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File No. 333-20105
Filed Pursuant to Rule 424(b)(1)
PROSPECTUS
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[THE MAXIM GROUP, INC. LOGO]
3,600,000 Shares
THE MAXIM GROUP, INC.
Common Stock
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Of the 3,600,000 shares of common stock, par value $.001 per share (the "Common
Stock"), offered hereby, 3,175,773 are being sold by The Maxim Group, Inc. (the
"Company") and 424,227 are being sold by certain selling stockholders of the
Company (the "Selling Stockholders"). The Company will not receive any of the
proceeds from the sale of shares sold by the Selling Stockholders. See
"Principal and Selling Stockholders."
The Common Stock is included in The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") under the symbol "MAXM." On February 18, 1997 the last
reported sales price for the Common Stock on the Nasdaq National Market was
$16.50 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" ON PAGES 7 THROUGH 10 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions (1) Company (2) Stockholders
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<S> <C> <C> <C> <C>
Per Share............. $16.00 $0.92 $15.08 $15.08
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Total (3)............. $57,600,000 $3,312,000 $47,890,657 $6,397,343
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(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933 (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated offering expenses of $282,000 payable by the
Company.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 540,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be
$66,240,000, the total Underwriting Discounts and Commissions will be
$3,808,800, the total Proceeds to Company will be $56,033,857 and the total
Proceeds to Selling Stockholders will be $6,397,343. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the offices of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about February 24, 1997.
PRUDENTIAL SECURITIES INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, INC.
WHEAT FIRST BUTCHER SINGER
February 18,1997
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[FRONT COVER PHOTOS]
[Artist rendering of CARPETMAX Flooring Idea Gallery(TM) Store]
The CARPETMAX Flooring Idea Gallery(TM) store is designed to create a more
comfortable, enjoyable and productive floorcovering shopping experience.
[Photograph of in-store advertising displays]
The CARPETMAX Flooring Idea Gallery(TM) offers customers commitment to service,
everday low pricing, complete product selection, unconditional satisfaction
guarantees and national buying power.
[Photograph of carpet selection display]
The Image color wall displays a broad spectrum of the Company's high-quality
proprietary carpets with complimentary hard surface products for effective
cross-selling.
[Photograph of area rug display]
In-store galleries display an extensive collection of area rugs and hard
surface products such as hardwood and laminates.
[Photograph of hardwood flooring display]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934 (THE "1934
ACT"). SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements appearing elsewhere and
incorporated by reference in this Prospectus. Except as otherwise indicated, the
information in this Prospectus assumes the Underwriters' over-allotment option
will not be exercised. The term "fiscal" when used in this Prospectus shall mean
the twelve-month period ending March 31 for the fiscal years ending March 31,
1995 and prior, the ten-month period ending January 31 for the ten-month period
ending January 31, 1996, and the twelve-month period ending January 31 of the
calendar year otherwise indicated. The consolidated financial statements of the
Company give retroactive effect to the merger of the Company and GCO, Inc. on
September 28, 1994 and the merger of the Company and Image Industries, Inc.
("Image") on August 30, 1996, which transactions were accounted for as
poolings-of-interests.
THE COMPANY
The Company operates and franchises one of the largest retail floorcovering
networks in North America through two retail floorcovering concepts: the
CARPETMAX Division ("CARPETMAX"), which operates full-service floorcovering
stores, and the Georgia Carpet Outlet Division ("GCO"), which operates cash-and-
carry discount floorcovering stores. The Company has built an integrated
floorcovering distribution network, consisting of both Company-owned and
franchised retail stores, supported by the Company's extensive specialty
retailing capabilities in product sourcing, store development, marketing and
advertising, credit and personnel training. As of January 1, 1997, the Company's
retail network consisted of 50 Company-owned CARPETMAX stores, seven
Company-owned GCO stores and 399 franchise dealers operating approximately 465
CARPETMAX stores and 99 GCO stores. The Company's retail floorcovering revenues
increased 22.4% to $87.0 million for the nine months ended October 31, 1996 from
$71.1 million for the nine months ended September 30, 1995 and total revenues,
including manufacturing revenues, increased 20.6% to $231.5 million for the nine
months ended October 31, 1996 from $192.0 million for the nine months ended
September 30, 1995.
The domestic retail floorcovering industry is highly-fragmented with
independent retail floorcovering dealers operating over 14,000 locations. Other
floorcovering vendors such as home centers, furniture stores, department stores
and mass merchants operate over 23,000 locations nationwide. The Company
estimates total retail floorcovering sales approximated $20 billion in 1995. The
Company believes that the industry is characterized by a large number of small
local and regional companies, none of which has a national brand name, and a
small number of national chains. The typical independent floorcovering retailer
operates one store with limited product selection and service. As a result, the
Company believes that most independent floorcovering retailers face distinct
competitive disadvantages.
The Company's objective is to establish the largest and most profitable
residential and commercial floorcovering distribution network in North America.
To achieve this objective, the Company pursues the following business
strategies: (i) offer a broad selection of products and services; (ii) locate
stores in prime retail locations; (iii) provide a customer friendly environment
and superior customer service; (iv) build the leading national brand; (v)
leverage product sourcing capabilities; and (vi) leverage retailing resources
and capabilities.
The cornerstone of the Company's business and growth strategies is the
CARPETMAX Flooring Idea Gallery store (the "Gallery Store"), a refinement of its
initial CARPETMAX store concept. As of January 1, 1997, the Company had opened
one Gallery Store. The Gallery Store prototype has 6,500 square feet of retail
selling space in a "Class A" retail location. The Company believes the Gallery
Store has one of the most extensive product offerings in the industry, featuring
approximately 8,000 SKUs of carpet, area rugs, hardwood flooring, vinyl
flooring, ceramic tile, laminates, stone and resilient surfaces produced by the
leading floorcovering manufacturers worldwide. The Gallery Store is designed to
create a more comfortable, enjoyable and productive shopping experience
supported by a well-trained professional staff. Each floorcovering category is
featured in a separate in-store gallery as well as in coordinated multi-category
displays throughout the store.
The Company intends to expand its floorcovering distribution network to
more fully utilize its retailing resources and capabilities. The Company's
growth strategy includes: (i) opening 70 new Gallery Stores during
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fiscal 1998 and 1999; (ii) increasing the Company's presence in all market
segments; (iii) expanding product offerings and services for each distribution
format; and (iv) pursuing strategic acquisitions.
To enhance its ability to offer high-quality and high-margin products and
services, in August 1996, the Company merged with Image, a leading producer of
polyester broadloom carpet. The Company believes that Image's product line will
provide the Company's retail and commercial customers with a greater selection
of high-quality carpet at a lower cost than would otherwise be available.
RECENT DEVELOPMENTS
The Company has recently begun to expand its floorcovering distribution
network to target large commercial projects for institutional customers such as
hospitals, hotels, governments, the military and schools (the "specified
contract" market) and smaller commercial and residential construction and
renovation projects managed by a general contractor (the "builder" market). On
November 22, 1996 and on November 26, 1996, the Company acquired Bailey &
Roberts Flooring, Inc. ("Bailey & Roberts") and Sexton Floor Covering, Inc.
("Sexton"), respectively. Bailey & Roberts is a specified contract floorcovering
business and Sexton is a floorcovering business catering to the builder market,
each with an excellent reputation in their respective markets. The Company
intends to build market share in these segments primarily by leveraging off of
its existing distribution network and established floorcovering distribution and
retail resources. See "Business -- Retail Operations -- Specified Contract
Market and -- Builder Market."
The Company 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 principal executive offices of the
Company are located at 210 TownPark Drive, Kennesaw, Georgia 30144, and its
telephone number is (770) 590-9369.
THE OFFERING
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Common Stock Offered by the Company........................ 3,175,773 shares
Common Stock Offered by the Selling Stockholders........... 424,227 shares
Common Stock to be Outstanding after the Offering(1)....... 16,034,852 shares
Use of Proceeds............................................ To reduce amounts outstanding under the
Company's credit facilities. See "Use of
Proceeds."
Nasdaq National Market Symbol.............................. MAXM
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(1) Excludes (i) 1,730,740 shares of Common Stock issuable as of January 16,
1997 upon the exercise of outstanding stock options under the Company's
1993 Stock Option Plan at a weighted average exercise price of
approximately $9.95 per share, of which 1,071,138 options to purchase
shares are exercisable as of January 16, 1997, (ii) 872,613 shares of
Common Stock issuable as of January 16, 1997 (adjusted to give effect to
the exercise of options to purchase 60,002 shares of Common Stock by one of
the Selling Stockholders) upon the exercise of presently exercisable
outstanding stock options under the Company's RSO Plan at an exercise price
of $.01 per share, and (iii) 269,260 shares reserved for future issuances
under the Company's 1993 Stock Option Plan. See "Shares Eligible For Future
Sale."
CARPETMAX(R) is a registered trademark of the Company and the Company has
applied for registration of the mark CARPETMAX Flooring Idea Gallery(TM).
Whenever such trademarks appear in this Prospectus, such names shall be deemed
to refer to the corresponding registered trademark or to the mark for which the
Company has applied for registration, as the case may be.
Except as otherwise indicated, industry data in this Prospectus is derived from
selected reports prepared by FloorCovering Weekly.
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
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TEN
MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, JANUARY 31,
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1992 1993 1994 1995 1996(1)
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(IN THOUSANDS, EXCEPT PER SHARE, STORE AND TERRITORY DATA)
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STATEMENT OF EARNINGS DATA:
Revenues
Sales of floorcovering products.... $ 74,809 $ 88,676 $ 106,237 $ 174,935 $186,568
Fees from franchise services....... 2,167 5,113 9,688 13,876 13,432
Fiber and PET sales................ 7,193 4,583 5,297 12,886 24,072
Other.............................. 388 479 1,369 1,644 3,479
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Total revenues................... 84,557 98,851 122,591 203,341 227,551
Cost of sales........................ 63,465 71,570 85,847 139,521 161,723
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Gross profit..................... 21,092 27,281 36,744 63,820 65,828
Selling, general, and administrative
expenses........................... 13,185 17,417 23,669 46,870 59,197
Replacement stock option charge...... -- -- 10,388(3) -- --
Goodwill impairment charge........... -- -- -- -- 6,569(4)
Merger-related costs................. -- -- -- 500(5) --
Interest expense, net................ 4,487 3,824 1,579 1,442 4,280
Other expense (income)............... 532 98 263 (421) (78)
------------- ------------- --------------- --------------- --------
Earnings (loss) before income taxes
and extraordinary income........... 2,888 5,942 845 15,429 (4,140)
Income tax expense................... 306 947 376 5,787 105
------------- ------------- --------------- --------------- --------
Net earnings (loss) before
extraordinary income............... 2,582 4,995 469 9,642 (4,245)
Extraordinary income................. -- -- 190 -- --
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Net earnings (loss).............. $ 2,582 $ 4,995 $ 659 $ 9,642 $ (4,245)
============= ============= =============== =============== ========
Net earnings (loss) per common
share(7)........................... $ 0.29 $ 0.56 $ 0.06 $ 0.72 $ (0.32)
============= ============= =============== =============== ========
Weighted average shares
outstanding(7)..................... 8,963 8,903 11,161 13,301 13,301
============= ============= =============== =============== ========
SELECTED OPERATING DATA:
Revenues attributable to:
CARPETMAX operations............... $ 1,325 $ 3,766 $ 10,051 $ 63,933 $ 85,278
GCO operations..................... 3,655 5,605 9,283 12,158 14,012
Image operations................... 79,577 89,480 103,257 127,250 128,261
End of period:
Company-owned stores............... 4 8 8 51 59
Franchise territories.............. 98 148 233 325 377
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NINE MONTHS ENDED
SOCTOBERR31,,
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1995(2) 1996(2)
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STATEMENT OF EARNINGS DATA:
Revenues
Sales of floorcovering products.... $161,733 $185,735
Fees from franchise services....... 12,146 19,684
Fiber and PET sales................ 15,928 23,458
Other.............................. 2,208 2,585
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Total revenues................... 192,015 231,462
Cost of sales........................ 132,351 166,934
-------- --------
Gross profit..................... 59,664 64,528
Selling, general, and administrative
expenses........................... 47,053 54,104
Replacement stock option charge...... -- --
Goodwill impairment charge........... -- --
Merger-related costs................. -- 4,700(6)
Interest expense, net................ 3,026 4,588
Other expense (income)............... (417) (426)
-------- --------
Earnings (loss) before income taxes
and extraordinary income........... 10,002 1,562
Income tax expense................... 3,656 1,514
-------- --------
Net earnings (loss) before
extraordinary income............... 6,346 48
Extraordinary income................. -- --
-------- --------
Net earnings (loss).............. $ 6,346 $ 48
======== ========
Net earnings (loss) per common
share(7)........................... $ 0.47 $ 0.00
======== ========
Weighted average shares
outstanding(7)..................... 13,546 13,791
======== ========
SELECTED OPERATING DATA:
Revenues attributable to:
CARPETMAX operations............... $ 73,244 $ 91,245
GCO operations..................... 11,381 16,958
Image operations................... 107,390 123,259
End of period:
Company-owned stores............... 64 53
Franchise territories.............. 364 397
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OCTOBER 31, 1996
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ACTUAL AS ADJUSTED(8)
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(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 54,551 $ 54,551
Total assets................................................ 210,144 210,144
Long-term debt and capital leases........................... 92,658 45,105
Stockholders' equity........................................ 72,937 120,490
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(1) On January 31, 1996, the Company changed its fiscal year end from March 31
to January 31.
