... The waiting period applicable to the Merger under
the Hart-Scott-Rodino Antitrust Improvement Act of
1976, as amended, was terminated on June 24, 1996.
See "TERMS OF THE MERGER -- Hart-Scott-Rodino
Act."
Certain Federal Income Tax
Consequences......................... It is expected that the Merger will constitute a
tax-free reorganization for federal income tax
purposes. See "TERMS OF THE MERGER -- Federal
Income Tax Consequences."
Accounting Treatment................... It is intended that the Merger will be accounted
for as a pooling of interests. It is a condition to
consummation of the Merger that Maxim and Image
determine to their satisfaction that the Merger
will be accounted for as a pooling of interests.
See "TERMS OF THE MERGER -- Accounting Treatment."
Conditions of the Merger;
Termination.......................... The consummation of the Merger is conditioned upon
the fulfillment or waiver of certain conditions
set forth in the Merger Agreement, including,
among other things, approval of the Merger by the
shareholders of Maxim and Image and the absence of
any material
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
adverse change in the business of Maxim or Image.
See "TERMS OF THE MERGER -- Conditions to the
Merger; Waiver of Conditions." The Merger
Agreement may be terminated (i) by either party if
the Merger has not been consummated on or before
December 31, 1996, (ii) by mutual consent of the
parties, or (iii) by one or both of the parties in
certain other situations. See "TERMS OF THE MERGER
-- Amendment and Termination."
No Appraisal Rights.................... Neither the holders of record of Maxim Common Stock
nor the holders of record of Image Common Stock
will have any dissenters' or appraisal rights as a
result of the matters to be voted upon at the
respective Meetings.
Effect of the Merger on Rights of Image
Shareholders......................... The rights of Maxim shareholders differ in certain
respects from the rights of Image shareholders,
including rights relating to anti-takeover
protection, the number and election of directors,
notice of director nominations, removal of
directors and special meetings of shareholders.
For a comparison of the rights of Maxim
shareholders and Image shareholders, respectively,
see "TERMS OF THE MERGER -- Certain Differences in
Rights of Shareholders."
Certain Considerations................. Shareholders of Image and Maxim should carefully
consider the matters set forth under "CERTAIN
CONSIDERATIONS." Factors to be considered, among
other things, include the ability of Maxim to
manage its growth, dependence on senior management
and suppliers and the absence of dividends.
</TABLE>
6
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF MAXIM
The following table sets forth selected consolidated financial data of Maxim
for the periods indicated, which data has been derived from the consolidated
financial statements of Maxim. The consolidated financial statements of Maxim as
of January 31, 1996 and for the ten month period ended January 31, 1996 have
been audited by Arthur Andersen LLP, independent public accountants. The
consolidated financial statements of Maxim as of March 31, 1995 and for each of
the years in the four-year period ended March 31, 1995 have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The selected
financial data for the three month periods ended March 31, 1995 and April 30,
1996 are derived from the unaudited consolidated financial statements of Maxim.
The unaudited consolidated financial statements include all adjustments,
consisting of normal recurring accruals, which Maxim considers necessary for a
fair presentation of the consolidated financial condition and results of
operations for these periods. Operating results for the three months ended April
30, 1996 are not necessarily indicative of the results that may be expected for
the entire year ending January 31, 1997. This selected consolidated financial
data should be read in conjunction with the consolidated financial statements,
related notes and other financial information included and incorporated by
reference herein. Financial data gives retroactive effect to the merger of Maxim
and GCO on September 28, 1994, which merger was accounted for as a
pooling-of-interests.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
TEN MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED ------------------------
-------------------------------------------- JANUARY 31, MARCH 31, APRIL 30,
1992 1993 1994 1995 1996 (1) 1995 1996
--------- --------- --------- ----------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues:
Sales of floorcovering products............. $ 2,782 $ 4,199 $ 8,493 $ 61,089 $ 84,526 $ 20,812 $ 27,129
Franchise license fees and royalties........ 1,767 2,780 4,470 5,586 4,778 1,689 1,452
Fees from brokering floorcovering
products................................... 301 1,027 2,016 4,760 4,673 1,291 1,972
Advertising fees, net of direct costs....... 99 1,306 3,202 3,531 3,980 647 2,488
Other....................................... 31 59 1,153 1,125 1,333 347 614
--------- --------- --------- ----------- ------------ ----------- -----------
Total revenues............................ 4,980 9,371 19,334 76,091 99,290 24,786 33,655
Cost of sales................................. 1,549 3,071 7,282 43,109 58,808 14,281 20,011
--------- --------- --------- ----------- ------------ ----------- -----------
Gross profit.................................. 3,431 6,300 12,052 32,982 40,482 10,505 13,644
Selling, general and administrative
expenses..................................... 2,667 4,621 8,396 28,906(2) 41,967 10,123 11,692
Goodwill impairment charge.................... -- -- -- -- (6,569)(3) -- --
--------- --------- --------- ----------- ------------ ----------- -----------
Operating income (loss)....................... 764 1,679 3,656 4,076 (8,054) 382 1,952
Other income (expense), net................... 56 112 236 54 (980) (124) (274)
--------- --------- --------- ----------- ------------ ----------- -----------
Earnings (loss) before income taxes........... 820 1,792 3,892 4,130 (9,034) 258 1,678
Income taxes (benefit)........................ 288 678 1,426 1,745 (1,760) 34 671
--------- --------- --------- ----------- ------------ ----------- -----------
Net earnings (loss)........................... $ 532 $ 1,114 $ 2,465 $ 2,385 $ (7,274) $ 224 $ 1,007
--------- --------- --------- ----------- ------------ ----------- -----------
--------- --------- --------- ----------- ------------ ----------- -----------
Net earnings (loss) per common and common
equivalent share............................. $ .13 $ .28 $ .50 $ .34(2) $ (1.02) $ .03 $ .14
--------- --------- --------- ----------- ------------ ----------- -----------
--------- --------- --------- ----------- ------------ ----------- -----------
Weighted average common and common equivalent
shares outstanding (4)....................... 4,096 4,035 4,958 7,092(5) 7,102 7,371 7,406
Revenues attributable to:
CARPETMAX operations........................ $ 1,325 $ 3,766 $ 10,051 $ 63,933 $ 85,278 $ 19,233 $ 28,139
GCO operations.............................. 3,655 5,605 9,283 12,158 14,012 5,553 5,516
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31, AT AT
------------------------------------------ JANUARY 31, APRIL 30,
1992 1993 1994 1995 1996 (1) 1996
--------- --------- --------- --------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $ 143 $ 1,436 $ 7,842 $ 18,930 $ 19,635 $ 20,360
Total assets........................................... 2,440 5,828 18,542 61,923 69,971 67,441
Long-term debt and capital lease obligations, less
current portion....................................... 115 637 1,228 20,339 30,068 29,302
Short-term debt, including current portion of long-term
debt and capital lease obligations.................... 166 319 309 1,211 1,260 1,170
Shareholders' equity................................... 642 1,731 12,255 26,339 19,661 20,333
</TABLE>
- ------------------------------
(1) On January 13, 1996, Maxim changed its fiscal year end from March 31 to
January 31.
(2) Includes a non-recurring charge of $500,000 ($.07 per share) recorded for
the quarter ended September 30, 1994 related to the merger with GCO.
(3) This represents a permanent impairment of goodwill related to certain of
Maxim's acquisitions and resulted in a write-off totaling $6,569,345 for
the ten month period ended January 31, 1996. See Note 2 to Consolidated
Financial Statements of Maxim.
(4) The weighted average number of common and common equivalent shares
outstanding during the period is calculated to give effect to Common Stock
equivalents arising from shares issuable upon the exercise of outstanding
stock options, using the treasury stock method of computation. At January
31, 1996, the Common Stock equivalents were anti-dilutive and were excluded
from weighted average common and common equivalent shares outstanding for
the ten months ended January 31, 1996.
(5) The increase in weighted average shares outstanding from fiscal 1994 to
fiscal 1995 principally results from the accounting for shares and warrants
issued in the October 1993 public offering, the exercise of warrants in
fiscal 1995, the issuance of shares in connection with acquisitions and the
accounting for options to purchase Common Stock.
8
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF IMAGE
The following table sets forth selected historical financial data of Image
for the periods indicated, derived from Image's financial statements, which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The information for the nine months ended April 1, 1995 and March 30, 1996, has
been derived from Image's unaudited financial statements, which in the opinion
of management, include all adjustments necessary for a fair statement of
financial position and results of operations for the unaudited period. Results
of operations for interim periods are not necessarily indicative of the results
that may be expected for the entire year. The selected financial data should be
read in conjunction with, and are qualified in their entirety by, "Image
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Image's financial statements and notes thereto included and
incorporated by reference herein.
<TABLE>
<CAPTION>
YEAR ENDED (1) NINE MONTHS ENDED
------------------------------------------------------------- ----------------------
JUNE 29, JUNE 27, JULY 3, JULY 2, JULY 1, APRIL 1, MARCH 30,
1991 1992 1993 1994 1995 (7) 1995 1996
----------- ----------- ----------- ----------- --------- --------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 65,553 $ 81,686 $ 95,935 $ 103,889 $ 135,182 $ 99,617 $ 117,473
Cost of sales......................... 51,857 62,823 73,994 78,403 102,448 75,605 97,130
----------- ----------- ----------- ----------- --------- --------- -----------
Gross profit.......................... 13,696 18,863 21,941 25,486 32,734 24,012 20,343
Selling, general and administrative
expenses............................. 9,657 10,992 13,724 15,327 19,765 14,420 14,992
Special charge -- replacement stock
options.............................. -- -- -- 10,388(2) -- -- --
----------- ----------- ----------- ----------- --------- --------- -----------
Operating income (loss)............... 4,039 7,871 8,217 (229) 12,969 9,592 5,351
Interest expense...................... 5,351 4,301 3,664 1,124 1,600 943 3,083
Other expense (income)................ (112) 48 332 79 (18) (26) 117
----------- ----------- ----------- ----------- --------- --------- -----------
Earnings (loss) before income taxes
and extraordinary items.............. (1,200) 3,522 4,221 (1,432) 11,387 8,675 2,151
Income tax provision (benefit)........ -- 1,327 1,620 (530) 4,195 3,158 727
----------- ----------- ----------- ----------- --------- --------- -----------
Earnings (loss) before extraordinary
items................................ (1,200) 2,195 2,601 (902) 7,192 5,517 1,424
Extraordinary items................... 5,299(3) 1,251(4) 1,520(4) 190 -- -- --
----------- ----------- ----------- ----------- --------- --------- -----------
Net earnings (loss)................... $ 4,099 $ 3,446 $ 4,121 $ (712) $ 7,192 $ 5,517 $ 1,424
----------- ----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- ----------- --------- --------- -----------
Pro forma per common and common
equivalent share data (5)(6)(8):
Earnings (loss) before extraordinary
items.............................. $ (0.37) $ 0.67 $ 0.71 $ (0.16) $ 1.24 $ 0.95 $ 0.23
Extraordinary items................. 1.63 0.39 0.41 0.03 -- -- --
----------- ----------- ----------- ----------- --------- --------- -----------
Net earnings (loss)................. $ 1.26 $ 1.06 $ 1.12 $ (0.13) $ 1.24 $ 0.95 $ 0.23
----------- ----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- ----------- --------- --------- -----------
Weighted average number of common
and common equivalent shares
outstanding........................ 3,258 3,258 3,671 5,609 5,809 5,807 6,205
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
JUNE 29, JUNE 27, JULY 3, JULY 2, JULY 1, MARCH 30,
1991 1992 1993 1994 1995 (7) 1996
----------- ----------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 11,767 $ 8,496 $ 14,381 $ 16,428 $ 32,087 $ 41,249
Total assets............................................. 52,814 54,915 62,062 81,464 131,483 137,981
Long-term debt and capital lease obligations,
including current installments.......................... 43,134 41,055 36,490 20,940 54,049 61,437
Shareholders' equity..................................... 284 3,730 14,169 39,545 51,156 52,568
</TABLE>
- ------------------------------
(1) Image's fiscal year is based on a 52/53 week year which ends on the
Saturday in June or July closest to the end of the month of June. The
fiscal year ended July 3, 1993 was a 53 week year; the other fiscal years
of Image shown in the above table were 52 week years.
(2) Image granted certain non-qualified stock options on August 10, 1993, in
replacement of a like number of unvested stock appreciation units and
vested and unvested stock options (the "Replacement Stock Options"). As a
result of this exchange, Image recognized a noncash, nonrecurring charge of
approximately $10.4 million and a related deferred tax benefit of
approximately $3.9 million, resulting in a net charge of approximately $6.5
million or $1.16 per share for the year ended July 2, 1994, based on
approximately 5.6 million equivalent shares outstanding.
(3) As a result of the restructuring of senior and subordinated debt, Image
recorded an extraordinary gain of $5.3 million net of reorganization
expenses of $1.0 million and a write-off of deferred loan costs of $0.1
million for the year ended June 29, 1991, all in connection with Image's
recapitalization in 1991.
(4) Represents tax benefits resulting from utilization of net operating loss
carry forwards.
(5) Because of the significant effect of the issuance of the 1,133,856 fully
vested Replacement Stock Options, pro forma earnings per share data are
presented for all periods prior to the year ended July 1, 1995. Earnings
per share data for the year ended July 1, 1995 are presented on an
historical basis.
(6) No dividends have been paid or declared for any of the periods presented.
(7) On June 30, 1995, Image completed the acquisition of substantially all the
operating assets of a carpet yarn spinning mill from Pharr Yarns of
Georgia, Inc. The acquisition was financed by internally generated funds,
funds borrowed under Image's credit facility, and the issuance by Image of
400,000 shares of its common stock to Pharr Yarns of Georgia, Inc.
(8) The $15.7 million in net proceeds of Image's initial public offering were
used to retire debt. If the initial public offering had occurred as of June
28, 1992 and July 4, 1993, net earnings (loss) per share would have been
$1.03 and ($0.08) for the years ended June 28, 1992 and July 4, 1993,
respectively, based on approximately 5.5 million and 5.8 million weighted
average shares outstanding, respectively.
10
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following selected unaudited pro forma combined financial information is
presented assuming the Merger will be accounted for as a pooling of interests
and reflects the combination of the historical consolidated financial statements
of Maxim and Image. The pro forma combined statement of earnings and balance
sheet data assume the Merger was consummated at April 1, 1993 and April 30,
1996, respectively. The unaudited pro forma combined financial information does
not reflect expenses expected to be incurred by Maxim or Image in connection
with the Merger. In addition, the following pro forma financial information does
not reflect any anticipated cost savings which may be realized by Maxim after
consummation of the Merger.
The pro forma information does not purport to represent what Maxim's and
Image's combined results of operations actually would have been if the Merger
had occurred as of the date indicated or will be for any future periods. The
selected unaudited pro forma financial information should be read in conjunction
with the Unaudited Pro Forma Condensed Combined Financial Statements and the
notes thereto, included elsewhere in this Proxy Statement/Prospectus.
The unaudited pro forma combined financial information for each of the years
ended March 31, 1994 and 1995, for the ten months ended January 31, 1996 and
each of the three month periods ended March 31, 1995 and April 30, 1996 combine
the historical financial statements of Maxim with those of Image for the
corresponding periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED TEN MONTHS
MARCH 31, ENDED ------------------------
-------------------- JANUARY 31, MARCH 31, APRIL 30,
1994 1995 1996 1995 1996
--------- --------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues..................................................... $ 122,591 $ 203,341 $ 227,550 $ 59,275 $ 73,242
Cost of sales................................................ 85,847 139,522 161,723 40,953 52,958
--------- --------- ----------- ----------- -----------
Gross profit............................................. 36,744 63,819 65,827 18,322 20,284
Selling, general, and administrative expenses................ 34,057 47,370 59,196 15,069 17,125
Goodwill impairment charge................................... -- -- 6,569 -- --
--------- --------- ----------- ----------- -----------
Operating income......................................... 2,687 16,449 62 3,253 3,159
--------- --------- ----------- ----------- -----------
Other income (expense):
Interest income............................................ 306 397 415 108 133
Interest expense........................................... (1,886) (1,838) (4,695) (928) (1,608)
Other...................................................... (263) 421 77 251 84
--------- --------- ----------- ----------- -----------
Total other.............................................. (1,843) (1,020) (4,203) (569) (1,391)
--------- --------- ----------- ----------- -----------
Earnings (loss) before income taxes and extraordinary
income...................................................... 844 15,429 (4,141) 2,684 1,768
Income tax expense........................................... 375 5,787 104 799 616
--------- --------- ----------- ----------- -----------
Net earnings (loss) before extraordinary income.............. 469 9,642 (4,245) 1,885 1,152
Extraordinary income......................................... 190 -- -- -- --
--------- --------- ----------- ----------- -----------
Net earnings (loss)...................................... $ 659 $ 9,642 $ (4,245) $ 1,885 $ 1,152
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
Earnings (loss) per common and common equivalent share....... $ .06 $ .72 $ (.32) $ .14 $ .08
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding............................... 11,161 13,301 13,301 13,580 13,611
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1996 1996
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................................ $ 61,457 $ 62,035
Total assets............................................................................... 207,821 204,012
Long-term debt............................................................................. 90,147 88,557
Shareholders' equity....................................................................... 72,151 72,976
</TABLE>
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth (i) certain historical per common share
information for Maxim and Image and (ii) certain unaudited pro forma per common
share information for Maxim after giving effect to the Merger on a pooling of
interests accounting basis, assuming the Merger had been effective during the
periods presented. No cash dividends have ever been declared or paid on the
Maxim Common Stock or on the Image Common Stock. This data should be read in
conjunction with the historical consolidated financial statements and the notes
thereto of Maxim and Image and the Unaudited Pro Forma Condensed Combined
Financial Statements and the notes thereto included elsewhere or incorporated by
reference in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
HISTORICAL UNAUDITED
-------------------- PRO FORMA
MAXIM IMAGE COMBINED (1)
--------- --------- -------------
<S> <C> <C> <C>
Earnings per common and common equivalent
share before extraordinary items:
Fiscal year ended March 31, 1994.................................... $ 0.50 $ (0.34) $ 0.06
Fiscal year ended March 31, 1995.................................... 0.34 1.25 0.72
Ten month period ended January 31, 1996............................. (1.02) 0.50 (0.32)
Three month period ended April 30, 1996............................. 0.14 0.02 0.08
Book value per common share as of:
January 31, 1996.................................................... $ 2.76 $ 8.59 $ 5.83
April 30, 1996...................................................... 2.85 8.62 5.89
</TABLE>
- ------------------------
(1) Unaudited pro forma combined per share information is based on the combined
average number of common and common equivalent shares of Maxim and Image
giving effect to the exchange ratios for Image Common Stock. It reflects
Maxim historical results combined with Image historical results. Pre-tax
expenses expected to be incurred by Maxim and Image in connection with the
Merger are estimated to total approximately $2.5 million. These costs have
not been reflected in the pro forma financial information, but will be
reflected in the combined statement of income upon consummation of the
Merger.
12
<PAGE>
COMPARATIVE PER SHARE MARKET AND DIVIDEND INFORMATION
The Maxim Common Stock is listed and traded on The Nasdaq National Market
under the symbol MAXM, and the Image Common Stock is listed and traded on The
Nasdaq National Market under the symbol IMAG. The information presented in the
table below represents the high and low prices per share of Maxim Common Stock
and Image Common Stock as reported on The Nasdaq National Market for the periods
indicated. Neither Maxim nor Image has paid any cash dividends on its Common
Stock. For current price information, shareholders are urged to consult publicly
available sources and obtain current market quotations.
<TABLE>
<CAPTION>
MAXIM
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal year ended March 31, 1995
First Quarter............................................. $ 15.50 $ 9.75
Second Quarter............................................ 16.50 10.50
Third Quarter............................................. 17.13 12.13
Fourth Quarter............................................ 16.00 11.25
Fiscal period ended January 31, 1996
First Quarter............................................. $ 13.50 $ 9.25
Second Quarter............................................ 13.75 9.75
Third Quarter............................................. 15.25 11.75
Fourth Quarter (1)........................................ 14.00 9.00
Fiscal year ending January 31, 1997
First Quarter............................................. $ 12.50 $ 9.38
Second Quarter (through July 22, 1996).................... 15.50 11.25
</TABLE>
- ------------------------
(1) Includes only the month of January 1996 due to a change in Maxim's fiscal
year end from March 31 to January 31.
<TABLE>
<CAPTION>
IMAGE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal year ended July 1, 1995
First Quarter............................................. $ 14.25 $ 9.00
Second Quarter............................................ 14.75 11.00
Third Quarter............................................. 16.25 10.88
Fourth Quarter............................................ 15.38 9.38
Fiscal year ended June 29, 1996
First Quarter............................................. $ 13.37 $ 10.25
Second Quarter............................................ 14.37 10.00
Third Quarter............................................. 12.12 9.50
Fourth Quarter............................................ 15.00 10.87
Fiscal year ending June 28, 1997
First Quarter (through July 22, 1996)..................... $ 14.25 $ 12.25
</TABLE>
As of July 15, 1996, there were approximately 133 holders of record of Maxim
Common Stock and approximately 114 holders of record of Image Common Stock.
Management of Maxim and Image each believe that there are in excess of 300
beneficial holders of its Common Stock.
Maxim has never declared or paid any dividends on its capital stock. Maxim
currently anticipates that all of its earnings will be retained for development
of Maxim's business, and does not anticipate paying any cash dividends in the
foreseeable future. Future cash dividends, if any, will be at the
13
<PAGE>
discretion of Maxim's Board of Directors and will depend upon, among other
things, Maxim's future earnings, operations, capital requirements and surplus,
general financial condition, contractual restrictions, and such other factors as
the Board of Directors may deem relevant.
Because the exchange ratio is fixed and because the market price of Maxim
Common Stock is subject to fluctuation, the market value of the shares of Maxim
Common Stock that holders of Image Common Stock will receive in the Merger may
increase or decrease prior to and following the Merger. Shareholders are urged
to obtain current market quotations for the Maxim Common Stock and the Image
Common Stock.
On May 30, 1996, the last full day of trading immediately preceding the
public announcement of the signing of the Merger Agreement, the last sale prices
of Maxim Common Stock and Image Common Stock were $14.63 and $12.50,
respectively. On July 22, 1996, the last sale prices of Maxim Common Stock and
Image Common Stock were $12.75 and $13.00, respectively.
14
<PAGE>
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to holders of Maxim
Common Stock in connection with the solicitation of proxies by the Board of
Directors of Maxim for use at the Maxim Annual Meeting to consider and vote upon
the approval of the Merger and the Maxim Annual Meeting Proposals and to
transact such other business as may properly come before the Maxim Annual
Meeting or any adjournments or postponements thereof. In addition, this Proxy
Statement/Prospectus is being furnished to holders of Image Common Stock in
connection with the solicitation of proxies by the Board of Directors of Image
for use at the Image Special Meeting to consider and vote upon the approval of
the Merger and to transact such other business as may properly come before the
Image Special Meeting or any adjournments or postponements thereof. Each copy of
this Proxy Statement/ Prospectus mailed to holders of Maxim Common Stock is
accompanied by a form of proxy for use at the Maxim Annual Meeting, and each
copy of this Proxy Statement/Prospectus mailed to holders of Image Common Stock
is accompanied by a form of proxy for use at the Image Special Meeting.
This Proxy Statement/Prospectus is also furnished by Maxim to Image
shareholders as a prospectus in connection with the issuance by Maxim of the
shares of Maxim Common Stock upon consummation of the Merger.
All information contained in this Proxy Statement/Prospectus relating to
Image has been furnished by Image, and Maxim is relying upon the accuracy of
that information. All information contained in this Proxy Statement/Prospectus
relating to Maxim has been furnished by Maxim, and Image is relying upon the
accuracy of that information.
THE MEETINGS
DATE, TIME AND PLACE
MAXIM. The Maxim Annual Meeting is to be held on Thursday, August 29, 1996
at 10:00 a.m., local time, at the principal office of Maxim, located at 210
TownPark Drive, Kennesaw, Georgia 30144.
IMAGE. The Image Special Meeting is to be held on Thursday, August 29, 1996
at 10:00 a.m., local time, at Image's executive offices located at 1112 Georgia
Highway 140, Armuchee, Georgia 30105.
PURPOSE OF MEETINGS
MAXIM. The purpose of the Maxim Annual Meeting is to consider and vote upon
a proposal to adopt the Merger Agreement and to approve the Merger. At the Maxim
Annual Meeting, the shareholders of Maxim will also be asked to consider and
vote upon proposals to: (i) amend Maxim's Certificate of Incorporation to (A)
increase the number of authorized shares of Maxim Common Stock from 15,000,000
shares to 25,000,000 shares, (B) provide for the election and removal of
directors and for the classification of the Board of Directors into three
classes, (C) prohibit actions by written consent of shareholders without a
meeting and (D) authorize the Board of Directors to amend the By-Laws without
action by shareholders (collectively referred to as the "Maxim Charter
Amendments"); (ii) elect directors of Maxim; (iii) approve an amendment to the
1993 Stock Option Plan of Maxim to increase the number of shares of Common Stock
available for grant thereunder from 1,000,000 shares to 2,000,000 shares; and
(iv) transact such other business as may properly come before the Maxim Annual
Meeting or any adjournments or postponements thereof (the matters referred to in
clauses (i) through (iv) above are referred to as the "Maxim Annual Meeting
Proposals").
IMAGE. The purpose of the Image Special Meeting is to consider and vote
upon a proposal to adopt the Merger Agreement and to approve the Merger and such
other business as may properly come before the Image Special Meeting or any
adjournments or postponements thereof.
RECORD DATE; SHARES ENTITLED TO VOTE
MAXIM. Only holders of record of shares of Maxim Common Stock at the close
of business on July 15, 1996 (the "Maxim Record Date") are entitled to notice of
and to vote at the Maxim Annual
15
<PAGE>
Meeting. On that date, 7,205,995 shares of Maxim Common Stock were outstanding
and entitled to vote. The holders of record on the Maxim Record Date of shares
of Maxim Common Stock are entitled to one vote per share on each matter
submitted to a vote at the Maxim Annual Meeting.
IMAGE. Only holders of record of shares of Image Common Stock at the close
of business on July 19, 1996 (the "Image Record Date") are entitled to notice of
and to vote at the Image Special Meeting. On that date, 5,266,285 shares of
Image Common Stock were outstanding and entitled to vote. The holders of record
on the Image Record Date of shares of Image Common Stock are entitled to one
vote per share on each matter submitted to a vote at the Image Special Meeting.
QUORUM; VOTE REQUIRED
MAXIM. The affirmative vote of the holders of a majority of the outstanding
shares of Maxim Common Stock is required for approval of the Maxim Charter
Amendments. The affirmative vote of the holders of a majority of the shares of
Maxim Common Stock present and voting at the Maxim Annual Meeting is necessary
to approve the Merger, elect each of the directors and approve the amendment to
the 1993 Stock Option Plan. Directors and executive officers of Maxim
beneficially owned as of July 15, 1996, 2,811,794 shares of Maxim Common Stock
(approximately 39% of the shares then outstanding). All directors and executive
officers of Maxim have indicated that they intend to vote all shares of Maxim
Common Stock over which they have voting power in favor of the Merger and the
Maxim Annual Meeting Proposals. The presence in person or by proxy of the
holders of a majority of the outstanding shares of Maxim Common Stock is
necessary to constitute a quorum for the transaction of business at the Maxim
Annual Meeting.
IMAGE. The affirmative vote of the holders of a majority of the outstanding
shares of Image Common Stock is required for approval of the Merger. Directors
and executive officers of Image beneficially owned as of July 16, 1996, 453,658
shares of Image Common Stock (approximately 8.6% of the shares then
outstanding). All directors and executive officers of Image have indicated that
they intend to vote all shares of Image Common Stock over which they have voting
power in favor of the Merger. The presence in person or by proxy of the holders
of a majority of the outstanding shares of Image Common Stock is necessary to
constitute a quorum for the transaction of business at the Image Special
Meeting.
VOTING; SOLICITATION AND REVOCATION OF PROXIES
Proxies for use at the Maxim Annual Meeting and the Image Special Meeting
(each sometimes referred to herein as a "Meeting") accompany copies of this
Proxy Statement/Prospectus delivered to record holders of Maxim Common Stock and
Image Common Stock, respectively. A shareholder may use his proxy if he is
unable to attend the appropriate Meeting in person or wishes to have his shares
voted by proxy even if he does attend the appropriate Meeting. Shares
represented by properly executed proxies received at or prior to the appropriate
Meeting and which have not been revoked will be voted at such Meeting and will
be voted in accordance with the instructions contained in such proxies. All
shares of Maxim Common Stock represented by properly executed proxies for which
no instruction is given will be voted at the Maxim Annual Meeting in favor of
the Merger and each of the Maxim Annual Meeting Proposals. All shares of Image
Common Stock represented by properly executed proxies for which no instruction
is given will be voted at the Image Special Meeting in favor of the Merger.
Maxim and Image shareholders are requested to complete, sign, date and
return promptly the enclosed proxy in the postage prepaid envelope provided for
this purpose, regardless of whether they plan to attend the appropriate Meeting,
to ensure that their shares are voted. A shareholder may revoke a proxy by
submitting at any time prior to the vote at the appropriate Meeting a later
dated proxy with respect to the same shares, by delivering written notice of
revocation to the Secretary of Maxim, for Maxim shareholders, or to the
Assistant Secretary of Image, for Image shareholders, at any time prior to such
vote or by attending the appropriate Meeting and voting in person. Mere
attendance at the appropriate Meeting will not in and of itself revoke a proxy.
Abstentions and broker non-votes will not be counted as votes either in favor of
or against the Merger or the Maxim Annual
16
<PAGE>
Meeting Proposals. The approval of the Merger by the shareholders of Image and
approval of the Maxim Charter Amendments by the shareholders of Maxim each
require the affirmative vote of the holders of a majority of shares outstanding.
As a result, a shareholder who fails to return a proxy or who abstains from
voting on these proposals in his proxy or at the appropriate Meeting will have
effectively voted against approval of these proposals.
If a quorum is not obtained, or if fewer shares of Maxim Common Stock or
Image Common Stock are voted in favor of approval of the Merger and/or, with
respect to Maxim, the Maxim Annual Meeting Proposals, than the number required
for approval, it is expected that the appropriate Meeting will be postponed or
adjourned for the purpose of allowing additional time for obtaining additional
proxies or votes, and, at any subsequent reconvening of such Meeting, all
proxies will be voted in the same manner as such proxies would have been voted
at the original convening of the meeting (except for any proxies which have
theretofore effectively been revoked), notwithstanding that they might have been
effectively voted on the same or any other matter at a previous meeting.
The Boards of Directors of Maxim and Image do not know of any other matters
which are to come before their respective Meetings. If any other matters are
properly presented at the Maxim Annual Meeting or the Image Special Meeting for
consideration, the persons named in the enclosed form of proxy and acting
thereunder will have discretion to vote on such matters in accordance with their
best judgment unless authority therefor is withheld on the enclosed proxy card.
Such discretionary matters may include motions to adjourn the meeting for the
purpose of further soliciting proxies in favor of the Merger and/or the Maxim
Annual Meeting Proposals.
Each of Maxim and Image will bear the cost of the solicitation of proxies
from its respective shareholders. In addition to solicitation by mail,
directors, officers and employees of Maxim and Image may solicit proxies by
telephone, telegram or otherwise. The directors, officers and employees of Maxim
and Image will not be additionally compensated for such solicitation but may be
reimbursed for out-of-pocket expenses incurred in connection therewith. Maxim
and/or Image may also employ a proxy solicitation firm at customary fees to
assist it in the solicitation effort. Brokerage firms, fiduciaries and other
custodians who forward soliciting material to the beneficial owners of shares of
Maxim Common Stock or Image Common Stock held by them will be reimbursed for
their reasonable expenses incurred in forwarding such material.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER
In January 1996, Maxim's executive management identified the desirability of
seeking a strategic combination with a carpet manufacturer which would provide
Maxim and its franchisees with one or more of the following: (i) a high-quality,
high price-point private label line of carpets for distribution through the
CarpetMax network, (ii) a consistent, high-quality line of lower-price point
private label products for distribution through GCO stores, (iii) a captive
manufacturing partner to stock and support Maxim's new store openings and
franchise expansion plans with scheduled production of core carpets, (iv)
expansion of Maxim's market share reach into the independent dealer sector, and
(v) expanded operations to enhance Maxim's capital markets access and
sponsorship. This new strategy resulted, in part, from the entry into the retail
sector of the carpet industry of Shaw Industries, Inc. ("Shaw"), the carpet
industry's largest manufacturer and Maxim's largest supplier. In December 1995,
Shaw and Maxim entered into a non-binding letter of intent for the merger of
Maxim into Shaw, which letter of intent was subsequently terminated by the
parties. See "MAXIM MANAGEMENT'S DISCUSSION AND ANALYSIS."
Maxim's senior management met with representatives of Maxim's investment
banking firm, Prudential Securities, several times during the early part of 1996
following the termination of the Shaw negotiations, to evaluate potential
strategic partners which might meet Maxim's criteria. On March 29, 1996, Maxim's
senior management and representatives of Prudential Securities discussed
17
<PAGE>
Maxim's operating strategy and prospective strategic initiatives. Among other
possibilities, the Prudential Securities representatives identified Image as a
potentially attractive partner, and suggested that representatives of Maxim meet
with Image's senior management about a possible combination. Maxim was familiar
with Image and its market niche and strengths, due to Image's long-standing
relationship as a supplier to Maxim's GCO network.
On April 4, 1996, representatives of Image met with Maxim sales and
marketing personnel to discuss an expanded supplier-customer relationship with
Maxim. After the presentation, representatives of Maxim, Image and Prudential
Securities met to discuss each party's vision of the future of the carpet
industry. At that meeting, the parties for the first time jointly addressed the
possibility and feasibility of a merger between Maxim and Image and discussed
the synergies which could result from the combined companies. Following this
meeting, Maxim retained Prudential Securities to advise it with respect to a
combination with Image. During the ensuing three week period, representatives of
Maxim, Image and Prudential Securities continued discussing the possibility of
combining the two companies.
On April 26, 1996, representatives of Image visited Maxim's headquarters for
a tour of the facilities and for further discussions concerning a possible
business combination. Subsequent to that meeting, and for the next two weeks,
the parties continued telephone discussions about a possible business
combination. Although none of these discussions was conclusive, they did allow
each party to become better informed about the other and to permit each party to
discuss in detail the advantages of a business combination.
On May 8, 1996, the Board of Directors of Image held its regularly scheduled
quarterly Board meeting. The Board was advised that Image's senior management
had held discussions with representatives of Maxim and Prudential Securities
concerning a possible combination of Maxim and Image. Image's senior management
reported that increasing sales to buying groups have resulted in increased
pressure on margins, and that carpet prices were declining. Senior management
further discussed the potential for combinations with other carpet
manufacturers, none of which were determined to be feasible in the near term.
Image's senior management then discussed the potential synergies which could
result from a combination with Maxim, including increased carpet sales volume
and a higher margin sales mix merchandised through Maxim's retail network. The
Board of Directors of Image authorized senior management to continue to
investigate a possible combination with Maxim.
On May 9, 1996 a regularly scheduled meeting of the Board of Directors of
Maxim was held at Maxim's headquarters to discuss a possible business
combination with Image. Maxim's senior management advocated the position that an
alliance with Image could provide Maxim with an opportunity for integration into
a desirable niche market without materially affecting any of its other supply
relationships. Management observed that in the event of a merger or similar
business combination, Image could develop proprietary products for Maxim's
company-owed and franchised stores, in addition to other synergies and
efficiencies which could be generated by the combined operations. The Board
further discussed Maxim's projected growth plan and capital requirements for the
coming eighteen months. A combination with Image could have the added benefits
of increased capital availability at a reduced cost to help fund Maxim's growth
initiatives.
At the same Board meeting, Maxim's directors discussed the risks of entering
the manufacturing sector of the carpet industry, including among others, the
potential reaction of the customers and suppliers of both Image and Maxim and of
the investment community to a business combination with Image. See "CERTAIN
CONSIDERATIONS." After further discussion, the Board determined that the
potential benefits of a combination with Image outweighed potential concerns and
authorized Maxim's management to proceed with negotiations to combine with
Image.
18
<PAGE>
On May 10, 1996, senior management of Image met with senior management of
Maxim to discuss their respective views on the long-term strategy of
consolidation of retail and manufacturing operations in the carpet industry.
During the period between May 10, 1996 and May 14, 1996, legal advisors for both
parties negotiated confidentiality agreements in anticipation of exchanging
confidential information and conducting due diligence. These agreements were
executed on May 15, 1996.
On May 12, 1996, representatives of Image participated in a telephonic
conference with representatives of Prudential Securities to discuss potential
structures of a business combination with Maxim. As a result of these
discussions, a preliminary determination was made by Image management that a
one-for-one share exchange could be most advantageous to the Image shareholders,
as, among other things, it would allow them to participate in the full
appreciation in the value of Maxim's stock which could occur following the
announcement of the Merger.
On May 16, 1996, a special meeting of the Board of Directors of Image was
held via conference telephone for the purpose of providing the Board members
with a status report on the discussions with Maxim and to determine if the Board
was interested in proceeding with due diligence and negotiations. The Board then
appointed a special Board committee to interview and hire an investment banker,
authorized Image's independent accountants and legal counsel to conduct due
diligence of Maxim and authorized senior management to begin negotiation of a
definitive merger agreement.
On May 17, 1996, representatives of Maxim and Image met at Image's offices,
where they confirmed their mutual interest in combining the companies, with
Maxim as surviving corporation and Image as a wholly owned subsidiary. The
general terms, timing, and proposed accounting treatment of the business
combination were also discussed. At this meeting, the parties also discussed a
number of other synergies that could result from a business combination. See "--
Reasons for the Merger; Recommendation of Boards of Directors" for a discussion
of the factors considered by the parties.
On May 20, 1996, representatives of Image began interviewing financial
advisors to assist Image in connection with the proposed Merger. On May 21,
1996, representatives of Image discussed with representatives of
Robinson-Humphrey the possible engagement of Robinson-Humphrey as financial
advisor to Image in connection with the proposed Merger. Following execution of
a confidentiality agreement by Robinson-Humphrey, representatives of Image
outlined the material terms of the proposed transaction and the strategic
reasons for the combination. Robinson-Humphrey then made a proposal for
financial advisory services, and on May 22, 1996 Image engaged Robinson-Humphrey
as its financial advisor to evaluate the proposed transaction with Maxim,
including the fairness of the transaction, from a financial point of view, to
the shareholders of Image.
From May 17, 1996 through May 23, 1996, senior management of Maxim and
Image, assisted by their legal, financial and accounting advisors, conducted a
due diligence review and commenced negotiation of a definitive merger agreement.
On the afternoon of May 23, 1996, senior management of Maxim and Image and their
legal advisors, financial advisors and accountants met to resolve a variety of
issues which had arisen in the course of such negotiations. Based upon the
parties' successful resolution of a number of these issues, senior management of
Maxim and Image instructed their financial and legal advisors and accountants to
work as expeditiously as possible to resolve the remaining outstanding issues
and to complete the negotiation of a definitive merger agreement. During the
ensuing week, the parties completed their due diligence review and worked to
finalize the definitive Merger Agreement.
Maxim's Board held a special meeting on May 30, 1996 to consider the
proposed merger with Image. At the meeting, Maxim's counsel discussed the
definitive Merger Agreement in detail and representatives of Prudential
Securities made a presentation which included delivery of Prudential Securities'
oral opinion as to the fairness of the Merger to Maxim's shareholders from a
financial point of view. The Prudential Securities presentation also offered a
summary of the transaction, including the value of the offer, post-transaction
ownership, tax and accounting treatment and the business rationale for a
combination of Maxim and Image. See "-- Opinion of Maxim's Financial Advisor."
The
19
<PAGE>
Maxim Board discussed the terms of the proposed merger and the matters presented
to it and scheduled a meeting for the following afternoon in order to give the
members of the Maxim Board additional time for consideration of the materials
presented to it and to coincide with the timing of Image's Board meeting, which
was scheduled for the following morning.
On May 31, 1996, a special meeting of the Board of Directors of Image was
held. In attendance were representatives of Robinson-Humphrey and Image's legal
counsel and independent accountants. Following a general overview of the
transaction by senior management of Image, representatives of Robinson-Humphrey
presented a detailed analysis of the Merger to the Board of Directors, including
an analysis of Image as a stand-alone company and as a subsidiary of Maxim, on
both a best-case and base-case scenario. See "-- Opinion of Image's Financial
Advisor." Robinson-Humphrey then delivered an oral opinion as to the fairness of
the Merger to Image's shareholders from a financial point of view.
Representatives of Image's independent accountants then reported to the Board on
certain tax and financial due diligence issues, and legal counsel reported on
the merger negotiations and legal due diligence. Following discussion, the Board
unanimously approved the Merger and the Merger Agreement and the transactions
contemplated thereby.
On May 31, 1996 a special meeting of the Board of Maxim was held by
telephone conference. Present by invitation were legal advisors for Maxim and
representatives of Prudential Securities. Management of Maxim reported that
Image's Board had approved the transaction and was prepared to sign the Merger
Agreement in substantially the form presented to the Maxim Board on May 30,
1996. Thereafter, the Board of Directors of Maxim unanimously approved the
Merger Agreement and the transactions contemplated thereby. Representatives of
Maxim and Image executed the Merger Agreement immediately following the
conclusion of Maxim's Board meeting on May 31, 1996.
REASONS FOR THE MERGER; RECOMMENDATION OF BOARDS OF DIRECTORS
MAXIM. On May 31, 1996, the Board of Directors of Maxim unanimously
approved the adoption of the Merger Agreement, and the Board of Directors of
Maxim recommends that shareholders vote FOR approval and adoption of the Merger
Agreement and consummation of the transactions contemplated thereby. In
approving the Merger Agreement and recommending that shareholders approve and
adopt the Merger Agreement, the Board of Directors of Maxim considered and based
their opinion as to the fairness of the transactions contemplated by the Merger
Agreement on the following factors:
(i) The ability of the combined companies to provide Maxim with a
controlled source of low-cost, high-quality polyester carpet and a
proprietary source of private label carpet lines for Maxim's multiple
distribution channels and expansion plans. Management of Maxim believes that
the Merger will not jeopardize Maxim's relationships with other
floorcovering suppliers. Because Image fills a relatively small niche in the
floorcovering market as a producer primarily of polyester carpet, Maxim
believes that it will be able to continue to expand its present
relationships with other floorcovering suppliers.
(ii) The ability to leverage Maxim's merchandising and marketing
capabilities to increase the penetration of Image products to other
customers.
(iii) The ability of the combined companies to use the funds resulting
from the strong cash flow produced by Image's operations to support the
growth of Maxim's retail floorcovering network.
(iv) The ability of the combined companies to increase Image's
profitability through the distribution of a higher margin mix of carpet
through Maxim's retail network and the greater utilization of Image's
polyester fiber to produce carpet.
(v) The financial advice of Prudential Securities and the opinion of
Prudential Securities that the financial terms of the Merger as provided in
the Merger Agreement were fair, from a financial point of view, to Maxim's
shareholders. The opinion of Prudential Securities is set forth in Appendix
B to this Proxy Statement/Prospectus.
20
<PAGE>
(vi) The successful experience and favorable reputation of Image's
executive management, together with Image's business, operations, earnings
and financial condition on a historical and prospective basis.
(vii) The anticipated positive impact of the Merger on the various
constituencies served by Maxim, including its franchisees and customers.
Each of the above factors support, directly or indirectly, the determination
of the Board of Directors of Maxim as to the fairness of the Merger. The Board
of Directors did not quantify or otherwise attempt to assign relative weights to
the specific factors considered in reaching its determination; however, the
Board of Directors placed a special emphasis on the consideration payable in the
Merger and the receipt of a favorable opinion from Prudential Securities. See
"-- Opinion of Maxim's Financial Advisor."
THE BOARD OF DIRECTORS OF MAXIM UNANIMOUSLY RECOMMENDS THAT THE MAXIM
SHAREHOLDERS VOTE TO APPROVE THE MERGER IN ACCORDANCE WITH THE TERMS OF THE
MERGER AGREEMENT.
IMAGE. On May 31, 1996, the Image Board of Directors unanimously approved
the Merger Agreement and determined that, subject to satisfaction of the
conditions in the Merger Agreement, the completion of the Merger on the terms
set forth in the Merger Agreement is fair and in the best interests of Image and
its shareholders. Accordingly, the Image Board of Directors has recommended that
the holders of Image Common Stock vote FOR approval of the Merger on and subject
to terms and conditions contained in the Merger Agreement.
Prior to approving the Merger and the Merger Agreement, the Image Board of
Directors received information regarding and analyzed and considered the
following:
(i) the rapid consolidations occurring in the carpet industry, including
the recent activity toward integration of carpet manufacturers with
retailers;
(ii) Image's business, operations, properties, assets, financial
condition and operating results since its initial public offering in 1993;
(iii) Image's future financial prospects in light of its position in the
carpet industry, its dependence on shrinking mid-East export and domestic
distributor markets and its limited supplier relationships with the major
floorcovering retailers, all of which could have an adverse impact on future
sales and earnings;
(iv) the opportunity by virtue of the Merger for Image to improve its
margins by using more of its internally produced polyester fiber in carpet
rather than for sale to the home furnishings industry as fiberfill;
(v) the opportunity for Image to increase its gross margin by
merchandising higher margin carpet lines through the Maxim retail
floorcovering network and displacing lower margin existing carpet sales
produced to help absorb fixed manufacturing costs;
(vi) the potential that Image's future earnings stream would be more
highly valued by the public market as a part of a retail company than as a
stand-alone carpet manufacturer;
(vii) the opportunity for Image's shareholders to participate, as holders
of Maxim Common Stock, in the anticipated trend toward consolidation and
integration of the carpet manufacturing industry with the retail carpet
industry;
(viii) an analysis of the Merger and the benefits to the Image
shareholders conducted by Image's financial advisor, Robinson-Humphrey; and
(ix) the proposed tax-free nature of the transaction to Image
shareholders.
21
<PAGE>
The Image Board of Directors also considered its knowledge of the business,
financial condition and prospects of Maxim, based on publicly available
information concerning Maxim, Image's due diligence review and discussions with
Maxim's President, A.J. Nassar, and other members of management. The Image
Board's determination was favorably influenced by its belief, based on the Image
Board's consideration and deliberation over the above factors, that the
long-term value of the shares of Maxim Common Stock to be received by Image
shareholders in the Merger was more favorable to Image shareholders as compared
to the value of Image's Common Stock if Image remained as an independent carpet
manufacturer and plastics recycler.
The Board of Directors' determination was also favorably influenced by the
terms, provisions and conditions of the Merger Agreement, including the
agreement to continue Image's separate operations as a wholly-owned subsidiary
of Maxim and the agreement to increase the Maxim Board to include following the
Merger, each of (i) H. Stanley Padgett, Image's President and Chief Executive
Officer, (ii) Larry M. Miller, Image's Chairman, and (iii) one outside director
chosen by Messrs. Padgett and Miller and reasonably acceptable to Maxim. The
Merger Agreement also sets forth certain commitments of Maxim concerning the
operations of Image after the Merger, the completion of Image's capital
expenditures planned through fiscal year 1997 and the composition of the Image
Board following the Merger, each of which further favorably influenced the
determination of the Image Board.
In view of the variety of factors considered in connection with its
evaluation of the Merger, the Image Board did not find it practicable to and did
not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination, or give prominence to any specific
factor or group of factors. In addition, individual members of the Board of
Directors may have given different weights to different factors.
THE BOARD OF DIRECTORS OF IMAGE UNANIMOUSLY RECOMMENDS THAT THE IMAGE
SHAREHOLDERS VOTE TO APPROVE THE MERGER IN ACCORDANCE WITH THE TERMS OF THE
MERGER AGREEMENT.
OPINION OF MAXIM'S FINANCIAL ADVISOR
On May 31, 1996, Prudential Securities delivered its written opinion to the
Board of Directors of Maxim (the "Maxim Board") that, as of such date, the
consideration to be paid pursuant to the Merger was fair to Maxim from a
financial point of view (the "Maxim Opinion"). Prudential Securities made a
presentation of the form of the Maxim Opinion and the underlying financial
analysis at a meeting of the Maxim Board on May 30, 1996. This analysis, as
presented to the Maxim Board is summarized below. Prudential Securities
discussed with the Maxim Board the information in the analysis, and the
financial data and other factors considered by Prudential Securities, in
conducting its analysis, all of which is summarized below.
In requesting the Maxim Opinion, the Maxim Board did not give any special
instructions to Prudential Securities or impose any limitation upon the scope of
the investigation that Prudential Securities deemed necessary to enable it to
deliver the Maxim Opinion. A copy of the Maxim Opinion, which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached to this Proxy Statement/Prospectus as Appendix B and is incorporated
herein by reference. The summary of the Maxim Opinion set forth below is
qualified in its entirety by reference to the full text of the Maxim Opinion.
Maxim shareholders are urged to read the Maxim Opinion in its entirety. Maxim
selected Prudential Securities to provide the Maxim Opinion because it is an
internationally recognized investment banking firm engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions and
for other purposes and has substantial experience in transactions similar to the
Merger.
In conducting its analysis and arriving at the Maxim Opinion, Prudential
Securities reviewed such information and considered such financial data and
other factors as Prudential Securities deemed appropriate under the
circumstances, including the following: (i) Image's historical financial
22
<PAGE>
data and other publicly available information regarding Image for the three year
period ended July 1, 1995, and certain financial data for the nine months ended
March 30, 1996; (ii) Maxim's historical financial data and other publicly
available information regarding Maxim for the three year period ended March 31,
1995, and for the ten month period ended January 31, 1996; (iii) certain
information, including financial projections prepared by the management of
Image, relating to the net revenues, earnings, cash flow, assets and prospects
for Image's business; (iv) certain information, including financial projections
prepared by the management of Maxim, relating to the net revenues, earnings,
cash flow, assets and prospects for Maxim's business; (v) pro forma operating
data, income statements, balance sheets and cash flow data for the fiscal years
ended January 1997, 1998 and 1999 prepared by Image and Maxim; (vi) industry
data relating to Image's and Maxim's businesses; (vii) the financial terms of
the Merger and the financial terms of certain other transactions Prudential
Securities deemed relevant; (viii) the trading history of the shares of Image's
common stock and Maxim's common stock; (ix) publicly available information
concerning certain other companies Prudential Securities deemed to be reasonably
similar to Image and to Maxim, and the trading history of the common stock of
each such company; and (x) the terms and conditions of the Merger Agreement.
Prudential Securities also met with the senior officers of Image and Maxim to
discuss the financial condition and prospects of Image and Maxim, respectively,
and such other matters as Prudential Securities deemed relevant to the Maxim
Opinion. The Maxim Opinion is necessarily based on economic, financial and
market conditions as they existed and could be evaluated as of the date of the
Maxim Opinion.
In connection with its review and analysis and in arriving at the Maxim
Opinion, Prudential Securities has relied without independent verification upon
the accuracy and completeness of the financial data and other information
reviewed by Prudential Securities that was provided by Image and Maxim, or was
publicly available. With respect to the financial projections and pro forma
financial and operating information prepared by the managements of Image and
Maxim, Prudential Securities has assumed that they represent the best currently
available estimates and judgments of the respective managements of Image and
Maxim as to the future financial performance of their respective companies.
Prudential Securities neither made nor obtained independent appraisals of the
properties, facilities or other assets of Image or of Maxim. In addition,
Prudential Securities assumed that all of the transactions contemplated by the
Merger Agreement will be consummated on the basis of the terms and provisions of
the Merger Agreement.
SUMMARY OF ANALYSES. The following is a summary of certain analyses
performed by Prudential Securities in connection with rendering the Maxim
Opinion. At a meeting of the Board of Directors of Maxim on May 30, 1996,
Prudential Securities presented its analyses discussed below.
Analysis of Selected Comparable Publicly-Traded Companies. Prudential
Securities compared certain financial information for Image with the
corresponding publicly available financial information of certain other
comparable companies.
Prudential Securities compared Image with a group of two residential carpet
manufacturers, Mohawk Industries, Inc. and Shaw Industries, Inc. and one
recycled polyester producer, Wellman, Inc. (collectively, the "Comparable
Companies"). The information compared included, among other things, (i) stock
price, (ii) equity market valuation ("Equity Market Value"), (iii) Equity Market
Value plus total debt less cash and cash equivalents ("Enterprise Value"), (iv)
latest twelve months earnings from continuing operations ("LTM Net Income"), (v)
the ratio of Equity Market Value to LTM Net Income ("LTM Net Income Multiple"),
(vi) book value at March 30, 1996 ("Book Value"), (vii) the ratio of Equity
Market Value to Book Value ("Book Value Multiple"), (viii) mean projected
calendar 1996 earnings per share as defined by the First Call Corporation
database ("Calendar 1996 EPS"), (ix) the ratio of stock price to Calendar 1996
EPS ("Calendar 1996 EPS Multiple"), (x) mean projected calendar 1997 earnings
per share as defined by the First Call Corporation database ("Calendar 1997
EPS"), (xi) the ratio of stock price to Calendar 1997 EPS ("Calendar 1997 EPS
Multiple"), (xii) latest twelve months sales ("LTM Sales"), (xiii) the ratio of
Enterprise Value to LTM Net Sales ("LTM Net
23
<PAGE>
Sales Multiple"), (xiv) latest twelve months earnings before interest, taxes,
depreciation and amortization ("LTM Operating Cash Flow"), (xv) the ratio of
Enterprise Value to LTM Operating Cash Flow ("LTM Operating Cash Flow
Multiple"), (xvi) latest twelve months earnings before interest and taxes ("LTM
Operating Income"), (xvi) the ratio of Enterprise Value to LTM Operating Income
("LTM Operating Income Multiple"). Collectively, the LTM Net Income Multiple,
Book Value Multiple, Calendar 1996 EPS Multiple, Calendar 1997 EPS Multiple, LTM
Net Sales Multiple, LTM Operating Cash Flow Multiple and LTM Operating Income
Multiple are referred to collectively as the "Comparable Company Multiples."
Based on its Comparable Companies analysis, Prudential Securities derived a
range of LTM Net Income multiples from 11.8x to 27.0x, a range of Book Value
Multiples from 1.2x to 2.6x, a range of Calendar 1996 EPS Multiples from 14.0x
to 19.3x, a range of Calendar 1997 EPS Multiples from 10.8x to 14.3x, a range of
LTM Net Sales Multiples from 0.6x to 0.9x, a range of LTM Operating Cash Flow
Multiples from 5.7x to 9.5x and a range of LTM Operating Income Multiples from
9.0x to 14.9x.
Prudential Securities applied the appropriate leveraged Comparable Company
Multiples to Image's LTM Net Income, Book Value, Calendar 1996 EPS and Calendar
1997 EPS to derive an implied leveraged equity value. This analysis yielded a
range of Image Equity Market Values from $36.5 million to $138.0 million with a
mean Image Equity Market Value of $85.2 million. Prudential Securities also
applied the appropriate unleveraged Comparable Company Multiples to Image's LTM
Net Sales, LTM Operating Cash Flow and LTM Operating Income. Prudential
Securities' analysis yielded a range of Image Enterprise Values from $78.8
million to $141.6 million with a mean Image Enterprise Value of $111.8 million,
and a corresponding implied range of Equity Market Values of $17.5 million to
$80.3 million with a mean Image implied Equity Market Value of $50.5 million.
The combined range of Equity Market Values is from $17.5 million to $138.0
million with a mean Image Equity Market Value of $70.3 million.
Analysis of Selected Comparable Transactions. Prudential Securities
reviewed the financial terms of eight carpet industry transactions announced or
closed in the last four years. The transactions considered were combinations of
(in reverse chronological order): Mohawk Industries, Inc./ Galaxy Carpet Mills,
Inc., Interface, Inc./Prince Street Technologies, Inc., Mohawk Industries, Inc/
Aladdin Mills, Inc., Interface, Inc./Bentley Mills, Inc., Mohawk Industries,
Inc./Karastan Bigelow, Dixie Yarns, Inc./Carriage Industries, Inc., Mohawk
Industries, Inc./Horizon Industries, Inc. and Shaw Industries, Inc./Salem Carpet
Mills, Inc. (collectively, the "Comparable Transactions"). Prudential Securities
reviewed certain financial information regarding the Comparable Transactions
including: (i) equity valuation ("Equity Transaction Value"), (ii) Equity
Transaction Value plus total debt less cash and cash Equivalents ("Enterprise
Transaction Value"), (iii) LTM Net Income, (iv) the ratio of Equity Transaction
Value to LTM Net Income ("LTM Net Income Transaction Multiple"), (v) Book Value,
(vi) the ratio of Equity Transaction Value to Book Value ("Book Value
Transaction Multiple"), (vii) LTM Net Sales, (viii) the ratio of Enterprise
Transaction Value to LTM Net Sales ("LTM Net Sales Transaction Multiple"), (ix)
LTM Operating Cash Flow, (x) the ratio of Enterprise Transaction Value to LTM
Operating Cash Flow ("LTM Operating Cash Flow Multiple"), (xi) LTM Operating
Income, and (xii) the ratio of Enterprise Transaction Value to LTM Operating
Income ("LTM Operating Income Transaction Multiple"). Collectively, the LTM Net
Income Transaction Multiples, the Book Value Transaction Multiples, the LTM Net
Sales Transaction Multiples, the LTM Operating Cash Flow Transaction Multiples
and the LTM Operating Income Transaction Multiples and are referred to as the
"Comparable Transaction Multiples." Prudential Securities deemed certain
Comparable Transaction information to be not meaningful and excluded such
information from its analysis to calculate Comparable Transaction Multiples.
Based on its Comparable Transactions analysis, Prudential Securities derived a
range of LTM Net Income Transaction Multiples from 12.7x to 28.3x, a range of
Book Value Transaction Multiples from 1.0x to 4.9x, a range of LTM Net Sales
Transaction Multiples from 0.3x to 1.0x, a range of LTM Operating Cash Flow
Transaction Multiples from 5.7x to 8.9x and a range of LTM Operating Income
Transaction Multiples from 8.7x to 13.1x.
24
<PAGE>
Prudential Securities applied the appropriate leveraged Comparable
Transaction Multiples to Image's LTM Net Income and Book Value to derive an
implied leveraged equity value. This analysis yielded a range of Image Equity
Market Values from $39.4 million to $258.0 million with a mean Image Equity
Market Value of $92.5 million. Prudential Securities also applied the
appropriate unleveraged Comparable Company Multiples to Image's LTM Net Sales,
LTM Operating Cash Flow and LTM Operating Income. Prudential Securities'
analysis yielded a range of Image Enterprise Values from $44.4 million to $147.7
million with a mean Image Enterprise Value of $95.9 million, and a corresponding
implied range of Equity Market Values of $14.6 million to $86.4 million with a
mean Image implied Equity Market Value of $39.3 million. The combined range of
Equity Market Values is from $14.6 million to $258.0 million with a mean Image
Equity Market Value of $61.7 million.
Discounted Cash Flow Analysis. Prudential Securities calculated a range of
Image Enterprise Values by means of a discounted cash flow analysis based upon
the discounted present value of Image's projected three-year stream of
unleveraged free cash flow and its projected calendar year 1998 terminal value
which was based on a range of multiples of Image's projected calendar 1998
earnings before interest and taxes ("Operating Income"). In conducting this
analysis, Prudential Securities relied upon certain financial projections
provided by Image management and applied discount rates ranging from 12% to 20%
and multiples of calendar 1998 Operating Income ranging from 9.0x to 15.0x.
Based on this analysis, Prudential Securities derived a range of Image
Enterprise Values from $130.2 million to $252.2 million. After deducting net
debt (total debt less cash and cash equivalents), the corresponding range of
implied Equity Market Values is from $68.9 million to $190.9 million.
Pro Forma Earnings per Share Analysis. Prudential Securities analyzed
certain pro forma effects resulting from the Merger. Based on historical
results, this analysis indicated a greater pro forma earnings per share for the
combined company than the aggregate historical earnings per share of Maxim. An
analysis of anticipated future results based on projections provided by the
management of Image and Maxim indicated the Merger resulting in greater pro
forma earnings per share for the combined company than the projected earnings
per share of Maxim.
The summary set forth above outlines the principal elements of Prudential
Securities' analysis but does not purport to be a complete description of the
analyses conducted by Prudential Securities or Prudential Securities'
presentation to the Maxim Board. Prudential Securities' analyses must be
considered as a whole and selecting portions of its analyses and the factors
considered by Prudential Securities, without considering all factors and
analyses considered by Prudential Securities, could create an incomplete view of
the process underlying the Maxim Opinion. The preparation of a fairness opinion
is a complex process that is not purely mathematical and is not necessarily
susceptible to partial analysis or summary description; rather, it involves
complex considerations and judgments. In performing its analyses, Prudential
Securities made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of Image and Maxim. Any estimates contained in the analyses
performed by Prudential Securities are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by Prudential Securities analyses. In addition,
analyses relating to valuation do not purport to be appraisals or to reflect the
prices at which such entity may actually be sold. Such estimates are inherently
subject to uncertainty.
TRANSACTION FEE AND OTHER INFORMATION. Maxim has agreed to pay Prudential
Securities, in cash upon consummation of the Merger, a transaction fee of
$1,250,000. Maxim has previously paid Prudential Securities an advisory retainer
fee of $50,000, which will be credited against the transaction fee. In addition,
Maxim has agreed to reimburse Prudential Securities for its out-of-pocket
expenses in connection with the Merger (including the fees and expenses of its
counsel), and to indemnify Prudential Securities against certain claims,
liabilities and expenses, including certain liabilities under U.S. federal
securities laws.
25
<PAGE>
Prudential Securities has, in the past, provided financial advisory and
financing services to Image, including acting as a managing underwriter in
Image's August 1993 initial public offering of 2,500,000 shares of Image Common
Stock, and has received customary compensation for the rendering of such
services. In addition, Prudential Securities has published equity research
regarding Image, and in the future may publish equity research regarding Maxim.
Prudential Securities acts as a market maker of both Image and Maxim common
stock, and in the ordinary course of business may trade such shares for its own
account and for the accounts of customers, and, accordingly, may at any time
hold a long or short position in such shares. Further, Prudential Securities in
the future, may provide various services to Maxim for which Prudential
Securities may receive fees customary for such services.
OPINION OF IMAGE'S FINANCIAL ADVISOR
The Board of Directors of Image retained Robinson-Humphrey to advise it with
respect to the fairness to the shareholders of Image, from a financial point of
view, of the Merger. Robinson-Humphrey is a nationally recognized investment
banking firm and was selected by the Board based on Robinson-Humphrey's
experience and expertise. As part of its investment banking business,
Robinson-Humphrey is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
At the May 31, 1996, meeting of the Image Board of Directors,
Robinson-Humphrey delivered its oral opinion, subsequently confirmed in writing
on June 7, 1996, that, based upon and subject to various considerations set
forth in such opinion, as of May 31, 1996, the consideration agreed to be paid
by Maxim in the Merger (the "Exchange Ratio") was fair to the holders of Image's
Common Stock from a financial point of view. No limitations were imposed by the
Image Board of Directors upon Robinson-Humphrey with respect to the
investigations made or the procedures followed by Robinson-Humphrey in rendering
its opinion. All references below to Robinson-Humphrey's opinion refer to
Robinson-Humphrey's opinion dated June 7, 1996, unless otherwise indicated.
The full text of the opinion of Robinson-Humphrey which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached as Appendix C to this Proxy Statement/Prospectus and is incorporated
herein by reference. Image shareholders are urged to read such opinion carefully
in entirety. Robinson-Humphrey's opinion is directed only to the exchange ratio
and does not constitute a recommendation to any Image or Maxim shareholder at to
how such shareholder should vote. Summary of the opinion of Robinson-Humphrey
set forth in the Proxy Statement-Prospectus is qualified in its entirety by
reference to the full text of such opinion. In furnishing its opinion,
Robinson-Humphrey did not admit that it is an expert within the meaning of the
term "expert" as used in the Securities Act and the rules and regulations
promulgated thereunder.
In arriving at its opinion, Robinson-Humphrey (i) analyzed certain
historical business and financial information relating to Image and Maxim; (ii)
reviewed various financial forecasts and other data provided to
Robinson-Humphrey by Image and Maxim relating to their respective businesses;
(iii) held discussions with members of the senior managements of Image and Maxim
with respect to the business and prospects of Image and Maxim, respectively;
(iv) reviewed public information with respect to certain other companies in
lines of businesses Robinson-Humphrey believed to be generally comparable to the
businesses of Image and Maxim; (v) reviewed the financial terms of certain
business combinations involving companies in lines of business Robinson-Humphrey
believed to be generally comparable to those of Image and Maxim, and in other
industries generally; (vi) reviewed the historical stock prices and trading
volumes of the Image Common Stock and the Maxim Common Stock; and (vii)
conducted such other financial studies, analyses and investigations as
Robinson-Humphrey deemed appropriate.
In connection with its review, Robinson-Humphrey relied upon the accuracy
and completeness of the financial and other information provided to it by Image
and Maxim, and did not assume any
26
<PAGE>
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of Image
and Maxim, nor was Robinson-Humphrey provided with any such appraisal. With
respect to financial forecasts, Robinson-Humphrey assumed that such financial
forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of management of Image and Maxim as to the
future financial performance of Image and Maxim, respectively. Robinson-Humphrey
assumed no responsibility for and expressed no view as to such forecasts or the
assumptions on which they were based.
Robinson-Humphrey's opinion was necessarily based on economic, monetary,
market and other conditions as in effect on, and the information made available
to it as of, the date of its opinion. The opinion did not address the underlying
business decision of Image to effect the Merger. Robinson-Humphrey expressed no
opinion as to what the value of the Maxim Common Stock actually will be when
issued to the holders of Image Common Stock upon consummation of the Merger.
Robinson-Humphrey assumed that the Merger would be consummated on the terms
described in the Merger Agreement, without any waiver of any material terms or
conditions by Image.
Robinson-Humphrey performed a variety of analyses in connection with its
opinion. These analyses were principally divided into (i) analyses used to
determine the value of Image Common Stock on a stand-alone basis, and (ii)
analyses used to determine the value of the Maxim Common Stock after giving
effect to the proposed Merger. These analyses are described below, along with
certain other procedures performed by Robinson-Humphrey.
ANALYSIS OF IMAGE COMMON STOCK (STAND-ALONE)
Comparable Public Company Analysis. Robinson-Humphrey compared certain
publicly available financial, operating and market valuation data for selected
public companies in the carpet industry to the corresponding data for Image. The
public companies used by Robinson-Humphrey for purposes of this analysis were
Interface, Inc., Mohawk Industries, Inc., Shaw Industries, Inc. and Wellman,
Inc. Robinson-Humphrey evaluated, among other things, multiples of stock prices
as of May 29, 1996 to calendar 1996 estimated earnings (which ranged from 12.0x
to 19.3x with a median of 13.8x); and multiples of total firm value (defined as
equity market capitalization plus net debt) to latest twelve months' earnings
before interest, taxes, depreciation and amortization ("EBITDA") (which ranged
from 5.7x to 9.5x with a median of 7.3x). Robinson-Humphrey then applied these
and other multiples for the selected companies to corresponding data for Image.
This analysis resulted in an equity value reference range for the Image Common
Stock of $10.48 to $10.89 per share.
Analysis of Selected Mergers and Acquisitions. Robinson-Humphrey evaluated
the financial terms of selected mergers and acquisitions in the carpet industry
from January 1, 1991 through May 29, 1996. This analysis included 22 such
transactions, of which seven had financial terms and transaction multiples that
Robinson-Humphrey could identify from publicly available information. These
acquiror/acquiree transactions were as follows: Mohawk Industries, Inc./Galaxy
Carpet Mills, Inc. (1995); Mohawk Industries, Inc./Aladdin Mills (1994);
Interface, Inc./Bentley Mills, Inc. (1993); Dixie Yarns, Inc./Masland Carpets,
Inc. (1993); Dixie Yarns, Inc./Carriage Industries, Inc. (1993); Mohawk
Industries, Inc./Horizon Industries, Inc. (1992); and Shaw Industries,
Inc./Salem Carpet Mills, Inc. (1992). The analysis considered, among other
things, the multiples of transaction firm value (defined as equity value plus
debt assumed minus cash) to latest twelve months' revenues (which ranged from
0.24x to 1.02x with a median of 0.42x), to latest twelve months' EBITDA (which
ranged from 3.1x to 9.3x with a median of 6.2x), and to latest twelve months'
EBIT (which ranged from 6.6x to 11.5x with a median of 9.6x). This analysis
resulted in an equity value reference range for Image Common Stock of $4.26 to
$5.22 per share, utilizing median multiples from the carpet industry
transactions. Robinson-Humphrey also observed that the transaction multiples in
the Mohawk Industries/Aladdin Mills transaction were the highest among the
carpet industry transactions that were analyzed. Utilizing the Mohawk
Industries/Aladdin Mills multiples, the Robinson-Humphrey analysis resulted in
an equity value reference range for Image Common Stock of $11.27 to $11.54 per
share.
27
<PAGE>
Discounted Cash Flow Analysis. Using traditional discounted cash flow
("DCF") valuation methodology, Robinson-Humphrey estimated the present value of
future free cash flows available to the debt and equity holders of Image, if
Image were to continue to operate on a stand-alone basis in accordance with
management forecasts and estimates. Robinson-Humphrey based this analysis on two
separate five-year operating forecasts prepared by management. These cases were
designated Base Case and Upside Case. Robinson-Humphrey analyzed, for each of
these two cases, the sum of the present values of the free cash flows over the
forecast period and the range of terminal values described below. The range of
terminal values was calculated by applying multiples of 5.0x to 7.0x to Image's
projected EBITDA in the year 2000. These terminal values, as well as the interim
free cash flows, were discounted using discount rates ranging from 8.9% to
11.4%. The DCF analysis for the Base Case resulted in an equity value reference
range for the Image Common Stock of $11.97 to $18.73 per share. The DCF analysis
for the Upside Case resulted in an equity value reference range for the Image
Common Stock of $15.20 to $22.80 per share. Robinson-Humphrey observed that the
Upside Case appeared to be an aggressive forecast in light of prevailing
business and industry conditions. Robinson-Humphrey observed further that the
DCF analysis should be considered as a more theoretical indication of value than
certain of the other methodologies employed. Accordingly, the equity values
implied by the DCF analysis may not be attainable.
Leveraged Buyout Analysis. Robinson-Humphrey performed a leveraged buyout
("LBO") analysis of Image, utilizing the same Base Case and Upside Case
management projections used in the DCF analysis and assuming a leveraged capital
structure (30.0% equity, 20.0% subordinated debt and 50.0% senior debt). In the
Base Case, the supportable LBO purchase price per share of Image Common Stock
was $9.00. This analysis resulted in a senior debt to calendar 1996 EBITDA
multiple of 2.97x and a calendar 1997 fixed charge coverage ratio of 1.02x. The
LBO equity holders in the Base Case would earn an annual return of 31.7%. In the
Upside Case, the supportable LBO purchase price per share of Image Common Stock
was $11.00. This analysis resulted in a senior debt to calendar 1996 EBITDA
multiple of 3.05x and a calendar 1997 fixed charge coverage ratio of 1.10x. LBO
equity holders in the Upside Case would earn an annual return of 33.3%.
Acquisition Premiums Analysis. Robinson-Humphrey analyzed the premiums paid
for recent mergers and acquisitions of publicly traded companies with
transaction values in the range of $50 - $200 million. Robinson-Humphrey
evaluated transactions that were accounted for using the pooling of interests
method, and that took place between January 1, 1995 and May 28, 1996. The median
premiums paid over the target's stock price four weeks prior to the announcement
date, one week prior to the announcement date and one day prior to the
announcement date were 34.2%, 29.7% and 17.4%, respectively. This analysis
resulted in an equity value reference range for Image Common Stock of $14.97 to
$16.10 per share. Robinson-Humphrey observed that the particular circumstances
and conditions surrounding any individual transaction are unique. Accordingly,
Robinson-Humphrey would tend to view the application of average or median
acquisition premiums as a less reliable indicator of value than other
methodologies.
Implied Stock Price Analysis. Robinson-Humphrey performed an implied stock
price analysis of the Image Common Stock. This analysis again used management's
Base Case and Upside Case forecasts. Under the Base Case, Robinson-Humphrey
calculated future stock prices using assumed price/earnings multiples of 12x to
16x. In 1997 these stock prices ranged from $16.22 to $21.63, and in 2000 from
$23.56 to $31.41. Under the Upside Case, again using assumed price/earnings
multiples of 12x to 16x, in 1997 these stock prices ranged from $20.52 to
$27.37, and in 2000 from $30.03 to $40.04.
ANALYSIS OF MAXIM COMMON STOCK (PRO FORMA FOR THE MERGER)
Pro Forma Merger Analysis. Robinson-Humphrey reviewed certain pro forma
financial effects on Maxim resulting from the merger for the projected calendar
years 1996, 1997 and 1998. Again Robinson-Humphrey analyzed two separate
scenarios, one incorporating Image's Base Case projections and one incorporating
Image's Upside Case projections. The analysis was based upon certain
assumptions, including that the projections provided to Robinson-Humphrey by
Image and Maxim
28
<PAGE>
management were accurate. In both cases, Robinson-Humphrey assumed pre-tax
synergies from the Merger of $5.2 million in 1997 and $6.4 million in 1998,
which were the amounts jointly developed by the managements of Image and Maxim.
Robinson-Humphrey expressed no view on whether these possible benefits could be
realized. In addition, Robinson-Humphrey assumed that the Merger would be
accounted for under the pooling of interests method of accounting. In the Base
Case, the financial analysis indicated that the combined entity would have
earnings per share of $0.71 (excluding merger expenses) in 1996, $1.31 in 1997
and $1.66 in 1998. The accretion (dilution) to Maxim's earnings per share would
be 19.9% in 1996, 49.6% in 1997 and 39.3% in 1998, while the accretion
(dilution) to Image's earnings per share would be (21.8)% in 1996, (3.2)% in
1997 and 2.2% in 1998. In the Upside Case, the financial analysis indicated that
the combined entity would have earnings per share of $0.79 (excluding merger
expenses) in 1996, $1.47 in 1997 and $1.86 in 1998. The accretion (dilution) to
Maxim's earnings per share would be 31.8% in 1996, 67.9% in 1997 and 56.0% in
1998, while the accretion (dilution) to Image's earnings per share would be
(27.0)% in 1996, (14.1)% in 1997 and (10.2)% in 1998.
Pro Forma Comparable Public Company Analysis. Robinson-Humphrey compared
certain publicly available financial, operating and market valuation data for
selected public companies in both the carpet industry and the specialty retail
industry to the corresponding data for pro forma Maxim. In both comparisons, pro
forma Maxim's projections incorporate Image's Base Case projections. The public
companies in the carpet industry used by Robinson-Humphrey for this analysis
were Interface, Inc., Mohawk Industries, Inc., Shaw Industries, Inc. and
Wellman, Inc. Robinson-Humphrey evaluated, among other things, multiples of
stock prices as of May 29, 1996 to calendar 1996 estimated earnings (which
ranged from 12.0x to 19.3x with a median of 13.8x); and multiples of total
levered firm value (defined as equity market capitalization plus net debt) to
latest twelve months' EBITDA (which ranged from 5.7x to 9.5x with a median of
7.3x). Robinson-Humphrey then applied these and other multiples for the selected
companies to corresponding data for Image. This analysis resulted in an equity
value reference range for pro forma Maxim Common Stock of $7.79 to $8.32 per
share.
The public companies in the specialty retail industry used by
Robinson-Humphrey for this analysis were Bed Bath & Beyond Inc.,
Books-A-Million, Inc., Heilig-Meyers Company, The Home Depot, Inc., Office
Depot, Inc. and The Sports Authority, Inc. Again Robinson-Humphrey evaluated,
among other things, multiples of stock prices as of May 29, 1996 to calendar
1996 estimated earnings (which ranged from 17.3x to 42.0x with a median of
25.8x); and multiples of total levered firm value to latest twelve months'
EBITDA (which ranged from 8.lx to 28.lx with a median of 12.3x). Robinson-
Humphrey then applied these and other multiples for the selected companies to
corresponding data for Maxim on a pro forma basis. This analysis resulted in an
equity value reference range for pro forma Maxim Common Stock of $15.44 to
$16.17 per share.
Pro Forma Discounted Cash Flow Analysis. Using traditional DCF valuation
methodology, Robinson-Humphrey calculated the present value of the common stock
of the combined Maxim/Image entity, giving effect to the Merger and various
assumptions provided by the management of Maxim and Image, including the
synergies expected by the managements of Image and Maxim to be realized as a
result of the Merger. In both the Base Case and the Upside Case,
Robinson-Humphrey analyzed the sum of the free cash flows over the forecast
period and the present values of the range of terminal values described below.
The range of terminal values was calculated by applying multiples of 6.0x to
8.0x to the combined entity's projected EBITDA in the year 2000. These terminal
values, as well as the interim free cash flows, were discounted using discount
rates ranging from 9.39% to 11.89%. The DCF analysis for the Base Case resulted
in an equity value reference range for the pro forma Maxim Common Stock of
$17.59 to $23.55 per share. The DCF analysis for the Upside Case resulted in an
equity value reference range for the pro forma Maxim Common Stock of $19.21 to
$25.53 per share. Robinson-Humphrey observed that the Upside Case appeared to be
an aggressive forecast in light of prevailing business and industry conditions.
Robinson-Humphrey observed further that the DCF
29
<PAGE>
analysis should be considered as a more theoretical indication of value than
certain of the other methodologies employed. Accordingly, the equity values
implied by the DCF analysis may not be attainable.
Pro Forma Leveraged Buyout Analysis. Robinson-Humphrey performed an LBO
analysis of pro forma Maxim, utilizing the same Base Case and Upside Case
management projections used in the pro forma DCF analysis and assuming a
leveraged capital structure (30.0% equity, 20.0% subordinated debt and 50.0%
senior debt). In the Base Case, the supportable LBO purchase price per share of
pro forma Maxim Common Stock was $12.00. This analysis resulted in a senior debt
to calendar 1996 EBITDA multiple of 3.72x and a calendar 1997 fixed charge
coverage ratio of 1.07x. The LBO equity holders in the Base Case would earn an
annual return of 36.4%. In the Upside Case, the supportable LBO purchase price
per share of pro forma Maxim Common Stock was $15.00. This analysis resulted in
a senior debt to calendar 1996 EBITDA multiple of 4.21x and a calendar 1997
fixed charge coverage ratio of 0.99x. LBO equity holders in the Upside Case
would earn an annual return of 32.6%.
Pro Forma Implied Stock Price Analysis. Robinson-Humphrey performed an
implied stock price analysis of the pro forma Maxim Common Stock. This analysis
again used management's Base Case and Upside Case forecasts. Under the Base
Case, Robinson-Humphrey calculated future stock prices using assumed
price/earnings multiples of 14x to 22x. In 1997 these stock prices ranged from
$18.32 to $28.79, and in 2000 from $28.09 to $44.13. Under the Upside Case,
again using assumed price/ earnings multiples of 14x to 22x, in 1997 these stock
prices ranged from $20.56 to $32.31, and in 2000 from $31.46 to $49.43.
Robinson-Humphrey utilized the comparable public company, selected merger
and acquisition, DCF, LBO, acquisition premiums and implied stock price analyses
described above in order to value Image and pro forma Maxim. For the reasons
noted above, Robinson-Humphrey did not consider the DCF and acquisition premiums
analyses to be as relevant as the implied stock price and the selected mergers
and acquisitions analyses. The other methodologies described above were used by
Robinson-Humphrey to determine whether the consideration proposed to be paid by
Maxim was fair to the holders of Image Common Stock in light of
Robinson-Humphrey's valuations of Image and pro forma Maxim.
In arriving at its opinion, Robinson-Humphrey performed a variety of
financial analyses, the material portions of which are summarized above. The
summary set forth above does not purport to be a complete description of the
analyses performed by Robinson-Humphrey. In addition, Robinson-Humphrey believes
that its analyses must be considered as an integrated whole, and that selecting
portions of such analyses and the factors considered by it, without considering
all of such analyses and factors, could create a misleading or an incomplete
view of the process underlying its analyses set forth in the opinion. Also
considered by Robinson-Humphrey to be very important but not readily subject to
analysis were various strategic alliances taking place in the carpet industry
which would potentially have a material effect on Image.
The preparation of a business opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. With regard
to the comparable transaction and the comparable public company analyses
summarized above, Robinson-Humphrey selected comparable public companies on the
basis of various factors, including the size of the public company and
similarity of the line of business; however, no public company utilized as a
comparison is identical to Image.
In performing its analyses, Robinson-Humphrey made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond Image's or Maxim's control. Any
estimates contained in such analyses are not necessarily indicative of actual
past or future results or values, which may be significantly more or less than
such estimates. Estimates of values of companies or parts of companies do not
purport to be appraisals or necessarily to reflect the price at which such
companies or parts may actually be sold, and such estimates are inherently
subject to uncertainty.
30
<PAGE>
In the ordinary course of its business, Robinson-Humphrey and its affiliates
actively trade in Image Common Stock for their own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
Robinson-Humphrey has in the past provided financial advisory services to
Maxim and has received customary fees for such services. In the ordinary course
of its business, Robinson-Humphrey and its affiliates actively trade in Maxim
Common Stock for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
In November 1995 Robinson-Humphrey acted as a managing underwriter in connection
with a public offering of Maxim Common Stock by certain selling shareholders of
Maxim, for which Robison-Humphrey received customary compensation for the
rendering of such services.
Image has paid Robinson-Humphrey an advisory fee of $175,000 and is
obligated to pay Robinson-Humphrey an additional $125,000 upon mailing of this
Proxy Statement/Prospectus to the shareholders of Image. Image has also agreed
to reimburse Robinson-Humphrey for its reasonable out-of-pocket expenses,
including fees and disbursements of legal counsel. Pursuant to the engagement,
Image has agreed to indemnify Robinson-Humphrey, its controlling persons,
affiliates, and their respective partners, directors, officers, agents,
consultants, and employees against certain liabilities, including liabilities
under the federal securities laws.
TERMS OF THE MERGER
THE DESCRIPTION OF THE MERGER AGREEMENT SET FORTH IN THIS SECTION DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MERGER AGREEMENT, WHICH IS ATTACHED AS APPENDIX A TO THIS PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED BY REFERENCE HEREIN. REFERENCE IS MADE
TO THE MERGER AGREEMENT FOR THE DEFINITION OF SUCH CAPITALIZED TERMS USED HEREIN
FOR WHICH NO DEFINITION IS PROVIDED. ALL MAXIM AND IMAGE SHAREHOLDERS ARE URGED
TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
GENERAL
The Merger Agreement provides that, subject to the satisfaction or waiver of
certain conditions (including, among other things, approval of the Merger by the
shareholders of each of Maxim and Image), the Merger Subsidiary will be merged
with and into Image. Upon consummation of the Merger, the separate existence of
the Merger Subsidiary will cease. Image will continue as the surviving
corporation and the name of Image, as the surviving corporation in the Merger,
will by virtue of the Merger remain "Image Industries, Inc." Image will become a
wholly-owned subsidiary of Maxim, and Image's shareholders will become
shareholders of Maxim.
CONVERSION OF IMAGE COMMON STOCK IN THE MERGER
At the Effective Time, each share of Image Common Stock issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger, be converted into the right to receive one share of Maxim Common Stock.
Based on the number of shares of Image Common Stock outstanding on the record
date, 5,266,285 shares of Maxim Common Stock will be issued upon conversion of
shares of Image Common Stock in the Merger, representing approximately 42% of
the outstanding shares of Maxim Common Stock as of July 15, 1996, after giving
effect to the Merger.
Upon consummation of the Merger, the holders of outstanding stock options to
purchase shares of Image Common Stock shall have exercised such options, or to
the extent not so exercised shall be deemed to have surrendered such options at
the Effective Time to Maxim in exchange for options to purchase shares of Maxim
Common Stock having the same aggregate exercise price, terms, duration and
vesting schedules, and exercisable for a number of shares of Maxim Common Stock
equal to the number of shares of Image Common Stock covered by the option. With
respect to options issued pursuant to that certain Plan and Agreement of
Conversion, dated July 30, 1993, among Image and certain option holders thereof
(the "Conversion Agreement"), Maxim will also assume the obligations of Image to
the option holders parties to such Conversion Agreement, including the
obligation of
31
<PAGE>
Image to maintain an effective registration statement under the Securities Act
with respect to resales of shares of common stock issuable upon the exercise of
such options. As of July 16, 1996, 978,327 shares of Image Common Stock were
reserved for issuance pursuant to outstanding stock options.
EXCHANGE OF CERTIFICATES IN THE MERGER
Immediately following the Effective Time, Wachovia Bank of North Carolina,
N.A. (the "Exchange Agent") will mail or otherwise deliver a transmittal form
and instructions to each holder of record of certificates which immediately
prior to the Effective Time represented outstanding shares of Image Common Stock
(the "Certificates") to be used in forwarding the Certificates for surrender and
exchange for certificates representing the number of whole shares of Maxim
Common Stock which such holder has the right to receive. No dividends or other
distributions that are declared after the Effective Time with respect to Maxim
Common Stock and payable to holders of record thereof after the Effective Time
shall be paid to Image shareholders entitled to receive certificates
representing Maxim Common Stock until such shareholders surrender their
Certificates. Upon such surrender, there shall be paid to the shareholder in
whose name the certificates representing such Maxim Common Stock shall be issued
any dividends which shall have become payable with respect to such Maxim Common
Stock between the Effective Time and the time of such surrender. After such
surrender, there shall also be paid to the shareholder in whose name the
certificates representing such Maxim Common Stock shall be issued any dividend
on such Maxim Common Stock that shall have a record date subsequent to the
Effective Time and prior to such surrender and a payment date after such
surrender, and such payment shall be made on the payment date. In no event will
the shareholders entitled to receive such dividends be entitled to receive
interest on such dividends. All dividends or other distributions declared after
the Effective Time with respect to Maxim Common Stock and payable to the holders
of record thereof after the Effective Time that are payable to the holders of
Certificates not theretofore surrendered and exchanged for certificates
representing Maxim Common Stock shall be paid or delivered by Maxim to the
Exchange Agent for the benefit of such holders.
Any dividends or other distributions held by the Exchange Agent for payment
or delivery to the holders of unsurrendered Certificates and unclaimed at the
end of one year from the Effective Time will be repaid or redelivered by the
Exchange Agent to Maxim, after which time any holder of Certificates who has not
theretofore surrendered such Certificates to the Exchange Agent, subject to
applicable law, will look as a general creditor only to Maxim for payment or
delivery of such dividends or distributions, as the case may be. Notwithstanding
the foregoing, none of Maxim, the Merger Subsidiary, the Exchange Agent, Image
as the surviving corporation or any other party to the Merger Agreement will be
liable to a holder of Image Common Stock for any Maxim Common Stock or dividends
or distributions thereon delivered to a public official pursuant to applicable
escheat or unclaimed fund laws.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties
relating to, among other things: (i) the due organization, power and good
standing of Maxim and Image and similar corporate matters; (ii) the
authorization, execution, delivery and enforceability of the Merger Agreement;
(iii) the capital structure of Maxim and Image; (iv) subsidiaries of Maxim and
Image; (v) the absence of conflicts under charters or bylaws and violations of
any instruments or law, and required consents or approvals; (vi) certain
documents filed by each of Maxim and Image with the Commission and the accuracy
of information contained therein; (vii) litigation; (viii) conduct of business
in the ordinary course and the absence of certain changes or material adverse
effects; (ix) taxes; (x) retirement and other employee benefit plans of Maxim
and Image; (xi) labor matters; (xii) compliance with environmental laws; (xiii)
qualification for "pooling of interests" accounting treatment; (xiv) brokers'
and finders' fees with respect to the Merger; and (xv) receipt of fairness
opinions.
CONDUCT OF MAXIM'S BUSINESS PENDING THE MERGER
Maxim has agreed that, during the period from the date of the Merger
Agreement through the Effective Time, unless Image otherwise consents in
writing, Maxim, among other things, shall:
32
<PAGE>
(i) conduct its businesses in the regular and ordinary course and in
substantially the same manner as such businesses have been previously conducted;
(ii) use its best efforts to preserve the businesses, rights, properties and
assets of Maxim, preserve intact its present business organization, keep
available the services of its present officers and employees and maintain its
relationships with customers, suppliers and others having business dealings with
Maxim; (iii) without the prior consent of Image, not (a) amend its Certificate
of Incorporation or Bylaws except as contemplated by the Merger Agreement, (b)
terminate or amend any employee benefit plan, fund or arrangement in a manner
which would directly or indirectly materially change the benefits under such
plan, (c) mortgage, pledge or subject to lien, restriction or other encumbrance
of property, business or assets, tangible or intangible, of Maxim or its
subsidiaries or sell, transfer or lease or otherwise dispose of assets except in
the ordinary course of business or (d) make any change in accounting method or
accounting period; (iv) use its best efforts to comply with all federal or state
law requirements with respect to the Merger; (v) use its best efforts to obtain
any consent, authorization or approval of, or an exemption by, any governmental
authority or agency, or other third party required in connection with the
Merger; (vi) afford to Image and its representatives full access during normal
business hours to all of its properties, books, contracts, commitments and
records and furnish to Image a copy of each document filed or received by it
pursuant to the requirements of federal and state securities laws and all other
information concerning its business, properties and personnel as Image may
reasonably request; (vii) advise Image of any change in the business, results of
operations, financial condition, assets, liabilities, or prospects of Maxim
which is or may be materially adverse to Maxim and its subsidiaries taken as a
whole; (viii) advise Image if, at any time before the Registration Statement
becomes effective or the Effective Time, the Registration Statement or the Proxy
Statement contains an untrue statement of material fact or omits to state a
material fact; (ix) not take any action or omit to take any action, except as
contemplated by the Merger Agreement, which would cause any of the
representations and warranties of Maxim to fail to be true and correct in all
respects; (x) timely file all reports required to be filed with the Commission;
(xi) use its best efforts to obtain a commitment from a Lender to extend to
Maxim subsequent to the Effective Time a credit facility in principal amount not
less than $120 million; (xii) ensure that (except as permitted) there will be no
outstanding options, warrants, rights, contracts, commitments, understandings or
arrangements by which Maxim is bound to issue additional shares of capital
stock; (xiii) fund any obligations to its employee stock ownership or stock
purchase plan, if any, required by ERISA or the terms of such plans; and (xiv)
defend and respond to certain actions, suits, proceedings, or investigations
which may arise relating to the Merger.
CONDUCT OF IMAGE'S BUSINESS PENDING THE MERGER
Image has agreed that, during the period from the date of the Merger
Agreement through the Effective Time, unless Maxim otherwise consents in
writing, Image, among other things, shall: (i) conduct its businesses in the
regular and ordinary course and in substantially the same manner as such
businesses have been previously conducted; (ii) use its best efforts to preserve
the businesses, rights, properties and assets of Image, preserve intact its
present business organization, keep available the services of its present
officers and employees and maintain its relationships with customers, suppliers
and others having business dealings with Image; (iii) without the prior consent
of Maxim, not (a) amend its Certificate of Incorporation or Bylaws except as
contemplated by the Merger Agreement, (b) terminate or amend any employee
benefit plan, fund or arrangement in a manner which would directly or indirectly
materially change the benefits under such plan, (c) mortgage, pledge or subject
to lien, restriction or other encumbrance property, business or assets, tangible
or intangible, of Image or sell, transfer or lease or otherwise dispose of
assets except in the ordinary course of business, or (d) make any change in
accounting method or accounting period; (iv) use its best efforts to comply with
all federal or state law requirements with respect to the Merger; (v) use its
best efforts to obtain any consent, authorization or approval of, or an
exemption by, any governmental authority or agency, or other third party
required in connection with the Merger; (vi) afford to Maxim and its
representatives full access during normal business hours to all of its
properties, books, contracts, commitments and records and furnish to Maxim a
copy of each document filed or received
33
<PAGE>
by it pursuant to the requirements of federal and state securities laws and all
other information concerning its business, properties and personnel as Maxim may
reasonably request; (vii) advise Maxim of any change in the business, results of
operations, financial condition, assets, liabilities, or prospects of Image
which is or may be materially adverse to Image; (viii) advise Maxim if, at any
time before the Registration Statement becomes effective or the Effective Time,
the Registration Statement or the Proxy Statement contains an untrue statement
of material fact or omits to state a material fact; (ix) not take any action or
omit to take any action, except as contemplated by the Merger Agreement, which
would cause any of the representations and warranties of Image to fail to be
true and correct in all respects; (x) timely file all reports required to be
filed with the Commission; (xi) ensure that, except as permitted, there will be
no outstanding options, warrants, rights, contracts, commitment, understandings
or arrangements by which Image is bound to issue additional shares of capital
stock; (xii) fund any obligations to its employee stock ownership or stock
purchase plan, if any, required by ERISA or the terms of such plans; and (xiii)
defend and respond to certain actions, suits, proceedings, or investigations
which may arise relating to the Merger.
CONFIDENTIALITY; STANDSTILL
As a condition to Maxim's and Image's furnishing to the other party or to
their respective Representatives confidential financial and other information,
the Merger Agreement provides that because of the competitive value and
confidential nature of such information and all notes, analyses, compilations,
studies, interpretations and other material prepared by them or their
Representatives containing or based on such information (collectively, the
"Evaluation Material") and the damage that could result to the other party if
the Evaluation Material is disclosed to a third party, neither Maxim nor Image
will disclose, except as otherwise provided in the Merger Agreement, any of the
Evaluation Material to any third party without the prior written consent of the
other party.
Pursuant to the Merger Agreement, Maxim and Image have each agreed that in
the event of termination of the Merger Agreement, for any reason, prior to the
Effective Time, then until the expiration of 18 months from the date of such
termination, neither Maxim nor Image, their Affiliates or those of their
Representatives to whom the Evaluation Material has been disclosed or who have
been made aware of the discussions between the parties concerning a possible
transaction, shall, without the prior written consent of the Board of Directors
of the other party, (i) in any manner acquire, agree to acquire, or make any
proposal to acquire, directly or indirectly, any voting securities of the other
party, or any rights or options to acquire such ownership, or to purchase,
directly or indirectly, a material portion of the assets of the other party;
provided that such a restriction will apply only to Maxim and Image and their
respective subsidiaries, executive officers and members of their Board of
Directors; (ii) propose to enter into, directly or indirectly, any merger or
business combination involving the other party; (iii) make, or in any way
participate in, directly or indirectly, any solicitation of "proxies" (as such
term is used in Regulation 14A under the Exchange Act) to vote or seek to advise
or influence any person with respect to the voting of any voting securities of
the other party; (iv) form, join or in any way participate in a "group" (within
the meaning of Section 13(d) of the Exchange Act) with respect to any voting
securities of the other party; (v) otherwise act, alone or in concert with
others, to seek to control or influence the management, Board of Directors or
policies of the other party; or (vi) publicly disclose any intention, plan or
arrangement inconsistent with the foregoing.
NO SOLICITATION
Pursuant to the Merger Agreement, Image agreed that from and after the date
of the Merger Agreement until the Effective Time, Image and its directors,
officers and employees will not, and Image will use its best efforts to cause
its representatives, investment bankers, agents and affiliates not to, directly
or indirectly, (i) initiate, solicit or cooperate with submission of any
inquiries, proposals or offers by any person, entity or group (other than Maxim,
the Merger Subsidiary and their affiliates, agents and representatives) relating
to any Acquisition Proposal, (ii) participate in any discussions or negotiations
with, or disclose any non-public information concerning Image to, or afford any
access to the properties, books or records of Image to, or otherwise assist,
facilitate or cooperate with, or enter
34
<PAGE>
into any agreement or understanding with, any person, entity or group (other
than Maxim, the Merger Subsidiary and their affiliates, agents and
representatives) in connection with any Acquisition Proposal or (iii) make or
authorize any statement, recommendation or solicitation in support of any
Acquisition Proposal made by any person, entity or group (other than Maxim and
the Merger Subsidiary).
Under the terms of the Merger Agreement, Maxim also agreed that from and
after the date of the Merger Agreement until the Effective Time, Maxim and its
subsidiaries and their respective directors, officers and employees will not,
and Maxim will use its best efforts to cause their respective representatives,
investment bankers, agents and affiliates not to, directly or indirectly, (i)
initiate, solicit or cooperate with submission of any inquiries, proposals or
offers by any person, entity or group (other than Image and its affiliates,
agents and representatives) relating to any Acquisition Proposal, (ii)
participate in any discussions or negotiations with, or disclose any non-public
information concerning Maxim or any of its subsidiaries to, or afford any access
to the properties, books or records of Maxim or any of its subsidiaries to, or
otherwise assist, facilitate or cooperate with, or enter into any agreement or
understanding with, any person, entity or group (other than Image and its
affiliates, agents and representatives) in connection with any Acquisition
Proposal or (iii) make or authorize any statement, recommendation or
solicitation in support of any Acquisition Proposal made by and person, entity
or group (other than Image).
Notwithstanding the above provisions, the Merger Agreement provides that
Maxim or Image, as applicable (such entity hereinafter called "Target") may, to
the extent the Board of Directors of Target determines in good faith, after
consultation with outside legal counsel, that the Board's fiduciary duties under
applicable law require it to do so, participate in discussions or negotiations
with, and furnish information to any person, entity or group after such person,
entity or group shall have delivered to Target in writing a Superior Proposal.
As used in the Merger Agreement, a "Superior Proposal" means an unsolicited bona
fide Acquisition Proposal which is not subject to any financing contingency and
which the Board of Directors of Target in its good faith reasonable judgment
determines, after consultation with its principal advisors in connection with
the transactions contemplated in the Merger Agreement, would upon consummation
thereof result in a transaction more favorable to the shareholders of Target
than the transactions contemplated in the Merger Agreement and for which
financing, to the extent required, is then committed or which, in the good faith
reasonable judgment of the Board of Directors of Target, is reasonably capable
of being financed by such person, entity or group and which is probable to be
consummated (a "Superior Proposal"). A Target must (i) notify the other party to
the Merger Agreement (Maxim or Image, as applicable) immediately if any inquiry
or proposal is made or any information or access is requested in connection with
an Acquisition Proposal or potential Acquisition Proposal and (ii) immediately
communicate to such other party the terms and conditions of any such Acquisition
Proposal or potential Acquisition Proposal or inquiry and the identity of the
offeror or potential offeror. Following such notification, a Target may furnish
information with respect to a Superior Proposal only if it (i) notifies the
other party to the Merger Agreement (Maxim or Image, as applicable) of the
information proposed to be disclosed reasonably concurrently with the disclosure
thereof, (ii) provides such information pursuant to a confidentiality agreement
at least as restrictive as that contained in the Merger Agreement.
In the event that a Target receives a Superior Proposal, the Board of
Directors of such Target may approve such Superior Proposal or recommend such
Superior Proposal to its shareholders, if the Board determines reasonably and in
good faith, after consultation with outside legal counsel, that such action is
required by its fiduciary duties under applicable law. In such a case, the Board
may amend or withdraw its approval or recommendation of the Merger. See "--
Termination Fee."
CONDITIONS TO THE MERGER; WAIVER OF CONDITIONS
The obligation of Maxim to consummate the Merger is subject to the
satisfaction of a number of conditions, including among others: (i) the
representations and warranties made by Image in the
35
<PAGE>
Merger Agreement shall have been true in all material respects as of the date of
the Merger Agreement and shall be true in all material respects as of the
Effective Time; (ii) Image shall have performed in all material respects every
obligation and complied in all material respects with each agreement, covenant
and condition required by the Merger Agreement to be performed or complied with
by it prior to or at the Effective Time; (iii) no preliminary or permanent
injunction or other order by any federal or state court which prevents the
consummation of the Merger shall have been issued and shall remain in effect,
nor any action therefor initiated which, in the good faith judgment of the Board
of Directors of Maxim, it is not in the best interests of the shareholders of
Maxim to contest; (iv) there shall not have been instituted or be pending any
action or proceeding by any U.S. federal or state government or governmental
agency or instrumentality, among other things, challenging or seeking to
restrain or prohibit the consummation of the Merger or seeking material damages
in connection with the Merger; (v) no material adverse change shall have
occurred in the business, results of operations, assets, financial condition, or
prospects of Image; (vi) the Merger, the Merger Agreement and related documents,
including the amendments to the Certificate of Incorporation of Maxim shall have
been validly approved by the requisite vote of the shareholders of each of Maxim
and Image, as appropriate; (vii) the Registration Statement shall have become
effective, and no stop order suspending such effectiveness or proceedings for
that purpose shall have been issued and remain in effect; (viii) Maxim shall
have received from Image's legal counsel an opinion dated the Effective Time, as
to certain matters; (ix) Maxim shall have received from Image's accountants
letters as to certain financial information contained in the Registration
Statement; (x) Maxim shall have received copies of all necessary third party
consents; (xi) all applicable waiting periods under the Hart-Scott-Rodino Act
shall have expired or terminated; (xii) the shares of Maxim Common Stock to be
issued pursuant to the Merger shall have been approved for listing on The Nasdaq
National Market, subject to official notice of issuance; (xiii) the members of
the Board of Directors of Image shall have submitted their written resignations
as directors of Image, effective as of the Effective Time; (xiv) Maxim shall
have received an opinion from Prudential Securities that the transactions
contemplated by the Merger Agreement are fair, from a financial point of view,
to the shareholders of Maxim; (xv) Image shall have received an opinion of its
tax counsel, in form reasonably acceptable to both Image and Maxim, to the
effect that the Merger will be a tax free reorganization for federal income tax
purposes; (xvi) Maxim shall have determined to its satisfaction that the Merger
will be accounted for as a pooling of interests; (xvii) all employment
agreements to which Image is a party at the date of the Merger Agreement (other
than the employment agreements between Image and H. Stanley Padgett and Larry M.
Miller, respectively), shall have been terminated, or shall have expired in
accordance with their terms without renewal, and in either case without
liability of the Surviving Corporation for any payment of severance payments or
severance benefits under any such agreement, and Image shall not have become a
party to any other employment agreements except as consented to by Maxim;
(xviii) Maxim shall have received from the affiliates of Image their agreement
with respect to restrictions on transfer of the securities of Maxim and Image;
and (xix) Maxim shall have received such other certificates, documents and
instruments as it shall have reasonably requested.
The obligation of Image to consummate the Merger is subject to the
satisfaction of a number of conditions, including among others: (i) the
representations and warranties made by Maxim in the Merger Agreement shall have
been true in all material respects as of the date of the Merger Agreement and
shall be true in all material respects as of the Effective Time; (ii) Maxim
shall have performed in all material respects every obligation and complied in
all material respects with each agreement, covenant and condition required by
the Merger Agreement to be performed or complied with by it prior to the
Effective Time; (iii) no preliminary or permanent injunction or other order by
any federal or state court which prevents the consummation of the Merger shall
have been issued and shall remain in effect, nor any action therefor initiated
which, in the good faith judgment of the Board of Directors of Image, it is not
in the best interests of the shareholders of Image to contest; (iv) there shall
not have been instituted or be pending any action or proceeding by any U.S.
federal or state government or governmental agency or instrumentality, among
other things, challenging or seeking to restrain or prohibit the consummation of
the Merger or seeking material damages in connection
36
<PAGE>
with the Merger; (v) no material adverse change shall have occurred in the
business, results of operations, assets, financial condition, or prospects of
Maxim; (vi) the Merger and the Merger Agreement shall have been validly approved
by the requisite vote of the shareholders of each of Maxim and Image; (vii) the
Registration Statement shall have become effective and no stop order suspending
such effectiveness or proceedings for that purpose shall have been issued and
remain in effect; (viii) Image shall have received an opinion of Maxim's legal
counsel as to certain matters; (ix) Image shall have received from Maxim's
accountants letters as to certain financial information contained in the
Registration Statement; (ix) Image shall have received copies of all necessary
third party consents; (x) all applicable waiting periods under the
Hart-Scott-Rodino Act shall have expired or terminated; (xi) the shares of Maxim
Common Stock to be issued pursuant to the Merger shall have been approved for
listing on The Nasdaq National Market, subject to official notice of issuance;
(xii) the Maxim Charter Amendments shall have been approved by the requisite
vote of the shareholders of Maxim; (xiii) Image shall have received an opinion
from Robinson-Humphrey that the transactions contemplated by the Merger
Agreement are fair, from a financial point of view, to the shareholders of
Image; (xiv) Image shall have determined to its satisfaction that the Merger
will be accounted for as a pooling of interests; (xv) Image shall have entered
into employment agreements with Larry M. Miller and H. Stanley Padgett in the
forms attached to the Merger Agreement; (xvi) Image shall have terminated each
of the Indemnity Agreements to which it is a party as of the date of the Merger
Agreement with Image Indemnitees, and shall not have entered into any additional
such agreements with present or former executive officers or members of its
Board of Directors, except that Image may, immediately prior to the Effective
Time, enter into a substitute indemnity agreement with any person who is, as of
the date of the Merger Agreement, an Image Indemnitee; (xvii) the Board of
Directors of Maxim shall have adopted a resolution authorizing Image, in the
discretion of executive management of such corporation, to proceed with
completion of implementation of the Capital Expenditure Plan following the
Effective Time, on the terms and within the time contemplated by the Capital
Expenditure Plan, with such modifications or amendments as shall be agreed to by
the chief executive officer of Image; (xviii) Maxim shall have received from the
affiliates of Image their agreement with respect to restrictions on transfer of
the securities of Maxim and Image; (xix) Maxim shall have received a commitment
letter from a lender to extend to Maxim subsequent to the Effective Time a
credit facility in principal amount not less than $120 million; (xx) Image shall
have received certain consents to the Merger from third parties; and (xxi) Image
shall have received such other certificates, documents and instruments as it
shall have reasonably requested.
At any time prior to the Effective Time, Maxim or Image, by action taken by
their respective Boards of Directors, may (i) extend the time for the
performance of any of the obligations or other acts of the other parties to the
Merger Agreement; (ii) waive any inaccuracies in the representations and
warranties of the other parties contained in the Merger Agreement or in any
document delivered pursuant thereto; or (iii) waive compliance with any of the
agreements of the other parties or satisfaction of any of the conditions to its
obligations contained in the Merger Agreement. Any agreement on the part of a
party in the Merger Agreement to any such extension or waiver shall be valid if
set forth in an instrument in writing signed on behalf of such party.
AMENDMENT AND TERMINATION
The parties may modify or amend the Merger Agreement by written agreement at
any time prior to the Effective Time, to the extent permitted by applicable law.
The Merger Agreement may be terminated and the Merger contemplated thereby
may be abandoned at any time prior to the Effective Time, whether before or
after approval by the shareholders of Image or Maxim: (i) by mutual consent of
Maxim and Image; or (ii) by either Maxim or Image if (a) the Merger shall not
have been consummated on or before December 31, 1996, (b) the requisite vote of
the shareholders of Image or Maxim to approve the Merger Agreement and the
transactions contemplated thereby shall not be obtained at the respective
meeting of the shareholders of such corporation called for such purpose or any
adjournment thereof, or (c) any court of competent jurisdiction in the United
States or any State shall have issued an order, judgment or decree (other than a
temporary restraining
37
<PAGE>
order) restraining, enjoining or otherwise prohibiting the Merger and such
terminating party determines in good faith that the pendency of such order,
judgment or decree renders the consummation of the Merger impracticable;
provided that the right to so terminate the Merger Agreement shall not be
available to any party whose failure to fulfill any obligation under the Merger
Agreement has been the cause of, or resulted in, the failure of the Effective
Time to occur on or before such date; or (iii) by either Maxim or Image if (a)
the Board of Directors of the other party to the Merger Agreement shall have
withdrawn or modified in a manner adverse to Maxim or Image, as the case may be,
its approval or recommendation of the Merger, the Merger Agreement or the
transactions contemplated thereby, or shall have resolved to do any of the
foregoing, or (b) there has been (x) a material breach of any covenant, or
agreement on the part of the other party to the Merger Agreement or failure of a
condition in the Merger Agreement which has not been cured or adequate assurance
of cure given, in either case within 15 business days following receipt of
notice of such breach, or (y) a breach of a representation or warranty of the
other party to the Merger Agreement which by its nature cannot be cured prior to
the Termination Date; or (c) if the Board of Directors of either party, pursuant
to actions permitted by the Merger Agreement, shall have authorized Maxim or
Image, as the case may be, to enter into an agreement with any third party with
respect to, or shall have approved or recommended to such corporation's
shareholders for approval, a Superior Proposal; or (iv) by either Maxim or Image
if, as of any date prior to the Effective Time, the Maxim Market Value is equal
to or less than $11.00.
In the event of termination of the Merger Agreement by either Maxim or Image
as provided above, the Merger Agreement shall forthwith become void and there
shall be no liability thereunder on the part of Maxim or Image or their
respective officers or directors except for willful breach and except that the
agreements with respect to confidentiality contained in the Merger Agreement,
and the agreements with respect to termination fees, expenses and liquidated
damages contained in the Merger Agreement, shall survive the termination
thereof.
TERMINATION FEE
If the Merger Agreement is terminated: (i) by Maxim as a result of the
modification or withdrawal by Image's Board of its recommendation of the Merger;
or (ii) by Image if it accepts a Superior Proposal; or (iii)(a) by Image (or
certain persons acting on behalf of Image) if it commits a breach of the no
solicitation provisions of the Merger Agreement or (b) a tender or exchange
offer for any shares of capital stock of Image or any business combination of
the type described in the no solicitation provisions of the Merger Agreement
shall have been made or publicly proposed to be made by any person, entity or
group other than Maxim, and either (1) the Board of Directors of Image shall
have announced a position in favor of such tender or exchange offer or business
combination, or (2) in the case of a tender or exchange offer, the offerer
successfully acquires pursuant thereto shares representing more than 51% of the
total outstanding voting stock of Image; then Image shall pay to Maxim a
termination fee of $3,000,000.
If the Merger Agreement is terminated: (i) by Image as a result of the
modification or withdrawal by Maxim's Board of its recommendation of the Merger;
or (ii) by Maxim, if it accepts a Superior Proposal; or (iii)(a) by Maxim (or
certain persons acting on behalf of Maxim) if it commits a breach of the no
solicitation provisions of the Merger Agreement, or (b) a tender or exchange
offer for any shares of capital stock of Maxim or any business combination of
the type described in the no solicitation provisions of the Merger Agreement
shall have been made or publicly proposed to be made by any person, entity or
group other than Image, and either (1) the Board of Directors of Maxim shall
have announced a position in favor of such tender or exchange offer or business
combination, or (2) in the case of a tender or exchange offer, the offerer
successfully acquires pursuant thereto shares representing more than 51% of the
total outstanding voting stock of Maxim; then Maxim shall pay to Image a
termination fee of $3,000,000.
38
<PAGE>
EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such expenses.
EFFECTIVE TIME OF THE MERGER
If the Merger is approved by the requisite vote of Maxim and Image
shareholders and the other conditions to the Merger are satisfied or waived, the
merger will be consummated and become effective at the time at which a
Certificate of Merger is filed with the Secretary of State of the State of
Delaware (the "Effective Time"). It is presently contemplated that the Effective
Time will occur promptly after the later to occur of (i) the Image Special
Meeting or the Maxim Annual Meeting, provided that each of the conditions set
forth in the Merger Agreement are fulfilled or waived, or (ii) such other time
and place as Maxim and Image shall agree.
HART-SCOTT-RODINO ACT
Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the rules promulgated thereunder, Maxim and Image
furnished notification of the Merger and provided certain information to the
Federal Trade Commission and the Antitrust Division of the U.S. Department of
Justice. The waiting period under the HSR Act with respect to the Merger was
terminated on June 24, 1996.
NO APPRAISAL RIGHTS
Neither the holders of record of Maxim Common Stock nor the holders of
record of Image Common Stock will have any dissenters' or appraisal rights as a
result of the matters to be voted upon at the respective Meetings.
RESALE OF MAXIM COMMON STOCK ISSUED IN THE MERGER; AFFILIATES
The Maxim Common Stock to be issued to shareholders of Image in connection
with the Merger will be freely transferable under the Securities Act, except for
shares of Maxim Common Stock issued to any person deemed to be an affiliate of
Image for purposes of Rule 145 under the Securities Act at the time of the Image
Special Meeting ("Affiliates"). Affiliates may not sell their shares of Maxim
Common Stock acquired in connection with the Merger except pursuant to an
effective registration statement under the Securities Act covering such shares,
or in compliance with Rule 145 promulgated under the Securities Act or another
applicable exemption from the registration requirements of the Securities Act.
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned upon each of Maxim and Image
having determined to its satisfaction that the Merger qualifies for
pooling-of-interests accounting treatment if consummated in accordance with the
Merger Agreement. Maxim and Image have agreed to use their best efforts to cause
the Merger to qualify for pooling-of-interests treatment by Maxim.
Under the pooling-of-interests method of accounting, the historical basis of
the assets and liabilities of Maxim and Image will be combined at the Effective
Time and carried forward at their previously recorded amounts, and the
shareholders' equity accounts of Maxim and Image will be combined on Maxim's
consolidated balance sheet and no goodwill or other intangible assets will be
created. Financial statements of Maxim issued after the Merger will be restated
retroactively to reflect the consolidated operations of Maxim and Image as if
the Merger had taken place prior to the periods covered by such financial
statements.
In order to permit the Merger to qualify for pooling-of-interests accounting
treatment, each of the affiliates of Maxim and Image have agreed not to sell,
transfer or otherwise dispose of any securities of Image or Maxim, including
shares of Maxim Common Stock received by such affiliate in the Merger, until
after such time as financial results covering at least thirty (30) days of
combined operations of Image and Maxim have been published by Maxim, in the form
of a quarterly earnings report, an
39
<PAGE>
effective registration statement filed with the SEC, a report to the SEC on Form
10-K, 10-Q or 8-K, or any other public filing or announcement which includes the
combined results of operations (which publication shall be effected by Maxim at
the earliest reasonably practicable opportunity), except for transfers or other
dispositions that Maxim determines, taking into account the actions of other
affiliates, will not prevent Maxim from accounting for the Merger as a pooling
of interests.
The unaudited pro forma financial information contained in this Proxy
Statement/Prospectus has been prepared using the pooling-of-interests accounting
method to account for the Merger. See "SUMMARY -- Comparative Per Share Data"
and "-- Selected Unaudited Pro Forma Combined Financial Data" and "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL INFORMATION."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
No ruling from the Internal Revenue Service concerning the tax consequences
of the Merger has been requested. It is a condition to the obligation of Maxim
to consummate the Merger that Image receive an opinion from tax counsel for
Image to the effect that the Merger will be a tax free reorganization under
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as
amended (the "Code").
Assuming that certain representations made by Image and Maxim are true as of
the Effective Time, Womble Carlyle Sandridge & Rice, PLLC, counsel to Image, is
of the opinion that (i) the Merger will be a tax free reorganization under
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, (ii) an Image shareholder
who, pursuant to the Merger, exchanges his or her Image Common Stock, actually
owned by him or her solely for Maxim Common Stock will not recognize any gain or
loss upon such exchange, (iii) the aggregate tax basis of the Maxim Common Stock
received in exchange for the Image Common Stock will be equal to the aggregate
tax basis of the respective Image Common Stock surrendered, and (iv) for the
purpose of determining long-term or short-term capital gain, the holding period
of the Image Common Stock will be added to the holding period of the newly
exchanged Maxim Common Stock in making the determination.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PROPOSE TO BE A COMPLETE
ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A DECISION WHETHER
TO VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER. THE DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES THAT MAY BE
RELEVANT TO A PARTICULAR IMAGE SHAREHOLDER SUBJECT TO SPECIAL TREATMENT UNDER
CERTAIN FEDERAL INCOME TAX LAWS, SUCH AS DEALERS IN SECURITIES, BANKS, INSURANCE
COMPANIES, TAX-EXEMPT ORGANIZATIONS, NON-UNITED STATES PERSONS AND SHAREHOLDERS
WHO ACQUIRED THEIR SHARES AS COMPENSATION, NOR ANY CONSEQUENCES ARISING UNDER
THE LAWS OF ANY STATE, LOCALITY OR FOREIGN JURISDICTION. THE DISCUSSION IS BASED
UPON THE CODE, TREASURY REGULATIONS THEREUNDER AND ADMINISTRATIVE RULINGS AND
COURT DECISIONS AS OF THE DATE HEREOF. ALL OF THE FOREGOING ARE SUBJECT TO
CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS
DISCUSSION. IMAGE SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER
TO THEM.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Under the terms of the Merger Agreement, the existing employment agreements
between Image and each of Larry M. Miller and H. Stanley Padgett will, effective
as of the Effective Time, be amended and extended to a term expiring on July 30,
1998. See "-- Management and Operations After the Merger" for a description of
these employment agreements.
40
<PAGE>
MANAGEMENT AND OPERATIONS AFTER THE MERGER
MANAGEMENT. Following consummation of the Merger, the Board of Directors of
Maxim will be expanded by three members (the Maxim Board is currently comprised
of eight members) to include Larry M. Miller (the Chairman of the Board of
Image), H. Stanley Padgett (the President and Chief Executive Officer of Image),
and one additional outside member, chosen by Messrs. Miller and Padgett and
reasonably acceptable to Maxim. Messrs. Miller and Padgett will also be elected
Senior Executive Vice Presidents of Maxim, with Mr. Miller continuing to serve
as Chairman of the Image Board and President of its Image Carpets Division, and
Mr. Padgett continuing to serve as President and Chief Executive Officer of
Image (which will be a wholly-owned subsidiary of Maxim).
Larry M. Miller, age 55, co-founder of Image, has served as a director of
Image since its inception in 1976 and currently serves as Chairman of the Board,
Secretary and President, Image Carpets division. Mr. Miller was the initial
President of Image and has served as an executive officer every year thereafter.
Mr. Miller has 32 years of experience in the floorcovering industry.
H. Stanley Padgett, age 49, President, Chief Executive Officer and a member
of the Board of Directors of Image, joined Image in 1976. He served as Vice
President of Manufacturing and Vice President of Operations of Image prior to
becoming its President and Chief Executive Officer in July 1990. Mr. Padgett and
has been a member of the Board of Directors of Image since September 1990. Mr.
Padgett has 24 years of experience in the fiber and carpet industries and has a
B.S. and an M.S. in Textiles from The Georgia Institute of Technology.
If the Maxim Charter Amendments are approved at the Maxim Annual Meeting,
Messrs. Miller and Padgett will, upon consummation of the Merger, each be
elected a Class II director of Maxim to serve for a term expiring at Maxim's
1998 annual meeting of shareholders. See "MAXIM ANNUAL MEETING PROPOSALS --
Proposal to Adopt Maxim Charter Amendments." For information regarding the
current directors of Maxim, see "MAXIM ANNUAL MEETING PROPOSALS -- Election of
Directors."
EMPLOYMENT AGREEMENTS. Mr. Padgett will, upon consummation of the Merger,
enter into an amendment to his current employment agreement with Image, pursuant
to which Mr. Padgett will serve as a Senior Executive Vice President of Maxim
and as the President and Chief Executive Officer of Image. Maxim will be added
as a party to the amended agreement, which will expire on July 30, 1998. Mr.
Padgett will be entitled to receive an annual base salary of $295,000 for
serving in such positions which is subject to increase at the discretion of the
Compensation Committee, plus certain specified benefits and other benefits
generally available to other senior executive officers of Image. The employment
agreement provides that the Compensation Committee may also grant an annual
bonus to Mr. Padgett. In the event that Mr. Padgett's employment is terminated
without "cause," as defined under the agreement, he is entitled to a severance
payment equal to the salary which would be owed to him through the remainder of
the term of the agreement, but in no event less than one year's then-current
salary, as well as a bonus equal to the average of the two prior years' annual
bonuses. In addition, certain benefits shall be continued for a period of six
months, and all unvested options held by Mr. Padgett which would vest in the
year of termination shall vest in full. In the event of termination of Mr.
Padgett's employment for any reason other than cause within twelve months after
a change in control, Maxim shall pay Mr. Padgett an amount equal to his annual
base salary as then in effect, in lieu of any other severance payment, and shall
continue certain benefits, including a company automobile and medical, life and
disability insurance, for a period of six months. A change in control is defined
in the employment agreement as (i) a sale of all or substantially all of the
assets of Image or Maxim, (ii) the acquisition by any person of more than 50% of
the voting stock of Image or Maxim, (iii) a change in a majority of the Board of
Directors of Image or Maxim in any two-year period unless the existing Board of
Directors nominated the new directors, (iv) a merger or other business
combination unless at least 50% of Image's or Maxim's voting stock remains
outstanding immediately thereafter, or (v) liquidation of substantially all of
Image's or Maxim's assets. A public offering of Image's or Maxim's shares does
not constitute a change in control. If Mr. Padgett's employment is
41
<PAGE>
terminated for cause, or if he voluntarily terminates his employment with Image,
he shall not be entitled to a severance payment or bonus and shall be subject to
a one-year noncompetition covenant. Termination of employment includes death,
disability, voluntary termination by the employee or involuntary termination by
Image with or without cause, which would include a material change in position
or responsibility.
Mr. Miller will also, upon consummation of the Merger, enter into an
amendment to his employment agreement with Image which will contain
substantially the same terms as described above for Mr. Padgett, except that:
(i) Mr. Miller's annual base salary is $240,000; and (ii) Mr. Miller is entitled
to receive an additional severance payment of $175,000 if his employment is
voluntarily or involuntarily terminated for any reason, with or without cause,
or upon the death or disability of Mr. Miller at any time during the term of his
employment agreement.
OPERATIONS. Following the Merger, Image will be a wholly-owned subsidiary
of Maxim and will continue to operate as a carpet manufacturer and PET recycler.
Image products will be marketed by Maxim to its retail network with production
capacity to be redirected from other lower margin business lines to meet the
anticipated demand from Maxim's retail network.
It is anticipated that Image will incur lower selling costs associated with
a captive retail network as compared to the current customer base of a large
number of independent retailers. It is also anticipated that Image will reduce
the number of stock keeping units (SKU's) allowing for longer, more efficient
production runs. Moreover, Image's carpet products will be prominently marketed
within Maxim's cash and carry GCO division. GCO is a roll stocking store which
will eliminate the need for samples, resulting in improved profitability of the
product while lowering the cost to the retailer. Image's production capacity
will be expanded as needed to meet the anticipated demand for carpet products
within Maxim's retail network. There can be no assurance, however, that Maxim
will be able to successfully implement these operational changes. See "CERTAIN
CONSIDERATIONS."
DESCRIPTION OF MAXIM CAPITAL STOCK
GENERAL. Maxim is authorized to issue up to 15,000,000 shares of Common
Stock, $.001 par value per share, and up to 1,000,000 shares of preferred stock
$.001 par value per share. If the Maxim Charter Amendments are approved at the
Maxim Annual Meeting, Maxim will be authorized to issue up to 25,000,000 shares
of Common Stock. See "MAXIM ANNUAL MEETING MATTERS -- Proposal to Approve Common
Stock Amendment."
COMMON STOCK. Subject to the rights of any holder of Preferred Stock, each
holder of Maxim Common Stock is entitled to one vote per share for the election
of directors as well as on other matters, to dividends as and when declared by
Maxim's Board of Directors, and upon liquidation to share in the net assets of
Maxim pro rata in accordance with his holdings. The Maxim Common Stock has no
preemptive, redemption, conversion or subscription rights, and all outstanding
shares of Maxim Common Stock are, and the shares of Maxim Common Stock issued in
the Merger will be, fully paid and nonassessable.
PREFERRED STOCK. Maxim is authorized to issue up to 1,000,000 shares of
$.001 par value Preferred Stock, none of which is outstanding. The Board of
Directors has the power, without further action by the shareholders, to divide
any and all shares of Preferred Stock into series and to fix and determine the
relative rights and preferences of the Preferred Stock, such as the designation
of series and the number of shares constituting such series, dividend rights,
redemption and sinking fund provisions, liquidating and dissolution preferences,
conversion or exchange rights and voting rights, if any. Until September 30,
1996, the prior consent of H. J. Meyers & Co., Inc., the underwriter of Maxim's
initial public offering, is required for any issuances of Preferred Stock.
Issuances of Preferred Stock by the Board of Directors of Maxim may result in
such shares having senior dividend and/or liquidation preferences to the holders
of shares of Maxim Common Stock and may dilute the voting rights of such
holders. Issuances of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, adversely affect
42
<PAGE>
the voting rights of holders of the Maxim Common Stock. In addition, the
issuance of Preferred Stock could make it more difficult for a third party to
acquire a majority of the outstanding voting stock. Accordingly, the issuance of
Preferred Stock may be used as an "anti-takeover" device without further action
on the part of the shareholders of Maxim. No shares of Preferred Stock have been
issued and Maxim has no present plans to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND
BY-LAWS. Requirements for Supermajority Approval of Transactions. Maxim's
Certificate of Incorporation contains provisions requiring supermajority
shareholder approval to effect certain extraordinary corporate transactions
which are not approved by the Board of Directors. The Certificate of
Incorporation requires the affirmative vote or consent of the holders of at
least 75% of the shares of each class of Common Stock of Maxim entitled to vote
in elections of directors to approve any merger, consolidation, disposition of
all or a substantial part of the assets of Maxim or a subsidiary of Maxim,
exchange of securities requiring shareholder approval or liquidation of Maxim
("Covered Transaction"), if any person who together with his affiliates and
associates owns beneficially 5% or more of any voting stock of Maxim
("Interested Person") is a party to the transaction; unless 75% of the entire
Board of Directors of Maxim has not approved the transaction. In addition, the
Certificate of Incorporation requires the separate approval by the holders of a
majority of the shares of each class of stock of Maxim entitled to vote in
elections of directors which are not beneficially owned, directly or indirectly,
by an Interested Person, of any merger, consolidation, disposition of all or a
substantial part of the assets of Maxim or a subsidiary of Maxim, or exchange of
securities requiring shareholder approval ("Business Combination"), if an
Interested Person is a party to such transaction; provided, that such approval
is not required if (a) the consideration to be received by the holders of the
stock of Maxim meets certain minimal levels determined by a formula under the
Certificate of Incorporation (generally the highest price paid by the Interested
Person for any shares which he has acquired), (b) there has been no reduction in
the average dividend rate from that which was obtained prior to the time the
Interested Person became such, and (c) the consideration to be received by
shareholders who are not Interested Persons shall be paid in cash or in the same
form as the Interested Person previously paid for shares of such class of stock.
Finally, the Certificate of Incorporation allows the Board of Directors in
evaluating an "Acquisition Proposal" (for example, a tender offer) to consider
all relevant factors involved in the proposal and not just the consideration
being offered to shareholders in relation to the then current market price of
Maxim's stock. This allows the Board to take into consideration its estimation
of the future value of Maxim, as well as other factors it deems relevant. These
Articles of Maxim's Certificate of Incorporation may be amended, altered, or
repealed only by the affirmative vote or consent of the holders of at least 75%
of the shares of each class of stock of Maxim entitled to vote in elections of
directors. The effect of these provisions is to make it more difficult for a
person, entity or group to effect a change in control of Maxim through the
acquisition of a large block of Maxim's voting stock.
Indemnification. The Certificate of Incorporation and By-laws provide that
directors and officers of Maxim will be indemnified by Maxim to the fullest
extent authorized by Delaware law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in connection
with service for or on behalf of Maxim.
Limitation of Liability. In addition, the Certificate of Incorporation
provides that directors of Maxim will not be personally liable for monetary
damages to Maxim for certain breaches of their fiduciary duty as directors,
unless they violated their duty of loyalty to Maxim or its shareholders, acted
in bad faith, knowingly or intentionally violated the law, authorized illegal
dividends or redemptions or derived an improper personal benefit from their
action as directors. This provision would have no effect on the availability of
equitable remedies or non-monetary relief, such as an injunction or rescission
for breach of the duty of care. In addition, the provision applies only to
claims against a director arising out of his role as a director and not in any
other capacity (such as an officer or employee of Maxim). Further, liability of
a director for violations of the federal securities laws is not limited by this
provision.
43
<PAGE>
TRANSFER AGENT. Wachovia Bank of North Carolina, N.A., Winston-Salem, North
Carolina, is the Transfer Agent for the Maxim Common Stock.
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
GENERAL. If the Merger is consummated, holders of Image Common Stock will
become holders of Maxim Common Stock, and the rights of such former Image
shareholders will be governed by the laws of the State of Delaware and by the
Certificate of Incorporation of Maxim (the "Maxim Certificate of Incorporation")
and By-laws of Maxim (the "Maxim By-laws"). The rights of Maxim shareholders
under the Maxim Certificate of Incorporation and the Maxim By-laws differ in
certain respects from the rights of Image shareholders under the Amended and
Restated Certificate of Incorporation of Image (the "Image Certificate of
Incorporation") and the Amended and Restated By-laws of Image (the "Image
By-laws"). Certain of these differences are summarized below. This summary is
qualified in its entirety by reference to the full text of such documents. For
information as to how such documents may be obtained, see "AVAILABLE
INFORMATION." Maxim and Image are each Delaware corporations.
ANTI-TAKEOVER PROTECTION. Under the Delaware General Corporation Law (the
"Delaware Law"), a merger or consolidation generally must be approved by the
affirmative vote of the holders of a majority of all of the outstanding shares
of each constituent corporation. No shareholder approval, however, is required
if the acquiring corporation owns 90% or more of the outstanding shares of the
acquired corporation.
The Maxim Certificate of Incorporation contains provisions requiring
supermajority shareholder approval to effect certain extraordinary corporate
transactions which are not approved by the board of directors. See "--
Description of Maxim Capital Stock." The effect of these provisions is to make
it more difficult for a person, entity or group to effect a change in control
through the acquisition of a large block of Maxim's voting stock.
The Image Certificate of Incorporation does not contain any requirement for
supermajority shareholder approval of corporate transactions.
NUMBER AND ELECTION OF DIRECTORS. Under the Delaware Law, the number of
directors shall be fixed or determined in the manner the bylaws provide, unless
the corporation's certificate of incorporation fixes the number of directors, in
which case the number of directors may only be changed by amending the
certificate of incorporation. The Delaware Law permits the certificate of
incorporation or by-laws to divide the directors into one, two or three classes,
with the term of office of one class of directors to expire each year and the
terms of office of no two classes to expire during the same year.
The Maxim By-laws sets the number of directors at not less than three nor
more than ten, with the Maxim Board to fix the exact number. If the Maxim
Charter Amendments are approved at the Maxim Annual Meeting, the Maxim
Certificate of Incorporation and the Maxim By-laws will be amended to increase
the maximum number of directors to 15. Although Maxim does not have a classified
Board of Directors, if the Maxim Charter Amendments are approved at the Maxim
Annual Meeting, Maxim will have a classified board of directors, whereby
one-third of the directors of Maxim will be elected each year at Maxim's annual
meeting of shareholders. Upon such election, each director of Maxim will serve
for a term of three years. See "MAXIM ANNUAL MEETING MATTERS -- Proposal to
Approve Maxim Charter Amendments."
The Image By-laws and Image Certificate of Incorporation provide that the
number of directors shall be determined from time to time by the Image Board of
Directors or its shareholders. In addition, the Image Certificate of
Incorporation divides the Image Board into three classes. Each director is
elected to serve a three-year term, with the term of office of one class of
directors to expire each year.
NOTICE OF DIRECTOR NOMINATIONS. Under the Image By-laws, a shareholder must
give prior written notice to Image's Corporate Secretary if the shareholder
wishes to nominate any person for election as an Image Director at an annual or
special meeting of shareholders. Such notice must be
44
<PAGE>
delivered to or received at Image's principal executive offices (i) in the case
of an annual meeting that is called for a date that is within 30 days before or
after the anniversary date of the immediately preceding annual meeting of
shareholders, not less than 60 days nor more than 90 days prior to such
anniversary date, and (ii) in the case of an annual meeting that is called for a
date that is not within 30 days before or after the anniversary date of the
immediately preceding annual meeting, or in the case of a special meeting of
shareholders called for the purpose of electing directors, not later than the
close of business on the tenth day following the day on which notice of the date
of the meeting was mailed or public disclosure of the meeting was made,
whichever occurs first. The notice must contain the following information: with
respect to each person the shareholder wishes to nominate, all information
relating to the person required to be disclosed in solicitations for proxies for
election pursuant to the Commission's proxy rules; with respect to the
shareholder giving the notice, the name and address of such shareholder and the
class and number of shares which are beneficially owned by such shareholder; and
with respect to the beneficial owner, if any, on whose behalf the nomination is
made, the name and address of such person and the class and number of shares of
the corporation which are beneficially owned by such person.
Although the current Maxim Certificate of Incorporation and the Maxim
By-laws do not impose comparable conditions on the submission of director
nominations by shareholders, if the Maxim Charter Amendments are approved at the
Maxim Annual Meeting, Maxim's By-laws will be amended to provide for conditions
on the submission of director nominations by shareholders which are similar to
those of Image. See "MAXIM ANNUAL MEETING MATTERS -- Proposal to Approve Maxim
Charter Amendments."
REMOVAL OF DIRECTORS. Under the Maxim By-laws, a director may be removed
either with or without cause, at any time by a vote of the shareholders holding
a majority of the shares then issued and outstanding and who are entitled to
vote for the election of directors, present at any special meeting called for
that purpose. If any vacancy so created is not filled by the shareholders at
such meeting, such vacancy may be filled by the Board of Directors. If the Maxim
Charter Amendments are approved at the Maxim Annual Meeting, Maxim's Certificate
of Incorporation will be amended to provide that directors may be removed only
for cause and only upon the affirmative vote of the holders of 75% of the total
number of votes cast by the holders of Maxim voting stock. See "MAXIM ANNUAL
MEETING MATTERS -- Proposal to Approve Maxim Charter Amendments."
The Image Certificate of Incorporation provides that subject to the rights,
if any, of any class or series of preferred stock to elect directors and to
remove any director who the holders of such stock had the right to elect, any
director may be removed from office only with cause and by the affirmative vote
of at least two-thirds of (i) the other members of the Board of Directors or
(ii) the total votes which would be eligible to be cast by shareholders in the
election of such director at a duly constituted meeting called for such purpose.
A director may not be removed from office without cause. The Image Certificate
of Incorporation further provides that at least 30 days prior to any meeting of
shareholders at which it is proposed that any director be removed from office,
written notice must be sent to the director whose removal will be considered at
the meeting.
SPECIAL MEETINGS OF SHAREHOLDERS. Under the Delaware Law, special meetings
of shareholders may be called by the board of directors or those persons
authorized by the corporations' certificate of incorporation or the by-laws.
Maxim's By-laws authorize the Maxim Board, the President or a Vice President of
Maxim, or the holders of not less than one-tenth of all shares entitled to vote
at the meeting to call a special meeting of shareholders at any time. If the
Maxim Charter Amendments are approved at the Maxim Annual Meeting, Maxim's
Certificate of Incorporation will be amended to eliminate the right of
shareholders to call a special meeting of shareholders. See "MAXIM ANNUAL
MEETING MATTERS -- Proposal to Approve Maxim Charter Amendments."
The Image Certificate of Incorporation allows special meetings of
shareholders to be called only by the Board of Directors pursuant to a
resolution adopted by the affirmative vote of the majority of the members of the
Board or by the President or Chairman of the Board of Directors.
45
<PAGE>
CERTAIN CONSIDERATIONS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY
SHAREHOLDERS OF IMAGE AND MAXIM IN EVALUATING THE MERGER.
MANAGEMENT OF GROWTH. Maxim has experienced significant growth, principally
through acquisitions of floorcovering retailers and adding new franchisees. In
addition, Maxim has recently commenced the opening of new company-owned stores.
Moreover, Maxim's strategy of vertical integration, through the Merger with
Image, is untested in the floorcovering industry. Maxim intends to continue to
pursue an aggressive growth strategy for the foreseeable future, and its future
operating results will depend largely upon its ability to successfully integrate
the operations of Image, open and operate new stores, acquire and integrate
floorcovering retailers and expand its franchise network. The process of
integrating acquired businesses into Maxim's operations may result in unforeseen
difficulties and may require a disproportionate amount of resources and
management's attention. See e.g. "MAXIM MANAGEMENT'S DISCUSSION AND ANALYSIS"
for a discussion of goodwill impairment relating to certain Maxim acquisitions.
There can be no assurance that Maxim's strategy of vertical integration will be
successful, that Maxim will be able to expand its market presence in its current
locations or successfully enter other markets or that any such expansion will be
as profitable as existing operations. Furthermore, there can be no assurance
that Maxim will be able to increase the number of franchisees and that new
franchisees will be as profitable to Maxim as existing franchisees. If Maxim's
management is unable to manage growth effectively, Maxim's business, results of
operations and financial condition could be materially and adversely affected.
DEPENDENCE ON SENIOR MANAGEMENT. The success of Maxim has been largely
dependent on the skills, experience and efforts of its senior management and
especially its President and Chief Executive Officer, A. J. Nassar. In addition,
upon the consummation of the Merger, the success of Maxim's manufacturing and
recycling operations will be dependent upon the skills, experience and efforts
of the senior management of Image and especially of Larry M. Miller (Image's
Chairman) and H. Stanley Padgett (Image's President). The loss of the services
of Messrs. Nassar, Miller or Padgett or other members of senior management of
Maxim or Image could have a material adverse effect on Maxim's business and
prospects. Upon consummation of the Merger, the existing employment agreements
with Messrs. Miller and Padgett will be amended and extended. Maxim maintains a
key man life insurance policy on Mr. Nassar in the amount of $2.0 million. Maxim
believes that its future success will also depend in part upon its ability to
attract, retain and motivate qualified personnel. There can be no assurance that
Maxim will be successful in attracting and retaining such personnel.
HIGHLY COMPETITIVE BUSINESS. The floorcovering industry is extremely
competitive. Certain of Maxim's primary competitors offer substantially similar
services as Maxim and some may have greater market recognition and greater
financial, technical, marketing and human resources than Maxim. There can be no
assurance that Maxim will be able to compete successfully against existing
companies or new entrants to the marketplace.
DEPENDENCE ON SUPPLIERS. Maxim relies primarily on several independent high
volume carpet manufacturers for the production of the CARPETMAX Division's
floorcoverings, including Shaw Industries, Mohawk Industries, Armstrong World
Industries and Bruce Hardwood Floors. Although these manufacturers have been
reliable, high-quality producers, there can be no assurance that in the future
these manufacturers will be willing or able to meet Maxim's requirements and
those of its franchisees on a timely basis or that their pricing and rebate
policies will remain competitive. Moreover, there can be no assurance that
Maxim's existing supply relationships will not be adversely affected by the
Merger. While Maxim believes that there are a number of manufacturers capable of
producing floorcovering products, any delays in obtaining such products on a
timely basis could have a material adverse effect on Maxim's operations and
those of its franchisees.
ANTI-TAKEOVER PROVISIONS. Maxim's Certificate of Incorporation contains
provisions requiring supermajority shareholder approval to effect certain
extraordinary corporate transactions which are not approved by the Board of
Directors. These provisions make it more difficult to effect a merger, sale
46
<PAGE>
of control or similar transaction involving Maxim even though a majority of
Maxim's shareholders may vote in favor of such a transaction. In addition,
Maxim's Certificate of Incorporation authorizes the issuance of up to 1,000,000
shares of Preferred Stock, issuable in series, the relative rights and
preferences of which may be designated by the Board of Directors. The effect of
these provisions is to make it more difficult to effect a change in control of
Maxim through the acquisition of a large block of Maxim's Common Stock.
INDOOR AIR QUALITY. The effect of carpeting and other floorcovering
products on indoor air quality has been the subject of debate in recent years.
Although there is some question within the industry as to whether emissions from
carpet pose a health hazard, there can be no assurance that researchers will not
detect hazardous levels of emissions from carpet. The discovery of adverse
health effects resulting from carpeting, or the public perception thereof, could
have a material adverse effect on Maxim's operations and those of its
franchisees.
VOLATILITY OF STOCK PRICE. The market price of the Maxim Common Stock could
be subject to significant fluctuations in response to Maxim's operating results
and other factors, and there can be no assurance that the market price of the
Maxim Common Stock will not decline below the current market price. In addition,
the stock market has from time to time experienced extreme price and volume
volatility. These fluctuations may be unrelated to the operating performance of
particular companies whose shares are publicly traded and may adversely affect
the market price of the Maxim Common Stock. Moreover, upon consummation of the
Merger, Maxim may be unable to maintain its historical price-earnings multiples
if the combined entity is viewed by the market as other than a retailer.
NO ANTICIPATED DIVIDENDS. Maxim has not previously paid any dividends on
its Common Stock and for the foreseeable future intends to continue its policy
of retaining any earnings to finance the development and expansion of its
business.
LOSS OF SALES TO EXISTING IMAGE CUSTOMERS. Image maintains open accounts
with approximately 6,000 floorcovering retailers, some of which may be direct
competitors of CarpetMax and GCO retail stores. Although Maxim's CarpetMax
Division and GCO stores will increase their purchases of Image carpet products
following consummation of the Merger, Image will continue to sell its products
to unaffiliated retailers. There can be no assurance that some of these
retailers will not discontinue purchasing carpet from Image as a result of the
Merger.
47
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
INTRODUCTION
The following unaudited pro forma condensed combined financial statements
are presented assuming the Merger will be accounted for as a pooling of
interests and reflect the combination of the historical consolidated financial
statements of Maxim and Image. The pro forma condensed combined statements of
income and balance sheet assume the Merger was consummated at April 1, 1993 and
April 30, 1996, respectively. The unaudited pro forma condensed combined
financial statements do not reflect expenses of approximately $2.5 million
expected to be incurred by Maxim and Image in connection with the Merger. In
addition, the following financial statements do not reflect any anticipated cost
savings which may be realized by Maxim after consummation of the Merger.
The pro forma information does not purport to represent what Maxim's and
Image's combined results of operations actually would have been if the Merger
had occurred as of the date indicated or will be for any future periods. The pro
forma condensed combined financial statements should be read in conjunction with
the historical financial statements and the notes thereto of Maxim and Image
contained elsewhere or incorporated by reference in this Proxy
Statement/Prospectus.
48
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
APRIL 30, 1996
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
MAXIM IMAGE ADJUSTMENTS COMBINED
--------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 2,414 $ 99 $ -- $ 2,513
Current portion of franchise license fees receivable........ 2,235 -- -- 2,235
Trade accounts receivable................................... 13,695 20,331 -- 34,026
Accounts receivable from officers and employees............. 522 6 -- 528
Current portion of notes receivable from franchisees and
related parties............................................ 1,215 -- -- 1,215
Inventories................................................. 14,465 31,796 -- 46,261
Refundable income taxes..................................... 1,325 987 -- 2,312
Deferred income taxes....................................... 1,342 760 -- 2,102
Prepaid expenses............................................ 953 1,404 -- 2,357
--------- ----------- ------ -----------
Total current assets.................................... 38,166 55,383 -- 93,549
Property and equipment, net................................... 17,376 75,785 -- 93,161
Franchise license fees receivable............................. 1,848 -- -- 1,848
Notes receivable from franchisees............................. 74 -- -- 74
Deferred license fee.......................................... 131 -- -- 131
Deferred income taxes......................................... 612 5,119 -- 5,731
Intangible assets............................................. 8,782 -- -- 8,782
Other assets.................................................. 452 284 -- 736
--------- ----------- ------ -----------
$ 67,441 $ 136,571 $ -- $ 204,012
--------- ----------- ------ -----------
--------- ----------- ------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................... $ 812 $ 13 $ -- $ 825
Current portion of capital lease obligations................ 358 192 -- 550
Rebates payable to franchisees.............................. 2,414 -- -- 2,414
Accounts payable............................................ 6,444 9,402 -- 15,846
Accrued expenses............................................ 3,772 4,101 -- 7,873
Deferred revenue............................................ 1,578 -- -- 1,578
Deposits.................................................... 2,428 -- -- 2,428
--------- ----------- ------ -----------
Total current liabilities............................... 17,806 13,708 -- 31,514
Long-term debt................................................ 27,478 61,080 -- 88,558
Capital lease obligations..................................... 1,824 616 -- 2,440
Deferred income taxes......................................... -- 8,524 -- 8,524
--------- ----------- ------ -----------
47,108 83,928 -- 131,036
--------- ----------- ------ -----------
Stockholders equity:
Common stock................................................ 7 52 (47) 12
Additional paid-in capital.................................. 20,593 39,761 47 60,401
Treasury stock.............................................. (336) -- -- (336)
Retained earnings........................................... 69 12,830 -- 12,899
--------- ----------- ------ -----------
Total stockholders' equity.............................. 20,333 52,643 -- 72,976
--------- ----------- ------ -----------
$ 67,441 $ 136,571 $ -- $ 204,012
--------- ----------- ------ -----------
--------- ----------- ------ -----------
</TABLE>
49
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
TEN MONTHS THREE MONTHS ENDED
YEARS ENDED MARCH 31, ENDED ----------------------
------------------------ JANUARY 31, MARCH 31, APRIL 30,
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 122,591 $ 203,341 $ 227,550 $ 59,275 $ 73,242
Cost of sales...................................... 85,847 139,522 161,723 40,953 52,958
----------- ----------- ----------- ----------- ---------
Gross profit................................. 36,744 63,819 65,827 18,322 20,284
Selling, general, and administrative expenses...... 34,057 47,370 59,196 15,069 17,125
Goodwill impairment charge......................... -- -- 6,569 -- --
----------- ----------- ----------- ----------- ---------
Operating income............................. 2,687 16,449 62 3,253 3,159
----------- ----------- ----------- ----------- ---------
Other income (expense):
Interest income.................................. 306 397 415 108 133
Interest expense................................. (1,886) (1,838) (4,695) (928) (1,608)
Other............................................ (263) 421 77 251 84
----------- ----------- ----------- ----------- ---------
(1,843) (1,020) (4,203) (569) (1,391)
----------- ----------- ----------- ----------- ---------
Earnings (loss) before income taxes and
extraordinary income.............................. 844 15,429 (4,141) 2,684 1,768
Income tax expense................................. 375 5,787 104 799 616
----------- ----------- ----------- ----------- ---------
Net earnings (loss) before extraordinary income.... 469 9,642 (4,245) 1,885 1,152
Extraordinary income............................... 190 -- -- -- --
----------- ----------- ----------- ----------- ---------
Net earnings (loss).......................... $ 659 $ 9,642 $ (4,245) $ 1,885 $ 1,152
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Earnings (loss) per common and common equivalent
share............................................. $ .06 $ .72 $ (.32) $ .14 $ .08
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Weighted average number of common and common
equivalent shares outstanding..................... 11,161 13,301 13,301 13,580 13,611
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
</TABLE>
50
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial information for each of
the years ended March 31, 1994 and 1995, the ten months ended January 31, 1996
and each of the quarters ended March 31, 1995 and April 30, 1996 combine the
historical financial statements of Maxim with those of Image for the
corresponding periods.
The table below sets forth a detailed breakdown by company of the components
of certain unaudited pro forma combined statements of income data for the years
ended March 31, 1994 and 1995 and for the ten months ended January 31, 1996 and
for the three months ended March 31, 1995 and April 30, 1996. Such information
is presented as if the Merger had taken place at April 1, 1993.
<TABLE>
<CAPTION>
TEN MONTHS
ENDED THREE MONTHS ENDED
YEARS ENDED MARCH 31, JANUARY 31, ----------------------
------------------------ ----------- MARCH 31, APRIL 30,
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Maxim............................................ $ 19,334 $ 76,091 $ 99,290 $ 24,786 $ 33,655
Image............................................ 103,257 127,250 128,260 34,489 39,587
----------- ----------- ----------- ----------- ---------
Pro forma combined........................... $ 122,591 $ 203,341 $ 227,550 $ 59,275 $ 73,242
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Net earnings (loss):
Maxim............................................ $ 2,465 $ 2,385 $ (7,274) $ 224 $ 1,007
Image............................................ (1,806) 7,257 3,029 1,661 145
----------- ----------- ----------- ----------- ---------
Pro forma combined........................... $ 659 $ 9,642 $ (4,245) $ 1,885 $ 1,152
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Earnings (loss) per share:
Maxim............................................ $ .50 $ .34 $ (1.02) $ .03 $ .14
Image............................................ (.35) 1.25 .50 .29 .02
Pro forma combined............................... .06 .72 (.32) .14 .08
Weighted average shares:
Maxim............................................ 4,958 7,092 7,103 7,371 7,407
Image............................................ 5,159 5,804 6,076 5,812 6,203
Pro forma combined............................... 11,161 13,301 13,301 13,580 13,611
</TABLE>
51
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
ADJUSTED FOR THE PURCHASE OF PHARR YARNS BY IMAGE
FOR THE TEN MONTH PERIOD ENDED JANUARY 31, 1996
The following unaudited pro forma condensed combined statement of income for
the ten month period ended January 31, 1996 reflects adjustments to the
Unaudited Pro Forma Condensed Combined Statement of Income for such period,
included elsewhere in this Proxy Statement/Prospectus, to include actual
operating results for Pharr Yarns of Georgia, Inc. ("Pharr Yarns"), which was
purchased by Image in June 1995, for the 1995 period during which it was
operated by the predecessor owner. Information below should be read in
conjunction with the Unaudited Pro Forma Condensed Financial Statements
contained in Image's Current Report on Form 8-K dated June 30, 1995, as amended.
The pro forma information does not purport to represent what Maxim's and
Image's combined results of operations actually would have been if the Merger
and the purchase of Pharr Yarns had occurred as of April 1, 1995 or will be for
any future periods.
<TABLE>
<CAPTION>
ADJUSTMENTS FOR ADJUSTED
PRO FORMA PURCHASE OF PRO FORMA
COMBINED PHARR YARNS COMBINED
----------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues............................................................... $ 227,550 $ 5,507 $ 233,057
Cost of sales.......................................................... 161,723 4,520 166,243
----------- ------- -----------
Gross profit......................................................... 65,827 987 66,814
Selling, general and administrative expenses........................... 59,196 267 59,463
Goodwill impairment charge........................................... 6,569 -- 6,569
----------- ------- -----------
62 720 782
----------- ------- -----------
Other income (expense):
Interest income...................................................... 415 -- 415
Interest expense..................................................... (4,695) -- (4,695)
Other................................................................ 77 -- 77
----------- ------- -----------
(4,203) -- (4,203)
----------- ------- -----------
Loss before income taxes............................................... (4,141) 720 (3,421)
Income tax expense................................................... 104 288 329
----------- ------- -----------
Net loss............................................................. $ (4,245) $ 432 $ (3,813)
----------- ------- -----------
----------- ------- -----------
Net loss per share..................................................... $ (.32) $ -- $ (.29)
----------- ------- -----------
----------- ------- -----------
Weighted average shares outstanding.................................... 13,301 -- 13,301
----------- ------- -----------
----------- ------- -----------
</TABLE>
52
<PAGE>
INFORMATION REGARDING MAXIM
GENERAL
Maxim, through its company-owned and franchise stores, operates one of the
largest retail floorcovering networks in North America. As of June 15, 1996,
Maxim had 60 Company-owned stores and 388 franchise dealers operating
approximately 545 stores. Maxim operates and franchises two distinct retail
floorcovering concepts: full-service floorcovering retailers representing the
CARPETMAX Division ("CARPETMAX") and cash-and-carry discount floorcovering
retailers representing the Georgia Carpet Outlet Division ("GCO").
Since fiscal 1992, Maxim has grown from total revenues of $5.0 million to
total revenues of $99.3 million in fiscal 1996. Maxim's growth strategy is to
continue to increase market share by (i) making additional acquisitions of
independent floorcovering dealers (some of which may include CARPETMAX and GCO
franchise dealers), (ii) opening new company-owned stores, (iii) securing
additional franchisees, (iv) increasing the penetration of the purchasing,
merchandising, advertising, training and administrative services offered to its
franchise network, and (v) broadening its products and services.
Maxim was originally organized under the laws of the State of New York on
April 21, 1989 and subsequently reincorporated under the laws of the State of
Delaware on July 29, 1993. The reincorporation was effected through a merger of
the New York corporation with and into the Delaware corporation on September 24,
1993.
On January 13, 1996, Maxim changed its fiscal year end from March 31 to
January 31.
RETAIL FLOORCOVERING INDUSTRY
The North American retail floorcovering industry is highly fragmented with
approximately 15,000 individual floorcovering retail dealers operating 25,000
locations in North America and producing approximately $20 billion in annual
retail sales, according to FLOOR COVERING WEEKLY. Maxim believes that no single
retailer accounts for more than 5% market share of total annual industry
revenues. According to FLOOR COVERING WEEKLY, the industry grew at an annual
rate of 6.5% from 1993 to 1994. The industry is characterized by a large number
of small local and regional companies and a small number of national chains,
including Color Tile, New York Carpet World, The Home Depot and Sears.
Maxim believes that its two primary competitors in the retail floorcovering
franchise business are Carpet One and Abbey Rug. These organizations principally
operate as buying groups offering their members economies of scale in the
purchasing of floorcovering products. Maxim believes that its franchise
competitors subcontract most other services to outside vendors, to the extent
that such services are offered at all.
Maxim believes that most independent floorcovering retailers face distinct
competitive disadvantages and challenges, including limited purchasing power for
products and services, lack of consumer product knowledge, and ineffective asset
management, merchandising, selling and store-management techniques. The typical
floorcovering retailer operates one store generating less than $1 million in
annual sales. Maxim's operating strategies are designed to capitalize on these
competitive disadvantages through industry-leading buying power and the
implementation of professional retailing operations.
An emerging niche of the retail floorcovering industry is the
"cash-and-carry" segment. This segment is devoted to the sale of discount
floorcovering products on a cash-and-carry basis to the price-conscious consumer
market. While some full-service floorcovering retailers have outlet stores that
sell remnants and discontinued items, Maxim believes that GCO is the only
national floorcovering retailer devoted solely to the cash-and-carry segment.
53
<PAGE>
HISTORY OF MAXIM
EARLY DEVELOPMENT. In fiscal 1991, Maxim initiated its present strategy of
providing low-cost product sourcing and advanced specialty retailing
capabilities to independent floorcovering retailers. Maxim initially focused on
establishing relationships with the leading carpet suppliers to negotiate
favorable purchasing terms for prospective franchisees. In addition, Maxim hired
experienced retailing management personnel and developed product mix,
distribution, merchandising, advertising and promotion, sales training and store
operations strategies and resources designed to increase store sales volume and
profitability.
FRANCHISE DEVELOPMENT. During fiscal 1991, Maxim awarded 11 CARPETMAX
franchises from which Maxim generated revenues of $172,000, principally from the
sale of franchises and the brokerage of carpet purchases from the major carpet
manufacturers. From the beginning of fiscal 1992 to the end of fiscal 1996,
Maxim awarded 281 additional CARPETMAX franchises.
ACQUISITIONS AND NEW STORES. In May 1994 (fiscal 1995), Maxim commenced its
store acquisition strategy with the acquisition of Kinnaird & Francke Interiors,
Inc. ("KFI"), a former CARPETMAX franchise. KFI is the leading floorcovering
retailer in the Louisville, Kentucky market with annual sales of over $29
million for the year ended April 30, 1994. As of April 1, 1996, Maxim has
acquired 10 full-service floorcovering operations currently representing 49
stores operating under the CARPETMAX format in nine markets. Aggregate sales of
Company-owned CARPETMAX stores during the ten months ended January 31, 1996 were
$70.0 million. In addition, in September 1994, Maxim acquired GCO in order to
enter the emerging cash-and-carry discount retail floorcovering segment. At the
time, GCO had 11 owned and 56 franchise stores across the country. Maxim's
revenue attributable to its GCO operations totaled $14.0 million for the ten
months ended January 31, 1996.
In April 1995 (fiscal 1996), Maxim commenced opening company-owned stores to
further expand its market share in acquired and contiguous markets. As of June
15, 1996, Maxim has opened 11 new CARPETMAX stores, which utilize the CARPETMAX
store layout, merchandising, advertising and promotion, personnel and store
operations strategies, located in Arizona, Kentucky, Florida, Alabama, North
Carolina, Nevada and Utah. Also, Maxim has opened two new GCO stores in
Birmingham and Decatur, Alabama. Maxim expects to open additional Company-owned
stores under the CARPETMAX and GCO formats, with greater emphasis on new
CARPETMAX stores.
Maxim's acquisitions and new store openings by market area and the number of
company-owned stores as of June 15, 1996 are summarized in the table below:
<TABLE>
<CAPTION>
DATE NUMBER OF NUMBER OF
MARKETS ACQUIRED (1) ACQUISITIONS STORES
- -------------------------------------------------- ------------- --------------- ---------------
<S> <C> <C> <C>
Kentucky, Indiana, Georgia........................ 5/94 1 11
Salt Lake City, Utah.............................. 9/94 1 4
Tampa, Florida.................................... 9/94 1 8
National (GCO).................................... 9/94 1 8
Phoenix, Arizona.................................. 11/94 1 7
San Antonio, Texas................................ 11/94,12/94 2 6
Southern Indiana.................................. 1/95 1 2
Fayetteville, North Carolina...................... 2/95 1 5
Birmingham, Alabama............................... 2/95 1 2
Des Moines, Iowa.................................. 8/95 1 5
Las Vegas, Nevada................................. 6/96 -- 2
-- --
Total.......................................................... 11 60
-- --
-- --
</TABLE>
- ------------------------
(1) This table reflects the closing date of Maxim's acquisitions and, with
respect to the Las Vegas stores, the opening date of such stores. For
financial reporting purposes, certain of the acquisitions are reflected in
periods prior to such closing dates.
54
<PAGE>
BUSINESS STRATEGY
The principal elements of Maxim's business strategy are as follows:
FULL-SERVICE AND CASH-AND-CARRY RETAIL FORMATS. A central aspect of Maxim's
business strategy is the development of two retail formats that target different
segments of the floorcovering market. Maxim's CARPETMAX stores typically offer
customers a full range of floorcovering products and services, including
ordering, measuring, delivery and installation. Maxim's GCO stores typically
offer discount carpeting held in inventory at the store and do not provide
delivery or installation. Management believes that the CARPETMAX customer is
primarily concerned with product selection, quality and customer service, while
the GCO customer is primarily concerned with price.