(2) These periods are not entirely comparable as the period ended October 31,
1996 does not include the month of January, which is one of the two weakest
sales months of the year. See "Risk Factors -- Fluctuations in Quarterly
Results, Seasonality and Cyclical Nature of the Floorcovering Industry."
(3) Image granted replacement stock options on August 10, 1993, in replacement
of a like number of unvested stock appreciation units and vested and
unvested stock options. As a result of this exchange, Image recognized a
non-cash, non-recurring charge of $10.4 million in its fiscal year ending
March 31, 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year Ended March 31, 1995 Compared to
Year Ended March 31, 1994 -- Replacement Stock Option Charge" and Note 13 of
"Notes to Consolidated Financial Statements."
(4) Certain of the Company's acquired stores have not performed as anticipated
at the time of purchase. The results from these operations through the end
of fiscal 1996 led management to assess the realizability of the goodwill
recorded in connection with these acquisitions, the result of which
indicated a permanent impairment of goodwill necessitating a write-off
totaling $6.6 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Ten Month Period Ended
January 31, 1996 Compared to Year Ended March 31, 1995 -- Goodwill
Impairment" and Note 2 of "Notes to Consolidated Financial Statements."
(5) Represents a non-recurring charge of $500,000 related to the merger with
GCO, Inc.
(6) Represents a non-recurring charge of $4.7 million related to the merger with
Image.
(7) Net earnings per share is computed on a fully diluted basis as described in
Note 1 to the Consolidated Financial Statements of the Company.
(8) As adjusted to give effect to the sale of 3,175,773 shares of Common Stock
offered by the Company hereby at the public offering price of $16.00 per
share after deducting underwriting discounts and commissions, estimated
offering expenses and underwriting discounts and commissions payable by the
Company to reimburse one of the Selling Stockholders, and the application of
the net proceeds therefrom. See "Use of Proceeds."
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information contained in this Prospectus, in
connection with an investment in the Common Stock offered hereby.
This Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the 1934 Act. Those statements appear in a number of places in this
Prospectus and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) the timing, magnitude and costs of the roll-out of the
Gallery Stores; (ii) potential acquisitions by the Company; (iii) the use of the
proceeds of this offering; (iv) the Company's financing plans; (v) trends
affecting the Company's financial condition or results of operations; (vi) the
Company's business and growth strategies; and (vii) the declaration and payment
of dividends. Prospective investors are cautioned that any such forward looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward looking statements as a result of various factors. The
accompanying information contained in this Prospectus, including without
limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business," identifies important factors that could cause such
differences.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH. The Company has experienced
significant growth, principally by acquiring floorcovering retailers, adding new
franchisees, opening new retail stores and entering into the carpet
manufacturing business. The Company 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 open and operate new stores
successfully, conduct its newly acquired carpet manufacturing business
profitably, expand its franchise network and acquire and integrate floorcovering
retailers. There can be no assurance that the Company's accounting systems,
purchasing systems, internal controls and management information systems will be
adequate or that the Company will be able to upgrade or reconfigure its systems
and controls to respond to the Company's growth, the inability of which could
have a material adverse effect on the successful operation of the Company's
business, implementation of its growth strategy and future operating results.
The change in the Company's business mix to emphasize the opening of new
Company-owned stores will require the expansion of the capabilities of the
Company's management information systems. To support its growth, the Company is
currently developing a centralized information system to integrate the Company's
store operations and financial data. There can be no assurance, however, that
the development of such an information system will be successful, or
accomplished within a time frame sufficient to accommodate planned growth. There
can also be no assurance that the Company will be able to expand its market
presence in its existing markets or successfully enter new or contiguous markets
by opening new stores or through acquisitions or that any such expansion will
not adversely affect the Company's profitability and results of operations. In
addition, there can be no assurance that the Company will be able to increase
the number of franchisees or that new franchisees will be as profitable to the
Company as existing franchisees. If the Company's management is unable to manage
this growth effectively, the Company's business, results of operations and
financial condition could be materially adversely affected.
LIMITED HISTORY OF OPENING COMPANY-OWNED STORES. The Company's growth
strategy focuses on the opening of its newly-designed Gallery Store. As of
January 1, 1997, the Company had opened 12 initial prototype CARPETMAX stores
and one Gallery Store. The Company plans to open approximately 70 new Gallery
Stores during fiscal 1998 and 1999. The Company's ability to successfully open
new Gallery Stores is dependent on a number of factors including its ability to
hire, train and assimilate management and store-level employees, the adequacy of
the Company's financial resources, the Company's ability to identify new and
contiguous markets, to locate and construct suitable store sites, to negotiate
acceptable lease terms and to successfully compete in new and contiguous
markets. There can be no assurance that the Company will be able to achieve the
planned expansion, that the new Gallery Store concept will be accepted in the
marketplace or that it will achieve planned operating results or results
comparable with the existing CARPETMAX stores. The Company intends to own
certain of its store sites and may encounter substantial delay, increased
expenses or loss of potential sites due to the complexities associated with the
regulatory and permitting processes in the markets in which the Company intends
to locate its stores. The Company intends to offer certain of its existing
CARPETMAX franchisees the opportunity to upgrade their existing CARPETMAX stores
to Gallery Stores
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in return for the ability to open Company-owned stores in their exclusive
territory. There can be no assurance that franchisees will permit the Company to
establish Company-owned Gallery Stores in their exclusive territories or accept
the Company's Gallery Store franchise program. See "Business -- Retail
Operations -- CARPETMAX Flooring Idea Gallery Stores."
HIGHLY COMPETITIVE NATURE OF THE FLOORCOVERING INDUSTRY. Competition in
the retail floorcovering market is intense due to the significant number of
retailers. In December 1995, Shaw Industries, Inc. ("Shaw"), the world's largest
carpet manufacturer, announced its decision to move into the retail
floorcovering sector and has since 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. In addition, large retailers also provide significant
competition, including The Home Depot, Inc. and Sears, Roebuck & Co. The
principal methods of competition within the retail floorcovering industry
include store location, product selection and merchandising, customer service
and price.
The Company's carpet manufacturing business competes with other carpet
manufacturers and manufacturers of alternative floorcoverings such as wood or
tile. Certain of the Company's competitors in the carpet manufacturing business
have greater financial and other resources than the Company. It is estimated
that the two largest carpet manufacturers accounted for approximately 45% of
total carpet industry sales for 1995. No assurance can be given that the
Company's competitors will not substantially increase resources devoted to the
production and marketing of products competitive with those of the Company,
which could require the Company to reduce prices or increase spending on product
development, marketing and sales, any of which could have a material adverse
affect on the Company. See "Business -- Competition."
FLUCTUATIONS IN QUARTERLY RESULTS, SEASONALITY AND CYCLICAL NATURE OF THE
FLOORCOVERING INDUSTRY. The Company's quarterly operating results have
fluctuated in the past and are expected to fluctuate in the future as a result
of a variety of factors, including the timing of store openings and related
pre-opening expenses, weather conditions, price increases by suppliers, actions
by competitors, conditions in the carpet manufacturing, home building and
improvement markets and the floorcovering industry in general, regional and
national economic conditions and other factors. Moreover, the Company expects
its business to continue to exhibit some measure of seasonality, which the
Company believes is typical of the floorcovering industry. Individual stores
generally experience lower net sales, operating income and cash flow from
operations and the Company experiences lower sales of manufactured carpets in
the first and fourth fiscal quarters than in any other fiscal quarter, due
primarily to the effect of winter weather on home improvement projects.
The floorcovering industry historically has been adversely impacted by
economic downturns. The Company believes that the industry is significantly
influenced by economic conditions generally and particularly by consumer
behavior, consumer confidence, the level of personal discretionary spending, the
condition of the residential and commercial construction industries, interest
rates, credit availability and the overall strength of the economy. There can be
no assurance that a prolonged economic downturn would not have a material
adverse effect on the Company.
DEPENDENCE ON SENIOR MANAGEMENT. The success of the Company is largely
dependent on the skills, experience and efforts of its senior management and
especially its President and Chief Executive Officer, A.J. Nassar, and its Chief
Operating Officer, James W. Inglis. The loss of the services of Mr. Nassar, Mr.
Inglis or other members of the Company's senior management could have a material
adverse effect on the Company's business and prospects. The Company is presently
negotiating a new employment agreement with Mr. Nassar and maintains a key man
life insurance policy on Mr. Nassar in the amount of $2.0 million. The Company
believes that its future success will also depend in part upon its ability to
attract, retain and motivate qualified personnel. Competition for such personnel
is intense. Although the Company has recently hired several senior level
management personnel with extensive retail experience, there can be no assurance
that the Company will continue to be successful in attracting and retaining such
personnel. See "Management."
RISKS ASSOCIATED WITH PRICE AND AVAILABILITY OF RAW MATERIALS. The
availability of low-cost materials, particularly post-consumer polyethylene
terephthalate ("PET") bottles, is important to the profitability of the
Company's carpet manufacturing operations. An increase in the demand for PET
bottles could increase prices for PET bottles, thereby increasing the Company's
manufacturing costs. Such increased costs could have an adverse effect on the
profitability of the Company's manufacturing operations. In recent years, PET
bottle prices have fluctuated dramatically, most notably in fiscal 1996 when PET
prices increased 150% and
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subsequently returned to historical price levels. There can be no assurance that
such prices will not continue to experience significant volatility. The Company
has not entered into long-term contracts with any suppliers for its raw
materials. The unavailability, scarcity or increased cost of such raw materials
could disrupt the Company's manufacturing operations which would have a material
adverse effect on these operations. In addition, any significant change in the
proportion of PET in the waste bottles supplied to the Company's manufacturing
operations, or the introduction of alternatives to PET bottles for food
packaging, could also disrupt the Company's manufacturing operations and have a
material adverse effect on the Company. For the nine months ended October 31,
1996, the Company's manufacturing operations comprised approximately 53% of its
total revenues. Any decrease in the profitability of these manufacturing
operations would have an adverse effect on the Company's overall results of
operations.
DEPENDENCE ON SUPPLIERS FOR FLOORCOVERING PRODUCTS AND DISTRIBUTION. The
Company relies on several large independent floorcovering manufacturers for the
production of the CARPETMAX Division's floorcoverings, including Shaw which
supplied approximately 23% of the Company's floorcovering purchases for the nine
months ended October 31, 1996. In addition, the Company's retail inventory
management is highly dependent on the delivery capabilities of these
manufacturers. Any significant change in the Company's relationships with
manufacturers, or in the manner in which these manufacturers produce or
distribute their products, could have a material adverse effect on the Company.
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 the Company's requirements and those of its franchisees on a timely
basis or that their pricing and rebate policies will remain competitive. While
the Company believes there are a number of alternative manufacturers capable of
supplying and distributing the Company's floorcovering products, any delays in
obtaining alternative suppliers could have a material adverse effect on the
Company's operations and those of its franchisees. In addition, the Company
expects that suppliers will substantially contribute to the opening expenses of
new Gallery Stores. However, there can be no assurance that these suppliers will
contribute to such expenses and, to the extent they do not, the Company's
ability to maintain its Gallery Store roll-out may be adversely affected. See
"Business -- Retail Infrastructure -- Supplier Relationships."
ENVIRONMENTAL AND REGULATORY MATTERS. The Company's carpet manufacturing
and recycling operations and facilities are subject to numerous federal, state
and local laws and regulations designed to protect the environment from wastes
and emissions of hazardous substances and to provide a safe workplace for the
Company's employees. The Company believes it is either in material compliance
with all currently applicable laws and regulations or is operating in accordance
with appropriate variances or similar arrangements. The Company believes that
compliance with current laws and regulations will not require significant
capital expenditures or have a material adverse effect on its operations.
However, such laws and regulations are subject to change in the future, and any
failure by the Company to comply with present or future regulations could
subject it to future liabilities or the suspension of production which could
have a material adverse effect on the Company's business. In addition, changes
in environmental regulations could restrict the Company's ability to expand its
facilities or could require the Company to incur substantial unexpected other
expenses to comply with such regulations.
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 it is uncertain 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 the Company's operations and those of its franchisees.
ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation, as
amended (the "Certificate of Incorporation"), contains provisions requiring
supermajority stockholder 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 of control or similar
transaction involving the Company even though a majority of the Company's
stockholders may vote in favor of such a transaction. The Company is also
subject to the provisions of Section 203 of the Delaware General Corporation
Law, which may have the effect of delaying, deferring, or preventing a change in
control of the Company by limiting transactions between the Company and
"interested stockholders" (generally, those stockholders who, together with
their affiliates and associates, own 15% or more of a company's outstanding
capital stock). In addition, the Company's Certificate of Incorporation includes
a number of additional anti-takeover provisions which, among other things,
require a
9
<PAGE> 10
staggered Board of Directors, limit the ability of stockholders to call special
meetings, eliminate stockholder action by unanimous consent, restrict the
ability of the stockholders to amend certain provisions of the Certificate of
Incorporation, permit the Board of Directors to amend the Bylaws without
stockholder consent and authorize 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 the
Company through the acquisition of a large block of the Company's Common Stock
and may have the effect of encouraging persons considering unsolicited tender
offers or other unilateral takeover proposals to negotiate with the Company's
Board of Directors rather than pursue non-negotiated takeover attempts.
VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be
subject to significant fluctuations in response to the Company's operating
results and other factors, and there can be no assurance that the market price
of the Common Stock will not decline below the public offering price herein.
Developments in the floorcovering industry or changes in general economic
conditions could adversely affect the market price of the Common Stock. 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 traded and may adversely
affect the market price of the Common Stock. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this offering, the
Company will have 16,034,852 shares of Common Stock outstanding. Of these
shares, a total of 12,281,498 shares, including the 3,600,000 shares offered
hereby, will be freely tradable without restrictions or further registration
under the Securities Act. All the remaining 3,753,354 shares of Common Stock are
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act. In general, under Rule 144 as currently in effect, an
affiliate of the Company or any person (or persons whose shares are aggregated
in accordance with Rule 144) who has beneficially owned such restricted
securities for at least two years would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of 1% of the
outstanding shares of Common Stock (approximately 160,349 shares based upon the
number of shares outstanding after this offering) or the reported average weekly
trading volume in the over-the-counter market for the four weeks preceding the
sale. Sales under Rule 144 are also subject to certain manner of sale
restrictions and notice requirements and to the availability of current public
information concerning the Company. Persons who have not been affiliates of the
Company for at least three months and who have held these shares for more than
three years are entitled to sell such restricted securities without regard to
the volume, manner of sale, notice and public information requirements of Rule
144. Of these restricted securities, approximately 3,378,236 shares are
currently eligible for sale in the public market pursuant to Rule 144.
Additional shares of Common Stock, including shares issuable upon exercise of
options, will also become eligible for sale in the public market pursuant to
Rule 144 from time to time. The Company has registered 2,663,355 shares of
Common Stock issuable upon the exercise of outstanding stock options which will
be available for sale in the open market upon exercise. As of January 16, 1997,
an aggregate of 2,003,753 shares were subject to presently exercisable stock
options. The Company, its directors and executive officers and each of the
Selling Stockholders who, upon completion of this offering will own in the
aggregate 4,059,582 shares, have each agreed that they will not directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or other capital stock
or any security convertible into, or exercisable or exchangeable for, any shares
of Common Stock or other capital stock of the Company, for a period of 180 days
after the date of this Prospectus, without the prior written consent of
Prudential Securities Incorporated on behalf of the Underwriters except for bona
fide gifts or transfers effected by such stockholder other than on any
securities exchange or in the over-the-counter market to donees or transferees
that agree to be bound by similar agreements and except for issuances by the
Company pursuant to the exercise of certain stock options outstanding upon
completion of this Offering. The Company is unable to predict the effect, if
any, that future sales of shares, or the availability of shares for future sale,
will have on the market price of the Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock, or the perception that such sales
could occur, could adversely effect the market price for the Common Stock and
could impair the Company's future ability to obtain capital through offerings of
equity securities. See "Principal and Selling Stockholders," "Shares Eligible
for Future Sale" and "Underwriting."
10
<PAGE> 11
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,175,773 shares of Common
Stock offered by the Company hereby (the "Offering") and after deducting
underwriting discounts and commissions, estimated offering expenses and
underwriting discounts and commissions of $55,202 payable by the Company to
reimburse one of the Selling Stockholders, are estimated to be approximately
$47.6 million (approximately $55.7 million if the Underwriters' over-allotment
option is exercised in full). The Company will not receive any of the proceeds
from the sale of shares of Common Stock by the Selling Stockholders.
The Company intends to use the net proceeds from the Offering primarily to
repay a portion of the Company's outstanding borrowings under its credit
facilities. As of January 15, 1997, the Company's credit facilities had
outstanding balances totaling approximately $91.1 million at a weighted average
interest rate of 8.25%. Amounts outstanding under the credit facilities mature
at various dates through September 30, 2003. The indebtedness under the credit
facilities was incurred primarily to refinance the existing debt of the Company
and Image as well as to provide the Company with additional working capital.
Upon completion of the Offering and application of the net proceeds therefrom,
the Company intends to renegotiate the terms of the credit facilities.
Pending such use, the net proceeds will be invested in short-term,
investment-grade securities, certificates of deposit, or direct or guaranteed
obligations of the United States government.
PRICE RANGE OF COMMON STOCK
The Common Stock is included in the Nasdaq National Market under the symbol
"MAXM." The following table sets forth the range of the high and low sales
prices of the Common Stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1995
First Quarter............................................. $15 1/2 $11 1/2
Second Quarter............................................ 16 1/2 10 1/2
Third Quarter............................................. 17 1/8 12 1/8
Fourth Quarter............................................ 16 11 1/4
FISCAL PERIOD ENDED JANUARY 31, 1996
First Quarter............................................. $13 1/2 $ 9 1/4
Second Quarter............................................ 13 3/4 9 3/4
Third Quarter............................................. 15 1/4 11 3/4
Fourth Quarter(1)......................................... 14 9
FISCAL YEAR ENDING JANUARY 31, 1997
First Quarter............................................. $12 1/2 $ 9 3/8
Second Quarter............................................ 15 1/2 11 1/4
Third Quarter............................................. 17 12
Fourth Quarter............................................ 17 7/8 14
FISCAL YEAR ENDING JANUARY 31, 1998
First Quarter (through February 18, 1997)................. $17 1/2 $16
</TABLE>
- ---------------
(1) Includes only the month of January 1996 due to a change in the Company's
fiscal year end from March 31 to January 31.
On February 18, 1997, the last reported sales price of the Common Stock on
the Nasdaq National Market was $16.50 per share.
11
<PAGE> 12
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock.
The Company does not intend to declare or pay any cash dividends for the
foreseeable future, and intends to retain earnings, if any, for the future
operation and expansion of the Company's business. Future cash dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's future earnings, operations,
capital requirements and surplus, availability of cash, general financial
condition, contractual restrictions and such other factors as the Board of
Directors may deem relevant. Currently, the Company is restricted in its ability
to declare or pay cash dividends under the terms of its credit facility.
CAPITALIZATION
The following table sets forth the capitalization of the Company at October
31, 1996 and as adjusted to give effect to the sale of the 3,175,773 shares of
Common Stock offered by the Company hereby and the application of the estimated
net proceeds therefrom as described under "Use of Proceeds." This table should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1996
---------------------------------
ACTUAL AS ADJUSTED
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 90,447 $ 42,894
Capital lease obligations................................... 2,211 2,211
Stockholders' equity:
Preferred stock, par value $.001 per share; 1,000,000
shares authorized; no shares issued and outstanding.... -- --
Common stock, par value $.001 per share; 25,000,000 shares
authorized; 12,489,180 and 15,724,955 shares issued and
outstanding on an actual and as adjusted basis,
respectively(1)........................................ 12 16
Additional paid-in capital................................ 61,131 108,680
Retained earnings......................................... 11,794 11,794
--------------- ---------------
Total stockholders' equity............................. 72,937 120,490
--------------- ---------------
Total capitalization................................... $ 165,595 $ 165,595
=============== ===============
</TABLE>
- ---------------
(1) Excludes (i) 1,567,040 shares of Common Stock issuable as of October 31,
1996 upon the exercise of outstanding stock options under the Company's
1993 Stock Option Plan, of which 1,071,138 options were presently
exercisable on that date, (ii) 932,615 shares of Common Stock issuable as
of October 31, 1996 (872,613 shares, as adjusted to give effect to the
exercise of options to purchase 60,002 shares of Common Stock by one of the
Selling Stockholders) upon the exercise of presently exercisable
outstanding stock options under the Company's RSO Plan, and (iii) 432,960
shares reserved for future issuance under the Company's 1993 Stock Option
Plan, as amended.
12
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth certain selected consolidated financial data
of the Company for the periods indicated, which data has been derived from the
consolidated financial statements of the Company. The consolidated financial
statements of the Company 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 the Company as of
March 31, 1995 and for each of the years in the two year period ended March 31,
1995 have been audited by KPMG Peat Marwick LLP, independent auditors. The
selected financial data for the years ended March 31, 1992 and 1993 and for the
nine month periods ended September 30, 1995 and October 31, 1996 are derived
from the unaudited consolidated financial statements of the Company. The
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, which the Company considers necessary for a fair
presentation of the consolidated financial condition and results of operations
for these periods. Operating results for the nine months ended October 31, 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 the
Company and GCO, Inc. on September 28, 1994 and the merger of the Company and
Image on August 30, 1996, which transactions were accounted for as
poolings-of-interests.
<TABLE>
<CAPTION>
TEN
FISCAL YEAR ENDED MARCH 31, MONTHS
------------------------------------------ ENDED
JANUARY 31, NINE MONTHS ENDED
----------- SEPTEMBER 30, OCTOBER 31,
------------------------
1992 1993 1994 1995 1996(1) 1995(2) 1996(2)
------- ------- -------- -------- ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE, STORE AND TERRITORY DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues
Sales of floorcovering products.... $74,809 $88,676 $106,237 $174,935 $ 186,568 $ 161,733 $ 185,735
Fees from franchise services....... 2,167 5,113 9,688 13,876 13,432 12,146 19,684
Fiber and PET sales................ 7,193 4,583 5,297 12,886 24,072 15,928 23,458
Other.............................. 388 479 1,369 1,644 3,479 2,208 2,585
------- ------- -------- -------- -------- -------- --------
Total revenues................... 84,557 98,851 122,591 203,341 227,551 192,015 231,462
Cost of sales........................ 63,465 71,570 85,847 139,521 161,723 132,351 166,934
------- ------- -------- -------- -------- -------- --------
Gross profit..................... 21,092 27,281 36,744 63,820 65,828 59,664 64,528
Selling, general, and administrative
expenses........................... 13,185 17,417 23,669 46,870 59,197 47,053 54,104
Replacement stock option charge...... -- -- 10,388(3) -- -- -- --
Goodwill impairment charge........... -- -- -- -- 6,569(4) -- --
Merger-related costs................. -- -- -- 500(5) -- -- 4,700(6)
Interest expense, net................ 4,487 3,824 1,579 1,442 4,280 3,026 4,588
Other expense (income)............... 532 98 263 (421) (78) (417) (426)
------- ------- -------- -------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary income........... 2,888 5,942 845 15,429 (4,140) 10,002 1,562
Income tax expense................... 306 947 376 5,787 105 3,656 1,514
------- ------- -------- -------- -------- -------- --------
Net earnings (loss) before
extraordinary income............... 2,582 4,995 469 9,642 (4,245) 6,346 48
Extraordinary income................. -- -- 190 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net earnings (loss).............. $ 2,582 $ 4,995 $ 659 $ 9,642 $ (4,245) $ 6,346 $ 48
======= ======= ======== ======== ======== ======== ========
Net earnings (loss) per common
share(7)........................... $ 0.29 $ 0.56 $ 0.06 $ 0.72 $ (0.32) $ 0.47 $ 0.00
======= ======= ======== ======== ======== ======== ========
Weighted average shares
outstanding(7)..................... 8,963 8,903 11,161 13,301 13,301 13,546 13,791
======= ======= ======== ======== ======== ======== ========
SELECTED OPERATING DATA:
Revenues attributable to:
CARPETMAX operations............... $ 1,325 $ 3,766 $ 10,051 $ 63,933 $ 85,278 $ 73,244 $ 91,245
GCO operations..................... 3,655 5,605 9,283 12,158 14,012 11,381 16,958
Image operations................... 79,577 89,480 103,257 127,250 128,261 107,390 123,259
End of period:
Company-owned stores............... 4 8 8 51 59 64 53
Franchise territories.............. 98 148 233 325 377 364 397
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31, OCTOBER 31,
------------------------------------------ ----------- -----------
1992 1993 1994 1995 1996(1) 1996
------- ------- -------- -------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $ 8,495 $12,297 $ 26,489 $ 44,844 $ 61,456 $ 54,551
Total assets........................ 54,074 63,809 95,281 162,473 202,085 210,144
Long-term debt and capital leases... 36,418 29,908 21,083 56,035 92,710 92,658
Stockholders' equity................ 28,378 30,960 50,053 71,424 72,150 72,937
</TABLE>
- ---------------
(1) On January 31, 1996, the Company changed its fiscal year end from March 31
to January 31.