ADVANTAGEOUS PURCHASING. Maxim attempts to obtain high quality
floorcovering products at the lowest possible prices by leveraging the
purchasing power of its retail network and its relationships with major
floorcovering manufacturers. As one of the leading purchasers of floorcoverings
on a consolidated basis, Maxim is able to obtain competitive pricing, delivery
terms and merchandising programs for its franchisees.
PROFESSIONAL RETAIL MANAGEMENT CAPABILITIES. Maxim has invested substantial
financial and management resources in the development of services and
infrastructure to support its retail floorcovering network. The Maxim
Communications Division maintains on-site, multi-track audio recording studios,
a television production facility and a full-service media department. This
division is able to provide advertising services to Company stores and
franchisees, at a discount from industry rates. Maxim's Humax Division employs a
team of training professionals, a new training center and interactive satellite
communications to train franchisees and Company store personnel. Maxim is
committed to making shopping for floorcovering products a pleasant experience
through the employment of well-trained, knowledgeable and courteous sales
associates. Maxim will also continue to invest in information systems and use
current technology to improve the operating efficiency of its business.
CENTRALIZED DISTRIBUTION AND LIMITED INVENTORY LEVELS. Maxim attempts to
minimize its store-level inventories by utilizing its primary distribution
center in Kennesaw, Georgia and the timely delivery from manufacturers to
service both its Company-owned stores and franchisees throughout its retail
network. Maxim uses regional warehouse facilities on a limited basis to receive
shipments and to stock high volume items. As a result, CARPETMAX stores maintain
limited amounts of inventory, consisting primarily of product samples, while the
GCO stores maintain inventory at the store level to support the cash-and-carry
customer. In addition, the new primary distribution center allows Maxim to
purchase and inventory "specials," or seasonal overruns, for sale through
CARPETMAX and GCO stores. As Maxim continues to expand its retail operations, it
intends to further leverage its existing distribution capabilities while closing
redundant distribution centers of acquired companies.
MULTIPLE PRODUCT CATEGORIES. Maxim's CARPETMAX stores offer a full range of
floorcovering products, including broadloom carpets, area rugs, hardwood
floorings, ceramic tiles and vinyl floorings, available in both private and
branded labels. Multiple product categories allow Maxim to respond to changes in
consumer demand. Maxim's focus on multiple floorcovering products has resulted
in a decrease in carpet sales as a percentage of total CARPETMAX retail sales.
Maxim's GCO stores primarily offer broadloom carpet, but also offer a limited
selection of hardwood and vinyl flooring.
GROWTH STRATEGY
Maxim's growth strategy is to develop the leading retail floorcovering
network in North America. The principal elements of this growth strategy include
(i) making selective acquisitions, (ii) opening additional company-owned stores,
(iii) expanding its CARPETMAX and GCO franchise dealer base, (iv) increasing the
penetration of CARPETMAX services within its franchise network and (v)
broadening its products and services.
ACQUISITIONS. Maxim generally seeks to acquire floorcovering retailers
located in markets which offer the potential for significant growth in the sale
of floorcovering and related products, thereby
55
<PAGE>
providing immediate market share in attractive growth markets and a platform for
additional acquisitions and new store openings. In evaluating potential
acquisitions, Maxim analyzes a number of factors, including: the target market's
general economy, demographics and growth potential; competition; the market
share and customer base of the target; the strength of the target's management
team; and the opportunity to increase volume and store profitability by
utilizing Maxim's operating strategies and resources. Maxim's acquisition
prospects include both independent retailers and existing CARPETMAX and GCO
franchisees.
To mitigate the risks of business disruption following an acquisition, upon
the execution of a letter-of-intent, Maxim seeks to commence implementation of
Maxim's operating strategies prior to closing, while Maxim is engaging in its
final due diligence investigation and preparing for closing the acquisition.
These store operating strategies focus on increasing customer traffic, improving
sales closing performance, increasing the average transaction size, and
consolidating inventories, facilities, operations and personnel to increase
store profitability and return on investment.
OPENING OF NEW STORES. Maxim's platform acquisitions provide a base in each
market which can be leveraged with new store openings to increase market share.
Maxim typically expands within existing markets or into contiguous new markets
and attempts to cluster its stores within a market in order to achieve
management and operating efficiencies and to enhance its name recognition.
However, Maxim believes that it also can establish company-owned stores in new
markets due to its effective strategies in generating customer traffic and the
increasing recognition of the CARPETMAX brand name.
Maxim has established an in-house real estate department with responsibility
for site selection, lease negotiation and build-out of company-owned stores.
Maxim seeks to locate new CARPETMAX stores in Class A strip shopping retail
space and has developed a 6,500 square foot standardized store format known as
the "CARPETMAX Flooring Center" to accelerate store opening and minimize store
opening costs. The interior store design includes pre-determined product mix,
fixtures and equipment, signage, and point-of-sale advertising and promotion
programs. Once a new store site is identified, Maxim will stage the products,
merchandising systems and personnel for the new store in its distribution center
and headquarters. Maxim believes that it can open a standard 6,500 square foot
CARPETMAX store within 45 days of executing a lease, with expected total capital
expenditures, initial inventory investments and pre-opening expenses of
approximately $75,000 to $100,000 per store. The CARPETMAX Flooring Center
concept is also available to franchisees on a fee basis.
EXPANSION OF THE CARPETMAX AND GCO FRANCHISE NETWORKS. Although a
substantial portion of Maxim's recent revenue growth is attributable to
strategic acquisitions, Maxim continues to emphasize expansion of its franchise
base. Maxim has CARPETMAX franchise dealers or company-owned stores in 175 of
the 259 areas of dominant influence ("ADI") in the United States. In addition,
Maxim has GCO franchise dealers and GCO-owned stores in 65 of such U.S. markets.
Maxim awards multiple franchises in certain ADIs. Maxim intends to continue
pursuing new franchises aggressively, and believes that its increasingly strong
supplier relationships and its broadening range of services will strengthen
these efforts. Furthermore, Maxim intends to leverage its CARPETMAX and GCO
formats to market GCO franchises to CARPETMAX dealers and CARPETMAX franchises
to GCO dealers.
INCREASED PENETRATION OF CARPETMAX FRANCHISE SERVICES. Maxim believes that
its programs with major floorcovering suppliers to offer private-label products
and special mill purchases, together with its increasing purchasing power, will
serve to increase its franchise revenues substantially. In addition, Maxim has
continued to expand the scope of services available to CARPETMAX franchisees.
Maxim now offers services relating to site selection and merchandising,
advertising and promotion, management and sales training, credit, information
systems and other store operations. Maxim anticipates increased utilization of
these services by CARPETMAX franchisees in the future.
56
<PAGE>
BROADENING OF PRODUCTS AND SERVICES. Maxim is developing additional
services relating to product installation, maintenance and in-store credit,
among others. These additional services, if fully developed, will be utilized by
Maxim-owned retail operations to increase sales and profitability and will be
marketed to Maxim's franchise dealers.
COMPANY OPERATIONS
Maxim provides its retail floorcovering network with products, services and
trained personnel that Maxim believes generally are unavailable to independent
floorcovering retailers and would be cost prohibitive for most independent
dealers to develop. Maxim's resources include merchandising, purchasing and
distribution, advertising and promotion, management and sales training,
management information systems and credit, as described below.
PURCHASING AND DISTRIBUTION. Due to the floorcovering purchasing volume of
Maxim's retail network and its relationships with major floorcovering suppliers,
management believes that Maxim obtains high-quality products and services at low
cost. A substantial portion of the floorcovering products purchased by or
through Maxim is shipped directly by the supplier to local warehouses or
individual retail stores. CARPETMAX stores generally maintain minimal inventory,
which predominantly consists of product samples. In June 1995, Maxim opened a
new 110,000 square foot distribution center in Kennesaw, Georgia. This
distribution center allows Maxim to make opportunistic purchases from carpet
mills at substantially discounted prices. Maxim is also able to offer special
purchases to its franchisees, including purchases of mill drops (discontinued
lines) and excess mill inventory which are made available to Maxim at
substantially discounted prices. Maxim also makes available on an ongoing basis
remnant packages and short roll packages which can be as small as 10 and as
large as 1,000 remnants at a time. The ability of Maxim to purchase and
inventory private-label products and specials creates the opportunity for
increased revenues and margins to Maxim and lower pricing to the retailer.
Management does not believe that Maxim is dependent upon any one vendor for
product purchases and the loss of any single vendor would not have a long-term
material adverse effect on Maxim's operating results or financial position. In
addition, Maxim uses regional warehouse facilities on a limited basis to receive
shipments and to stock high volume items.
PRODUCT MIX AND MERCHANDISING. Maxim offers a full range of floorcovering
products from key suppliers, including Shaw, Mohawk Industries, Beaulieu of
America, Queen Carpet and World Carpet for broadloom carpet, DuPont and
AlliedSignal for proprietary carpet fiber, Armstrong World Industries and
Congoleum for vinyl flooring, Bruce Hardwood Floors (a division of Triangle
Pacific) for hardwood flooring and Dal-Tile for ceramic tile. Each of these
suppliers is one of the leaders in its respective floorcovering category.
Maxim's suppliers also include niche carpet, vinyl, hardwood and ceramic tile
producers, as well as leading manufacturers and importers of room-size area
rugs.
In early 1994, Maxim entered into an arrangement with Shaw, the world's
largest carpet manufacturer, enabling CARPETMAX franchise dealers to become
licensed dealers of Shaw's TrustMark products. Maxim paid an initial fee of $1.0
million, which is being amortized over the life of the agreement. The TrustMark
program consists of 1,200 floorcovering dealers nationwide, and allows retailers
to market TrustMark products with exclusivity. Shaw also provides various
merchandising support including in-store displays, racks, samples and signage to
licensed TrustMark dealers. A substantial number of Maxim's CARPETMAX retailers
have elected to be included in the TrustMark program. The investment in the
TrustMark program provides Maxim with certain benefits including volume rebates,
exclusive marketing arrangements to prospective TrustMark franchisees and
directed marketing programs to benefit CARPETMAX retailers. Maxim believes that
incremental revenues resulting from sales of TrustMark products by its member
network will exceed its investment in the TrustMark program.
Maxim has developed an attractively priced private-label line of CARPETMAX
products consisting of approximately 1,700 styles ranging from base grades to
designer products produced by approximately 20 leading manufacturers. Franchise
dealers using CARPETMAX private-label programs receive the same display racks,
national warranty and guarantee programs, sales promotions and in-
57
<PAGE>
store point of sale materials utilized by Maxim-owned retail stores. Retailers
provide a 15-day unconditional replacement warranty to their customers. Wear
warranties are provided directly by the manufacturers.
Maxim's merchandising strategies address effective store layout, fixtures,
signage, product mix, and cross-selling techniques designed to increase sales
closing performance, average transaction size, sales per square foot of retail
space, and gross margins. Store interiors provide easy-to-locate presentation of
floorcovering samples, organized by product line, in an attractive and brightly
lit interior.
ADVERTISING AND PROMOTION. The Maxim Communications Division, with its
in-house, state-of-the-art production facilities, develops and offers to Maxim's
CARPETMAX retail network high-quality, creative marketing materials, including
television, radio, print and direct mail campaigns, sales literature, and
point-of-purchase programs and media placement. This division maintains on-site
multi-track audio recording studios, a television production facility and a
full-service media department, and has produced advertising campaigns in over
200 markets nationwide. Programs are available to franchisees at rates Maxim
believes are below those charged by most advertising or production companies.
Maxim offers economies of scale in advertising production and media placement
which are unavailable to independent retailers. In addition to producing
promotional products, Maxim Communications test markets promotional programs and
maintains a library of advertising promotions and commercials, each with
coordinated merchandising, purchasing and sales training support, which is
available to franchisees on a customized basis for purchase at discounted rates.
MANAGEMENT AND SALES TRAINING. Maxim's Humax Division focuses on developing
professional sales and leadership skills and team building concepts by applying
state-of-the-art training techniques. Maxim utilizes the Humax Division to train
its company-owned store management, sales and operating personnel and offers
these services to its franchise dealers on a fee basis. The methodology
developed and offered by Humax provides a turnkey training and diagnostics
system, and provides retailers with competent and skilled professional personnel
for use in training at store locations or at Maxim's training facility.
All franchisees, as a part of their franchise package, receive an intense
training and orientation program which emphasizes Maxim's advertising and
marketing support, use of consumer credit, store operations, general business
practices and intercompany operations. The goal of the training program is to
help franchisees update and professionalize the operation of their stores. Maxim
also conducts semi-annual conventions for the benefit of its franchisees,
including workshops, seminars and training programs.
In addition, Maxim has installed a state-of-the-art interactive satellite
communications system consisting of digital video, audio and data compilation
and analysis, which is used to broadcast training programs to participating
franchise dealers, as well as the latest floorcovering information. Broadcasts
include information on sales training, new technology, new products,
merchandising, available specials and design trends.
MANAGEMENT INFORMATION SYSTEMS. Company-owned stores are currently
operating their businesses with the information systems which were in place at
the time of acquisition by Maxim. However, Maxim is developing a custom
point-of-sale system for tracking consumer demographics and purchasing patterns,
and integrating store operations and financial data into Maxim's central
information system. Maxim began installation of this new hardware and software
system in its company-owned stores in 1996 and may make it available to its
franchise dealers on a license basis. Management believes that there is also an
opportunity to link franchisees, company-owned stores and vendors through the
integration of Electronic Data Interchange ("EDI") capabilities with Maxim's
information systems.
58
<PAGE>
Maxim's Maxciss Division assists on a consulting basis with respect to the
design and implementation of retail floorcovering computer systems. The Maxciss
Division recommends appropriate hardware systems and software programs to
Maxim's retail network. The Maxciss Division is currently operated as an
accommodation service, and no fee is charged for the advice and assistance
provided, although Maxim is reimbursed for its out-of-pocket expenses.
CREDIT. Maxim has a business relationship with Bank One, Youngstown, N.A.
and, through its Creditmax Division, makes consumer credit packages available to
its retail network. With 60-day, 90-day, six-month and 12-month interest-free
programs, plus open- and closed-end revolving credit packages, Maxim's retailers
are able to offer a variety of credit plans to their customers. Retailers may
also obtain longer term (up to three years) consumer credit financing for their
customers. Maxim is not contingently liable for the credit extended.
In February 1996, Maxim entered into an agreement with Bank One, Dayton,
N.A. to underwrite an exclusive private label credit card program. The program
is marketed as The CARPETMAX Wall to Wall Credit program and is exclusively for
the use of Maxim's CARPETMAX stores and participating franchisees. The card
enables participants to create a credit culture which enhances closing sales and
encourages the consumer to purchase higher ticket items. Bank One also provides
a pre-approved listing service which enables CARPETMAX stores to solicit sales
from a 100% credit pre-approved audience in a given geographic area.
STORE AND FRANCHISE OPERATIONS
CARPETMAX COMPANY-OWNED RETAIL OPERATIONS. Maxim opens and operates
CARPETMAX stores in markets that management believes have the potential for
above-average growth in floorcovering sales. Maxim generates revenues through
these stores from sales of floorcovering products to consumers and other
customers. Company-owned CARPETMAX stores carry the full product mix available
to Maxim, including CARPETMAX private label floorcoverings, as well as other
leading brand names. New stores average 6,000 square feet, are typically located
in Class A strip shopping retail space in suburban locations, and are staffed
with four personnel. These stores cater primarily to consumers seeking a breadth
of high-quality products and customer service. Consumers make purchase
selections from floor samples, and the order is delivered from a local
warehouse, direct from Maxim's distribution center, or direct from the
manufacturer. CARPETMAX stores also either maintain internal installation staffs
or subcontract installation services from local contractors. Company-owned
stores are supported by the full range of services provided by Maxim, including
extensive merchandising and sales promotion programs, high quality advertising,
integrated information systems, and professionally trained management and sales
personnel. CARPETMAX customers include homeowners, designers, homebuilders and
commercial contractors. CARPETMAX stores compete with independent retailers,
other industry franchisees and a small number of national chains, including
Color Tile, New York Carpet World and The Home Depot.
Maxim believes that the CARPETMAX Flooring Center concept utilized in its
stores is visually appealing and provides an enjoyable shopping experience for
its customers. The new standardized layout of CARPETMAX stores is professionally
designed to include eye-catching signage, bright lighting, a children's play and
rest area and departmentalized product displays. CARPETMAX stores use floor
samples to display the breadth of Maxim's available products, with separate
areas dedicated to carpet, area rugs, hardwood flooring, vinyl flooring and
ceramic tiles. Maxim's acquired CARPETMAX stores range in size from 4,800 to
25,000 square feet. New stores opened under Maxim's new store opening program
have ranged in size from 4,800 to 8,500 square feet. These new stores utilize a
standardized layout and design with standardized signage and merchandising. As
part of Maxim's new standardized store layout, Maxim has also initiated a store
remodeling program. Remodeling costs range from approximately $50,000 to $75,000
per store.
59
<PAGE>
CARPETMAX FRANCHISE OPERATIONS. As of June 15, 1996, Maxim had a total of
295 CARPETMAX franchisees. During fiscal 1996, total revenues attributable to
CARPETMAX franchisees were approximately $13 million, representing 13% of
Maxim's total revenues. Maxim's franchisees are generally located in
metropolitan areas or populated rural areas. The profile of Maxim's typical
franchisee is a one to four store retail chain with annual sales ranging from
approximately $1 million to approximately $10 million (on average, annual
revenues are approximately $4.5 million), although Maxim does have franchisees
with annual revenues of over $50 million. Maxim markets to potential new
franchisees almost exclusively through targeted solicitation, although Maxim
does make trade show appearances at major floorcovering markets. Typically Maxim
targets for solicitation the leading floorcovering retailers in a particular
market area.
Maxim generates revenues from CARPETMAX franchisees through three primary
sources: franchise fees, brokerage fees from purchases of floorcovering
products, and additional services provided on a fee basis to franchisees. The
current basic one-time franchise fee payable by each CARPETMAX member is $35,000
for each franchise operation within an exclusive area. The initial franchise fee
may be financed through Maxim over four years at 10% per annum or the franchisee
may pay a reduced price of $33,250 in a single lump sum. The initial franchise
fee is deemed fully-earned at the time of the execution of the franchise
agreement and is not refundable. The franchise agreement requires CARPETMAX
franchisees to purchase 50% of their floorcovering products through suppliers
designated by Maxim on which Maxim earns a brokerage fee. In addition to having
increased and more cost-effective access to standard industry floorcovering
products, CARPETMAX franchisees also have access to CARPETMAX private-label
products and specials. Additional services, including customized merchandising
programs, advertising and promotion, credit, and certain training programs are
offered on a fee-for-service basis.
CARPETMAX franchisees have the exclusive right to use the CARPETMAX business
concept and service marks, logos, slogans and other identifying features within
a specific geographic area (the "Exclusive Area"). Provided that the member is
not in default, Maxim may not grant more than one franchise within an Exclusive
Area, nor may Maxim or any affiliate of Maxim operate a company-owned franchise
within an Exclusive Area. Major metropolitan market areas, however, may be
divided into a number of Exclusive Areas. Thus, Maxim may grant more than one
franchise in the metropolitan area. In addition, because of the differing nature
of their business, CARPETMAX and GCO franchises may be established in the same
territory.
Maxim believes its two primary competitors for franchisees in the
floorcovering franchise business are Carpet One and Abbey Rug. These
organizations principally operate as buying groups offering their franchisees
economies of scale in the purchasing of floorcovering products. Maxim believes
that its franchise competitors subcontract most other services offered by Maxim
to outside vendors, to the extent that such services are offered at all.
GCO DIVISION OPERATIONS. GCO is engaged in the business of operating, and
franchising discount floorcovering establishments under the name "GCO Carpet
Outlets." GCO is a leader in the sale of discount floorcovering products on a
"cash-and-carry" basis to the price-conscious consumer market. The outlets do
not offer installation; instead, customers requiring installation services are
provided a list of recommended independent installers. The products are sold
primarily to individual homeowners, home builders, rental property owners and
property managers. GCO Carpet Outlets franchisees compete with numerous other
local and national businesses offering discount floorcoverings, and compete to
some extent with traditional full-service floorcovering businesses. Maxim
conducts GCO's business as a separate division which continues to be
headquartered in Montgomery, Alabama.
GCO stores operate from a retailing format of 10,000 square feet. Unlike a
typical CARPETMAX store, GCO stores stock all of their carpet, hardwood and
vinyl flooring products. Inventory for GCO
60
<PAGE>
stores is provided through Maxim's primary distribution center in Kennesaw,
Georgia. GCO stores derive more than 70% of their revenues from the sale of
carpet, with the balance consisting of pad, hardwood and vinyl flooring sales.
GCO generates revenues from sales of floorcovering products through
company-owned stores, as well as franchise fees and franchise royalty fees based
on franchise store sales. The current basic one-time franchise fee payable by
each GCO member is $25,000. In addition, the GCO franchisee pays to GCO a
royalty at the rate of 5% of the first $500,000 of all gross sales of the
franchisee during any year and 3% on all gross sales over $500,000 during a
year. GCO franchisees have the exclusive right to use the GCO business concept
and service marks, logos, slogans and other identifying features within a
specific geographic area. Maxim does not permit GCO's franchisees to use the
CARPETMAX system, Maxim's proprietary marks or to sell CARPETMAX private-label
products. However, GCO will continue to expand its outlet concept franchise
program throughout the United States. Maxim intends to create additional
services and products which will be offered to GCO and possibly GCO's
franchisees.
GCO stores compete with local cash-and-carry retailers and certain
full-service carpet dealers who offer a selection of cash-and-carry and remnant
products.
COMPETITION
Maxim, through its retail stores, competes with other floorcovering
retailers in their respective local market areas. According to FLOOR COVERING
WEEKLY, the North American market consists of approximately 15,000 individual
floorcovering retailers, which represent 25,000 locations and produce
approximately $20 billion in annual retail sales. The typical floorcovering
retailer consists of one store generating less than $1 million in annual sales.
Competition in the retail floorcovering market is intense due to the significant
number of retailers in operation. In addition, large retailers have entered the
market and provide significant competition, including Color Tile, New York
Carpet World, The Home Depot, Inc. and Sears.
Maxim also competes with any business which markets conversion franchises to
retail carpet dealers. Maxim believes that there are two primary competitors in
its franchise business: Carpet One, a cooperative association; and Abbey Rug,
which Maxim believes to be the oldest franchisor in the retail carpet franchise
business. Maxim distinguishes itself from its competition by directly offering a
full range of services to its members in addition to the traditional services of
purchasing and merchandising. Management believes that Maxim's competitors
subcontract most services (except floorcovering purchasing) to outside vendors.
In December 1995 Shaw Industries, Inc., the world's largest carpet
manufacturer, announced its decision to move into the retail floorcovering
sector. See "BACKGROUND OF AND REASONS FOR THE MERGER." Pursuant to this
strategy, Shaw has acquired Carpetland USA Inc. and New York Carpet World, Inc.
Although Shaw is in the early stages of developing its retail operations, there
can be no assurance that it will not become a major competitor in the future.
TRADEMARKS, SERVICE MARKS, TRADE NAMES AND COMMERCIAL SYMBOLS
Maxim has registered a number of marks with the U.S. Patent and Trademark
Office including: CARPET MAX; Carpetmax -- THE NATIONAL CARPET EXCHANGE; MAKING
A WORLD OF DIFFERENCE; Carpetmax -- Making a World of Difference and Design;
Carpetmax; Carpetmax -- Making a World of Difference, with an oval globe showing
North America in the middle of the mark; and Making a World of Difference. GCO
has registered a number of marks with the U.S. Patent and Trademark Office,
including: GCO and GCO CARPET OUTLETS. GCO also uses a number of service marks
in association with its standard GCO franchise including a word mark consisting
of the words "GCO Carpet Outlets"; a design mark consisting of the words "GCO
Carpet Outlets" or "Georgia Carpet Outlets" within a triangular design of a
cartoon figure unrolling a roll of carpet; the phrase "Bringing Beautiful Carpet
Within Reach of Everyone", which frequently appears immediately below the
triangular design mark; and a word mark consisting of the words "Georgia Carpet
Outlets."
61
<PAGE>
Maxim licenses its rights in and to these proprietary marks to its
respective CARPETMAX and GCO franchisees. With Maxim's prior consent,
franchisees may use an assumed name for a corporation or do business under a
trade name containing the respective proprietary marks. Maxim reserves the right
to modify or to discontinue the use of its proprietary marks or of any other
service mark, logo, or slogan associated with the franchise and may acquire
rights in and to additional service marks, logos and slogans. By signing a
franchise agreement, each franchisee agrees to adopt and utilize whatever
service marks, logos and slogans deemed most suitable by Maxim for conducting
the franchise business. Upon termination of a franchise agreement, the
franchisee must cease the use of any service mark, logo or slogan of Maxim, must
promptly return to Maxim all written materials relating to the operation of the
franchise and must pay all costs and expenses relating to termination of such
use, including, without limitation, removing any franchise related service mark,
logo or slogan from each relevant franchise location.
There are no infringing uses actually known to Maxim which could materially
affect franchisees' use of the service marks, logos or slogans in any state in
which franchises are or are proposed to be located. There are no patents or
copyrights relevant to the franchise, and Maxim is not the owner or licensee of
any patent or copyrights relevant to the franchise.
EMPLOYEES
As of June 15, 1996, Maxim employed approximately 850 persons on a full-time
basis, including approximately 740 persons at its retail operations. No employee
is a party to any collective bargaining agreement and Maxim believes its
relationship with its employees is good.
GOVERNMENTAL REGULATION
Each company-owned store and franchise location is subject to licensing and
regulation by a number of governmental authorities, which may include health,
sanitation, safety, fire, building and other agencies in the state or
municipality in which the business is located. Difficulties in obtaining or
failure to obtain the required licenses or approvals could delay or prevent the
procurement of new franchises in a particular area.
Maxim is subject to federal and state environmental regulations. While these
regulations have not had a material adverse effect on Maxim's operations to
date, the enactment of new or expanded environmental regulations could adversely
affect Maxim's operations.
Maxim is subject to Federal Trade Commission ("FTC") regulations which
regulate the offer and sale of franchises. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires Maxim to furnish to prospective
franchisees a franchise offering circular containing information prescribed by
the FTC Rule.
State laws that regulate the offer and sale of franchises and the
franchisor-franchisee relationship currently exist in a substantial number of
states. Such laws generally require registration of the franchise offering
circular with state authorities prior to the offer or sale of franchises and
regulate the franchise relationship by, for example, requiring the franchisor to
deal with its franchisees in good faith, prohibiting misrepresentations and
interference with the right of free association among franchisees, limiting the
imposition of standards of performance on a franchisee and regulating
discrimination against franchisees in charges, royalties or fees. Although such
laws may restrict a franchisor in the termination of a franchise agreement by,
for example, requiring "good cause" to exist as a basis for the termination,
advance notice to the franchisee of the termination, an opportunity to cure a
default and a requirement to repurchase inventory or other compensation, these
provisions have not had a significant effect on Maxim's franchise operations.
Maxim is not aware of any pending franchise legislation which in its view is
likely to affect significantly the operations of Maxim. Maxim is aware, however,
that various legislative proposals have been or are being debated at both the
state and federal levels which could result in new laws regulating the offer and
sale of franchises and other aspects of the franchisor-franchisee relationship.
It is possible that such legislation, if enacted, could adversely affect Maxim's
franchise operations.
62
<PAGE>
Maxim believes that its operations comply in all material respects with
federal and state franchise regulations.
PROPERTIES
In June 1995, to accommodate a growing distribution and retail business,
Maxim relocated its entire corporate staff and distribution center to a 150,000
square foot facility on a 13 acre site in Kennesaw, Georgia. Maxim stores
inventory and distributes products to its retail floorcovering network from this
facility. Maxim previously occupied a 62,000 square foot building in nearby
Marietta, Georgia. The Marietta facility is currently being leased to an
unrelated third party.
Maxim also leases 60 facilities, through which it conducts its retail
operations.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Maxim is a party or
of which any of its properties are subject; nor are there material proceedings
known to Maxim to be contemplated by any governmental authority; nor are there
material proceedings known to Maxim, pending or contemplated, in which any
director, officer or affiliate or any principal security holder of Maxim, or any
associate of any of the foregoing is a party or has an interest adverse to
Maxim.
63
<PAGE>
MAXIM
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF MAXIM (INCLUDING THE NOTES THERETO) CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT/PROSPECTUS.
GENERAL
From fiscal 1991 through fiscal 1994, Maxim's operations principally
consisted of securing franchise dealers and brokering the purchase of
floorcovering products (principally carpet) from major suppliers on behalf of
its franchisees. The number of CARPETMAX franchisees grew from 11 in fiscal 1991
to 187 in fiscal 1994. During this early phase, Maxim derived the majority of
its revenues and operating profits from franchise fees and royalties, as well as
fees from the provision of various services to the franchisees. Due to its
emphasis on franchise operations, Maxim's operating margin during the fiscal
1992 to 1994 period averaged 18.1%.
In May 1994, Maxim commenced a strategy of acquiring independent
floorcovering retailers, with the goal of building a Company-owned chain of
stores in addition to its franchise network. This acquisition program included
selected CARPETMAX franchisees and other independent dealers. Through July 1,
1996, Maxim has acquired 11 retail floorcovering companies currently consisting
of 58 stores, including GCO stores. Maxim issued 563,511 shares of Common Stock
and paid cash of approximately $11.8 million to consummate those acquisitions
which were accounted for under the purchase method. As a result of those
acquisitions, Maxim has recorded goodwill of $16.3 million, which was adjusted
to $8.9 million with the goodwill impairment charge of $6.6 million recorded in
fiscal 1996. See "-- Results of Operations." The GCO acquisition, in which Maxim
issued 790,603 shares of Common Stock, was accounted for as a
pooling-of-interests.
In April 1995, Maxim commenced opening additional Company-owned stores to
further expand its market share in the acquired markets. As of July 1, 1996,
Maxim has opened 11 new CARPETMAX stores with total capital expenditures,
initial inventory investments and pre-opening expenses ranging from $75,000 to
$100,000 per store, and three new GCO stores at a total initial investment of
approximately $250,000 per store. Furthermore, in June 1995 Maxim opened its new
distribution center and headquarters facility. Accordingly, Maxim's results of
operations for the ten months ended January 31, 1996 and for the three months
ended April 30, 1996 reflect the costs and expenses associated with the new
store openings and the new distribution center and headquarters.
Maxim's acquisition program led to rapid revenue growth from $19.3 million
in fiscal 1994 to $99.3 million in fiscal 1996. Conversely, the operating margin
declined from 18.9% in fiscal 1994 to (1.5%) in fiscal 1996 (excluding the
one-time goodwill impairment charge of $6.6 million), reflecting the change in
business mix resulting from Maxim-owned retail operations and costs associated
with the growth of Maxim's retail stores. Operating income decreased from $3.7
million in fiscal 1994 to a loss of $8.1 million in fiscal 1996, as a result of
a one-time goodwill impairment charge of $6.6 million, additional reserves
placed on receivables and inventory, as well as additional costs associated with
the opening of new stores and the closing of certain stores. Company-owned
stores produced aggregate revenues of $80.8 million for the ten months ended
January 31, 1996. As a result of the acquisitions and new store openings, a
substantial portion of Maxim's total revenues is currently derived, and is
anticipated to continue to be derived, from the sale of floorcovering products
at Maxim-owned retail stores.
On December 12, 1995 Maxim announced the execution of a letter of intent for
the merger of Maxim into Shaw Industries, Inc. ("Shaw"). The transaction was
proposed as a one-for-one exchange of the outstanding shares of common stock of
Maxim for shares of common stock of Shaw. On January 12, 1996 Maxim terminated
its negotiations with Shaw. This aborted transaction affected the fiscal 1996
operating results with nonrecurring merger transaction costs and material
interruptions to advertising, brokerage and membership revenue.
64
<PAGE>
In January 1996, Maxim changed its fiscal year end from March 31 to January
31. Thus, results for the fiscal period ended January 31, 1996 consisted of only
ten months of operations. The following discussion compares results of
operations for the ten month period ended January 31, 1996 with results of
operations for the year ended March 31, 1995.
RESULTS OF OPERATIONS
The following table sets forth Maxim's results of operations expressed as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR TEN MONTH THREE MONTHS ENDED
ENDED PERIOD ENDED ---------------------
--------------- JANUARY 31, MARCH 31, APRIL 30,
1994 1995 1996 1995 1996
------ ------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales of floorcovering products................. 43.9% 80.3% 85.1% 84.0% 80.6%
Franchise license fees and royalties............ 23.1 7.3 4.8 6.8 4.3
Fees from franchise services and other.......... 33.0 12.4 10.1 9.2 15.1
------ ------ ----- --------- ---------
Total revenues................................ 100.0 100.0 100.0 100.0 100.0
------ ------ ----- --------- ---------
Cost of sales..................................... 37.7 56.7 59.2 57.6 59.5
------ ------ ----- --------- ---------
Gross profit...................................... 62.3 43.3 40.8 42.4 40.5
Selling, general and administrative expenses...... 43.4 38.0(1) 42.3 40.9 34.7
Goodwill impairment charge........................ -- -- 6.6 -- --
------ ------ ----- --------- ---------
Operating income (loss)........................... 18.9 5.4 (8.1) 1.5 5.8
Other income (expense), net....................... 1.2 -- (1.0) (0.5) (0.8)
------ ------ ----- --------- ---------
Earnings (loss) before income taxes............... 20.1 5.4 (9.1) 1.0 5.0
Income taxes (benefit)............................ 7.4 2.3 (1.8) 0.1 2.0
------ ------ ----- --------- ---------
Net earnings (loss)............................... 12.7% 3.1%(1) (7.3)% 0.9% 3.0%
------ ------ ----- --------- ---------
------ ------ ----- --------- ---------
</TABLE>
- ------------------------
(1) During fiscal 1995, Maxim incurred a non-recurring charge of $500,000 (0.7%
of total revenues) related to the merger with GCO.
THREE MONTHS ENDED APRIL 30, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
TOTAL REVENUES. Total revenues for the quarter ended April 30, 1996 (the
first quarter of fiscal 1997) increased 36% to $33,654,858, from $24,786,282
reported for the quarter ended March 31, 1995. The growth in revenues largely
reflects the impact of the acquisitions of floorcovering retailers during the
year ended March 31, 1996 ("fiscal 1996"), and their associated direct sales of
floorcovering products. Revenues from the direct sale of floorcovering products
through company-owned stores and to franchisees, increased 30% to $27,129,116
for the first quarter of fiscal 1997 from $20,811,855 for the quarter ended
March 31, 1995.
Franchise license fees and royalties for the first quarter of fiscal 1997
decreased 14% to $1,451,499 from $1,689,249 for the quarter ended March 31,
1995. The dollar decrease for the three month period includes a $504,069
decrease attributable to the CARPETMAX franchise license fees as a result of a
smaller base of potential franchisees and a decrease of $30,250 in GCO franchise
license fees, which was offset by a $296,569 increase in royalties collected on
the revenues of GCO franchisees.
Fees from franchise services, which includes brokering of floorcovering
products and advertising, increased 130% to $4,460,160 for the first quarter of
fiscal 1997 from $1,938,366 in the quarter ended March 31, 1995. The increase
for the three month period is attributable to increases in buying activity
65
<PAGE>
generated from new CARPETMAX franchisees, growth in product demand from existing
CARPETMAX franchisees, greater utilization of advertising services by CARPETMAX
franchisees and an expansion of services offered by the advertising division.
GROSS PROFIT. Gross profit for the first quarter of fiscal 1997 increased
30% to $13,643,452 from $10,504,828 in the quarter ended March 31, 1995. Gross
profit as a percentage of revenue decreased to 41% in the first quarter of
fiscal of 1997 from 42% in the quarter ended March 31, 1995. The slight
compression in gross margins is primarily a result of the continuing change in
the business mix of Maxim to a revenue base consisting principally of the net
sales from company-owned stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling general and
administrative expenses for the first quarter of fiscal 1997 increased 15% to
$11,691,257 compared to $10,123,080 for the quarter ended March 31, 1995.
Increases in operating expenses on an absolute basis reflects an overall growth
in the size of Maxim's operations required to serve the growing retail base as
well as expenses associated with the opening of new company-owned stores. During
the quarter Maxim reduced certain trade and note receivable reserves totaling
$400,000 reflecting the settlement of such receivables and certain other
reserves totaling $225,000 for the resolution of certain claims. These
adjustments favorably affected selling, general, and administrative expenses by
approximately $625,000 for the quarter ended April 30, 1996 and the first
quarter's net income by approximately $375,000.
OTHER INCOME (EXPENSE), NET. Interest expense for the first quarter of
fiscal 1997 increased to $588,101 from $457,134 for the quarter ended March 31,
1995 due to increased borrowings under Maxim's revolving credit facility,
principally to fund acquisitions and working capital.
INCOME TAX. Maxim's income tax expense for the first quarter of fiscal 1997
increased to $671,177 from $34,106 for the quarter ended March 31, 1995 due an
increase in earnings as well as March 31, 1995 quarter recording a deduction for
the donation of certain inventory to a not-for-profit organization.
NET EARNINGS. Net earnings and earnings per share for the first quarter of
fiscal 1997 increased to $1,006,766 and $.14, respectively, from $223,694 and
$.03, respectively, for the quarter ended March 31, 1995.
TEN MONTH PERIOD ENDED JANUARY 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
In January 1996, Maxim changed its fiscal year end from March 31 to January
31. Thus, results for the fiscal period ended January 31, 1996 consisted of only
ten months of operations. The following discussion compares results of
operations for the ten month period ended January 31, 1996 with results of
operations for the year ended March 31, 1995.
TOTAL REVENUES. Total revenues increased 30.5% to $99.3 million for the ten
months ended January 31, 1996 (fiscal 1996) from $76.1 million in the year ended
March 31, 1995 (fiscal 1995). The growth in Maxim's revenues during fiscal 1996
largely reflected increases in direct sales of floorcovering products through
its retail stores, where retail sales increased 40.9% to $80.8 million for
fiscal 1996 from $57.3 million in fiscal 1995.
Fees from franchise services, which includes brokering of floorcovering
products, advertising and training, increased 4.4% to $8.7 million during fiscal
1996 from $8.3 million in fiscal 1995. The increase was attributable to
increases in buying activity generated from new CARPETMAX franchisees, growth in
product demand from existing CARPETMAX franchisees, and greater utilization of
advertising and training services by CARPETMAX franchisees.
Maxim opened a new distribution facility in Kennesaw, Georgia in June of
1995. The distribution division generated revenues during each of fiscal 1996
and fiscal 1995 of $3.8 million, largely representing sales to Maxim's
franchisees.
GROSS PROFIT. Gross profit increased 23% to $40.5 million during fiscal
1996 from $33.0 million in fiscal 1995. Although gross profit grew in absolute
dollar terms, it decreased as a percentage of sales to
66
<PAGE>
40.8% in fiscal 1996 from 43.3% in fiscal 1995. The reduction in gross margin
was primarily the result of the decrease in franchise revenues of $0.8 million,
due to less franchise sales resulting from the ten month fiscal period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in fiscal 1996 increased 45.2% to $42.0 million compared
to $28.9 million in fiscal 1995. As a percentage of sales, this represented an
increase in fiscal 1996 from fiscal 1995 of 4.3%. This was largely due to
Maxim's recording additional reserves on accounts receivables resulting from
some commercial and building contractors at risk for bankruptcy, as well as
additional inventory reserves recorded in order to record inventory at new lower
market prices, and costs associated with the proposed merger with Shaw, which
was subsequently terminated in January 1996. In addition, Maxim incurred
additional expenses resulting from the move to the Kennesaw facility as well as
additional expenses associated with the opening of new stores and significant
growth in personnel.
GOODWILL IMPAIRMENT. Certain of Maxim's acquisitions have not performed as
anticipated at the time of purchase. The continuing poor financial results from
these operations through the end of fiscal 1996 led management to a reevaluation
of operations that indicated significant strategic and operational changes would
be necessary at some stores, including changes in the customer mix, changes of
location, and changes in store design and merchandising. These same factors also
led management to reassess Maxim's ability to realize fully the remaining
unamortized portion of the goodwill which had been recorded in connection with
such acquisitions. Management's reassessment of such goodwill value was
prompted, in large measure, by the conclusion of a retail consultant that the
acquired retail locations, store designs and merchandising with respect to
certain of the acquired businesses would require significant upgrades, as well
as by the loss of significant builder and contract business and changes in the
relevant marketplace. Management's determination of the degree of impairment of
goodwill was made by projecting each acquired entity's undiscounted future cash
flows, based on certain assumptions, and comparing the unamortized goodwill
balance from Maxim's acquisition of such entity to such projected cash flow
(there were no significant long-lived assets involved in any of such
acquisitions). The assumptions used in such projections reflected the acquired
business' earnings, market and industry conditions, as well as internal
operating plans. The overall results of management's assessment in this regard
indicated a permanent impairment of goodwill for these acquisitions, and
resulted in a write-off of the unamortized balances totaling $6.6 million.
OTHER INCOME (EXPENSE), NET. Interest expense for fiscal 1996 increased to
$1.6 million from $0.7 million in fiscal 1995 due to increased borrowings
related to the acquisition and operation of Company-owned stores, funding of
operating losses in certain divisions, increased borrowings resulting from
moving to the new facility in Kennesaw, Georgia, as well as additions of fixed
assets and leasehold improvements associated with new stores.
INCOME TAXES. Maxim reported an income tax benefit in fiscal 1996 of $1.8
million, compared to an income tax expense in fiscal 1995 of $1.7 million.
Maxim's effective tax benefit rate for fiscal 1996 was 19.5% due to the
write-off of certain goodwill not deductible for tax purposes. Maxim's effective
tax rate for fiscal 1995 was 42.2%.
NET (LOSS) EARNINGS. As a result of the foregoing factors, Maxim recorded a
net loss of $7.1 million in fiscal 1996 compared to net earnings of $2.4 million
in fiscal 1995. The net loss for fiscal 1996 was due primarily to a charge of
$6.6 million for goodwill impairment and increased competition, as well as
increased costs associated with the opening of new stores and closing certain
acquired stores.
YEAR ENDED MARCH 31, 1995 COMPARED TO YEAR ENDED MARCH 31, 1994
TOTAL REVENUES. Total revenues increased 293.6% to $76.1 million in fiscal
1995 from $19.3 million in fiscal 1994. The growth in Maxim's revenues during
fiscal 1995 largely reflects the impact of the acquisitions of floorcovering
retailers and the strong internal growth of the franchise operations. Revenues
from the direct sale of floorcovering products increased 619.3% to $61.1 million
from $8.5 million in fiscal 1994.
67
<PAGE>
Although a significant portion of Maxim's increase in revenues from the
prior year period is directly related to Maxim's acquisitions of floorcovering
retailers, Maxim's franchise-related revenues also experienced strong growth in
fiscal 1995. Franchise license fees and royalties increased 25% to $5.6 million
in fiscal 1995 from $4.5 million in fiscal 1994. The dollar increase includes
$341,000 attributable to CARPETMAX and GCO franchise license fees during the
period and $774,000 attributable to the net increase in royalties collected on
the revenues of GCO franchisees.
Fees from franchise services, which includes brokering of floorcovering
products, advertising and training, for fiscal 1995 increased 60% to $8.3
million from $5.2 million in fiscal 1994. The increase was attributable to
increases in buying activity generated from new CARPETMAX franchisees, growth in
product demand from existing CARPETMAX franchisees and greater utilization of
advertising and training services by CARPETMAX franchisees.
GROSS PROFIT. Gross profit increased 173.7% to $33.0 million in fiscal 1995
from $12.1 million in fiscal 1994. Although gross profit grew in absolute dollar
terms, it decreased as a percentage of revenues to 43.3% in fiscal 1995 from
62.3% in fiscal 1994. The compression in gross margins primarily resulted from
the change in the business mix of Maxim, to a revenue base consisting
principally of franchise fees and services to direct retail sales from the
acquired and newly-opened Company-owned stores. Direct retail sales have higher
associated cost of goods sold than Maxim's other revenue sources.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in fiscal 1995 were $28.9 million compared to $8.4
million in fiscal 1994. The decrease as a percentage of revenues to 38.0% in
fiscal 1995 from 43.4% in fiscal 1994 was primarily due to Maxim's ability to
spread expenses over a larger revenue base and a continued emphasis on cost
control. During fiscal 1995, Maxim incurred a non-recurring charge of $500,000
($.07 per share) related to the merger with GCO.
OTHER INCOME (EXPENSE), NET. Interest expense for fiscal 1995 increased to
$0.7 million from $71,126 in fiscal 1994 due to increased borrowings related to
the acquisition and operation of Company-owned stores.
INCOME TAXES. Maxim's income tax expense in fiscal 1995 increased to $1.7
million from $1.4 million in fiscal 1994. Maxim's effective tax rate for fiscal
1995 increased to 42.2% from 36.7% in fiscal 1994 due to the nondeductibility of
a portion of the goodwill amortization for tax purposes and higher effective
state income tax rates.
NET EARNINGS. Net earnings and earnings per share for fiscal 1995 decreased
to $2.4 million and $.34, respectively, from $2.5 million and $.50,
respectively, for fiscal 1994. Net earnings increased 16% to $2.9 million for
fiscal 1995 before giving effect to the non-recurring GCO merger charge. The
weighted average common and common equivalent shares outstanding increased to
7,092,000 shares from 4,958,000 shares as a result of the accounting for shares
and warrants issued in the October 1993 public offering, the exercise of
warrants in fiscal 1995, the issuance of shares in connection with acquisitions
and the accounting for options to purchase Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Maxim's primary capital requirements are for acquisitions, working
capital, new store openings and other capital expenditures. Maxim historically
has met its capital requirements through a combination of equity transactions,
cash flow from operations, bank lines of credit and credit terms from suppliers.
Since the beginning of fiscal 1994, Maxim has invested over $31.2 million to
construct and equip its operating facilities, acquire floorcovering retailers,
renovate the acquired stores and open new Company-owned stores. In addition,
Maxim used approximately $3.2 million to fund operations.
68
<PAGE>
Maxim has financed these investments and operations principally with net
borrowings under its credit facilities and the net proceeds resulting from its
initial public offering of common stock and the exercise of warrants.
EQUITY TRANSACTIONS. In October 1993, Maxim completed an initial public
offering of 911,300 units each consisting of two shares of Common Stock and one
Common Stock purchase warrant. Net proceeds to Maxim totaled $7.9 million. In
September 1994, Maxim called for the redemption of the outstanding warrants,
resulting in the exercise of the warrants and the issuance of 907,415 shares of
Common Stock and net proceeds to Maxim of $6.3 million. Other significant equity
transactions included the issuance of 1,311,257 shares in fiscal 1995 and 42,857
shares in fiscal 1996 in connection with the merger with GCO and acquisitions of
other floorcovering retailers. See Notes 3 and 12 to Consolidated Financial
Statements of Maxim.
CREDIT FACILITIES. Maxim has a variable rate revolving credit facility with
First Union National Bank of Georgia ("First Union") allowing for borrowings up
to $23.0 million. As of July 1, 1996, $21.6 million was outstanding under this
revolving credit facility at an average interest rate of 7.56%. This credit
facility also contains certain covenants related to Maxim's financial condition
and operating results. Maxim is not permitted to: (i) incur indebtedness from
others in excess of $2.0 million; (ii) consummate certain acquisitions or
investments in excess of $1.5 million without the consent of First Union; or
(iii) sell or dispose of certain assets in excess of $100,000. Additionally,
Maxim is required to maintain certain financial covenants relating to tangible
net worth, funded debt leverage ratio, fixed charge coverage ratio and funded
debt coverage ratio. At April 30, 1996, Maxim obtained waivers of violations of
certain of the credit facility covenants. No assurances can be given that Maxim
will be able to meet these covenants in the future or, if necessary, obtain the
required waivers. See Note 8 to Consolidated Financial Statements of Maxim.
As of July 1, 1996 Maxim also has approximately $7.0 million in principal
outstanding under various term loans at interest rates ranging from 6% to 11%.
See Note 8 to the Consolidated Financial Statements of Maxim.
CASH FLOWS. During the first three months of fiscal 1997, operating
activities used $495,284 compared to $1,917,459 in the quarter ended March 31,
1995. The decrease in cash used in operating activities resulted primarily from
an increase in net earnings and an increase in noncash depreciation and
amortization charges. During fiscal 1996, operating activities provided $1.9
million compared to a use of $3.3 million for fiscal 1995. The change is
primarily a result of a combination of the impairment writedown of goodwill in
fiscal 1996 in the amount of $6.6 million, as well as a decrease in deferred
income taxes of $4.4 million from fiscal 1995 to fiscal 1996.
During the first three months of fiscal 1997, investing activities used
$61,068 compared to $4,740,871 in the quarter ended March 31, 1995. The decrease
is primarily due to a decrease in acquisitions during the first quarter of
fiscal 1997 as compared to the prior year quarter. Investing activities used
$9.9 million in fiscal 1996, compared to $17.3 million in fiscal 1995. The
decrease is primarily due to a decrease in acquisition expenditures during the
fiscal 1996 period. Maxim used $7.3 million in fiscal 1996 for capital
expenditures, compared to $4.7 million in fiscal 1995. The increase in capital
expenditures in fiscal 1996 is primarily due to Maxim's move to the new facility
in Kennesaw, Georgia.
During the first three months of fiscal 1997, financing activities used cash
of $1,191,274 compared to cash provided of $6,053,896 in the prior year period.
This decrease is primarily due to a decrease in proceeds from the line of credit
during the fiscal 1997 period. Financing activities provided cash of $9.9
million in fiscal 1996, compared to $18.8 million in fiscal 1995. The decrease
is due primarily to a reduction in fiscal 1996 in proceeds from exercise of
warrants.
Maxim has received a loan commitment from First Union National Bank to
provide a $125 million revolving credit facility to Maxim. The extension of this
credit facility by First Union is subject, among other things, to the
consummation of the Merger.
69
<PAGE>
INFORMATION REGARDING IMAGE
INTRODUCTION
Image, a Delaware corporation, is a leading plastic recycler and carpet
manufacturer. Image has been involved in the manufacture of carpet, primarily
polyester residential carpeting, since 1976. In 1990, Image began a strategy of
backward integration into the extrusion of polyester fiber for its carpet
products from recycled polyethylene terephthalate ("PET") obtained from
post-consumer plastics, primarily discarded soda bottles. Image is vertically
integrated from the purchase of curbside collected bottles through the complete
manufacturing of carpet products, as well as polyester fiber and PET flake and
pellet which are sold for a variety of end uses.
RECYCLING OPERATIONS
OVERVIEW. Image purchases recycled PET plastic from a variety of sources in
several forms. Currently, Image is capable of processing 150 million gross
pounds of recycled PET into 120 million pounds of clean PET flake each year.
From this net output, Image makes available for sale approximately 20 million
pounds of PET flake. Approximately 5 million pounds of PET flake are extruded
into pellet form and are available for sale as PET pellet. The remaining
approximately 95 million pounds of PET flake are extruded into polyester fiber,
of which approximately 55 million pounds are allocated internally for Image's
carpet manufacturing operations and 40 million pounds of fiber are available for
sale primarily to the home furnishings industry. Image's polyester fiber and PET
flake and pellet sold externally are used for a variety of purposes, including
carpet fiber and fiberfill, food and non-food containers, package strapping and
plastic sheeting. A portion of Image's PET flake and pellet sold to third
parties in the plastics industry, is reproduced into virgin-type resins through
chemical recycling for use in new food and beverage containers.
Over the past five years, Image has developed or acquired certain equipment
and recycling techniques that it has partially customized to enhance Image's
ability to utilize lower-cost and readily-available curbside plastic waste
materials. Heightened environmental awareness and a desire to reduce waste going
into landfills have resulted in legally mandated and voluntary initiatives
around the country to reclaim waste materials for recycling, including
post-consumer plastic bottles.
AVAILABILITY OF RAW MATERIALS. The primary material used in the manufacture
of plastic beverage containers is PET. PET plastic is inert and does not impart
taste, color, odor or chemicals into beverages bottled in PET containers. PET
has a high tensile strength (which enables it to be used for packaging material
under pressure), is lightweight and shatter resistant. PET bottles have enjoyed
increasing consumer acceptance since their introduction in 1978. According to
statistics published by the National Association for Plastic Container Recovery
("NAPCOR"), the number of pounds of new PET bottles sold in the United States in
1995 increased 16.3% over 1994, which increased 13.3% over 1993, which increased
11.1% over 1992.
Traditional methods of disposal have not kept pace with the increasing
number of PET bottles manufactured each year. PET bottles are not biodegradable
and take up a disproportionate amount of space in landfills. Groups and
individuals concerned with the quality and preservation of the environment have
sought to reduce the litter of plastic beverage bottles and to conserve natural
resources and energy by encouraging recycling or by encouraging the adoption of
reclamation legislation. Three primary methods of reclamation have developed:
(i) the adoption by several states of "bottle bill" legislation requiring
bottlers and wholesalers to pay deposit refunds upon return of containers
(deposit materials); (ii) legislation regulating landfill disposal, resulting in
voluntary reclamation of curbside waste plastic material; and (iii) profit
motivated efforts by municipal and private waste handling companies. Curbside
waste bottles are sorted by the consumer and typically contain a higher non-PET
content than deposit materials. According to NAPCOR, 32% of all PET containers
manufactured in 1995 were collected for recycling in the U.S., constituting 622
million pounds of PET. Although this represents a percentage decrease in the
recycling rate of 2% compared to 1994, it is a
70
<PAGE>
volume increase of approximately 55 million pounds or 10%. As a result of
further legislative initiatives that promote consumer recycling programs and
increasing PET consumption, management anticipates increasing availability of
this raw material.
Currently, approximately 80% of Image's PET raw material is curbside waste.
The balance is predominantly deposit materials or post industrial scrap
(manufacturing by-product).
Image's recycling methods produce clean PET flake from curbside waste that
is equal to the purity level attained from recycling deposit materials. During
fiscal 1996, Image purchased waste PET material from approximately 293
suppliers, and no one supplier accounted for more than 12.5% of Image's supply
of PET raw materials.
During fiscal 1995, a shortage of cotton on world markets resulted in
significant growth in demand for polyester fiber for textile manufacturing
applications. This growth initially resulted in increases in demand for
polyester textile fibers and the chemical components for the manufacture of such
fibers. During the fourth quarter of fiscal 1995, competition for PET baled
bottles increased dramatically as east-Asian polyester fiber producers purchased
recycled PET for use in their manufacturing operations. At the end of the fourth
quarter of fiscal 1995, this demand for PET bottles declined significantly. The
reasons for the decline are not certain. Management believes that a number of
factors were involved, including the high delivered costs of PET baled bottles
transported from North America to Asia; health and safety concerns, raised by
the foreign governments involved, resulting from the long transportation time;
the fundamental technology barriers against using recycled plastics to
manufacture fine denier fibers required for textile applications; and a lack of
expertise in processing methods needed to convert PET baled bottles into usable
raw materials. Prices of PET baled bottles have returned to the levels
experienced prior to the period of increased demand. During and subsequent to
this period of unusually high demand, Image was able to procure adequate
supplies of raw materials.
Image currently maintains PET raw materials inventories of approximately 18
to 23 million pounds, which would sustain Image's current recycling operations
for a period of approximately seven to nine weeks. Management believes that
these inventory levels are currently adequate to keep its recycling operations
at capacity. Should the need arise, Image has additional storage space available
to substantially increase its inventories of raw materials.
RECYCLING PROCESS. Image's recycling operations, which produce clean PET
flake, polyester fiber and PET pellet from post-consumer plastic bottles,
include bottle sortation and granulation, washing and fiber and pellet
extrusion.
Bottle Sortation and Granulation. Image's sortation and granulation plant
processes post-consumer PET bottles directly from curbside and deposit waste
material. Image has developed a semi-automated, optically-actuated process which
breaks down bales of post-consumer plastic bottles, separates PET bottles from
non-PET bottles and sorts the PET bottles by color (clear and green). Image
believes that this process is less labor-intensive and more reliable than hand
sortation methods. The PET bottles are then ground into small chips (dirty
flake). Image has expanded its net bottle sorting and grinding capacity to
approximately 135 million annual net pounds with the addition of its fourth
sortation and granulation line. This production line was completed during the
fourth quarter of fiscal 1996. Image's sortation and granulation equipment is
located at plants in Lyerly and Summerville, Georgia.
Washing. Image's washing process receives the dirty flake, removes
contaminants (such as labels, caps and base cups) and cleans the remaining PET
flake using a multi-stage washing process. In the first quarter of fiscal 1996,
Image completed the installation of its third wash line that increased net
washing capacity to a total of 120 million pounds per year from 85 million
pounds per year. Image's washing equipment is located at its plant in
Summerville, Georgia.
Fiber Extrusion. Image produces polyester fiber directly from clean PET
flake, without requiring that the flake first be converted into PET pellet.
Image's fiber extrusion process involves a number
71
<PAGE>
of steps. The clean PET flake is first dried to remove moisture and heated into
a molten state. The molten material is then filtered to remove contaminants and
pumped through spinnerettes to produce the fibers. The fibers are then drawn
(lengthened) to the desired denier (size). The drawing process helps to control
shrinkage and strengthens the fiber. The fibers are then crimped to provide
texture and bulk. Image's extruders can produce fiber ranging in size from 6 to
18 denier and in length from 2 to 7 inches. In fiscal 1995, Image completed
construction of its second fiber extruder which increased Image's total annual
fiber extrusion capacity to 100 million pounds beginning in the fourth quarter
of fiscal 1995. Based on current market conditions, Image expects to operate its
fiber extrusion plant at approximately 95% of capacity in fiscal 1997. Image's
carpet operations are expected to consume approximately 60% of its total fiber
production. Image's fiber extrusion equipment is located at its plant in
Summerville, Georgia.
Pellet Extrusion. In October 1993, Image installed a PET pellet extruder.
The pellet extrusion process includes a number of steps in which clean PET flake
is dried, melted, filtered and extruded into strands and then cut into PET
pellets. Compared to PET flake, PET pellets are purer, have higher bulk density
levels and are sold to customers who cannot use PET flake or who blend PET flake
with PET pellets. Image's PET pellet extrusion process has production capacity
of approximately 10 million pounds per year. Image sells its PET pellet
production to external customers. Image's PET pellet extruder is located at its
plant in Summerville, Georgia.
Quality Control. Image controls quality throughout its recycling process,
beginning with the analysis of the raw materials for chemical properties, color
and purity. During the production process, instrumentation and statistical
process control methods are used to monitor product quality.
MARKETS AND COMPETITION. Based on numerous discussions with manufacturers
of plastic products, Image believes that there is a growing demand for PET resin
and polyester fiber, including clean PET flake and recycled PET pellet. For many
applications, including non-food containers, plastic sheeting and industrial
strapping, recycled PET has a cost advantage over virgin polyester resins. In
addition, plastics manufacturers are increasingly using recycled material in
their manufacturing process to demonstrate to consumers that their products are
environmentally responsible. Image is aware of a number of states that have
enacted laws that encourage a certain percentage of recycled material in
selected rigid plastic products for both food and non-food applications. The FDA
has approved the use of recycled PET in food contact applications through three
different methods. First, it has permitted the use in food and beverage
packaging of a percentage of recycled PET that has been purified through
chemical depolymerization, a process that can reproduce virgin-type resins from
recycled PET. Even though this process is more expensive than using virgin
resins, several major soft drink manufacturers have marketed their products in
bottles containing chemically depolymerized PET. The second method involves a
multilayer manufacturing process which allows recycled PET to be used directly
in food bottles as long as it is encased between layers of virgin resin. In this
process, as much as 50% of the bottle weight can be recycled PET. Image has sold
PET flake and pellet to customers utilizing these two methods. The third method
allows for the direct use of recycled PET which has been cleaned through a
process proprietary to another manufacturer in food packaging applications.
Image has implemented an aggressive marketing program to develop a customer
base for its recycled PET products. During fiscal 1996, 28 companies have
purchased approximately 24.4 million pounds of clean PET flake and pellet
produced by Image.
Image's clean PET flake business faces competition from other established
clean PET flake manufacturers. These competitors include Wellman, Inc., Pure
Tech International, Inc., St. Jude Polymer, Day Products, Inc. and Star
Plastics, Inc. Image competes in its PET flake business on the basis of price,
purity and uniformity of product, warranty, timeliness of delivery and other
service factors. Image also competes with producers of virgin polyester resins
and fibers, including Eastman Chemical Co., Shell Oil Company, ICI American
Holdings, Inc., Wellman, Inc. and Hoechst-Celanese Corp.
72
<PAGE>
Image's polyester fiber is sold to independent yarn spinners for the
manufacture of carpet yarn and as fiberfil to the home furnishings industry for
the manufacture of furniture and pillows. Image enjoys a cost advantage through
the use of recycled materials; it successfully competes in these markets on the
basis of price. Three polyester carpet fiber producers (Hoechst-Celanese Corp.,
Wellman, Inc. and Martin Color-Fi, Inc.) produce approximately 64% of the carpet
industry's polyester fiber needs. Management believes that these same fiber
producers control a significant percentage of the polyester fiberfill market as
well.
CARPET OPERATIONS
OVERVIEW. Image has been involved in manufacturing carpeting since 1976
primarily for the residential market. Image's operations are vertically
integrated from the production of its own fiber through carpet finishing. The
principal raw materials used in Image's carpet manufacturing operations are
polyester fiber, synthetic backing materials and various dyes and chemicals.
Image obtains the principal raw material, polyester fiber, primarily from its
recycling operations and other raw materials from several supply sources. Image
has experienced no significant shortages of raw materials in recent years.
During the last three fiscal years Image has produced carpet for its
domestic and export markets as described in the following table (in approximate
thousands of square yards).
<TABLE>
<CAPTION>
DOMESTIC EXPORT
----------- ---------
<S> <C> <C>
Fiscal 1994........................ 12,013 5,726
Fiscal 1995........................ 15,538 5,138
Fiscal 1996........................ 16,180 3,729
</TABLE>
This production has consumed approximately 42.1, 41.7 and 46.8 million pounds of
Image's internally produced polyester fiber in fiscal 1994, 1995 and 1996,
respectively. During these periods, Image's carpet production has consumed
polyester and nylon fiber, produced by other manufacturers, totaling
approximately 9.7 and 2.9 million pounds in fiscal 1995 and 1996, respectively.
On June 30, 1995, Image acquired substantially all of the assets of Pharr
Yarns of Georgia, Inc., which consists of a yarn spinning facility located in
Rome, Georgia. With this acquisition, Image added 20 million annual pounds to
its polyester yarn spinning capacity.
Image has excess carpet manufacturing capacity at certain stages of the
production process and could increase carpet production through the utilization
of this capacity and readily available subcontracting arrangements if market
conditions warranted additional production.
MANUFACTURING PROCESS. Image's carpet operations include yarn spinning,
tufting, dyeing and finishing operations, as discussed below.
Yarn Spinning. Image's yarn spinning mills produce either spun polyester
yarn or polyester/ nylon blended yarn primarily from the polyester fiber
produced internally. The staple fiber is drawn until the desired size is
produced, and then the ends are twisted together to create a continuous strand.
After twisting, the yarn is then heat-set and wound onto cones. Image's spinning
mills, including the spinning mill acquired June 30, 1995 from Pharr Yarns of
Georgia, Inc., currently have a total production capacity of approximately 45
million pounds of spun yarn per year. During fiscal 1996 Image consumed
approximately 49.7 million pounds of yarn, of which approximately 42.2 million
pounds were produced internally. The remaining yarn consumed was produced by
contract yarn spinners with an insignificant quantity of purchased package
yarns. Due to the completion of its second fiber extruder, it is expected that
Image will only rarely purchase finished yarn. Image's spinning mills are
located in Rome, Georgia; Talladega, Alabama; and Dillon, South Carolina.
Tufting. The process of tufting involves needling the yarn into a primary
backing at the desired pile height. This process produces a large roll of greige
(undyed) carpet. Image has tufting capacity of approximately 25 million square
yards per year. The tufting operations are located at Image's plant located in
Armuchee, Georgia.
73
<PAGE>
Dyeing. Image utilizes a sophisticated dyeing system which involves the
placing of a roll of carpet in a heated, pressurized chamber containing water,
chemicals and dyes. Image dyes carpet manufactured from both clear and green
polyester fiber into a wide variety of colors. Image currently has dyeing
capacity of approximately 25 million square yards per year. The dyeing plant is
located in Rome, Georgia.
Finishing. After dyeing, the carpet is ready for the final processes
required to convert tufted and dyed rolls into a finished product. The rolls
receive an application of adhesive, a sturdy secondary backing, and are dried or
"cured" through the circulation of heated air in the finishing oven. A small
amount of fiber is then sheared from the top of the carpet, and the rolls
receive a final inspection. Image has finishing capacity of approximately 30
million square yards per year. The finishing operations are located at Image's
plant located in Armuchee, Georgia.
CARPET MARKETING AND SALES. Image manufactures high quality polyester
carpeting primarily for the residential market. Currently Image designs,
manufactures and markets 58 carpet styles and maintains approximately 1,663 SKUs
consisting of a range of colors, densities and textures. Image has positioned
its products in the medium price range for carpets sold in the United States and
emphasizes quality, style and service.
The Carpet and Rug Institute ("CRI") estimates that polyester carpet
comprised approximately 7.8% of the total carpet market in calendar year 1995,
down from 8.6% in 1994, 9.5% in 1993 and 10.0% in 1992. CRI also estimates that
nylon carpet made up approximately 60% of the total carpet market in 1995, down
from 65.1% of the total carpet market in 1994, 65.5% in 1993, and 68.1% in 1992.
While the overall polyester carpet market has declined in recent years, Image's
domestic carpet sales have increased each year, as its polyester carpet products
compete directly with nylon carpeting. Management believes that the overall
market decline in polyester carpet sales is due in part to dramatic fluctuations
in the price of polyester staple fiber.
Image markets its carpets domestically and internationally through a direct
sales force of 54 full-time sales representatives and 15 independent sales
agents. Image's carpets are sold under the Classique-Registered Trademark-,
Enviro-Tech-Registered Trademark- and Image-TM- trade style names through over
6,000 retailers and distributors. The Enviro-Tech-Registered Trademark- product
line, initiated in fiscal 1991, emphasizes the 100% recycled fiber content of
the carpet and has experienced solid customer acceptance. Sales of the
Enviro-Tech-Registered Trademark- line were approximately $18.5 million in
fiscal 1996 and $16.6 million in fiscal 1995. Carpets wholesaled to distributors
are typically then sold under private label.
COMPETITION. The carpet manufacturing industry has one dominant competitor,
Shaw Industries, Inc. ("Shaw"), whose 1995 sales were estimated to represent
approximately 30% of the total industry sales. In addition, carpet sales by
Mohawk Industries, Inc. in 1995 were estimated to represent 15% of the total
industry sales. Carpet manufacturers also face competition from the hard surface
floorcovering industry.
The principal methods of competition within the carpet industry are price,
style, quality and service. In both the residential and commercial markets,
price competition and market coverage are particularly important because of the
relatively small differentiation perceived among competing product lines.
Image's recent investment in polyester fiber extrusion equipment, its modern
carpet manufacturing equipment and its marketing strategy contribute to its
ability to compete on the basis of price, style, quality and service. Image has
not historically advertised its products directly to retail customers, although
many of its competitors devote significant resources to promoting their
products.
During the 1980s and continuing into the 1990s, there has been a significant
trend toward consolidation and attrition in the carpet industry, which has
reduced the number of domestic carpet manufacturers.
BACKLOG
Carpet orders are generally filled within 30 days and, as a result, backlog
is not significant.
74
<PAGE>
EMPLOYEES
As of June 15, 1996, Image employed approximately 1,434 persons, of whom
approximately 98 employees are in management and administration, 54 in carpet
sales, 328 in recycling operations and the balance in carpet manufacturing. None
of Image's employees is covered by a collective bargaining agreement. Image
believes it has a good relationship with its employees.
PATENTS
Image's PET recycling processes and carpet manufacturing operations do not
involve licenses or ownership of any patents.
TRADEMARKS
Image uses several trademarks in the marketing of its polyester fiber and
carpeting, including Wearlon-Registered Trademark-, Duratron-Registered
Trademark-, Duratron Gold-TM-, Image Resist-Gard-Registered Trademark-,
Resistron-Registered Trademark-, Ecolon-Registered Trademark-, Permalon-TM-,
Enviro-Tech-Registered Trademark-, Image-TM- and Classique-Registered
Trademark-. Image's registered trademarks are of perpetual duration, subject to
periodic renewal and continued use.
ENVIRONMENTAL MATTERS
Image's operations are subject to numerous existing and proposed laws and
regulations designed to protect the environment from wastes and emissions of
hazardous substances. Management believes it is either in material compliance
with all currently applicable laws and regulations or is acting in accordance
with the appropriate variances or similar arrangements. Image believes that
compliance with current laws and regulations will not require significant
capital expenditures or have a material adverse effect on its operations.
PROPERTIES
Image's executive offices are located in Armuchee, Georgia, and operates
recycling and manufacturing plants in Georgia, Alabama and South Carolina. The
following is a summary of the plants and other properties owned or leased by
Image:
<TABLE>
<CAPTION>
APPROXIMATE
ENCLOSED AREA
IMAGE LOCATIONS PRIMARY USE (SQUARE FEET)
- ------------------------------------------ ------------------------------------------------------- -------------
<S> <C> <C>
Armuchee, Georgia (1)..................... Executive office, carpet tufting and finishing, storage 232,000
and shipping
Calhoun, Georgia (2)...................... PET storage 53,000
PET storage 116,000
PET storage 50,000
Kensington, Georgia (2)(3)................ PET storage 136,000
Lyerly, Georgia (2)....................... PET sortation and granulation, PET storage 54,000
Rome, Georgia (1)......................... Carpet dyeing, finished carpet storage 216,000
Rome, Georgia (2)......................... Finished carpet and fiber storage 140,000
Finished carpet and yarn storage 41,000
Rome, Georgia (1)......................... Yarn Spinning 211,000
Summerville, Georgia (1).................. PET sortation, granulation, washing, fiber extrusion 366,000
and PET pellet extrusion, storage and shipping
Dillon, South Carolina (1)................ Yarn spinning 102,000
Talladega, Alabama (1).................... Yarn spinning 82,000
Melville, New York (2).................... PET purchasing office 425
Shannon, Georgia (1)(4)................... Finished carpet storage 308,000
</TABLE>
75
<PAGE>
- ------------------------
(1) These plants are owned by Image, with the exception that Image's plant in
Summerville, Georgia is leased by Image pursuant to a capital lease from the
Development Authority of the City of Summerville. Image has the option to
purchase the Summerville plant, which includes 14 acres, for $100 upon
expiration of the lease in 2003. These plants include owned approximate
acreages as follows: 168 acres at Armuchee, Georgia; 20 acres at Rome,
Georgia (carpet dyeing); 48 acres at Rome (yarn spinning); 10 acres at
Talladega, Alabama; 12 acres at Dillon, South Carolina; 8 acres at
Summerville, Georgia; and 35 acres at Shannon, Georgia.
(2) These facilities are leased by Image under leases which expire within the
next three years. Management believes that these leases can be renewed on
substantially the same terms and conditions as the existing leases.
(3) On May 1, 1995, Image entered into a second amendment to the lease for this
facility. On July 24, 1995, a fire destroyed a portion of the space covered
by the second amendment. Image's remaining leased space for this facility
includes approximately 136,000 square feet.
(4) On May 29, 1996, Image purchased approximately 35 acres of land and has
begun construction of its new distribution center which is expected to be
completed by mid-1997.
Image believes that its properties are in good condition and sufficient to
meet its requirements. Management monitors the condition of its properties to
ensure they remain sufficient to meet production plans and long-term sales
goals. Management expects that all of Image's leases that expire in the next
three years can be renewed on substantially the same terms and conditions as
those currently in effect.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Image is a party or
of which any of its properties are subject; nor are there material proceedings
known to Image to be contemplated by any governmental authority; nor are there
material proceedings known to Image, pending or contemplated, in which any
director, officer or affiliate or any principal security holder of Image, or any
associate of any of the foregoing is a party or has an interest adverse to
Image.
76
<PAGE>
IMAGE
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS OF IMAGE (INCLUDING THE NOTES THERETO) CONTAINED ELSEWHERE IN THIS
PROXY STATEMENT/PROSPECTUS.
GENERAL
Image has been involved in the manufacture and sale of carpet, primarily for
the residential market, since 1976. In 1990, Image began implementing a strategy
of lowering its production costs and diversifying its product mix through the
backward integration of its operations to include the production of polyester
fiber, PET flake and pellet, primarily from recycled post-consumer soda bottles.
Image completed its initial public offering (the "Initial Public Offering") on
August 18, 1993, and used the net proceeds to prepay and refinance its debt.
Since that time, Image has expanded all areas of its manufacturing capacity.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 30, 1996 COMPARED TO NINE MONTHS ENDED APRIL 1, 1995
The following table sets forth sales data with respect to total sales (sales
dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
------------- ------------
<S> <C> <C>
April 1, 1995.................................................... $ 34,489 $ 99,617
March 30, 1996................................................... 37,573 117,473
------------- ------------
Change........................................................... $ 3,084 $ 17,856
------------- ------------
------------- ------------
Percentage....................................................... 8.9% 17.9%
</TABLE>
CARPET MANUFACTURING. Image sells its carpet products in two primary
markets described below.
Domestic Carpet Sales. The following table sets forth sales data with
respect to domestic carpet (sales dollars and square yards in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------- -------------------------------------
AVERAGE AVERAGE
SQUARE SELLING SQUARE SELLING
SALES YARDS PRICE SALES YARDS PRICE
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
April 1, 1995...................... $ 23,875 3,884 $ 6.15 $ 69,598 11,392 $ 6.11
March 30, 1996..................... 23,396 3,765 $ 6.21 74,438 11,764 $ 6.33
------------ ----- ----------- -----------
Change............................. $ (479) (119) $ 4,840 372
------------ ----- ----------- -----------
------------ ----- ----------- -----------
Percentage......................... (2.0)% (3.1)% 7.0% 3.3%
</TABLE>
Unit sales volumes decreased modestly for the third quarter of fiscal 1996
as a result of the inclement weather conditions in the northern part of the
United States during the winter months, most particularly during the month of
January. For the nine months ended March 30, 1996, however, sales are
significantly ahead of amounts reported for the nine months ended April 1, 1995
as a result of steady market penetration. Sales of Image's
Enviro-Tech-Registered Trademark- product line increased from approximately $4.1
million in the third quarter of fiscal 1995 to $4.5 million in the third quarter
of fiscal 1996 and from approximately $11.5 million in the nine month period
ended April 1, 1995 to $13.7 million in the nine month period ended March 30,
1996. Domestic carpet sales have tended to follow a seasonal pattern.
Historically, domestic carpet sales increase in the fourth quarter as compared
to the third quarter.
77
<PAGE>
Export Carpet Sales. The following table sets forth sales data with respect
to export carpet (sales dollars and square yards in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------- --------------------------------------
AVERAGE AVERAGE
SQUARE SELLING SQUARE SELLING
SALES YARDS PRICE SALES YARDS PRICE
------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
April 1, 1995..................... $ 6,136 1,347 $ 4.56 $ 19,014 4,208 $ 4.52
March 30, 1996.................... 3,917 820 $ 4.78 15,467 3,170 $ 4.88
------------ ----- ------------ -----------
Change............................ $ (2,219) (527) $ (3,547) (1,038)
------------ ----- ------------ -----------
------------ ----- ------------ -----------
Percentage........................ (36.2)% (39.1)% (18.7)% (24.7)%
</TABLE>
Since fiscal 1994, Image has steadily pursued a strategy to shift carpet
sales away from the highly competitive Middle Eastern market. As a result of
this strategy, export sales have declined as a percentage of all carpet sales.
Management expects that export carpet sales to the Middle Eastern market will
continue to decline in the foreseeable future.
PLASTICS RECYCLING. Polyester fiber and the PET resin from which it is made
are used in an ever-growing variety of products. During the third and fourth
quarters of fiscal 1995, demand for PET and polyester fiber increased
dramatically due to a shortage of cotton in world markets. PET resin demand also
increased in response to high prices for competitive packaging materials such as
aluminum and glass. The combined increase in demand resulted in significant
increases in selling prices for all of Image's recycled plastic products as
compared to the first and second quarters of fiscal 1995.
During the third quarter of fiscal 1996, the market price of polyester fiber
and PET resin fell significantly. This resulted in a decline in selling prices
of Image's recycled plastics products during the third quarter of fiscal 1996.
Image sells its recycled plastics products in three primary markets as
described below.
Polyester Fiber Sales. The following table sets forth sales data with
respect to polyester fiber (sales dollars and pounds in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
AVERAGE AVERAGE
SELLING SELLING
SALES POUNDS PRICE SALES POUNDS PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
April 1, 1995......................... $ 1,227 2,265 $ 0.54 $ 3,075 5,909 $ 0.52
March 30, 1996........................ 6,031 9,125 $ 0.66 14,962 22,135 $ 0.68
----------- ----- ----------- -----------
Change................................ $ 4,804 6,860 $ 11,887 16,226
----------- ----- ----------- -----------
----------- ----- ----------- -----------
Percentage............................ 391.5% 302.9% 386.6% 274.6%
</TABLE>
Unit volume continued to show significant increases in both the quarter and
nine months ending March 30, 1996. However, as discussed above, selling prices
have started to fall in response to increasing worldwide polyester fiber
production. Image's growth in fiber sales resulted from the production of
additional quantities of fiber from Image's second polyester fiber extrusion
line which became fully operational in the fourth quarter of fiscal 1995.
Polyester fiber sales are expected to continue to improve but at a slower rate
than during the first nine months of fiscal 1996. Management is investigating
ways to increase fiber production within the framework of existing facilities.
78
<PAGE>
PET Flake Sales. The following table sets forth sales data with respect to
PET flake (sales dollars and pounds in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
AVERAGE AVERAGE
SELLING SELLING
SALES POUNDS PRICE SALES POUNDS PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
April 1, 1995.......................... $ 2,017 5,007 $ 0.40 $ 4,797 13,280 $ 0.36
March 30, 1996......................... 2,677 5,411 $ 0.49 7,842 14,613 $ 0.54
----------- ----- ----------- -----------
Change................................. $ 660 404 $ 3,045 1,333
----------- ----- ----------- -----------
----------- ----- ----------- -----------
Percentage............................. 32.7% 8.1% 63.5% 10.0%
</TABLE>
Increased PET flake sales have resulted from higher average selling prices
and significant growth in unit volume. However, as discussed above, selling
prices have begun to decline. This trend is expected to continue during the
fourth quarter of fiscal 1996 as well. The unit volume increases are chiefly
attributable to the completion of Image's third PET flake washline during the
first quarter of fiscal 1996.
PET Pellet Sales. The following table sets forth sales data with respect to
PET Pellet (sales dollars and pounds in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
AVERAGE AVERAGE
SELLING SELLING
SALES POUNDS PRICE SALES POUNDS PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
April 1, 1995....................... $ 1,032 2,069 $ 0.50 $ 2,711 5,701 $ 0.48
March 30, 1996...................... 865 1,439 $ 0.60 2,500 3,821 $ 0.65
----------- ----- ----------- -----------
Change.............................. $ (167) (630) $ (211) (1,880)
----------- ----- ----------- -----------
----------- ----- ----------- -----------
Percentage.......................... (16.2)% (30.4)% (7.8)% (33.0)%
</TABLE>
The market for Image's PET pellet is heavily influenced by the market for
virgin PET resin, which is also sold in pellet form. As a result of the dramatic
increase in the cost of Image's recycled PET raw materials during the third and
fourth quarters of fiscal 1995 and the first quarter of fiscal 1996, the prices
of Image's PET pellet products were not competitive with virgin PET resin,
resulting in decreases in sales volumes. Management does not expect significant
improvement in PET pellet sales for the remainder of fiscal 1996.
By-Product Sales. Image has begun selling certain goods which are
essentially by-products of the recycling process. As Image has increased the
production capacities of its recycled PET products, greater quantities of
by-products have been produced in the normal course of business, most notably
waste polyester fiber, polyvinyl chloride and high density polyethylene. The net
sales for these by-products during the third quarter of fiscal 1996 was
approximately $0.5 million. Sales in prior periods were not significant.
Image does not expect seasonality to play an important role in the quarterly
sales of its plastic recycling products.
79
<PAGE>
STATEMENT OF OPERATIONS DATA. The following table sets forth certain
statement of operations data for the periods ended April 1, 1995 and March 30,
1996, expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
------------------------- -------------------------
APRIL 1, MARCH 30, APRIL 1, MARCH 30,
1995 1996 1995 1996
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................. 77.3 83.9 75.9 82.7
----- ----- ----- -----
Gross margin.............................................. 22.7 16.1 24.1 17.3
Selling, general and administrative expenses.............. 14.3 13.0 14.5 12.7
----- ----- ----- -----
Operating income.......................................... 8.4 3.1 9.6 4.6
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Gross Margin. In the third quarter of fiscal 1996, gross margin decreased
by 6.6% from the comparable quarter of fiscal 1995. In the nine month period
ended March 30, 1996, gross margin decreased by 6.8% from the comparable period
in fiscal 1995. High raw materials prices during the third and fourth quarters
of fiscal 1995, and the first quarter and part of the second quarter of fiscal
1996, have had a negative impact on gross margin during the third quarter of
fiscal 1996 and the nine months ended March 30, 1996. Current pricing of
recycled PET raw materials has fallen approximately 60% since September 1995.
During the fourth quarter of fiscal 1995 and the first three quarters of
fiscal 1996, management has taken several steps to reduce unit operating costs.
The first of these was the acquisition of Image's third carpet yarn spinning
mill located in Rome, Georgia. The acquisition of this plant significantly
reduced the cost of yarn conversion on approximately 22 million annual pounds of
Image's carpet yarn needs. Management's second action was the construction of
Image's third and fourth recycled plastic sortation and granulation lines, which
allowed Image to shift its raw material supply more toward less expensive whole
bottles and away from pre-ground PET flake. Finally, Image completed
construction of its third PET flake washing line which improves the production
efficiency and yield of this important process. Management expects that these
improvements and reduced raw materials costs, taken as a whole, should result in
improved gross margins beginning in the fourth quarter of fiscal 1996.
Gross margin for Image's overall operations was approximately 16.1% of net
sales in the third quarter of fiscal 1996 and 17.3% of net sales in the nine
months ended March 30, 1996. When analyzed by segment, the results are somewhat
different. For carpet products, gross margin was approximately 18.7% for the
third quarter of fiscal 1996 and 18.6% for the nine months ending March 30,
1996. For recycled plastic products, gross margin was approximately 2.7% of net
sales in the third quarter of fiscal 1996 and 5.9% of net sales in the nine
months ended March 30, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 13.0% of net sales in the third quarter of
fiscal 1996 compared to 14.3% of net sales in the same period in fiscal 1995.
Selling, general and administrative expenses decreased to 12.7% of net sales in
the nine months ended March 30, 1996 compared to 14.5% in the same period in
fiscal 1995. These percentage decreases are due primarily to the increased sales
of polyester fiber, PET flake and PET pellet.
Marketing carpet products to floor covering retailers requires significant
expenditures for product sampling, commission sales personnel, sales promotions
and administrative support. Management expects that due to strong response to
new carpet product introductions during the fourth quarter of fiscal 1996,
selling, general and administrative expenses, principally sampling costs, will
exceed historical averages which may adversely affect the results of operations
for the fourth quarter of fiscal 1996. Recycled plastic products are sold in a
commodity marketplace that does not require the same commitment of
administration and marketing resources as do carpet products.
80
<PAGE>
In the three months and nine months ended March 30, 1996, selling, general
and administrative expenses attributable to all carpet products were
approximately $3.4 million and $10.4 million, respectively, representing 12.5%
and 11.5% of all carpet sales for each of the periods. In the three months and
nine months ended March 30, 1996, selling, general and administrative expenses
attributable to all recycled plastic products were less than $0.1 million and
$0.2 million respectively, representing 0.5% and 0.7% of recycled plastic sales
for each of the periods. Administrative costs of approximately $1.4 million in
the third quarter of fiscal 1996 and $4.4 million in the nine months ended March
30, 1996 were general in nature and not directly attributable to either sales
segment in fiscal 1996.
Interest Expense. The increase in interest expense in the third quarter of
fiscal 1996 and the nine months ended March 30, 1996 over the comparable periods
in fiscal 1995 was due primarily to the debt incurred to acquire the assets of
Pharr Yarns of Georgia, Inc. on June 30, 1995. Significant capital expenditures
in fiscal 1995 and Image's increased working capital requirements also
contributed to higher debt levels and interest expense. At March 30, 1996,
approximately $3.7 million of the amounts owed under Image's credit facility
incurred interest at the prime rate (8.25% at March 30, 1996). The remaining
$55.0 million owed under the credit facility incurred interest at the Eurodollar
rate plus 1%, or approximately 6.72% at March 30, 1996. Image has capitalized
approximately $0.1 million in interest costs in the nine months ending March 30,
1996.
Income Taxes. In the nine months ended March 30, 1996, Image has recognized
a net provision of $0.7 million. This net provision includes a current benefit
of $0.5 million and a deferred provision of $1.3 million. The net provision also
includes a $0.1 million in current benefit resulting from adjustments determined
upon the completion and filing of Image's 1995 tax returns during the third
quarter of fiscal 1996.
In the nine months ended April 1, 1995, Image recognized a net provision of
$3.2 million. This net provision included a current liability $2.8 million and a
deferred provision of $0.5 million. The net provision in the nine months ended
April 1, 1995 also included a current benefit resulting from adjustments
determined upon the completion and filing of Image's 1994 tax returns during the
third quarter of fiscal 1995.
FISCAL YEARS ENDED JULY 1, 1995, JULY 2, 1994 AND JULY 3, 1993
The following table sets forth sales data with respect to total sales
(dollars in thousands):
<TABLE>
<CAPTION>
PERCENTAGE
YEAR ENDED SALES CHANGE
- ---------------------------------------- ----------- ------------
<S> <C> <C>
July 3, 1993............................ $ 95,935
July 2, 1994............................ $ 103,889 8.29%
July 1, 1995............................ $ 135,182 30.12%
</TABLE>
The following discussions present an analysis of sales by segment:
CARPET MANUFACTURING. Image sells its carpet products in two primary
markets described below.
Domestic Carpet Sales. The following table sets forth sales data with
respect to domestic carpet (sales dollars and square yards in thousands):
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
------------------------
SQUARE AVERAGE UNIT SQUARE
YEAR ENDED SALES YARDS SELLING PRICE SALES YARDS
- ----------------------------------- --------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
July 3, 1993....................... $ 66,585 11,848 $ 5.62
July 2, 1994....................... $ 70,933 12,013 $ 5.90 6.53% 1.39%
July 1, 1995....................... $ 95,477 15,538 $ 6.14 34.60% 29.34%
</TABLE>
During the past three years, Image has pursued a program to expand its
domestic carpet business by marketing its carpet products in new territories.
During that time, the sales force has grown from 19 sales employees and 17
independent agents at the beginning of fiscal 1993 to 46 sales employees
81
<PAGE>
and 13 independent agents at the end of fiscal 1995. Image has successfully
focused its efforts toward retailers of mid- to high-end carpet products in the
residential replacement market. Sales of the Company's
Enviro-Tech-Registered Trademark- product line, which focuses consumer attention
on the recycled content of Image's carpet products, increased to $16.6 million
in fiscal 1995 from approximately $9.5 million in fiscal 1994 and from
approximately $7.5 million in fiscal 1993.
Export Carpet Sales. The following table sets forth sales data with respect
to export carpet (sales dollar and square yards in thousands):
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
------------------------
SQUARE AVERAGE UNIT SQUARE
YEAR ENDED SALES YARDS SELLING PRICE SALES YARDS
- --------------------------------- --------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
July 3, 1993..................... $ 25,110 5,313 $ 4.73
July 2, 1994..................... $ 26,309 5,726 $ 4.59 4.78% 7.77%
July 1, 1995..................... $ 23,444 5,138 $ 4.56 (10.89)% (10.27)%
</TABLE>
Due to continued strong demand in domestic carpet markets, Image has pursued
a program to shift gradually away from export sales, especially the highly
price-sensitive Middle Eastern markets. As this trend continues, Image expects
that export carpet sales will continue to decline.
PLASTICS RECYCLING. Image sells its recycled plastic products in three
primary markets described below.
Polyester Fiber Sales. The following table sets forth sales data with
respect to polyester fiber (sales dollars and pounds in thousands):
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
AVERAGE UNIT ------------------------
YEAR ENDED SALES POUNDS SELLING PRICE SALES POUNDS
- -------------------------------------- --------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
July 3, 1993.......................... $ 2,887 5,167 $ 0.56
July 2, 1994.......................... $ 3,064 5,676 $ 0.54 6.13% 9.85%
July 1, 1995.......................... $ 5,011 8,892 $ 0.56 63.54% 56.66%
</TABLE>
A small additional quantity of fiber, from Image's recently completed second
polyester fiber extrusion line, was available for sale in the fourth quarter of
fiscal 1995, accounting for the increase in sales volume. Image sells its fiber
to customers in the carpet and home furnishings industries. Prices of the
various types of fiber sold to these industries depend upon quality and color.
While overall selling prices of Image's fibers have increased steadily, changes
in the mix of products sold have resulted in only a small increase in the
average selling price. In response to demand for Image's fiber products, and as
production efficiency improves on the second polyester fiber extrusion line,
Image expects that fiber sales will continue to improve.
PET Flake Sales. The following tables sets forth sales data with respect to
PET flake (sales dollars and pounds in thousands):
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
AVERAGE UNIT ------------------------
YEAR ENDED SALES POUNDS SELLING PRICE SALES POUNDS
- ---------------------------------- --------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
July 3, 1993...................... $ 999 3,122 $ 0.32
July 2, 1994...................... $ 2,888 10,157 $ 0.28 189.09% 225.34%
July 1, 1995...................... $ 6,737 16,487 $ 0.41 133.28% 62.32%
</TABLE>
In many applications, recycled PET flake can be used as a direct substitute
for virgin PET resin. Image has experienced steady volume growth and quality
acceptance from manufacturers in the consumer product packaging, beverage
bottling and industrial strapping markets. This acceptance has significantly
improved average selling prices.
82
<PAGE>
PET Pellet Sales. The following table sets forth sales data with respect to
PET pellet (sales dollars and pounds in thousands):
<TABLE>
<CAPTION>
AVERAGE UNIT
YEAR ENDED SALES POUNDS SELLING PRICE
- ------------------------------------------------------------ --------- ----------- -------------
<S> <C> <C> <C>
July 2, 1994................................................ $ 486 1,109 $ 0.44
July 1, 1995................................................ $ 3,844 7,507 $ 0.51
</TABLE>
PET pellet is used for the same purposes as PET flake discussed above. Image
began selling PET pellet in the second quarter of fiscal 1994. Prices have
improved compared to fiscal 1994 primarily due to quality acceptance.
STATEMENT OF OPERATIONS DATA. The following table sets forth certain
statement of operations data for the years ended July 3, 1993, July 2, 1994 and
July 1, 1995, expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
JULY 3, 1993 JULY 2, 1994 JULY 1, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0%
Cost of sales......................................... 77.1 75.5 75.8
----- ----- -----
Gross margin.......................................... 22.9 24.5 24.2
Selling, general and administrative expenses.......... 14.3 14.7 14.6
Special charge -- replacement stock options........... -- 10.0 --
----- ----- -----
Operating income (loss)............................... 8.6 (0.2) 9.6
</TABLE>
Gross Margin. In addition to consistently improving selling prices, as
discussed in the preceding analysis of sales, several factors have contributed
to Image's strong gross margin performance. Backward integration into recycling
has reduced Image's costs of manufacturing its carpet products, created
profitable new products and further lowered the manufacturing costs of Image's
recycled products.
Image has contended with two factors that have increased costs during 1995.
First, the unprecedented increase in domestic carpet sales temporarily required
the purchase of polyester carpet yarn on the open market at prices that exceeded
Image's internal costs. These costs affected gross margin in the third and
fourth quarters of fiscal 1995, but are not expected to affect future
operations. Second, strong demand for polyester (PET) resin on the world market
caused a sharp increase in the cost of Image's primary raw material,
post-consumer PET soda bottles, during the fourth quarter of fiscal 1995.
Management believes that demand for these materials has subsided and prices
should continue to decline slowly throughout fiscal 1996. The current high-cost
inventory will, however, result in diminished gross margin performance for the
next two or three fiscal quarters, depending on Image's rate of consumption and
realization of declines in future costs.
Gross margin for Image's overall operations was approximately 24.2% of net
sales in fiscal 1995. When analyzed by segment, the results are somewhat
different. For carpet-related sales, gross margin represented approximately
25.2% of net sales. For recycled plastics products, gross margin was
approximately 15.5% of net sales. Due to the developmental nature of the
Company's recycled products, it was not practical to determine the allocation of
costs between the two business segments in prior years.
Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses have remained consistent during the
last three years.
The marketing of carpet products to floor covering retailers requires
significant commitments in the areas of product sampling, commission sales
personnel, sales promotions and administrative support. Since recycled polyester
fiber and recycled PET flake and pellet are sold primarily in a commodity
marketplace, these products require fewer selling, general and administrative
expenses.
83
<PAGE>
Due to the developmental nature of Image's recycled products, it is not
practical to determine the allocation of selling, general and administrative
expenses between Image's two business segments in prior years. In fiscal 1995,
selling, general and administrative expenses attributable to all carpet products
were approximately $13.5 million, representing 11.4% of all carpet sales.
Selling, general and administrative expenses attributable to recycled products
were approximately $0.3 million in fiscal 1995, representing 2.0% of all
recycled product sales. Approximately $5.9 million in administrative costs were
general in nature and not directly attributable to either sales segment in
fiscal 1995.
Special Charge -- Replacement Stock Options. Effective as of August 10,
1993, and in connection with its initial public offering, Image granted
fully-vested stock options (the "Replacement Stock Options") to acquire
1,133,856 shares of Common Stock, exercisable at $0.01 per share, to certain
management officials, employees and consultants of Image in replacement of a
like number of unvested stock appreciation units and vested and unvested stock
options, also with an initial basis value or exercise price of $0.01 per share.
As a result of this exchange, Image recognized in the first quarter of fiscal
1994 a noncash, nonrecurring charge of approximately $10.4 million and a related
deferred tax benefit of approximately $3.9 million, resulting in a net charge of
approximately $6.5 million, which is equivalent to approximately $1.16 per share
based on 5.6 million equivalent shares outstanding. Although this noncash charge
had no net effect on Image's total stockholders' equity, the charge caused Image
to report a loss for all of fiscal 1994.
Image did not receive any current tax deductions upon the granting of the
Replacement Stock Options; however, Image has realized a $1.2 million tax
deduction in fiscal 1995 and a $.5 million tax deduction in fiscal 1996 related
to the exercise of a portion of the Replacement Stock Options and expects to
realize additional income tax deductions for compensation expense upon exercise
of each of the remaining Replacement Stock Options in an amount equal to the
fair market value of the Common Stock at the date of exercise minus the $0.01
per share exercise price. Image's future income tax deductions would be
allowable in its fiscal year which includes the last day of the calendar year in
which the holder of the Replacement Stock Options recognizes the corresponding
income. As of July 1, 1995 and 1996, approximately 970,000 and 934,000
Replacement Stock Options, respectively, remained and are exercisable until
March 30, 2006, at the sole discretion of the holders. Image is therefore unable
to project the precise amount or timing of any future tax benefits related to
the exercise of the Replacement Stock Options. Any required adjustments to
deferred tax assets relating to stock options could increase or decrease
additional paid-in capital or future net earnings, depending upon the
circumstances.
Interest Expense. The increase in interest expense in fiscal 1995 over
fiscal 1994 and fiscal 1993 was due primarily to the overall increase in
interest rates, the significant capital expenditures made to expand Image's
recycled polyester fiber production, PET sortation, granulation and washing
capacities, carpet yarn spinning capacity and Image's increased working capital
requirements. At July 1, 1995, approximately $18.0 million of Image's restated
credit facility was incurring interest at the prime interest rate (9.0% at July
1, 1995). The remaining $35.0 million incurs interest at the Eurodollar rate
plus 1%, or approximately 6.8% at July 1, 1995. As a result of the capital
projects undertaken during fiscal 1994 and fiscal 1995, Image has capitalized
approximately $0.5 million in interest costs during fiscal 1995. Most of the
projects requiring this capitalization were completed by the end of the third
quarter of fiscal 1995.
Income Taxes. In fiscal 1993, Image's tax provision was $1.6 million under
the provisions of APB 11. This provision was largely offset by the utilization
of net operating loss carryforwards ("NOLs") described below under
"Extraordinary Items". In fiscal 1994, Image recognized a net income tax benefit
of $0.5 million, principally resulting from the future tax deductions associated
with the replacement stock option charge under the provisions of SFAS 109.
In fiscal 1995, Image recognized a tax provision of approximately $4.2
million. As of July 1, 1995, Image had approximately $3.6 million of NOLs.
Approximately $1.8 million of NOLs should be available to reduce current taxable
income in each of the next two fiscal years.
84
<PAGE>
EXTRAORDINARY ITEMS. In fiscal 1993, Image realized, as an extraordinary
item, a tax benefit resulting from the utilization of NOLs in the amount of $1.5
million. In fiscal 1994, Image realized a $0.8 million noncash extraordinary
gain on the extinguishment of long-term debt owed to two stockholders, which was
partially offset by the write-off of the $0.5 million remaining balance of
deferred loan costs on debts prepaid with proceeds of the Initial Public
Offering. The net gain was reduced by $0.1 million in related income taxes.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. In the nine months ended March 30, 1996, operating activities
resulted in a net use of cash totaling $1.4 million. All components of working
capital increased in accordance with significantly higher sales recorded in the
first nine months of fiscal 1996. Net working capital increased $9.2 million
between July 1, 1995 and March 30, 1996, representing a growth of approximately
28.6% during the period.
At June 30, 1996 Image had long-term debt and capital lease obligations of
approximately $61.3 million. At July 1, 1995 Image had long-term debt and
capital lease obligations of approximately $54.0 million. This increase is
primarily attributable to capital expenditures and increased working capital
requirements.
On November 3, 1995, Image amended its credit facility with The First
National Bank of Boston, First Union National Bank of Georgia and Wachovia Bank
of Georgia, NA. The amended credit facility increased Image's line of credit
from $60.0 million to $70.0 million. Image's borrowings under the amended credit
facility are secured by a first priority lien on all assets. The credit facility
contains numerous covenants relating to restrictions on certain types of
indebtedness, minimum earnings levels and tangible net worth. Management
believes that the net cash provided by operations and borrowings available under
the credit facility are sufficient to meet Image's anticipated liquidity and
capital expansion needs.
CAPITAL EXPENDITURES. In the third quarter of fiscal 1996, capital
expenditures were $1.6 million. Capital expenditures for the nine months ended
March 30, 1996 were $6.1 million. In the third quarter of fiscal 1995, capital
expenditures were $4.1 million. Capital expenditures for the first nine months
of fiscal 1995 were $15.3 million. Capital expenditures for the first nine
months of fiscal 1996 primarily related to the purchase of additional yarn
spinning, carpet tufting and dyeing equipment as well as continued additions to
PET bottle sortation and granulation machinery and PET flake washing capacity.
Capital expenditures in the first nine months of fiscal 1995 primarily related
to Image's second bottle sortation and granulation production line and Image's
second recycled polyester fiber extrusion line and related facilities.
Expenditures were financed by funds borrowed under Image's credit facility.
Projects which are currently in the early stages of construction include a new
308,000 square foot distribution center which will ultimately replace all
existing shipping facilities for Image's carpet-related products. This new
facility is expected to be operational during the fourth quarter of fiscal 1997.
Capital expenditures during fiscal 1997, including the completion of projects in
process, are expected to be approximately $15 million. As of July 22, 1996,
Image had approximately $6.9 million of obligations under contract.
In fiscal 1993, 1994 and 1995, capital expenditures were $5.7 million, $13.4
million and $34.3 million respectively. Capital expenditures in 1993 were
primarily related to Image's PET pellet extrusion line and plant expansion,
including expansions of Image's washing, sortation and granulation capacities.
During fiscal 1994 and 1995, Image undertook the construction of its second
recycled polyester fiber extruder and related plant expansions. During these
years, Image also completed other expansions of its PET washing, sortation and
granulation capacities.
85
<PAGE>
On June 30, 1995, Image completed the acquisition of a carpet yarn spinning
facility under the Asset Purchase Agreement between Image, Pharr Yarns of
Georgia, Inc. and Stowe-Pharr Mills, Inc. This expenditure was financed by
internally generated funds and funds borrowed under the restated credit facility
as well as the issuance of an additional 400,000 shares of Image's common stock
to Pharr Yarns of Georgia, Inc.
In previous years, as Image expanded its recycling capabilities, the
plastics recycling segment of business accounted for the majority of Image's
capital expenditures and working capital growth. Due to the acquisition of
additional carpet yarn spinning plant and equipment in fiscal 1995, the two
segments' use of liquidity and capital resources was approximately equal. In
fiscal 1996, the two segments' use of liquidity and capital resources is
expected to remain approximately equal.
LONG-TERM DEBT. Image's long-term revolving credit facility allows for
borrowings of up to $70.0 million which incurs interest, at Image's option, at
the prime interest rate (8.25% at June 30, 1996) or Eurodollar rate plus 1.0%
(approximately 6.5% at June 30, 1996). Refer to Image's discussion in "Liquidity
and Capital Resources" for further discussion.
As of March 31, 1996 Image was in compliance with all covenants and
restrictions contained in the New Credit Facility.
INFLATION. See Image's discussion under "Plastics Recycling" and "Gross
Margin" for the effects of inflation on Image's operations.
MAXIM ANNUAL MEETING MATTERS
PROPOSAL TO APPROVE COMMON STOCK AMENDMENT
A condition precedent to the consummation of the Merger is an amendment to
Article IV of Maxim's Certificate of Incorporation to increase the number of
authorized shares of Common Stock of Maxim to provide for the issuance of shares
of Maxim Common Stock (or options covering such shares, as applicable) to the
shareholders and option holders of Image as contemplated in the Merger Agreement
(the "Common Stock Amendment"). The Common Stock Amendment amends Article IV of
the Maxim Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 15,000,000 shares to 25,000,000 shares.
Because Maxim may not have sufficient uncommitted authorized but unissued
shares of Common Stock to consummate the Merger without approval of the proposed
increase in the number of authorized shares of Common Stock, such proposed
increase is a condition precedent to consummation of the Merger, which the Maxim
Board believes is in the best interests of Maxim shareholders. See "BACKGROUND
OF AND REASONS FOR THE MERGER" and "TERMS OF THE MERGER." In addition, Maxim's
Board of Directors believes that the proposed increase in the number of
authorized shares of Maxim Common Stock will provide flexibility needed to meet
corporate objectives and to implement Maxim's strategic plan and is in the best
interests of Maxim and its shareholders.
The Board of Directors recommends that shareholders approve the Common Stock
Amendment because it considers the proposal to be in the best long-term and
short-term interests of Maxim, its shareholders and its other constituencies.
The proposed increase in the number of shares of authorized Common Stock will
ensure that sufficient shares of Common Stock are available subsequent to the
issuance of shares of Common Stock pursuant to the terms of the Merger Agreement
and will ensure that additional shares of Common Stock will be available, if
needed, for issuance in connection with any possible future transactions
approved by the Board of Directors, including, among others, stock splits, stock
dividends, acquisitions, financings and other corporate purposes. In addition,
the proposed increase in the number of authorized shares of Common Stock will
ensure that sufficient shares are available for grant pursuant to Maxim's 1993
Stock Option Plan. See "-- Proposal to Amend 1993 Stock Option Plan."
86
<PAGE>
The Board of Directors believes that the availability of the additional
shares of Common Stock for such purposes without delay or the necessity for a
special shareholders' meeting (except as may be required by applicable law or
regulatory authorities or by the rules of any stock exchange on which Maxim's
securities may then be listed) will be beneficial to Maxim by providing it with
the flexibility required to consider and respond to future business
opportunities and needs as they arise. The availability of additional authorized
shares of Common Stock will also enable Maxim to act promptly when the Board of
Directors determines that the issuance of additional shares of Common Stock is
advisable. It is possible that shares of Common Stock may be issued at a time
and under circumstances that may increase or decrease earnings per share and
increase or decrease the book value per share of shares presently held.
Although Maxim may require additional capital or other financing to fund its
operations and continued growth, other than the shares of Common Stock to be
issued in connection with the Merger and the 1993 Stock Option Plan, Maxim does
not have any immediate agreements, arrangements, commitments or understandings
with respect to the issuance of any of the additional shares of Common Stock
which would be authorized by the proposal to increase the number of authorized
shares.
On July 15, 1996, 7,205,995 shares of Maxim Common Stock were issued and
outstanding. Upon consummation of the Merger, 12,472,280 shares of Common Stock
will be issued and outstanding (14,651,527 shares assuming the exercise of all
outstanding stock options of Maxim and Image).
It should be noted that the availability of additional shares could render
more difficult or discourage a takeover attempt. For example, additional shares
of Maxim Common Stock could be issued and sold to purchasers who oppose a
takeover bid which is not in the best long-term and short-term interests of
Maxim, its shareholders and its other constituencies or could be issued to
increase the aggregate number of outstanding shares of Maxim Common Stock and
thereby dilute the interest of parties attempting to obtain control of Maxim. In
connection with any issuance of shares of Maxim Common Stock, the Board of
Directors is required to determine that such issuance would be in the best
long-term and short-term interests of Maxim, its shareholders and its other
constituencies.
The approval of the holders of a majority of the issued and outstanding
shares of Common Stock of Maxim is required for the adoption of the Common Stock
Amendment. THE BOARD OF DIRECTORS RECOMMENDS THAT MAXIM'S SHAREHOLDERS APPROVE
THE COMMON STOCK AMENDMENT.
PROPOSAL TO APPROVE OTHER MAXIM CHARTER AMENDMENTS
GENERAL. The Board of Directors of Maxim has determined that, in addition
to the Common Stock Amendment, certain other amendments to Maxim's Certificate
of Incorporation are advisable and has recommended that Maxim's shareholders
approve such amendments. The proposed amendments to the Maxim Certificate of
Incorporation would:
(a) Adopt a new Article XI to fix the size of the Board at not less than
three (3) nor more than fifteen (15) directors (the exact number of
directors to be determined from time to time by resolutions adopted by a
majority of the Board); provide for the classification of the Board at the
Maxim Annual Meeting into three classes, as nearly equal in number as
possible, each class of which, after the election to initial terms of one,
two and three years, will serve for a term of three years, with one class
being elected each year; to provide that directors may be removed from
office only for cause and only upon the affirmative vote of the holders of
75% of the total number of votes entitled to be cast by the holders of all
shares of capital stock then entitled to vote generally in the election of
directors of Maxim ("Maxim Voting Stock"); to provide that any director
selected by the Board of Directors to fill a vacancy or newly created
directorship will serve until the expiration of the term of the class of
directors in which such vacancy or newly created
87
<PAGE>
directorship occurs; and to provide that those provisions cannot be
subsequently amended or repealed without the affirmative vote of the holders
of not less than 75% of the total number of votes entitled to be cast by the
holders of Maxim Voting Stock;
(b) Adopt a new Article XII to provide that special meetings of the
shareholders may only be called by a resolution of a majority of the Board
and that the shareholders of Maxim may not take action by written consent;
and provide that this provision cannot subsequently be amended or repealed
without the affirmative vote of the holders of not less than 75% of the
total number of votes entitled to be cast by the holders of Maxim Voting
Stock; and
(c) Adopt a new Article XIII to permit amendment of the Maxim By-laws by
the Board of Directors without action by shareholders; and to provide that
this provision cannot subsequently be amended or replaced without the
affirmative vote of the holders of not less than 75% of the total number of
votes entitled to be cast by the holders of Maxim Voting Stock.
The proposed amendments to the Maxim Certificate of Incorporation, including
the Common Stock Amendment, are referred herein as the "Maxim Charter
Amendments."
Because approval of the Common Stock Amendment is a condition precedent to
the consummation of the Merger, it will be voted on separately by the
shareholders of Maxim at the Maxim Annual Meeting. The other Maxim Charter
Amendments are being presented to shareholders of Maxim for approval as a single
proposal. The Maxim Charter Amendments, when taken together with the present
ability of the Board to issue additional shares of capital stock from Maxim's
presently authorized but unissued shares of capital stock, including one or more
series of preferred stock having rights and privileges and preferences
determined by the Board, the existing provisions of Maxim's Certificate of
Incorporation which require super-majority approval of certain transactions with
interested shareholders, and the provisions of Section 203 ("Section 203") of
the General Corporation Law of the State of Delaware (the "Delaware Law")
relating to mergers or business combinations involving certain large
shareholders discussed below in this Proxy Statement/Prospectus, would, if
adopted, effectively reduce the possibility that a third party could effect a
sudden or surprise change in control of Maxim's Board without the consent or
support of the incumbent Board and would help to assure fair treatment of all
shareholders in the event of an attempt to take over Maxim.
Adoption of the Maxim Charter Amendments may have significant effects on the
ability of shareholders of Maxim to change the composition of the incumbent
Board of Maxim and to benefit from certain transactions which are opposed by the
incumbent Board. Accordingly, shareholders are urged to read carefully this
Proxy Statement/Prospectus which describes the Maxim Charter Amendments and
their purposes and effects, and to study carefully the Maxim Charter Amendments,
the full texts of which are set forth in Appendix D, which is attached to this
Proxy Statement/Prospectus and incorporated herein by this reference.
The Maxim Charter Amendments are permitted under Delaware law and are
consistent with the rules of The Nasdaq National Market through whose facilities
the Common Stock of Maxim are traded. The Nasdaq National Market is not
required, however, to review, approve or otherwise pass upon the Maxim Charter
Amendments. The Maxim Charter Amendments are not the result of any specific
efforts of which Maxim is aware to accumulate Maxim's Common Stock or to obtain
control of Maxim. The Board, which unanimously approved the Maxim Charter
Amendments and recommends that the shareholders approve such amendments, does
not presently contemplate recommending the adoption of any further amendments to
the Certificate of Incorporation of Maxim, or taking any additional measures,
other than those described herein, which would affect the ability of third
parties to take over or change control of Maxim.
In considering adoption of the Maxim Charter Amendments, shareholders should
note that Maxim is already subject to Section 203 of the Delaware Law which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested shareholder for a period of three
years following the date that such shareholder became an interested
88
<PAGE>
shareholder, unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the shareholder becoming an interested shareholder, (ii) upon
consummation of the transaction which resulted in the shareholder becoming an
interested shareholder, the interested shareholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of shareholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested shareholder.
Section 203 of the Delaware Law was adopted by the State of Delaware with
respect to corporations incorporated under its laws in response to certain
tactics involved in takeovers (such as "two-tier pricing") that can result in
dissimilar treatment of a corporation's shareholders. At the time Section 203
was adopted, a number of corporations had been subject to tender offers for, or
other acquisitions of, more than 10% but less than 85% of their outstanding
stock. In many cases, such purchases were followed by business combinations in
which the tender offeror or other purchasers paid a lower price for the
remaining outstanding shares than the price it paid in acquiring its original
interest in the corporation or paid a less desirable form of consideration.
Federal securities law and regulations applicable to business combinations
govern the disclosure required to be made to minority shareholders in order to
consummate such a transaction, but do not assure shareholders that the terms of
the business combination will be fair to them or that they can effectively
prevent its consummation. Moreover, the statutory right of the remaining
shareholders of the corporation to dissent in connection with certain business
combinations and receive the "fair value" of their shares in cash may involve
significant expense to dissenting shareholders and may not be meaningful in all
cases. Ordinarily, in the second phase of a two-step business combination
involving a merger, the shareholders of the corporation would be entitled under
Delaware law to dissent and receive the appraised fair value of their shares.
The statutory right to dissent is unavailable under Delaware law, however, to
the holders of shares of any class of capital stock of the corporation which is
listed on a national securities exchange or designated as a national market
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. on the record date for any vote required for a business
combination. Accordingly, so long as Maxim's Common Stock remains designated as
a national market system security on The Nasdaq National Market, as is presently
the case, the holders of Maxim Common Stock will not be entitled to the
statutory right to dissent under Delaware law. In addition, in the case of some
business combinations, such as a sale of assets or a reclassification or
recapitalization of Maxim's capital stock, the statutory right of dissent is not
available at all, regardless of whether the Maxim Common Stock is so listed or
designated. Section 203 of the Delaware Law was intended to meet partially these
gaps in federal and state law and to prevent certain of the potential inequities
of business combinations.
REASONS FOR AND CERTAIN EFFECTS OF THE MAXIM CHARTER AMENDMENTS. The Board
is asking the shareholders of Maxim to consider and adopt the Maxim Charter
Amendments in order to further discourage certain types of transactions which
would involve an actual or threatened change of control of Maxim and to make it
more difficult and time-consuming to change majority control of the Board, thus
reducing the vulnerability of Maxim to an unsolicited proposal for the takeover
of Maxim, particularly a proposal that does not contemplate the acquisition of
substantially all of Maxim's outstanding capital stock. The Board believes that
such takeover proposals and tactics generally are not in the best interests of
Maxim and its shareholders.
In recent years, third parties often have accumulated substantial stock
positions in public companies as a prelude to proposing a takeover or a
restructuring or sale of all or part of a corporation's assets or other similar
extraordinary corporate actions. Such actions are often undertaken by the
89
<PAGE>
third party without advance notice to or consultation with management of a
corporation, and in many cases, the third party seeks representation on the
corporation's board of directors in order to increase the likelihood that its
proposal will be implemented by the corporation. If the corporation resists the
efforts of the third party to obtain representation on the board of directors,
the third party may commence a proxy contest to have its nominees elected to the
board of directors in place of management's nominees. In some cases, the third
party may use the threat of a proxy fight or a bid to acquire the corporation as
a means of attempting to force the corporation to repurchase the securities
owned by the third party at a substantial premium over market price.
The Board believes that the threat of removal of Maxim's management in
situations of the type described above would severely impede management's
ability to negotiate effectively with potential purchasers. The Maxim Charter
Amendments are intended to discourage the use of the tactics described above or
unilateral attempts by persons to acquire control of Maxim or to effect a change
in management of Maxim. One purpose of the Maxim Charter Amendments is to
enhance management continuity and to encourage any person seeking to gain
control of Maxim to act through the Board in proposing any transaction with
Maxim. Although it is not the purpose of the Maxim Charter Amendments to ensure
that Maxim remains independent, the amendments, if adopted, could increase the
likelihood that Maxim would remain independent in the event the Board were to
consider an offer for Maxim to be inadequate or not in the best interests of
Maxim and its shareholders. The Board recognizes that unilateral attempts to
acquire or gain control of Maxim may not, in all instances, necessarily be
detrimental to Maxim or its shareholders. However, the Board believes that
adoption of the Maxim Charter Amendments, in concert with the provisions of
Maxim's Certificate of Incorporation and Section 203 of the Delaware Law already
applicable to Maxim, will encourage prior consultation and negotiation with the
Board, will permit the Board to evaluate the proposal of any third party or
purchaser and to study alternative proposals and will permit the Board to
negotiate more effectively with any proposed purchaser of Maxim, by, among other
things, limiting or precluding the ability of the third party or purchaser to
effect a business combination with Maxim promptly following acquiring a majority
or significant percentage of the Maxim Voting Stock without the cooperation of
the Board in calling a meeting of shareholders to consider such business
combination and the ability of such third party or purchaser to effect promptly
a change in the composition of the Board in the event such cooperation is not
forthcoming. The Board believes that the benefits of seeking to protect its
ability to negotiate more effectively with proponents of an unfriendly or
unsolicited proposal to take over or restructure Maxim outweigh the
disadvantages of discouraging such proposals.
The Maxim Charter Amendments, if they are adopted, could have the effect of
discouraging a third party from making a tender offer or otherwise attempting to
obtain control of Maxim, even though such an attempt might be beneficial to
Maxim and its shareholders.
The Maxim Charter Amendments are not being recommended in response to any
specific effort to obtain control of Maxim, but rather are being recommended in
order to ensure that Maxim is prepared for future exigencies and to ensure that
shareholders of Maxim are treated fairly in the event of any future takeover
effort. The Board does not presently have any intention of soliciting a vote of
the shareholders for any additional proposals or amendments designed to deter a
possible takeover of Maxim.
The Certificate of Incorporation of Maxim requires super-majority approval
of certain transactions with interested shareholders. See "TERMS OF THE MERGER
- -- Description of Maxim Capital Stock." In addition, under Maxim's Certificate
of Incorporation, Maxim has authorized but not outstanding or reserved for
issuance 1,000,000 shares of Preferred Stock. Shares of authorized, unissued and
unreserved Preferred Stock of Maxim, within the limits imposed by and subject to
the requirements of applicable law and the rules of The Nasdaq National Market,
could be issued under circumstances where a shareholder would obtain sufficient
voting power to ensure that any proposal to remove directors or to alter, amend,
change or repeal any of the provisions that will be added to the Certificate of
Incorporation by the Maxim Charter Amendments would not receive the 75% vote
required therefor by the Maxim Charter Amendments and that any proposal to
effect a transaction
90
<PAGE>
subject to the provisions of Section 203 of the Delaware Law or in other
transactions which could have the effect of discouraging or making more
difficult a tender offer or other attempt to obtain control of Maxim, even
though such an attempt might be beneficial to Maxim and its shareholders.
POTENTIAL DISADVANTAGES OF THE MAXIM CHARTER AMENDMENTS. Adoption of the
Maxim Charter Amendments may have several potential disadvantages for
shareholders of Maxim. First, the Maxim Charter Amendments, if adopted, could
have the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of Maxim, even though such an attempt
might be beneficial to Maxim and its shareholders, because of the restrictions
under Delaware law on such third party's ability to effect a business
combination without the concurrence of Maxim's incumbent Board and the
limitations on the ability of the shareholders to effect a prompt change in the
Board should the views of the shareholders be at variance with those of the
Board. Second, apart from the effect on the ability of a third party to attempt
to obtain control of Maxim, the Maxim Charter Amendments limit the ability of
the shareholders (i) to effect a prompt change in the composition of the Board
by requiring at least two meetings of the shareholders to elect a majority of
the members of the Board, (ii) to remove a director, even for cause, by
requiring a 75% vote of shareholders to remove a director, which may be done
only for cause, and (iii) to fill vacancies on the Board, which vacancies,
except under certain limited circumstances prescribed by Delaware law, will be
permitted to be filled only by the remaining members of the Board. Third, by
eliminating the ability of shareholders to call special meetings of shareholders
or to take action by written consent, the Maxim Charter Amendments will limit
the ability of the shareholders to bring matters up for consideration by
shareholders other than at annual meetings of the shareholders unless the
majority of the members of the Board agree such matters should be considered by
the shareholders. Finally, should the shareholders desire to amend or repeal any
portion of the Maxim Charter Amendments (other than the Common Stock Amendment),
the present directors and executive officers of Maxim, were they to exercise
their options to acquire Common Stock exercisable within sixty days of June 15,
1996, would be able to veto any proposal to amend or repeal the Maxim Charter
Amendments.
SIZE OF BOARD OF DIRECTORS, CLASSIFICATION OF THE BOARD OF DIRECTORS,
REMOVAL OF DIRECTORS AND RELATED MATTERS. The Maxim Charter Amendments add a
new Article XI to the Maxim Certificate of Incorporation which would (i) fix the
size of the Board at not less than three (3) nor more than fifteen (15)
directors, the exact number of such directors to be determined from time to time
by resolution adopted by a majority of the Board, (ii) classify the Board into
three classes, as nearly equal in number as possible, each of which, after
initial terms of one, two and three years, will serve for three years, with one
class being elected each year, (iii) provide that directors may be removed only
for cause and only upon the affirmative vote of the holders of not less than 75%
of the total number of votes entitled to be cast by the holders of all shares of
Maxim Voting Stock, and (iv) increase the vote required to alter, amend, change
or repeal the foregoing provisions, or to adopt any provision inconsistent
therewith, to an affirmative vote of not less than 75% of the total number of
votes entitled to be cast by the holders of all shares of Maxim Voting Stock.
The Maxim Certificate of Incorporation does not presently deal with the
election of directors. The By-laws of Maxim now provide that all directors are
to be elected to Maxim's Board annually for a term ending at the next annual
meeting of shareholders of Maxim, and the By-laws provide that the number of
directors shall be determined by resolution of the Board but shall be not less
than three (3) nor more than ten (10). Proposed Article XI of the Certificate of
Incorporation provides that the Board may establish the number of directors at
not less than three (3) nor more than fifteen (15) persons and provides that the
Board shall be divided into three classes of directors, each class to be as
nearly equal in number of directors as possible. If the Maxim Charter Amendments
are adopted, Maxim's directors will be divided into three classes and at the
Maxim Annual Meeting, three directors will be elected for a term expiring at the
Annual Meeting of Shareholders of Maxim to be held in 1997, two directors will
be elected for a term expiring at the Annual Meeting of Shareholders of Maxim to
be held in 1998, and three directors will be elected for a term expiring at the
Annual Meeting of
91
<PAGE>
Shareholders of Maxim to be held in 1999 (in each case, until their respective
successors are duly elected and qualified). See "-- Election of Directors."
Starting with the 1997 Annual Meeting of Shareholders, one class of directors
will be elected each year for a three year term.
The classification of directors will have the effect of making it more
difficult to change the composition of the Board. At least two meetings of the
shareholders, instead of one, will be required to effect a change in he control
of the Board unless a shareholder controls 75% or more of the total number of
votes entitled to be cast by the holders of all shares of Maxim Voting Stock.
Although there have been no problems with respect to continuity or stability of
the Board in the past, the Board believes that the longer time required to elect
a majority of a classified Board will help to ensure the continuity and
stability of Maxim's management and policies in the future since a majority of
the directors, at any given time, will have prior experience as directors of
Maxim. It also should be noted that the classification provision will apply to
every election of directors, whether or not a change in the Board would be
beneficial to Maxim and its shareholders and whether or not a majority of
Maxim's shareholders believes that such a change could be desirable. At the same
time, the Maxim Charter Amendments will ensure that the Board will have an
opportunity to evaluate properly any proposal that might result in a change in
the control of the Board, to consider appropriate alternatives to such proposal
and to respond in a manner that the Board believes is in the best interest of
Maxim and its shareholders.
Under Delaware law, directors may be removed with or without cause by a vote
of the holders of a majority of the shares of capital stock then entitled to
vote in the election of directors unless the board of directors is classified,
in which case directors may only be removed for cause. In addition, under
Delaware law, an amendment to the certificate of incorporation requires the
approval of the holders of a majority of the outstanding capital stock entitled
to vote on the amendment and the approval of the holders of a majority of the
outstanding capital stock of each class entitled to vote on the amendment as a
class. Delaware law also permits provisions in certificates of incorporation
that require a greater vote than the vote otherwise required by law for any
corporate action. As permitted by these provisions of Delaware law, the Maxim
Charter Amendments would permit directors to be removed only for cause and only
if such removal is approved by an affirmative vote of the holders of not less
than 75% of the total number of votes entitled to be cast by the holders of all
shares of Maxim Voting Stock and would require the affirmative vote of at least
75% of the total number of votes entitled to be cast by the holders of all
shares of Maxim Voting Stock to alter, amend, change or repeal, or adopt any
provision inconsistent with, the Maxim Charter Amendment discussed above. The
requirement of an increased shareholder vote is designed to prevent a
shareholder with a majority of the total number of votes entitled to be cast by
the holders of all shares of Maxim Voting Stock from avoiding the requirements
of the Maxim Charter Amendments by simply removing a majority of the directors
or repealing such amendments.
In addition, as of the date of this Proxy Statement/Prospectus, the By-laws
of Maxim provide that a vacancy on the Board, including a vacancy created by an
increase in the number of directors, may be filled by the majority of the
remaining directors, though less than a quorum, or by a sole remaining director.
The Maxim Charter Amendments retain the provision that a vacancy on the Board
during the course of the year, including a vacancy created by an increase in the
number of directors, may be filled by the remaining directors, but does not
permit shareholders to fill such vacancies. In addition, the Maxim Charter
Amendments provide that any new director elected to fill a vacancy on the Board
will serve for the remainder of the full term of the class in which the vacancy
occurred rather than until the next annual meeting of shareholders.
The Delaware Law, however, provides that if, at the time of filling any
vacancy or newly created directorship, the directors then in office shall
constitute less than a majority of the whole Board (as constituted immediately
prior to any such increase), the Court of Chancery of Delaware may, upon
application of any shareholder or shareholders holding at least 10% of the total
number of shares then outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors
92
<PAGE>
then in office to fill such vacancy or newly created directorships, which
election is to be governed by the provisions of the Delaware Law. The Maxim
Charter Amendments will have no effect on this provision of the Delaware Law.
The provisions of the Maxim Charter Amendments relating to the removal of
directors and the filling of vacancies on the Board will preclude a third party
from removing incumbent directors without cause and simultaneously gaining
control of the Board by filling the vacancies created by removal with his own
nominees.
As indicated above, the Maxim Charter Amendments would have the effect of
requiring at least two meetings of shareholders, instead of one meeting of
shareholders, to change control of the Board even though the shareholders of
Maxim desiring to change control of the Board might hold a majority of the
outstanding Maxim Voting Stock. The Maxim Charter Amendments will also reduce
the power of shareholders, even those with a majority interest in Maxim, to
remove incumbent directors and fill vacancies on the Board. Under the Maxim
Charter Amendments, shareholders will have the power to remove directors for
cause with a 75% vote, but, except as set forth above, only the directors will
have the power to fill vacancies created by such removal. Moreover, the Board's
appointees will serve for the remainder of the removed directors' full terms.
Accordingly, the Maxim Charter Amendments could have the effect of discouraging
an investor from making a tender offer or otherwise attempting to obtain control
of the Board, even though either course of conduct might be beneficial to Maxim
and its shareholders, because an investor proposing, or wishing to effect, a
transaction resulting in a change of control of the ownership of the Maxim
Voting Stock of Maxim could not be assured of promptly effecting a change in the
majority of the members of the Board which might be necessary in order to obtain
Board approval of a transaction proposed or desired by such investor, thereby
delaying the ability to implement policies and actions desired by such investor
and making such transaction less desirable to such investor.
As more fully discussed above, the Board believes the Maxim Charter
Amendments would, if adopted, effectively reduce the possibility that a third
party could effect a sudden or surprise change in majority control of Maxim's
Board without the support of the incumbent Board. Adoption of the Maxim Charter
Amendments, however, may have significant effects on the ability of shareholders
of Maxim to change the composition of the incumbent Board and to benefit from
certain transactions that are opposed by the incumbent Board.
PROHIBITION AGAINST SHAREHOLDER ACTION BY WRITTEN CONSENT. Pursuant to the
Delaware Law, unless otherwise provided in the Maxim Certificate of
Incorporation, any action required or permitted to be taken by the shareholders
of Maxim may be taken without a meeting and without a shareholder vote if a
written consent setting forth the action to be taken is signed by the holders of
shares of outstanding stock having the requisite number of votes that would be
necessary to authorize such action at a meeting of shareholders at which all
shares entitled to vote thereon were present and voted. The Maxim Charter
Amendments add a new Article XII to the Certificate of Incorporation, which
would require that shareholder action be taken at an annual or special meeting
of shareholders called by the Board pursuant to a resolution adopted by a
majority of the entire Board and would prohibit shareholder action by consent.
Shareholders would not be permitted to call a special meeting of shareholders or
to require that the Board call such a special meeting.
The provisions of the Maxim Charter Amendments prohibiting shareholder
action by consent would give all the shareholders of Maxim the opportunity to
participate in determining any proposed action and would prevent the holder of a
majority of the voting power of Maxim from using the written consent procedure
to take shareholder action. Moreover, a shareholder could not force shareholder
consideration of a proposal over the opposition of the Board by calling a
special meeting of shareholders prior to such time as the Board believes such
consideration to be appropriate.
The provisions of the Maxim Charter Amendments prohibiting shareholder
action by consent and the calling by shareholders of special meetings of
shareholders would permit the Board to prevent consideration or adoption by the
shareholders of any proposal, including a proposal respecting a
93
<PAGE>
business combination or the removal of directors, until the next scheduled
annual meeting of shareholders, even though such proposal were favored by
shareholders owning a sufficient number of shares to adopt such proposal.
AUTHORIZATION OF BOARD OF DIRECTORS TO AMEND BY-LAWS. Under the Delaware
Law, the power to adopt, amend or repeal by-laws shall be in the shareholders
entitled to vote; provided, however, that any corporation may, in its
certificate of incorporation, confer the right to adopt, amend or repeal by-laws
upon the directors. To provide the directors of Maxim with greater flexibility
with respect to matters regarding corporate governance, the Maxim Charter
Amendments add a new Article XIII to the Maxim Certificate of Incorporation,
which would otherwise authorize the Board to amend or repeal any provision of
the Maxim By-laws or adopt any new By-law, unless the shareholders have adopted,
amended or repealed a particular By-law provision and, in doing so, have
expressly reserved to the shareholders the right of amendment or repeal
therefor. The Board may adopt, amend, alter or repeal the By-laws only by the
vote of a majority of the entire Board; provided, however, that the affirmative
vote of not less than two-thirds (66 2/3%) of the entire Board is required to
amend those provisions of the By-laws relating to the call of special
shareholder and director meetings, notice of shareholder and director meetings,
establishment of a quorum for shareholder and directors meetings, action by
shareholder consent, director nominations, number, tenure and qualifications of
directors, director vacancies, removal of directors, and amendment of by-laws.
Except as may otherwise specifically be required by law, the affirmative
vote of the holders of not less than 75% of the combined voting power of the
then outstanding shares of Maxim Voting Stock, voting together as a single
class, shall be required for the shareholders to adopt, amend, alter or repeal
any provision of the By-laws.
The ability of the Board to amend the Maxim By-laws without shareholder
action will provide the Board with greater flexibility in responding to, among
other things, attempts by third parties to take over or change control of Maxim.
If the Maxim Charter Amendments are approved, the Board proposes to amend
the By-laws to provide that nominations for election to the Board may be made by
the Board, any nominating committee thereof or by any holder of any outstanding
class of capital stock of Maxim entitled to vote for the election of directors.
Any shareholder entitled to vote for the election of directors may nominate a
person or persons for election as a director only if written notice of such
shareholder's intention to make any such nomination is given either by personal
delivery or mailed by the United States Mail, postage prepaid, certified and
return receipt requested, to the Secretary of Maxim not later than the later of
(i) the close of business on the seventh (7th) calendar day following the date
on which notice of the meeting of shareholders for the election of directors is
first given to shareholders (any such notice of meeting of shareholders shall
not be given earlier than the record date for the meeting of shareholders) and
(ii) a date ninety (90) days prior to the date of the meeting of shareholders.
Each such notice shall set forth: (a) the name and address of the shareholder
who intends to make the nomination and of the person or persons to be nominated;
(b) a representation that the shareholder is a holder of record of stock of
Maxim entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(c) a description of all arrangements or understandings between the shareholder
and each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder; (d) such other information regarding each nominee proposed by such
shareholder as would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the Commission had each nominee been
nominated, or intended to be nominated, by the Board; and (e) the consent of
each nominee to serve as a director of Maxim if so elected.
This proposed amendment to the Maxim By-laws will provide a framework for
the uniform treatment of nominations to the Board of Directors of Maxim. The
Maxim By-laws do not currently provide a procedure for director nominations.
94
<PAGE>
The Board will also adopt amendments to the By-laws of Maxim which are
similar to the Maxim Charter Amendments. Reference is made to Appendix E, which
is attached to this Proxy Statement/ Prospectus and incorporated herein by this
reference, for the full text of the proposed amendments to the Maxim By-laws.
These By-law amendments will become effective immediately upon approval of the
Maxim Charter Amendments by the shareholders of Maxim.
INCREASED SHAREHOLDER VOTE FOR AMENDMENT, REPEAL, ETC., OF MAXIM CHARTER
AMENDMENTS. Under Delaware law, amendments of the Maxim Certificate of
Incorporation require the approval of the holders of a majority of the
outstanding stock entitled to vote thereon and a majority of the outstanding
stock of each class entitled to vote thereon and of a majority of the
outstanding stock of each class entitled to vote thereon as a class. Delaware
law also permits provisions in the Certificate of Incorporation which require a
greater vote than the vote otherwise required by law for any corporate action.
With respect to such super-majority provisions, Delaware law requires that any
amendment or modification thereof, whether direct or indirect, be approved by an
equally large shareholder vote. The Maxim Charter Amendments (other than the
Common Stock Amendment) would require the concurrence of the holders of at least
75% of the total number of votes entitled to be cast by the holders of all
shares of Maxim Voting Stock for the amendment or repeal of, or the adoption of
any provision inconsistent with, such Maxim Charter Amendments.
The requirement of an increased shareholder vote is designed to prevent a
shareholder holding shares entitled to cast a majority of the votes entitled to
be cast by the holders of all shares of Maxim Voting Stock from avoiding the
requirements of the Maxim Charter Amendments by simply amending all of the
provisions again. With respect to the provision requiring a vote of 75% of the
votes entitled to be cast by the holders of all shares of Maxim Voting Stock to
remove directors, the increased shareholder vote is intended to confirm the
Delaware law provision requiring an equally large shareholder vote for any
direct or indirect amendment or modification thereof.
Shareholders should note that, as described below under the caption "--
Security Ownership of Certain Beneficial Owners and Management of Maxim," the
directors and executive officers of Maxim as a group, own approximately 39% of
the outstanding shares of Maxim Common Stock. Accordingly, if the Maxim Charter
Amendments, which include adoption of the new Article XI, XII and XIII, is
adopted, such persons would be able to veto any proposal to amend or repeal the
Maxim Charter Amendments. In addition, no director could be removed even for
cause, were such persons, as a group, to oppose such removal.
The approval of the holders of a majority of the issued and outstanding
shares of Common Stock of Maxim is required for the adoption of the Maxim
Charter Amendments. THE BOARD OF DIRECTORS RECOMMENDS THAT MAXIM'S SHAREHOLDERS
APPROVE THE MAXIM CHARTER AMENDMENTS.
ELECTION OF DIRECTORS
The Board of Directors of Maxim consists of eight directors. Maxim's By-Laws
provide that the Board of Directors shall consist of not less than three nor
more than ten members, the precise number to be determined from time to time by
the Board of Directors. The number of directors has been set at eight by the
Board. The Board of Directors recommends the election of the eight nominees
listed below.
Each of the nominees has consented to being named in this Proxy
Statement/Prospectus and to serve as a director of Maxim if elected. In the
event that any nominee withdraws or for any reason is not able to serve as a
director, the proxy will be voted for such other person as may be designated by
the Board of Directors, but in no event will the proxy be voted for more than
eight nominees. The affirmative vote of a majority of all votes cast at the
meeting by the holders of Maxim Common Stock is required for the election of the
eight nominees standing for election. Management of Maxim has no reason to
believe that any nominee will not serve if elected.
95
<PAGE>
If the Maxim Charter Amendments under the caption "-- Proposal to Approve
Maxim Charter Amendments" are approved, a classified Board will be elected as
set forth below. If the Maxim Charter Amendments are not approved, those persons
elected will serve until the next annual meeting of shareholders of Maxim and
until their successors shall have been duly elected and qualified.
Each of the following persons has been nominated by management for election
to the Board of Directors of Maxim:
<TABLE>
<CAPTION>
SERVED AS
NAME AGE POSITION(S) WITH THE COMPANY DIRECTOR SINCE
- -------------------- ---- ----------------------------------- --------------
<S> <C> <C> <C>
NOMINEES FOR TERMS EXPIRING IN 1997
Dicky W. McAdams 60 Director 1994
Herb Wolk 64 Director 1989
J. Michael Nixon 50 Director 1996
NOMINEES FOR TERMS EXPIRING IN 1998
James W. Inglis 52 Senior Executive Vice President and 1996
Director
Ronald McSwain 53 Director 1991
NOMINEES FOR TERMS EXPIRING IN 1999
Richard A. Kaplan 50 Director 1989
A.J. Nassar 40 President, Chief Executive Officer 1990
and Director
M.B. Seretean 72 Director 1993
</TABLE>
JAMES W. INGLIS has served as Senior Executive Vice President and as a
director of Maxim since May 1996. From 1983 to 1996, Mr. Inglis served in
various capacities with The Home Depot, Inc., a home improvement retailer,
including most recently as its Executive Vice President of Strategic
Development.
RICHARD A. KAPLAN has served as Chairman Emeritus of Maxim since February
1995 and served as Chairman of the Board of Maxim from 1989 to February 1994.
Mr. Kaplan founded Maxim in 1989. Mr. Kaplan has also served as Chairman of the
Board of Richland Industries Corp., a retail floorcovering chain based in
Rochester, New York, since 1972. Mr. Kaplan also served as Chairman of the Board
of Resnick Media Associates, Inc., Rochester, New York, an advertising,
marketing and production company from 1984 until its merger into Maxim in 1992.
Mr. Kaplan is active in community activities and charities and serves on the
executive board of the Fair Business Council of Rochester, New York.
DICKY W. MCADAMS has served as a Director of Maxim since October 1994. Mr.
McAdams has been Chairman of the Board of Directors of GCO since it was
incorporated in April 1988 and served as its President from April 1988 to
October 1995. He has also been Chairman of the Board and CEO of McAdams
Commercial Flooring and Furnishings, Inc., a full service residential and
commercial floorcovering business, and its predecessor McAdams Carpets, Inc.,
since 1958. Mr. McAdams served as Chairman of the Retail Floorcovering Institute
(now the American Floorcovering Association) from 1987 to 1988 and as its
President from 1986 to 1987. From 1990 to 1991 he was Chairman of the Board of
Directors of the Floorcovering Consumer Credit Association.
RONALD MCSWAIN has served as a Director of Maxim since 1991. Since 1968, Mr.
McSwain has served as the President and owner of McSwain's Carpets, a retail
floorcovering business with 15 stores in the Cincinnati, Dayton, Columbus and
Toledo, Ohio areas. In 1988, Mr. McSwain was the recipient of the Cincinnati
Chamber of Commerce Small Businessman of the Year Award. Mr. McSwain serves as a
director of Johnson Investment Mutual Fund Trust, an investment company.
A.J. NASSAR has served as President, Chief Executive Officer and a Director
of Maxim since December 1990. From 1986 to 1990, Mr. Nassar served as Vice
President and Chief Operating Officer of Kenny Carpet and Linoleum, Inc., a
multistore retail carpet chain in western New York. He was
96
<PAGE>
previously employed in the carpet manufacturing industry by Trend Carpet Mills
and Queen Carpet Mills, where he was responsible for sales of floorcovering
products to floorcovering retailers and for cultivating new customer
relationships in the northeastern United States.
J. MICHAEL NIXON has served as a Director of Maxim since February 1996. Mr.
Nixon has served as the President and co-owner of Q.I. Corporation, a building
materials contractor, since 1967.
M.B. SERETEAN has served as a director of Maxim since September 1993 and as
its Chairman of the Board since February 1995. Mr. Seretean was a founder of
Coronet Industries, Inc. in 1956 and served as its President and Chairman of the
Board until his retirement in 1987. Coronet Industries, Inc. is a major carpet
manufacturer. He is a former director of RCA Corporation and Turner Broadcasting
Corporation. He presently serves on the Board of the Atlanta Hawks and the
Atlanta Braves.
HERB WOLK has served as a Director of Maxim since 1991. Mr. Wolk is the
owner and President of Cadillac Carpet Distributors and has served in various
capacities with that Company since 1976. Mr. Wolk has 37 years of experience in
the retail carpet industry. Mr. Wolk is the Chairman-elect of the American
Floorcovering Association and is a co-founder of the Mayfield School, a national
sales training school for the floorcovering industry.
There are no family relationships between any director or executive officer
and any other director or executive officer of Maxim.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires Maxim's
directors, executive officers and persons who own more than 10% of the
outstanding Common Stock of Maxim, to file with the Securities and Exchange
Commission reports of changes in ownership of the Common Stock of Maxim held by
such persons. Officers, directors and greater than 10% shareholders are also
required to furnish Maxim with copies of all forms they file under this
regulation. To Maxim's knowledge, based solely on a review of the copies of such
reports furnished to Maxim and representations that no other reports were
required, during the ten month period ended January 31, 1996, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
shareholders were complied with, except as follows: J. Michael Nixon (failed to
file on a timely basis his initial report of beneficial ownership); A.J. Nassar
(failed to file on a timely basis his annual statement of changes in beneficial
ownership); H. Gene Harper (failed to file on a timely basis his annual
statement of changes in beneficial ownership); Paul W. Gilson (failed to file on
a timely basis his annual statement of changes in beneficial ownership); and
M.B. Seretean (failed to file on a timely basis one report relating to one
transaction).
Although it is not Maxim's obligation to make filings pursuant to Section 16
of the Securities Exchange Act of 1934, Maxim has adopted a policy requiring all
Section 16 reporting persons to report monthly to the Chief Financial Officer of
Maxim as to whether any transactions in Maxim's Common Stock occurred during the
previous month.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors of Maxim held 11 meetings during the ten months ended
January 31, 1996. Each director attended at least 75% or more of the aggregate
number of meetings held by the Board of Directors and the committees on which he
served. Maxim's Board of Directors has three standing committees -- the Audit
Committee, the Compensation Committee and the Stock Option Committee. The Board
of Directors does not have a standing nominating committee, such function being
reserved to the full Board of Directors.
97
<PAGE>
The Audit Committee presently consists of Ronald McSwain and M.B. Seretean.
The Audit Committee has been assigned the principal functions of: (1)
recommending the independent auditors; (ii) reviewing and approving the annual
report of the independent auditors; (iii) approving the annual financial
statements; and (iv) reviewing and approving summary reports of the auditor's
findings and recommendations. The Audit Committee did not hold any meetings
during the ten months ended January 31, 1996.
The Compensation Committee presently consists of Ronald McSwain and M.B.
Seretean. The Compensation Committee has been assigned the functions of
approving and monitoring the remuneration arrangements for senior management.
The Compensation Committee held one meeting during the ten months ended January
31, 1996.
The Stock Option Committee presently consists of Richard A. Kaplan, Ronald
McSwain and Herb Wolk. The Stock Option Committee has been assigned the
functions of administering Maxim's 1993 Stock Option Plan and granting options
thereunder. The Stock Option Committee held three meetings during the ten months
ended January 31, 1996.
PROPOSAL TO AMEND 1993 STOCK OPTION PLAN
GENERAL. On July 30, 1993, the Board of Directors of Maxim adopted a 1993
Stock Option Plan (the "1993 Plan") for eligible officers, directors and key
employees of Maxim and recommends that the shareholders vote for approval of the
1993 Plan, which provides for the grant of both incentive and non-qualified
stock options. The purpose of the 1993 Plan is to encourage and enable eligible
directors, officers and key employees of Maxim and its subsidiaries to acquire
proprietary interests in Maxim and its subsidiaries through the ownership of
common stock of Maxim and to provide motivation for participating directors,
officers and key employees to remain in the employ of and to give greater effort
on behalf of Maxim.
The 1993 Plan provides for the grant of options to purchase up to an
aggregate of 1,000,000 shares of Maxim Common Stock. Under the terms of the 1993
Plan, the Stock Option Committee of the Board of Directors may grant options to
purchase shares of Common Stock to officers, directors and employees of Maxim or
of a subsidiary of Maxim.
As of June 15, 1996, Maxim had granted options to purchase shares of Common
Stock pursuant to the 1993 Plan as follows: (i) each Named Executive Officer
(A.J. Nassar: 350,000 shares; and Dicky W. McAdams: no shares); (ii) all current
executive officers as a group: 790,000 shares; (iii) all current directors who
are not executive officers as a group: 25,000 shares; (iv) each nominee for
election as a director (James W. Inglis: 200,000 shares; A.J. Nassar: 350,000
shares, J. Michael Nixon: 25,000 shares; Richard A. Kaplan, Dicky W. McAdams,
Ronald McSwain, M.B. Seretean and Herb Wolk: no shares) and (v) all employees,
including all current officers who are not executive officers, as a group:
417,120 shares.
DESCRIPTION OF PROPOSED AMENDMENT. On April 18, 1996, the Board of
Directors of Maxim adopted an amendment to the 1993 Plan which would increase
the number of shares of Maxim Common Stock available for grant thereunder to
2,000,000 from 1,000,000. As of June 15, 1996, no shares of Common Stock
remained available for grant under the 1993 Plan. The proposed increase in the
number of authorized shares would ensure the uninterrupted continuation of the
1993 Plan. The Board of Directors recommends that shareholders vote FOR the
proposed amendment. The affirmative vote of a majority of the shares of Maxim
Common Stock represented in person or by proxy at the Maxim Annual Meeting is
necessary for the approval of the amendment to the 1993 Plan.
DESCRIPTION OF 1993 PLAN. Effective Date. The effective date of the 1993
Plan is July 30,1993. The 1993 Plan shall remain in effect until all shares
subject to or which may become subject to the 1993 Plan shall have been
purchased pursuant to options granted under the 1993 Plan, provided that options
under the 1993 Plan must be granted within ten (10) years from the effective
date.
98
<PAGE>
Shares Subject to the 1993 Plan. The shares of Maxim's common stock
available for issuance under the 1993 Plan may, at the election of the Board of
Directors, be either treasury shares or shares originally issued for such
purpose. The maximum number of shares which shall be reserved and made available
for sale under the 1993 Plan shall be 1,000,000 (2,000,000 shares if the
amendment to the 1993 Plan is approved by Maxim shareholders at the Maxim Annual
Meeting). Any shares subject to an option which for any reason expires or is
terminated may again be subject to an option under the 1993 Plan.
Persons Eligible to Participate in the 1993 Plan. Under the 1993 Plan,
options may be granted only to officers, directors and key employees of Maxim or
its subsidiaries.
Administration of the 1993 Plan. The 1993 Plan shall be administered by the
Board of Directors or by a committee comprised of no fewer than two (2) members
appointed by the Board of Directors of Maxim from among its members (the
"Committee"). Members of the Committee shall be "disinterested persons" as such
term is defined under Rule 16b-3 under the Securities Exchange Act of 1934, as
amended. Subject to the provisions of the 1993 Plan, the Board of Directors or
the Committee has the authority to determine the employees to whom options shall
be granted and to determine exercise prices, vesting requirements, the term of
and the number of shares covered by each option.
Exercise Price, Terms of Exercise and Payment for Shares. Each option
granted under the 1993 Plan will be represented by an Option Agreement which
shall set forth the terms particular to that option, including the number of
shares covered by the option, the exercise price, the term of the option and any
vesting requirements.
The exercise price of options granted under the 1993 Plan will be determined
by the Committee, but in no event shall be less than 100% of the Average Market
Price of the common stock on the date of the grant of the option. The term
Average Market Price is defined in the 1993 Plan to be the average of the high
bid and low ask prices as of the close of business for Maxim's shares of common
stock in the over-the-counter market, as reported by the National Association of
Securities Dealers, Inc., Automated Quotation System (or other national
quotation service). If Maxim's common stock is registered on a national
securities exchange, then Average Market Price shall mean the closing price of
Maxim's common stock on such national securities exchange. If Maxim's Common
Stock is not traded in the organized markets, then the price shall be the fair
market value of the common stock as determined in good faith by the Board of
Directors or the Committee, but in no case less than the par value of such
stock.
Options may be exercised in whole or in part by the optionee, but in no
event later than ten (10) years from the date of the grant. Any incentive stock
option granted under the 1993 Plan to an individual who owns more than 10% of
the total combined voting power of all classes of stock of Maxim or a subsidiary
may not be purchased at a price less than 110% of the market price on the day
the option is granted, and no such option may be exercised more than five (5)
years from the date of grant. The purchase price for the shares shall be paid in
cash or shares of common stock of Maxim, or a combination of both. Upon payment,
Maxim will deliver stock certificates for such shares to the optionee.
Termination of Service. In the event that a holder of an option granted
under the 1993 Plan ceases to be a director or employee of Maxim or any
subsidiary of Maxim for any reason other than his death or total and permanent
disability, any option or unexercised portion thereof, which is otherwise
exercisable on the date of such termination, shall expire three (3) months from
the date of such termination. Any options which are not exercisable on the date
of such termination shall immediately terminate.
Upon the death or total and permanent disability of the holder of an option,
any option or unexercised portion thereof which is otherwise exercisable shall
expire within one year of the date of such death or disability. Any options
which were not exercisable on the date of such death or disability shall be
immediately exercisable for a period of one year.
99
<PAGE>
Options granted under the 1993 Plan are exercisable during the lifetime of
the optionee only by the optionee. All options granted under the 1993 Plan are
non-transferable except by will or under the laws of descent and distribution.
Reorganization and Recapitalization. In case Maxim is merged or
consolidated with another corporation and Maxim is not the survivor, or in case
Maxim is acquired by another corporation, or in case of a separation,
reorganization, recapitalization or liquidation of Maxim, the Board of Directors
of Maxim shall either make appropriate provision for the protection of any
outstanding options, including without limitation the substitution of
appropriate stock of Maxim or of the merged, consolidated or otherwise
reorganized corporation which will be issuable in respect of the shares of the
Common Stock of Maxim, or upon written notice to the optionee, provide that the
option must be exercised within 60 days or it will be terminated.
In the event that dividends are payable in Common Stock of Maxim or in the
event there are splits, subdivisions or combinations of shares of Common Stock
of Maxim, the number of shares available under the 1993 Plan will be increased
or decreased proportionately, as the case may be, and the number of shares
deliverable upon the exercise thereafter of any option theretofore granted will
be increased or decreased proportionately, as the case may be, without change in
the aggregate purchase price.
Limitation on Number of Shares That May be Purchased. For options granted
under the 1993 Plan, the aggregate fair market value (determined at the time the
option was granted) of the shares with respect to which incentive stock options
are exercisable for the first time by an optionee during any calendar year shall
not exceed $100,000.
Amendment and Termination of the 1993 Plan. With respect to any shares of
stock at the time not subject to options, the Board of Directors may at any time
and from time to time, terminate, modify or amend the 1993 Plan in any respect,
except that no such modification or amendment shall be made absent the approval
of the shareholders of Maxim to: (i) increase the maximum number of shares for
which options may be granted under the 1993 Plan; (ii) reduce the option price
or waiting period; (iii) extend the period during which options may be granted
or exercised; (iv) change the class of employees eligible for incentive stock
options; (v) otherwise materially modify the requirements as to eligibility for
participation in the 1993 Plan; or (vi) otherwise materially increase the
benefits accruing to participants under the 1993 Plan.
With the consent of the affected optionee, the Board of Directors or the
Committee may amend outstanding option agreements in a manner consistent with
the 1993 Plan.
FEDERAL INCOME TAX CONSEQUENCES. Incentive Stock Options. All incentive
stock options granted or to be granted under the 1993 Plan which are designated
as incentive stock options are intended to be incentive stock options as defined
in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
Under the provisions of Section 422 of the Code, neither the holder of an
incentive stock option nor Maxim will recognize income, gain, deduction or loss
upon the grant or exercise of an incentive stock option. An optionee will be
taxed only when the stock acquired upon exercise of his incentive stock option
is sold or otherwise disposed of in a taxable transaction. If at the time of
such sale or disposition the optionee has held the shares for the required
holding period (two years from the date the option was granted and one year from
the date of the transfer of the shares to the optionee), the optionee will
recognize long-term capital gain or loss, as the case may be, based upon the
difference between his exercise price and the net proceeds of the sale. However,
if the optionee disposes of the shares before the end of such holding period,
the optionee will recognize ordinary income on such disposition in an amount
equal to the lesser of:
(a) gain on the sale or other disposition; or
100
<PAGE>
(b) the amount by which the fair market value of the shares on the date
of exercise exceeded the option exercise price, with any excess gain being
capital gain, long-term or short-term, depending on whether or not the
shares had previously been held for more than one year on the date of sale
or other taxable disposition.
The foregoing discussion and the reference to capital gain or loss treatment
therein assume that the option shares are a capital asset in the hands of the
optionee. A sale or other disposition which results in the recognition of
ordinary income to the optionee will also result in a corresponding income tax
deduction for Maxim.
The 1993 Plan permits an optionee to pay all or part of the purchase price
for shares acquired pursuant to exercise of an incentive stock option by
transferring to Maxim other shares of Maxim's common stock owned by the
optionee. Section 422 of the Code provides that an option will continue to be
treated as an incentive stock option even if an optionee exercises such
incentive stock option with previously acquired stock of the corporation
granting the option. Accordingly, except as noted below with respect to certain
"statutory option stock," an optionee who exercises an incentive stock option in
whole or in part by transferring to Maxim shares of Maxim's common stock will
recognize no gain or loss upon such exercise. The optionee's basis in the shares
so acquired will be equal to the optionee's cost basis in the shares surrendered
(plus, in the case of payment of the purchase price in a combination of cash and
surrendered shares, the amount of any cash paid).
Section 424(c)(3) of the Code provides that if "statutory option stock" is
transferred in connection with the exercise of an incentive stock option, and if
the holding period requirements under Section 422(a)(1) of the Code are not met
with respect to such statutory option stock before such transfer, then ordinary
income will be recognized as a result of the transfer of statutory option stock.
However, the incentive stock option stock acquired through the exchange of
statutory option stock will still qualify for favorable tax treatment under
Section 422 of the Code.
Incentive stock options offer two principal tax benefits: (1) the
possibility of converting ordinary income into capital gain to the extent of the
excess of fair market value over option price at the time of exercise, and (2)
the deferral of recognition of gain until disposition of the stock acquired upon
the exercise of the option.
At present, the maximum tax rate on capital gains is 28%, while the maximum
tax rate on ordinary income is 39.6%. Thus, the conversion of ordinary income
into capital gain produces some tax benefit for certain taxpayers. However, the
benefit of income deferral generally provided by incentive stock options is
reduced for some taxpayers since the excess of the fair market value of shares
acquired through the exercise of an incentive stock option over the exercise
price is taken into account in computing an individual taxpayer's alternative
minimum taxable income. Thus, the exercise of an incentive stock option could
result in the imposition of an alternative minimum tax liability.
In general, an option granted under the 1993 Plan which is designated as an
incentive stock option will be taxed as described above. However, in some
circumstances an option which is designated as an incentive stock option will be
treated as a non-qualified stock option and the holder taxed accordingly. For
example, a change in the terms of an option which gives the employee additional
benefits may be treated as the grant of a new option. Unless all the criteria
for treatment as an incentive stock option are met on the date the "new option"
is considered granted (such as the requirement that the exercise price of the
option be not less than the fair market value of the stock as of the date of the
grant), the option will be treated and taxed as a non-qualified stock option.
Non-Qualified Stock Options. All options granted or to be granted under the
1993 Plan which do not qualify as incentive stock options are non-statutory
options not entitled to special tax treatment under Section 422 of the Code.
A participant in the 1993 Plan will recognize taxable income upon the grant
of a non-qualified stock option only if such option has a readily ascertainable
fair market value as of the date of the grant. In such a case, the recipient
will recognize taxable ordinary income in an amount equal to the
101
<PAGE>
excess of the fair market value of the option as of such date over the price, if
any, paid for such option. No income would then be recognized on the exercise of
the option, and when the shares obtained through the exercise of the option are
disposed of in a taxable transaction, the resulting gain or loss would be
capital gain or loss (assuming the shares are a capital asset in the hands of
the optionee). However, under the applicable Treasury Regulations, the
non-qualified stock options issued under the 1993 Plan will not have a readily
ascertainable fair market value unless at the time such options are granted
similar options of Maxim are actively traded on an established market. Maxim
presently has no such actively traded options.
Upon the exercise of a non-statutory option not having a readily
ascertainable fair market value, the optionee recognizes ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the option exercise price for those shares. Maxim is not entitled
to an income tax deduction with respect to the grant of a non-statutory stock
option or the sale of stock acquired pursuant thereto. Maxim generally is
permitted a deduction equal to the amount of ordinary income the optionee is
required to recognize as a result of the exercise of a non-statutory stock
option.
The 1993 Plan permits the Committee to allow an optionee to pay all or part
of the purchase price for shares acquired pursuant to an exercise of a
non-statutory option by transferring to Maxim other shares of Maxim's Common
Stock owned by the optionee. If an optionee exchanges previously acquired Common
Stock pursuant to the exercise of a non-qualified stock option, the Internal
Revenue Service has ruled that the optionee will not be taxed on the unrealized
appreciation of the shares surrendered in the exchange. In other words, the
optionee is not taxed on the difference between his or her cost basis for the
old shares and their fair market value on the date of the exchange, even though
the previously acquired shares are valued at the current market price for
purposes of paying all or part of the option price.
General. The 1993 Plan is not qualified under Section 401(a) of the Code
and is not subject to the provisions of the Employee Retirement Income Security
Act of 1974.
The preceding discussion is based upon federal tax laws and regulations in
effect on the date of this Proxy Statement/Prospectus, which are subject to
change, and upon an interpretation of the statutory provisions of the Code, its
legislative history and related income tax regulations. Furthermore, the
foregoing is only a general discussion of the federal income tax consequences of
the 1993 Plan and does not purport to be a complete description of all federal
income tax aspects of the 1993 Plan. Option holders may also be subject to state
and local taxes in connection with the grant or exercise of options granted
under the 1993 Plan and the sale or other disposition of shares acquired upon
exercise of the options. Each employee receiving a grant of options should
consult with his or her personal tax advisor regarding federal, state and local
consequences of participating in the 1993 Plan.
The approval of the holders of a majority of the shares of Maxim Common
Stock present and voting at the Maxim Annual Meeting is necessary to approve the
proposed amendment to the 1993 Plan. THE BOARD OF DIRECTORS RECOMMENDS THAT
MAXIM'S SHAREHOLDERS APPROVE THE PROPOSED AMENDMENT TO THE 1993 PLAN.