(2) These periods are not entirely comparable as the period ended October 31,
1996 does not include the month of January, which is one of the two weakest
sales months of the year. See "Risk Factors -- Fluctuations in Quarterly
Results, Seasonality and Cyclical Nature of the Floorcovering Industry."
(3) Image granted replacement stock options on August 10, 1993, in replacement
of a like number of unvested stock appreciation units and vested and
unvested stock options. As a result of this exchange, Image recognized a
non-cash, non-recurring charge of $10.4 million in its fiscal year ending
March 31, 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year Ended March 31, 1995 Compared to
Year Ended March 31, 1994 -- Replacement Stock Option Charge" and Note 13 of
"Notes to Consolidated Financial Statements."
(4) Certain of the Company's acquired stores have not performed as anticipated
at the time of purchase. The results from these operations through the end
of fiscal 1996 led management to assess the realizability of the goodwill
recorded in connection with these acquisitions, the result of which
indicated a permanent impairment of goodwill necessitating a write-off
totaling $6.6 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Ten Month Period Ended
January 31, 1996 Compared to Year Ended March 31, 1995 -- Goodwill
Impairment" and Note 2 of "Notes to Consolidated Financial Statements."
(5) Represents a non-recurring charge of $500,000 related to the merger with
GCO, Inc.
(6) Represents a non-recurring charge of $4.7 million related to the merger with
Image.
(7) Earnings per share is computed on a fully diluted basis as described in Note
1 to the Consolidated Financial Statements of the Company.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company (including the notes thereto)
contained elsewhere in this Prospectus. In January 1996, the Company changed its
fiscal year end from March 31 to January 31. The following discussion compares
results of operations for the nine months ended October 31, 1996 with the nine
months ended September 30, 1995 and compares the ten month period ended January
31, 1996 with the twelve month period ended March 31, 1995. Thus, comparisons
are not entirely comparable. On August 30, 1996 the Company merged with Image,
which transaction was accounted for as a pooling-of-interests.
GENERAL
From fiscal 1991 through fiscal 1994, the Company's operations consisted of
selling floorcovering products, securing franchise dealers and brokering the
purchase of floorcovering products, principally carpet, from major suppliers on
behalf of its franchisees. During this period, the Company derived the majority
of its revenues and operating profits from sales of floorcovering products,
franchise fees and royalties, as well as fees from the provision of various
services to the franchisees. In May 1994, the Company commenced a strategy of
acquiring independent floorcovering retailers, with the goal of building a
network of Company-owned stores in addition to its franchise network. This
acquisition program included selected CARPETMAX franchisees, other independent
dealers and GCO (accounted for as a pooling-of-interests). Acquisitions
accounted for under the purchase method of accounting resulted in the Company
originally recording goodwill of $16.2 million, which was adjusted for the
goodwill impairment charge of $6.6 million recorded in fiscal 1996. See " --
Results of Operations."
In April 1995, the Company commenced opening additional Company-owned
stores to expand its market share. Furthermore, in June 1995 the Company opened
its new distribution center and headquarters facility. Accordingly, the
Company's results of operations for the ten months ended January 31, 1996 and
for the nine months ended October 31, 1996 reflect the costs and expenses
associated with the new store openings and the new distribution center and
headquarters.
On December 12, 1995, the Company announced the execution of a letter of
intent for the merger of the Company into Shaw. On January 12, 1996, the Company
terminated its negotiations with Shaw resulting in non-recurring merger
transaction costs and material interruptions to advertising, brokerage and
franchise revenue in fiscal 1996.
As of January 1, 1997, the Company's retail network consisted of 50
Company-owned CARPETMAX stores, including one Gallery Store, seven Company-owned
GCO stores and 399 franchise dealers operating approximately 465 CARPETMAX
stores and 99 GCO stores.
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations
expressed as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED NINE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, JANUARY 31, SEPTEMBER 30, OCTOBER 31,
------------------------------ ------------- -----------------------------
1994 1995 1996(1) 1995(2) 1996(2)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues
Sales of floorcovering products......... 86.7% 86.0% 82.0% 84.2% 80.2%
Fees from franchise services............ 7.8 6.7 5.9 6.3 8.5
Fiber and PET sales..................... 4.3 6.3 10.6 8.3 10.1
Other................................... 1.2 1.0 1.5 1.2 1.2
------ ------ ------ ------ ------
Total revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
Cost of sales............................. 70.0% 68.6% 71.1% 68.9% 72.1%
------ ------ ------ ------ ------
Gross profit............................ 30.0 31.4 28.9 31.1 27.9
Selling, general, and administrative
expenses................................ 19.3 23.1 26.0 24.5 23.4
Replacement stock option charge........... 8.5(3) -- -- -- --
Goodwill impairment charge................ -- -- 2.9(4) -- --
Merger-related costs...................... -- 0.2(5) -- -- 2.0(6)
Interest expense, net..................... 1.3 0.7 1.9 1.6 2.0
Other expense (income).................... 0.2 (0.2) (0.1) (0.2) (0.2)
------ ------ ------ ------ ------
Earnings (loss) before income taxes and
extraordinary income.................... 0.7 7.6 (1.8) 5.2 0.7
Income tax expense........................ 0.3 2.9 0.1 1.9 0.7
------ ------ ------ ------ ------
Net earnings (loss) before extraordinary
income.................................. 0.4 4.7 (1.9) 3.3 --
Extraordinary income...................... 0.1 -- -- -- --
------ ------ ------ ------ ------
Net earnings (loss)................... 0.5% 4.7% (1.9)% 3.3% --%
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) On January 31, 1996, the Company changed its fiscal year end from March 31
to January 31.
(2) These periods are not entirely comparable as the period ended October 31,
1996 does not include the month of January, which is one of the two weakest
sales months of the year. See "Risk Factors -- Fluctuations in Quarterly
Results, Seasonality and Cyclical Nature of the Floorcovering Industry."
(3) Image granted replacement stock options on August 10, 1993, in replacement
of a like number of unvested stock appreciation units and vested and
unvested stock options. As a result of this exchange, Image recognized a
non-cash, non-recurring charge of $10.4 million in its fiscal year ending
March 31, 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year Ended March 31, 1995 compared to
Year Ended March 31, 1994 -- Replacement Stock Option Charge" and Note 13 of
"Notes to Consolidated Financial Statements."
(4) Certain of the Company's acquired stores have not performed as anticipated
at the time of purchase. The results from these operations through the end
of fiscal 1996 led management to assess the realizability of the goodwill
recorded for these acquisitions, the result of which indicated a permanent
impairment of goodwill necessitating a write-off totaling $6.6 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Ten Month Period Ended January 31, 1996 Compared to Year Ended
March 31, 1995 -- Goodwill Impairment" and Note 2 of "Notes to Consolidated
Financial Statements."
(5) Represents a non-recurring charge of $500,000 related to the merger with
GCO, Inc.
(6) Represents a non-recurring charge of $4.7 million related to the merger with
Image.
NINE MONTHS ENDED OCTOBER 31, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Total Revenues. Total revenues increased 20.6% to $231.5 million for the
nine months ended October 31, 1996 from $192.0 million for the nine months ended
September 30, 1995. The components of total revenues are discussed below.
Sales of Floorcovering Products. Sales of floorcovering products
increased 14.8% to $185.7 million for the nine months ended October 31,
1996 from $161.7 million for the nine months ended September 30, 1995.
Sales of floorcovering products in Company-owned stores increased 24.3% to
$84.3 million for the nine months ended October 31, 1996 from $67.8 million
for the nine months ended September 30, 1995. The growth in retail sales of
floorcovering products was primarily due to the impact
16
<PAGE> 17
of the acquisitions of floorcovering retailers and, to a lesser extent, to
internal growth. The results of these acquired retailers are not fully
reflected in the prior year periods as such acquisitions were made at
various times during the year. Sales of manufactured carpet increased 8.9%
to $98.8 million for the nine months ended October 31, 1996 from $90.7
million for the nine months ended September 30, 1995. Unit sales of
manufactured carpet increased 7.2% to 16.4 million square yards for the
nine months ended October 31, 1996 from 15.3 million square yards for the
nine months ended September 30, 1995. Also contributing to the overall
increase in total sales was a 1.7% increase in the average unit selling
price of manufactured carpet. The Company opened a new distribution
facility in Kennesaw, Georgia in June of 1995. Sales from the distribution
center amounted to $2.7 million for the nine months ended October 31, 1996
and $3.3 million for the nine months ended September 31, 1995, largely
representing sales to the Company's franchisees.
Fees from Franchise Services. Fees from franchise services, which
include franchise license fees and royalties, brokering of floorcovering
products, and advertising, increased 62.8% to $19.7 million for the nine
months ended October 31, 1996 from $12.1 million for the nine months ended
September 30, 1995. This increase was attributable to increases in
brokering activity generated from new CARPETMAX and GCO franchisees, growth
in demand for franchise services from existing CARPETMAX and GCO
franchisees, greater utilization of advertising and other services offered
to franchisees and an expansion of advertising services offered by the
Company.
Fiber and PET Sales. Sales of fiber and PET increased 47.8% to $23.5
million for the nine months ended October 31, 1996 from $15.9 million for
the nine months ended September 30, 1995. Unit sales increased 57.1% to
44.3 million pounds for the nine months ended October 31, 1996 from 28.2
million pounds for the nine months ended September 30, 1995 as a result of
increased fiber production capacity from the addition of a second polyester
fiber extruder. The unit sales increase was partially offset by a 6.0%
decline in the average selling price per pound of fiber and PET sales for
the nine months ended October 31, 1996 compared to the nine months ended
September 30, 1995.
Gross Profit. Gross profit increased 8.0% to $64.5 million for the nine
months ended October 31, 1996 from $59.7 million for the nine months ended
September 30, 1995. As a percentage of sales, gross profit was 27.9% for the
nine months ended October 31, 1996 compared to 31.1% for the nine months ended
September 30, 1995. The decrease in gross profit as a percentage of sales is
primarily a result of the recognition of higher raw material costs associated
with manufacturing operations. Also contributing to the decrease in gross profit
as a percentage of sales was the continuing change in the retail business mix of
the Company to a revenue base consisting principally of the net sales of
floorcovering products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 14.9% to $54.1 million for the nine months
ended October 31, 1996 from $47.1 million for the nine months ended September
30, 1995. As a percentage of revenues, selling, general and administrative
expenses decreased to 23.4% for the nine months ended October 31, 1996 from
24.5% for the nine months ended September 30, 1995 as a result of spreading
fixed costs over a larger revenue base. Additionally, the Company reduced
certain note receivable reserves totaling $350,000 which favorably affected net
earnings by approximately $210,000.
Merger-Related Costs. The Company recorded merger-related costs of $4.7
million for the nine months ended October 31, 1996 relating to the merger with
Image. The charge includes both transaction costs, as well as severance costs
and the elimination of redundant systems.
Interest Expense, net. Interest expense increased 53.3% to $4.6 million
for the nine months ended October 31, 1996 from $3.0 million for the nine months
ended September 30, 1995 due principally to financing associated with capital
expenditures in the manufacturing operations and increased working capital
requirements.
Income Tax Expense. The Company recorded income tax expense of $1.5
million for the nine months ended October 31, 1996 compared to $3.7 million for
the nine months ended September 30, 1995. Income tax
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expense for the nine months ended October 31, 1996 reflects the impact of
non-deductible expenses associated with the merger with Image. The effective tax
rate for the nine months ended September 30, 1995 was 36.6%.
Net Earnings. As a result of the foregoing factors, the Company recorded
net earnings of $48,000 for the nine months ended October 31, 1996 compared to
net earnings of $6.3 million for the nine months ended September 30, 1995.
TEN MONTH PERIOD ENDED JANUARY 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Total Revenues. Total revenues increased 12.0% to $227.6 million for
fiscal 1996 from $203.3 million for fiscal 1995. The components of total
revenues are discussed below.
Sales of Floorcovering Products. Sales of floorcovering products
increased 6.7% to $186.6 million for fiscal 1996 from $174.9 million for
fiscal 1995. Sales of floorcovering products in Company-owned stores
increased 41.0% to $80.8 million for fiscal 1996 from $57.3 million for
fiscal 1995. The growth in retail revenues for fiscal 1996 largely
reflected increases in direct sales resulting from acquired retailers in
the prior fiscal year which were only included in the Company's sales for
part of fiscal 1995. Sales of manufactured carpet decreased 10.4% to $102.0
million for fiscal 1996 from $113.8 million from fiscal 1995. Units sales
decreased 15.8% to 17.0 million square yards for fiscal 1996 from 20.2
million square yards for fiscal 1995. Expressed on a per week basis (total
sales divided by number of weeks in the fiscal year), sales of manufactured
carpet represented an increase of 5.9% resulting from an increase in
average unit selling price for domestic markets. Expressed on a per week
basis (total units divided by number of weeks in the fiscal year), unit
sales decreased 0.7%. Therefore, the increase in sales was attributable
solely to increased average unit selling prices. Sales from the
distribution center amounted to $3.8 million during each of fiscal 1996 and
fiscal 1995, largely representing sales to the Company's franchisees.