102
<PAGE>
MAXIM EXECUTIVE COMPENSATION
The following table provides certain summary information for the ten month
transition period ended January 31, 1996 and for fiscal years ended March 31,
1995 and 1994 concerning compensation paid or accrued by Maxim to or on behalf
of Maxim's Chief Executive Officer and the other executive officers of Maxim
whose total annual salary and bonus exceeded $100,000 during the ten month
transition period ended January 31, 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION --------------
------------------------------------------------------- NUMBER OF
NAME AND OTHER ANNUAL OPTIONS
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) AWARDED
- ------------------------------------------- ------------ ----------- --------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
A.J. Nassar................................ 1996(2) $ 165,456 $ 25,000 $ 6,618 142,400(3)
President and Chief Executive 1995 205,750 -- 1,653 110,000(4)
Officer 1994 184,667 52,971 -- --
Dicky W. McAdams (5)....................... 1996(2) $ 144,231 $ 42,096 $ 2,295 --
President of GCO 1995 197,550 -- -- --
1994 187,925 9,000 -- --
</TABLE>
- ------------------------
(1) Represents Maxim's matching contribution under its 401(k) plan.
(2) Represents compensation for the ten-month period ended January 31, 1996,
which period was the result of a change in the fiscal year end of Maxim from
March 31 to January 31.
(3) Includes options to purchase 40,000 shares of common stock which were
subsequently cancelled. Options to purchase an additional 200,000 shares of
common stock were granted to Mr. Massar in fiscal 1997.
(4) Includes options to purchase 62,400 shares of common stock which were
subsequently cancelled.
(5) Amounts indicated have been paid to Mr. McAdams by GCO and include periods
prior to the acquisition of GCO by Maxim in September 1994. Mr. McAdams
retired as President of GCO in October 1995.
EMPLOYMENT AGREEMENTS
Maxim has entered into an Employment Agreement with A.J. Nassar, pursuant to
which Mr. Nassar will serve as President and Chief Executive Officer of Maxim.
The Employment Agreement is for a term of three years, expiring on July 30,
1996, and provided for an initial annual base salary of $225,000. In fiscal
1994, fiscal 1995 and in fiscal 1996, Mr. Nassar elected not to receive the full
amount of his base salary. Mr. Nassar's current annual base salary is $300,000.
The Employment Agreement provides for certain severance payments to be paid to
Mr. Nassar in the event of a change in control of Maxim. In the event of a
change in control, Mr. Nassar will be entitled, for a period of one year
thereafter, to terminate his employment with Maxim and to receive a lump sum
cash payment equal to 18 months' salary, as well as 12 months' provision of
employee benefits. In addition, in the event Mr. Nassar is terminated by Maxim
without cause, he will receive during the balance of his term of employment, the
annual base salary which would otherwise be payable to Mr. Nassar had he
remained in the employ of Maxim. In addition, all unvested stock options shall
become immediately exercisable. The Employment Agreement contains noncompete and
non-solicitation provisions, effective through the actual date of termination of
the Employment Agreement and for a period of one year thereafter.
In October 1995, Mr. McAdams retired as the President and Chief Executive
Officer of GCO. Prior to his resignation, Mr. McAdams was employed pursuant to a
three-year Employment Agreement expiring on September 28, 1997. The Employment
Agreement provided for an annual base salary of
103
<PAGE>
$200,000 plus incentive bonus payments. The Employment Agreement contained
noncompete and non-solicitation provisions, effective through the actual date of
termination of the Employment Agreement and for a period of one year thereafter.
COMPENSATION OF DIRECTORS
Directors of Maxim who are compensated as officers of Maxim serve without
compensation for their services as directors. Each director of Maxim who is not
a compensated officer of Maxim is to be paid a fee of $500 per board meeting
attended, which fees shall not exceed $3,000 during any fiscal year. In
addition, from time to time, certain of Maxim's outside directors assist in
conducting workshops and orientation sessions for Maxim's franchisees, for which
they customarily have been paid consulting fees of $10,000 annually. All
directors of Maxim are to be reimbursed by Maxim for all out-of-pocket expenses
reasonably incurred by them in the discharge of their duties as directors,
including out-of-pocket expenses incurred in attending meetings of the Board of
Directors and of any committees of the Board of Directors.
In addition, during fiscal 1996, Maxim granted to M.B. Seretean, one of
Maxim's outside directors, an option to purchase 100,000 shares of Common Stock
at an exercise price of $9.00 per share, exercisable for a period of ten years
from date of grant. During fiscal 1997, Maxim granted to J. Michael Nixon and
Dicky W. McAdams, outside directors of Maxim, options to purchase 25,000 shares
and 10,000 shares, respectively, of Common Stock at an exercise price of $11.25
per share and $14.38 per share, respectively, exercisable for a period of ten
years from the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as members of the Compensation Committee of the
Board of Directors during the ten month transition period ended January 31,
1996: Ronald McSwain and M.B. Seretean. None of the members of the Compensation
Committee has been an officer or employee of Maxim or any of its subsidiaries.
Except as set forth under "-- Certain Relationships and Related Transactions,"
there were no material transactions between Maxim and any of the members of the
Compensation Committee during the ten month transition period ended January 31,
1996.
STOCK OPTION PLAN
Maxim has adopted a 1993 Stock Option Plan (the "1993 Plan") for employees
who are contributing significantly to the management or operation of the
business of Maxim or its subsidiaries as determined by Maxim's Board of
Directors or the committee administering the 1993 Plan. The 1993 Plan provides
for the grant of options to purchase up to 1,000,000 shares of Common Stock
(2,000,000 shares if the proposed amendment to the 1993 Plan is approved at the
Maxim Annual Meeting) at the discretion of the Board of Directors of Maxim or a
committee designated by the Board of Directors to administer the 1993 Plan. The
option exercise price must be at least 100% (110% in the case of a holder of 10%
or more of the Common Stock) of the fair market value of the Common Stock on the
date the option is granted and the options are exercisable by the holder thereof
in full at any time prior to their expiration in accordance with the terms of
the 1993 Plan. Stock options granted pursuant to the Plan will expire on or
before (1) the date which is the tenth anniversary of the date the option is
granted, or (2) the date which is the fifth anniversary of the date the option
is granted in the event that an incentive stock option is granted to a key
employee who owns more than 10% of the total combined voting power of all
classes of stock of Maxim or any subsidiary of Maxim. See "-- Proposal to Amend
1993 Stock Option Plan."
104
<PAGE>
The following table provides certain information concerning individual
grants of stock options under the 1993 Plan made during the ten month transition
period ended January 31, 1996 to the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
OPTION GRANTS IN LAST FISCAL YEAR VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES
----------------------------------------------------- OF
% OF TOTAL STOCK PRICE
OPTIONS EXERCISE OR APPRECIATION
GRANTED TO BASE PRICE FOR OPTION TERM (1)
OPTIONS EMPLOYEES IN ($ PER EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR SHARE) DATE 5% 10%
- -------------------------------------------------- ----------- ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
A.J. Nassar....................................... 40,000(2) 10.1% $10.25 (2) N/A N/A
102,400(3) 25.9% $ 9.00 1/24/06 $579,589 $1,468,793
Dicky W. McAdams.................................. -- -- -- -- -- --
</TABLE>
- ------------------------
(1) The dollar amounts under these columns represent the potential realizable
value of each grant of option assuming that the market price of Maxim's
Common Stock appreciates in value from the date of grant at the 5% and 10%
annual rates prescribed by the SEC and therefore are not intended to
forecast possible future appreciation, if any, of the price of Maxim's
Common Stock.
(2) Options were cancelled by Maxim in January 1996.
(3) Options are immediately exercisable.
The following table provides certain information concerning the value of
unexercised options held by the Named Executive Officers under the 1993 Plan as
of January 31, 1996. No stock options were exercised during fiscal 1996 by the
Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END FISCAL YEAR-END (1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
A.J. Nassar............................................... 121,440 28,560 $ 38,400 $ --
Dicky W. McAdams.......................................... -- -- N/A N/A
</TABLE>
- ------------------------
(1) Dollar values were calculated by determining the difference between the fair
market value of the underlying securities at January 31, 1996 ($9.375 per
share) and the exercise price of the options.
On January 24, 1996, Maxim granted to A.J. Nassar, its President and Chief
Executive Officer, an option to purchase 102,400 shares of Common Stock of
Maxim. In connection therewith, Mr. Nassar forfeited previously granted options
to purchase a like number of shares of Common Stock. See "-- Report of
Compensation and Stock Option Committees on Executive Compensation" for an
explanation of this transaction. The following table provides certain
information concerning all such repricings of options held by any executive
officer of Maxim since the inception of Maxim:
OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES MARKET PRICE OPTION TERM
UNDERLYING OF STOCK AT EXERCISE PRICE REMAINING AT
OPTIONS/SARS TIME OF AT TIME OF NEW DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED (#) AMENDMENT ($) AMENDMENT ($) PRICE ($) AMENDMENT
- --------------------------------- --------- ------------- --------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
A.J. Nassar...................... 1/24/96 62,400 $ 9.00 $ 10.50 $ 9.00 8.5 years
President and CEO 1/24/96 40,000 $ 9.00 $ 10.25 $ 9.00 9.5 years
</TABLE>
105
<PAGE>
EMPLOYEE RETIREMENT SAVINGS PLAN
Maxim has established a savings and profit-sharing plan that qualifies as a
tax-deferred savings plan under Section 401(k) of the Internal Revenue Code (the
"401(k) Plan") for its salaried employees who are at least 21 years old and who
have completed one year of service with Maxim. Under the 401(k) Plan, eligible
employees may contribute up to 20% of their gross salary to the 401(k) Plan or
$9,240, whichever is less. Each participating employee is fully vested in
contributions made by such employee. Maxim presently matches 25% of the amount
contributed by an employee up to 6% of the employee's salary, but Maxim's policy
regarding matching contributions may be changed annually in the discretion of
the Board of Directors. All amounts contributed under the 401(k) Plan are
invested in one or more investment accounts administered by an independent plan
administrator.
REPORT OF COMPENSATION AND STOCK OPTION COMMITTEES ON EXECUTIVE COMPENSATION
During the ten months ended January 31, 1996, the Compensation Committee of
the Board of Directors was comprised of two non-employee members of the Board
and the Stock Option Committee of the Board of Directors was comprised of three
non-employee members of the Board. The Compensation Committee is responsible
for: (i) setting Maxim's compensation philosophy and policies; (ii) review and
approval of pay recommendations for the executive officers of Maxim; and (iii)
initiation of all compensation actions for the Chief Executive Officer of Maxim.
The Stock Option Committee is responsible for setting the terms and
administering Maxim's 1993 Stock Option Plan.
Maxim's compensation policies have been designed to align the financial
interests of Maxim's management with those of its shareholders, and reflect the
nature of Maxim by taking into account Maxim's operating environment and the
expectations for continued growth and enhanced profitability. Compensation for
each of Maxim's executive officers consists of a base salary, an annual
discretionary bonus and stock options. Maxim does not currently provide
executive officers with other long term incentive compensation other than the
ability to contribute their earnings to Maxim's 401(k) Plan.
The Compensation Committee's philosophy is that the predominant portion of
an executive's compensation should be based directly upon the value of long-term
incentive compensation in the form of stock option awards. The Compensation
Committee believes that providing executives with the opportunities to acquire
significant stakes in the growth and prosperity of Maxim (through grants of
stock options), while maintaining other elements of Maxim's compensation program
at conservative levels, will enable Maxim to attract and retain executives with
the outstanding management abilities and entrepreneurial spirit which are
essential to Maxim's ongoing success. Furthermore, the Compensation Committee
believes that this approach to compensation motivates executives to perform to
their full potential.
At least annually, the Compensation Committee reviews salary recommendations
for Maxim's executives (other than the Chief Executive Officer) and then
approves such recommendations, with any modifications it has deemed appropriate.
The annual salary recommendations are made under the ultimate direction of the
Chief Executive Officer, based on peer group and national industry surveys of
total compensation packages, as well as evaluations of the individual
executive's past and expected future performance. Similarly, the Compensation
Committee fixes the base salary of the Chief Executive Officer based on a review
of competitive compensation data, the Chief Executive Officer's overall
compensation package, and the Compensation Committee's assessment of his past
performance and its expectation as to his future performance in leading Maxim.
The Compensation Committee also determines, based upon the recommendation of
the Chief Executive Officer, the annual bonus, if any, to be paid to executive
officers (other than the Chief Executive Officer). The amount of each individual
bonus is determined based upon an evaluation of such factors as individual
performance, increases in Maxim's revenue, net income, net income per share and
market penetration, as well as the executive's contribution to Maxim's
performance. The Compensation Committee applies similar criteria in setting the
amount of annual bonus, if any, earned by the Chief Executive Officer.
106
<PAGE>
Stock options represent a substantial portion of compensation for Maxim's
executive officers, including the Chief Executive Officer. Stock options are
granted at the prevailing market price on the date of grant, and will only have
value if Maxim's stock price increases. Generally, grants vest in equal amounts
over a period of five years (although certain special types of grants may vest
either immediately or over a shorter period) and executives must be employed by
Maxim at the time of vesting in order to exercise the options. Grants of stock
options generally are based upon the level of the executive's position with
Maxim and an evaluation of the executive's past and expected future performance.
The Compensation Committee believes that dependence on stock options for a
significant portion of executives' compensation more closely aligns such
executives' interests with those of Maxim's shareholders, since the ultimate
value of such compensation is linked directly to stock price.
The Chief Executive Officer's employment agreement provides for an annual
base salary of $300,000. The base salary paid to the Chief Executive Officer is
reviewed annually by the Compensation Committee and may be adjusted based on
competitive compensation data, the Chief Executive Officer's overall
compensation package and the Compensation Committee's assessment of his past
experience and its expectation as to his future contributions in leading Maxim
and its businesses. In April 1995, the Compensation Committee reviewed the
compensation of Maxim's executive officers and increased the annual base salary
of the Chief Executive Officer from $265,000 to $300,000. The Compensation
Committee did not increase the salary of any other executive officer.
During the ten months ended January 31, 1996, the Stock Option Committee
granted the Chief Executive Officer options to purchase 142,400 shares of
Maxim's Common Stock (of which options to purchase 40,000 shares were
subsequently cancelled, as discussed below). These stock option awards were
based upon an evaluation of individual performance criteria and is consistent
with the philosophy of providing incentives based on Maxim's future performance.
On January 24, 1996, Maxim granted to the Chief Executive Officer of Maxim
options to purchase 102,400 shares of Common Stock of Maxim. In connection
therewith, Mr. Nassar forfeited previously granted options to purchase a like
number of shares of Common Stock. These options were repriced at fair market
value on the date of the regrant in consideration of Mr. Nassar's exemplary
performance as chief executive officer of Maxim.
The Compensation Committee continually evaluates Maxim's compensation
policies and procedures with respect to executives. Although the Compensation
Committee believes that current compensation policies have been successful in
aligning the financial interests of executive officers with those of Maxim's
shareholders and with Company performance, it continues to examine what
modifications, if any, should be implemented to further link executive
compensation with both individual and Company performance.
STOCK OPTION COMMITTEE COMPENSATION COMMITTEE
Richard A. Kaplan Ronald McSwain
Ronald McSwain M.B. Seretean
Herb Wolk
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF MAXIM'S
PREVIOUS FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, THAT MIGHT INCORPORATE FUTURE FILINGS,
INCLUDING THIS PROXY STATEMENT/PROSPECTUS, IN WHOLE OR IN PART, THE FOREGOING
REPORT OF COMPENSATION AND STOCK OPTION COMMITTEES ON EXECUTIVE COMPENSATION AND
THE STOCKHOLDER RETURN PERFORMANCE GRAPH SHALL NOT BE INCORPORATED BY REFERENCE
INTO ANY SUCH FILINGS.
107
<PAGE>
STOCKHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total stockholder return on Maxim's Common Stock against the
cumulative total return of the Nasdaq Stock Market Index and the Nasdaq Retail
Stock Index for the period commencing on September 30, 1993 (the date of Maxim's
initial public offering of Common Stock) and ending January 31, 1996. The graph
assumes that the value of the investment in Maxim's Common Stock and each index
was $100 on September 30, 1993. The yearly change in cumulative total return is
measured by dividing (1) the sum of (i) the cumulative amount of dividends for
each fiscal year, assuming dividend reinvestment, and (ii) the change in share
price between the beginning and end of the Measuring Period, by (ii) the share
price at the beginning of the Measuring Period. Maxim has not paid any cash
dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
THE MAXIM GROUP, INC., NASDAQ STOCK MARKET INDEX AND
NASDAQ RETAIL STOCK INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE MAXIM GROUP, INC. NASDAQ STOCK MARKET INDEX NASDAQ RETAIL STOCK INDEX
<S> <C> <C> <C>
9/30/93 100 100 100
3/31/94 229 98 94
3/31/95 235 109 92
1/31/96 179 142 101
</TABLE>
* On January 13, 1996, Maxim changed its fiscal year end from March 31 to
January 31.
ASSUMES $100 INVESTED ON SEPTEMBER 30, 1993 IN THE MAXIM GROUP, INC.
COMMON STOCK, NASDAQ STOCK MARKET INDEX AND
NASDAQ RETAIL STOCK INDEX
108
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1995, Maxim loaned $820,987 to Kevodrew Realty, Inc. ("Kevodrew")
a company controlled by A.J. Nassar, the President and Chief Executive Officer
of Maxim, which loan bears interest at an annual rate of prime. These funds were
loaned to Kevodrew to provide interim financing for the purchase by Kevodrew of
a retail shopping center in Louisville, Kentucky. This loan was repaid in May
1996. A primary tenant in the shopping center is a company-owned store, which
has entered into a five-year lease agreement with Kevodrew providing for annual
lease payments of $89,155. In addition to the foregoing, Maxim loaned to Mr.
Nassar an additional $119,266, $141,650 and $300,000 during fiscal 1994, 1995
and 1996, respectively. As of June 15, 1996, a total of $563,415 was owed to
Maxim by Mr. Nassar, which amount bears interest at an annual rate of 8%. Maxim
may in the future make loans to officers and employees in furtherance of proper
corporate purposes.
GCO leases two facilities in Montgomery, Alabama and an airplane from Dicky
W. McAdams, a director of Maxim and the Chairman of GCO. One of these facilities
and the airplane is owned directly by Mr. McAdams and the other facility is
owned by a partnership in which Mr. McAdams has a 50% interest. Lease payments
to Mr. McAdams and the partnership totaled $162,887 in fiscal 1996.
Mr. McAdams provided consulting services to GCO in fiscal 1996 subsequent to
his resignation as President and Chief Executive Officer of GCO. Payments for
these services totaled $50,000 in fiscal 1996.
Richard A. Kaplan, Ronald McSwain and Herb Wolk, directors of Maxim, are
also owners of floorcovering retailers which are franchisees of Maxim. The
following table sets forth for the periods indicated, the amounts paid to Maxim
by the franchisees controlled by these directors and rebates received by these
franchisees. Rebate payments to these franchisees by Maxim represent a pass
through of volume rebates paid by various floorcovering manufacturers to Maxim.
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995 FISCAL 1996
-------------------------- -------------------------- --------------------------
AMOUNTS PAID AMOUNTS PAID AMOUNTS PAID
NAME TO COMPANY REBATES TO COMPANY REBATES TO COMPANY REBATES
- -------------------------------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Kaplan............... $ 158,278 $ 113,912 $ 106,682 $ 74,118 $ 55,187 $ 35,909
Ronald McSwain.................. 433,202 374,274 323,175 274,550 242,550 206,453
Herb Wolk....................... 63,460 56,588 72,134 48,328 47,604 26,863
------------- ----------- ------------- ----------- ------------- -----------
Total......................... $ 654,940 $ 544,774 $ 501,991 $ 396,996 $ 345,341 $ 269,225
------------- ----------- ------------- ----------- ------------- -----------
------------- ----------- ------------- ----------- ------------- -----------
</TABLE>
Although there has not been any independent determination of the fairness
and reasonableness of the terms and conditions of the transactions between Maxim
and its affiliates, Maxim believes that these transactions are on terms no less
favorable than those which could have been obtained from parties not affiliated
with Maxim or other franchisees. As with any contractual arrangement, the terms
of these transactions are subject to adjustment should the parties so desire.
Maxim, however, has no present intention of adjusting the terms of these
transactions.
109
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF MAXIM
The following table sets forth information regarding the beneficial
ownership of the Common Stock of Maxim as of June 15, 1996, with respect to (i)
each person known by Maxim to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each of Maxim's directors, (iii) each of the Named
Executive Officers, and (iv) all directors and executive officers as a group.
Unless otherwise indicated, each of the shareholders has sole voting and
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED PERCENTAGE OF
OF BENEFICIAL OWNER (1) TOTAL
- ----------------------------------------------------------------------------- -------------------- ---------------
<S> <C> <C>
Richard A. Kaplan............................................................ 915,000 12.7%
7 Far View Hill
Rochester, New York 14620
A.J. Nassar (2).............................................................. 709,440 9.7
210 TownPark Drive
Kennesaw, Georgia 30144
Ronald McSwain (3)........................................................... 424,500 5.9
765 Hedgerow Lane
Cincinnati, Ohio 45246
M.B. Seretean (4)............................................................ 502,000 6.7
19700 Oakbrook Circle
Boca Raton, Florida 33434
Herb Wolk.................................................................... 319,000 4.4
Dicky W. McAdams (5)......................................................... 220,294 3.1
J. Michael Nixon (6)......................................................... 75,000 1.0
James W. Inglis (7).......................................................... 150,000 2.1
The Kaufmann Fund, Inc. (8).................................................. 750,000 10.4
140 E. 45th Street, 43rd Floor
New York, New York 10017
All directors and executive officers as a group (13 persons)................. 3,449,494 44.0
</TABLE>
- ------------------------
(1) "Beneficial Ownership" includes shares for which an individual, directly or
indirectly, has or shares voting or investment power or both and also
includes warrants and options which are exercisable within sixty days of the
date hereof. Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 of the Securities Exchange Act of
1934. The percentages are based upon 7,204,795 shares outstanding, except
for certain parties who hold presently exercisable warrants or options to
purchase shares. The percentages for those parties who hold presently
exercisable warrants or options are based upon the sum of 7,204,795 shares
plus the number of shares subject to presently exercisable warrants or
options held by them, as indicated in the following notes.
(2) Includes 121,440 shares of Common Stock subject to presently exercisable
stock options and 70,000 shares of Common Stock held by a partnership in
which Mr. Nassar serves as a general partner.
(3) Includes 30,500 shares owned by a foundation and a trust with respect to
which Mr. McSwain serves as trustee.
(4) Includes 250,000 shares of Common Stock subject to presently exercisable
stock options.
(5) Includes 10,000 shares of Common Stock subject to presently exercisable
stock options.
110
<PAGE>
(6) Includes 25,000 shares of Common Stock subject to presently exercisable
stock options.
(7) Includes 100,000 shares of Common Stock subject to presently exercisable
stock options.
(8) Based on a Schedule 13G dated April 30, 1996 filed by The Kaufmann Fund.
Maxim makes no representation as to the accuracy or completeness of the
information reported.
TRANSITION REPORT ON FORM 10-K
Maxim's Transition Report on Form 10-K for the ten months ended January 31,
1996, as filed with the Commission, is available to shareholders who make
written request therefor to Maxim at 210 TownPark Drive, Kennesaw, Georgia
30144. Copies of exhibits and basic documents filed with that report or
referenced therein will be furnished to shareholders of record upon request.
LEGAL MATTERS
The legality of the Maxim Common Stock to be issued in connection with the
Merger is being passed upon for Maxim by Smith, Gambrell & Russell, Atlanta,
Georgia. Certain legal matters relating to the Merger will be passed upon for
Image by Womble Carlyle Sandridge & Rice, PLLC, Atlanta, Georgia. Attorneys at
Womble Carlyle Sandridge & Rice, PLLC owned 5,500 shares of Image Common Stock
as of July 16, 1996.
INDEPENDENT PUBLIC ACCOUNTANTS
On September 11, 1995, Maxim dismissed its independent auditors, KPMG Peat
Marwick LLP, and on the same date engaged the firm of Arthur Andersen LLP as its
independent public accountants for the ten month period ended January 31, 1996.
Each of these actions was approved by the Board of Directors of Maxim.
The reports of KPMG Peat Marwick LLP on the financial statements of Maxim
for the past two fiscal years did not contain an adverse opinion or a disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope,
or accounting principles. In connection with the audits of Maxim's financial
statements for each of the two fiscal years ended March 31, 1995 and 1994, and
in the subsequent interim period prior to the dismissal of KPMG Peat Marwick
LLP, there were no disagreements with KPMG Peat Marwick LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
KPMG Peat Marwick LLP, would have caused it to make reference to the subject
matter of the disagreement in its report.
Arthur Andersen LLP has served as independent auditors of Maxim for the ten
months ended January 31, 1996 and has been selected by the Board of Directors to
serve as independent auditors of Maxim for the fiscal year ending January 31,
1997. Representatives of Arthur Anderson LLP are expected to be present at the
Maxim Annual Meeting and will have the opportunity to make a statement if they
desire to do so and to respond to appropriate questions.
EXPERTS
The consolidated financial statements of Maxim as of and for the ten months
ended January 31, 1996, included herein and incorporated by reference in Maxim's
Transition Report (Form 10-K), have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their report thereon included
therein and incorporated herein by reference in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Maxim as of March 31, 1995 and for
each of the years in the two-year period ended March 31, 1995, have been
included and incorporated by reference herein
111
<PAGE>
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, included and incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Image as of July 1, 1995 and July 2, 1994 and
for each of the years in the three year period ended July 1, 1995, have been
included and incorporated by reference herein in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, included and
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The financial statements of Pharr Yarns of Georgia, Inc. as of March 25,
1995, included and incorporated by reference herein, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and is included and incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
The financial statements of Pharr Yarns of Georgia, Inc. as of March 26,
1994, included and incorporated by reference herein, have been audited by
Deloitte & Touche LLP, independent auditors, as indicated in their reports with
respect thereto, and is included and incorporated by reference herein in
reliance upon the authority of said firm as experts in accounting and auditing.
PROPOSALS BY MAXIM SHAREHOLDERS
Any proposal to be presented at Maxim's 1997 Annual Meeting of Shareholders
must be received at the principal executive offices of Maxim not later than
January 15, 1997, directed to the attention of H. Gene Harper, Secretary, for
consideration for inclusion in Maxim's proxy statement and form of proxy
relating to that meeting. Any such proposals must comply in all respects with
the rules and regulations of the Commission.
PROPOSALS BY IMAGE SHAREHOLDERS
If the Merger is not consummated, management of Image expects that the 1996
Annual Meeting of Shareholders of Image would be held in December 1996. As
stated in Image's Proxy Statement for its 1995 Annual Meeting of Shareholders,
proposals of Image shareholders intended to be presented at such meeting must
have been received by Image on or before June 7, 1996 to be considered for
inclusion in Image's proxy statement and form of proxy relating to that meeting.
Image has received no such shareholder proposals.
OTHER MATTERS
The Boards of Directors of Maxim and Image are not aware of any matter to be
presented for action at the Maxim Annual Meeting or the Image Special Meeting
other than the approval and adoption of the Merger and, with respect to Maxim,
the Maxim Annual Meeting Proposals. If any other matter comes before the Maxim
Annual Meeting or the Image Special Meeting, it is the intention of the persons
named in the accompanying proxy to vote on such matter in accordance with their
best judgment unless authority therefor is withheld on the enclosed proxy card.
Such discretionary matters may include motions to adjourn the meeting for the
purpose of further soliciting proxies in favor of the Merger and, with respect
to Maxim, the Maxim Annual Meeting Proposals.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE MAXIM GROUP, INC.
Report of Independent Public Accountants........................................ F-2
Independent Auditors' Report.................................................... F-3
Consolidated Balance Sheets -- March 31, 1995, January 31, 1996 and April 30,
1996 (unaudited)............................................................... F-4
Consolidated Statements of Operations -- Years ended March 31, 1994 and 1995,
ten months ended January 31, 1996 and three months ended March 31, 1995 and
April 30, 1996 (unaudited)..................................................... F-6
Consolidated Statements of Stockholders' Equity -- Years ended March 31, 1994
and 1995, ten months ended January 31, 1996 and three months ended April 30,
1996 (unaudited)............................................................... F-7
Consolidated Statements of Cash Flows -- Years ended March 31, 1994 and 1995,
ten months ended January 31, 1996 and three months ended March 31, 1995 and
April 30, 1996 (unaudited)..................................................... F-8
Notes to Consolidated Financial Statements...................................... F-9
</TABLE>
<TABLE>
<S> <C>
IMAGE INDUSTRIES, INC.
Independent Auditors' Report.................................................... F-22
Balance Sheets -- July 1, 1995, July 2, 1994 and March 30, 1996 (unaudited)..... F-23
Statements of Operations -- Years ended July 1, 1995, July 2, 1994 and July 3,
1993 and nine months ended March 30, 1996 and April 1, 1995 (unaudited)........ F-24
Statements of Stockholders' Equity -- Years ended July 1, 1995, July 2, 1994 and
July 3, 1993 and nine months ended March 30, 1996 (unaudited).................. F-25
Statements of Cash Flows -- Years ended July 1, 1995, July 2, 1994 and July 3,
1993 and nine months ended March 30, 1996 and April 1, 1995 (unaudited)........ F-26
Notes to Financial Statements................................................... F-27
</TABLE>
<TABLE>
<S> <C>
PHARR YARNS OF GEORGIA , INC.
Report of Independent Public Accountants........................................ F-36
Independent Auditors' Report.................................................... F-37
Balance Sheets -- March 25, 1995 and March 26, 1994............................. F-38
Statements of Income and Retained Earnings -- Years ended March 25, 1995 and
March 26, 1994................................................................. F-39
Statements of Cash Flows -- Years ended March 25, 1995 and March 26, 1994....... F-40
Notes to Financial Statements................................................... F-41
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The Maxim Group, Inc.:
We have audited the accompanying consolidated balance sheet of THE MAXIM
GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of January 31, 1996 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the ten months ended January 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
accompanying financial statements of The Maxim Group, Inc. and subsidiaries as
of March 31, 1995 and for each of the two years in the period ended March 31,
1995 were audited by other auditors whose report thereon dated June 9, 1995
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Maxim Group, Inc. and
subsidiaries as of January 31, 1996 and the results of their operations and
their cash flows for the ten months ended January 31, 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 19, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Maxim Group, Inc.:
We have audited the accompanying consolidated balance sheet of The Maxim
Group, Inc. and subsidiaries as of March 31, 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the two-year period ended March 31, 1995. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule for the two-year period ended March 31, 1995. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Maxim
Group, Inc. and subsidiaries as of March 31, 1995, and the results of their
operations and their cash flows for each of the years in the two-year period
ended March 31, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
June 9, 1995
F-3
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995, JANUARY 31, 1996, AND APRIL 30, 1996
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31, APRIL 30,
1995 1996 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $195,038
and $1,027,607 at March 31, 1995 and January 31, 1996,
respectively.................................................... $ 2,238,486 $ 4,161,866 $ 2,414,240
Current portion of franchise license fees receivable, net of
allowance for doubtful accounts of $103,521 and $175,041 at
March 31, 1995 and January 31, 1996, respectively............... 1,787,114 1,893,949 2,235,072
Trade accounts receivable, net of allowance for doubtful accounts
of $733,553 and $1,475,432 at March 31, 1995 and January 31,
1996, respectively.............................................. 11,646,449 12,801,523 13,694,938
Accounts receivable from officers and employees (Note 5)......... 411,711 614,230 522,211
Current portion of notes receivable from franchisees and related
parties, net of allowance for doubtful accounts of $0 and
$383,333 at March 31, 1995 and January 31, 1996, respectively
(Note 6)........................................................ 557,274 1,008,455 1,215,349
Inventories...................................................... 14,003,970 14,862,142 14,464,854
Refundable income taxes (Note 10)................................ 1,058,614 2,176,348 1,324,780
Deferred income taxes (Note 10).................................. 0 1,319,963 1,342,301
Prepaid expenses................................................. 1,014,788 1,039,317 952,942
-------------- -------------- --------------
Total current assets......................................... 32,718,406 39,877,793 38,166,687
PROPERTY AND EQUIPMENT, net (Note 4)............................. 12,053,486 17,858,534 17,376,072
FRANCHISE LICENSE FEES RECEIVABLE, less current portion, net of
allowance for doubtful accounts of $210,000 and $210,000 at
March 31, 1995 and January 31, 1996, respectively............... 2,106,882 2,091,361 1,847,662
NOTES RECEIVABLE FROM FRANCHISEES, less current portion.......... 450,000 0 73,632
DEFERRED LICENSE FEE, net of accumulated amortization (Note 7)... 879,533 340,553 130,553
DEFERRED INCOME TAXES (Note 10).................................. 0 611,973 611,973
INTANGIBLE ASSETS, net of accumulated amortization of $443,283
and $698,694 at March 31, 1995 and January 31, 1996,
respectively (Note 2)........................................... 13,418,648 8,859,611 8,782,315
OTHER ASSETS..................................................... 295,878 331,413 451,914
-------------- -------------- --------------
$ 61,922,833 $ 69,971,238 $ 67,440,808
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-4
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
MARCH 31, 1995, JANUARY 31, 1996, AND APRIL 30, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31, APRIL 30,
1995 1996 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt.............................. $ 884,469 $ 903,382 $ 812,281
Current portion of capital lease obligations (Note 9).......... 326,898 356,876 357,888
Rebates payable to franchisees................................. 1,752,056 3,672,783 2,414,268
Accounts payable............................................... 6,508,214 6,919,836 6,444,077
Accrued expenses............................................... 1,676,885 5,029,277 3,771,683
Deferred revenue............................................... 441,000 1,284,254 1,577,972
Deposits....................................................... 2,198,641 2,075,988 2,428,216
-------------- -------------- --------------
Total current liabilities.................................... 13,788,163 20,242,396 17,806,385
LONG-TERM DEBT, less current portion (Note 8).................... 18,169,673 28,159,336 27,477,488
CAPITAL LEASE OBLIGATIONS, less current portion (Note 9)......... 2,169,007 1,908,843 1,824,206
DEFERRED INCOME TAXES (Note 10).................................. 1,457,315 0 0
-------------- -------------- --------------
Total liabilities............................................ 35,584,158 50,310,575 47,108,079
-------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 9, 13 and 15)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 1,000,000 shares authorized, no
shares issued or outstanding.................................... 0 0 0
Common stock, $.001 par value; authorized 15,000,000 shares,
7,059,772 and 7,129,895 shares issued and outstanding in 1995
and 1996, respectively.......................................... 7,060 7,130 7,130
Additional paid-in capital....................................... 19,996,121 20,591,591 20,592,891
Retained earnings (accumulated deficit).......................... 6,335,494 (938,058) 68,708
Treasury stock, at cost; 28,000 shares........................... 0 0 (336,000)
-------------- -------------- --------------
Total stockholders' equity................................... 26,338,675 19,660,663 20,332,729
-------------- -------------- --------------
$ 61,922,833 $ 69,971,238 $ 67,440,808
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995, THE TEN MONTHS ENDED JANUARY 31,
1996,
AND THE THREE MONTHS ENDED MARCH 31, 1995 AND APRIL 30, 1996
<TABLE>
<CAPTION>
TEN MONTHS
ENDED THREE MONTHS ENDED
YEARS ENDED MARCH 31 JANUARY 31, ------------------------------
------------------------------ -------------- MARCH 31, APRIL 30,
1994 1995 1996 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales of floor covering products (Note 11)....... $ 8,492,834 $ 61,089,121 $ 84,525,692 $ 20,811,855 $ 27,129,116
Franchise license fees and royalties............. 4,470,047 5,585,445 4,778,232 1,689,249 1,451,499
Fees from brokering floor covering products (Note
11)............................................. 2,015,553 4,760,091 4,673,286 1,291,106 1,972,203
Advertising fees, net of direct costs (Note
11)............................................. 3,202,375 3,531,210 3,980,466 647,260 2,487,957
Other (Note 11).................................. 1,153,039 1,125,270 1,332,734 346,812 614,083
-------------- -------------- -------------- -------------- --------------
Total revenues............................... 19,333,848 76,091,137 99,290,410 24,786,282 33,654,858
COST OF SALES...................................... 7,282,206 43,109,094 58,808,023 14,281,454 20,011,406
-------------- -------------- -------------- -------------- --------------
Gross profit................................... 12,051,642 32,982,043 40,482,387 10,504,828 13,643,452
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES...... 8,395,544 28,906,173 41,967,375 10,123,080 11,691,257
GOODWILL IMPAIRMENT CHARGE (Note 2)................ 0 0 (6,569,345) 0 0
-------------- -------------- -------------- -------------- --------------
Operating (loss) income.......................... 3,656,098 4,075,870 (8,054,333) 381,748 1,952,195
-------------- -------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest income.................................. 306,590 397,130 415,286 108,489 132,836
Interest expense................................. (71,126) (707,174) (1,588,088) (457,134) (588,101)
Other............................................ 0 364,366 193,583 224,697 181,013
-------------- -------------- -------------- -------------- --------------
235,464 54,322 (979,219) (123,948) (274,252)
-------------- -------------- -------------- -------------- --------------
(Loss) earnings before income taxes.......... 3,891,562 4,130,192 (9,033,552) 257,800 1,677,943
INCOME TAX (BENEFIT) EXPENSE (Note 10)............. 1,426,323 1,745,000 (1,760,000) 34,106 671,177
-------------- -------------- -------------- -------------- --------------
Net (LOSS) EARNINGS................................ $ 2,465,239 $ 2,385,192 $ (7,273,552) $ 223,694 $ 1,006,766
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
(LOSS) EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE............................................. $ 0.50 $ 0.34 $ (1.02) $ .03 $ .14
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING..................... 4,957,869 7,091,541 7,102,242 7,370,633 7,406,445
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995, AND THE TEN MONTHS ENDED JANUARY
31, 1996
AND THE THREE MONTHS ENDED APRIL 30, 1996
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
----------------- PAID-IN (ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL DEFICIT) STOCK TOTAL
--------- ------ ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1993....... 3,968,821 $3,969 $ 223,749 $ 1,485,063 $ 0 $1,712,781
Redemption and cancellation
of 178,218 shares of common
stock (Note 12)............ (178,218) (178) (106,822) 0 0 (107,000)
Sale of common stock, less
underwriting and issuance
costs of $1,603,453 (Note
12)........................ 1,822,600 1,823 7,963,374 0 0 7,965,197
Exercise of redeemable
common stock purchase
warrants (Note 12)......... 26,898 26 188,260 0 0 188,286
Net earnings for the year... 0 0 0 2,465,239 0 2,465,239
--------- ------ ----------- ------------ --------- ----------
BALANCE, March 31, 1994....... 5,640,101 5,640 8,268,561 3,950,302 0 12,224,503
Exercise of redeemable
common stock purchase
warrants, net of $46,084 in
redemption costs (Note
12)........................ 880,517 881 6,123,654 0 0 6,124,535
Issuance of stock........... 520,654 521 7,009,954 0 0 7,010,475
Stock options exercised..... 18,500 18 97,152 0 0 97,170
Cancellation of
underwriter's warrants
(Note 12).................. 0 0 (1,503,200) 0 0 (1,503,200)
Net earnings for the year... 0 0 0 2,385,192 0 2,385,192
--------- ------ ----------- ------------ --------- ----------
BALANCE, March 31, 1995....... 7,059,772 7,060 19,996,121 6,335,494 0 26,338,675
Issuance of stock........... 42,857 43 449,955 0 0 449,998
Stock options exercised..... 27,266 27 145,515 0 0 145,542
Net loss for the ten months
ended January 31, 1996..... 0 0 0 (7,273,552) 0 (7,273,552)
--------- ------ ----------- ------------ --------- ----------
BALANCE, January 31, 1996..... 7,129,895 7,130 20,591,591 (938,058) 0 19,660,663
Retirement of treasury
shares..................... 0 0 0 0 (336,000) (336,000)
Stock options exercised..... 0 0 1,300 0 0 1,300
Net earnings for the three
months ended April 30,
1996....................... 0 0 0 1,006,766 0 1,006,766
--------- ------ ----------- ------------ --------- ----------
BALANCE, April 30, 1996
(unaudited).................. 7,129,895 $7,130 $20,592,891 $ 68,708 $(336,000) $20,332,729
--------- ------ ----------- ------------ --------- ----------
--------- ------ ----------- ------------ --------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995, THE TEN MONTHS ENDED JANUARY 31,
1996,
AND THE THREE MONTHS ENDED MARCH 31, 1995 AND APRIL 30, 1996
<TABLE>
<CAPTION>
TEN MONTHS THREE MONTHS ENDED
YEARS ENDED MARCH 31 ENDED ------------------------
------------------------ JANUARY 31, MARCH 31, APRIL 30,
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings............................. $ 2,465,239 $ 2,385,192 $(7,273,552) $ 223,694 $ 1,006,766
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net (loss) earnings to
net cash provided by (used in) operating
activities:
Impairment writedown of goodwill.............. 0 0 6,569,345 0 0
Depreciation and amortization................. 257,318 1,202,784 3,150,386 217,072 830,826
Bad debt provision............................ 107,550 515,149 1,348,755 150,000 (150,000)
Deferred income taxes......................... 160,434 1,051,328 (3,389,251) 1,198,002 (22,338)
Changes in assets and liabilities:
Increase in receivables..................... (3,963,880) (4,869,409) (2,002,005) (1,645,201) (1,029,346)
Decrease (increase) in inventories.......... (1,564,860) (3,160,467) 77,397 (715,782) 397,288
Increase in refundable income taxes......... 0 (1,058,614) (1,117,734) (1,058,614) 851,568
Decrease (increase) in prepaid expenses and
other assets............................... (200,130) 117,765 372,259 861,407 (34,126)
Increase (decrease) in accounts payable,
rebates payable, accrued expenses, and
deposits and deferred revenue.............. 1,454,890 492,056 4,155,204 (1,148,037) (2,345,922)
----------- ----------- ----------- ----------- -----------
Total adjustments......................... (3,748,678) (5,709,408) 9,164,356 (2,141,153) (1,502,050)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities............................... (1,283,439) (3,324,216) 1,890,804 (1,917,459) (495,284)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (2,946,746) (4,675,921) (7,314,759) (1,817,432) (61,068)
Acquisitions, net of cash acquired.............. 0 (12,634,587) (2,576,597) (2,923,439) 0
Deferred license fee payments................... (1,035,000) 0 0 0 0
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities..... (3,981,746) (17,310,508) (9,891,356) (4,740,871) (61,068)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net..... 7,965,197 0 0 0 0
Proceeds from exercise of warrants and options,
net............................................ 188,286 6,221,705 145,542 126,714 1,300
Purchase of underwriter's warrants.............. 0 (1,503,200) 0 (1,503,200) 0
Purchase of treasury stock...................... (107,000) 0 0 0 (336,000)
Proceeds from issuance of debt.................. 1,895,000 17,231,656 10,962,591 0 0
Principal payments on debt...................... (1,323,679) (2,829,359) (954,015) 7,566,409 (772,949)
Principal payments on capital lease
obligations.................................... (8,035) (347,856) (230,186) (136,027) (83,625)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities............................... 8,609,769 18,772,946 9,923,932 6,053,896 (1,191,274)
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH................... 3,344,584 (1,861,778) 1,923,380 (604,434) (1,747,626)
CASH, beginning of period......................... 755,680 4,100,264 2,238,486 2,842,920 4,161,866
----------- ----------- ----------- ----------- -----------
CASH, end of period............................... $ 4,100,264 $ 2,238,486 $ 4,161,866 $ 2,238,486 $ 2,414,240
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest...................................... $ 96,029 $ 786,539 $ 1,434,015 $ 552,497 $ 537,042
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income taxes.................................. $ 1,260,972 $ 1,827,890 $ 2,344,000 $ 525,000 $ 50,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in connection with
acquisitions................................... $ 0 $ 7,010,475 $ 449,998 $ 670,110 $ 0
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Maxim Group, Inc. and subsidiaries (the "Company" or "Maxim") is engaged
in retail and commercial sales of floor covering products. The Company is also
engaged in the sale of franchise licensing agreements for the retail floor
covering industry and other related products and services to its franchisees. At
January 31, 1996, the Company had 377 franchisees under contract. The Company
does not have a concentration of revenues or accounts receivable with a single
customer or small number of customers. Management does not believe that the
Company is dependent upon any one vendor for product purchases and the loss of
any single vendor would not have a significant adverse effect.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The Maxim
Group, Inc. and all wholly owned subsidiaries. Upon consolidation, all
intercompany accounts, transactions, and profits are eliminated. The financial
statements give retroactive effect to the merger of the Company and GCO, Inc.
("GCO") on September 28, 1994, which was accounted for as a pooling of
interests, as described in Note 3 to the consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates depending
upon certain risks and uncertainties. Potential risks and uncertainties include
such factors as the financial strength of the retail industry, the level of
consumer spending for floor covering products, the amount of sales of the
Company's floor covering products, the competitive pricing environment, and the
success of planned advertising, marketing, and promotional campaigns.
FISCAL YEAR
The Company changed its year-end from March 31 to January 31. As a result,
the fiscal year ended January 31, 1996 contains ten months. The fiscal years
ended March 31, 1994 and 1995 each contain 12 months.
The consolidated Statement of Operations (unaudited) for the ten months
ended January 31, 1995 is as follows:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED JANUARY
31, 1995
(UNAUDITED)
---------------
<S> <C>
Revenues............................................................................... $ 59,047,329
Cost of sales.......................................................................... 33,534,200
---------------
Gross profit........................................................................... 25,513,129
Selling, general and administrative expenses........................................... 21,715,281
---------------
Operating income....................................................................... 3,797,848
Other expense.......................................................................... 361,132
Income taxes........................................................................... 1,666,496
---------------
Net earnings........................................................................... $ 1,770,220
---------------
---------------
Earnings per common and common equivalent share........................................ $ .25
---------------
---------------
</TABLE>
F-9
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash balances include short-term interest-bearing deposits, net of
outstanding checks.
ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION
The Company recognizes the entire franchise license fee as income on the
date the franchise agreement is signed, at which time the Company has performed
substantially all of its obligations under the franchise agreement. Some
franchise agreements contain provisions which, under defined circumstances,
would require the Company to refund a portion or all of the franchise license
fee. Franchise revenues associated with these contracts, which are not material
at March 31, 1995 or January 31, 1996, have been deferred until these
obligations are fulfilled.
The Company finances a portion of the sale of franchises over a term of four
years, generally at 10% interest. An allowance for doubtful accounts is provided
based on the Company's collection experience and periodic reviews of the
accounts.
Revenue from retail and commercial sales is recognized upon completion of
the installation of floor coverings or at the time of delivery for floor
coverings not installed by the Company or its authorized installers.
FEES FROM BROKERING FLOOR COVERING PRODUCTS AND ADVERTISING FEES
The Company negotiates volume rebates with various floor covering
manufacturers on behalf of its franchisees. In exchange for this service, the
Company earns a portion of the rebates as the shipments are made to its
franchisees. The rebates are paid directly to the Company by the manufacturers
throughout the year. The franchisees typically receive their portions of the
rebates semiannually in February and July. Accordingly, the Company has recorded
revenue, restricted cash owed to franchisees, receivables from manufacturers,
and rebates payable to franchisees related to these rebates.
Advertising production fees, excluding direct mail, are considered earned
once the ad is produced, and the related media commission fees, if applicable,
are considered earned once the commercial is aired. Direct mail commissions are
earned on the date of the franchisee's promotion or sale.
INVENTORIES
Inventories, consisting of goods held for resale, are recorded at the lower
of cost or market. Cost is determined on a specific identification basis which
approximates the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. When retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
respective accounts and the net difference, less any amount realized, is
reflected in the statements of operations.
Depreciation is calculated using the straight-line method over the estimated
remaining useful lives of the respective assets.
DEFERRED LICENSE FEE
A deferred license fee is being amortized over the three-year contract
period using the straight-line method.
F-10
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill. Goodwill arises in
connection with business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over 20 years. Amortization of approximately
$327,000 and $668,000 was charged to earnings in 1995 and 1996, respectively.
The Company periodically evaluates the carrying value of goodwill in relation to
the operating performance and future undiscounted cash flows of the underlying
businesses. The Company adjusts the carrying amount of the goodwill if the
unamortized balance exceeds the estimate of future cash flows (Note 2).
Organizational costs have been deferred and are being amortized using the
straight-line method over 60 months.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
EARNINGS PER SHARE
Earnings per common share are computed on the basis of the weighted average
shares of common stock outstanding plus common stock equivalents, if dilutive,
arising from the effect of common shares contingently issuable, primarily from
stock options and warrants.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, and long-term debt. The carrying amounts of cash,
accounts receivable, and accounts payable approximate their fair values because
of the short-term maturity of such instruments. The carrying amount of long-term
debt approximates its fair value, because interest rates on debt are
periodically adjusted and approximate current market rates.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables are limited
due to the wide variety of customers and markets for which the Company's
products and services are provided, as well as their dispersion across many
different geographic areas. As a result, as of January 31, 1996, the Company
does not consider itself to have any significant concentrations of credit risk.
RECLASSIFICATIONS
Certain prior year financial statement balances have been reclassified to
conform with the current period presentation.
INTERIM UNAUDITED DATA FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND APRIL
30, 1996
In the opinion of management, the unaudited financial statements contain all
the normal and recurring adjustments necessary to present fairly the financial
position of the Company as of April 30, 1996 and the results of the Company's
operations and its cash flows for the three months ended March 31, 1995 and
April 30, 1996 in conformity with generally accepted accounting principles. The
results of operations for the three month period ended April 30, 1996 are not
necessarily indicative of the results to be expected for the year.
F-11
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
2. GOODWILL IMPAIRMENT
Certain of the Company's acquisitions have not performed as anticipated at
the time of purchase. Several acquired stores have closed, management has been
replaced, and there has been a loss of revenues from building contractors in
certain locations. The continuing poor financial results of these stores through
the end of fiscal 1996 led management to a reevaluation of operations that
indicated significant strategic and operational changes would be necessary at
some stores, including changes in the customer mix, location, and store design
and merchandising. These factors also caused management to assess the
realizability of the goodwill recorded for these units.
The determination of impairment was made by comparing the unamortized
goodwill balance for each acquisition to the estimate of the related entity's
undiscounted future cash flows, including interest. There were no significant
long-lived assets acquired with these companies. 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 Company's acquisitions and resulted in a write-off totaling
$6,569,345.
The Company will adopt Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", in the first quarter of fiscal 1997. The adoption will not
materially affect the Company's statement of financial position or operating
results.
3. ACQUISITIONS
On May 2, 1994, the Company acquired Kinnaird & Francke Interiors, Inc.
("KFI"), a ten-store retail carpet chain based in Louisville, Kentucky. The
acquisition has been reflected on the purchase basis of accounting at a price of
$5,673,462, consisting of a cash payment of $1,750,000, the issuance of 270,000
shares of the Company's common stock, valued at $3,611,250, and an additional
$312,212 in acquisition costs. The purchase price has been allocated to the
assets acquired and liabilities assumed based on estimates of the fair values at
the date of acquisition, resulting in goodwill of $2,777,479, which is being
amortized over a 20-year period.
On September 7, 1994, the Company acquired Steve Peterson Interiors &
Associates, Inc. and National Carpet Brokers, Inc., which are engaged in the
retail sale and installation of floor coverings and related items from a total
of three stores located around Salt Lake City, Utah. The acquisition has been
reflected on the purchase basis of accounting at a purchase price of $2,623,668,
consisting of a cash payment of $440,000, the issuance of 155,254 shares of the
Company's common stock, valued at $2,057,115, and an additional $126,553 in
acquisition costs. The purchase price has been allocated to the assets acquired
and liabilities assumed based on estimates of fair values at the date of
acquisition, resulting in goodwill of $1,805,747, which is being amortized over
a 20-year period.
On September 14, 1994, the Company acquired RNA Enterprises, Inc. ("RNA"),
Bay Area Carpets, Inc. ("BAC"), and Carpet World, Inc. ("CW"), which are engaged
in the retail sale and installation of floor coverings and related items from a
total of six stores based in Tampa, Florida. The acquisition has been reflected
on the purchase basis of accounting at a price of $612,782, consisting of a cash
payment of $200,000, the issuance of 16,760 shares of the Company's common
stock, valued for the purpose of the acquisition at $234,640, and an additional
$178,142 in acquisition costs. In addition to the consideration received at
closing, the shareholders of RNA, BAC, and CW may receive additional shares of
common stock of the Company and cash based on the profitability of the acquired
companies during the two years following the closing date of the acquisitions.
The purchase price has been allocated to the assets acquired and liabilities
assumed based on estimates of fair values at the date of acquisition, resulting
in goodwill of $1,513,190, which is being amortized over a 20-year period.
F-12
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
3. ACQUISITIONS (CONTINUED)
On September 28, 1994, the Company acquired all of the common stock of GCO
in exchange for 790,603 shares of the Company's common stock. GCO is engaged in
the business of operating and franchising others to operate discount floor
covering establishments. The acquisition of GCO has been accounted for under the
pooling-of-interests method of accounting, and accordingly, the Company's
historical financial statements have been restated to include the accounts and
results of operations of GCO.
The results of operations previously reported by the separate companies
above and the combined amounts for the year ended March 31, 1994 are presented
below:
<TABLE>
<S> <C>
Net revenues:
The Maxim Group, Inc................................ $10,051,009
GCO................................................. 9,282,839
-----------
Total............................................. $19,333,848
-----------
-----------
Net earnings:
The Maxim Group, Inc................................ $ 1,822,945
GCO................................................. 642,294
-----------
Total............................................. $ 2,465,239
-----------
-----------
</TABLE>
On November 4, 1994, the Company acquired substantially all of the assets of
Carpetime Floor Covering, Inc., which is engaged in the retail sale and
installation of floor coverings and related items from five stores based in
Phoenix, Arizona. The acquisition has been reflected on a purchase basis of
accounting at a price of $3,064,337, consisting of a cash payment of $2,985,673
and an additional $78,664 in acquisition costs. The purchase price has been
allocated to the assets acquired based on estimates of the fair values at the
date of acquisition, resulting in goodwill of $2,938,689, which is being
amortized over a 20-year period.
On November 15, 1994, the Company acquired DuBose Carpet & Floors, Inc.
("DuBose") and Carpet Wholesalers, Inc. ("CWI"), which are engaged in the retail
sale and installation of floor coverings and related items from a total of five
stores based in San Antonio, Texas. The acquisition has been reflected on a
purchase basis of accounting at a purchase price of $1,144,492, consisting of a
cash payment of $600,000, the issuance of 32,000 shares of the Company's common
stock, valued for the purpose of the acquisition at $472,000, and an additional
$72,492 in acquisition costs. The purchase price has been allocated to the
assets acquired and liabilities assumed based on estimates of fair values at the
date of acquisition, resulting in goodwill of $1,304,014 which is being
amortized over a 20-year period.
On December 1, 1994, the Company acquired Rugs-N-Remnants, Inc., which is
engaged in the retail sale and installation of floor coverings and related items
from a total of three stores based in San Antonio, Texas. The acquisition has
been reflected on a purchase basis of accounting at a purchase price of
$2,912,521, consisting of a cash payment of $2,850,000 and an additional $62,521
in acquisition costs. The purchase price has been allocated to the assets
acquired and liabilities assumed based on estimates of the fair values at the
date of acquisition, resulting in goodwill of $2,176,980, which is being
amortized over a 20-year period.
On January 18, 1995, the Company acquired Losantville Carpet Outlet, Inc.
("LCO"), which is engaged in the retail sale and installation of floor coverings
and related items from two stores in Indiana. The acquisition has been reflected
on the purchase basis of accounting at a price of $948,367,
F-13
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
3. ACQUISITIONS (CONTINUED)
consisting of a cash payment of $889,786 and an additional $58,581 in
acquisition costs. The purchase price has been allocated to the assets acquired
and liabilities assumed based on estimates of fair values at the date of
acquisition, resulting in goodwill of $426,670, which is being amortized over a
20-year period. In connection with the purchase, the Company entered into a
20-year lease agreement with respect to certain real property owned by the
seller of LCO ("Shareholder") and the Company paid to the Shareholder prepaid
rent for the 20-year term in the amount of $200,000 in cash. LCO will operate as
a wholly owned subsidiary of KFI.
On February 9, 1995, the Company purchased certain assets of Carpet Gallery,
Inc. in Birmingham, Alabama. The acquisition has been reflected on the purchase
basis of accounting at a price of $389,280, consisting of a cash payment of
$270,000 and an additional $119,280 in acquisition costs. The purchase price has
been allocated to the assets acquired based on estimates of the fair values at
the date of acquisition, resulting in goodwill of $562,378, which is being
amortized over a 20-year period.
On February 17, 1995, the Company acquired American Carpet and Interiors,
Inc. and Todd and Harold, Inc., which are engaged in the retail sale and
installation of floor coverings and related items from three stores based in
North Carolina. The acquisition has been reflected on the purchase basis of
accounting at a price of $1,270,688, consisting of a cash payment of $567,086,
the issuance of 46,640 shares of the Company's common stock, valued for the
purpose of the acquisition at $635,470, and an additional $68,132 in acquisition
costs. The purchase price has been allocated to the assets acquired and
liabilities assumed based on estimates of fair values at the date of acquisition
resulting in goodwill of $1,300,425, which is being amortized over 20 years.
On August 17, 1995, the Company acquired certain assets of Carpet Country,
Inc. ("CCI"), which is engaged in the retail sale and installation of floor
coverings and related items from five stores in Iowa. The acquisition has been
reflected on the purchase basis of accounting at a price of $1,860,507,
consisting of a cash payment of $1,272,029, the issuance of 42,857 shares of the
Company's common stock valued at $449,998 and an additional $138,480 in
acquisition costs. In addition to the consideration received at closing, the
shareholders of CCI may receive cash or additional shares of common stock of the
Company based on the profitability of the acquired company during the twelve
month period ending July 31, 1996. The purchase price has been allocated to the
assets acquired and liabilities assumed based on estimates of fair values at the
date of acquisition resulting in goodwill of $1,535,465 which is being amortized
over a 20 year period. The allocation has been based on preliminary estimates
which may be revised at a later date. The operating results for CCI are included
in the Company's consolidated statements of operations from August 1, 1995.
F-14
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
4. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1995 and January 31, 1996 are summarized
as follows:
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Land................................................................... $ 1,446,543 $ 1,446,543
Buildings and leasehold improvements................................... 7,236,767 11,664,561
Machinery and equipment................................................ 2,164,714 4,690,073
Furniture and fixtures................................................. 1,830,370 1,645,972
Transportation equipment............................................... 862,295 1,841,867
-------------- --------------
13,540,689 21,289,016
Less accumulated depreciation and amortization......................... 1,487,203 3,430,482
-------------- --------------
$ 12,053,486 $ 17,858,534
-------------- --------------
-------------- --------------
</TABLE>
5. ACCOUNTS RECEIVABLE FROM OFFICERS AND EMPLOYEES
The Company has made loans to certain officers and employees with terms of
one to two years and with interest rates ranging from up to 8%.
6. NOTES RECEIVABLE FROM FRANCHISEES AND RELATED PARTIES
The Company has made loans to certain franchisees totaling $950,000 and
$501,682 at March 31, 1995 and January 31, 1996, respectively, with principal
payments due in monthly installments beginning October 1, 1995 through October
1, 2000 and interest payable monthly at the prime rate on the outstanding
balance, secured by the franchisees' accounts receivable and/or inventory and
equipment and personal guarantees.
In addition, the Company has made unsecured loans to franchisees and outside
directors at interest rates ranging from 0% to 7% and totaling $57,274 and
$81,571 at March 31, 1995 and January 31, 1996, respectively (Note 11).
7. DEFERRED LICENSE FEE
In March 1994, the Company entered into an agreement with a manufacturer
which provides the Company's franchisees with the opportunity to become licensed
dealers of certain brand-name products. The agreement is effective for a
three-year period beginning April 1, 1994. The Company paid an initial fee of
$1,035,000, which is being amortized over the life of the agreement. Accumulated
amortization totaled $155,467 and $694,447 as of March 31, 1995 and January 31,
1996, respectively.
F-15
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
8. LONG-TERM DEBT
Long-term debt at March 31, 1995 and January 31, 1996 is summarized as
follows:
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Revolving line of credit, due March 1998......................................... $ 15,225,000 $ 22,185,000
Note payable to bank, secured by land and building, interest payable in monthly
installments of $21,953, including interest at 8.34% with final payment due
October 9, 2005................................................................. 1,106,656 3,952,062
Note payable to bank, secured by land and building, payable in monthly
installments of $11,686, including interest at 7.125%, with final payment due
February 1, 2004................................................................ 919,524 856,659
Note payable to bank, secured by satellite equipment, in monthly installments of
$17,370, including interest at 9.46%, with final payment due March 1, 2000...... 900,000 791,062
Note payable to bank, secured by transportation equipment, in monthly
installments of $9,352, including interest at 8% with final payment due November
1, 2000......................................................................... 0 589,536
Other debt with interest ranging from approximately 6% to 11%; a portion secured
by vehicles and other property and maturing at various dates through 2000....... 902,962 688,399
-------------- --------------
19,054,142 29,062,718
Less current portion............................................................. 884,469 903,382
-------------- --------------
Long-term debt, less current portion............................................. $ 18,169,673 $ 28,159,336
-------------- --------------
-------------- --------------
</TABLE>
The aggregate annual maturities of long-term debt subsequent to January 31,
1996 are as follows:
<TABLE>
<S> <C>
Year ending January 31:
1997........................................ $ 903,382
1998........................................ 819,511
1999........................................ 22,825,318
2000........................................ 673,772
2001........................................ 721,901
2002 and thereafter......................... 3,118,834
-----------
$29,062,718
-----------
-----------
</TABLE>
The revolving credit agreement was amended during fiscal 1996 to provide
borrowings of up to $23 million. The interest rate charged will vary from LIBOR
plus 1.125%, to LIBOR plus 2.125% based on the financial leverage of the Company
as measured by the ratio of adjusted funded debt to total capitalization, as
defined by the revolving credit agreement. Interest-only payments are due
monthly for the first three years. The weighted average interest rate for the
ten months ended January 31, 1996 was 7.72%.
The revolving credit agreement contains financial and other covenants,
including requirements for minimum tangible net worth, debt coverage and
leverage ratios, each as defined. The Company was not in compliance with its
financial covenants as of January 31, 1996. However, the bank granted a waiver
of such noncompliance and amended the covenant requirements. The Company must
pay an
F-16
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
8. LONG-TERM DEBT (CONTINUED)
annual facility fee ranging from .00125% to .0035% of the total credit
commitment, depending upon the Company's performance measured against specific
coverage ratios, as defined by revolving the credit agreement.
9. LEASES
The Company is a party to noncancelable lease agreements involving property
and equipment, which extend for varying periods up to 20 years. Certain of these
leases have options to renew at varying terms.
Rental expense for operating leases amounted to $521,000 $1,704,000 and
$2,759,000, for the years ended March 31, 1994 and 1995 and the ten months ended
January 31, 1996, respectively, including $110,000 in 1994, $462,000 in 1995,
and $333,700 in 1996 paid to related parties.
Included in property and equipment are the following assets held under
capital leases:
<TABLE>
<CAPTION>
RELATED-PARTY OTHER TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
March 31, 1995:
Buildings and improvements........................................... $ 2,760,486 $ 0 $ 2,760,486
Machinery and equipment.............................................. 7,500 63,635 71,135
------------- ----------- -------------
Assets under capital leases.......................................... 2,767,986 63,635 2,831,621
Less accumulated amortization........................................ 331,673 32,846 364,519
------------- ----------- -------------
Assets under capital leases, net..................................... $ 2,436,313 $ 30,789 $ 2,467,102
------------- ----------- -------------
------------- ----------- -------------
January 31, 1996:
Buildings and improvements........................................... $ 2,760,486 $ 0 $ 2,760,486
Machinery and equipment.............................................. 0 106,406 106,406
------------- ----------- -------------
Assets under capital leases.......................................... 2,760,486 106,406 2,866,892
Less accumulated amortization........................................ 628,741 19,454 648,195
------------- ----------- -------------
Assets under capital leases, net..................................... $ 2,131,745 $ 86,952 $ 2,218,697
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
Minimum future lease obligations on long-term noncancelable leases in effect
at January 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES
--------------------------------------- OPERATING
RELATED-PARTY OTHER TOTAL LEASES
------------- --------- ------------- --------------
<S> <C> <C> <C> <C>
Year ending January 31:
1997................................................. $ 465,180 $ 39,172 $ 504,352 $ 3,443,670
1998................................................. 465,180 24,991 490,171 3,012,564
1999................................................. 465,180 16,062 481,242 2,543,997
2000................................................. 465,180 6,977 472,157 2,146,915
2001................................................. 465,180 1,955 467,135 1,394,477
2002 and thereafter.................................. 599,783 0 599,783 3,511,514
------------- --------- ------------- --------------
Total minimum lease payments....................... 2,925,683 89,157 3,014,840 $ 16,053,137
--------------
--------------
Less amounts representing interest................... 755,327 12,693 768,020
Less current portion................................. 320,000 17,977 337,977
------------- --------- -------------
$ 1,850,356 $ 58,487 $ 1,908,843
------------- --------- -------------
------------- --------- -------------
</TABLE>
F-17
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
10. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------- -------------- --------------
<S> <C> <C> <C>
Year ended March 31, 1994:
U.S. Federal..................................................... $ 1,131,178 $ 140,821 $ 1,271,999
State and local.................................................. 134,710 19,614 154,324
------------- -------------- --------------
$ 1,265,888 $ 160,435 $ 1,426,323
------------- -------------- --------------
------------- -------------- --------------
Year ended March 31, 1995:
U.S. Federal..................................................... $ 455,000 $ 1,031,000 $ 1,486,000
State and local.................................................. 80,000 179,000 259,000
------------- -------------- --------------
$ 535,000 $ 1,210,000 $ 1,745,000
------------- -------------- --------------
------------- -------------- --------------
Ten months ended January 31, 1996:
U.S. Federal..................................................... $ 275,000 $ (1,795,000) $ (1,520,000)
State and local.................................................. 50,000 (290,000) (240,000)
------------- -------------- --------------
$ 325,000 $ (2,085,000) $ (1,760,000)
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. federal income tax rate of 34% to pretax (loss) earnings as a result of
the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------- JANUARY 31,
1994 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
Computed "expected" tax (benefit) expense........................... $ 1,323,131 $ 1,404,265 $ (3,071,141)
Increase in income taxes resulting from:
Goodwill impairment charge........................................ 0 0 1,110,000
Nondeductible expenses............................................ 21,692 177,783 199,058
State and local income taxes, net of federal income tax benefit... 101,854 170,940 (158,400)
Other, net........................................................ (20,354) (7,988) 160,483
------------- ------------- --------------
$ 1,426,323 $ 1,745,000 $ (1,760,000)
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
F-18
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
10. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) at March 31, 1995 and January
31, 1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Goodwill impairment............................................................. $ 0 $ 1,243,545
Accounts receivable, principally due to allowance for doubtful accounts......... 374,094 684,488
Inventory valuation............................................................. 269,369 482,449
Accrued expenses................................................................ 286,704 720,634
Other, net...................................................................... 0 18,946
-------------- --------------
Total gross deferred tax assets............................................... 930,167 3,150,062
Less valuation allowance........................................................ 0 0
-------------- --------------
Net deferred tax assets........................................................... 930,167 3,150,062
-------------- --------------
Deferred tax liabilities:
Deferred franchise and other revenue............................................ (2,146,191) (1,111,373)
Amortization of intangible assets............................................... (75,730) (106,753)
Other, net...................................................................... (165,561) 0
-------------- --------------
Total gross deferred tax liabilities.......................................... (2,387,482) (1,218,126)
-------------- --------------
Net deferred tax assets (liabilities)............................................. $ (1,457,315) $ 1,931,936
-------------- --------------
-------------- --------------
</TABLE>
11. RELATED-PARTY TRANSACTIONS
Certain of the directors also own franchises which utilize the services of
the Company. Trade accounts receivable at March 31, 1995 and January 31, 1996
include amounts due from these affiliated companies of $126,192 and $85,344,
respectively. In addition, rebates payable to franchisees at March 31, 1995 and
January 31, 1996 include amounts due to stockholder-owned franchises of $72,167
and $25,975, respectively.
Included in fees from brokering floor covering products for the years ended
March 31, 1994 and 1995 and the ten months ended January 31, 1996 are $110,166,
$104,995, and, $76,116, respectively, earned from services provided to these
franchises. Included in advertising revenue for the years ended March 31, 1994
and 1995 and the ten months ended January 31, 1996 and are $517,867, $317,907,
and $106,075, respectively, from services purchased by affiliated franchises.
Included in carpet sales for the years ended March 31, 1994 and 1995 and the
ten months ended January 31, 1996 are $54,620, $175,579, and $216,387,
respectively, for carpet purchased by affiliated franchises.
Included in other revenues for the years ended March 31, 1994 and 1995 and
the ten months ended January 31, 1996 are $51,900, $18,290, and $8,787,
respectively, for purchases by affiliated franchises.
Included in interest expense for the years ended March 31, 1994 and 1995 and
the ten months ended January 31, 1996 are approximately $20,000, $0, and $0,
respectively, of interest on notes payable to stockholders.
In August 1995, the Company loaned $820,987 to Kevodrew Realty, Inc.
("Kevodrew"), a company controlled by A. J. Nassar, the President and Chief
Executive Officer of the Company, which loan
F-19
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
11. RELATED-PARTY TRANSACTIONS (CONTINUED)
bears interest at an annual rate of prime. These funds were loaned to Kevodrew
to provide interim financing for the purchase by Kevodrew of a retail shopping
center in Louisville, Kentucky. This loan is due May 31, 1996 and will be repaid
from the proceeds of permanent financing for which a commitment has been
received by Kevodrew. A primary tenant in the shopping center will be a
Company-owned store, which has entered into a five-year lease agreement with
Kevodrew providing for annual lease payments of $89,155.
12. STOCKHOLDERS' EQUITY
On July 30, 1993, the Company's board of directors approved a
1-for-3.3666667 reverse stock split and reduced the number of authorized shares
to 15,000,000. All share data have been restated to give effect to this reverse
stock split.
The Company completed an initial public offering ("IPO") for 1,822,600
shares of common stock and 911,300 redeemable common stock purchase warrants
("warrants") under Regulation S-B of the Securities and Exchange Commission in
October 1993. The warrants were subject to redemption by the Company at $.05 per
warrant, on 30 days, prior written notice, with either (1) the prior written
consent of Thomas James Associates, Inc. ("Thomas James") (the IPO underwriter)
or (2) provided that the average of the closing bid price of the common stock
for a period of 20 consecutive trading days, ending within 15 days prior to the
notice of redemption, exceeds $13.125 per share. On July 27, 1994, the board of
directors of the Company called for the redemption of all the issued and
outstanding warrants. The warrants were exercisable at a price of $7 per share
until September 1, 1994. In total, warrants for 907,415 shares of stock were
exercised and the Company received $6,358,905.
Effective January 4, 1995, the Company reached an agreement with Thomas
James, the underwriter of the Company's initial public offering in 1993, to
cancel and surrender the remaining underwriter's warrants issued by the Company
to Thomas James in connection with the IPO. In consideration of the cancellation
and surrender of the underwriter's warrants, which entitled Thomas James to
purchase up to 240,000 shares of the Company's common stock, the Company paid
$1,503,200, consisting of $5,200 in legal costs and $1,498,000, or the
equivalent of $14 per common share, to Thomas James.
The Company adopted a stock option plan in fiscal 1994 which provides for
the granting of incentive and nonqualified stock options for up to 1,000,000
shares of common stock to key employees and directors at an exercise price of at
least 100% of fair market value at the date of grant. Information relating to
stock options is summarized as of March 31, 1995 and January 31, 1996 as
follows:
<TABLE>
<CAPTION>
1995 1996
---------------- ---------------
<S> <C> <C>
Options outstanding at beginning of year...................................... 394,500 634,210
Options granted............................................................. 321,410 395,400
Options canceled............................................................ (63,200) (181,036)
Options exercised........................................................... (18,500) (27,266)
---------------- ---------------
Options outstanding at end of year.......................................... 634,210 821,308
---------------- ---------------
---------------- ---------------
Option prices per share:
Options granted during the year............................................. $10.50-$15.50 $9.00-$11.75
Options canceled............................................................ 5.25-14.50 5.26-15.50
Options exercised........................................................... 5.25-6.50 5.25-10.50
Options outstanding at end of year.......................................... 5.25-15.50 5.25-14.50
</TABLE>
F-20
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996
12. STOCKHOLDERS' EQUITY (CONTINUED)
The employee options become exercisable in increments ranging from 20% to
33 1/3% per year beginning on September 30, 1994 and ending on January 10, 2000.
In addition, the Company has granted options to purchase 250,000 shares of
common stock to one of its outside directors at an exercise price of $5.25 to
$10.25 per share, of which 166,666 are currently exercisable and 33,334 of which
will become exercisable at September 30, 1996.
13. EMPLOYMENT AGREEMENTS
The Company has entered into separate three-year employment agreements with
its president and certain key officers. These contracts provide for aggregate
base salaries of approximately $1,615,600, certain severance provisions, and
additional bonuses at the discretion of the board of directors.
14. EMPLOYEE BENEFIT PLAN
Effective April 1, 1994, the Company instituted a 401(k) retirement savings
plan (the "Plan"), which is open to all employees who have completed one year of
service. The Company's matching contribution is 25% of the first 6% of
contributions made by the employees. The Company's matching contribution vests
to the employees over six years. Employee and employer contributions to the Plan
were $211,172 and $24,410, respectively, for the year ended March 31, 1995 and
$124,939 and $21,488 for the ten months ended January 31, 1996, respectively.
15. CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
16. SUBSEQUENT EVENTS
On April 2, 1996 the Company issued a nonbinding letter of intent to acquire
the four store operations of Manasota Carpet, Inc. based in Bradenton, Florida,
for a purchase price of $3 million to be allocated between cash and the
Company's common stock.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Image Industries, Inc.:
We have audited the accompanying balance sheets of Image Industries, Inc.,
as of July 1, 1995 and July 2, 1994, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended July 1, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Image Industries, Inc., as
of July 1, 1995 and July 2, 1994, and the results of its operations and its cash
flows for each of the years in the three-year period ended July 1, 1995, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
August 25, 1995
F-22
<PAGE>
IMAGE INDUSTRIES, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JULY 2, JULY 1, MARCH 30,
1994 1995 1996
--------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash........................................................................... $ 14 $ 186 $ 125
Trade accounts receivable, less allowance of $193, $176 and $103 at July 2,
1994, July 1, 1995 and March 30, 1996, respectively (notes 4 and 7)........... 12,792 17,994 21,681
Other receivables.............................................................. 61 384 413
Inventories (notes 3 and 4).................................................... 16,287 31,549 31,981
Prepaid expenses and other current assets...................................... 212 134 1,960
Deferred income tax benefit.................................................... 760 760 760
--------- ----------- ------------
Total current assets......................................................... 30,126 51,007 56,920
--------- ----------- ------------
Net property, plant and equipment (notes 3, 4 and 5)........................... 44,663 74,591 75,645
--------- ----------- ------------
Deferred income tax benefit (note 6)............................................. 6,584 5,474 5,119
Deferred loan costs, less accumulated amortization of $7, $30 and $147 at July 2,
1994, July 1, 1995 and March 30, 1996 respectively (note 9)..................... 69 271 154
Deposits......................................................................... 22 44 41
Goodwill......................................................................... -- 96 102
--------- ----------- ------------
Total other assets........................................................... 6,675 5,885 5,416
--------- ----------- ------------
$ 81,464 $ 131,483 $ 137,981
--------- ----------- ------------
--------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long term debt and capital lease obligations (notes 4
and 5)........................................................................ $ 218 $ 227 $ 219
Trade accounts payable......................................................... 9,568 14,072 10,831
Accrued compensation and benefits.............................................. 1,284 1,592 1,415
Accrued returns and allowances................................................. 770 1,073 687
Other accrued expenses......................................................... 1,431 1,851 2,518
Income taxes payable (note 6).................................................. 427 105 --
--------- ----------- ------------
Total current liabilities.................................................... 13,698 18,920 15,671
--------- ----------- ------------
Long term debt and capital lease obligations, excluding current installments
(notes 4, 5 and 9)............................................................ 20,722 53,822 61,218
Deferred income tax liability (note 6)......................................... 7,499 7,585 8,524
--------- ----------- ------------
Total liabilities............................................................ 41,919 80,327 85,413
--------- ----------- ------------
Stockholder's equity (notes 8 and 11)
Preferred stock, $.01 par value per share, authorized 10,000 shares; none
issued and outstanding........................................................ -- -- --
Common stock, $.01 par value per share, authorized 20,000 shares; issued and
outstanding 4,770, 5,227 and 5,248 shares at July 2, 1994, July 1, 1995 and
March 30, 1996 respectively................................................... 48 52 52
Additional paid-in capital..................................................... 35,358 39,773 39,761
Retained earnings.............................................................. 4,139 11,331 12,755
--------- ----------- ------------
Total stockholders' equity................................................... 39,545 51,156 52,568
--------- ----------- ------------
$ 81,464 $ 131,483 $ 137,981
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
See accompanying notes to financial statements
F-23
<PAGE>
IMAGE INDUSTRIES INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
----------------------------------- ------------------------
JULY 3, JULY 2, JULY 1, APRIL 1, MARCH 30,
1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (note 7)............................... $ 95,935 $ 103,889 $ 135,182 $ 99,617 $ 117,473
Cost of sales.................................... 73,994 78,403 102,448 75,605 97,130
--------- ----------- ----------- ----------- -----------
Gross profit................................. 21,941 25,486 32,734 24,012 20,343
Selling, general and administrative expenses..... 13,724 15,327 19,765 14,420 14,992
Special charge replacement stock options (note
8).............................................. -- 10,388 -- -- --
--------- ----------- ----------- ----------- -----------
Operating income (loss)...................... 8,217 (229) 12,969 9,592 5,351
--------- ----------- ----------- ----------- -----------
Other expense (income)
Interest expense -- stockholders and related
parties....................................... 3,542 507 -- -- --
Interest expense -- other...................... 122 617 1,600 943 3,083
Other expense (income), net.................... 332 79 (18) (26) 117
--------- ----------- ----------- ----------- -----------
3,996 1,203 1,582 917 3,200
--------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
extraordinary items........................... 4,221 (1,432) 11,387 8,675 2,151
Income tax provision (benefit) (note 6).......... 1,620 (530) 4,195 3,158 727
--------- ----------- ----------- ----------- -----------
Earnings (loss) before extraordinary items..... 2,601 (902) 7,192 5,517 1,424
Extraordinary items:
Gain on extinguishment of debt, less related
income taxes of $117 (note 9)................. -- 190 -- -- --
Tax benefit resulting from utilization of
operating loss carryforwards (note 6)......... 1,520 -- -- -- --
--------- ----------- ----------- ----------- -----------
Net earnings (loss).......................... $ 4,121 $ (712) $ 7,192 $ 5,517 $ 1,424
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Pro forma earnings per share information:
Earnings (loss) before extraordinary items..... $ 0.71 $ (0.16) $ 1.24 $ 0.95 $ 0.23
Extraordinary items............................ 0.41 0.03 -- -- --
--------- ----------- ----------- ----------- -----------
Net earnings (loss).......................... $ 1.12 $ (0.13) $ 1.24 $ 0.95 $ 0.23
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding................... 3,671 5,609 5,809 5,807 6,205
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements
F-24
<PAGE>
IMAGE INDUSTRIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED
COMMON STOCK STOCK ADDITIONAL TOTAL
-------------- -------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 27, 1992............... 2,059 $ 21 -- -- $ 2,979 $ 730 $ 3,730
Issuance of common stock................ 807 8 -- -- 6,310 -- 6,318
Net earnings............................ -- -- -- -- -- 4,121 4,121
------ ------ ------ ------ ---------- -------- -------------
Balances at July 3, 1993................ 2,866 29 -- -- 9,289 4,851 14,169
Issuance of common stock (note 11)...... 1,904 19 -- -- 15,681 -- 15,700
Issuance of replacement stock options
(note 11).............................. -- -- -- -- 10,388 -- 10,388
Net loss................................ -- -- -- -- -- (712) (712 )
------ ------ ------ ------ ---------- -------- -------------
Balances at July 2, 1994................ 4,770 48 -- -- 35,358 4,139 39,545
Issuance of common stock (notes 11 and
12).................................... 457 4 -- -- 4,396 -- 4,400
Gain on exercise of replacement stock
options (note 11)...................... -- -- -- -- 19 -- 19
Net earnings............................ -- -- -- -- -- 7,192 7,192
------ ------ ------ ------ ---------- -------- -------------
Balances at July 1, 1995................ 5,227 52 -- -- 39,773 11,331 51,156
Issuance of common stock................ 21 -- -- -- -- -- --
Gain on exercise of replacement stock
options (note 11)...................... -- -- -- -- 8 -- 8
Registration of shares to Pharr Yarns of
GA, Inc................................ -- -- -- -- (20 ) -- (20 )
Net earnings............................ -- -- -- -- -- 1,424 1,424
------ ------ ------ ------ ---------- -------- -------------
Balance at March 30, 1996 (Unaudited)... 5,248 $ 52 -- -- $ 39,761 $ 12,755 $ 52,568
------ ------ ------ ------ ---------- -------- -------------
------ ------ ------ ------ ---------- -------- -------------
</TABLE>
See accompanying notes to financial statements
F-25
<PAGE>
IMAGE INDUSTRIES, INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------- -------------------------
JULY 3, JULY 2, JULY 1, APRIL 1, MARCH 30,
1993 1994 1995 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Earnings (loss) before extraordinary items...... $ 2,601 $ (902) $ 7,192 $ 5,517 $ 1,424
Extraordinary items:
Gain on extinguishment of debt................ -- 190 -- -- --
Tax benefit resulting from utilization of
operating loss carryforwards................. 1,520 -- -- -- --
------- ------- ------- ----------- -----------
Net earnings (loss)....................... 4,121 (712) 7,192 5,517 1,424
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating
activities:
Extraordinary gain -- extinguishment of
debt......................................... -- (190) -- -- --
Special charge -- replacement stock options
(note 4)..................................... -- 10,388 -- -- --
Deferred income taxes......................... -- (2,731) 1,215 1,101 1,302
Depreciation and amortization................. 3,048 3,656 4,187 3,059 4,874
Amortization of deferred loan costs........... 236 27 23 10 117
(Gain) loss on disposal of equipment.......... 173 137 8 (9) 126
Changes in operating assets and liabilities
Receivables................................. (2,623) (530) (5,525) (5,383) (3,715)
Inventories................................. (1,409) (588) (15,262) (7,845) (432)
Prepaid expenses............................ (1,088) 893 78 283 (794)
Deposits and other.......................... 73 (2) (118) (506) (1,033)
Trade accounts payable...................... 2,628 1,257 4,504 3,423 (3,241)
Accrued expenses............................ (195) 393 1,031 1,087 105
Income taxes payable........................ -- 427 (322) (428) (106)
------- ------- ------- ----------- -----------
Net cash provided by (used in) operating
activities............................... 4,964 12,425 (2,989) 308 (1,373)
------- ------- ------- ----------- -----------
Cash flows from investing activities:
Capital expenditures............................ (5,673) (13,356) (18,407) (15,290) (6,060)
Acquisition of net assets -- Pharr Yarns of
Georgia, Inc................................... -- -- (11,298) -- --
Proceeds from sales of equipment................ 13 81 135 124 23
------- ------- ------- ----------- -----------
Net cash used in investing activities..... (5,660) (13,275) (29,570) (15,166) (6,037)
------- ------- ------- ----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit agreement... 6,083 2,529 33,148 15,104 7,534
Proceeds from issuance of long term debt........ 48 32 26
Principal payments on long term debt and capital
lease obligations.............................. (5,432) (17,333) (218) (160) (165)
Proceeds from issuance of common stock.......... -- 15,700 -- -- --
Deferred loan costs............................. -- (79) (225) 26 --
Cost of issuance and registration of shares..... -- -- -- -- (20)
------- ------- ------- ----------- -----------
Net cash provided by financing
activities............................... 699 849 32,731 14,970 7,349
------- ------- ------- ----------- -----------
Net increase (decrease) in cash........... 3 (1) 172 112 (61)
Cash at beginning of period....................... 12 15 14 14 186
------- ------- ------- ----------- -----------
Cash at end of period............................. $ 15 $ 14 $ 186 $ 126 $ 125
------- ------- ------- ----------- -----------
------- ------- ------- ----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest paid to stockholders and related
parties........................................ $ 3,697 $ 645 -- -- --
------- ------- ------- ----------- -----------
------- ------- ------- ----------- -----------
Interest paid to others......................... $ 125 $ 730 $ 2,029 $ 1,219 $ 2,873
------- ------- ------- ----------- -----------
------- ------- ------- ----------- -----------
Income taxes.................................... $ 196 $ 1,672 $ 3,025 $ 2,712 $ 565
------- ------- ------- ----------- -----------
------- ------- ------- ----------- -----------
Supplemental disclosures of noncash investing and
financing activities:
Conversion of subordinated note and accrued
interest to equity............................... $ 6,318 -- -- -- --
------- ------- ------- ----------- -----------
------- ------- ------- ----------- -----------
Incurrence of capital lease obligations for
equipment...................................... $ 46 $ -- $ 153 -- $ 19
------- ------- ------- ----------- -----------
------- ------- ------- ----------- -----------
Image purchased substantially all the operating
assets of Pharr Yarns of Georgia, Inc. in the
year ended July 1, 1995, in conjunction with this
acquisition the company issued 400,000 shares in
common stock as follows:
Fair value of assets acquired................... $15,698
Cash paid for assets acquired................... 11,298
-------
Common stock issued............................. $ 4,400
-------
-------
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE>
IMAGE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Image Industries, Inc. is a recycler of PET (Polyethylene Terepthalate)
post-consumer plastics, which it converts into PET flake, PET pellet, and
polyester fiber, most of which is consumed internally to produce carpet for the
residential market.
Information with respect to the March 30, 1996 and the nine months then
ended is unaudited; however, in the opinion of management, such information
reflects all adjustments, consisting of all normal recurring accruals, necessary
to present fairly the financial position at March 30, 1996 and the results from
operations and cash flows for the nine months then ended. Results of operations
for interim periods are not necessarily indicative of results for the entire
year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Sales are recognized at the time related goods are shipped. An allowance for
loss on doubtful receivables is provided based on management's estimates of
potential credit losses. Receivables are written off against the allowance
account when deemed to be uncollectible.
(B) INVENTORIES
Inventories are stated at the lower of cost or market (net realizable
value). The cost of inventory is determined using standard cost methods which
approximate the first-in, first-out method (FIFO).
(C) PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment is recorded at cost and includes interest on
funds borrowed to finance construction. Depreciation is provided over the
estimated useful lives of the assets on the straight-line basis (generally 12
years for equipment and 31 years for buildings).
(D) DEFERRED LOAN COSTS
Deferred loan costs represent fees and expenses incurred to obtain long-term
debt. The deferred loan costs are being amortized over the lives of the
applicable loans.
(E) EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired ("goodwill") resulted from the
Pharr Yarns of Georgia, Inc. asset purchase (Note 12) which occurred during 1995
and is being amortized to income on a straight-line basis over 15 years.
(F) INCOME TAXES
Effective July 4, 1993, the Company adopted Statement of Financial
Accounting Standards No.109 "Accounting for Income Taxes" (Statement 109). The
cumulative effect of that change in the method of accounting for income taxes
was not material. The Company elected not to restate prior year financial
statements. Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Pursuant to the deferred method under APB Opinion 11, which was applied in
fiscal 1993 and prior years, deferred income taxes were recognized for income
and expense items that are reported in different years for financial reporting
purposes and income tax purposes using the tax rate applicable for the year of
the calculation. Under the deferred method, deferred taxes were not adjusted for
subsequent changes in tax rates.
F-27
<PAGE>
IMAGE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) FISCAL YEAR
The Company's 52- or 53- week fiscal year ends on the Saturday closest to
the end of June. The results of operations for fiscal years 1994 and 1995
reflect 52-week periods, and 1993 reflects a 53-week period.
(H) COMMON STOCK AND EARNINGS PER SHARE
All share and per share data have been adjusted to give retroactive effect
to the stock split described in note 11. Earnings per common share is calculated
based upon weighted average number of common shares and their equivalents
outstanding in the respective periods.
Because of the significant effect of the issuance of the fully vested
Replacement Stock Options for 1,133,856 shares, pro forma earnings per share
data are presented for the years ended July 3, 1993 and July 2, 1994. Pro forma
weighted average common and common equivalent shares include the dilutive effect
of the 1,133,856 Replacement Stock Options. Earnings per share data for year
ended July 1, 1995 are presented on a historical basis.
(I) RECLASSIFICATIONS
Certain reclassifications were made to the 1993 and 1994 amounts in order to
conform to the 1995 classifications.
(3) INVENTORIES AND PROPERTY, PLANT AND EQUIPMENT
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
JULY 2, JULY 1, MARCH 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................ $ 7,032 $ 13,761 $ 15,796
Work in process.......................................... 1,597 1,890 2,254
Finished goods........................................... 7,658 15,898 13,931
--------- --------- -----------
$ 16,287 $ 31,549 $ 31,981
--------- --------- -----------
--------- --------- -----------
</TABLE>
Property, plant and equipment consisted of (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Land and improvements.................................................. $ 1,320 $ 2,149
Buildings.............................................................. 12,368 20,867
Machinery and equipment................................................ 40,879 69,402
Furniture and fixtures................................................. 342 375
Vehicles............................................................... 385 481
Construction in progress............................................... 6,631 2,567
--------- ---------
61,925 95,841
Less accumulated depreciation and amortization......................... 17,262 21,250
--------- ---------
Net property, plant and equipment...................................... $ 44,663 $ 74,591
--------- ---------
--------- ---------
</TABLE>
F-28
<PAGE>
IMAGE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Note payable to bank under revolving credit agreement...................................... $ 19,901 $ 53,049
Equipment notes at 6.5% to 10.6%, due in monthly installments, including interest, through
December, 1996............................................................................ 46 40
--------- ---------
19,947 53,089
Less current installments.................................................................. 28 23
--------- ---------
Total long-term debt, excluding current installments..................................... $ 19,919 $ 53,066
--------- ---------
--------- ---------
</TABLE>
The note payable to bank at July 2, 1994 was under a revolving line of
credit agreement, expiring June 30, 1999, bearing interest payable quarterly at
the prime interest rate or Eurodollar rate plus 1.25%. On December 5, 1994, the
Company negotiated a reduction in the rate applicable to Eurodollar loans to the
Eurodollar rate plus 1.00%. Effective on June 20, 1995, the Company renegotiated
its credit agreement with its primary lender and two other financial
institutions. The restated credit facility allows the Company to borrow up to
$60 million with interest payable quarterly at prime rate (on July 1, 1995,
prime rate was 9.00%) or Eurodollar rate (approximately 5.81% at July 1, 1995)
plus 1.00%. The borrowings under the agreement are secured by a first priority
lien on all assets. The facility contains numerous covenants including, but not
limited to, restrictions on the assumption of certain types of indebtedness,
minimum earnings levels, interest coverage, and tangible net worth. On July 1,
1995, the Company was in compliance with all such covenants. The maximum amounts
borrowed during the fiscal years 1993, 1994 and 1995 were $17,371,000,
$19,901,000 and $53,049,000 respectively. At July 1. 1995 availability under the
Company's credit facility was approximately $6,951,000.
The aggregate maturities of long-term debt as of July 1, 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------------------------------------------------------------------
<S> <C>
1996..................................................................... $ 23
1997..................................................................... 14
1998..................................................................... 3
1999..................................................................... --
2000 and beyond.......................................................... 53,049
---------
Total.................................................................... $ 53,089
---------
---------
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
The Company is obligated under various capital leases for buildings and
certain machinery and equipment that expire at various dates during the next
eight years. At July 2, 1994, and July 1, 1995, the gross amount of buildings
and equipment and related accumulated amortization recorded under capital leases
were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Buildings................................................................ $ 1,080 $ 1,080
Machinery and equipment.................................................. 282 435
--------- ---------
1,362 1,515
less accumulated depreciation............................................ 381 467
--------- ---------
Net assets under capital leases........................................ $ 981 $ 1,048
--------- ---------
--------- ---------
</TABLE>
F-29
<PAGE>
IMAGE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Amortization of assets held under capital leases is included with
depreciation expense.
Future minimum lease payments under noncancellable operating leases and the
present value of future minimum capital lease payments as of July 1, 1995 are
approximately (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- ---------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
1996.............................................................................. $ 267 $ 515
1997.............................................................................. 226 110
1998.............................................................................. 178 17
1999.............................................................................. 169 --
2000.............................................................................. 152 --
Later years....................................................................... 181 --
--------- -----
Total minimum lease payments...................................................... $ 1,173 $ 642
-----
-----
Less amounts representing interest (at approximate rates ranging from 6% to
14%)............................................................................. 213
Present value of minimum capital lease payments................................... 960
Less current installments of obligations under capital leases..................... 204
Obligations under capital leases, excluding current installments.................. $ 756
</TABLE>
Rent expense under operating leases was approximately $241,000, $580,000 and
$736,000 for fiscal years 1993, 1994 and 1995 respectively.
Effective August 10, 1993, the Company entered into three-year employment
agreements with four of its executive officers. The contracts obligate the
Company for compensation, severance, bonus, and other employment related
matters. These agreements provide for aggregate base compensation levels
totaling $796,000 per year. On that date, the Company also entered into
agreements indemnifying certain officers and key employees against personal
liability for actions taken in the course of their employment and obligating the
Company for costs to defend those officers and employees.
(6) INCOME TAXES
The components of the income tax provision (benefit) are as follows (in
thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Year ended July 3, 1993:
Federal............................................................... $ 1,106 $ 251 $ 1,357
State................................................................. 193 70 263
--------- --------- ---------
Total............................................................... $ 1,299 $ 321 $ 1,620
--------- --------- ---------
--------- --------- ---------
Year ended July 2, 1994:
Federal............................................................... $ 1,946 $ (2,420) $ (474)
State................................................................. 255 (311) (56)
--------- --------- ---------
Total............................................................... $ 2,201 $ (2,731) $ (530)
--------- --------- ---------
--------- --------- ---------
Year ended July 1, 1995:
Federal............................................................... $ 2,771 $ 1,116 $ 3,887
State................................................................. 209 99 308
--------- --------- ---------
Total............................................................... $ 2,980 $ 1,215 $ 4,195
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-30
<PAGE>
IMAGE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The income tax provision (benefit) differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% for the years ended July 3,
1993 and July 2, 1994 and of 35% for the year ended July 1, 1995 to earnings
(loss) before income taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax provision (benefit)......................................... $ 1,435 $ (487) $ 3,985
Increase (reduction) in income taxes resulting from:
State income taxes, net of Federal income tax effect.............................. 174 (37) 200
Alternative minimum tax........................................................... 80 -- --
Other, net........................................................................ (69) (6) 10
--------- --------- ---------
Actual income tax provision (benefit)........................................... $ 1,620 $ (530) $ 4,195
--------- --------- ---------
--------- --------- ---------
</TABLE>
The significant components of deferred income tax expense (benefit) for the
year ended July 2, 1994 and July 1, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Special charge -- replacement stock options........................................ $ (3,900) $ --
Tax benefit from exercise of stock options......................................... -- 397
Utilization of net operating loss carryovers and tax credits....................... 932 682
Inventory adjustments.............................................................. -- (417)
Depreciation....................................................................... -- 293
Changes in other tax assets and liabilities........................................ 237 260
--------- ---------
Total............................................................................ $ (2,731) $ 1,215
--------- ---------
--------- ---------
</TABLE>
For the fiscal year 1993, no net deferred income tax expense was recognized.
Deferred income taxes result from timing differences in the recognition of
income and expenses for income tax and financial reporting purposes. The sources
and effects of those timing differences are presented below (in thousands):
<TABLE>
<S> <C>
Plant and equipment, principally due to differences in depreciation......... $ 333
Accounts receivable, principally due to returns and allowances reserves..... 185
Gain on sale of assets...................................................... (67)
Benefit of net operating loss carryforward.................................. (440)
Other, net.................................................................. (11)
---------
Net deferred income tax liability......................................... $ --
---------
---------
</TABLE>
F-31
<PAGE>
IMAGE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at July 2, 1994 and July 1,
1995 are (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts and
accrued returns and allowances.................................................. $ 366 $ 480
Inventories, principally due to additional costs inventoried for tax purposes.... 582 827
Compensated absences and employee benefits, principally due to accrual for
financial reporting purposes.................................................... 219 178
Special charge -- replacement stock options...................................... 3,900 3,420
Net operating loss carryforwards................................................. 2,217 1,315
Other............................................................................ 60 14
--------- ---------
Total gross deferred income tax assets....................................... 7,344 6,234
Valuation allowance.............................................................. -- --
Net deferred tax assets...................................................... 7,344 6,234
--------- ---------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation............ 7,196 7,299
Other.......................................................................... 303 286
--------- ---------
Total gross deferred tax liabilities......................................... 7,499 7,585
--------- ---------
Net deferred tax liabilities................................................. $ 155 $ 1,351
--------- ---------
--------- ---------
</TABLE>
No valuation allowance was recorded against deferred tax assets at July 2,
1994 or July 1, 1995. The Company's management believes the existing net
deductible temporary differences comprising total deferred tax assets will
reverse during periods in which the Company generates sufficient net taxable
income.
For the year ended July 3, 1993, income tax expense was offset by the
utilization of net operating loss carryforwards of $1,520,000. As of July 2,
1994 and July 1, 1995, the Company had net operating loss carryforwards of
approximately $5,833,000 and $3,555,000, respectively, available for use through
2005. Due to the change in ownership resulting from the initial public offering
(see note 11), the future utilization of net operating loss carryforwards for
income tax purposes, if any, may be limited on an annual basis. In addition,
utilization of net operating loss carryforwards may be limited by the
alternative minimum tax provisions.
(7) BUSINESS AND CREDIT CONCENTRATION
In fiscal years 1993, 1994 and 1995, export sales accounted for
approximately 26%, 25% and 17%, respectively, of the Company's net sales. Export
sales are principally to customers in the Middle East, Europe and Canada. Sales
to Middle Eastern customers totaled 20%, 21% and 13% of net sales in fiscal
years 1993, 1994 and 1995. Sales to European and Canadian customers totaled 5%,
3% and 3% of net sales in fiscal years 1993, 1994 and 1995, respectively.
In 1993, 1994 and 1995, one customer accounted for approximately 20%, 21%
and 13% of the Company's net sales, respectively.
(8) STOCK OPTION PLANS
Effective August 10, 1993, the Company adopted a Plan and Agreement of
Conversion in which all previously outstanding vested and unvested stock options
and unvested stock appreciation units were
F-32
<PAGE>
IMAGE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTION PLANS (CONTINUED)
canceled and a like number of fully vested replacement stock options were
issued. These options have an exercise price of $.01 per share and expire March
30, 2006. In connection with the grant of the replacement stock options, the
Company recognized a noncash, nonrecurring charge of approximately $10,388,000
(pre-tax) in the fiscal year ending July 2, 1994. In connection with the Plan,
the Company has granted the option holders certain protections against possible
tax consequences associated with the grant of the options. At July 1, 1995
approximately 970,000 replacement stock options were outstanding.
The Company also adopted a stock option plan which provides for the grant of
stock options to selected participants, including officers and key employees of
the Company. A total of 350,000 shares of common stock has been reserved for
issuance under the stock option plan which is administered by the compensation
committee of the Board of Directors. The compensation committee selects the
participants and determines the terms of all options. On August 10, 1993, the
Company granted 41,318 fully vested incentive options to the Company's chief
executive officer at $10.00 per share, exercisable over a three-year period. On
May 9, 1995, the Company granted an additional 3,294 fully vested incentive
options to other Company employees at $12.38 per share.
(9) GAIN ON EXTINGUISHMENT OF DEBT
During the fiscal year ended July 2, 1994, the Company recognized an
extraordinary gain of approximately $764,000 on the extinguishment of long-term
debt owed to two shareholders, which was partially offset by the write-off of
approximately $457,000 of deferred loan costs on debt prepaid with the proceeds
of the Initial Public Offering.
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended July 2, 1994:
Net sales........................................................ $ 25,186 $ 24,794 $ 26,276 $ 27,633
Gross profit..................................................... 6,054 6,493 6,114 6,825
Earnings (loss) before extraordinary item........................ (5,543) 1,746 1,155 1,740
Net earnings (loss).............................................. (5,353) 1,746 1,155 1,740
Earnings (loss) per share before extraordinary item.............. (1.10) 0.30 0.20 0.30
Net earnings (loss) per share.................................... (1.06) 0.30 0.20 0.30
Year ended July 1, 1995:
Net sales........................................................ $ 30,513 $ 34,615 $ 34,489 $ 35,565
Gross profit..................................................... 7,389 8,806 7,817 8,722
Net earnings..................................................... 1,702 2,154 1,661 1,675
Net earnings per share........................................... 0.29 0.37 0.29 0.29
</TABLE>
(11) STOCKHOLDERS' EQUITY
On August 18, 1993, 2,500,000 shares of the Company's common stock were sold
to the public, of which 1,800,000 were sold by the Company at $10.00 per share
in the Company's initial public offering. On August 26, 1993, an overallotment
option for an additional 375,000 shares was exercised by the underwriters on
behalf of the selling stockholders. In connection with the offering, the options
and stock appreciation units (see note 8) then outstanding were converted into
an equal number of fully vested replacement stock options having an exercise
price of $.01 per share. As a result of this exchange, the Company recognized a
noncash, nonrecurring charge of approximately $10,388,000. The number of
authorized common shares was increased to 20,000,000 shares, the Class A and
Class B common stock was converted on a one-to-one basis to ordinary common
stock, and the common shares
F-33
<PAGE>
IMAGE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
plus all options, warrants, and stock appreciation units were split on the basis
of approximately 3.294 to 1. The Company also authorized 10,000,000 shares of
preferred stock, of which no shares were outstanding as of July 1, 1995.
(12) ACQUISITIONS
Effective April 5, 1995, the Company entered into an asset purchase
agreement with Pharr Yarns of Georgia, Inc. and Stowe-Pharr Mills, Inc. to
purchase substantially all of the operating assets of Pharr Yarns of Georgia,
Inc., including the property, plant and equipment as well as certain inventory
items and supplies. The transaction was consummated on June 30, 1995. The
purchase price payable by Image at the transaction's closing was 400,000 shares
of stock ,valued at $4,400,000, and cash of approximately $11,298,000.
The above acquisition was accounted for as a purchase, and accordingly, the
purchase price has been allocated to the assets acquired based on the estimated
fair values as of the acquisition date. The net excess of the cost over the
estimated fair value of the acquired assets as a result of this acquisition has
been allocated to goodwill in the approximate amount of $96,000 and will be
amortized over fifteen years. Since the acquisition occurred on the day before
the Company's year end, the acquisition had no effect on operating results for
fiscal 1995.
The following unaudited pro forma data summarizes the results of operations
for the periods indicated as if the transaction had taken place at the beginning
of the periods presented and do not purport to be indicative of what would have
occurred had the acquisition been made as of those dates or of results which may
occur in the future (in thousands except per share data).
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 2, JULY 1,
1994 1995
----------- -----------
<S> <C> <C>
Net sales..................................................................... $ 103,889 $ 135,182
----------- -----------
----------- -----------
Earnings before extraordinary items........................................... $ 461 $ 8,511
----------- -----------
----------- -----------
Pro forma earnings per share before extraordinary items....................... $ 0.08 $ 1.37
----------- -----------
----------- -----------
</TABLE>
(13) SEGMENT REPORTING
The Company's operations consist of two functional areas, carpet
manufacturing and plastics recycling. Income from operations by segment is total
sales to unaffiliated customers less expenses which are deemed to be related to
the operation of that functional area. The information below does not
incorporate approximately $355,000, in net sales, $5,911,000, in general and
administrative expenses or approximately $130,000, in net property, plant and
equipment for the year ended and as of July 1, 1995; approximately $2,264,000,
in net sales, $4,450,000, in general and administrative
F-34
<PAGE>
IMAGE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) SEGMENT REPORTING (CONTINUED)
expenses or approximately $102,000, in net property, plant and equipment for the
nine month period ended and as of March 30, 1996 all of which are not directly
allocable to either segment. Financial information for these identified segments
is summarized in the following table (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 1, 1995 MARCH 30, 1996
---------------------- --------------------
CARPET RECYCLING CARPET RECYCLING
----------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers......................... $ 118,921 $ 15,906 $ 89,905 $ 25,304
Operating income........................................ 16,390 2,135 6,403 1,314
Identifiable assets:
Trade receivables..................................... 14,552 3,826 15,573 6,129
Inventory............................................. 20,384 11,165 18,862 13,119
Property, plant and equipment......................... 53,021 42,540 54,546 46,820
Accumulated depreciation.............................. 14,701 6,399 17,474 8,349
Capital expenditures.................................. 19,667 14,438 4,377 1,683
</TABLE>
(14) SUBSEQUENT EVENTS
On July 24, 1995, a fire destroyed approximately 4.9 million pounds of raw
material and work-in-process inventory which was stored in a warehouse leased
from an unrelated third party. The value of the loss has not yet been fully
determined. However, management believes that the Company has sufficient
property and casualty insurance coverage to compensate for the loss upon its
final determination. No material unfavorable impact on financial position or
results of operations is expected as a result of this incident.
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pharr Yarns of Georgia, Inc.:
We have audited the accompanying balance sheet of Pharr Yarns of Georgia,
Inc. (a Georgia corporation) as of March 25, 1995, and the related statements of
income and retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pharr Yarns of Georgia, Inc.
as of March 25, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
April 28, 1995
F-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
Pharr Yarns of Georgia, Inc.:
We have audited the accompanying balance sheet of Pharr Yarns of Georgia,
Inc. as of March 26, 1994, and the related statements of income and retained
earnings and of cash flows for the fiscal year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Pharr Yarns of Georgia, Inc. as of March 26,
1994, and the results of its operations and its cash flows for the fiscal year
then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
May 20, 1994
F-37
<PAGE>
PHARR YARNS OF GEORGIA, INC.
BALANCE SHEETS
MARCH 25, 1995, AND MARCH 26, 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 1,617,172 $ 5,729,844
--------------- ---------------
Investments.................................................................. 5,119,819 4,151,347
--------------- ---------------
Accounts receivable (Note 2) --
Trade...................................................................... 718,478 688,179
Factors.................................................................... 1,429,738 1,743,825
Other...................................................................... 76,702 32,574
--------------- ---------------
Total accounts receivable................................................ 2,224,918 2,464,578
--------------- ---------------
Notes receivable -- Parent company (Note 7).................................. 13,000,000 1,000,000
--------------- ---------------
Inventories (Note 3)......................................................... 1,012,929 1,178,881
--------------- ---------------
Prepaid expenses............................................................. 9,266 3,180
--------------- ---------------
Deferred income taxes (Note 5)............................................... 23,679 63,182
--------------- ---------------
Total current assets..................................................... 23,007,783 14,591,012
--------------- ---------------
Notes receivable -- Parent company (Note 7).................................... 0 1,000,000
--------------- ---------------
Property (Note 4).............................................................. 13,528,050 13,478,773
Less -- Accumulated depreciation............................................. (10,788,054) (10,288,243)
--------------- ---------------
Property, net............................................................ 2,739,996 3,190,530
--------------- ---------------
$ 25,747,779 $ 18,781,542
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (Note 6)........................................................ $ 6,000,000 $ 0
Accounts payable --
Trade...................................................................... 727,222 1,536,674
Parent company (Note 7).................................................... 736,923 245,370
Accrued liabilities --
Profit sharing............................................................. 322,672 306,046
Payroll.................................................................... 141,412 154,300
Income taxes (Notes 5 and 7)............................................... 284,395 2,515
Property taxes............................................................. 31,800 33,000
Other...................................................................... 42,919 47,781
--------------- ---------------
Total current liabilities................................................ 8,287,343 2,325,686
--------------- ---------------
Deferred income taxes (Note 5)................................................. 261,454 313,540
--------------- ---------------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock -- $2 par (100,000 shares authorized; 84,900 outstanding)....... 169,800 169,800
Retained earnings............................................................ 17,029,182 15,972,516
--------------- ---------------
Total stockholders' equity............................................... 17,198,982 16,142,316
--------------- ---------------
$ 25,747,779 $ 18,781,542
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-38
<PAGE>
PHARR YARNS OF GEORGIA, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE FISCAL YEARS ENDED MARCH 25, 1995 (1995), AND MARCH 26, 1994 (1994)
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Net sales (Note 7)............................................................... $ 26,318,289 $ 28,765,861
Cost of sales (Note 7)........................................................... 22,606,464 25,161,038
-------------- --------------
Gross margin on sales............................................................ 3,711,825 3,604,823
Selling, administrative and general expenses..................................... 967,373 970,788
-------------- --------------
Income from operations........................................................... 2,744,452 2,634,035
-------------- --------------
Other income (expenses):
Interest income (Note 2)....................................................... 671,426 487,747
Interest expense............................................................... (7,970) (19,484)
Other, net..................................................................... (54,915) (60,623)
-------------- --------------
Total other income (expense)............................................... 608,541 407,640
-------------- --------------
Income before income taxes....................................................... 3,352,993 3,041,675
-------------- --------------
Provision (benefit) for income taxes (Note 5):
Current........................................................................ 1,176,910 1,118,551
Deferred....................................................................... (12,583) 32,337
-------------- --------------
Total provision for income taxes........................................... 1,164,327 1,150,888
-------------- --------------
Net income....................................................................... 2,188,666 1,890,787
Retained earnings, beginning of fiscal year...................................... 15,972,516 15,215,062
Deduct -- Cash dividends (1995 -- $13.333 per share; 1994 -- $13.349 per
share).......................................................................... 1,132,000 1,133,333
-------------- --------------
Retained earnings, end of fiscal year............................................ $ 17,029,182 $ 15,972,516
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-39
<PAGE>
PHARR YARNS OF GEORGIA, INC.
STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED MARCH 25, 1995 (1995), AND MARCH 26, 1994 (1994)
<TABLE>
<CAPTION>
1995 1994
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 2,188,666 $ 1,890,787
Adjustments to reconcile net income to net cash provided by operating
activities --
Depreciation................................................................. 533,442 704,026
Provision (benefit) for deferred income taxes................................ (12,583) 32,337
Decrease in accounts receivable.............................................. 239,660 26,942
Decrease in inventories...................................................... 165,952 1,177,857
Decrease (increase) in prepaid expenses...................................... (6,086) 44,634
Decrease in accounts payable................................................. (317,899) (1,034,742)
Increase in accrued liabilities.............................................. 279,556 219,459
--------------- --------------
Net cash provided by operating activities.................................. 3,070,708 3,061,300
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property........................................................... (82,908) (222,666)
Purchases of investments....................................................... (1,850,392) (1,369,890)
Proceeds from maturity of investments.......................................... 881,920 404,619
--------------- --------------
Net cash used in investing activities...................................... (1,051,380) (1,187,937)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid................................................................. (1,132,000) (1,133,333)
Repayment (issuance) of loan to parent......................................... (11,000,000) 1,000,000
Proceeds of loan from bank..................................................... 6,000,000 0
--------------- --------------
Net cash used in financing activities...................................... (6,132,000) (133,333)
--------------- --------------
Net (decrease) increase in cash and cash equivalents............................. (4,112,672) 1,740,030
Cash and cash equivalents, beginning of fiscal year.............................. 5,729,844 3,989,814
--------------- --------------
Cash and cash equivalents, end of fiscal year.................................... $ 1,617,172 $ 5,729,844
--------------- --------------
--------------- --------------
Supplemental disclosure of cash flow information -- Cash paid during the year for
interest........................................................................ $ 7,970 $ 19,484
--------------- --------------
--------------- --------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-40
<PAGE>
PHARR YARNS OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 25, 1995, AND MARCH 26, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
Pharr Yarns of Georgia, Inc. (the Company), majority owned by Stowe-Pharr
Mills, Inc., doing business as Pharr Yarns, Inc. (Pharr), is engaged in the
manufacturing and selling of synthetic yarns used in the production of carpet.
The plant is located in Rome, Georgia.
SALES
The Company includes in sales and cost of sales the cost of raw materials
provided by certain customers under agreements similar to commission finishing
type arrangements. The Company is responsible for waste occurring during
processing and therefore, records the raw material inventory value in sales and
costs of sales. The amount of raw material costs included in sales and costs of
sales in 1995 and 1994 for these transactions was approximately $7,400,000 and
$10,600,000, respectively. Materials on hand from these customers at year-end
are included in the Company's inventories as reported on the accompanying
balance sheets, with an offsetting amount included in the Company's accounts
payable.
The Company also performs commission manufacturing for certain other
customers for which the Company is not responsible for waste occurring during
processing. Accordingly, the Company does not include raw material costs in
sales or cost of sales for these transactions, nor does the Company report
amounts in its inventories or accounts payable for materials on hand from these
customers at year-end.
INVESTMENTS
Investments consist primarily of municipal bonds. The Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," (SFAS No. 115), at the beginning of
fiscal year 1995. The effect of implementation of SFAS No. 115 was not
significant. In accordance with the requirements of SFAS No. 115, the Company's
investments at March 25, 1995, are designated as held-to-maturity and are
recorded at amortized cost, which approximates market value. The Company's
investments at March 26, 1994, were valued at cost, which approximated market
value.
INVENTORIES
Inventories of finished yarn, yarn in process and raw materials are stated
at the lower of cost, determined on the last-in, first-out (LIFO) dollar value
method, or market.
Supplies are stated at first-in, first-out cost, not in excess of market.
Waste is stated at net realizable value.
PROPERTY
Property is stated at cost. Depreciation is provided using the declining
balance and straight-line methods over the estimated useful lives of the
property.
INCOME TAXES
Deferred income taxes have been recorded for temporary differences in the
recognition for tax and financial reporting purposes of certain expense items,
principally depreciation.
EMPLOYEE BENEFIT PLANS
The Company has a profit sharing retirement plan covering substantially all
of its employees. Contributions to the plan are determined by the Board of
Directors, limited in any one year to the maximum amount deductible for income
tax purposes. Profit sharing expense for fiscal years 1995 and 1994 was $323,000
and $206,000, respectively.
F-41
<PAGE>
PHARR YARNS OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 25, 1995, AND MARCH 26, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company also provides health care and accident benefits to participating
employees. These benefits are funded by contributions from the Company and
participating employees. Company contributions for the fiscal years 1995 and
1994 were $612,000 and $600,000, respectively.
CASH EQUIVALENTS
The Company considers matured factor receivables and highly liquid
unrestricted investments with original maturities of three months or less to be
cash equivalents. The carrying value of cash and cash equivalents approximates
their fair value.
2. MAJOR CUSTOMERS, CONCENTRATION OF CREDIT RISK, ACCOUNTS RECEIVABLE AND
INTEREST INCOME
During fiscal year 1995, sales to the Company's top four customers were 30%,
21%, 17% and 8% of total net sales, respectively. Sales to the same four
customers in the prior fiscal year represented 5%, 36%, 10% and 13% of total net
sales, respectively.
Certain trade receivables are sold under factoring agreements, without
recourse to the Company except in the event of dispute or claim as to price,
terms, quality, material, workmanship, quantity or delivery of merchandise and
absence of prior approval of the customer by the factor. The Company generally
does not require collateral on its nonfactored trade accounts receivable. Prior
to extending credit, the Company reviews a customer's credit history.
The Company earns interest income on the proceeds from matured factor
receivables that remain on deposit with the factor. Interest income for fiscal
years 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Interest income from factors.................................................. $ 409,265 $ 218,714
Other interest income......................................................... 262,161 269,033
----------- -----------
Total interest income..................................................... $ 671,426 $ 487,747
----------- -----------
----------- -----------
</TABLE>
3. INVENTORIES
Inventories at March 25, 1995, and March 26, 1994, are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
At first-in, first-out cost --
Finished yarn........................................................... $ 337,890 $ 493,890
Yarn in process......................................................... 458,094 602,823
Raw materials........................................................... 543,087 519,584
Less -- Allowance to adjust to a LIFO basis............................... (533,083) (644,030)
------------- -------------
Total................................................................. 805,988 972,267
Supplies and waste........................................................ 206,941 206,614
------------- -------------
$ 1,012,929 $ 1,178,881
------------- -------------
------------- -------------
</TABLE>
During fiscal years 1995 and 1994, the Company reduced certain inventory
quantities which were valued at lower LIFO costs prevailing in prior years. The
effect of this reduction was to increase net income by approximately $69,000 for
fiscal year 1995 and $65,800 for fiscal year 1994.
F-42
<PAGE>
PHARR YARNS OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 25, 1995, AND MARCH 26, 1994
4. PROPERTY
Property at March 25, 1995, and March 26, 1994, is summarized as follows:
<TABLE>
<CAPTION>
DEPRECIABLE
1995 1994 LIVES
-------------- -------------- ------------
<S> <C> <C> <C>
Land and land improvements.............................. $ 292,093 $ 292,093 7-20 years
Buildings and components................................ 3,722,225 3,701,930 5-30 years
Machinery and equipment................................. 9,385,952 9,348,565 3-20 years
Furniture and fixtures.................................. 127,780 136,185 5-10 years
-------------- --------------
$ 13,528,050 $ 13,478,773
-------------- --------------
-------------- --------------
</TABLE>
5. INCOME TAXES
The Company, together with its parent company and Pharr's other domestic
subsidiaries, files a consolidated federal income tax return. In accordance with
Pharr's established policy, the provision for federal income taxes is allocated
to the Company based on its taxable income on a separate return basis.
The Company recognizes income taxes in accordance with Financial Accounting
Standards Board Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the enacted statutory tax
rate. Deferred income tax expenses or benefits are based on the changes in the
asset or liability from period to period.
The following summarizes the components of the income tax provisions:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Current provision --
Federal................................................................. $ 1,015,130 $ 942,864
State................................................................... 161,780 175,687
------------- -------------
1,176,910 1,118,551
Deferred provision (benefit).............................................. (12,583) 32,337
------------- -------------
Total provision....................................................... $ 1,164,327 $ 1,150,888
------------- -------------
------------- -------------
</TABLE>
The provision for income taxes for 1995 and 1994 differs from the amounts
computed by applying federal statutory rates due to the following:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Income tax provision computed at the federal statutory rate of 34%........ $ 1,140,018 $ 1,034,170
State income taxes, net of federal benefit................................ 106,775 115,954
Tax exempt interest income................................................ (77,250) (34,565)
Other, net................................................................ (5,216) 35,329
------------- -------------
$ 1,164,327 $ 1,150,888
------------- -------------
------------- -------------
</TABLE>
F-43
<PAGE>
PHARR YARNS OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 25, 1995, AND MARCH 26, 1994
5. INCOME TAXES (CONTINUED)
The tax effect of temporary differences giving rise to the Company's
deferred taxes at March 25, 1995, and March 26, 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Current deferred taxes --
Reserves not currently deductible......................................... $ 24,092 $ 61,544
Other, net................................................................ (413) 1,638
------------ ------------
Total current deferred asset............................................ $ 23,679 $ 63,182
------------ ------------
------------ ------------
Noncurrent deferred taxes-
Accelerated depreciation.................................................. $ (290,896) $ (318,935)
Unrealized loss on investments............................................ 29,442 5,395
------------ ------------
Total noncurrent deferred liability..................................... $ (261,454) $ (313,540)
------------ ------------
------------ ------------
</TABLE>
No valuation allowance against deferred tax assets has been recorded in the
accompanying balance sheets.
The Company made net income tax payments during fiscal years 1995 and 1994,
including payments to Pharr, totaling $871,347 and $1,153,278, respectively.
6. NOTE PAYABLE
The Company entered into a note payable with a bank for $6,000,000 on March
24, 1995. The note was repaid with interest at an annual rate of 6.88% on April
7, 1995.
7. RELATED-PARTY TRANSACTIONS
Transactions with Pharr for fiscal years 1995 and 1994 and net account
balances as of March 25, 1995, and March 26, 1994, are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
Accounts payable (net of $23,583 receivable relating to federal income
taxes at March 26, 1994)................................................ $ 736,923 $ 245,370
-------------- -------------
-------------- -------------
Notes receivable......................................................... $ 13,000,000 $ 2,000,000
-------------- -------------
-------------- -------------
Raw material purchases................................................... $ 3,535,284 $ 1,929,057
-------------- -------------
-------------- -------------
Interest income.......................................................... $ 102,714 $ 104,409
-------------- -------------
-------------- -------------
Income tax payments...................................................... $ 722,347 $ 616,000
-------------- -------------
-------------- -------------
Accrued federal income taxes............................................. $ 269,200 $ 0
-------------- -------------
-------------- -------------
</TABLE>
The notes receivable are due on demand and are uncollateralized. Interest on
the notes is at the monthly federal interest rates as published by the Internal
Revenue Service (7% at March 25, 1995). The Company expects the notes to be
repaid upon the sale of substantially all of the Company's property assets (see
Note 9).
8. COMMITMENTS AND CONTINGENCIES
In March 1993, the Company began leasing certain equipment under an
agreement classified as an operating lease. Rental expense for the years ended
March 25, 1995, and March 26, 1994, relating to these leases was $58,000 and
$71,000 respectively. On March 31, 1995, the Company purchased the equipment
that was being leased under this agreement at a cost of approximately $241,000.
F-44
<PAGE>
PHARR YARNS OF GEORGIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 25, 1995, AND MARCH 26, 1994
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the normal course of business, the Company is party to certain legal and
environmental matters, none of which individually or in the aggregate, in the
opinion of management, is expected to have a material adverse affect on the
financial position or future operations of the Company.
9. SUBSEQUENT EVENT
On April 5, 1995, the Company entered into an agreement to sell
substantially all of its property assets to Image Industries, Inc. (Image) for a
purchase price of $16,000,000. Image is the Company's largest customer. The
purchase price is to be paid in a combination of cash of $11,300,000 and 400,000
shares of common stock of Image. The Company plans to cease its manufacturing
operations in connection with the consummation of the sale of the property to
Image, which is expected to occur on or before June 30, 1995. In addition, Image
is to pay the Company for the costs incurred for inventories on hand at the
closing date. The Company will retain all other assets and all liabilities.
F-45
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF MAY 31, 1996
BETWEEN
THE MAXIM GROUP, INC.,
TMG-II MERGER, INC.
AND
IMAGE INDUSTRIES, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
The Merger.............................................................................. A-1
SECTION 1.1 The Merger............................................................ A-1
SECTION 1.2 Effective Time of the Merger.......................................... A-1
SECTION 1.3 Effect of Merger...................................................... A-1
ARTICLE II
Certificate of Incorporation and Bylaws of the Surviving................................ A-1
SECTION 2.1 Certificate of Incorporation, Bylaws.................................. A-1
ARTICLE III
Conversion of Shares.................................................................... A-2
SECTION 3.1 Exchange Ratio........................................................ A-2
SECTION 3.2 Maxim to Make Certificates Available.................................. A-3
SECTION 3.3 Dividends............................................................. A-3
SECTION 3.4 Closing of Image Transfer Book........................................ A-4
ARTICLE IV
Representations, Warranties and Certain Covenants of Maxim.............................. A-4
SECTION 4.1 Organization and Qualification........................................ A-4
SECTION 4.2 Capitalization........................................................ A-4
SECTION 4.3 Authorization......................................................... A-5
SECTION 4.4 No Violation.......................................................... A-5
SECTION 4.5 Governmental Authorities.............................................. A-5
SECTION 4.6 Reports and Financial Statements...................................... A-5
SECTION 4.7 Absence of Certain Changes or Events.................................. A-6
SECTION 4.8 Registration Statement; Proxy Statement............................... A-6
SECTION 4.9 Brokers and Finders................................................... A-6
SECTION 4.10 Compliance with Law................................................... A-7
SECTION 4.11 Litigation............................................................ A-7
SECTION 4.12 Properties............................................................ A-7
SECTION 4.13 Intellectual Property Rights.......................................... A-7
SECTION 4.14 Taxes................................................................. A-8
SECTION 4.15 Executive Compensation and Benefits................................... A-8
SECTION 4.16 Compliance with ERISA................................................. A-8
SECTION 4.17 Environmental Matters................................................. A-8
SECTION 4.18 Absence of Undisclosed Liabilities.................................... A-10
SECTION 4.19 Fairness Opinion...................................................... A-10
SECTION 4.20 Statutory Provisions; Appraisal Rights................................ A-10
SECTION 4.21 Vote.................................................................. A-10
SECTION 4.22 Contracts............................................................. A-10
ARTICLE V
Representations, Warranties and Certain Covenants of Image.............................. A-11
SECTION 5.1 Organization and Qualification........................................ A-11
SECTION 5.2 Capitalization........................................................ A-11
SECTION 5.3 Subsidiaries.......................................................... A-11
SECTION 5.4 Authorization......................................................... A-11
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 5.5 No Violation.......................................................... A-11
SECTION 5.6 Governmental Authorities.............................................. A-12
SECTION 5.7 Reports and Financial Statements...................................... A-12
SECTION 5.8 Absence of Certain Changes or Events.................................. A-12
SECTION 5.9 Registration Statement; Proxy Statement............................... A-12
SECTION 5.10 Brokers and Finders................................................... A-13
SECTION 5.11 Compliance with Law................................................... A-13
SECTION 5.12 Properties............................................................ A-13
SECTION 5.13 Intellectual Property Rights.......................................... A-13
SECTION 5.14 Litigation............................................................ A-14
SECTION 5.15 Taxes................................................................. A-14
SECTION 5.16 Executive Compensation and Benefits................................... A-14
SECTION 5.17 Compliance with ERISA................................................. A-14
SECTION 5.18 Environmental Matters................................................. A-15
SECTION 5.19 Absence of Undisclosed Liabilities.................................... A-16
SECTION 5.20 Fairness Opinion...................................................... A-16
SECTION 5.21 Statutory Provisions; Appraisal Rights................................ A-16
SECTION 5.22 Vote.................................................................. A-16
SECTION 5.23 Capital Expenditure Plan.............................................. A-16
SECTION 5.24 Contracts............................................................. A-16
ARTICLE VI
Representations and Warranties Regarding the Subsidiary................................. A-17
SECTION 6.1 Organization.......................................................... A-17
SECTION 6.2 Capitalization........................................................ A-17
SECTION 6.3 Authority Relative to this Agreement.................................. A-17
ARTICLE VII
Covenants............................................................................... A-17
SECTION 7.1 Covenants of Image.................................................... A-17
SECTION 7.2 Covenants of Maxim.................................................... A-19
ARTICLE VIII
Additional Agreements................................................................... A-20
SECTION 8.1 Confidentiality; Standstill........................................... A-20
SECTION 8.2 Registration Statement................................................ A-22
SECTION 8.3 Approval of Stockholders.............................................. A-22
SECTION 8.4 No Solicitation....................................................... A-23
SECTION 8.5 Identification of Affiliates.......................................... A-24
SECTION 8.6 Issuance of Shares.................................................... A-24
SECTION 8.7 Expenses; Termination Fee............................................. A-24
SECTION 8.8 Hart-Scott-Rodino Filing.............................................. A-25
SECTION 8.9 Stockholder Communication............................................. A-25
SECTION 8.10 Rule 144 Considerations............................................... A-25
SECTION 8.11 Stock Options......................................................... A-25
SECTION 8.12 Post Effectiveness Management Matters................................. A-25
SECTION 8.13 Amendments to Maxim Certificate of Incorporation...................... A-26
SECTION 8.14 Tax Treatment: Accounting Treatment................................... A-26
SECTION 8.15 Registration of Option Shares......................................... A-27
SECTION 8.16 Additional Agreements................................................. A-27
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 8.17 Closing Conditions.................................................... A-27
ARTICLE IX
Conditions.............................................................................. A-27
SECTION 9.1 Conditions to Obligations of Maxim and the Subsidiary to Proceed with
the Merger........................................................... A-27
SECTION 9.2 Conditions to Obligations of Image to Proceed with the Merger......... A-30
ARTICLE X
Termination, Amendment and Waiver....................................................... A-32
SECTION 10.1 Termination........................................................... A-32
SECTION 10.2 Effect of Termination................................................. A-33
SECTION 10.3 Amendment............................................................. A-33
SECTION 10.4 Waiver................................................................ A-33
ARTICLE XI
General Provisions...................................................................... A-33
SECTION 11.1 Survival of Representations, Warranties and Agreements................ A-33
SECTION 11.2 Closing............................................................... A-34
SECTION 11.3 Notices............................................................... A-34
SECTION 11.4 Interpretation........................................................ A-35
SECTION 11.5 Severability.......................................................... A-35
SECTION 11.6 Miscellaneous......................................................... A-35
SECTION 11.7 Schedules and Exhibits................................................ A-35
</TABLE>
A-iii
<PAGE>
EXHIBIT
--------
EXHIBITS
Certificate of Merger................................................. A
Certificate of Incorporation of Subsidiary............................ B
Bylaws of Subsidiary.................................................. C
Opinion of Parker, Johnson, Cook & Dunlevie, Counsel to Image......... D
Accountant's Letter of KPMG Peat Marwick LLP, Independent Accountants
for Image............................................................ E
Opinion of Smith, Gambrell & Russell, Counsel to Maxim................ F
Accountant's Letter of Arthur Andersen LLP, Independent Accountants
for Maxim............................................................ G
Form of Employment Agreement for Larry M. Miller...................... H
Form of Employment Agreement for H. Stanley Padgett................... I
Form of Indemnity Agreement for Image Indemnitees..................... J
DISCLOSURE SCHEDULES
4.2 Capitalization
4.7 Certain Maxim Changes or Events
4.9 Maxim Financial Advisor Engagement
4.10 Maxim Compliance With Law
4.11 Maxim Litigation
4.14 Maxim Tax Matters
4.15 Maxim Executive Compensation and Benefits
4.16 Maxim ERISA Compliance
4.17 Maxim Environmental Matters
4.18 Absence of Undisclosed Liabilities
4.22 Maxim Contracts
5.2 Image Options, Warrants and Other Stock Rights
5.3 Subsidiaries
5.5 No Violation
5.8 Absence of Certain Changes or Events
5.10 Image Financial Advisor Engagement
5.11 Image Compliance with Law
5.14 Image Litigation
5.15 Image Taxes
5.16 Image Employee Compensation and Benefits
5.17 Image Compliance with ERISA
5.18 Image Environmental Matters
5.19 Absence of Undisclosed Liabilities
5.24 Image Contracts
8.14 Actions Affecting Pooling of Interests
A-iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), dated as of May 31,
1996, among The Maxim Group, Inc., a Delaware corporation ("Maxim"), TMG-II
Merger, Inc., a Delaware corporation (the "Subsidiary"), and Image Industries,
Inc., a Delaware corporation ("Image").
This Agreement provides for the merger of the Subsidiary, a wholly-owned
subsidiary of Maxim, with and into Image (the "Merger") in accordance with the
applicable statutes of the State of Delaware. This Agreement is intended to
constitute a plan of reorganization within the meaning of Sections 368(a)(1)(A)
and 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. At the Effective Time (as defined in Section 1.2),
the Subsidiary shall be merged with and into Image in accordance with the
applicable provisions of the Delaware General Corporation Law and the separate
existence of the Subsidiary shall thereupon cease. The name of Image, as the
surviving corporation in the Merger (the "Surviving Corporation"), shall by
virtue of the Merger remain "Image Industries, Inc." Subject to the terms and
conditions hereof, the parties hereto shall take all reasonable action necessary
in accordance with applicable law and their respective charters and bylaws to
cause the Merger to be consummated as soon as is reasonably practicable.
SECTION 1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective at the time when the properly executed Certificate of Merger under the
Delaware General Corporation Law is duly filed with the Secretary of State of
Delaware. The Certificate of Merger shall be filed on the date of the closing
(as set forth in Section 11.2 hereof) in the form attached hereto as Exhibit A.
When used in this Agreement, the term "Effective Time" shall mean the date and
time at which such action is completed.
SECTION 1.3 EFFECT OF MERGER. The Merger shall have the effects set forth
in Section 259 of the Delaware Corporate Code, and immediately after the Merger,
the Surviving Corporation shall possess all the rights, privileges, powers and
franchises of each of Image and the Subsidiary, and all property and other
interests due or belonging to Image and the Subsidiary shall be vested in the
Surviving Corporation.
ARTICLE II
CERTIFICATE OF INCORPORATION AND
BYLAWS OF THE SURVIVING CORPORATION
SECTION 2.1 CERTIFICATE OF INCORPORATION, BYLAWS. The Certificate of
Incorporation of the Subsidiary as in effect as of the Effective Time, a copy of
which is attached hereto as Exhibit B, shall be the Certificate of Incorporation
of the Surviving Corporation until altered, amended or repealed. The Bylaws of
the Subsidiary as in effect as of the Effective Time, a copy of which is
attached hereto as Exhibit C, shall be the Bylaws of the Surviving Corporation
until altered, amended or repealed.
A-1
<PAGE>
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 EXCHANGE RATIO. As of the Effective Time, by virtue of the
Merger and without any action on the part of any record holder thereof:
(a) Each share of Common Stock, $0.01 par value, of Image (the "Image
Common Stock") that is held by Image as treasury stock (the "Image Treasury
Stock"), shall be canceled.
(b) Each share of capital stock of the Subsidiary that is issued and
outstanding immediately prior to the Effective Time shall be converted into
one (1) share of the $1.00 par value common stock of the Surviving
Corporation, and each certificate evidencing ownership of any such shares
shall evidence ownership of the same number of shares of Common Stock of the
Surviving Corporation.
(c) Each share of Image Common Stock issued and outstanding immediately
prior to the Effective Time shall be converted into one share of Common
Stock, $0.001 par value, of Maxim (the "Maxim Common Stock") subject,
however, to the other provisions of this Article III (the number of shares
of Maxim Common Stock so issuable for each share of Image Common Stock
hereinafter referred to as the "Conversion Ratio"). No fractional shares of
Maxim Common Stock shall be issued in respect of the conversion of shares of
Image Common Stock pursuant hereto, but instead, a holder of Image Common
Stock otherwise entitled to receive a fractional share of Maxim Common Stock
shall instead receive cash in accordance with the provisions of Section
3.2(a) hereof.
(d) The number of shares of Maxim Common Stock to be issued pursuant to
this Section 3.1 shall be adjusted for any stock dividend, split or any
combination or reclassification in respect of Maxim Common Stock occurring
after the date hereof.
(e) At the Effective Time, each holder of then outstanding stock
options, warrants, or other rights to acquire shares of Common Stock of
Image heretofore granted under any employee or non-employee compensation
plan or arrangement of Image, shall either have exercised such options,
warrants or rights in accordance with their terms, or to the extent not so
exercised:
(i) if such options are tax-qualified incentive stock options
("ISOs") issued pursuant to the Image 1993 Stock Option Plan, shall be
deemed to have surrendered such options at the Effective Time to Maxim in
exchange for a corresponding tax qualified option to purchase shares of
Maxim Common Stock issued under the Maxim 1993 Stock Option Plan having
the same aggregate exercise price, terms, duration and vesting schedule,
but exercisable for a number of shares of Maxim Common Stock equal to the
Conversion Ratio for each share of Image Common Stock covered by the ISO
so deemed to be exchanged in accordance with the terms of this Agreement;
and
(ii) if such options are not ISO's, shall be deemed to have
surrendered such options at the Effective Time to Maxim in exchange for a
corresponding option (the "Corresponding Nonqualified Option") to
purchase shares of Maxim Common Stock having the same aggregate exercise
price, terms, duration and vesting schedule, but exercisable for a number
of shares of Maxim Common Stock equal to the Conversion Ratio to each
share of Image Common Stock covered by the option so deemed to be
exchanged in accordance with the terms of this Agreement PROVIDED that
with respect to options issued pursuant to that certain Plan and
Agreement of Conversion, dated July 30, 1993, among Image and certain
optionholders thereof (the "Conversion Agreement"), Maxim shall also
simultaneously assume the obligations of Image under the Conversion
Agreement to the optionholders parties to such Conversion Agreement.
A-2
<PAGE>
SECTION 3.2 MAXIM TO MAKE CERTIFICATES AVAILABLE. (a) Maxim shall
authorize one or more bank or trust companies to act as Exchange Agent hereunder
(the "Exchange Agent"). Immediately following the Effective Time, Maxim shall
make available, and each holder of record of Image Common Stock will be entitled
to receive, upon surrender to the Exchange Agent of one or more certificates
representing such Image Common Stock for cancellation, certificates representing
the number of whole shares of Maxim Common Stock into which such shares of Image
Common Stock are convertible in the Merger. Neither certificates nor scrip for
fractional shares of Maxim Common Stock will be issued, but each such holder
otherwise entitled to receive a fractional share shall have the right to receive
cash in lieu thereof in an amount equal to the proportional fractional share
interest of one (1) share of Maxim Common Stock to which he is entitled
multiplied by the Maxim Share Value (the "fractional share payment"). As used
herein, the term "Maxim Share Value" shall mean the average of the closing
prices as reported on The Nasdaq National Market of one share of Maxim Common
Stock for the five trading days immediately preceding the date on which the
meeting of Image stockholders is held for the purpose of approving this
Agreement and the Merger. Maxim Common Stock into which Image Common Stock shall
be converted in the Merger shall be deemed to have been issued at the Effective
Time.
(b) Immediately following the Effective Time, the Exchange Agent shall mail
or otherwise deliver to each holder of record (other than Maxim, the Subsidiary,
any other Maxim subsidiary, Image or any wholly-owned subsidiary of Image) of a
certificate or certificates that immediately prior to the Effective Time
represented outstanding Image Common Stock (the "Certificates") (i) a form
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
Maxim Common Stock, such letter and instructions to be in a form reasonably
acceptable to the chief executive officer of Image. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Maxim, together with such letter of transmittal,
duly executed, the holder of record of such Certificate shall be entitled to
receive in exchange therefor a certificate representing that number of whole
shares of Maxim Common Stock into which the shares of Image Common Stock
theretofore represented by the Certificate so surrendered shall have been
converted pursuant to the provisions of this Article III and a check for such
holder's fractional share payment, if any, and the Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of Image
Common Stock that is not registered on the transfer records of Image,
certificates representing the proper number of shares of Maxim Common Stock may
be issued to a transferee if the Certificate representing such Image Common
Stock is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by payment of any applicable stock
transfer taxes.
(c) All Maxim Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such Image Common Stock.
SECTION 3.3 DIVIDENDS. No dividends or other distributions that are
declared after the Effective Time with respect to Maxim Common Stock and payable
to holders of record thereof after the Effective Time shall be paid to Image
stockholders entitled to receive certificates representing Maxim Common Stock
until such stockholders surrender their Certificates. Upon such surrender, there
shall be paid to the stockholder in whose name the certificates representing
such Maxim Common Stock shall be issued any dividends which shall have become
payable with respect to such Maxim Common Stock between the Effective Time and
the time of such surrender. After such surrender, there shall also be paid to
the stockholder in whose name the certificates representing such Maxim Common
Stock shall be issued any dividend on such Maxim Common Stock that shall have a
record date subsequent to the Effective Time and prior to such surrender and a
payment date after such surrender, and such payment shall be made on the payment
date. In no event shall the stockholders entitled to receive such dividends be
entitled to receive interest on such dividends. All dividends or
A-3
<PAGE>
other distributions declared after the Effective Time with respect to Maxim
Common Stock and payable to the holders of record thereof after the Effective
Time that are payable to the holders of Certificates not theretofore surrendered
and exchanged for certificates representing Maxim Common Stock pursuant to this
Section 3.3 shall be paid or delivered by Maxim to the Exchange Agent for the
benefit of such holders. Any dividends or other distributions held by the
Exchange Agent for payment or delivery to the holders of unsurrendered
Certificates and unclaimed at the end of one (1) year from the Effective Time
shall be repaid or redelivered by the Exchange Agent to Maxim, after which time
any holder of Certificates who has not theretofore surrendered such Certificates
to the Exchange Agent, subject to applicable law, shall look as a general
creditor only to Maxim for payment or delivery of such dividends or
distributions, as the case may be. Notwithstanding the foregoing, none of Maxim,
the Subsidiary, the Exchange Agent, the Surviving Corporation or any other party
hereto shall be liable to a holder of Image Common Stock for any Maxim Common
Stock or dividends or distributions thereon delivered to a public official
pursuant to applicable escheat or unclaimed fund laws.
SECTION 3.4 CLOSING OF IMAGE TRANSFER BOOKS. At the Effective Time, the
stock transfer books of Image shall be closed, and no transfer of Image Common
Stock shall thereafter be made. If, after the Effective Time, Certificates are
presented to the Surviving Corporation, they shall be canceled and exchanged for
certificates representing Maxim Common Stock as provided in this Article III.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS OF MAXIM
Maxim represents, warrants and covenants to Image as follows:
SECTION 4.1 ORGANIZATION AND QUALIFICATION. Maxim and each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its state of organization and has the requisite
corporate power to carry on its business as it is now being conducted and to own
the properties and assets it now owns; is duly qualified or licensed to do
business as a foreign corporation in good standing in every jurisdiction where
the failure to be so qualified would have a material adverse effect on Maxim and
its subsidiaries taken as a whole; and has heretofore delivered to Image
complete and correct copies of its Certificate of Incorporation and Bylaws, as
currently in effect.
SECTION 4.2 CAPITALIZATION. The authorized capital stock of Maxim consists
of 15,000,000 shares of Maxim Common Stock and 5,000,000 shares of Preferred
Stock, $0.001 par value ("Maxim Preferred Stock"). As of May 29, 1996, 7,102,095
shares of Maxim Common Stock, and no shares of Maxim Preferred Stock were
validly issued and outstanding, fully paid and nonassessable, and 28,000 shares
of Maxim Common Stock were validly issued and held by Maxim as treasury shares.
Except as set forth on Disclosure Schedule 4.2 attached hereto, there are no
options, warrants, or other rights, contracts, commitments, understandings or
arrangements outstanding or contemplated as of the date of this Agreement
obligating Maxim to issue shares of its capital stock. As of the date of this
Agreement, and at the Effective Time, there are not and will not be any
agreements for the purchase or acquisition by Maxim or any of its subsidiaries
of any shares of its capital stock or any obligation to pay dividends on such
shares or to redeem or retire such shares. All outstanding stock, options,
warrants, convertible notes and other securities of Maxim and its subsidiaries
have been issued in compliance with the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended or in compliance with
applicable exemptions therefrom, and the registration and qualification
requirements of all applicable securities laws of states of the United States
and of any other applicable securities laws. Disclosure Schedule 4.2 sets forth
a list of the subsidiaries of Maxim, and Maxim owns all the issued and
outstanding capital stock of each such subsidiary. Except as set forth on
Disclosure Schedule 4.2, Maxim has no subsidiaries, nor does it own, directly or
indirectly, any of the outstanding capital stock or securities convertible into
capital stock of any corporation or have any direct or indirect equity or
ownership interest in any partnership, joint venture or other business
enterprise. Except as set forth in Disclosure Schedule 4.2, neither Maxim nor
any of its subsidiaries
A-4
<PAGE>
has granted or agreed to grant any registration rights, including piggy-back
rights, with respect to its capital stock to any person or entity. Neither Maxim
nor any of its subsidiaries, nor to the knowledge of Maxim any shareholder of
Maxim or any subsidiary, has entered into any agreements concerning the voting
of any shares of its capital stock, or any agreements with respect to the
election of directors. The Maxim Common Stock to be issued to holders of Image
Common Stock at the Effective Time will be duly authorized and validly issued,
fully paid and nonassessable and will not be issued in violation of any
preemptive rights of any Maxim stockholders, and will be registered with the
Commission pursuant to an effective Registration Statement.
SECTION 4.3 AUTHORIZATION. Maxim has full corporate power and authority to
enter into this Agreement and to carry out the transactions contemplated hereby.
Maxim's Board of Directors has duly authorized the execution and delivery of
this Agreement and, subject to obtaining the necessary approval of stockholders
of Maxim, the consummation of the transactions contemplated hereby. Except for
the approval of its stockholders, no other corporate proceedings on the part of
Maxim are necessary to authorize this Agreement and the transactions
contemplated hereby. Subject to the foregoing, this Agreement has been duly
executed and delivered, and constitutes the valid and binding agreement of
Maxim.
SECTION 4.4 NO VIOLATION. Subject to the exceptions set forth in Section
4.5 hereof, neither the execution, delivery and performance of this Agreement by
Maxim and the Subsidiary nor the consummation of the transactions contemplated
hereby will constitute a breach or violation of (i) Maxim's or the Subsidiary's
Certificate of Incorporation or Bylaws, each as amended to date, or (ii) any
material agreement, instrument, license, franchise or permit to which Maxim or
the Subsidiary is subject or by which Maxim or the Subsidiary is bound, other
than any breaches or violations that, either singly or in the aggregate, will
not have a material adverse effect on Maxim and its subsidiaries, taken as a
whole, or (iii) any order, writ, injunction or decree to which Maxim or the
Subsidiary is subject or by which Maxim or the Subsidiary is bound, other than
any breaches or violations that, either singly or in the aggregate, will not
have a material adverse effect on Maxim and its subsidiaries taken as a whole.
Maxim is not, and the Subsidiary will not be, subject to any law, rule or
regulation of any governmental authority that would be violated by the
execution, delivery or performance by Maxim and the Subsidiary of this Agreement
and the consummation of the transactions contemplated hereby.
SECTION 4.5 GOVERNMENTAL AUTHORITIES. Except as referred to herein, or in
connection or in compliance with the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "Hart Scott-Rodino Act"), the Securities
Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the rules of The Nasdaq National Market
("Nasdaq-NMS"), the corporation laws and state securities (or "blue sky") laws
of the various states, and the filing and recordation of appropriate merger
documents as required by the laws of the State of Delaware, Maxim is not, and
the Subsidiary will not be, required to obtain the consent of, register with or
submit any notice, report or other filing with any governmental authority in
connection with the execution and delivery by Maxim and the Subsidiary of this
Agreement or the consummation of the transactions contemplated hereby, other
than those that are not material to Maxim and its subsidiaries taken as a whole.
SECTION 4.6 REPORTS AND FINANCIAL STATEMENTS. Maxim has previously
furnished, or (to the extent not yet due under the terms of the federal
securities laws and the regulations thereunder) will furnish, Image with a true
and complete copy of Maxim's (i) Transition Report on Form 10-K for the 10-month
period ended January 31, 1996 and Annual Reports on Form 10-KSB for each of the
two (2) fiscal years in the period ended March 31, 1995, as filed with the
Securities and Exchange Commission (the "Commission"), (ii) proxy statement and
Annual Report to Stockholders relating to its Annual Meeting of Stockholders on
September 20, 1995 and any proxy statements relating to any other meetings of
its stockholders during 1994, 1995 and 1996, (iii) any Quarterly Reports on Form
10-Q filed with the Commission subsequent to the date hereof and prior to the
Effective Time, (iv) Form S-3 Registration Statement and related Prospectus,
dated November 21, 1995, as filed with
A-5
<PAGE>
the Commission and (v) all other reports or registration statements filed by
Maxim with the Commission during or with respect to Maxim's previous three (3)
fiscal years or transition period (as applicable). As of their respective dates,
such reports and statements did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. Since January 31, 1996, there have been no material
changes in the business of Maxim as described in the Maxim Transition Report on
Form 10-K for the ten months ended January 31, 1996, filed with the Commission.
The consolidated financial statements of Maxim included in such reports and
separately furnished to Image by Maxim were prepared in accordance with
generally accepted accounting principles applied on a consistent basis (except
as may be indicated therein or in the notes thereto) and fairly present the
financial position of Maxim as at the dates thereof and the results of its
operations and changes in cash flow for the periods then ended, subject, in the
case of the unaudited interim financial statements, to normal year-end
adjustments and any other adjustments described therein.
SECTION 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in
Disclosure Schedule 4.7 or otherwise contemplated by this Agreement, or as
described in the reports and financial statements provided as of the date of
this Agreement pursuant to Section 4.6, since January 31, 1996 there has not
been (a) any change in the business, results of operations, assets, financial
condition or prospects or in the manner of conducting the business of Maxim and
its subsidiaries considered as a whole which individually or in the aggregate
has had or is reasonably likely to have a material adverse effect on the
business, results of operations, assets, financial condition or prospects of
Maxim and its subsidiaries considered as a whole and, other than changes
occurring after the date hereof, none of which individually or in the aggregate
at the Effective Time will have had or is reasonably likely to have a material
adverse effect on the business, results of operations, assets, financial
condition or prospects of Maxim and its subsidiaries taken as a whole; (b) any
damage to, or destruction or loss of, the properties of Maxim or its
subsidiaries, whether covered by insurance or not, which has had or will have a
material adverse effect on the business, results of operations, assets,
financial condition or prospects of Maxim and its subsidiaries considered as a
whole; (c) any declaration, setting aside or payment of any dividend (whether in
cash, stock or property) in respect of the capital stock of Maxim or any
redemption or other acquisition of such stock by Maxim.
SECTION 4.8 REGISTRATION STATEMENT; PROXY STATEMENT. None of the
information to be supplied by Maxim or the Subsidiary for inclusion in (i) the
Registration Statement to be filed with the Commission by Maxim for the purpose
of registering the Maxim Common Stock to be issued in the Merger (the
"Registration Statement"), or (ii) the joint proxy statement to be distributed
in connection with the meeting of Image's stockholders and the meeting of Maxim
shareholders, respectively, to vote upon this Agreement and the Merger (the
"Proxy Statement") will, in the case of the Proxy Statement or any amendments
thereof or supplements thereto, at the time of the meeting of Image stockholders
to be held in connection with this Agreement and the Merger, and at the
Effective Time, or, in the case of the Registration Statement, at the time it
becomes effective, at the time of the meeting of Image stockholders, and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Registration
Statement and Proxy Statement will comply as to form in all material respects
with the applicable provisions of the Securities Act, the Exchange Act, and the
applicable rules and regulations promulgated thereunder, as well as any
applicable blue sky laws (except that Maxim makes no representations and
warranties about information, including, but not limited to financial
information, contained in the Registration Statement and in the Proxy Statement
which has been supplied by Image).
SECTION 4.9 BROKERS AND FINDERS. Except for Prudential Securities
Incorporated ("Prudential") which is to receive a fee payable by Maxim for
financial advisory services related to the Merger, neither Maxim, nor any of its
affiliates, associates, officers, directors or employees has employed any broker
or finder or agreed to pay any brokerage fees, commissions or finders' fees in
A-6
<PAGE>
connection with the transactions contemplated hereby. A true and complete copy
of the engagement letter between Maxim and Prudential with respect to the Merger
(and if contained in a separate document, the fee arrangement with respect
thereto) is attached as Disclosure Schedule 4.9.
SECTION 4.10 COMPLIANCE WITH LAW. Except as set forth on Disclosure
Schedule 4.10, (a) the business of Maxim and its subsidiaries has not been and
is not being conducted in violation of any statute, law, ordinance, rule or
regulation of any governmental entity applicable to it or its business,
properties or assets or by which it is bound, including, without limitation, any
law, ordinance, or regulation relating to the protection of the environment or
occupational health and safety, the noncompliance with which would have a
material adverse effect on the business of Maxim and its subsidiaries, taken as
a whole; (b) Maxim and its subsidiaries have all permits, licenses, orders,
approvals, authorizations, concessions and franchises of any federal, state,
local or foreign governmental or regulatory body that are material to or
necessary in the conduct of its business; (c) all such permits, licenses,
orders, approvals, concessions and franchises are in full force and effect, and
no proceeding is pending, or overtly threatened to revoke or limit any of them;
(d) neither Maxim nor its subsidiaries is in violation of, or in default under,
any term or provision of any judgment, order, writ, injunction or decree of any
court or any federal, state, territorial, municipal or other commission, board
or other administrative or government agency or authority to which it is subject
or by which it is bound; and (e) as of the date hereof, no investigation or
review by any governmental entity with respect to Maxim or its subsidiaries is
pending or overtly threatened, nor has any governmental entity indicated to
Maxim an intention to conduct the same.
SECTION 4.11 LITIGATION. (a) There is no suit, charge of infringement,
action or proceeding pending or, to the knowledge of Maxim, threatened against
or affecting Maxim which seeks to prevent the consummation of the Merger or the
transactions contemplated hereby; (b) there is no suit, charge of infringement,
action or proceeding (including those relating to environmental matters) pending
or, to the knowledge of Maxim, threatened against or affecting Maxim or any of
its subsidiaries, which, in the opinion of Maxim, is reasonably likely to result
in a judgment or decree having a material adverse effect on the business,
results of operations, assets, financial condition or prospects of Maxim and its
subsidiaries taken as a whole and which has not been disclosed in the periodic
reports filed by Maxim with the Commission, (copies of which reports have
heretofore been provided to Image for its review); and (c) there is no judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against Maxim or
any of its subsidiaries which has any such effect and which has not been
disclosed in the periodic reports filed by Maxim with the Commission. Disclosure
Schedule 4.11 summarizes all actions, suits and proceedings of Maxim or its
subsidiaries pending or, to the knowledge of Maxim, threatened, as of the date
hereof.
SECTION 4.12 PROPERTIES. Maxim or its applicable subsidiaries have good
and marketable title to all the properties and assets reflected as owned in
Maxim's January 31, 1996 audited financial statements, subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except (i) those, if any,
reflected in such financial statements, or (ii) those which are not material in
amount and do not materially and adversely affect the use made and proposed to
be made of such property by Maxim and its subsidiaries. Maxim or its applicable
subsidiary holds its leased properties under valid and binding leases, with such
exceptions as are not materially significant in relation to the business of
Maxim and its subsidiaries taken as a whole. Maxim and its subsidiaries own or
lease all such properties as are necessary to their operations as now conducted
or as proposed to be conducted.
SECTION 4.13 INTELLECTUAL PROPERTY RIGHTS. Maxim and its subsidiaries have
sufficient trademarks, trade names, patent rights, mask works, copyrights,
licenses, approvals and governmental authorizations to conduct their businesses
as now conducted; the expiration of any trademarks, trade names, patent rights,
mask works, copyrights, licenses, approvals or governmental authorizations would
not have a material adverse effect on the business, results of operations or
financial condition of Maxim and its subsidiaries taken as a whole; and Maxim
has no knowledge of any material infringement by it or its subsidiaries of
trademark, trade name rights, patent rights, mask works, copyrights, licenses,
trade secret or other similar rights of others, and there is no claim being made
against Maxim
A-7
<PAGE>
or its subsidiaries regarding trademark, trade name, patent, mask work,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the business, results of operations or financial
condition of Maxim and its subsidiaries.
SECTION 4.14 TAXES. Except as set forth in Disclosure Schedule 4.14, Maxim
has timely filed with the appropriate taxing authorities all returns required to
be filed in respect of all taxes of Maxim and its subsidiaries, and has paid all
such taxes, including interest, penalties and additions in connection therewith
shown to have become due on such returns or for which a notice of assessment or
demand for payment has been received. Since January 31, 1996, no material tax
liability has been assessed, proposed to be assessed or accrued other than in
the ordinary course of business, and no material tax issues have been raised by
the Internal Revenue Service in connection with any of the tax returns referred
to above, and no waivers of statutes of limitations or extensions of time within
which to file any tax return or with respect to tax assessment or deficiency
have been given or requested with respect to Maxim or any of its subsidiaries.
SECTION 4.15 EXECUTIVE COMPENSATION AND BENEFITS. Except as set forth on
Disclosure Schedule 4.15, Maxim's Transition Report on Form 10-K for the
ten-month period ended January 31, 1996 accurately describes all material
employment or consulting contracts or other arrangements for the provision of
benefits or compensation having a value in excess of $60,000 per year for
executive officers or former executive officers of Maxim and its subsidiaries,
and neither Maxim nor its subsidiaries have any commitment to create any
additional such contracts or arrangements or to amend any such plans, contracts
or arrangements so as to increase benefits thereunder. True and complete copies
of all such plans, contracts or arrangements have been delivered to Image. Since
January 31, 1996, there has not been any increase in the compensation payable or
to become payable by Maxim to its directors, officers, key employees or
consultants, or any adoption of or increase in any bonus, insurance, pension or
other employee benefit plan, payment or arrangement made to, for or with any
directors, officers, employees, or consultants except increases occurring in the
ordinary course of business or except as set forth in this Section 4.15 and on
Disclosure Schedule 4.15.
SECTION 4.16 COMPLIANCE WITH ERISA. All employee benefit plans (as such
term is defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") maintained by Maxim or its subsidiaries, and to
the best of Maxim's knowledge those to which it contributes, comply with the
applicable provisions of ERISA in all material respects and have so complied
during all prior periods during which such provisions were applicable; and Maxim
has complied in all material respects with the provisions of ERISA applicable to
it as an employer, plan sponsor, plan administrator or fiduciary of any such
employee benefit plan. Except as set forth on Disclosure Schedule 4.16, Maxim
does not maintain any pension or profit sharing plans or other benefit plans
(within the meaning of Section 3(3) of ERISA) and does not maintain any unfunded
post-retirement medical or other employee benefit plans. With respect to its
employee benefit plans, Maxim has made all contributions required of it by any
law (including, without limitation, ERISA) or contract. Maxim has maintained
sufficient funding to meet its obligations for all claims of current employees
and retired or inactive employees that may be filed for benefits under such
plans up to and including the Effective Time. The only employee benefit plans
(as such term is defined in Section 3(3) of ERISA) maintained by Maxim or to
which Maxim has contributed since August of 1993 are disclosed on Disclosure
Schedule 4.16, and each such employee benefit plan has made a timely filing of
Form 5500 for each year that such plan has been in existence. Maxim has not
incurred any liability under Title IV of ERISA.
SECTION 4.17 ENVIRONMENTAL MATTERS. Except as set forth on Disclosure
Schedule 4.17:
(a) (i) Maxim and each of its subsidiaries holds and is in substantial
compliance with all environmental permits, certificates, licenses, approvals,
registrations and authorizations ("Environmental Permits") required under all
laws, rules and regulations in connection with their respective businesses and
all such Environmental Permits are currently in effect, and (ii) Maxim has
substantially
A-8
<PAGE>
complied with all, and is not in violation of any, applicable environmental
statutes, rules, regulations, ordinances and orders of any governmental entity,
including those relating to Hazardous Substances as defined below.