Fees from Franchise Services. Fees from franchise services decreased
3.6% to $13.4 million for fiscal 1996 from $13.9 million for fiscal 1995.
The overall decrease resulted from fewer CARPETMAX franchises granted in
fiscal 1996.
Fiber and PET Sales. Sales of fiber and PET increased 86.8% to $24.1
million for fiscal 1996 from $12.9 million for fiscal 1995. Unit sales
increased 25.6% to 38.3 million pounds for fiscal 1996 from 30.5 million
pounds for fiscal 1995 as a result of increased fiber production capacity
from the addition of a second polyester fiber extruder. The remainder of
the total increase was due to increased average unit selling prices.
Gross Profit. Gross profit increased 3.1% to $65.8 million for fiscal 1996
from $63.8 million for fiscal 1995. As a percentage of sales, gross profit was
28.9% in fiscal 1996 compared to 31.4% for fiscal 1995. Gross profit as a
percentage of sales for manufacturing decreased to 19.8% for fiscal 1996 from
24.2% in fiscal 1995 as a result of increased costs of PET raw materials, which
were only partially offset by increased selling prices of fiber, PET and
polyester carpet.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 26.2% to $59.2 million for fiscal 1996 from
$46.9 million for fiscal 1995. As a percentage of revenues, selling, general and
administrative expenses increased to 26.0% for fiscal 1996 from 23.1% for fiscal
1995. This increase was largely due to the Company's recording additional
reserves on accounts receivables, costs associated with the closing of certain
under-performing stores as well as additional inventory reserves recorded in
order to reflect lower inventory market prices, and costs associated with the
proposed merger with Shaw. In addition, the Company 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 the Company's acquired stores have not
performed as anticipated at the time of purchase. The results from these
operations through the end of fiscal 1996 led management to a re-evaluation of
operations that indicated significant strategic and operational changes would be
necessary at certain stores, including changes in the customer mix, changes of
location, and changes in store design and merchandising. These factors caused
management to assess the realizability of the goodwill recorded for these
acquisitions, the result of which indicated a permanent impairment of goodwill
resulting in the Company recording a goodwill impairment charge of $6.6 million.
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Merger-related Costs. The Company recorded merger-related costs of
$500,000 for fiscal 1995, relating to transaction costs associated with the
merger with GCO, Inc.
Interest Expense, net. Interest expense increased 207.1% to $4.3 million
for fiscal 1996 from $1.4 million for fiscal 1995 due principally to increased
borrowings related to the acquisition and operation of Company-owned stores and
Pharr Yarns of Georgia, Inc., the funding of operating losses in certain
Company-owned stores, increased borrowings resulting from the move to the new
facility in Kennesaw, Georgia, as well as additions of fixed assets and
leasehold improvements associated with new stores and plant facilities.
Income Tax Expense. The Company recorded income tax expense of $105,000
for fiscal 1996 compared to $5.8 million for fiscal 1995. Income tax expense for
fiscal 1996 reflects the impact of certain non-deductible goodwill. The
Company's effective tax rate for fiscal 1995 was 37.5%.
Net (Loss) Earnings. As a result of the foregoing factors, the Company
recorded a net loss of $4.2 million for fiscal 1996 compared to net earnings of
$9.6 million for fiscal 1995.
YEAR ENDED MARCH 31, 1995 COMPARED TO YEAR ENDED MARCH 31, 1994
Total Revenues. Total revenues increased 65.8% to $203.3 million in fiscal
1995 from $122.6 million in fiscal 1994. The components of total revenues are
discussed below.
Sales of Floorcovering Products. Sales of floorcovering products
increased 64.7% to $174.9 million for fiscal 1995 from $106.2 million for
fiscal 1994. Sales of floorcovering products in Company-owned stores
increased 664.0% to $57.3 million for fiscal 1995 from $7.5 million for
fiscal 1994. The growth in retail sales of floorcovering products was
primarily due to direct sales from retailers acquired in the prior fiscal
year which were only included in the Company's sales for a portion of
fiscal 1994. Sales of manufactured carpet increased 16.5% to $113.8 million
for fiscal 1995 from $97.7 million for fiscal 1994. Unit sales of
manufactured carpet increased 13.5% to 20.2 million square yards for fiscal
1995 from 17.8 million square yards for fiscal 1994. Also contributing to
the overall increase in total sales of manufactured carpet was a 2.4%
increase in the average unit selling price of manufactured carpet. Sales
from the distribution center amounted to $3.8 million for fiscal 1995 and
$967,000 for fiscal 1994, largely representing sales to the Company's
franchises.
Fees from Franchise Services. Fees from franchise services increased
43.3% to $13.9 million for fiscal 1995 from $9.7 million for fiscal 1994.
This increase was attributable to increases in brokering activity generated
from new CARPETMAX franchisees, growth in demand for franchise services
from existing CARPETMAX and GCO franchisees, greater utilization of
advertising and other services offered to franchisees and an expansion of
advertising services offered by the Company.
Fiber and PET Sales. Sales of fiber and PET increased 143.4% to $12.9
million for fiscal 1995 from $5.3 million for fiscal 1994. Unit sales of
fiber and PET products increased 100.7% to 30.5 million pounds for fiscal
1995 from 15.2 million pounds for fiscal 1994 due to increased production
capacity of clean PET flake and pellet. Also contributing to the overall
increase in total sales was a 20% increase in average unit selling price
for fiscal 1995 compared to fiscal 1994.
Gross Profit. Gross profit increased 73.8% to $63.8 million for fiscal
1995 from $36.7 million for fiscal 1994. As a percentage of revenues, gross
profit was 31.4% for fiscal 1995 compared to 30.0% for fiscal 1994. This
increase was primarily the result of increased efficiencies in the manufacturing
operations partially offset by a decline in gross profit as a percentage of
revenues from retail operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 97.9% to $46.9 million for fiscal 1995 from
$23.7 million for fiscal 1994. As a percentage of revenues, selling, general and
administrative expenses increased to 23.1% for fiscal 1995 from 19.3% for fiscal
1994 as a result of the Company's greater emphasis in fiscal 1995 on operating
Company-owned rather than franchise retail stores and the corresponding
additional costs associated with operating additional retail stores in fiscal
1995.
Replacement Stock Option Charge. In fiscal 1994, Image adopted a Plan and
Agreement of Conversion in which all previously outstanding vested and unvested
stock options and unvested stock appreciation units were canceled and a like
number of fully vested replacement stock options were issued. These options have
an
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<PAGE> 20
exercise price of $.01 per share and expire March 30, 2006. In connection with
the grant of the replacement stock options, Image recognized a non-cash,
non-recurring charge of $10.4 million.
Income Tax Expense. The Company recorded income tax expense of $5.8
million for fiscal 1995 compared to $376,000 for fiscal 1994. The Company's
effective tax rate decreased to 37.5% for fiscal 1995 from 44.4% for fiscal 1994
due to the reduction in non-deductible expenses for tax purposes. In addition,
the Company recognized a $3.9 million deferred tax benefit in fiscal 1994 in
connection with the replacement stock option charge.
Net Earnings. As a result of the foregoing factors, the Company recorded
net earnings of $9.6 million for fiscal 1995 compared to $659,000 for fiscal
1994.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's primary capital requirements are for new store
openings, investments in the manufacturing operations, working capital and
acquisitions. The Company historically has met its capital requirements through
a combination of cash flow from operations, equity transactions, bank lines of
credit and credit terms from suppliers.
Credit Facilities. In connection with the Image merger, the Company
established three credit facilities aggregating $125 million, (the "Credit
Facility"). The Credit Facility consists of (i) a $65 million revolving facility
of which $6.6 million was available for borrowings on January 15, 1997, and
which matures in August 1999, (ii) a $30 million term facility that matures in
December 2001, and (iii) a $30 million term facility that matures in September
2003. As of January 15, 1997, the Company had fully borrowed amounts available
under both term facilities. Amounts outstanding under the Credit Facility bear
interest at a variable rate based on LIBOR or the prime rate, at the Company's
option. As of January 15, 1997, the weighted average interest rate on amounts
outstanding under the Credit Facility was 8.25%. The Credit Facility contains
customary covenants. As of January 15, 1997, the Company was in compliance with
all covenants under the Credit Facility. The Company intends to renegotiate the
Credit Facility upon completion of the Offering.
As of January 15, 1997, the Company also has approximately $1.0 million of
debt outstanding under various term loans at interest rates ranging from 5.9% to
10.5%.
Cash Flows. During the nine months ended October 31, 1996, operating
activities provided $13.1 million compared to a use of $13.2 million for the
nine months ended September 30, 1995. The increase in cash provided by operating
activities resulted primarily from a decrease in inventories, which was
principally attributable to substantially reduced raw material unit costs and
reduced raw material quantities and an increase in depreciation and
amortization. The decrease in inventory was also partially due to higher sales
of floorcovering products to franchisees and other carpet retailers.
During the nine months ended October 31, 1996, investing activities used
$12.4 million compared to $32.7 million for the nine months ended September 30,
1995. The decrease is primarily due to a decrease in acquisitions during fiscal
1997, the completion of Image's second polyester fiber extruder in fiscal 1995
and the completion of a new main office/distribution facility in fiscal 1996.
During the nine months ended October 31, 1996, financing activities
provided cash of $273,000 compared to cash provided of $43.0 million in the
prior year period. This decrease is primarily due to decreased borrowings during
the fiscal 1997 period, in connection with reduced uses for investing activities
and improved cash flows from operations.
Capital Expenditures. The Company anticipates that it will require
approximately $40.0 million in fiscal 1998 to open new Gallery Stores,
reconfigure existing CARPETMAX stores, expand its manufacturing capacity and
upgrade its management information systems. The Company expects to open
approximately 30 new Gallery Stores in fiscal 1998. The Company estimates that
capital expenditures to open a new Gallery Store will average approximately
$100,000 net of landlord allowances and supplier participations. Pre-opening
expenses will be approximately $50,000 per store. The actual costs that the
Company will incur in opening a new Gallery Store cannot be predicted with
precision because the Company has opened only one Gallery Store and opening
costs will vary based upon geographic location, the size of the store, the
amount of supplier contributions and the extent of the build-out required at the
selected site.
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BUSINESS
GENERAL
The Company operates and franchises one of the largest retail floorcovering
networks in North America through two retail floorcovering concepts: CARPETMAX,
which operates full-service floorcovering stores, and GCO, which operates
cash-and-carry discount floorcovering stores. As of January 1, 1997, the
Company's retail network consisted of 50 Company-owned CARPETMAX stores,
including one Gallery Store, seven Company-owned GCO stores, and 399 franchise
dealers operating approximately 465 CARPETMAX stores and 99 GCO stores. In
addition, the Company has recently begun to expand its floorcovering
distribution network to target large commercial projects for institutional
customers such as hospitals, hotels, governments, the military and schools (the
"specified contract" market) and smaller commercial and residential construction
and renovation projects managed by a general contractor (the "builder" market).
The Company's retail floorcovering revenues increased 22.4% to $87.0 million for
the nine months ended October 31, 1996 from $71.1 million for the nine months
ended September 30, 1995 and total revenues, including manufacturing revenues,
increased 20.6% to $231.5 million for the nine months ended October 31, 1996
from $192.0 million for the nine months ended September 30, 1995.
In 1991, the Company commenced franchising the CARPETMAX brand name and
concept and, through fiscal 1994, had established 187 franchisees in 233
territories. In fiscal 1995, the Company began to establish its Company-owned
stores by acquiring existing CARPETMAX franchisees and additional independent
floorcovering retailers. In September 1994, the Company acquired GCO, Inc., a
franchisor and operator of cash-and-carry discount floorcovering stores with 11
owned and 56 franchised stores.
In April 1995, the Company began opening Company-owned CARPETMAX stores
utilizing a consistent format to expand its floorcovering retail market share
and leverage its specialty retailing strategies and resources. The initial
prototype CARPETMAX store is typically in a "Class A" retail location and ranges
in size from 6,500 to 7,000 square feet of retail selling space. Each store
carries a broad range of floorcovering selections featuring every major
floorcovering category in separate in-store galleries. With the exception of
area rugs, the Company merchandises its hard surface and carpet lines using
product sample displays rather than in-stock inventories in order to minimize
store investment and inventory risks. These CARPETMAX stores leverage the
Company's strong supplier relationships, state-of-the-art advertising and
promotion production and media placement capabilities, advanced store personnel
training systems and programs and proprietary consumer credit program, thereby
maximizing store productivity and profitability. The Company opened 12 initial
prototype CARPETMAX stores from April 1995 through June 1996.
In May 1996, the Company began expanding its retail management team and
initiated certain refinements to its CARPETMAX store concept. In November 1996,
the Company opened its first Gallery Store. The Gallery Store prototype has
6,500 square feet of retail selling space in a "Class A" retail location. The
Company believes the Gallery Store has one of the most extensive product
offerings in the industry, featuring approximately 8,000 SKUs of carpet, area
rugs, hardwood flooring, vinyl flooring, ceramic tile, laminates, stone and
resilient surfaces produced by the leading floorcovering manufacturers
worldwide. The Gallery Stores are designed to create a more comfortable,
enjoyable and productive shopping experience supported by a well-trained
professional staff. Each floorcovering category is featured in a separate
in-store gallery as well as in coordinated multi-category displays throughout
the store. The Company has introduced the Gallery Store prototype in conjunction
with a coordinated national advertising program to establish CARPETMAX as the
"first-in-mind" floorcovering brand with the consumer. The Company plans to open
70 Gallery Stores during fiscal 1998 and 1999 in existing, contiguous and
targeted new markets as well as convert certain of its 12 initial prototype
CARPETMAX stores to Gallery Stores.
To enhance its ability to offer high-quality and high-margin products and
services, in August 1996, the Company merged with Image, a leading producer of
polyester broadloom carpet. The Company believes that Image's product line will
provide the Company's retail and commercial customers with a greater selection
of high-quality carpet at a lower cost than would otherwise be available. Due to
the niche nature of polyester carpet manufacturing, the Image merger has not
adversely impacted the Company's relationships with its
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other carpet suppliers. In addition, the Company intends to develop and offer
proprietary floorcovering maintenance and cleaning services throughout its
retail network.
INDUSTRY OVERVIEW
The floorcovering market is divided into three distinct segments:
residential replacement (including full-service and cash-and-carry), specified
contract and builder. The Company believes that the residential replacement
segment comprises approximately 50% of the total North American floorcovering
market with the specified contract and builder segments making up the remainder
of the floorcovering market. The Company estimates total retail floorcovering
sales approximated $20 billion in 1995.
The domestic retail floorcovering industry is highly fragmented with
independent retail floorcovering dealers operating over 14,000 locations. Other
floorcovering vendors such as home centers, furniture stores, department stores
and mass merchants operate over 23,000 locations nationwide. The Company
believes that the industry is characterized by a large number of small local and
regional companies, none of which has a national brand name, and a small number
of national chains. The typical independent floorcovering retailer operates one
store with limited product selection and service. As a result, the Company
believes that most independent floorcovering retailers face distinct competitive
disadvantages and challenges, including limited purchasing power for products
and services, lack of product breadth and knowledge, and ineffective asset
management, merchandising, selling and store-management techniques. The Company
plans to capitalize on these competitive disadvantages through its buying power
and professional retailing operations. The Company believes that the
manufacturing component of the floorcovering industry has substantially
consolidated and that the retail component is in its initial stages of
consolidation. In addition, Shaw, the largest domestic carpet manufacturer, has
entered the retail floorcovering market principally through the acquisition of
several independent floorcovering dealers.
BUSINESS STRATEGY
The Company's objective is to establish the largest and most profitable
residential and commercial floorcovering distribution network in North America.
The Company has built an integrated floorcovering distribution network,
consisting of both Company-owned and franchised retail stores, supported by the
Company's extensive specialty retailing capabilities in product sourcing, store
development, marketing and advertising, credit and personnel training.
The cornerstone of the Company's strategy is focused on CARPETMAX, a
full-service floorcovering retail concept that is designed to address the
competitive disadvantages of traditional floorcovering stores. After opening 12
initial prototype CARPETMAX stores through June 1996, the Company refined its
CARPETMAX retailing concept and opened the first Gallery Store in November 1996.
The principal elements of the CARPETMAX strategy include:
Offer Broad Selection of Products and Services. CARPETMAX is a one-stop,
full-service floorcovering store for customers seeking a broad selection of
carpet and other floorcovering products. Each store offers approximately 8,000
SKUs of floorcovering products, including carpets, area rugs, hardwood flooring,
ceramic tile, vinyl flooring, laminates, and stone and resilient surfaces from
leading floorcovering manufacturers worldwide. CARPETMAX stores, in particular
the Gallery Store format, carry a much broader selection of floorcovering
products and offer a more comprehensive range of related services than those
featured at traditional floorcovering dealers.
Locate Stores in Prime Retail Locations. The Company's strategy is to
locate its new CARPETMAX stores in "Class A" retail locations, preferably as
freestanding stores in locations with high consumer visibility. The Company
intends to open multiple stores within a market to achieve management, operating
and advertising efficiencies and to create barriers to competitive entry or
expansion.
Provide Customer Friendly Environment and Superior Service. The Company
believes that a customer friendly shopping environment and high level of
customer service are important competitive advantages. The size and format of
the CARPETMAX prototype emphasize customer intimacy and are designed to create a
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more comfortable, enjoyable and productive shopping experience supported by a
well-trained professional staff. In addition, the Company offers customers added
conveniences including a proprietary credit program, interior design consulting,
delivery and installation services and a 100% satisfaction guarantee.
Build Leading National Brand. The Company intends to establish CARPETMAX
as the "first-in-mind" floorcovering brand by (i) increasing its offering of
proprietary, CARPETMAX branded products, (ii) utilizing both local and national
advertising campaigns reinforcing the CARPETMAX name, and (iii) opening
consistent CARPETMAX stores in highly visible locations.
Leverage Product Sourcing Capabilities. As a leading purchaser of
floorcoverings, the Company is able to obtain advantageous pricing, delivery
terms and merchandising programs. The Company has established close
relationships with its major suppliers across all floorcovering categories. By
capitalizing on these suppliers' production and delivery capabilities, the
Company is able to offer what it believes is one of the largest selections of
high-quality floorcovering products, generally on a private-label and
just-in-time basis, which minimizes inventory risk and maximizes retail
profitability. Furthermore, the Company merged with Image to ensure and enhance
its ability to provide a reliable, low-cost proprietary source of carpet to
support its expanding retail network.
Leverage Retailing Resources and Capabilities. In addition to its product
sourcing capabilities, the Company has invested in extensive retailing resources
to support the growth and operation of its floorcovering distribution network.
Specific resources include (i) highly-experienced retailing management, (ii)
in-house media studios to produce advertising and promotion programs and
point-of-sale merchandising materials, (iii) a media placement staff servicing
all major markets, (iv) a satellite communication system for store-level
training and product promotions, (v) proprietary training programs to develop
store personnel, and (vi) a proprietary consumer credit program. The Company
will continue to leverage these resources to support the opening of new
CARPETMAX stores and the expansion of its other distribution channels.
GROWTH STRATEGY
While the Company intends to use the CARPETMAX concept, in particular the
Gallery Store prototype, as its primary growth vehicle, the Company will
continue to expand its floorcovering distribution network to more fully utilize
its distribution and retailing resources and capabilities. Specifically, the
Company intends to grant additional GCO franchises to further penetrate the
cash-and-carry market and to expand its presence in the specified contract and
builder markets through both internal growth and acquisitions. The principal
elements of the Company's growth strategy include:
Roll Out New Gallery Stores. The Company intends to open 70 Gallery Stores
in existing, contiguous and targeted new markets during fiscal 1998 and 1999.
The Company intends to target areas with significant new residential building
activity or older, more established communities where remodeling is likely to
occur. The Company plans to open multiple stores within each market to achieve
management, operating and advertising efficiencies and to create barriers to
competitive entry or expansion.
Expand the GCO Franchise Network. GCO stores principally target the
cash-and-carry residential replacement and builder segments. The Company intends
to continue to franchise GCO stores as opposed to opening Company-owned GCO
stores because of capital investment requirements. Currently, the Company has
GCO franchise dealers operating 99 stores in approximately 55 of the 259 areas
of dominant influence ("ADI") in the United States. As a result, the Company
believes there exists opportunities to open GCO stores in contiguous and
targeted new markets and expects to grant approximately 25 new GCO franchises in
fiscal 1998.
Expand Product Offerings and Services for Each Distribution Format. The
Company believes that by offering new products and services to its customers,
such as consumer credit programs, installation and post-sale maintenance
products and services, the Company will increase retail productivity through
more frequent and larger customer transactions. The Company has developed its
"Wall-to-Wall" credit program to provide attractive financing arrangements for
customers.
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Expand Specified Contract and Builder Distribution Capabilities. The
Company has expanded its presence in the specified contract and builder markets
through recent acquisitions. The Company intends to build market share in these
segments primarily by leveraging its existing distribution network and
established floorcovering distribution and retail resources to target these
segments. The Company believes that the Company's existing infrastructure and
proprietary, low-cost carpet products will support the growth of the Company's
complementary specified contract and builder businesses.
Strategic Acquisitions. The Company intends to selectively pursue the
acquisition of floorcovering dealers in markets which offer the potential for
the Company to build substantial market share and provide a platform for new
store openings. The Company's acquisition prospects include both independent
retailers and existing CARPETMAX franchisees. The Company will also selectively
pursue the acquisition of complementary businesses and services.
RETAIL OPERATIONS
CARPETMAX Stores. CARPETMAX stores currently operate under a variety of
formats. All CARPETMAX stores carry a broad variety of CARPETMAX private-label
floorcoverings from leading manufacturers, including high-quality polyester
carpets manufactured by Image. In May 1994, the Company commenced a store
acquisition strategy and as of January 1, 1997, the Company had acquired 13
full-service floorcovering operations currently representing 36 stores operating
under the CARPETMAX brand name in 11 markets (the "Acquired CARPETMAX Stores").
In April 1995, the Company began opening Company-owned CARPETMAX stores and as
of January 1, 1997, the Company had opened 12 initial prototype CARPETMAX
stores.
CARPETMAX Flooring Idea Gallery Stores. In November 1996, the Company
opened its first Gallery Store, offering an extensive merchandise mix, including
carpet, area rugs, hardwood flooring, ceramic tile, vinyl flooring, laminates
and stone and resilient surfaces, and a wide range of services, including
interior design consulting, measuring, delivery, installation and satisfaction
guarantees. The Company intends to use the Gallery Store as its primary growth
vehicle and plans to open 70 Gallery Stores during fiscal 1998 and 1999 in
existing, contiguous and targeted new markets as well as convert certain of its
12 initial prototype CARPETMAX stores into Gallery Stores.
Store Format. The Gallery Store provides customers with a "one-stop"
shopping experience for all of their floorcovering needs, catering
primarily to consumers seeking a wide selection of high-quality products.
The typical Gallery Store will be free-standing with 6,500 square feet of
retail selling space located in a prime retail location. Gallery Stores
feature a race-track design and are outfitted with innovative merchandising
fixtures and displays, attractive in-store signage, a child-play area, and
customer conference and work areas. Gallery Stores are designed to create a
more comfortable, enjoyable and productive shopping experience supported by
a well-trained professional staff. Each Gallery Store displays
approximately 8,000 SKUs of floorcovering products, with departmentalized
product displays dedicated to particular floorcovering products as well as
cross-merchandise displays exhibiting a combination of floorcovering
products. With a greater emphasis on hard surface floorcovering products
than its initial prototype CARPETMAX store, the Company believes that the
Gallery Store will meet increasing consumer demand for alternatives to
traditional carpet products.
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A schematic drawing of the Company's Gallery Store prototype is
illustrated below.
[Schematic diagram depicting the interior design and store layout of the
Company's Gallery Store.]
Site Selection and Targeted Markets. In locating new store sites, the
Company relies on its in-house store development department to identify
markets and store sites with high sales potential. In evaluating potential
markets, the Company considers the target market's economy, demographics,
growth potential and customer base as well as potential competition. The
Company also targets areas with significant new residential building
activity or older, more established communities where remodeling is likely
to occur. In addition to performing internal market analyses, the Company
has used a nationally recognized market research group to validate internal
forecasts and to conduct additional market studies based on specific
criteria established by the store development department. Within each
market, the Company seeks to locate stores in prime retail locations with
high consumer visibility. The Company intends to open multiple stores
within each market to achieve management, operating and advertising
efficiencies and to create barriers to competitive entry or expansion.
The Company also intends to offer certain of its existing CARPETMAX
franchisees the opportunity to upgrade their existing CARPETMAX stores to
Gallery Stores. See "-- Franchise Operations -- CARPETMAX Franchise
Network."
Conversion of Company-Owned Stores. The Company intends to convert
certain of its 12 Company-opened initial prototype CARPETMAX stores into
Gallery Stores. Also, where economically feasible, the Company intends to
initiate a store remodeling program to upgrade certain of the remaining 36
Acquired CARPETMAX Stores to be consistent with the Gallery Store format.
Where it is not economically feasible, the Company will utilize such stores
as service centers to expand its builder business. The Company may also
convert such stores, on a limited basis, into a factory direct cash-and-
carry format.