(b) Maxim has made timely applications for renewals of all such
Environmental Permits that are scheduled to expire by December 31, 1996, except
for such Environmental Permits for which by their terms or by operation of law,
application for renewal need not be made more than 90 days before their
expiration.
(c) Maxim has received no notice that any notice, citation, summons, order
or consent decree has been issued, complaint filed, penalty assessed, or that
any investigation or review is pending or, to the best of Maxim's knowledge, has
been threatened by any governmental or other entity (i) with respect to any
alleged violation by Maxim or its subsidiaries of any environmental statute,
ordinance, rule, regulation or other of any governmental entity, (ii) with
respect to any alleged failure by Maxim or its subsidiaries to have any
Environmental Permit, certificate, license, approval registration or
authorization required in connection with their respective businesses, or (iii)
with respect to any generation, use, possession, treatment, storage, recycling,
transportation or disposal (collectively "management" and as sued in verb form,
"manage") of any hazardous or toxic substance or waste, including petroleum
products and radioactive materials ("Hazardous Substances") by Maxim or its
subsidiaries.
(d) Maxim has not received any request for information, notice of claim,
demand or notification that it or any of its subsidiaries is or may be
potentially responsible under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA"), or any similar
law of any governmental entity with respect to any investigation or clean-up of
any threatened or actual release of any Hazardous Substance.
(e) Except as set forth on Disclosure Schedule 4.17, to the best of Maxim's
knowledge, no polychlorinated biphenyls ("PCBs") or asbestos-containing
materials are or have been present at any property now or previously owned,
operated or leased by Maxim or its subsidiaries. Except as set forth on
Disclosure Schedule 4.17, there are no underground storage tanks, active or
abandoned, or above-ground storage tanks or lagoons or surface impoundments at
any property now owned by Maxim or its subsidiaries, or to the knowledge of
Maxim, at any property now operated or leased by Maxim or its subsidiaries.
(f) To the best of Maxim's knowledge, no Hazardous Substance managed by
Maxim or its subsidiaries has come to be located at any site which is listed or
proposed for listing under CERCLA, CERCLIS or on any similar state list, or
which is the subject of federal, state or local enforcement actions or other
investigations which may lead to claims against Maxim for clean-up costs,
remedial work, damages to natural resources or for personal injury claims,
including, but not limited to, claims under CERCLA.
(g) There are no environmental liens on any properties owned by Maxim or its
subsidiaries or to the knowledge of Maxim, on any property leased by Maxim or
its subsidiaries, and no government actions have been taken or are in the
process or pending which would subject any of such properties to such liens.
(h) Except as listed on Disclosure Schedule 4.17 and heretofore provided to
Image, there have been no environmental inspections, investigations, studies,
audits, tests, reviews or other analyses conducted in relation to any property
or business now or previously owned, operated, or leased by Maxim or its
subsidiaries.
(i) There are no actions, suits, claims, arbitration proceedings, or
complaints pending or, to the knowledge of Maxim, threatened or under
consideration by any governmental entity, community, citizen or other entity
against Image or any of its subsidiaries relating to environmental protection
with respect to or affecting its or their properties or assets, nor does Maxim
have reason to believe that any such actions, suits, claims, or complaints will
be brought against it.
A-9
<PAGE>
SECTION 4.18 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the
extent reflected or reserved against in the January 31, 1996 audited
consolidated balance sheet of Maxim, at January 31, 1996, Maxim did not have any
material liability or obligation, whether accrued, absolute, known or unknown,
contingent or otherwise. Except as set forth on Disclosure Schedule 4.18, since
January 31, 1996, Maxim has not incurred any liability except in the ordinary
course of its business and except in connection with the transactions
contemplated hereby; and no such liability incurred by Maxim in the ordinary
course of its business has been or will prove to be materially adverse to the
business, financial condition, results of operations or prospects of Maxim and
its subsidiaries considered as a whole.
SECTION 4.19 FAIRNESS OPINION. Maxim has received from Prudential oral
advice as of the date hereof, and expects to receive from Prudential a written
opinion, satisfactory to Maxim, dated no later than five business days following
the date of execution of this Agreement by Image and Maxim, to the effect that
the consideration to be paid by Maxim hereunder is fair to the stockholders of
Maxim as well as Prudential's consent to the inclusion of such opinion in the
Registration Statement and Proxy Statement (and will provide a true and complete
copy of such opinion and consent to Image).
SECTION 4.20 STATUTORY PROVISIONS; APPRAISAL RIGHTS. None of the
provisions of Sections 144 or 203 of the Delaware General Corporation Law apply
to this Agreement, the Certificate of Merger, the Merger or to the transactions
contemplated hereby. The entry into and performance by Maxim of this Agreement
and consummation of the transactions contemplated hereby will not give rise to
appraisal rights or dissenters rights in favor of any holder of shares of Maxim
Common Stock (or any holder of any option, warrant or other right to acquire
shares of Maxim Common Stock), whether pursuant to the terms of Section 262 of
the Delaware General Corporation Law or pursuant to the terms of the Certificate
of Incorporation or By-Laws of Maxim or of any shareholders agreement or other
contract, agreement or instrument to which Image is a party or by which it is
bound.
SECTION 4.21 VOTE. The affirmative vote of a majority of the votes that
holders of the outstanding shares of Maxim Common Stock are entitled to cast is
the only vote the holders of Maxim's capital stock necessary to approve this
Agreement and the Certificate of Merger and the transactions contemplated hereby
and thereby.
SECTION 4.22 CONTRACTS. (a) Except as set forth in Disclosure Schedule
4.22, neither Maxim nor any of its subsidiaries is a party to or bound by any
written contract, commitment or arrangement (i) for the employment of any
executive officer of Maxim; (ii) with any labor union; (iii) for the purchase of
materials, supplies or equipment in excess of its requirements for normal
operating inventories; (iv) except to the extent so provided in its standard
franchise agreements with its franchisees, in the nature of a confidentiality
agreement, royalty or license or an agreement for the acquisition of intangible
property rights that is material to the conduct of the business of Maxim and its
subsidiaries; (v) with a governmental agency (or subcontractor) other than
agreements for the sale of standard products; (vi) for the purchase of products
from a single-source supplier; (vii) in the nature of a non-competition
agreement which in any way restricts the right of Maxim and its subsidiaries to
conduct business; (viii) in the nature of a management agreement; (ix) except to
the extent so provided in its standard franchise agreements with its
franchisees, for any quantity discount, volume purchase, rebate or bill back
sales arrangement that will continue after the Effective Time and is material to
the conduct of the business of Maxim and its subsidiaries; (x) except to the
extent so provided in its standard franchise agreements with its franchisees,
which is not in the ordinary course of business and cannot be performed within
one (1) calendar year; (xi) which is not in the ordinary course of business and
provides for future aggregate annual payments by Maxim and its subsidiaries or a
fixed price to be paid by Maxim and its subsidiaries of more than $100,000;
(xii) except to the extent so provided in its standard franchise agreements with
its franchisees, which provides for the sale of Maxim products at a sale price
aggregating more than $100,000; (xiii) except to the extent so provided in its
standard franchise agreements with its franchisees, which provides for the
distribution or sale of Maxim products by a distributor, dealer or sales
representatives; or (xiv) not the ordinary course of business.
A-10
<PAGE>
(b) Neither Maxim nor any of its subsidiaries is in violation of, or in
default under, any term or provision of (i) its Certificate of Incorporation or
its Bylaws; (ii) any loan agreement or other debt instrument; or (iii) in any
material respect, any other material contract, agreement or instrument to which
it is a party or by which it is bound. No other party to any material contract
with Maxim or its subsidiaries is known by Maxim to be in default or breach
thereof in any material respect.
ARTICLE V
REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS OF IMAGE
Image represents, warrants and covenants to Maxim as follows:
SECTION 5.1 ORGANIZATION AND QUALIFICATION. Image is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power to carry on its business as it is
now being conducted and to own the properties and assets it now owns; is duly
qualified or licensed to do business as a foreign corporation in good standing
in every jurisdiction where the failure to be so qualified would have a material
adverse effect on Image; and has heretofore delivered to Maxim complete and
correct copies of its Certificate of Incorporation and Bylaws, as currently in
effect.
SECTION 5.2 CAPITALIZATION. As of the date of this Agreement, the
authorized capital stock of Image consists of 20,000,000 shares of Image Common
Stock and 10,000,000 shares of $0.01 par value Preferred Stock ("Image Preferred
Stock"). As of May 30, 1996, 5,249,697 shares of Image Common Stock were issued
and outstanding, no shares of Image Preferred Stock were issued and outstanding,
and no shares were held in treasury. All issued and outstanding shares of Image
Common Stock are validly issued, fully paid and nonassessable. Except as
disclosed on Disclosure Schedule 5.2 hereof, there are no outstanding options,
warrants, rights, contracts, commitments, understandings or arrangements by
which Image is bound to issue any additional shares of its capital stock. As of
the date of this Agreement, and at the Effective Time, there are not, and will
not be any agreements for the purchase or acquisition by Image of any shares of
its capital stock or any obligation to pay dividends on such shares or to redeem
or retire such shares. Except as set forth on Disclosure Schedule 5.2, Image has
not granted nor agreed to grant any registration rights, including piggy-back
rights with respect to its capital stock to any person or entity. Neither Image,
nor to the knowledge of Image any shareholder of Image, has entered into any
agreements concerning the voting of any shares of its capital stock or any
agreements with respect to election of directors.
SECTION 5.3 SUBSIDIARIES. Except as set forth on Disclosure Schedule 5.3,
Image has no subsidiaries, nor does it own, directly or indirectly, any of the
outstanding capital stock or securities convertible into capital stock of any
corporation or have any direct or indirect equity or ownership interest in any
partnership, joint venture or other business enterprise.
SECTION 5.4 AUTHORIZATION. Image has full corporate power and authority to
enter into this Agreement and, subject to obtaining the necessary approval of
stockholders of Image, to carry out the transactions contemplated hereby.
Image's Board of Directors has duly authorized the execution and delivery of
this Agreement and, subject to obtaining the necessary approval of stockholders
of Image, the consummation of the transactions contemplated hereby. Except for
the approval of its stockholders, no other corporate proceedings on the part of
Image are necessary to authorize this Agreement and the transactions
contemplated hereby. Subject to the foregoing, this Agreement has been duly
executed and delivered, and constitutes the valid and binding agreement of
Image.
SECTION 5.5 NO VIOLATION. Except as set forth on Disclosure Schedule 5.5,
subject to the exceptions set forth in Section 5.6 hereof, neither the
execution, delivery and performance of this Agreement by Image nor the
consummation of the transactions contemplated hereby will constitute a breach or
violation of (i) Image's Certificate of Incorporation or Bylaws, or (ii) any
material agreement, instrument, license, franchise or permit to which Image is
subject or by which Image is bound, or (iii) any order, writ, injunction or
decree to which Image is subject or by which Image is bound, other
A-11
<PAGE>
than any breaches or violations that, either singly or in the aggregate, will
not have a material adverse effect on Image. To the best of Image's knowledge,
Image is not subject to any law, rule or regulation of any governmental
authority that would be violated by the execution, delivery or performance by
Image of this Agreement and the consummation of the transactions contemplated
hereby.
SECTION 5.6 GOVERNMENTAL AUTHORITIES. Except as referred to herein, or in
connection or in compliance with the Hart-Scott-Rodino Act, the Securities Act,
the Exchange Act, the rules of the NASDAQ-NMS, the corporation laws and state
securities or blue sky laws of the various states and the filing and recordation
of appropriate merger documents as required by the laws of the State of
Delaware, Image is not required to submit any notice, report or other filing to
any governmental authority in connection with the execution and delivery by
Image of this Agreement or the consummation of the transactions contemplated
hereby, other than those that are not material to Image.
SECTION 5.7 REPORTS AND FINANCIAL STATEMENTS. Image has previously
furnished, or (to the extent not yet due under the terms of the federal
securities laws and the regulations thereunder as of the date hereof) will
furnish Maxim with true and complete copies of Image's (i) Annual Reports on
Form 10-K for each of the two fiscal years in the period ended July 1, 1995, as
filed with the Commission, (ii) proxy statements relating to all meetings of its
stockholders (whether annual or special) during fiscal years 1994, 1995 and
1996, (iii) Quarterly Reports on Form 10-Q for each of the first three quarters
in the fiscal year ending June 29, 1996, as filed with the Commission, and any
subsequent Quarterly Reports on Form 10-Q filed by Image prior to the Effective
Time, and (iv) all other reports or registration statements filed by Image with
the Commission during or with respect to Image's previous three (3) fiscal
years. As of their respective dates, such reports and statements did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Since
July 1, 1995, there have been no material changes in the business of Image as
described in the Image Annual Report on Form 10-K for the fiscal year ended July
1, 1995, filed with the Commission, other than as disclosed in the Image
Quarterly Reports on Form 10-Q for the first three quarters in the fiscal year
ending June 29, 1996, as filed with the Commission. The financial statements of
Image included in such reports and separately furnished to Maxim by Image have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto) and fairly present the financial position of Image as at the
dates thereof and the results of its operations and changes in financial
position for the periods then ended, subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments and any other
adjustments described therein.
SECTION 5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as contemplated
or permitted by this Agreement, or as set forth on Disclosure Schedule 5.8, or
as described in the reports and financial statements provided as of the date of
this Agreement pursuant to Section 5.7, since March 30, 1996, there has not been
(a) any change in the business, results of operations, assets, financial
condition or prospects or in the manner of conducting the business of Image
other than changes in the ordinary course of business, none of which
individually or in the aggregate have had or is reasonably likely to have a
material adverse effect on the business, results of operations, assets,
financial condition or prospects of Image and other than changes occurring after
the date hereof, none of which individually or in the aggregate at the Effective
Time will have had or is reasonably likely to have a material adverse effect on
the business, results of operations, assets, financial condition or prospects of
Image; (b) any damage to, or destruction or loss of, the properties of Image,
whether covered by insurance or not, which has had or will have a material
adverse effect on the business, results of operations, assets, financial
condition or prospects of Image; or (c) any declaration, setting aside or
payment of any dividend (whether in cash, stock or property) in respect of the
capital stock of Image or any redemption or other acquisition of Image Common
Stock by Image.
SECTION 5.9 REGISTRATION STATEMENT; PROXY STATEMENT. None of the
information supplied by Image for inclusion in the Proxy Statement or the
Registration Statement will, in the case of the Proxy Statement or any
amendments thereof or supplements thereto, at the time of the meeting of the
A-12
<PAGE>
Image stockholders to be held in connection with the Merger, and at the
Effective Time, or, in the case of the Registration Statement, at the time it
becomes effective, at the time of the meeting of Image stockholders, and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations promulgated thereunder, as well as
any applicable blue sky laws (except that Image makes no representations and
warranties about information, including, but not limited to, financial
information contained in the Registration Statement and in the Proxy Statement
which has been supplied by Maxim).
SECTION 5.10 BROKERS AND FINDERS. Except with respect to the fees and
expenses to The Robinson-Humphrey Company, Inc. (the "Financial Advisor") paid
for financial advisory services related to the Merger, neither Image, any
subsidiary of Image nor any of their officers or directors has employed any
broker or finder or incurred any liability for any financial advisory, brokerage
or finder's fee or commissions in connection with the transactions contemplated
herein. A true and complete copy of the engagement letter between Image and the
Financial Advisor with respect to the Merger (and if contained in a separate
document, the fee arrangement with respect thereto) is attached as Disclosure
Schedule 5.10.
SECTION 5.11 COMPLIANCE WITH LAW. Except as set forth on Disclosure
Schedule 5.11, (a) the business of Image has not been and is not being conducted
in violation of any statute, law, ordinance, rule or regulation of any
governmental entity applicable to it or its business, properties or assets or by
which it is bound, including, without limitation, any law, ordinance, or
regulation relating to the protection of the environment or occupational health
and safety, the noncompliance with which would have a material adverse effect on
the business of Image; (b) Image has all permits, licenses, orders, approvals,
authorizations, concessions and franchises of any federal, state, local or
foreign governmental or regulatory body that are material to or necessary in the
conduct of its business; (c) all such permits, licenses, orders, approvals,
concessions and franchises are in full force and effect, and no proceeding is
pending, or overtly threatened to revoke or limit any of them; (d) Image is not
in violation of, or in default under, any term or provision of any judgment,
order, writ, injunction or decree of any court or any federal, state,
territorial, municipal or other commission, board or other administrative or
government agency or authority to which it is subject or by which it is bound;
and (e) as of the date hereof, no investigation or review by any governmental
entity with respect to Image is pending or overtly threatened, nor has any
governmental entity indicated to Image an intention to conduct the same.
SECTION 5.12 PROPERTIES. Image has good and marketable title to all the
properties and assets reflected as owned in the March 31, 1996 unaudited balance
sheet of Image, subject to no lien, mortgage, pledge, charge or encumbrance of
any kind except (i) those, if any, reflected in such financial statements, or
(ii) those which are not material in amount and do not materially and adversely
affect the use made and proposed to be made of such property by Image. Image
holds its leased properties under valid and binding leases, with such exceptions
as are not materially significant in relation to the business of Image. Image
owns or leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted.
SECTION 5.13 INTELLECTUAL PROPERTY RIGHTS. Image has sufficient
trademarks, trade names, patent rights, mask works, copyrights, licenses,
approvals and governmental authorizations to conduct its business as now
conducted; the expiration of any trademarks, trade names, patent rights, mask
works, copyrights, licenses, approvals or governmental authorizations would not
have a material adverse effect on the business, results of operations or
financial condition of Image and Image has no knowledge of any material
infringement by it of trademark, trade name rights, patent rights, mask works,
copyrights, licenses, trade secret or other similar rights of others, and there
is no claim being made against Image regarding trademark, trade name, patent,
mask work, copyright, license, trade secret or other infringement which could
have a material adverse effect on the business, results of operations or
financial condition of Image.
A-13
<PAGE>
SECTION 5.14 LITIGATION. (a) There is no suit, charge of infringement,
action or proceeding pending or, to the knowledge of Image, threatened against
or affecting Image which seeks to prevent the consummation of the Merger or the
transactions contemplated hereby; (b) there is no suit, charge of infringement,
action or proceeding (including those relating to environmental matters) pending
or, to the knowledge of Image, threatened against or affecting Image, which, in
the opinion of Image, is reasonably likely to result in a judgment or decree
having a material adverse effect on the business, results of operations, assets,
financial condition or prospects of Image and which has not been disclosed in
the periodic reports filed by Image with the Commission, (copies of which
reports have heretofore been made available to Maxim for its review); and (c)
there is no judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or arbitrator
outstanding against Image which has any such effect. Disclosure Schedule 5.14
summarizes all actions, suits and proceedings of Image pending, or to the
knowledge of Image threatened, as of the date hereof.
SECTION 5.15 TAXES. Except as set forth in Disclosure Schedule 5.15, Image
has timely filed with the appropriate taxing authorities all returns required to
be filed in respect of all taxes of Image and its subsidiaries, and has paid all
such taxes, including interest, penalties and additions in connection therewith
shown to have become due on such returns or for which a notice of assessment or
demand for payment has been received. Since March 30, 1996, no material tax
liability has been assessed, proposed to be assessed or accrued other than in
the ordinary course of business, and no material tax issues have been raised by
the Internal Revenue Service in connection with any of the tax returns referred
to above, and no waivers of statutes of limitations or extensions of time within
which to file any tax return or with respect to a tax assessment or deficiency
have been given or requested with respect to Image or any of its subsidiaries.
SECTION 5.16 EXECUTIVE COMPENSATION AND BENEFITS. Except as set forth on
Disclosure Schedule 5.16, Image's Proxy Statement for the 1995 Annual Meeting of
Shareholders of Image held on November 15, 1995 accurately describes all
material employment or consulting contracts or other arrangements as of such
date for the provision of benefits or compensation having a value in excess of
$60,000 per year for executive officers or former executive officers of Image
and its subsidiaries, and neither Image nor its subsidiaries have any commitment
to create any additional such contracts or arrangements or to amend any such
plans, contracts or arrangements so as to increase benefits thereunder. True and
complete copies of all such plans, contracts or arrangements have been delivered
to Maxim. Since July 1, 1995, there has not been any increase in the
compensation payable or to become payable by Image to its directors, officers,
key employees or consultants, or any adoption of or increase in any bonus,
insurance, pension or other employee benefit plan, payment or arrangement made
to, for or with any directors, officers, employees, or consultants except
increases occurring in the ordinary course of business or except as set forth in
this Section 5.16 and on Disclosure Schedule 5.16.
SECTION 5.17 COMPLIANCE WITH ERISA. All employee benefit plans (as such
term is defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") maintained by Image or its subsidiaries, and to
the best of Image's knowledge those to which it contributes, comply with the
applicable provisions of ERISA in all material respects and have so complied
during all prior periods during which such provisions were applicable; and Image
has complied in all material respects with the provisions of ERISA applicable to
it as an employer, plan sponsor, plan administrator or fiduciary of any such
employee benefit plan. Except as set forth on Disclosure Schedule 5.17, Image
does not maintain any pension or profit sharing plans or other benefit plans
(within the meaning of Section 3(3) of ERISA) and does not maintain any unfunded
post-retirement medical or other employee benefit plans. With respect to its
employee benefit plans, Image has made all contributions required of it by any
law (including, without limitation, ERISA) or contract. Image has maintained
sufficient funding to meet its obligations for all claims of current employees
and retired or inactive employees that may be filed for benefits under such
plans up to and including the Effective Time. The only employee benefit plans
(as such term is defined in Section 3(3) of ERISA) maintained by Image or to
which Image has contributed since August of 1993 are disclosed
A-14
<PAGE>
on Disclosure Schedule 5.17, and each such employee benefit plan has made a
timely filing of Form 5500 for each year that such plan has been in existence.
Image has not incurred any liability under Title IV of ERISA.
SECTION 5.18 ENVIRONMENTAL MATTERS. Except as set forth on Disclosure
Schedule 5.18:
(a) (i) Image and each of its subsidiaries holds and is in substantial
compliance with all environmental permits, certificates, licenses, approvals,
registrations and authorizations ("Environmental Permits") required under all
laws, rules and regulations in connection with their respective businesses and
all of such Environmental Permits are currently in effect, and (ii) Image has
substantially complied with all, and is not in violation of any, applicable
environmental statutes, rules, regulations, ordinances and orders of any
governmental entity, including those relating to Hazardous Substances.
(b) Image has made timely applications for renewals of all such
Environmental Permits that are scheduled to expire by December 31, 1996, except
for such Environmental Permits for which by their terms or by operation of law,
application for renewal need not be made more than 90 days before their
expiration.
(c) Image has received no notice that any notice, citation, summons, order
or consent decree has been issued, complaint filed, penalty assessed, or that
any investigation or review is pending or, to the best of Image's knowledge, has
been threatened by any governmental or other entity (i) with respect to any
alleged violation by Image or its subsidiaries of any environmental statute,
ordinance, rule, regulation or order of any governmental entity, (ii) with
respect to any alleged failure by Image or its subsidiaries to have any
Environmental Permit, certificate, license, approval, registration or
authorization required in connection with their respective businesses, or (iii)
with respect to any generation, use, possession, treatment, storage, recycling,
transportation or disposal (collectively "management" and as used in verb form,
"manage") of any Hazardous Substances by Image or its subsidiaries.
(d) Image has not received any request for information, notice of claim,
demand or notification that it or any of its subsidiaries is or may be
potentially responsible under CERCLA, or any similar law of any governmental
entity with respect to any investigation or clean-up of any threatened or actual
release of any Hazardous Substance.
(e) Except as set forth on Disclosure Schedule 5.18, to the best of Image's
knowledge, no PCBs or asbestos-containing materials are or have been present at
any property now or previously owned, operated or leased by Image or its
subsidiaries. Except as set forth on Disclosure Schedule 5.18, there are no
underground storage tanks, active or abandoned, or above-ground storage tanks or
lagoons or surface impoundments at any property now owned by Image or to the
knowledge of Image at any property now leased or operated by Image.
(f) To the best of Image's knowledge, no Hazardous Substance managed by
Image or its subsidiaries has come to be located at any site which is listed or
proposed for listing under CERCLA, CERCLIS or on any similar state list, or
which is the subject of federal, state or local enforcement actions or other
investigations which may lead to claims against Image or the Surviving
Corporation for clean-up costs, remedial work, damages to natural resources or
for personal injury claims, including, but not limited to, claims under CERCLA.
(g) There are no environmental liens on any properties owned by Image or to
the knowledge of Image on any property leased by Image, and no government
actions have been taken or are in the process or pending which would subject any
of such properties to such liens.
(h) Except as listed on Disclosure Schedule 5.18 and heretofore provided to
Maxim, there have been no environmental inspections, investigations, studies,
audits, tests, reviews or other analyses conducted in relation to any property
or business now or previously owned, operated, or leased by Image or its
subsidiaries.
(i) There are no actions, suits, claims, arbitration proceedings, or
complaints pending or, to the knowledge of Image, threatened or under
consideration by any governmental entity, community,
A-15
<PAGE>
citizen or other entity against Image or any of its subsidiaries relating to
environmental protection with respect to or affecting its or their properties or
assets, nor does Image have reason to believe that any such actions, suits,
claims, or complaints will be brought against it.
SECTION 5.19 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the
extent reflected or reserved against in the March 30, 1996 unaudited balance
sheet of Image, and subject to such year-end adjustments as would be appropriate
if such date were the end of Image's fiscal year, at March 30, 1996, Image did
not have any material liability or obligation, whether accrued, absolute, known
or unknown, contingent or otherwise. Except as set forth on Disclosure Schedule
5.19, since March 30, 1996, Image has not incurred any liability except in the
ordinary course of its business and except in connection with the transactions
contemplated hereby; and no such liability incurred by Image in the ordinary
course of its business has been or will be materially adverse to the business or
financial condition of Image.
SECTION 5.20 FAIRNESS OPINION. Image has received from the Financial
Advisor oral advice as of the date hereof, and expects to receive from the
Financial Advisor a written opinion, satisfactory to Image, dated no later than
five business days following the date of execution of this Agreement by Image
and Maxim, to the effect that the consideration to be received by the
stockholders of Image hereunder is fair to the stockholders of Image as well as
the Financial Advisor's consent to the inclusion of such opinion in the Proxy
Statement (and will provide a true and complete copy of such opinion and consent
to Maxim).
SECTION 5.21 STATUTORY PROVISIONS; APPRAISAL RIGHTS. None of the
provisions of Sections 144 or 203 of the Delaware General Corporation Law apply
to this Agreement, the Certificate of Merger, the Merger or to the transactions
contemplated hereby. The entry into and performance by Image of this Agreement
and consummation of the transactions contemplated hereby will not give rise to
appraisal rights or dissenters rights in favor of any holder of shares of Image
Common Stock (or any holder of any option, warrant or other right to acquire
shares of Image Common Stock), whether pursuant to the terms of Section 262 of
the Delaware General Corporation Law or pursuant to the terms of the Certificate
of Incorporation or By-Laws of Image or of any shareholders agreement or other
contract, agreement or instrument to which Image is a party or by which it is
bound.
SECTION 5.22 VOTE. The affirmative vote of a majority of the votes that
holders of the outstanding shares of Image Common Stock are entitled to cast is
the only vote the holders of Image's capital stock necessary to approve this
Agreement and the Certificate of Merger and the transactions contemplated hereby
and thereby.
SECTION 5.23 CAPITAL EXPENDITURE PLAN. Image has previously delivered to
Maxim a true, complete and correct copy, certified as such by the chief
executive officer of Image, of Image's 1997 Capital Expenditure Plan (the
"Capital Expenditure Plan") as adopted by the Board of Directors of Image and as
presently implemented and in effect, as well as all additional financial data
and other information necessary to explain the manner, extent and degree of
Image's implementation of such Capital Expenditure Plan to the date hereof, as
well as the anticipated implementation of such plan to the anticipated date of,
and subsequent to, the Effective Time.
SECTION 5.24 CONTRACTS. (a) Except as set forth in Disclosure Schedule
5.24, Image is not a party to or bound by any written contract, commitment or
arrangement (i) for the employment of any executive officer; (ii) with any labor
union; (iii) for the purchase of materials, supplies or equipment in excess of
its requirements for normal operating inventories; (iv) in the nature of a
confidentiality agreement, royalty or license or an agreement for the
acquisition of intangible property rights that is material to the conduct of the
business of Image; (v) with a governmental agency (or subcontractor) other than
agreements for the sale of standard products; (vi) for the purchase of products
from a single-source supplier; (vii) in the nature of a non-competition
agreement which in any way restricts the right of Image to conduct business;
(viii) in the nature of a management agreement; (ix) for any quantity discount,
volume purchase, rebate or bill back sales arrangement that will continue after
the Effective Time and is material to the conduct of the business of Image; (x)
which is not in the ordinary
A-16
<PAGE>
course of business and cannot be performed within one (1) calendar year; (xi)
which is not in the ordinary course of business and provides for future
aggregate annual payments by Image or a fixed price to be paid by Image of more
than $100,000; (xii) which provides for the sale of Image products at a sale
price aggregating more than $100,000; (xiii) which provides for the distribution
or sale of Image products by a distributor, dealer or sales representatives; or
(xiv) not the ordinary course of business.
(b) Image is not in violation of, or in default under, any term or provision
of (i) its Certificate of Incorporation or its Bylaws; (ii) any loan agreement
or other debt instrument; or (iii) in any material respect, any other material
contract, agreement or instrument to which it is a party or by which it is
bound. No other party to any material contract with Image is known by Image to
be in default or breach thereof in any material respect.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES REGARDING THE SUBSIDIARY
Maxim and the Subsidiary represent and warrant to Image as follows:
SECTION 6.1 ORGANIZATION. The Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is a wholly owned subsidiary of Maxim. Subsidiary has not and, at the
Effective Time, the Subsidiary will not have engaged directly or through any
predecessor or subsidiary in any business or activities of any type or kind
whatever or entered into any agreements or arrangements with any person or
entity and will not be subject to or bound by any obligation or undertaking
which is not contemplated by this Agreement or referred to in the Proxy
Statement.
SECTION 6.2 CAPITALIZATION. The authorized capital stock of the Subsidiary
will consist of 100 shares of Common Stock, $.01 par value, all of which have
been validly issued and outstanding, fully paid and nonassessable and are owned
by Maxim free and clear of all liens, claims and encumbrances.
SECTION 6.3 AUTHORITY RELATIVE TO THIS AGREEMENT. The Subsidiary has full
corporate power and authority to carry out the transactions contemplated hereby.
The consummation of the transactions contemplated hereby have been duly
authorized by Subsidiary's Board of Directors and approved by Maxim as its sole
stockholder, and no other corporate proceedings on the part of the Subsidiary
are necessary to authorize the transactions contemplated hereby.
ARTICLE VII
COVENANTS
SECTION 7.1 COVENANTS OF IMAGE. During the period commencing on the date
hereof and continuing until the Effective Time, Image agrees (except as
expressly contemplated by this Agreement or to the extent that Maxim shall
otherwise consent in writing) that:
(a) Image will carry on its businesses in, and only in, the regular and
ordinary course in substantially the same manner as heretofore conducted,
use its best efforts to preserve and protect the businesses, rights,
properties and assets of Image and, to the extent consistent with such
businesses, use its best efforts to preserve intact its present business
organization, keep available the services of its present officers and
employees and preserve its relationships with customers, suppliers and
others having business dealings with it. Image agrees that from and after
the date hereof, through the Effective Time, Image will not, without the
prior consent of Maxim, (i) amend its Certificate of Incorporation or
Bylaws, except as contemplated by this Agreement, (ii) terminate or amend in
any manner which would directly or indirectly materially change the benefits
under any employee benefit plan, fund or arrangement, (iii) mortgage, pledge
or subject to lien, restriction or other encumbrance any of the material
property, business or assets, tangible or intangible, of Image, except in
the ordinary course of its business as presently
A-17
<PAGE>
conducted, (iv) sell, transfer, lease or otherwise dispose of assets, except
in the ordinary course of its business as presently conducted, or (v) make
any change in accounting method or annual accounting period.
(b) Image will use its best efforts to comply promptly with all
requirements that federal or state law may impose on Image with respect to
the Merger and promptly cooperate with and furnish information to Maxim in
connection with any such requirements imposed upon Maxim or on the
Subsidiary in connection with the Merger.
(c) Image will use its best efforts to obtain (and cooperate with Maxim
in obtaining) at the earliest practicable date and prior to the Effective
Time, any consent, authorization or approval of, or any exemption by, any
governmental authority or agency, or material third party, required to be
obtained or made by Image (or by Maxim) in connection with the Merger or the
taking of any action necessary to the transactions contemplated hereby or
thereby.
(d) Image will afford to Maxim and to Maxim's accountants, counsel and
other representatives, full access, during normal business hours during the
period prior to the Effective Time or the earlier termination of this
Agreement, to all of its properties, books, contracts, commitments and
records (including, with the consent of such auditors, which consent Image
shall use its best efforts to obtain, the working papers of the independent
auditors in connection with their audits or other services performed for
Image) and, during such period, Image shall furnish promptly to Maxim (i) a
copy of each report, schedule and other document filed or received by it
during such period pursuant to the requirements of federal and state
securities laws; and (ii) all other information concerning its business,
properties and personnel as Maxim may reasonably request. Such investigation
shall not affect the representations and warranties of Image contained or
provided for herein.
(e) Image will promptly advise Maxim orally and in writing of any change
in the business, results of operations, financial condition, assets,
liabilities or prospects of Image that is or may be materially adverse to
Image. Image will promptly advise Maxim if, at any time before the
Registration Statement becomes effective or the Effective Time, the
Registration Statement or the Proxy Statement, as the same relate to Image,
contains an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading. In such event, Image will promptly provide Maxim with the
information needed to correct such misstatement or omission.
(f) If any action, suit, proceeding or investigation of the nature
specified in Sections 9.1(c) and 9.2(c) hereof is commenced before the
Effective Time, Image agrees to cooperate with Maxim and the Subsidiary and
to use its best efforts to defend against the same and respond thereto,
unless the Board of Directors of Image has made the determination, pursuant
to Section 9.2(c) hereof, in its good faith judgment, that it is not in the
best interests of the shareholders of Image to contest such action, in which
event prompt written notice of such determination shall be delivered to
Maxim.
(g) Except as set forth in Section 5.2, there will be no outstanding
options, warrants, rights, contracts, commitments, understandings or
arrangements by which Image is bound to issue additional shares of its
capital stock.
(h) Image will not take any action the taking of which, or omit to take
any action the omission of which, would cause any of the representations and
warranties of Image herein to fail to be true and correct in all respects as
of the date of such action or omission as though made at and as of the date
of such action or omission, except as otherwise specifically contemplated by
this Agreement.
A-18
<PAGE>
(i) Image will timely file all reports required to be filed by it with
the Commission during such period pursuant to the reporting requirements to
the Exchange Act and the rules and regulations thereunder.
(j) Image will fund any obligations to its employee stock ownership or
stock purchase plans, if any, required by ERISA or the terms of such plans.
SECTION 7.2 COVENANTS OF MAXIM. During the period commencing on the date
hereof and continuing until the Effective Time, Maxim agrees (except as
expressly contemplated by this Agreement or to the extent that Image shall
otherwise consent in writing) that:
(a) Maxim will carry on its businesses in, and only in, the regular and
ordinary course in substantially the same manner as heretofore conducted,
use its best efforts to preserve and protect the businesses, rights,
properties and assets of Maxim and, to the extent consistent with such
businesses, use its best efforts to preserve intact its present business
organization, keep available the services of its present officers and
employees and preserve its relationships with customers, suppliers and
others having business dealings with it. Maxim agrees that from and after
the date hereof, through the Effective Time, Maxim will not, without the
prior consent of Image, (i) amend its Certificate of Incorporation or
Bylaws, except as contemplated by this Agreement, (ii) terminate or amend in
any manner which would directly or indirectly materially change the benefits
under any employee benefit plan, fund or arrangement, (iii) mortgage, pledge
or subject to lien, restriction or other encumbrance property, business or
assets, tangible or intangible, of Maxim or its subsidiaries, except in the
ordinary course of their respective businesses, as presently conducted, (iv)
sell, transfer, lease or otherwise dispose of assets except in the ordinary
course of their respective businesses, as presently conducted, or (v) make
any change in accounting method or annual accounting period.
(b) If any action, suit, proceeding or investigation of the nature
specified in Sections 9.1(c) and 9.2(c) hereof is commenced before the
Effective Time, Maxim agrees to cooperate with Image, and use its best
efforts to defend against the same and respond thereto, unless the Board of
Directors of Maxim has made the determination, pursuant to Section 9.1(c)
hereof, in its good faith judgment, that it is not in the best interest of
the shareholders of Maxim to contest such action, in which event prompt
written notice of such determination shall be delivered to Image.
(c) Maxim will use its best efforts to comply promptly with all
requirements which federal or state law may impose on it with respect to the
Merger and will promptly cooperate with and furnish information to Image in
connection with any such requirements imposed upon Image in connection with
the Merger.
(d) Maxim will use its best efforts to obtain (and to cooperate with
Image in obtaining) at the earliest practicable date and prior to the
Effective Time, any consent, authorization or approval of, or any exemption
by, any governmental authority or agency, or other third party, required to
be obtained or made by Maxim (or by Image) in connection with the Merger or
the taking of any action necessary to the transactions contemplated hereby
or thereby.
(e) Maxim will afford to Image and to Image's accountants, counsel and
other representatives, full access, during normal business hours during the
period prior to the Effective Time or the earlier termination of this
Agreement, to all of its properties, books, contracts, commitments and
records (including, with the consent of such auditors, which consent Maxim
will use its best efforts to obtain, the working papers of the independent
auditors in connection with their audits or other services performed for
Maxim) and, during such period, Maxim shall furnish promptly to Image (i) a
copy of each report, schedule and other document filed or received by it
during such period pursuant to the requirements of federal and state
securities laws; and (ii) all other
A-19
<PAGE>
information concerning its business, properties and personnel as Image may
reasonably request. Such investigation shall not affect the representations
and warranties of Maxim contained or provided for herein.
(f) Maxim will promptly advise Image orally and in writing of any change
in the business, results of operations, financial condition, assets,
liabilities or prospects of Maxim which is or may be materially adverse to
Maxim and its subsidiaries taken as a whole. Maxim will promptly advise
Image if, at any time before the Registration Statement becomes effective or
the Effective Time, the Registration Statement or the Proxy Statement, as
the same relate to Maxim and the Subsidiary, contains an untrue statement of
a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements contained therein, in the light
of the circumstances under which they were made, not misleading.
In such event or in the event Maxim receives supplemental information
from Image pursuant to Section 7.1(e) hereof, Maxim will prepare a
supplement or amendment to the Registration Statement and the Proxy
Statement which corrects any misstatements or omissions contained therein
and furnish to Image such number of copies of such supplements or amendments
as may be required for distribution to Image's stockholders.
(g) Maxim will not take any action the taking of which, or omit to take
any action the omission of which, would cause any of the representations and
warranties of Maxim herein to fail to be true and correct in all respects as
of the date of such action or omission as though made at and as of the date
of such action or omission, except as otherwise specifically contemplated by
this Agreement.
(h) Maxim will timely file all reports required to be filed by it with
the Commission during such period pursuant to the reporting requirements of
the Exchange Act and the rules and regulations thereunder.
(i) Maxim will use its best efforts to obtain a commitment from a bank
lender or consortium thereof (collectively, the "Lender") to extend to
Maxim, following the effectuation of the Merger, a credit facility in
principal amount not less than $120,000,000 (the "Credit Facility"), a
permitted use of the proceeds of which is the payment in full of the
indebtedness of Image to its bank lenders under its currently outstanding
line of credit.
(j) Except as set forth in Section 4.2, there will be no outstanding
options, warrants, rights, contracts, commitments, understandings or
arrangements by which Maxim is bound to issue additional shares of its
capital stock.
(k) Maxim will fund any obligations to its employee stock ownership or
stock purchase plans, if any, required by ERISA or the terms of such plans.
ARTICLE VIII
ADDITIONAL AGREEMENTS
SECTION 8.1 CONFIDENTIALITY; STANDSTILL. (a) As a condition to each party
hereto furnishing to the other party hereto or to their directors, officers,
employees, lenders, agents and advisors (collectively, "Representatives")
financial and other information that has not heretofore been made generally
available on a nonconfidential basis, each party hereto agrees to treat such
information furnished to it (both orally and in writing) before or after the
date hereof by or on behalf of the other party or its Representatives and all
notes, analyses, compilations, studies, interpretations and other
A-20
<PAGE>
material prepared by it or its Representatives containing or based in whole or
in part on any such information furnished by or on behalf of the other party or
any of its Representatives (collectively, the "Evaluation Material"), as
follows:
(1) Each party hereto recognizes and acknowledges the competitive value
and confidential nature of the Evaluation Material and the damage that could
result to the other party if information contained therein is disclosed to
any third party.
(2) Each party hereto agrees that the Evaluation Material will be used
solely for the purpose of evaluating the transaction contemplated hereby.
Each party hereto agrees that it will not disclose any of the Evaluation
Material to any third party without the prior written consent of the other
party hereto; provided, however, that any such information may be disclosed
to its Representatives who need to know such information for the purpose of
evaluating the transaction contemplated herein and who agree to keep such
information confidential and to be bound by the provisions of this Section
8.1(a) to the same extent as if they were parties hereto.
(3) In the event that a party hereto or its Representatives are
requested in any proceeding to disclose any Evaluation Material, it will
give the other party hereto prompt notice of such request so that the other
party hereto make seek an appropriate protective order. If, in the absence
of a protective order, the party or its Representatives are nonetheless
compelled by law to disclose such Evaluation Material, it or its
Representatives, as the case may be, may disclose such information in such
proceeding without liability hereunder; provided, however, that it gives the
other party hereto written notice of the information to be disclosed as far
in advance of its disclosure as is practicable and, upon the request of the
other party and at its expense, use its best efforts to obtain assurances
that confidential treatment will be accorded to such information.
(4) In the event that the transaction contemplated by this Agreement is
not consummated, each party will promptly redeliver to the other party all
copies of all Evaluation Material furnished to it or its Representatives and
will destroy all analyses, compilations, studies and other material based in
whole or in part on such material prepared by or on behalf of such party.
(5) Each party and its Representatives shall have no obligation
hereunder with respect to any information in the Evaluation Material
furnished by the other party or its Representatives to the extent that such
information (a) has been made public other than by the acts of the recipient
party or acts of its Representatives in violation of this Agreement or (b)
becomes available to the recipient party on a nonconfidential basis from a
source that is entitled to disclose it on a nonconfidential basis.
(6) Each party hereto agrees that money damages would not be a
sufficient remedy for any breach of the agreements set forth in this Section
8.1(a) by it or its Representatives, and that, in addition to all other
remedies, the other party hereto shall be entitled to specific performance
and injunctive or other equitable relief as a remedy for any such breach,
and each party hereto further agrees to waive, and to use its best efforts
to cause its Representatives to waive, any requirements for the securing or
posting of any bond in connection with such remedy. Each party hereto agrees
to be responsible for any breach of its agreement set forth in this Section
8.1(a) by any of its Representatives.
(b) In the event of termination of this Agreement, for any reason, prior to
the Effective Time, then until the expiration of eighteen (18) months from the
date of such termination, none of Maxim, its affiliates (as defined in Rule 405
of the Securities Act of 1933, hereinafter "Affiliates") or those of Maxim's
Representatives to whom the Evaluation Material has been disclosed or who have
been made aware of the discussions between the parties concerning a possible
transaction, shall, without the prior written consent of the Board of Directors
of Image, (i) in any manner acquire, agree to acquire, or make any proposal to
acquire, directly or indirectly, any voting securities of Image, or any rights
or options to acquire such ownership, or to purchase, directly or indirectly, a
material portion of the assets of Image; provided that the restriction contained
in this clause (i) shall apply only to Maxim, its
A-21
<PAGE>
subsidiaries, its executive officers and the members of the Board of Directors
of Maxim; (ii) propose to enter into, directly or indirectly, any merger or
business combination involving Image; (iii) make, or in any way participate,
directly or indirectly, in any solicitation of "proxies" (as such term is used
in Regulation 14A under the Securities Exchange Act of 1934, as amended) to vote
or seek to advise or influence any person with respect to the voting of any
voting securities of Image; (iv) form, join or in any way participate in a
"group" (within the meaning of Section 13(d) of the Securities Exchange Act of
1934) with respect to any voting securities of Image; (v) otherwise act, alone
or in concert with others, to seek to control or influence the management, Board
of Directors or policies of Image; or (vi) publicly disclose any intention, plan
or arrangement inconsistent with the foregoing.
(c) In the event of termination of this Agreement, for any reason, prior to
the Effective Time, then until the expiration of eighteen (18) months from the
date of such termination, none of Image, its affiliates (as defined in Rule 405
of the Securities Act of 1933, hereinafter "Affiliates") or those of Image's
Representatives to whom Evaluation Material has been disclosed or who have been
made aware of the discussions between the parties concerning a possible
transaction, shall, without the prior written consent of the Board of Directors
of Maxim, (i) in any manner acquire, agree to acquire, or make any proposal to
acquire, directly or indirectly, any voting securities of Maxim, or any rights
or options to acquire such ownership or to purchase, directly or indirectly, a
material portion of the assets of Maxim, provided that the restriction contained
in this clause (i) shall apply only to Image, its subsidiaries, its executive
officers, and the members of the Board of Directors of Image; (ii) propose to
enter into, directly or indirectly, any merger or business combination involving
Maxim; (iii) make, or in any way participate, directly or indirectly, in any
solicitation of "proxies" (as such term is used in Regulation 14A under the
Securities Exchange Act of 1934, as amended) to vote or seek to advise or
influence any person with respect to the voting of any voting securities of
Maxim; (iv) form, join or in any way participate in a "group" (within the
meaning of Section 13(d) of the Securities Exchange Act of 1934) with respect to
any voting securities of Maxim; (v) otherwise act, alone or in concert with
others, to seek to control or influence the management, Board of Directors or
policies of Maxim; or (vi) publicly disclose any intention, plan or arrangement
inconsistent with the foregoing.
(d) The parties agree that the covenants contained in Sections 8.1(b) and
8.1(c) shall be for the respective benefit of Image and Maxim, and each such
respective party shall be entitled to enforce such respective covenant. The
parties also agree that money damages would not be a sufficient remedy for any
violation of the terms of such covenants, and, accordingly, that the respective
enforcing party shall be entitled to equitable relief, including injunctive
relief and specific performance in the event of any breach of the provisions of
such covenants, in addition to all other remedies available at law or in equity.
SECTION 8.2 REGISTRATION STATEMENT. Maxim shall prepare at its expense and
file as promptly as practicable hereafter with the Commission the Registration
Statement with respect to the Maxim Common Stock issuable pursuant to the
Merger, which Registration Statement shall include the Proxy Statement (and
which Proxy Statement, insofar as it relates to the meeting of shareholders of
Image for approval of the Merger, shall be reasonably acceptable to Image in all
respects), and shall use all reasonable efforts to have the Registration
Statement declared effective by the Commission as promptly as practicable. Maxim
shall also take any action required to be taken under any applicable state blue
sky or securities laws in connection with the issuance of the Maxim Common Stock
to be issued as set forth in this Agreement. Image shall furnish all information
concerning Image and the holders of Image Common Stock as may be reasonably
requested in connection with the issuance of the Maxim Common Stock to be issued
as set forth in this Agreement.
SECTION 8.3 APPROVAL OF STOCKHOLDERS. Each of Maxim and Image shall cause
a meeting of its respective stockholders to be duly called and held on or before
September 15, 1996, or as soon thereafter as practicable following effectiveness
of the Registration Statement (and allowing a reasonable period of time to
solicit proxies) for the purpose of approving the Merger, this Agreement and all
actions contemplated hereby which require the approval of such corporation's
respective stockholders. Image will, through its Board of Directors, consistent
with their fiduciary duties, recommend to
A-22
<PAGE>
Image's stockholders, and use its best efforts to obtain approval by the
stockholders of Image of the transactions contemplated by this Agreement. Maxim
will, through its Board of Directors, consistent with their fiduciary duties,
recommend to Maxim's stockholders, and use its best efforts to obtain approval
by the stockholders of Maxim of the transactions contemplated by this Agreement.
SECTION 8.4 NO SOLICITATION. (a) From and after the date of this
Agreement until the Effective Time, or the earlier termination of this
Agreement, Image and its directors, officers and employees will not, and Image
will use its best efforts to cause its representatives, investment bankers,
agents and affiliates not to, directly or indirectly, (i) initiate, solicit or
cooperate with submission of any inquiries, proposals or offers by any person,
entity or group (other than Maxim, the Subsidiary and their affiliates, agents
and representatives) relating to any Acquisition Proposal (as hereinafter
defined), or (ii) participate in any discussions or negotiations with, or
disclose any non-public information concerning Image to, or afford any access to
the properties, books or records of Image to, or otherwise assist, facilitate or
cooperate with, or enter into any agreement or understanding with, any person,
entity or group (other than Maxim, the Subsidiary and their affiliates, agents
and representatives) in connection with any Acquisition Proposal. For the
purposes of this Section 8.4(a), an "Acquisition Proposal" shall mean any
proposal relating to the possible acquisition of (i) Image (whether by way of
merger or otherwise), (ii) all or a substantial portion of the assets of Image
or (iii) a substantial portion of the equity securities of Image (except by
conversion or exercise of currently outstanding securities). In addition,
subject to the other provisions of this Section 8.4, from and after the date of
this Agreement until the Effective Time, Image and its directors, officers and
employees will not, and Image will use its best efforts to cause its
representatives, investment bankers, agents and affiliates not to, directly or
indirectly, make or authorize any statement, recommendation or solicitation in
support of any Acquisition Proposal made by any person, entity or group (other
than Maxim and the Subsidiary). Image will immediately cease any existing
discussions, negotiations or other activities with any parties with respect to
any of the foregoing.
(b) From and after the date of this Agreement until the Effective Time or
the earlier termination of this Agreement, Maxim and its subsidiaries and their
respective directors, officers and employees will not, and Maxim will use its
best efforts to cause their respective representatives, investment bankers,
agents and affiliates not to, directly or indirectly, (i) initiate, solicit or
cooperate with submission of any inquiries, proposals or offers by any person,
entity or group (other than Image and its affiliates, agents and
representatives) relating to any Acquisition Proposal (as hereinafter defined),
or (ii) participate in any discussions or negotiations with, or disclose any
non-public information concerning Maxim or any of its subsidiaries to, or afford
any access to the properties, books or records of Maxim or any of its
subsidiaries to, or otherwise assist, facilitate or cooperate with, or enter
into any agreement or understanding with, any person, entity or group (other
than Image and its affiliates, agents and representatives) in connection with
any Acquisition Proposal. For the purposes of this Section 8.4(b) an
"Acquisition Proposal" shall mean any proposal relating to the possible
acquisition (i) of Maxim (whether by way of merger or otherwise), (ii) of all or
a substantial portion of the assets of Maxim or (iii) of a substantial portion
of the equity securities of Maxim (except by conversion or exercise of currently
outstanding securities) or (iv) by Maxim of substantially all the securities or
assets of a business a substantial part of which is the manufacture of carpet or
similar floor covering, PROVIDED THAT none of the provisions of clauses (ii),
(iii) or (iv) of the sentence shall prohibit any payment of cash or issuance of
securities by Maxim in a transaction not otherwise prohibited by clause (iv) and
involving the acquisition of a business which, considered as if it were a
subsidiary of Maxim, would not be a "significant subsidiary" or defined in
Registration S-X of the Securities and Exchange Commission. In addition, subject
to the other provisions of this Section 8.4, from and after the date of this
Agreement until the Effective Time, Maxim and its subsidiaries and their
respective directors, officers and employees will not, and Maxim will use its
best efforts to cause their respective representatives, investment bankers,
agents and affiliates not to, directly or indirectly, make or authorize any
statement, recommendation or solicitation in support of any Acquisition Proposal
made by and person, entity or group (other than Image). Maxim will immediately
cease any existing discussions, negotiations or other activities with any
parties with respect to any of the foregoing.
A-23
<PAGE>
(c) Notwithstanding the provisions of paragraphs (a) and (b) above, Maxim or
Image, as applicable (such entity hereinafter called "Target") may, to the
extent the Board of Directors of Target determined in good faith, after
consultation with outside legal counsel, that the Board's fiduciary duties under
applicable law require it to do so, participate in discussions or negotiations
with, and, subject to the requirements of paragraph (d) below, furnish
information to any person, entity or group after such person, entity or group
shall have delivered to Target in writing an unsolicited bona fide Acquisition
Proposal (as defined in subsection (a) or (b) hereof, as applicable) which is
not subject to any financing contingency and which the Board of Directors of
Target in its good faith reasonable judgment determines, after consultation with
its principal advisors in connection with the transactions contemplated herein,
would upon consummation thereof result in a transaction more favorable to the
stockholders of Target than the transactions contemplated herein and for which
financing, to the extent required, is then committed or which, in the good faith
reasonable judgment of the Board of Directors of Target (based upon the advice
of its principal advisors in connection with the transactions contemplated
herein), is reasonably capable of being financed by such person, entity or group
and which is probable to be consummated (a "Superior Proposal"). In addition,
notwithstanding the provisions of paragraph (a) above, in connection with a
possible Acquisition Proposal (as defined in subsection (a) or (b) hereof, as
applicable), Target may refer any third party to this Section 8.4 or make a copy
of this Section 8.4 available to a third party.
(d) A Target may furnish information with respect to a Superior Proposal
only if the Target (i) notifies the other party hereto (Maxim or Image, as
applicable) of the information proposed to be disclosed reasonably concurrently
with the disclosure thereof, (ii) first complies with the provisions of
paragraph (f) below and (iii) provides such information pursuant to a
confidentiality agreement at least as restrictive (but with provisions
specifically permitting compliance with Section 8.4(f) hereof) as the provisions
of Section 8.1(a) hereof.
(e) In the event, a Target receives a Superior Proposal, nothing contained
in this Agreement shall prevent the Board of Directors of such Target from
approving such Superior Proposal or recommending such Superior Proposal to its
stockholders, if the Board determines reasonably and in good faith, after
consultation with outside legal counsel, that such action is required by its
fiduciary duties under applicable law; in such case, the Board may amend or
withdraw its approval or recommendation of the Merger. Subject to the right of
termination set forth in Section 10.1(c)(iii) or 10.1(d)(iii), as applicable,
except to the extent expressly set forth in this Section 8.4, nothing shall
relieve the Target from complying with all other terms of this Agreement.
(f) A Target will (i) notify the other party hereto (Maxim or Image, as
applicable) immediately if any inquiry or proposal is made or any information or
access is requested in connection with an Acquisition Proposal or potential
Acquisition Proposal and (ii) immediately communicate to such other party the
terms and conditions of any such Acquisition Proposal or potential Acquisition
Proposal or inquiry and the identity of the offeror or potential offeror.
(g) Nothing contained in this Section 8.4 shall prevent a Target or its
Board of Directors from complying with the provisions of Rule 14e-2(a) and 14d-9
promulgated under the Exchange Act.
SECTION 8.5 IDENTIFICATION OF AFFILIATES. Image shall deliver to Maxim a
letter identifying all persons who are, at the time the Merger is submitted to a
vote of the stockholders of Image, "affiliates" of Image for purposes of Rule
145 under the Securities Act.
SECTION 8.6 ISSUANCE OF SHARES. Maxim shall, as and when required by the
provisions hereof, issue and deliver to the Exchange Agent certificates
representing the number of shares of Maxim Common Stock to be issued to the
Image stockholders in the Merger and sufficient funds to provide for the
fractional share cash payments to be paid to any Image stockholders in the
Merger.
SECTION 8.7 EXPENSES; TERMINATION FEE. (a) Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such expenses.
A-24
<PAGE>
(b) If: (1) this Agreement is terminated by Maxim pursuant to Section
10.1(c)(i); or (2) this Agreement is terminated by Image pursuant to Section
10.1(d)(iii) hereof; or (3)(i) Image (or any of the persons named in such
subsection acting on behalf of Image) commits a breach of Section 8.4 hereof, or
(ii) a tender or exchange offer for any shares of capital stock of Image or any
business combination of the type described in Section 8.4 shall have been made
or publicly proposed to be made by any person, entity or group (as that term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended)
other than Maxim, and either (A) the Board of Directors of Image shall have
announced a position in favor of such tender or exchange offer or business
combination, or (B) in the case of a tender or exchange offer, the offerer
successfully acquires pursuant thereto shares representing more than 51% of the
total outstanding voting stock of Image; then Image shall pay to Maxim a
termination fee of $3,000,000. Such payment is intended by the parties to
constitute liquidated damages and not a penalty.
(c) If: (1) this Agreement is terminated by Image pursuant to Section
10.1(d)(i); or (2) this Agreement is terminated by Maxim, pursuant to Section
10.1(c)(iii); or if (3)(i) Maxim (or any of the persons named in such subsection
acting on behalf of Maxim) commits a breach of Section 8.4 hereof, or (ii) a
tender or exchange offer for any shares of capital stock of Maxim or any
business combination of the type described in Section 8.4 shall have been made
or publicly proposed to be made by any person, entity or group (as that term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended)
other than Image, and either (A) the Board of Directors of Maxim shall have
announced a position in favor of such tender or exchange offer or business
combination, or (B) in the case of a tender or exchange offer, the offerer
successfully acquires pursuant thereto shares representing more than 51% of the
total outstanding voting stock of Maxim; then Maxim shall pay to Image a
termination fee of $3,000,000. Such payment is intended by the parties to
constitute liquidated damages and not a penalty.
SECTION 8.8 HART-SCOTT-RODINO FILING. Within ten (10) business days after
the execution hereof, Image and Maxim shall file Notification and Report Forms
under the Hart-Scott-Rodino Act with the Federal Trade Commission and the
Antitrust Division of the Department of Justice.
SECTION 8.9 STOCKHOLDER COMMUNICATION. From and after the date hereof,
neither Image nor Maxim will, with respect to the transactions contemplated
hereby, issue any press release or make any public statements or mail any
communications or letters to their respective stockholders generally (except
Maxim's and Image's annual and quarterly reports to stockholders) without the
prior approval of the other party and its counsel, except as required by law,
the rules of the Nasdaq-NMS or the rules of the National Association of
Securities Dealers, Inc.
SECTION 8.10 RULE 144 CONSIDERATIONS. Maxim shall (i) satisfy the current
public information requirements set forth in paragraph (c) of Rule 144 under the
Securities Act (or any rule or regulation, which may be substituted for or
replace, and which is substantially similar to, such paragraph (c)); and (ii)
upon request by an affiliate identified pursuant to Section 8.5 who receives
Maxim Common Stock in the Merger, make promptly available to such affiliate any
and all information relating to Maxim and its outstanding securities as such
affiliate may require in consummating a sale pursuant to Rule 144 under the
Securities Act (or any rule or regulation which may be substituted for or
replace, and which is substantially similar to, Rule 144); and (iii) file such
reports and take such action as may be necessary on its part to permit such
affiliate to sell Maxim Common Stock under Rule 144 (or any rule or regulation
which may be submitted for or replace, and which is substantially similar to,
Rule 144).
SECTION 8.11 STOCK OPTIONS. Maxim shall use its best efforts to obtain
shareholder approval, to the extent required by the terms of such plan, of such
increase in the number of shares of Maxim Common Stock covered by its employee
stock option plans as necessary to permit issuance of such options as required
by Section 3.1(e) hereof.
SECTION 8.12 POST EFFECTIVENESS MANAGEMENT MATTERS. (a) Maxim will cause
to be called and held immediately following the Effective Time a special meeting
of the Board of Directors of
A-25
<PAGE>
Maxim, at which meeting the Board of Directors of Maxim shall take all action
necessary to increase the number of members of the Maxim Board of Directors by
such number of members (if any) as is necessary to take the action contemplated
by this Section 8.12 (a), and:
(i) to elect as members of such Board of Directors (x) Larry M. Miller,
(y) H. Stanley Padgett, and (z) such additional individual, reasonably
acceptable to the members of the Board of Directors voting in such election,
as designated by agreement between Messrs. Miller and Padgett, PROVIDED that
such third individual is not, at the time of such election, an employee of
either Maxim or Image; and
(ii) to elect each of Larry M. Miller and H. Stanley Padgett as a Senior
Executive Vice President of Maxim.
(b) Immediately following the Effective Time, Maxim shall vote its stock in
the Surviving Corporation in favor of the election of a Board of Directors of
the Surviving Corporation consisting of (i) Larry M. Miller, (ii) H. Stanley
Padgett, (iii) one individual designated by the Chief Executive Officer of
Maxim, and (iii) two other individuals designated by mutual agreement between
Messrs. Miller and Padgett.
SECTION 8.13 AMENDMENTS TO MAXIM CERTIFICATE OF INCORPORATION. If
necessary, Maxim will use its best efforts to cause its shareholders to approve
the amendment of, and to amend, its Certificate of Incorporation on or before
the Effective Time (i) to increase the authorized number of shares of Maxim
Common Stock to provide for the issuance of the shares of Maxim Common Stock (or
options covering such shares, as applicable) to the stockholders and option
holders of Image as contemplated herein and (ii) to authorize amendment of its
By-laws by action of its Board of Directors, without shareholder approval, as
necessary to permit the actions contemplated by Section 8.12(a) hereof.
SECTION 8.14 TAX TREATMENT: ACCOUNTING TREATMENT. (a) Each of Image and
Maxim agree to use their respective best efforts to cause the Merger to qualify
as a tax-free reorganization under Section 368(a)(2)(E) of the Code.
(b) Image and Maxim agree to use their respective best efforts to cause the
Merger to be accounted for as a pooling of interests and to use their respective
best efforts to cause their affiliates to take such actions as shall be
necessary to permit the Merger to qualify for such accounting treatment. Image
and Maxim each covenant not to take, and each covenant to use its best efforts
to cause its affiliates not to take, prior to the Effective Time, any action
that could in any manner adversely affect such qualification other than as
disclosed on Disclosure Schedule 8.14.
(c) Image shall use its best efforts to cause each of its affiliates
identified pursuant to Section 8.5, and Maxim will use its best efforts to cause
each of its affiliates required pursuant to Section 9.2(s), to deliver a written
undertaking, in form reasonably satisfactory to Maxim, to the effect that:
(i) During the period from the execution of this Agreement until thirty
(30) days prior to the Effective Time such affiliate has not and will not
transfer or otherwise dispose of any securities of Image or Maxim, as
applicable, held by such affiliates, except for transfers or other
dispositions by operation of law upon the death of such affiliates or by the
estate of such affiliates if necessary to pay estate taxes or other
transfers or dispositions that Maxim determines will not prevent Maxim from
accounting for the Merger as a pooling of interests, taking into account the
actions of other affiliates.
(ii) From and after thirty (30) days prior to the Effective Time, such
affiliate will not sell, transfer or otherwise dispose of any securities of
Image or Maxim, including shares of Maxim Common Stock received by such
affiliate in the Merger, until after such time as financial results covering
at least thirty (30) days of combined operations of Image and Maxim have
been published by Maxim, in the form of a quarterly earnings report, an
effective registration statement filed with the SEC, a report to the SEC on
Form 10-K, 10-Q or 8-K, or any other public filing or announcement which
includes the combined results of operations (which publication shall be
A-26
<PAGE>
effected by Maxim at the earliest reasonably practicable opportunity),
except for transfers or other dispositions that Maxim determines, taking
into account the actions of other affiliates, will not prevent Maxim from
accounting for the Merger as a pooling of interests.
SECTION 8.15 REGISTRATION OF OPTION SHARES. Not later than 30 days
following the date of first publication of financial statements covering at
least 30 days of combined operations of Maxim and the Surviving Corporation,
Maxim shall cause to be filed with the Securities and Exchange Commission,
pursuant to the Securities Act of 1933, as amended, a registration statement on
Form S-3 (or other appropriate registration form) which shall cover the resale,
by the holders of such options, of the shares of Maxim Common Stock (the "Merger
Option Shares") covered by the Corresponding Nonqualified Options issued at the
Effective Time pursuant to Section 3.1(e) hereof, and shall use its best efforts
(i) to cause such registration statement to be declared effective at the
earliest practicable time thereafter, and (ii) to maintain such registration
statement as effective until the earlier of (a) the resale by the option holders
to whom such shares are originally issued of all the Merger Option Shares, or
(b) June 30, 1998.
SECTION 8.16 ADDITIONAL AGREEMENTS. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use best efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or reasonably advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by the Merger and
this Agreement, including using its best efforts to obtain all necessary
waivers, consents and approvals and effecting all necessary registrations and
filings. In case at any time after the Effective Time any further action is
necessary or reasonably desirable to carry out the purposes of this Agreement,
the proper officers and directors of Maxim, the Subsidiary or Image, as the case
may be, shall take all such necessary action.
SECTION 8.17 CLOSING CONDITIONS. Maxim and Image will use their best
efforts to cause the conditions set forth in Article IX to occur.
ARTICLE IX
CONDITIONS
SECTION 9.1 CONDITIONS TO OBLIGATIONS OF MAXIM AND THE SUBSIDIARY TO
PROCEED WITH THE MERGER. Notwithstanding any other provision of this Agreement,
each of the following shall be a condition to the obligation of Maxim and the
Subsidiary to consummate the Merger:
(a) The representations and warranties made by Image herein shall have
been true in all material respects as of the date of this Agreement and
shall be true in all material respects as of the Effective Time as though
made on and as of the Effective Time; and it is understood that all
representations and warranties made by Image herein if specifically stated
to be as of the date hereof shall be deemed to be true as of the Effective
Time if true as of the date hereof;
(b) Image shall have performed in all material respects every obligation
and complied with in all material respects each agreement, covenant and
condition required by this Agreement to be performed or complied with by it
prior to or at the Effective Time and Image shall have delivered to Maxim a
certificate dated the Effective Time and signed on its behalf by its
Chairman of the Board or its President and its Secretary or Treasurer,
certifying the satisfaction of the conditions set forth in this paragraph
and in paragraph 9.1(a);
(c) No preliminary or permanent injunction or other order by any federal
or state court which prevents the consummation of the Merger shall have been
issued and shall remain in effect, nor any action therefor initiated which,
in the good faith judgment of the Board of Directors of Maxim, it is not in
the best interests of the shareholders of Maxim to contest; and there shall
not have been instituted or be pending any action or proceeding by any
United States federal or state government or governmental agency or
instrumentality (i) challenging or seeking to restrain or
A-27
<PAGE>
prohibit the consummation of the Merger or seeking material damages in
connection with the Merger; or (ii) seeking to prohibit Maxim's or the
Surviving Corporation's ownership or operation of all or a material portion
of Maxim's or Image's business or assets, or to compel Maxim or the
Surviving Corporation to dispose of or hold separate all or a material
portion of Maxim's or Image's business or assets as a result of the Merger,
which, in any case, in the reasonable judgment of Maxim based upon a legal
opinion from an independent legal counsel, could result in the relief sought
being obtained;
(d) There shall not have been any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any United States federal or state government or governmental
agency or instrumentality or court which would (i) prohibit Maxim's or the
Surviving Corporation's ownership or operation of all or a material portion
of Maxim's or Image's business or assets, or compel Maxim or the Surviving
Corporation to dispose of or hold separate all or a material portion of
Maxim's or Image's business or assets, or compel Maxim or the Surviving
Corporation to dispose of or hold separate all or a material portion of
Image's or Maxim's business or assets, as a result of the Merger, (ii)
render Maxim unable to consummate the Merger, or (iii) make such
consummation illegal;
(e) No material adverse change shall have occurred in the business,
results of operations, assets, financial condition, or prospects of Image,
including any judgment, decree, injunction, ruling or order rendered in
connection with any litigation referred to in Section 5.12 hereof, which, in
the reasonable opinion of Maxim, if not successfully appealed would result
in such a material adverse change;
(f) The Merger and this Agreement (including, without limitation, such
approval as required by Section 8.11 hereof) shall have been validly
approved by the requisite vote of the stockholders of each of Maxim and
Image.
(g) The Certificate of Merger shall have been executed by the duly
authorized officer(s) of Image;
(h) The Registration Statement shall have become effective, and no stop
order suspending such effectiveness or proceedings for that purpose shall
have been issued and remain in effect;
(i) Maxim shall have received from Parker, Johnson, Cook & Dunlevie,
counsel to Image, an opinion dated the Effective Time, such opinion to be to
the effect set forth in Exhibit D attached hereto;
(j) Maxim shall have received from KPMG Peat Marwick LLP, independent
accountants for Image, a letter dated the effective date of the Registration
Statement, a letter dated the date of each of the respective meetings of the
stockholders of Image and Maxim which approves the transactions contemplated
hereby and a letter dated the Effective Time, each letter to be to the
effect set forth in Exhibit E attached hereto;
(k) Maxim shall have received the following documents from Image, all of
which shall be in a form and substance reasonably acceptable to Maxim and
its counsel:
(i) Certified copy of resolutions adopted by Image's Board of
Directors approving this Agreement, the Certificate of Merger and the
transactions contemplated hereby and thereby;
(ii) Certified copy of resolutions adopted by Image's stockholders
approving the transactions contemplated hereby;
(iii) Certificate of incumbency executed by the Secretary of Image
indicating the current officers and directors of Image;
(iv) Certificate of good standing of Image dated not more than ten
(10) days prior to the Effective Time from the Secretary of State of
Delaware; and
A-28
<PAGE>
(v) Such other certificates, documents or instruments as Maxim or its
counsel may reasonably require.
(l) Maxim shall have received copies of consents of all third parties
necessary for Image to execute, deliver and perform this Agreement and
consents of all third parties having material business relationships with
Image if consent to or approval of transactions of the nature herein
contemplated is required in order to prevent a material adverse change in
such business relationship, such as acceleration of indebtedness by a lender
or a declaration of default by a landlord;
(m) All applicable waiting periods under the Hart-Scott-Rodino Act shall
have expired or terminated.
(n) The shares of Maxim Common Stock to be issued pursuant to the Merger
shall have been approved for listing on the Nasdaq-NMS, subject to official
notice of issuance.
(o) The members of the Board of Directors of Image as of the Effective
Time shall have submitted their written resignations as directors of Image,
effective as of the Effective Time.
(p) The amendments to the Certificate of Incorporation of Maxim
described in Section 8.13 shall have been approved by the requisite vote of
the stockholders of Maxim.
(q) Maxim shall have received an opinion from Prudential that the
transactions contemplated by this Agreement are fair, from a financial point
of view, to the stockholders of Maxim, and each of Maxim and Image shall
have received an originally executed counterpart of the written opinion of
the Financial Advisor described in Section 5.20.
(r) Maxim shall have received from such of the affiliates of Image
(designated pursuant to Section 8.5 hereof) as it determines necessary in
its sole discretion a letter of undertaking, in form satisfactory to Maxim
and its counsel, acknowledging the restrictions imposed by the federal
securities laws and regulations thereunder (including but not limited to SEC
Rule 145) on the shares of Maxim Common Stock to be received by such
persons, and agreeing to be bound by such restrictions.
(s) Maxim shall have received from each of the affiliates of Image
(designated pursuant to Section 8.5 hereof), and from each such affiliate of
Maxim as Maxim determines necessary in its sole discretion, a written
undertaking in form and substance contemplated in Section 8.14 hereof.
(t) Image shall have received an opinion of its tax counsel, in form
reasonably acceptable to both Image and Maxim, to the effect that the Merger
will be a tax free reorganization under Code Section 368(a)(1)(A) and
368(a)(2)(E), as well as the consent of such counsel to the inclusion of
such opinion in the Registration Statement and Proxy Statement.
(u) Maxim shall have determined to its satisfaction that the Merger will
be accounted for as a pooling of interests.
(v) All employment agreements to which Image is a party at the date
hereof other than the employment agreements between Image and H. Stanley
Padgett and Larry M. Miller, respectively, shall have been terminated, or
shall have expired in accordance with their terms without renewal, and in
either case without liability of the Surviving Corporation for any payment
of severance payments or severance benefits under any such agreement, and
Image shall not have become a party to any other employment agreements
except as consented to by Maxim.
(w) Maxim shall have received such other certificates, documents and
instruments as it shall have reasonably requested.
A-29
<PAGE>
SECTION 9.2 CONDITIONS TO OBLIGATIONS OF IMAGE TO PROCEED WITH THE
MERGER. Notwithstanding any other provisions of this Agreement, each of the
following shall be a condition to the obligation of Image to consummate the
Merger:
(a) The representations and warranties made by Maxim herein shall have
been true in all material respects as of the date of this Agreement and
shall be true in all material respects as of the Effective Time as though
made on and as of the Effective Time; and it is understood that all
representations and warranties made by Maxim herein if specifically stated
to be as of the date hereof shall be deemed to be true as of the Effective
Time if true as of the date hereof;
(b) Maxim and the Subsidiary shall each have performed in all material
respects every obligation and complied with in all material respects each
agreement, covenant or condition required by this Agreement to be performed
or complied with by them prior to or at the Effective Time, and Maxim shall
have delivered to Image a certificate dated the Effective Time and signed on
its behalf by its Chairman or President and its Secretary or Treasurer
certifying the satisfaction of the conditions set forth in this paragraph
and in paragraph 9.2(a);
(c) No preliminary or permanent injunction or other order by any federal
or state court which prevents the consummation of the Merger shall have been
issued and shall remain in effect, nor any action therefor initiated which,
in the good faith judgment of the Board of Directors of Image, it is not in
the best interests of the shareholders of Image to contest; and there shall
not have been instituted or be pending any action or proceeding by any
United States federal or state government or governmental agency or
instrumentality (i) challenging or seeking to restrain or prohibit the
consummation of the Merger or seeking material damages in connection with
the Merger or (ii) seeking to prohibit Maxim's or the Surviving
Corporation's ownership or operation of all or a material portion of Maxim's
or Image's business or assets, or to compel Maxim or the Surviving
Corporation to dispose of or hold separate all or a material portion of
Maxim's or Image's business or assets as a result of the Merger, which, in
any case, in the reasonable judgment of Image, based on an opinion from
independent legal counsel, could result in the relief sought being obtained;
(d) There shall not have been any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any United States federal or state government or governmental
agency or instrumentality or court which would (i) prohibit Maxim's or the
Surviving Corporation's ownership or operation of all or a material portion
of Maxim's or Image's business or assets, or compel Maxim or the Surviving
Corporation to dispose of or hold separate all or a material portion of
Maxim's or Image's business or assets, or compel Maxim or the Surviving
Corporation to dispose of or hold separate all or a material portion of
Image's or Maxim's business or assets, as a result of the Merger, (ii)
render Image unable to consummate the Merger, or (iii) make such
consummation illegal;
(e) No material adverse change shall have occurred in the business,
results of operations, assets, financial condition, or prospects of Maxim,
including any judgment, decree, injunction, ruling or order rendered in
connection with any litigation referred to in Section 4.10 hereof, which, in
the reasonable opinion of Image, if not successfully appealed would result
in such a material adverse change;
(f) The Merger and this Agreement (including, without limitation, such
approval as required by Section 8.11 hereof) shall have been validly
approved by the requisite vote of the stockholders of each of Maxim and
Image;
(g) The Agreement of Merger and Certificate of Merger shall have been
executed by the duly authorized officer(s) of Subsidiary;
(h) The Registration Statement shall have become effective and no stop
order suspending such effectiveness or proceedings for that purpose shall
have been issued and remain in effect;
A-30
<PAGE>
(i) Image shall have received an opinion of Smith, Gambrell & Russell,
counsel to Maxim and the Subsidiary, to the effect set forth in Exhibit F
attached hereto;
(j) Image shall have received from Arthur Andersen LLP, independent
accountants for Maxim, a letter dated the date of the Proxy Statement and a
letter dated the Effective Time, each letter to be to the effect set forth
in Exhibit G hereto;
(k) Image shall have received the following documents from Maxim and
Subsidiary, all of which shall be in a form and substance reasonably
acceptable to Image and its counsel:
(i) Certified copy of resolutions adopted by the Boards of Directors
and stockholders of Maxim and Subsidiary approving this Agreement, the
Certificate of Merger and the transactions contemplated hereby and
thereby, including the issuance of the Maxim Common Stock and the options
(contemplated by Section 3.1(e) hereof) to be issued pursuant hereto and
the amendments to the Certificate of Incorporation of Maxim contemplated
hereby;
(ii) Certified copy of resolutions adopted by Maxim as the sole
stockholder of Subsidiary approving this Agreement, the Certificate of
Merger and the transactions contemplated hereby;
(iii) Certificate of incumbency executed by the Secretary or Assistant
Secretary of Maxim indicating the current officers and directors of Maxim
and Subsidiary;
(iv) Certificates of good standing from the Secretary of State of
Delaware for each of Maxim and Subsidiary, each dated not more than ten
(10) days prior to the Effective Time; and
(v) Such other certificates, documents or instruments as Image or its
counsel may reasonably require.
(l) Image shall have received copies of consents of all third parties
necessary for Maxim to execute, deliver and perform this Agreement and
consents of all third parties having material business relationships with
Maxim if consent to or approval of transactions of the nature herein
contemplated is required in order to prevent a material adverse change in
such business relationship, such as acceleration of indebtedness by a lender
or a declaration of default by a landlord;
(m) All applicable waiting periods under the Hart-Scott-Rodino Act shall
have expired or terminated;
(n) The shares of Maxim Common Stock to be issued pursuant to the Merger
shall have been approved for listing on the Nasdaq-NMS, subject to official
notice of issuance.
(o) The amendments to the Certificate of Incorporation of Maxim
described in Section 8.13 shall have been approved by the requisite vote of
the stockholders of Maxim.
(p) The condition set forth in Section 9.1(t) shall have been fulfilled.
(q) Image shall have received an opinion from the Financial Advisor that
the transactions contemplated by this Agreement are fair, from a financial
point of view, to the stockholders of Image, and each of Maxim and Image
shall have received an originally executed counterpart of the written
opinion of Prudential described in Section 4.19.
(r) Image shall have determined to its satisfaction that the Merger will
be accounted for as a pooling of interests.
(s) Maxim shall have received from each of the affiliates of Image
(designated pursuant to Section 8.5 hereof), and from each such affiliate of
Maxim as Maxim determines necessary in its sole discretion, a written
undertaking in form and substance contemplated in Section 8.14 hereof.
A-31
<PAGE>
(t) Maxim shall have received, and delivered to Image a copy of, the
Lender's commitment letter with respect to the Credit Facility, as described
in Section 7.2(i), which commitment letter shall be reasonably satisfactory
to Image.
(u) The Surviving Corporation shall have entered into employment
agreements with Larry M. Miller and H. Stanley Padgett in the forms attached
to this Agreement as Exhibits H and I, respectively, to be effective as of
the Effective Time.