Georgia Carpet Outlet Stores. GCO operates and franchises discount
floorcovering stores under the name "GCO Carpet Outlets" catering to the
cash-and-carry floorcovering market. As of January 1, 1997, GCO operated seven
Company-owned GCO stores and had 99 franchise stores. GCO stores have a
consistent format with approximately 10,000 square feet of retail selling space.
Unlike CARPETMAX or Gallery Stores, a GCO store maintains all of its products in
inventory. Replacement inventory is provided through the
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<PAGE> 26
Company's distribution center in Kennesaw, Georgia. GCO stores derive more than
75% of their revenues from the sale of carpet, with the balance consisting of
pad, hardwood and vinyl flooring sales. GCO caters primarily to consumers with a
higher degree of price sensitivity who do not require the higher levels of
customer service and broad selection of products provided by CARPETMAX stores.
Customers typically include "do-it-yourself" homeowners, home builders, rental
property owners and property managers. In contrast to the full service
operations of the CARPETMAX stores, GCO does not offer delivery or installation
services. Instead, customers requiring these services, principally installation,
are provided a list of recommended independent contractors. Floorcovering
products are sold on a limited warranty basis. The Company intends to focus its
expansion of the GCO network through franchises. See "-- Franchise
Operations -- GCO Franchise Network."
SPECIFIED CONTRACT OPERATIONS
To expand its market share in the specified contract segment of the
floorcovering industry, in November 1996 the Company acquired Bailey & Roberts,
a Knoxville, Tennessee-based company with a significant presence in the
specified contract market and an excellent reputation for attracting and
maintaining specified contract business. The specified contract business caters
primarily to the floorcovering requirements of larger commercial customers. As a
result, it is possible to manage the specified contract segment from relatively
few regional offices. The Company serves specified contract customers beginning
at the project specification stage and continuing through securing, delivering,
installing and maintaining the floorcovering product. The Company currently has
approximately 25 salespeople whose primary responsibility is to develop
specified contract business and service specified contract customers and plans
to add salespeople in regional markets.
BUILDER OPERATIONS
To expand its market share and enhance its management expertise in the
builder segment of the floorcovering industry, in November 1996 the Company
acquired Sexton, a Knoxville, Tennessee-based company with an excellent
reputation in the builder market. The Company services the builder segment
primarily in local markets where it has established regional service centers and
a base of CARPETMAX stores. Leveraging the established infrastructure available
in these local markets, the Company utilizes its extensive merchandise mix,
product displays, sales personnel and customer service capabilities in catering
to the builder customer's needs. The Company currently has approximately 40
salespeople whose primary responsibility is to service the builder customer.
FRANCHISE OPERATIONS
CARPETMAX Franchise Network. The Company 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. The current one-time franchise fee payable by a new CARPETMAX franchisee
is $35,000 for the operation of a CARPETMAX franchise in an exclusive territory.
The franchise agreement requires CARPETMAX franchisees to purchase at least 50%
of their floorcovering products through suppliers designated by the Company on
which the Company earns a brokerage fee paid by the supplier. In addition to
having better and lower-cost access to 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 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 dealer is not in default, the Company may not grant more than one franchise
within an Exclusive Area, nor may the Company or any affiliate of the Company
operate a Company-owned store within an Exclusive Area without the franchisee's
consent. Major metropolitan market areas, however, may be divided into a number
of Exclusive Areas. In addition, because of the different nature of their
business, CARPETMAX and GCO franchises may be established in the same territory.
While there are currently no
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<PAGE> 27
franchisees with rights to open and operate Gallery Stores, the Company intends
to offer certain of its existing CARPETMAX franchisees the opportunity to
upgrade their existing CARPETMAX stores to Gallery Stores in return for allowing
the Company to open stores in their exclusive territory.
As of January 1, 1997, the Company had 300 franchise dealers operating
approximately 465 CARPETMAX stores. The Company does not expect its CARPETMAX
franchise network to grow materially in the future, as its strategy is to open
Company-owned Gallery Stores to expand its retail network.
GCO Franchise Network. GCO generates revenues from franchise fees and
franchise royalty fees based on franchise store sales. The current one-time
franchise fee payable by each new GCO franchisee is $25,000. In addition, the
GCO franchisee pays the Company a royalty at the rate of 5% on the first
$500,000 of gross sales and 3% on 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. The Company has continued to expand the scope of services
available to GCO franchisees. The Company now offers services relating to site
selection and merchandising, advertising and promotion, management and sales
training, credit, information systems and other store operations. Although the
Company markets GCO franchises to CARPETMAX franchisees, the Company does not
permit GCO's franchisees to use the CARPETMAX store format and services, the
Company's CARPETMAX proprietary marks or to sell CARPETMAX private-label
products. Currently there are four franchisees operating both GCO and CARPETMAX
franchises.
As of January 1, 1997, the Company had 99 GCO franchise stores operating in
55 of the 259 ADI markets in the United States.
RETAIL INFRASTRUCTURE
Supplier Relationships. The Company believes that the Company obtains
high-quality products at a lower cost than its competitors due to the
floorcovering purchasing volume of the Company's retail network and its
relationships with major floorcovering suppliers. The ability of the Company to
purchase and inventory private label products creates significant buying
opportunities and competitive advantages for the Company. In addition, the
Company's use of its vendors' efficient distribution networks permits it to
maintain low inventory levels, providing the Company with an important
competitive advantage. The Company believes that the Company is not 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 the Company's operating
results or financial position.
The Company offers a full range of floorcovering products from leading
manufacturers, including Shaw, Mohawk Industries, Inc., Beaulieu of America,
Inc., Queen Carpet and World Carpet, together with its proprietary Image
products, for broadloom carpet, Monsanto, DuPont and AlliedSignal for carpet
fiber, Armstrong World Industries, Mannington and Congoleum for vinyl flooring,
Bruce Hardwood Floors (a division of Triangle Pacific Industries), and
Harris-Tarkett for hardwood flooring, American Marazzi, Dal-Tile and Florida
Tile (a division of PreMark International), for ceramic tile and Pergo and
Wilsonart (a division of PreMark International) for laminates. Each of these
suppliers is a leader in its respective floorcovering category. The Company's
suppliers also include niche carpet, vinyl, hardwood, laminates and ceramic tile
producers worldwide, as well as leading manufacturers and importers of area rugs
and other decorative floorcovering products.
Advertising and Promotion. The Company, through its in-house,
state-of-the-art production facilities, develops and offers to its CARPETMAX
retail distribution network high-quality, creative marketing and promotion
programs, including television, radio, print and direct mail campaigns, sales
literature and point-of-purchase programs. The Company maintains on-site
multi-track audio recording studios, a television production facility and
full-service media department, and has produced advertising campaigns
nationwide. The Company believes that it obtains economies of scale in
advertising production and media placement that are unavailable to smaller
retailers. Customized advertising packages are available to franchisees at lower
rates than those charged by most advertising or production companies.
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<PAGE> 28
To further expand and develop the national brand awareness of CARPETMAX
floorcovering products and services, the Company has developed a comprehensive
national and regional marketing strategy that emphasizes electronic and paper
media, including television and newspaper circulars. The Company has recently
placed a greater emphasis on national media campaigns, such as TV and magazines.
In conjunction with the Gallery Store roll-out, the Company launched nationwide
CARPETMAX advertisements in national magazines such as Architectural Digest,
Women's Day, Ladies Home Journal, Better Homes and Gardens, and House Beautiful
featuring CARPETMAX product selection, quality, pricing and satisfaction
guarantee as well as the Company's commitment to superior customer service.
Retail Management and Sales Training. The Company focuses on enhancing
retail productivity by applying proven techniques to train its store managers
and sales representatives. All Company-owned store management, sales and
operating personnel receive intensive training in a variety of areas ranging
from product knowledge to sales and service techniques at the Company's "Carpet
College." The Company offers a variety of training programs to its franchisees
on a fee basis. These programs range from daily classes to intensive three-week
programs. Also, all store personnel, whether at Company-owned stores or
franchise stores, receive a comprehensive training and orientation program which
emphasizes the Company's advertising and marketing support, use of consumer
credit, store operations, general business practices and inter-company
operations.
To further enhance its training capabilities, the Company utilizes a
state-of-the-art interactive satellite communications system consisting of
digital video, audio and data compilation and analysis with 170 down-links. The
training system utilizes interactive communication capabilities to broadcast
training and merchandising programs to Company-owned store locations and
participating CARPETMAX franchise dealers. Broadcasts include information on
sales training, new technology, new products, merchandising, available specials
and design trends.
Site Selection and Store Development and Design. The Company has an
in-house store development department with responsibility for site selection,
lease negotiation and build-out of Company-owned stores to accelerate store
openings and minimize opening costs. In locating sites for its Gallery Stores,
the store development department evaluates the economic conditions,
demographics, growth and customer base of potential markets as well as possible
competition. In addition to performing internal market analysis, the Company has
used a nationally recognized market research group to validate internal
forecasts and to conduct additional market studies based on specific criteria
established by the store development department. Using its construction and
development expertise, the store development department will also coordinate the
redesign of certain of the Company-owned CARPETMAX stores into, or to be
consistent with, the Gallery Store prototype. See "-- Retail
Operations -- CARPETMAX Flooring Idea Gallery Stores." The interior store design
includes pre-determined product mix merchandised principally through samples
rather than in stock inventory, fixtures and display systems, and point-of-sale
merchandising signage and promotional materials. Once a new store site is
identified, the Company will stage the products and merchandising systems for
the new store in its distribution center and headquarters. The Company intends
to own certain of its store sites.
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 the Company. However, the Company is currently
working with a nationally recognized information technology consulting firm to
develop a proprietary point-of-sale system for tracking consumer demographics
and purchasing patterns, and integrating store operations and financial data
into the Company's central information system. The Company believes that there
is also an opportunity to link franchisees, Company-owned stores and vendors
through the integration of EDI capabilities with the Company's information
systems. Using its current information system, the Company obtains information
on a weekly basis detailing each of its Company-owned store's sales, expenses,
close ratios and various other data relating to store operations that the
Company requires for the efficient management of its retail stores.
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<PAGE> 29
CUSTOMER SERVICE
The Company seeks to differentiate itself from other independent and large
retailers through its service offerings. Accordingly, CARPETMAX stores offer
retail customers the following services:
Interior Design and Product Selection. CARPETMAX sales professionals
assist customers in all aspects of making a floorcovering selection, including
assessment of interior design preferences, coordination with other home
furnishings and decorating preferences, and product layout and measuring. To
confirm customer satisfaction with a selected floorcovering product, the Company
offers a full replacement guarantee for any reason, including if the customer
does not like their own choice of color or style once installed. CARPETMAX sales
professionals seek opportunities to visit a customer's home or commercial
location to verify proper installation and to identify additional purchase
opportunities.
Delivery and Installation. CARPETMAX stores rely on local contractors for
the installation of floorcovering products. Because installation is often the
Company's final contact with customers, the Company has recently developed the
"Ten Point Must System," a merit based training program for its installation
subcontractors, to guarantee consistent high-quality installation service.
Points are earned under the Ten Point Must System by satisfying various
requirements including (i) attending classes devoted to increasing the
subcontractors' knowledge of the Company's floorcovering products and services,
(ii) complying with a standardized dress code, and (iii) the absence of customer
complaints.
Consumer Credit Program. The Company, in affiliation with a national
provider of consumer financing, began offering consumer credit to its customers
in November 1996. The Company's consumer credit program is marketed as the
CARPETMAX "Wall-to-Wall" credit program and is exclusively for the use of the
Company's CARPETMAX stores and participating franchisees. The Company believes
these credit programs enhance closing ratios and lead to higher average ticket
purchases. The Company uses a pre-approved listing service which enables
CARPETMAX stores to solicit sales from 100% credit pre-approved potential
customers. With 60-day, 90-day, 6-month and 12-month interest-free programs,
plus open- and closed-end revolving credit packages, the Company offers a
variety of credit plans to its customers. The Company also offers longer term
(up to three years) consumer credit financing for its customers. The Company is
not contingently liable for the credit extended and receives a percentage of
interest attributable to accounts outstanding.
CARPET MANUFACTURING OPERATIONS
On August 30, 1996, the Company merged with Image, a leading manufacturer
of polyester carpet, to establish a proprietary source of private-label,
high-quality polyester carpet lines for the Company's multiple distribution
channels. The ability of the Company to manufacture high-quality polyester
carpet enables the Company and its franchisees to offer lower prices and obtain
higher margins than they might otherwise be able to obtain.
Carpet Manufacturing. Image's carpet manufacturing operations include yarn
spinning, tufting, dyeing and finishing operations. In fiscal 1996, the Company
converted 42.5 million pounds of fiber into carpet. Because the Company's
current fiber conversion capacity is approximately 70 million pounds, the
Company intends to expand its production of high-quality polyester carpet.