(v) Image shall have terminated each of the Indemnity Agreements to
which it is a party as of the date of this Agreement with executive officers
or members of its Board of Directors ("Image Indemnitees"), and shall not
have entered into any additional such agreements with present or former
executive officers or members of its Board of Directors, except that Image
may, immediately prior to the Effective Time, enter into a substitute
indemnity agreement, in the form attached hereto as Exhibit J, with any
person who is, as of the date hereof, an Image Indemnitee.
(w) The Board of Directors of Maxim shall have adopted a resolution
authorizing the Surviving Corporation, in the discretion of executive
management of such corporation, to proceed with completion of implementation
of the Capital Expenditure Plan following the Effective Time, on the terms
and within the time contemplated by the Capital Expenditure Plan, with such
modifications or amendments as shall be agreed to by the chief executive
officer of the Surviving Corporation.
(x) Image shall have received, and delivered to Maxim, such consent to
the Merger and the transactions contemplated hereby as shall be required,
under the terms of such loan agreements, in order for Image's entry into and
performance of the Merger and the transactions contemplated by this
Agreement not to constitute an event of termination or default under the
terms of Image's loan agreements with its current lenders, The First
National Bank of Boston, First Union National Bank of Georgia and Wachovia
Bank of Georgia, N.A.
(y) Image shall have received such other certificates, documents and
instruments as it shall have reasonably requested.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1 TERMINATION. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time,
whether before or after approval by the shareholders of Image or Maxim:
(a) by mutual consent of Maxim and Image; or
(b) by either Maxim or Image if (i) the Merger shall not have been
consummated on or before December 31, 1996 (the "Termination Date"), (ii)
the requisite vote of the shareholders of Image or Maxim to approve this
Agreement and the transactions contemplated hereby shall not be obtained at
the respective meeting of the shareholders of such corporation called for
such purpose or any adjournment thereof, or (iii) any court of competent
jurisdiction in the United States or any State shall have issued an order,
judgment or decree (other than a temporary restraining order) restraining,
enjoining or otherwise prohibiting the Merger and such terminating party
determines in good faith that the pendency of such order, judgment or decree
renders the consummation of the Merger impracticable; provided that the
right to terminate this Agreement under this Section 10.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date; or
(c) by Maxim (i) if the Board of Directors of Image shall have withdrawn
or modified in a manner adverse to Maxim its approval or recommendation of
the Merger, this Agreement or the
A-32
<PAGE>
transactions contemplated hereby, or shall have resolved to do any of the
foregoing, or (ii) there has been (x) a material breach of any covenant, or
agreement on the part of Image or failure of a condition in Section 9.1
hereof which has not been cured or adequate assurance (acceptable to Maxim
in its sole discretion) of cure given, in either case within 15 business
days following receipt of notice of such breach, or (y) a breach of a
representation or warranty of Image herein which by its nature cannot be
cured prior to the Termination Date; or (iii) if the Board of Directors of
Maxim, pursuant to actions permitted by Section 8.4(e) hereof, shall have
authorized Maxim to enter into an agreement with any third party with
respect to, or shall have approved or recommended to the shareholders of
Maxim for approval, a Superior Proposal; or
(d) by Image (i) if the Board of Directors of Maxim shall have withdrawn
or modified in a manner adverse to Image its approval or recommendation of
the Merger, this Agreement or the Transactions contemplated hereby, or shall
have resolved to do any of the foregoing, or (ii) there has been (x) a
material breach of any covenant, or agreement on the part of Maxim or
failure of a condition in Section 9.2 hereof which has not been cured or
adequate assurance (acceptable to Image in its sole discretion) of cure
given, in either case within 15 business days following receipt of notice of
such breach or (y) a breach of a representation or warranty of Maxim herein
which by its nature cannot be cured prior to the Termination Date; or (iii)
if the Board of Directors of Image, pursuant to the actions permitted by
Section 8.4(e) hereof, shall have authorized Image to enter into an
agreement with any third party with respect to, or shall have approved or
recommended to the shareholders of Image for approval, a Superior Proposal;
or
(e) by either Maxim or Image if, as of any date prior to the Effective
Time, the Maxim Market Value is equal to or less than $11.00 (as used
herein, the term "Maxim Market Value" shall mean the average of the closing
prices as reported on the NASDAQ National Market of one share of Maxim
Common Stock for the five (5) trading days immediately preceding the date
for which such determination is made).
SECTION 10.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either Maxim or Image as provided above, this Agreement shall
forthwith become void and there shall be no liability hereunder on the part of
Maxim or Image or their respective officers or directors except for willful
breach and except that the agreements with respect to confidentiality contained
in Section 8.1, and the agreements with respect to fees, expenses and liquidated
damages contained in Section 8.7 hereof, shall survive the termination hereof.
SECTION 10.3 AMENDMENT. This Agreement may be amended by the parties
hereto at any time before or after approval hereby of the stockholders of Image
to the extent permitted by law. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
SECTION 10.4 WAIVER. At any time prior to the Effective Time, the parties
hereto, by action taken by their respective Boards of Directors, may (i) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto; (ii) waive any inaccuracies in the representations and
warranties of the other parties contained herein or in any document delivered
pursuant hereto; and (iii) waive compliance with any of the agreements of the
other parties or satisfaction of any of the conditions to its obligations
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
parties agree that the representations, warranties and agreements in this
Agreement or in any exhibit, disclosure schedule, certificate or other
instrument delivered pursuant to this Agreement shall not survive the
A-33
<PAGE>
Effective Time, with the exception of the agreements contained in Sections 8.1,
8.7, 8.10, 8.11, 8.12 and 8.15 hereof. In the event that a fact or matter is
discovered which the discovering party determines to be a breach of a
representation or warranty, it shall promptly notify the other parties hereto in
writing.
SECTION 11.2 CLOSING. The closing of the transactions contemplated by this
Agreement shall take place (i) at the offices of Smith, Gambrell & Russell,
Suite 1800, 3343 Peachtree Road, N.E., Atlanta, Georgia 30326, on the same
business day as, and immediately following the later to occur of, the Image
stockholder meeting or the Maxim stockholder meeting, provided that each of the
conditions set forth in Article IX is fulfilled or waived; or (ii) at such other
time and place as Maxim and Image shall agree.
SECTION 11.3 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given when delivered personally, transmitted
by confirmed facsimile transmission to the fax number set forth below (or such
other fax number for a party as shall be specified in a notice to all other
parties meeting the requirements of this section), or when mailed by registered
or certified mail (return receipt requested and postage prepaid) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice); provided, however, that the absence of a return
receipt shall not constitute irrebuttable evidence that the notice or
communication was not so mailed:
(a) if to Maxim, to:
The Maxim Group, Inc.
210 TownPark Drive
Kennesaw, Georgia 30144
Fax No.: 770/590-7709
Attention: A.J. Nassar, President and Chief Executive Officer
with a copy to:
Smith, Gambrell & Russell
Suite 1800
3343 Peachtree Road, N.E.
Atlanta, Georgia 30326
Fax No.: 404/264-2652
Attention: A. Jay Schwartz, Esquire
(b) if to Image, to:
Image Industries, Inc.
1112 Georgia Highway 140
Armuchee, Georgia 30105
Fax No.: 706/235-0386
Attention: H. Stanley Padgett, President and Chief Executive Officer
with a copy to:
Parker, Johnson, Cook & Dunlevie
Suite 700
1275 Peachtree Street, N.E.
Atlanta, Georgia 30309
Fax No.: 404/888-7490
Attention: G. Donald Johnson, Esquire
A-34
<PAGE>
SECTION 11.4 INTERPRETATION. When a reference is made in this Agreement to
subsidiaries of Maxim, the Subsidiary or Image, the word "subsidiaries" means
any corporation more than 50% of the outstanding voting securities of which are
directly or indirectly owned by Maxim, the Subsidiary or Image, as the case may
be. The headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
SECTION 11.5 SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
SECTION 11.6 MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral, among
the parties, or any of them, with respect to the subject matter hereof; (b) is
not intended to confer upon any third parties any rights or remedies hereunder,
(c) shall not be assigned by operation of law or otherwise; and (d) shall be
governed in all respects, including validity, interpretation and effect, by the
laws of the State of Georgia (except for the Articles of Merger attached hereto
as Exhibit A, which shall be governed by the laws of the State of Delaware).
This Agreement may be executed in counterparts which together shall constitute a
single agreement.
SECTION 11.7 SCHEDULES AND EXHIBITS. All Schedules and Exhibits attached
hereto are incorporated herein by reference. Each Disclosure Schedule shall be
deemed to be a representation and warranty of the party preparing such schedule.
No item shall be deemed disclosed for any schedule or representation, unless
specifically referenced on said schedule, and reference on one schedule shall
not be deemed disclosure for any other purpose.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunto duly authorized all as of the date
first-above written.
THE MAXIM GROUP, INC.
By: /s/ A.J. NASSAR
------------------------------------------
Its: President and Chief Executive Officer
IMAGE INDUSTRIES, INC.
By: /s/ H. STANLEY PADGETT
------------------------------------------
Its: President and Chief Executive Officer
TMG-II MERGER, INC.
By: /s/ A.J. NASSAR
------------------------------------------
Its: President and Chief Executive Officer
A-35
<PAGE>
[LETTERHEAD]
APPENDIX B
May 31, 1996
Board of Directors
The Maxim Group, Inc.
210 Town Park Drive
Kennesaw, Georgia 30144
Gentlemen:
We understand that The Maxim Group, Inc. ("Maxim" or the "Company"), TMG-II
Merger, Inc. ("TMG", a wholly-owned subsidiary of Maxim), and Image Industries,
Inc. ("Image"), each a Delaware corporation, have entered into an Agreement and
Plan of Reorganization dated May 31, 1996 (the "Merger Agreement") pursuant to
which, as more fully described therein: (i) TMG shall merge with and into Image
(the "Merger") and Image shall continue as the surviving corporation and a
wholly-owned subsidiary of Maxim. In the Merger, holders of shares of Image's
common stock, par value $0.01 per share (the "Image Common Stock"), shall
receive one share (the "Merger Consideration") of the common stock of Maxim, par
value $0.001 per share (the "Maxim Common Stock").
You have asked us to render an opinion with respect to the fairness as of the
date hereof, from a financial point of view, to the Company of the Merger
Consideration to be paid pursuant to the Merger.
In conducting our analysis and arriving at the opinion stated herein, we have
reviewed such information and considered such financial data and other factors
as we deemed appropriate under the circumstances, including the following: (i)
Image's historical financial data and other publicly available information
regarding Image for the three year period ended July 1, 1995, and certain
financial data for the nine months ended March 30, 1996; (ii) the Company's
historical financial data and other publicly available information regarding the
Company for the three year period ended March 31, 1995, and for the ten month
period ended January 31, 1996; (iii) certain information, including financial
projections prepared by the management of Image, relating to the net revenues,
earnings, cash flow, assets and prospects for Image's business; (iv) certain
information, including financial projections prepared by management of the
Company, relating to the net revenues, earnings, cash flow, assets and prospects
for the Company's business; (v) pro forma operating data, income statements,
balance sheets and cash flow data for the fiscal years ended January 1997, 1998
and 1999 prepared by Image and Maxim; (vi) industry data relating to Image's and
the Company's businesses; (vii) the financial terms of the Merger and the
financial terms of certain other transactions we deemed relevant; (viii) the
trading history of the shares of the Image Common Stock and of the Maxim Common
Stock; (ix) publicly available information concerning certain other companies
that we deemed to be reasonably similar to Image, and to the Company, and the
trading history of the common stock of each such company; (x) the Merger
Agreement. We have met with senior officers of Image and the Company to discuss
the financial condition and prospects of Image and the Company, respectively,
and such other matters as we deemed relevant to our opinion. Our opinion is
necessarily based on economic, financial and market conditions as they exist and
can be evaluated on the date hereof.
In connection with our review and analysis, we have relied without independent
verification upon the accuracy and completeness of the financial data and other
information reviewed by us that was provided to us by Image and the Company, or
is publicly available. With respect to the financial projections and pro forma
financial and operating information prepared by the managements of Image and the
Company, we have assumed that they represent the best currently available
estimates
B-1
<PAGE>
Board of Directors
The Maxim Group, Inc.
May 31, 1996
Page 2
and judgments of the respective managements of Image and the Company as to the
future financial performance of their respective companies. We have neither made
nor obtained any independent appraisals of the properties, facilities or other
assets of Image or the Company. In addition, we have assumed that all the
transactions contemplated by the Merger Agreement will be consummated on the
basis of the terms and provisions of the Merger Agreement.
Prudential Securities acts as a market maker for the Image Common Stock and the
Maxim Common Stock and follows Image in equity research, and in the ordinary
course of business may trade such shares for our own account and for the
accounts of customers, and, accordingly, may at any time hold a long or short
position in such shares. Prudential Securities Incorporated also acted as a
co-manager in Image's Initial Common Stock offering in 1993. As you know, we are
to receive a fee from Maxim upon consummation of the Merger.
This letter and the opinion stated herein is for the use of the Board of
Directors, and except as set forth in our engagement letter with the Company,
dated May 24, 1996, may not be reproduced, summarized, excerpted from or
otherwise publicly referred to in any manner, nor our opinion stated herein
publicly disclosed, without our prior written consent.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Merger Consideration to be paid pursuant to the Merger is fair
to the Company from a financial point of view.
Very truly yours,
/s/ Prudential Securities Incorporated
PRUDENTIAL SECURITIES INCORPORATED
B-2
<PAGE>
[LETTERHEAD]
APPENDIX C
June 7, 1996
Board of Directors
Image Industries, Inc.
1112 Georgia Highway 140
Armuchee, Georgia 30105
To the Members of the Board:
We understand that Image Industries, Inc. (the "Company") is considering a
proposed merger (the "Proposed Transaction") between the Company and an
affiliate of the Maxim Group, Inc. ("Maxim"). We understand that under the
Proposed Transaction, the affiliate will be merged with and into the Company,
and the Company will become a wholly owned subsidiary of Maxim. We further
understand that each of the issued and outstanding shares of Common Stock of the
Company (the "Company Common Stock") shall be converted into one share of common
stock of Maxim (the "Maxim Common Stock"), as described in the Agreement and
Plan of Reorganization dated May 31, 1996 between Maxim and the Company (the
"Agreement").
We have been requested by the Company to render our opinion with respect to
the fairness, from a financial point of view, to the Company's stockholders of
the consideration to be received by the Company's stockholders in the Proposed
Transaction.
In arriving at our opinion, we reviewed: (1) the Agreement, (2) publicly
available information concerning the Company and Maxim which we believe to be
relevant to our inquiry, (3) financial and operating information with respect to
the business, operations and prospects of the Company and Maxim furnished to us
by the Company and Maxim, (4) a trading history of the Company Common Stock and
the Maxim Common Stock, (5) a comparison of the historical financial results and
present financial condition of the Company with those of other companies which
we deemed relevant, (6) a comparison of the financial terms of the Proposed
Transaction with the financial terms of certain other transactions which we
deemed relevant, and (7) certain historical data relating to percentage premiums
paid in acquisitions of publicly traded companies. In addition, we held
discussions with the management of the Company and Maxim concerning their
businesses and operations, assets, present conditions and future prospects and
undertook such other studies, analyses and investigations as we deemed
appropriate.
We have relied upon the accuracy and completeness of the financial and other
information used by us in arriving at our opinion without independent
verification and have assumed and relied upon the representations and warranties
of the Company and Maxim contained in the Agreement. With respect to the
financial forecasts and other data reviewed by us, we have assumed with your
permission that such forecasts and other data have been reasonably prepared on
bases reflecting the best currently available estimates and good faith judgments
of the management of the Company and Maxim as to the future financial
performance of the merging parties and the strategic and operating benefits
anticipated from the Proposed Transaction. In arriving at our opinion, we have
not conducted a physical inspection of the properties and facilities of the
Company. We have not made nor obtained any evaluations or appraisals of the
assets or liabilities of the Company. We have assumed with your
C-1
<PAGE>
Board of Directors
Image Industries, Inc.
June 7, 1996
Page 2
permission that the Proposed Transaction will be treated as a tax-free
reorganization for federal income tax purposes and will be accounted for as a
"pooling of interests". In addition, you have not authorized us to solicit, and
we have not solicited, any indications of interest from any third party with
respect to the purchase of all or part of the Company's business. We are not
expressing any opinion as to what the value of the Maxim Common Stock actually
will be, or the prices at which such Maxim Common Stock will trade, subsequent
to the Proposed Transaction. We did not participate in negotiating the terms of
the Agreement, and our opinion does not in any manner address the Company's
underlying business decision to effect the Proposed Transaction. Our opinion is
necessarily based upon market, economic and other conditions as they exist and
can be evaluated as of the date of the rendering of our opinion to the Board of
Directors of the Company on May 31, 1996.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services. In addition, the
Company has agreed to indemnify us for certain liabilities arising out of the
rendering of this opinion. In the past, we have performed certain investment
banking services for Maxim and have received customary fees for such services.
In the ordinary course of our business, we and our affiliates actively trade in
the Common Stock of the Company for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
It is understood that this letter is for the information of the Board of
Directors of the Company only in connection with its consideration of the
Proposed Transaction and may not be relied upon by any other person, nor does
our opinion constitute a recommendation to any stockholder as to how such
stockholder should vote on the Proposed Transaction. This letter is not to be
quoted or referred to, in whole or in part, in any registration statement,
prospectus or proxy statement, or in any other document used in connection with
the offering or sale of securities, nor shall this letter be used for any other
purpose, without our prior written consent.
Based upon and subject to the foregoing, we are of the opinion that, as of
May 31, 1996, from a financial point of view, the consideration to be received
by the Company's stockholders in the Proposed Transaction is fair to the
stockholders of the Company.
Very truly yours,
/s/ The Robinson-Humphrey Company,
Inc.
THE ROBINSON-HUMPHREY COMPANY, INC.
C-2
<PAGE>
APPENDIX D
MAXIM CHARTER AMENDMENTS
1. ARTICLE I OF THE CERTIFICATE OF INCORPORATION OF MAXIM SHALL BE AMENDED
BY DELETING THE FIRST TWO PARAGRAPHS THEREOF IN THEIR ENTIRETY AND REPLACING
THEM AS FOLLOWS:
The Corporation shall have authority to issue 26,000,000 shares of
capital stock, which shall be divided into classes and shall have the
following designations, preferences, limitations and relative rights:
A. COMMON STOCK. One class shall consist of 25,000,000 shares of
common stock having a par value of $.001 per share, designated "Common
Stock." Subject to the rights of the holders of Preferred Stock, the
holders of Common Stock shall be entitled to elect all of the members of
the Board of Directors of the Corporation, and such holders shall be
entitled to vote as a class on all matters required or permitted to be
submitted to the shareholders of the Corporation.
2. THE CERTIFICATE OF INCORPORATION OF MAXIM SHALL BE AMENDED BY ADDING
THERETO A NEW ARTICLE, TO BE DESIGNATED AS ARTICLE XI, AS FOLLOWS:
XI.
(a) NUMBER, ELECTION AND TERMS. The business and affairs of the
Corporation shall be managed by or under the direction of a board of
directors which, except as otherwise fixed by or pursuant to the provisions
of Article IV hereof relating to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
shall consist of not less than three (3) nor more than fifteen (15) persons.
The exact number of directors within the minimum and maximum limitations
specified in the preceding sentence shall be fixed from time to time by the
board of directors pursuant to a resolution adopted by a majority of the
entire board of directors. At the annual meeting of stockholders of the
Corporation held in 1996, the directors shall be divided into three classes,
as nearly equal in number as possible, with the term of office of the first
class of directors to expire at the annual meeting of stockholders of the
Corporation to be held in 1997, the term of office of the second class of
directors to expire at the annual meeting of stockholders of the Corporation
to be held in 1998, and the term of office of the third class of directors
to expire at the annual meeting of stockholders of the Corporation to be
held in 1999. At each annual meeting of the stockholders of the Corporation
following such initial classification and election, and except as otherwise
so fixed by or pursuant to the provisions of Article IV hereof relating to
the rights of the holders of any series of Preferred Stock to elect
additional directors under specified circumstances, directors elected to
succeed those directors whose terms expire at such annual meeting shall be
elected for a term of office to expire at the third succeeding annual
meeting of stockholders of the Corporation after their election.
(b) VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Subject to the rights
of the holders of any series of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the number of directors
or any vacancies occurring in the board of directors resulting from death,
resignation, retirement, disqualification, removal from office or other
cause shall be filled by the affirmative vote of a majority of the remaining
directors then in office, although less than a quorum of the board of
directors, or by the sole remaining director. A director so chosen shall
hold office until the annual meeting of stockholders of the Corporation at
which the term of the class of directors for which he has been chosen
expires. No decrease in the number of directors constituting the board of
directors shall shorten the term of any incumbent director.
D-1
<PAGE>
(c) CONTINUANCES IN OFFICE. Notwithstanding the foregoing provisions
of this Article XI, any director whose term of office has expired shall
continue to hold office until his successor shall be elected and qualify.
(d) REMOVAL. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any director, or the entire board of
directors, may be removed from office at any time, but only for cause and
only by the affirmative vote of the holders of at least seventy-five percent
(75%) of the total number of votes entitled to be cast by the holders of all
of the shares of capital stock of the Corporation then entitled to vote
generally in the election of directors. The holder of each share of capital
stock entitled to vote thereon shall be entitled to cast the same number of
votes as the holder of such shares is entitled to cast generally in the
election of each director.
(e) AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of
this Certificate or the By-laws of the Corporation (and notwithstanding the
fact that some lesser percentage may be specified by law, this Certificate
or the By-laws of the Corporation), the affirmative vote of the holders of
at least seventy-five percent (75%) of the total number of votes entitled to
be cast by the holders of all of the shares of capital stock of the
Corporation then entitled to vote generally in the election of directors
shall be required to amend, alter, change or repeal, or to adopt any
provision as part of this Certificate inconsistent with, this Article XI.
The holder of each share of capital stock entitled to vote thereon shall be
entitled to cast the same number of votes as the holder of such shares is
entitled to cast generally in the election of each director.
3. THE CERTIFICATE OF INCORPORATION OF MAXIM SHALL BE AMENDED BY ADDING
THERETO A NEW ARTICLE, TO BE DESIGNATED AS ARTICLE XII, AS FOLLOWS:
XII.
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders. Special meetings of stockholders of the
Corporation may be called only by the Chairman of the Board, the Chief
Executive Officer or the board of directors pursuant to a resolution
approved by a majority of the entire board of directors, upon not less than
ten nor more than sixty days' written notice. Notwithstanding any other
provisions of this Certificate or the By-laws of the Corporation (and
notwithstanding the fact that some lesser percentage may be specified by
law, this Certificate or the By-laws of the Corporation), the affirmative
vote of the holders of at least seventy-five percent (75%) of the total
number of votes entitled to be cast by the holders of all of the shares of
the capital stock of the Corporation then entitled to vote generally in the
election of directors shall be required to amend or repeal, or to adopt any
provision as part of this Certificate inconsistent with, this Article XII.
The holder of each share of capital stock entitled to vote thereon shall be
entitled to cast the same number of votes as the holder of such shares is
entitled to cast generally in the election of each director.
4. THE CERTIFICATE OF INCORPORATION OF MAXIM SHALL BE AMENDED BY ADDING
THERETO A NEW ARTICLE, TO BE DESIGNATED AS ARTICLE XIII, AS FOLLOWS:
XIII.
(a) AMENDMENT OF BY-LAWS BY BOARD OF DIRECTORS. Except as otherwise
provided in this Certificate or by applicable law, the board of directors,
pursuant to the terms of this Article XIII, may amend or repeal any
provision of the By-Laws of the Corporation or adopt any new By-Law, unless
the shareholders have adopted, amended or repealed a particular By-Law
provision and, in doing so, have expressly reserved to the shareholders the
right of amendment or repeal therefor. The board of directors may adopt,
amend, alter or repeal the By-Laws of the Corporation only by the vote of a
majority of the entire Board.
D-2
<PAGE>
(b) SUPERMAJORITY REQUIRED FOR AMENDMENT BY SHAREHOLDERS. The
stockholders of the Corporation have the right, in accordance with the
voting requirements set forth in this Article XIII(b), to amend or repeal
any provision of the By-Laws of the Corporation, or to adopt new By-Law
provisions, even though such provisions may also be adopted, amended or
repealed by the Board. Except as may otherwise specifically be required by
law, the affirmative vote of the holders of not less than seventy-five
percent (75%) of the total number of votes entitled to be cast by the
holders of all of the shares of capital stock of the Corporation then
entitled to vote generally in the election of directors shall be required
for the stockholders to adopt, amend, alter or repeal any provision of the
By-Laws of the Corporation.
(c) AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of
this Certificate or the By-laws of the Corporation (and notwithstanding the
fact that some lesser percentage may be specified by law, this Certificate
or the By-laws of the Corporation), the affirmative vote of the holders of
at least seventy-five percent (75%) of the total number of votes entitled to
be cast by the holders of all of the shares of capital stock of the
Corporation then entitled to vote generally in the election of directors
shall be required to amend, alter, change or repeal, or to adopt any
provision as part of this Certificate inconsistent with, this Article XIII.
The holder of each share of capital stock entitled to vote thereon shall be
entitled to cast the same number of votes as the holder of such shares is
entitled to cast generally in the election of each director.
D-3
<PAGE>
APPENDIX E
MAXIM BY-LAW AMENDMENTS
1. SECTION 3.02 OF THE BY-LAWS OF MAXIM SHALL BE AMENDED BY DELETING THE
TEXT THEREOF IN ITS ENTIRETY AND SUBSTITUTING THE FOLLOWING IN LIEU THEREOF:
"Section 3.02. SPECIAL MEETING. A special meeting of the
shareholders of the Company may be called only by the Chairman of the
Board, the Chief Executive Officer or by the Board of Directors pursuant
to a resolution adopted by a majority of the total number of directors
which the Company would have if there were no vacancies, upon not less
than ten nor more than sixty days' written notice. Any special meeting
of the shareholders shall be held on such date, at such time and at such
place within or without the State of Delaware as the Board of Directors
or the officer calling the meeting may designate. At a special meeting
of the shareholders, no business shall be transacted and no corporate
action shall be taken other than that stated in the notice of the
meeting."
2. SECTION 3.12 OF THE BY-LAWS OF MAXIM SHALL BE AMENDED BY DELETING THE
TEXT THEREOF IN ITS ENTIRETY AND SUBSTITUTING THE FOLLOWING IN LIEU THEREOF:
"SECTION 3.12. ACTION BY SHAREHOLDER CONSENT PROHIBITED. Unless
otherwise provided in the Certificate of Incorporation, any action
required or permitted to be taken by the shareholders of the Company
must be effected at a duly called annual or special meeting of
shareholders of the Company and may not be effected by any consent in
writing by such shareholders. Except as otherwise required by the
Certificate of Incorporation or by law, special meetings of shareholders
of the Company may be called only as provided in Section 3.02 of these
By-Laws."
3. THE BY-LAWS OF MAXIM SHALL BE AMENDED BY ADDING THERETO THE FOLLOWING
NEW SECTION 3.14:
"SECTION 3.14. NOMINATIONS AND NOTIFICATION OF NOMINATIONS FOR
DIRECTORS. Nominations for election to the Board may be made by the
Board, any nominating committee thereof or by any holder of any
outstanding class of capital stock of the Company entitled to vote for
the election of directors. Any shareholder entitled to vote for the
election of directors may nominate a person or persons for election as a
director only if written notice of such shareholder's intention to make
any such nomination is given either by personal delivery or mailed by
the United States Mail, postage prepaid, certified and return receipt
requested, to the Secretary of the Company not later than the later of
(i) the close of business on the seventh (7th) calendar day following
the date on which notice of the meting of shareholders for the election
of directors is first given to shareholders (any such notice of meeting
of shareholders shall not be given earlier than the record date for the
meeting of shareholders) and (ii) a date ninety (90) days prior to the
date of the meeting of shareholders. Each such notice shall set forth:
(a) the name and address of the shareholder who intends to make the
nomination and of the person or persons to be nominated; (b) a
representation that the shareholder is a holder of record of stock of
the Company entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to nominate the person or persons
specified in the notice; (c) a description of all arrangements or
understandings between the shareholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (d) such
other information regarding each nominee proposed by such shareholder as
would have been required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission
had each nominee been nominated, or intended to be nominated, by the
Board; and (e) the consent of each nominee to serve as a director of the
Company if so elected.
E-1
<PAGE>
The notification shall be signed by the nominating shareholder and
shall include or be accompanied by a signed written consent to be named
as a nominee for election as a director from each proposed nominee.
Purported nominations not made in compliance with these procedures may
be disregarded by the chairman of the meeting, and upon his
instructions, the inspectors of election shall disregard all votes cast
for each such nominee. The Board may also refuse to acknowledge the
nomination of any person not made in compliance with the foregoing
procedures."
4. SECTION 4.02 OF THE BY-LAWS OF MAXIM SHALL BE AMENDED BY DELETING THE
TEXT THEREOF IN ITS ENTIRETY AND SUBSTITUTING THE FOLLOWING IN LIEU THEREOF:
(a) NUMBER, ELECTION AND TERMS. The business and affairs of the
Company shall be managed by or under the direction of a board of
directors which, except as otherwise fixed by or pursuant to the
provisions of the Certificate of Incorporation relating to the rights of
the holders of any series of Preferred Stock to elect additional
directors under specified circumstances, shall consist of not less than
three (3) nor more than fifteen (15) persons. The exact number of
directors within the minimum and maximum limitations specified in the
preceding sentence shall be fixed from time to time by the board of
directors pursuant to a resolution adopted by a majority of the entire
board of directors. At the annual meeting of shareholders of the Company
held in 1996, the directors shall be divided into three classes, as
nearly equal in number as possible, with the term of office of the first
class of directors to expire at the annual meeting of shareholders of
the Company to be held in 1997, the term of office of the second class
of directors to expire at the annual meeting of shareholders of the
Company to be held in 1998, and the term of office of the third class of
directors to expire at the annual meeting of shareholders of the Company
to be held in 1999. At each annual meeting of the shareholders of the
Company following such initial classification and election, and except
as otherwise so fixed by or pursuant to the provisions of the
Certificate of Incorporation relating to the rights of the holders of
any series of Preferred Stock to elect additional directors under
specified circumstances, directors elected to succeed those directors
whose terms expire at such annual meeting shall be elected for a term of
office to expire at the third succeeding annual meeting of shareholders
of the Company after their election.
(b) VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Subject to the
rights of the holders of any series of Preferred Stock then outstanding,
newly created directorships resulting from any increase in the number of
directors or any vacancies occurring in the board of directors resulting
from death, resignation, retirement, disqualification, removal from
office or other cause shall be filled by the affirmative vote of a
majority of the remaining directors then in office, although less than a
quorum of the board of directors, or by the sole remaining director. A
director so chosen shall hold office until the annual meeting of
shareholders of the Company at which the term of the class of directors
for which he has been chosen expires. No decrease in the number of
directors constituting the board of directors shall shorten the term of
any incumbent director.
(c) CONTINUANCES IN OFFICE. Notwithstanding the foregoing
provisions of this Section 4.02, any director whose term of office has
expired shall continue to hold office until his successor shall be
elected and qualify.
(d) REMOVAL. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any director, or the entire board of
directors, may be removed from office at any time, but only for cause
and only by the affirmative vote of the holders of at least seventy-five
percent (75%) of the total number of votes entitled to be cast by the
holders of all of the shares of capital stock of the Company then
entitled to vote generally in the election of directors. The holder of
each share of capital stock entitled to vote thereon shall be entitled
to cast the same number of votes as the holder of such shares is
entitled to cast generally in the election of each director.
E-2
<PAGE>
5. ARTICLE VIII OF THE BY-LAWS OF MAXIM SHALL BE AMENDED BY DELETING THE
TEXT THEREOF IN ITS ENTIRETY AND SUBSTITUTING THE FOLLOWING IN LIEU THEREOF:
ARTICLE VIII.
AMENDMENT TO BY-LAWS
8.01 AMENDMENT OF BY-LAWS BY BOARD OF DIRECTORS. Except as
otherwise provided in the Certificate of Incorporation, by applicable
law or by the provisions of this Article VIII, the board of directors
may amend or repeal any provision of the By-Laws of the Company or adopt
any new By-Law, unless the shareholders have adopted, amended or
repealed a particular By-Law provision and, in doing so, have expressly
reserved to the shareholders the right of amendment or repeal therefor.
The board of directors may adopt, amend, alter or repeal the By-Laws of
the Company only by the vote of a majority of the entire Board.
8.02 SUPERMAJORITY REQUIRED FOR AMENDMENT BY SHAREHOLDERS. The
shareholders of the Company have the right, in accordance with the
voting requirements set forth in this Section 8.02, to amend or repeal
any provision of these By-Laws, or to adopt new By-Law provisions, even
though such provisions may also be adopted, amended or repealed by the
Board. Except as may otherwise specifically be required by law, the
affirmative vote of the holders of not less than seventy-five percent
(75%) of the total number of votes entitled to be cast by the holders of
all of the shares of capital stock of the Company then entitled to vote
generally in the election of directors shall be required for the
shareholders to adopt, amend, alter or repeal any provision of the
By-Laws of the Company.
E-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Bylaws effectively provide that the Registrant shall, to
the full extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as amended from time to time ("Section 145"), indemnify all
persons whom it may indemnify pursuant thereto. In addition, the Registrant's
Certificate of Incorporation eliminates personal liability of its directors to
the full extent permitted by Section 102(b)(7) of the General Corporation Law of
the State of Delaware, as amended from time to time ("Section 102(b)(7)").
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit, or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to a matter
as to which they shall have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation, except
that no indemnification shall be made if such person shall have been adjudged
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine upon application that the
defendant officers or directors are reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
Section 102(b)(7) provides that a corporation may eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent conduct
in paying dividends or repurchasing stock out of other than lawfully available
funds or (iv) for any transaction from which the director derived an improper
benefit. No such provision shall eliminate or limit the liability of a director
for any act or omission occurring prior to the date when such provision becomes
effective.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS FILED PURSUANT TO ITEM 601 OF REGULATION S-K.
The following exhibits are filed with or incorporated by reference into this
Registration Statement. The exhibits which are denominated by an asterisk (*)
were previously filed as a part of, and are hereby incorporated by reference
from either (i) a Registration Statement on Form SB-2 under the Securities Act
of 1933 for the Registrant, Registration No. 33-66926 (referred to as "SB-2"),
(ii) Amendment No. 1 to the Registrant's Registration Statement on Form SB-2
(referred to as "SB-2 Amendment No. 1"), (iii) Amendment No. 2 to the
Registrant's Registration Statement on Form SB-2 (referred to as "SB-2 Amendment
No. 2"), (iv) Post-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form SB-2 (referred to as ("SB-2 Post-Effective Amendment"), and
(v) the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1994 ("1994 10-Q"), (vi) the Registrant's Annual Report on Form
10-KSB for the year ended March 31, 1995 (referred to as "1995 10-K"); (vii) a
Registration Statement on Form S-3 under the Securities Act of 1933 for the
Registrant, Registration No. 33-98762 (referred to as "S-3"), (viii) the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995 (referred to as "9/30/95 10-Q"), (ix) the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995 (referred to as "12/3/95
10-Q"), (x) the Registrant's Transition Report on Form 10-K for the ten month
period ended January 31, 1996 (referred to as "1996 10-K"), (xi) the
Registrant's Quarterly
II-1
<PAGE>
Report on Form 10-Q for the quarter ended April 30, 1996 (referred to as
"4/30/96 10-Q"), and (xii) the Registrant's Current Report on Form 8-K dated May
31, 1996 (referred to as "8-K"). The exhibit number corresponds to the exhibit
number in the referenced document.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------
<C> <C> <S>
*2.1 -- Agreement and Plan of Reorganization, between The Maxim Group, Inc., TMG-II
Merger, Inc. and Image Industries, Inc., dated as of May 31, 1996 (8-K).
*3.1 -- Certificate of Incorporation of the Company (SB-2).
*3.2 -- By-Laws of the Company (SB-2).
*4.1 -- Specimen Certificate of Common Stock (SB-2 Amendment No. 2).
5.1 -- Opinion of Smith, Gambrell & Russell regarding legality of shares.
8.1 -- Opinion of Womble Carlyle Sandridge & Rice, PLLC regarding tax matters.
*10.1 -- 1993 Stock Option Plan (SB-2).
*10.1.1 -- Amendment No. 1 to 1993 Stock Option Plan (1995 10-K).
10.1.2 -- Amendment No. 2 to 1993 Stock Option Plan.
*10.2 -- Employment Agreement dated July 30, 1993 between the Company and A.J. Nassar
(SB-2).
*10.3 -- Form of Franchise Membership Agreement (SB-2 Amendment No. 1, Exhibit 10.3.1).
*10.6 -- Employment Agreement dated September 28, 1994 between GCO, Inc. and Dicky W.
McAdams (1995 10-K).
*10.18 -- Loan Agreement between the Company, its subsidiaries and First Union National
Bank of Georgia, N.A. dated February 2, 1995 regarding $21 million revolving
loan and $900,000 term loan (1994 10-Q).
*10.18.1 -- First Amendment dated March 31, 1995 to Loan Agreement dated February 2, 1995
between the Company, its subsidiaries and First Union National Bank of Georgia
(1995 10-K).
*10.18.2 -- Second Amendment dated June 15, 1995 to Loan Agreement dated February 2, 1995
between the Company, its subsidiaries and First Union National Bank of Georgia
(1995 10-K).
*10.18.3 -- Third Amendment and Waiver to Loan Agreement dated August 17, 1995 to Loan
Agreement dated February 2, 1995 between the Company, its subsidiaries and First
Union National Bank of Georgia (S-3).
*10.18.4 -- Fourth Amendment to Loan Agreement dated October 27, 1995 to Loan Agreement
dated February 2, 1995 between the Company, its subsidiaries and First Union
National Bank of Georgia (9/30/95 10-Q).
*10.18.5 -- Fifth Amendment to Loan Agreement dated December 15, 1995 to Loan Agreement
dated February 2, 1995 between the Company, its subsidiaries and First Union
National Bank of Georgia (12/31/95 10-Q).
10.19 -- Revolving Credit Note dated December 15, 1995 to First Union National Bank of
Georgia, N.A. in the principal amount of up to $23 million.
*10.20 -- Term Note dated February 2, 1995 to First Union National Bank of Georgia, N.A.
in the principal amount of $900,000 (1994 10-Q).
*10.21 -- Construction Loan Agreement dated March 9, 1995 between the Company and its
subsidiaries and First Union National Bank of Georgia regarding $4,000,000
mortgage loan (1995 10-K).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------
<C> <C> <S>
*10.22 -- Lease Agreement dated October 30, 1995 between Kevodrew Realty, Inc. and
Kinnaird & Francke Interiors, Inc. for lease of retail space in Louisville,
Kentucky (9/30/95 10-Q).
*11.1 -- Statement Regarding Computation of Per Share Earnings (1996 10-K and 4/30/96
10-Q).
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of KPMG Peat Marwick LLP.
23.3 -- Consent of KPMG Peat Marwick LLP.
23.4 -- Consent of Deloitte & Touche LLP.
23.5 -- Consent of Arthur Andersen LLP
23.6 -- Consent of Smith, Gambrell & Russell (contained in their opinion filed as
Exhibit 5.1 hereto).
23.7 -- Consent of Womble Carlyle Sandridge & Rice, PLLC (contained in their opinion
filed as Exhibit 8.1 hereto).
23.8 -- Consent of Prudential Securities Incorporated.
23.9 -- Consent of The Robinson Humphrey Company, Inc.
24.1 -- Powers of Attorney.
99.1 -- Form of Proxy Card of The Maxim Group, Inc.
99.2 -- Form of Proxy Card of Image Industries, Inc.
99.3 -- Opinion of Prudential Securities Incorporated (included as Appendix B to the
Proxy Statement/Prospectus).
99.4 -- Opinion of The Robinson-Humphrey Company, Inc. (included as Appendix C to the
Proxy Statement/Prospectus).
</TABLE>
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statement schedule of the Registrant,
together with the report of Arthur Andersen LLP and KPMG Peat Marwick LLP
thereon, is incorporated by reference to the Registrant's Transition Report on
Form 10-K for the ten months ended January 31, 1996:
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not applicable
or the required information is included in the Registrant's Consolidated
Financial Statements or notes thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed
II-3
<PAGE>
that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change in such information in the Registration Statement:
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(g) (1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Kennesaw, State of
Georgia, on the 19th day of July, 1996.
THE MAXIM GROUP, INC.
By: /s/ A. J. NASSAR
-----------------------------------------
A. J. Nassar
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
<S> <C> <C> <C>
/s/ A. J. NASSAR President, Chief Executive Officer and
------------------------------------------- Director (principal executive officer) July 19, 1996
A. J. Nassar
/s/ THOMAS P. LEAHEY Executive Vice President, Finance and
------------------------------------------- Treasurer (principal financial July 19, 1996
Thomas P. Leahey officer)
/s/ H. GENE HARPER Chief Financial Officer and Secretary
------------------------------------------- (principal accounting officer) July 19, 1996
H. Gene Harper
Senior Executive Vice President and
------------------------------------------- Director July , 1996
James W. Inglis
*
------------------------------------------- Director July 19, 1996
Richard A. Kaplan
*
------------------------------------------- Director July 19, 1996
Dicky W. McAdams
*
------------------------------------------- Director July 19, 1996
Ronald McSwain
*
------------------------------------------- Director July 19, 1996
J. Michael Nixon
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
<S> <C> <C> <C>
*
------------------------------------------- Chairman of the Board July 19, 1996
M.B. Seretean
*
------------------------------------------- Director July 19, 1996
Herb Wolk
*By: /s/ A. J. NASSAR
--------------------------------------
A.J. Nassar, as attorney-in-fact pursuant to
powers of attorney filed as exhibits to this
Registration Statement
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NUMBER
- ----------- ----------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
5.1 Opinion of Smith, Gambrell & Russell regarding legality of shares........................
8.1 Opinion of Womble Carlyle Sandridge & Rice, PLLC regarding tax matters...................
10.1.2 Amendment No. 2 to 1993 Stock Option Plan................................................
10.19 Revolving Credit Note dated December 15, 1995 to First Union National Bank of Georgia,
N.A. in the principal amount of up to $23 million.......................................
21.1 Subsidiaries of the Registrant...........................................................
23.1 Consent of Arthur Andersen LLP...........................................................
23.2 Consent of KPMG Peat Marwick LLP.........................................................
23.3 Consent of KPMG Peat Marwick LLP.........................................................
23.4 Consent of Deloitte & Touche LLP.........................................................
23.5 Consent of Arthur Andersen LLP...........................................................
23.8 Consent of Prudential Securities Incorporated............................................
23.9 Consent of The Robinson Humphrey Company, Inc............................................
24.1 Powers of Attorney.......................................................................
99.1 Form of Proxy Card of The Maxim Group, Inc...............................................
99.2 Form of Proxy Card of Image Industries, Inc..............................................
</TABLE>
<PAGE>
EXHIBIT 5.1
<PAGE>
[LETTERHEAD]
July 18, 1996
Board of Directors
The Maxim Group Inc.
210 TownPark Drive
Kennesaw, Georgia 30144
Re: The Maxim Group, Inc.
Registration Statement on Form S-4
5,266,285 Shares of Common Stock (the "Registration Statement")
Gentlemen:
We have acted as counsel for The Maxim Group, Inc. (the "Company") in
connection with the proposed public offering of the shares of its Common Stock
covered by the above-described Registration Statement.
In connection therewith, we have examined the following:
(1) The Certificate of Incorporation of the Company, certified by the
Secretary of State of the State of Delaware;
(2) The Bylaws of the Company, certified as complete and correct by the
Secretary of the Company;
(3) The minute book of the Company, certified as correct and complete by
the Secretary of the Company;
(4) Certificate of Good Standing with respect to the Company, issued by
the Delaware Secretary of State; and
(5) The Registration Statement (including exhibits thereto).
<PAGE>
Board of Directors
The Maxim Group Inc.
July 18, 1996
Page 2
Based upon such examination and upon examination of such other instruments
and records as we have deemed necessary, we are of the opinion that:
(A) The Company has been duly incorporated under the laws of the State of
Delaware and is validly existing and in good standing under the laws of
that state.
(B) The 5,266,285 shares of Common Stock covered by the Registration
Statement have been legally authorized and when issued in accordance with
the terms described in said Registration Statement, will be validly
issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to this firm under the caption "Legal Matters" in
the Proxy Statement/Prospectus. In giving this consent, we do not thereby admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Sincerely,
SMITH, GAMBRELL & RUSSELL
/s/ Robert T. Molinet
Robert T. Molinet
<PAGE>
EXHIBIT 8.1
<PAGE>
[LETTERHEAD]
EXHIBIT 8.1
July 19, 1996
Image Industries, Inc.
Post Office Box 5555
Armuchee, Georgia 30105
Gentlemen:
We have acted as counsel to you, Image Industries, Inc., a corporation
organized under the laws of the State of Delaware ("Image"), in connection with
the proposed merger (the "Merger") of Image and TMG-II Merger, Inc. ("Merger
Sub"), a subsidiary of The Maxim Group, Inc. ("Maxim"), a corporation organized
under the laws of the State of Delaware, pursuant to which the Merger Sub will
be merged with and into Image, with Image thereby becoming a wholly-owned
subsidiary of Maxim and in which each issued and outstanding share of Image
common stock will be converted into the right to receive one share of Maxim
common stock. You have requested our opinion regarding the material U.S. federal
income tax consequences of the Merger to your shareholders.
In rendering our opinion, we have reviewed the Agreement and Plan of
Reorganization, dated May 31, 1996, by and among Image, Maxim and Merger Sub
(the "Merger Agreement"), the Proxy Statement/Prospectus to shareholders of
Image, included in the Form S-4 Registration Statement to which this opinion is
an exhibit (the "Proxy Statement/Prospectus"), and such other materials as we
have deemed necessary or appropriate as a basis for our opinion. Capitalized
terms used but not defined herein shall have the meanings assigned to them in
the Merger Agreement.
In rendering our opinion, we have considered the applicable provisions of
the Internal Revenue Code of 1986 (the "Code"), Treasury regulations, pertinent
judicial authorities, rulings of the Internal Revenue Service, and such other
authorities as we have considered relevant.
In rendering our opinion, we have assumed that the Merger will be
consummated in accordance with the Merger Agreement and that the representations
and warranties of Image and Maxim contained therein are true and correct as of
the Effective Time of the Merger, and that the Proxy Statement/Prospectus
accurately reflects the material facts of the Merger and those surrounding
Image, Maxim and Merger Sub. In addition, as to any facts material to this
opinion which we did not independently establish or verify, we have relied upon
the facts contained in the statements and representations of officers and other
representatives of Image and Maxim and others, including but not limited to
those representations made in each respective Tax Certificate delivered in
connection with this opinion, which facts may in certain instances derive from
the best knowledge of such persons without duty of inquiry. In addition we have
assumed the following:
1. The Merger will be consummated in accordance with the terms of the
Merger Agreement and none of the material terms or conditions therein have
been waived or modified and neither Maxim, Image nor Merger Sub has any plan
or intention to waive or modify any such material terms or conditions.
2. The Merger is expected to further the business purposes as discussed
in the Proxy Statement/Prospectus.
3. Following the Effective Time, it is Maxim's plan that it will either
(i) continue the historic business of Image or (ii) use, in a going concern,
a significant portion of Image's business assets.
4. The ratio for the exchange of shares of common stock of Image (the
"Image Common Stock") for voting common stock of Maxim ("Maxim Common
Stock") in the Merger was negotiated through arm's-length bargaining.
<PAGE>
Image Industries, Inc.
July 19, 1996
Page 2
5. The Maxim Common Stock to be received by Image shareholders is, in
the aggregate, approximately equal to the aggregate fair market value of the
Image Common Stock surrendered in exchange therefor.
6. There is no present plan or intention on the part of the
shareholders of Image to engage in a sale, exchange, transfer, reduction of
risk of ownership or any other direct or indirect disposition (a "Sale") of
(i) shares of Maxim Common Stock to be issued to them in the Merger, which
shares have an aggregate fair market value, as of the period ending at the
Effective Time of the Merger, in excess of fifty percent (50%) of the
aggregate fair market value, immediately prior to the Merger, of the
outstanding shares of Image Common Stock held by shareholders immediately
prior to the Merger ("Outstanding Image Common Stock") (including shares of
Image Common Stock issued after the date hereof and prior to the Effective
Time pursuant to exercise of outstanding options to acquire Image Common
Stock (the "Image Options")), or (ii) more than fifty percent (50%) of the
shares of Maxim Common Stock received by such shareholders in the Merger.
For purposes of the foregoing, a Sale of Maxim Common Stock shall be
considered to have occurred pursuant to a plan if such Sale occurs in a
transaction that is in contemplation of or related to the Merger (a "Related
Transaction"). In addition, shares of Image Common Stock (or the portion
thereof) with respect to which a Sale occurred in a Related Transaction
prior to the Merger shall be considered to have been Outstanding Image
Common Stock that was exchanged for Maxim Common Stock in the Merger and
then disposed of pursuant to a plan.
7. Maxim has no plan or intention to redeem or otherwise reacquire any
of the Maxim Common Stock to be issued in the Merger.
8. Maxim has no present plan or intention to liquidate Image; to merge
Image into another corporation; to cause Image to sell or otherwise dispose
of any of its assets, except for dispositions made in the ordinary course of
business; or to sell or otherwise dispose of any of the Image Common Stock
acquired in the Merger or otherwise.
9. Maxim will acquire Image Common Stock solely in exchange for Maxim
Common Stock, and immediately after the Merger, Maxim will have control of
Image, as defined in Section 368(c) of the Code. Furthermore, no liabilities
of Image shareholders will be assumed by Maxim, nor will any of the Image
Common Stock be subject to any liabilities.
10. Maxim is not an "investment company" as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code, nor will Maxim be an investment
company at the Effective Time.
11. Any compensation paid to shareholders of Image who enter (or who
will enter) into employment contracts with Maxim at any time or with Image
after the Effective Time will be for services actually rendered or to be
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services. None of such compensation
represents consideration for the exchange of shares of Image Common Stock
for Maxim Common Stock. None of the shares of Maxim Common Stock received by
Image shareholders in the Merger is separate consideration for or otherwise
allocable to anything other than Image Common Stock, such as for services or
any covenant not to compete.
12. The Maxim Common Stock issued pursuant to the Merger will not be
subject to any restriction, other than any restrictions imposed under any
applicable securities laws.
13. Maxim formed Merger Sub solely for the purpose of the Merger.
14. None of the shares of Maxim Common Stock received by any party
pursuant to the Merger is separate consideration for or allocable to the
Image Options which remain unexercised after the Effective Time.
15. Image has no plan or intention to acquire after the Merger any of
the Maxim Common Stock to be issued in the Merger.
<PAGE>
Image Industries, Inc.
July 19, 1996
Page 3
16. The fair market value of the assets of Image does and at the
effective time of the Merger will exceed the aggregate liabilities of Image
plus the amount of any other liabilities to which such assets are subject
that are not included in the aggregate.
17. The liabilities of Image, if any, to be assumed by Maxim and the
liabilities, if any, to which the transferred assets of Image are subject
were incurred by Image in the ordinary course of its business.
18. Maxim has no present plan or intention to reacquire any of its
Common Stock issued in the Merger. There have been no transfers of Image
stock which were made in contemplation of, or as part of a plan involving,
the Merger, nor has Image redeemed any of its stock or made any distribution
with respect to any of its stock in contemplation of, or as part of a plan
involving, the Merger.
19. Not more than twenty-five percent (25%) of the fair market value of
Image's or Maxim's total assets consist of stock and securities of any one
issuer, and not more than fifty percent (50%) of the fair market value of
its total assets consists of stock and securities of five or fewer issuers.
For purposes of the preceding sentence, (i) a corporation's total assets
exclude cash, cash items (including accounts receivable and cash
equivalents), and U.S. government securities, (ii) a corporation's total
assets exclude stock and securities issued by any subsidiary at least fifty
percent (50%) of the voting power or fifty percent (50%) of the total fair
market value of the stock of which is owned by the corporation, but the
corporation is treated as owning directly a ratable share (based on the
percentage of the fair market value of the subsidiary's stock owned by the
corporation) of the assets owned by any such subsidiary, and (iii) all
corporations that are members of the same "controlled group" within the
meaning of Section 1563(a) of the Code are treated as a single issuer.
20. The transfer of assets pursuant to the Merger Agreement does not
constitute a transfer in a "title 11 or similar case" as such term is
defined in Section 368(a)(3) of the Code.
21. Image nor Maxim is not a foreign personal holding company as more
fully defined in the Code.
Based upon the foregoing, it is our opinion that, under present law, the
discussion presented under the heading "Terms of the Merger -- Certain Federal
Income Tax Consequences" in the Proxy Statement/Prospectus, although general in
nature, sets forth the material U.S. federal income tax consequences of the
Merger to shareholders of Image.
We express no opinion as to the tax treatment of warrants and options and
the holders thereof and as to the tax consequences to any shareholder who is not
a citizen or resident of the United States.
We express no opinion regarding the U.S. federal income tax consequences,
other than as set forth above, of the Merger that may be applicable to any
particular shareholder of Image. In addition, we express no opinion as to the
U.S. federal income tax consequences, other than as set forth above, and we
express no opinion as to the state, local, foreign or other tax consequences.
This opinion is being furnished in connection with the Proxy
Statement/Prospectus. You may rely upon and refer to the foregoing opinion in
the Proxy Statement/Prospectus. Any material changes in the facts from those set
forth or assumed herein or in the Proxy Statement/Prospectus may affect the
conclusions stated herein.
The reference to Code Sections and other authority above are not intended to
be complete citations of all relevant authority. Changes to the Code,
regulations, the rulings thereunder, or changes by the courts in the
interpretation of the authorities relied upon, may be applied retroactively and
may affect the opinion expressed herein.
<PAGE>
Image Industries, Inc.
July 19, 1996
Page 4
We hereby consent to the reference to us in the section captioned "Terms of
Merger -- Certain Federal Income Tax Matters" in the Proxy Statement/Prospectus
and to the filing of this opinion as an exhibit to the Registration Statement
containing such Proxy Statement/Prospectus. In giving this consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the Rules and
Regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
WOMBLE CARLYLE SANDRIDGE & RICE, PLLC
/s/ G. DONALD JOHNSON
G. Donald Johnson
<PAGE>
EXHIBIT 10.1.2
<PAGE>
AMENDMENT NO. 2
1993 STOCK OPTION PLAN
THE MAXIM GROUP, INC.
WHEREAS, the Board of Directors of The Maxim Group, Inc. (the "Company") has
previously adopted, and the shareholders of the Company have approved, the 1993
Incentive Stock Option Plan (the "Plan") pursuant to which options to purchase
stock of the Company may be issued to eligible directors, officers and key
employees of the Company; and
WHEREAS, the Board of Directors of the Company deems it desirable to amend
the Plan so as to increase the number of shares available for issuance pursuant
to the exercise of options granted under the Plan;
NOW, THEREFORE, the Plan is amended upon the terms, and subject to the
conditions, set forth herein:
ARTICLE I
AMENDMENT TO PLAN
1.1 Section 4 of the Plan shall be amended by deleting the second sentence
thereof in its entirety and substituting the following sentence therefor:
"The maximum number of shares which shall be reserved and made available
for sale under the Plan shall be 2,000,000."
ARTICLE II
EFFECTIVE DATE OF AMENDMENT
2.1 The amendment effected hereby shall be effective for options granted
under the Plan on or after the date this amendment is approved by the Board of
Directors of the Company, but subject to approval of a majority of the shares of
Common Stock of the Company entitled to vote thereon represented in person and
by proxy at a meeting of shareholders. In the event shareholder approval of
adoption of this amendment is not obtained within twelve months of the date this
amendment is approved by the Board of Directors of the Company, then any option
granted in the intervening period shall be void.
<PAGE>
EXHIBIT 10.19
<PAGE>
REVOLVING CREDIT NOTE
Atlanta, Georgia
$23,000,000 December 15, 1995
FOR VALUE RECEIVED, the undersigned, THE MAXIM GROUP, INC., a Delaware
corporation, and KINNAIRD & FRANCKE INTERIORS, INC., a Delaware corporation,
KINNAIRD & FRANCKE DRAPERY CO., INC., a Kentucky corporation, FIRST QUALITY,
INC., a Delaware corporation, STEVE PETERSON INTERIORS & ASSOCIATES, INC., a
Utah corporation, NATIONAL CARPET BROKERS, INC., a Utah corporation, BAY AREA
CARPETS, INC., a Delaware corporation, CARPET WORLD, INC., a Delaware
corporation, RNA ENTERPRISES, INC., a Delaware corporation, GCO, INC., an
Alabama corporation, CARPETIME, INC., a Delaware corporation, DUBOSE CARPETS &
FLOORS, INC., a Delaware corporation, RUG N REMNANTS, INC., a Texas corporation,
CARPET GALLERY, INC. (GEORGIA), a Georgia corporation, AMERICAN CARPETS &
INTERIORS, INC., a Georgia corporation, INVESTOR MANAGEMENT, INC., an Alabama
corporation, LOSANTVILLE CARPET OUTLET, INC., an Indiana corporation, and CARPET
COUNTRY, INC., a Georgia corporation, jointly and severally (hereinafter
referred to as "Maker", which term shall refer to each of the undersigned
individually and jointly), promise to pay to the order of FIRST UNION NATIONAL
BANK OF GEORGIA, a national banking association (hereinafter referred to as the
"Holder"), at Holder's office located at 999 Peachtree Street, N.E., Atlanta,
Georgia 30309, or at such other place as Holder may from time to time designate
in writing, the principal sum of Twenty Three Million Dollars ($23,000,000.00)
or, if less, the aggregate outstanding principal amount of Advances, as such
term is defined in that certain Loan Agreement dated February 2, 1995, as
amended, between Maker and Holder, as further amended, modified, supplemented or
restated from time to time (the "Loan Agreement"), made or issued by Holder to
or on behalf of Maker, in lawful money of the United States, payable in full
upon the Line Termination Date (as defined in the Loan Agreement), together with
accrued interest from the date hereof on the unpaid principal balance hereof,
payable in the manner and at the rate or rates specified in the Loan Agreement.
The date and amount of each Advance made by the Holder to the Maker of this
Note under the Loan Agreement referred to above, and each payment of principal
thereof, shall be recorded by Holder on its books.
In no contingency or event whatsoever shall the interest rate charged
pursuant to the terms of this Note exceed the highest rate permissible under any
law which a court of competent jurisdiction shall, in a final determination,
deem applicable hereto. In the event that such a court determines that Holder
has received interest hereunder in excess of the highest applicable rate, Holder
shall promptly pay or credit such excess interest as provided in the Loan
Agreement.
This Note is the "Revolving Credit Note" referred to in the Loan Agreement,
and is subject to all of the terms and conditions of the Loan Agreement,
including, but not limited to, those related to the acceleration of the
indebtedness represented hereby upon the occurrence of an Event of Default (as
defined in the Loan Agreement). Payment of this Note is secured by the
Collateral and the Realty (as such terms are defined in the Loan Agreement) as
set forth in the Loan Agreement. Maker may prepay this Note as provided in the
Loan Agreement. This Note is issued in renewal of that certain Revolving Credit
Note, dated as of February 2, 1995, from the Company and each of its then
existing Subsidiaries to the Holder.
Upon and after the occurrence of an Event of Default, the unpaid principal
balance hereunder, at the option of Holder, shall bear interest, calculated
daily on the basis of a 360-day year for the actual days elapsed, at the rate
per annum equal to the Default Rate (as such term is defined in the Loan
Agreement).
THIS NOTE HAS BEEN EXECUTED AND DELIVERED IN ATLANTA, GEORGIA AND THE LOANS
REPRESENTED HEREBY ARE TO BE REPAID AT ATLANTA, GEORGIA. THIS NOTE SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD FOR CONFLICTS OF
LAW RULES.
<PAGE>
If legal action is instituted on this Note, the Maker agrees to pay
reasonable attorneys' fees actually incurred by Holder.
The Maker hereby waives presentment, demand for payment, protest and notice
of protest, notice of dishonor and all other notices in connection with this
Note.
WITNESS the hand and seal of each of the undersigned.
THE MAXIM GROUP, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
"SUBSIDIARIES"
KINNAIRD & FRANCKE INTERIORS, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
KINNAIRD & FRANCKE DRAPERY, CO., INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
FIRST QUALITY, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
STEVE PETERSON INTERIORS & ASSOCIATES,
INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
<PAGE>
NATIONAL CARPET BROKERS, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
BAY AREA CARPETS, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
CARPET WORLD, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
RNA ENTERPRISES, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
GCO, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
CARPETIME, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
<PAGE>
DUBOSE CARPETS & FLOORS, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
RUGS N REMNANTS, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
CARPET GALLERY, INC. (GEORGIA)
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
LOSANTVILLE CARPET OUTLET, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
AMERICAN CARPETS & INTERIORS, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
INVESTOR MANAGEMENT, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
CARPET COUNTRY, INC.
By: /s/ A.J. NASSAR
-----------------------------------
ITS AUTHORIZED OFFICER
[SEAL]
<PAGE>
EXHIBIT 21.1
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Kinnaird & Francke Interiors, Inc., a Delaware corporation
Kinnaird & Francke Drapery Co., Inc., a Kentucky corporation
First Quality, Inc., a Delaware corporation
First Quality of North Carolina, Inc., a Georgia corporation
Steve Peterson Interiors & Associates, Inc., a Utah corporation
National Carpet Brokers, Inc., a Utah corporation
RNA Enterprises, Inc., a Delaware corporation
Bay Area Carpets, Inc., a Delaware corporation
Carpet World, Inc., a Delaware corporation
GCO, Inc., an Alabama corporation
CarpeTime, Inc., a Delaware corporation
DuBose Carpets & Floors, Inc., a Delaware corporation
Rugs N Remnants, Inc., a Texas corporation
American Carpet & Interiors, Inc., a Georgia corporation
Carpet Gallery, Inc., a Georgia corporation
Carpet Country, Inc., a Georgia corporation
Investor Management, Inc., an Alabama corporation
Losantville Carpet Outlet, Inc., an Indiana corporation
CreditMax, Inc., a Georgia Corporation
<PAGE>
EXHIBIT 23.1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 19, 1996 on the January 31, 1996 consolidated financial
statements of the Maxim Group, Inc. (and to all references to our firm) included
in this Registration Statement on Form S-4.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 18, 1996
<PAGE>
EXHIBIT 23.2
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
The Maxim Group, Inc.
We consent to the use of our reports included herein or incorporated herein
by reference and to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
July 22, 1996
<PAGE>
EXHIBIT 23.3
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Image Industries, Inc.
We consent to the use of our reports included herein or incorporated herein
by reference and to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
July 22, 1996
<PAGE>
EXHIBIT 23.4
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of The Maxim Group,
Inc. on Form S-4 of our report dated May 20, 1994 with respect to the financial
statements of Pharr Yarns of Georgia, Inc. for the fiscal year ended March 26,
1994, appearing in the Prospectus, which is part of this Registration Statement,
and to the reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
July 17, 1996
<PAGE>
EXHIBIT 23.5
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion and
incorporation by reference in this registration statement of The Maxim Group,
Inc. on Form S-4 of our report dated April 28, 1995 with respect to the
financial statements of Pharr Yarns of Georgia, Inc. for the fiscal year ended
March 25, 1995, appearing in the Form 8-K/A-1 of Image Industries, Inc. dated
September 12, 1995, and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
Charlotte, North Carolina
July 18, 1996
<PAGE>
EXHIBIT 23.8
<PAGE>
[PRUDENTIAL LETTERHEAD]
CONSENT OF PRUDENTIAL SECURITIES INCORPORATED
We consent to the inclusion in this Registration Statement on Form S-4 of
our opinion, dated May 31, 1996, as set forth as Appendix B to the Proxy
Statement/Prospectus and to the summarization thereof in the Proxy
Statement/Prospectus under the caption "Background of and Reasons for the
Merger." In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933 or the Rules and Regulations of the Securities and Exchange
Commission thereunder.
PRUDENTIAL SECURITIES INCORPORATED
By: /s/ STEPHEN W. POWELL
-----------------------------------
Stephen W. Powell,
DIRECTOR
Atlanta, Georgia
July 18, 1996
<PAGE>
EXHIBIT 23.9
<PAGE>
EXHIBIT 23.9
[ROBINSON-HUMPHREY COMPANY LETTERHEAD]
CONSENT
Notwithstanding the provisions of that certain fairness opinion letter to
the Board of Directors of Image Industries, Inc., dated June 7, 1996, from The
Robinson-Humphrey Company, Inc. ("RH"), RH hereby consents to the inclusion of
such letter as an exhibit to the Prospectus/Joint Proxy Statement to be filed by
The Maxim Group, Inc. with the Securities and Exchange Commission in connection
with the proposed transaction referred to in said letter and to the distribution
of such letter as an exhibit to said Prospectus/Proxy Statement to the
shareholders of Image and Maxim.
THE ROBINSON-HUMPHREY COMPANY, INC.
BY:
_______/S/ REYNOLDS C. FAULKNER_______
Name:_______Reynolds C. Faulkner______
Title:______First Vice President______
<PAGE>
EXHIBIT 24.1
<PAGE>
STATE OF ALABAMA
COUNTY OF MONTGOMERY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Dicky W. McAdams, a Director of THE
MAXIM GROUP, INC., a Delaware corporation, do constitute and appoint A. J.
Nassar and Thomas P. Leahey my true and lawful attorneys-in-fact, each with full
power of substitution, for me in any and all capacities, to sign, pursuant to
the requirements of the Securities Act of 1933, a Registration Statement on Form
S-4 for THE MAXIM GROUP, INC. in connection with the acquisition of Image
Industries, Inc., and to file the same with the Securities and Exchange
Commission, together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all capacities,
any amendments to said Registration Statement, incorporating such changes as
said attorneys-in-fact deem appropriate, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of
July, 1996.
/s/ DICKY W. MCADAMS
--------------------------------------
Dicky W. McAdams
ACKNOWLEDGMENT
BEFORE me this 18th day of July, 1996, came Dicky W. McAdams, personally
known to me, who in my presence did sign and seal the above and foregoing Power
of Attorney and acknowledged the same as his true act and deed.
/s/ JUDI GRANT
--------------------------------------
NOTARY PUBLIC
State of _______Alabama_______________
My Commission Expires:
May 3, 1997
--------------------------------------
<PAGE>
STATE OF NEW YORK
COUNTY OF NASSAU
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Herb Wolk, a Director of THE MAXIM
GROUP, INC., a Delaware corporation, do constitute and appoint A. J. Nassar and
Thomas P. Leahey my true and lawful attorneys-in-fact, each with full power of
substitution, for me in any and all capacities, to sign, pursuant to the
requirements of the Securities Act of 1933, a Registration Statement on Form S-4
for THE MAXIM GROUP, INC. in connection with the acquisition of Image
Industries, Inc., and to file the same with the Securities and Exchange
Commission, together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all capacities,
any amendments to said Registration Statement, incorporating such changes as
said attorneys-in-fact deem appropriate, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 17th day of
July, 1996.
/s/ HERB WOLK
--------------------------------------
Herb Wolk
ACKNOWLEDGMENT
BEFORE me this 17th day of July, 1996, came Herb Wolk, personally known to
me, who in my presence did sign and seal the above and foregoing Power of
Attorney and acknowledged the same as his true act and deed.
/s/ WILLIAM F. BRAHE, JR.
--------------------------------------
NOTARY PUBLIC
State of _______New York______________
My Commission Expires:
12/23/97
--------------------------------------
<PAGE>
STATE OF OHIO
COUNTY OF HAMILTON
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Ronald McSwain, a Director of THE
MAXIM GROUP, INC., a Delaware corporation, do constitute and appoint A. J.
Nassar and Thomas P. Leahey my true and lawful attorneys-in-fact, each with full
power of substitution, for me in any and all capacities, to sign, pursuant to
the requirements of the Securities Act of 1933, a Registration Statement on Form
S-4 for THE MAXIM GROUP, INC. in connection with the acquisition of Image
Industries, Inc., and to file the same with the Securities and Exchange
Commission, together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all capacities,
any amendments to said Registration Statement, incorporating such changes as
said attorneys-in-fact deem appropriate, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of
July, 1996.
/s/ RONALD MCSWAIN
--------------------------------------
Ronald McSwain
ACKNOWLEDGMENT
BEFORE me this 18th day of July, 1996, came Ronald McSwain, personally known
to me, who in my presence did sign and seal the above and foregoing Power of
Attorney and acknowledged the same as his true act and deed.
/s/ VIVIAN M. HERNANDEZ
--------------------------------------
NOTARY PUBLIC
State of _________Ohio________________
My Commission Expires:
15 June 2000
--------------------------------------
<PAGE>
STATE OF NEW YORK
COUNTY OF MONROE
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Richard A. Kaplan, a Director of THE
MAXIM GROUP, INC., a Delaware corporation, do constitute and appoint A. J.
Nassar and Thomas P. Leahey my true and lawful attorneys-in-fact, each with full
power of substitution, for me in any and all capacities, to sign, pursuant to
the requirements of the Securities Act of 1933, a Registration Statement on Form
S-4 for THE MAXIM GROUP, INC. in connection with the acquisition of Image
Industries, Inc., and to file the same with the Securities and Exchange
Commission, together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all capacities,
any amendments to said Registration Statement, incorporating such changes as
said attorneys-in-fact deem appropriate, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 17th day of
July, 1996.
/s/ RICHARD A. KAPLAN
--------------------------------------
Richard A. Kaplan
ACKNOWLEDGMENT
BEFORE me this 17th day of July, 1996, came Richard A. Kaplan, personally
known to me, who in my presence did sign and seal the above and foregoing Power
of Attorney and acknowledged the same as his true act and deed.
/s/ SANDRA A. WHITE
--------------------------------------
NOTARY PUBLIC
State of _______New York______________
My Commission Expires:
February 28, 1997
--------------------------------------
<PAGE>
STATE OF FLORIDA
COUNTY OF PALM BEACH
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, M.B. Seretean, a Director of THE
MAXIM GROUP, INC., a Delaware corporation, do constitute and appoint A. J.
Nassar and Thomas P. Leahey my true and lawful attorneys-in-fact, each with full
power of substitution, for me in any and all capacities, to sign, pursuant to
the requirements of the Securities Act of 1933, a Registration Statement on Form
S-4 for THE MAXIM GROUP, INC. in connection with the acquisition of Image
Industries, Inc., and to file the same with the Securities and Exchange
Commission, together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all capacities,
any amendments to said Registration Statement, incorporating such changes as
said attorneys-in-fact deem appropriate, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of
July, 1996.
/s/ M.B. SERETEAN
--------------------------------------
M.B. Seretean
ACKNOWLEDGMENT
BEFORE me this 18th day of July, 1996, came M.B. Seretean, personally known
to me, who in my presence did sign and seal the above and foregoing Power of
Attorney and acknowledged the same as his true act and deed.
/s/ MARSHALL OWENS LLOYD
--------------------------------------
NOTARY PUBLIC
State of _______Florida_______________
My Commission Expires:
March 9, 1999
--------------------------------------
<PAGE>
STATE OF GEORGIA
COUNTY OF PAULDING
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, A.J. Nassar, a Director of THE MAXIM
GROUP, INC., a Delaware corporation, do constitute and appoint Thomas P. Leahey
my true and lawful attorney-in-fact, with full power of substitution, for me in
any and all capacities, to sign, pursuant to the requirements of the Securities
Act of 1933, a Registration Statement on Form S-4 for THE MAXIM GROUP, INC. in
connection with the acquisition of Image Industries, Inc., and to file the same
with the Securities and Exchange Commission, together with all exhibits thereto
and other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Registration Statement,
incorporating such changes as said attorney-in-fact deems appropriate, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of
July, 1996.
/s/ A. J. NASSAR
--------------------------------------
A.J. Nassar
ACKNOWLEDGMENT
BEFORE me this 18th day of July, 1996, came A.J. Nassar, personally known to
me, who in my presence did sign and seal the above and foregoing Power of
Attorney and acknowledged the same as his true act and deed.
/s/ HOWARD L. MARX, III
--------------------------------------
NOTARY PUBLIC
State of _______Georgia_______________
My Commission Expires:
December 4, 1999
--------------------------------------
<PAGE>
STATE OF GEORGIA
COUNTY OF GWINNETT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, J. Michael Nixon, a Director of THE
MAXIM GROUP, INC., a Delaware corporation, do constitute and appoint A. J.
Nassar and Thomas P. Leahey my true and lawful attorneys-in-fact, each with full
power of substitution, for me in any and all capacities, to sign, pursuant to
the requirements of the Securities Act of 1933, a Registration Statement on Form
S-4 for THE MAXIM GROUP, INC. in connection with the acquisition of Image
Industries, Inc., and to file the same with the Securities and Exchange
Commission, together with all exhibits thereto and other documents in connection
therewith, and to sign on my behalf and in my stead, in any and all capacities,
any amendments to said Registration Statement, incorporating such changes as
said attorneys-in-fact deem appropriate, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or substitutes, may do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of
July, 1996.
/s/ J. MICHAEL NIXON
--------------------------------------
J. Michael Nixon
ACKNOWLEDGMENT
BEFORE me this 18th day of July, 1996, came J. Michael Nixon, personally
known to me, who in my presence did sign and seal the above and foregoing Power
of Attorney and acknowledged the same as his true act and deed.
/s/ JANICE M. ASHBY
--------------------------------------
NOTARY PUBLIC
State of _______Georgia_______________
My Commission Expires:
February 25, 1999
--------------------------------------
<PAGE>
EXHIBIT 99.1
<PAGE>
THE MAXIM GROUP, INC.
210 TOWNPARK DRIVE
KENNESAW, GEORGIA 30144
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE 1996 ANNUAL
MEETING OF SHAREHOLDERS.
The undersigned hereby appoints A.J. Nassar and Thomas P. Leahey or either
of them, with power of substitution to each, the proxies of the undersigned to
vote the Common Stock of the undersigned at the Annual Meeting of Shareholders
of THE MAXIM GROUP, INC. to be held on August 29, 1996, at 10:00 a.m. at 210
TownPark Drive, Kennesaw, Georgia 30144, and any adjournments or postponements
thereof:
1. To consider and vote upon a proposal to adopt the Agreement and Plan of
Reorganization, dated as of May 31, 1996 (the "Merger Agreement"), among
Maxim, TMG-II Merger, Inc., a wholly-owned subsidiary of Maxim (the "Merger
Subsidiary") and Image Industries, Inc. ("Image"), and to approve the merger
(the "Merger") of Image and the Merger Subsidiary, pursuant to which the
Merger Subsidiary will be merged into Image, with Image thereby becoming a
wholly-owned subsidiary of Maxim, and in which each issued and outstanding
share of Image Common Stock will be converted into the right to receive one
share of Maxim Common Stock.
/ / FOR / / AGAINST / / ABSTAIN
2. To approve an amendment to the Certificate of Incorporation of Maxim to
increase the number of authorized shares of Common Stock from 15,000,000
shares to 25,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
3. To approve an amendment to the Certificate of Incorporation of Maxim to (A)
provide for the election and removal of directors and for the classification
of the Board of Directors into three classes, (B) prohibit actions by
written consent of shareholders without a meeting and (C) authorize the
Board of Directors to amend the By-Laws without action by shareholders (the
matters referred to in items 2 and 3 are collectively referred to as the
"Maxim Charter Amendments").
/ / FOR / / AGAINST / / ABSTAIN
4. If the Maxim Charter Amendments referred to in item 3, above, are adopted,
to elect eight (8) directors to constitute the Board of Directors of Maxim
to be divided into three classes as set forth below and to serve until their
successors are duly elected and shall have qualified; otherwise, such
directors are to be elected to serve for the ensuing year and until their
successors are duly elected and shall have qualified.
/ / FOR all nominees listed below (except as marked to the contrary
below) / / WITHHOLD AUTHORITY to vote for all nominees listed
below
Class I Directors (to serve for a term expiring at the 1997 Annual Meeting
of Shareholders): Dicky W. McAdams; Herb Wolk; and J. Michael Nixon.
Class II Directors (to serve for a term expiring at the 1998 Annual Meeting
of Shareholders): James W. Inglis; and Ronald McSwain.
Class III Directors (to serve for a term expiring at the 1999 Annual Meeting
of Shareholders): Richard A. Kaplan; A. J. Nassar; and M. B. Seretean.
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE
THE NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.
----------------------------------------------------------------------------
<PAGE>
5. To approve an amendment to the 1993 Stock Option Plan of Maxim to increase
the number of shares available for grant thereunder from 1,000,000 shares to
2,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
6. To transact such other business incidental to the conduct of the Maxim
Annual Meeting as may properly come before the Maxim Annual Meeting or any
adjournments or postponements thereof.
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ABOVE PROPOSALS AND UNLESS
INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS PROXY
WILL BE SO VOTED.
Please date and sign this Proxy exactly
as name(s) appears on the mailing
label.
---------------------------------------
---------------------------------------
Print Name(s):_________________________
NOTE: When signing as an attorney,
trustee, executor, administrator or
guardian, please give your title as
such. If a corporation or partnership,
give full name by authorized officer.
In the case of joint tenants, each
joint owner must sign.
Dated:_________________________________
<PAGE>
EXHIBIT 99.2
<PAGE>
IMAGE INDUSTRIES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby acknowledges receipt of the Notice of the Special
Meeting of Shareholders and Proxy Statement and does hereby appoint H. Stanley
Padgett and Larry M Miller, and either of them with full power of substitution,
as proxies of the undersigned to represent the undersigned and to vote all
shares of IMAGE INDUSTRIES, INC. (the "Company") common stock which the
undersigned would be entitled to vote if personally present at the Special
Meeting of Shareholders of the Company, to be held at the executive offices of
the Company, 1112 Georgia Highway 140, Armuchee, Georgia 30105, at 10:00 o'clock
a.m. local time, on August 29, 1996 and at any adjournments or postponements
thereof.
PROPOSAL
/ / FOR the proposal to adopt the Agreement and Plan of Reorganization, dated as
of May 31, 1996 (the "Merger Agreement"), among the Company, The Maxim Group,
Inc. ("Maxim") and TMG-II Merger, Inc., a wholly-owned subsidiary of Maxim (the
"Merger Subsidiary") and to approve the merger (the "Merger") of Image and the
Merger Subsidiary, pursuant to which the Merger Subsidiary will be merged into
Image, with Image thereby becoming a wholly-owned subsidiary of Maxim, and in
which each issued and outstanding share of Image common stock will be converted
into the right to receive one share of Maxim common stock.
/ / AGAINST the above Proposal. / / ABSTAIN.
In their discretion, the Proxies are authorized to vote on such other
business as may properly come before the meeting or any adjournments or
postponements thereof. This Proxy may be revoked at any time prior to voting
thereof.
<PAGE>
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY PROMPTLY
This proxy, when properly executed, duly returned and not revoked will be
voted. It will be voted in accordance with the directions given by the
undersigned shareholder. If no direction is made, it will be voted in favor of
the Proposal listed on this Proxy.
Signature(s)
---------------------------------------
---------------------------------------
Dated: __________________________, 1996
NOTE: Joint owners should each sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If the
signatory is a corporation, sign the
full corporate name by a duly
authorized officer.