Image is vertically integrated from the manufacture of polyester fiber from
PET bottles and other post-consumer and post-industrial PET waste materials
through the manufacturing of carpet products. The principal raw materials used
in Image's carpet manufacturing operations are polyester fiber, synthetic
backing materials and various dyes and chemicals. Image manufactures its
polyester fiber from recycled PET obtained from post-consumer plastics such as
discarded soda bottles, and obtains other raw materials from several supply
sources.
During fiscal 1997, Image purchased recycled PET from over 300 suppliers
for conversion into clean PET resin. Image extrudes clean PET resin into
polyester fiber, which it spins into carpet face yarn. The yarn is then tufted
into undyed and unfinished carpet and later dyed and finished into one of the
Company's various carpet styles. Image converts approximately 60% of its clean
PET resin into its carpet products. The balance is
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<PAGE> 30
sold as PET resin to producers of packaging and other materials or converted
into polyester fiber and sold to home furnishings producers. During the twelve
months ended June 29, 1996, a total of 28 companies purchased approximately 24.4
million pounds of clean PET resin produced by Image.
Carpet Marketing and Sales. 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 domestically and emphasizes quality, style and
service. Image has historically marketed its carpets domestically and
internationally through a direct sales force of approximately 50 full-time sales
representatives and 15 independent sales agents at January 16, 1997. Image's
carpets are sold through over 6,000 independent retailers and distributors.
Following its merger with the Company in August 1996, the Company significantly
expanded the marketing of Image's carpets by offering and selling a greater
amount of Image's carpets through its CARPETMAX network and GCO stores. For the
nine months ended October 31, 1996, total sales of Image's carpets through the
Company's distribution networks amounted to approximately $7.0 million, or 7.1%
of Image's total carpet sales. In both the residential and commercial markets,
price competition and market coverage are particularly important because of the
relatively small differentiation perceived among most 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. For the
nine months ended October 31, 1996, revenues generated from the sale of Image's
carpets was $98.8 million, comprising 42.7% of the Company's total revenues.
COMPETITION
Competition in the retail floorcovering market is intense due to the
significant number of retailers in operation. In December 1995, Shaw, the
world's largest carpet manufacturer, announced its decision to move into the
retail floorcovering sector. 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. In addition, large
retailers also provide significant competition, including The Home Depot, Inc.
and Sears, Roebuck & Co. The principal methods of competition within the retail
floorcovering industry include store location, product selection and
merchandising, customer service and price. The Company also competes with
businesses that market to retail floorcovering franchisors. The Company believes
that there are two primary competitors in its franchise business: Carpet One and
Abbey Rug, two buying cooperative associations. The Company 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 the Company's competitors subcontract most services
(except floorcovering purchasing) to outside vendors.
The Company's carpet manufacturing business competes with other carpet
manufacturers and manufacturers of alternative floorcoverings such as wood or
tile. Certain of the Company's competitors in the carpet manufacturing business
have greater financial and other resources than the Company. The carpet
manufacturing industry currently has one dominant participant, 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 manufacturing industry are price, style,
quality and service.
TRADEMARKS, SERVICE MARKS, TRADE NAMES AND COMMERCIAL SYMBOLS
The Company has registered a number of marks with the U.S. Patent and
Trademark Office including CARPETMAX(R), Carpetmax -- THE NATIONAL CARPET
EXCHANGE(R) and MAKING A WORLD OF DIFFERENCE(R). The Company has also applied
for registration of the mark CARPETMAX Flooring Idea Gallery(TM). GCO has
registered a number of marks with the U.S. Patent and Trademark Office,
including GCO(R) and GCO CARPET OUTLETS(R). 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(TM)" and design and word marks
consisting of "GCO Carpet Outlets(TM)" or "Georgia Carpet Outlets(TM)." Image
uses several
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trademarks in the marketing of its polyester fiber and carpet, including
Duratron(R), Duratron Gold(TM), Image Resist-Gard(R), Resistron(R), Ecolon(R),
Permalon(TM), Enviro-Tech(R), Image(TM) and Classique(R). Image's registered
trademarks are of perpetual duration, subject to periodic renewal and continued
use.
There are no infringing uses actually known to the Company which could
materially affect the Company's use of the service marks, logos or slogans in
any state in which the Company is, or is proposed to be, located. There are no
patents or copyrights relevant to the Company and the Company is not the owner
or licensee of any patent or copyrights relevant to the franchise.
EMPLOYEES
As of January 1, 1997, the Company employed approximately 2,300 persons on
a full-time basis, including approximately 800 persons at its retail operations
and approximately 1,500 persons at its manufacturing operations. No employee is
a party to any collective bargaining agreement and the Company believes its
relationship with its employees is good.
GOVERNMENTAL REGULATION
The Company is subject to Federal Trade Commission ("FTC") regulations
governing the offer and sale of franchises. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires the Company to furnish to prospective
franchisees a franchise offering circular containing certain 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 the Company's franchise
operations.
The Company is not aware of any pending franchise legislation which in its
view is likely to have a material adverse effect on the operations of the
Company. The Company 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 the Company's franchise operations. The
Company believes, however, that its operations comply in all material respects
with current federal and state franchise regulations.
The Company is also subject to numerous existing and proposed state and
federal 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. The Company
believes that compliance with current laws and regulations will not require
significant capital expenditures or have a material adverse effect on its
operations. However, the enactment of new or expanded environmental regulations
could adversely affect the Company's operations.
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 Company store sites or franchises in a particular area.
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PROPERTIES
In June 1995, to accommodate a growing distribution and retail business,
the Company relocated its entire corporate staff and distribution center to a
150,000 square foot facility on a 13 acre site in Kennesaw, Georgia. The Company
stores inventory and distributes products to its retail floorcovering network
from this facility. The Company previously occupied a 62,000 square foot
building in nearby Marietta, Georgia. The Marietta facility is currently being
leased to an unrelated third party.
The Company also leases 57 facilities, through which it conducts its retail
operations.
The executive offices of the Company's manufacturing subsidiary, Image, are
located in Armuchee, Georgia. In addition, plants are located 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
IMAGE LOCATIONS PRIMARY USE AREA (SQUARE FEET)
--------------- ----------- ------------------
<S> <C> <C>
Armuchee, Georgia(1)........... Executive Office, Carpet Tufting,
Finishing and Storage 232,000
Calhoun, Georgia(2)............ PET Storage 53,000
PET Storage 116,000
PET Storage 50,000
Kensington, Georgia(2)......... PET Storage 136,000
Lylerly, Georgia(2)............ PET Storage 54,000
Rome, Georgia(1)............... Carpet Dyeing and Sample Processing 216,000
Rome, Georgia(2)............... PET Storage 140,000
PET Storage 41,000
Rome, Georgia(1)............... Yarn Spinning 211,000
Shannon, Georgia(1)............ Finished Carpet Storage and Distribution 308,000
Summerville, Georgia(1)........ PET Sortation, Granulation, Washing,
Fiber Extrusion and PET Pellet
Extrusion,
Storage and Shipping 366,000
Talladega, Alabama(1).......... Yarn Spinning 82,000
Melville, New York(2).......... PET Purchasing Office 425
Dillon, South Carolina(1)...... Yarn Spinning 102,000
</TABLE>
- ---------------
(1) These plants are owned, with the exception that the plant in Summerville,
Georgia is leased 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 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.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which any of its properties are subject; nor are there material
proceedings known to the Company to be contemplated by any governmental
authority; nor are there material proceedings known to the Company, pending or
contemplated, in which any director, officer or affiliate or any principal
security holder of the Company, or any associate of any of the foregoing is a
party or has an interest adverse to the Company.
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MANAGEMENT
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------- --- ---------------------------------------------------------
<S> <C> <C>
M.B. Seretean............ 72 Chairman of the Board
A.J. Nassar.............. 40 President, Chief Executive Officer and Director
James W. Inglis.......... 52 Chief Operating Officer, Senior Executive Vice President
and Director
Larry M. Miller.......... 55 Senior Executive Vice President and Director
H. Stanley Padgett....... 49 Senior Executive Vice President and Director; President
of Image
Thomas P. Leahey......... 35 Executive Vice President, Finance and Treasurer
Sandra Fowler............ 34 Executive Vice President, Administration
H. Gene Harper........... 35 Chief Financial Officer and Secretary
Richard A. Kaplan........ 51 Chairman Emeritus and Director
Dicky W. McAdams......... 61 Director
Ronald H. McSwain........ 54 Director
J. Michael Nixon......... 51 Director
Herb Wolk................ 64 Director
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
The following persons serve as the directors and executive officers of the
Company:
M.B. Seretean has served as a Director of the Company since September 1993
and as its Chairman of the Board since February 1995. Mr. Seretean was a founder
of Coronet Industries, Inc., a carpet manufacturer, in 1956 and served as its
President and Chairman of the Board until his retirement in 1987. Mr. Seretean
serves as a director of Trend Laboratories, Inc., a cosmetics company. He is a
former director of RCA Corporation, Turner Broadcasting Corporation, the Atlanta
Hawks and the Atlanta Braves.
A.J. Nassar has served as President, Chief Executive Officer and a Director
of the Company 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 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.
James W. Inglis has served as Chief Operating Officer, Senior Executive
Vice President and as a Director of the Company 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 and as a member of its board of directors.
Larry M. Miller has served as a Senior Executive Vice President and
Director of the Company since August 30, 1996. Mr. Miller was the 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.
H. Stanley Padgett has served as a Senior Executive Vice President and
Director of the Company since August 30, 1996. Since joining Image in 1976, Mr.
Padgett has 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 has been a member of the Board of Directors of Image
since September 1990.
Thomas P. Leahey has served as Executive Vice President, Finance of the
Company since August 1993 and as Treasurer since July 1994. Mr. Leahey was
employed by the Wachovia Bank of Georgia, N.A. from September 1991 to August
1993 as a Vice President in the Corporate Banking Division. Mr. Leahey's banking
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career began in January 1984 and included service with Barnett Bank of Central
Florida, N.A. and, from March 1987 to July 1991, with Fleet/Norstar Financial
Group.
Sandra Fowler has served as Executive Vice President, Administration of the
Company since September 1993. From 1982 to September 1993, Ms. Fowler served in
various capacities with Shaw, the nation's largest carpet manufacturer,
including Manager of Corporate Accounts, where she acted as the liaison between
that company and its corporate customers in all areas, ranging from sales to
administration.
H. Gene Harper has served as Chief Financial Officer and Secretary of the
Company since September 1994. Mr. Harper was employed by KPMG Peat Marwick LLP
from 1983 to September 1994 as a senior manager in the audit department.
Richard A. Kaplan has served as Chairman Emeritus of the Company since
February 1995 and served as Chairman of the Board of the Company from 1989 to
February 1994. Mr. Kaplan founded the Company 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.
Dicky W. McAdams has served as a Director of the Company 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 H. McSwain has served as a Director of the Company 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. Mr. McSwain serves as a director of Johnson Investment
Mutual Fund Trust, an investment company.
J. Michael Nixon has served as a Director of the Company since February
1996. Mr. Nixon has served as the President and co-owner of Q.I. Corporation, a
building materials contractor, since 1967.
Herb Wolk has served as a Director of the Company 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 is the Chairman-elect
of the American Floorcovering Association.
KEY EMPLOYEES
Each of the following persons is a key employee, but not an executive
officer of the Company.
Herb Biggers, age 47, has served as Senior Vice President of Retail
Operations since July 1996. Mr. Biggers was a General Manager in the Expo
division of The Home Depot, Inc. from January 1994 to October 1995, and the
President and Chief Executive Officer of Hancock Park Associates from 1988 to
1994. Mr. Biggers' retail experience includes positions of Chief Operating
Officer of Seattle Lighting Corporation, the President and Chief Executive
Officer of Forecast Lighting, Inc., and President and Chief Executive Officer of
Homestead Fan Company.
Ben S. Wu, age 45, has served as Senior Vice President of Real Estate
Operations since July 1996. Prior to joining the Company, Mr. Wu served the
McDonald's Corporation from 1990 to 1996, most recently as Senior Real Estate
Manager responsible for the Southern California market. Mr. Wu also served as
the Director of Real Estate and Licensing for McDonald's China Development
Company in Hong Kong.
Cristina L. Smith, age 32, has served as Vice President of Marketing since
November 1996. Prior to joining the Company, Ms. Smith was a Marketing and
Advertising Manager for the Expo division of The Home Depot, Inc. from March
1995 to November 1996. She began her retail marketing career with Mercantile
Corporation in 1987 as a Computer Graphic Designer and left as Director of
Newspaper Advertising and Catalogs to join Pet Stuff in 1993, where she served
as the Creative Director until March 1995.
34
<PAGE> 35
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of January 16, 1997, and as adjusted to reflect
the completion of the Offering, by (i) each of the Company's directors and
executive officers; (ii) all directors and executive officers of the Company as
a group; (iii) each person known by the Company to own beneficially 5.0% or more
of the outstanding Common Stock; and (iv) the Selling Stockholders. Except as
otherwise noted below, each of the holders listed below has sole voting power
and investment power with respect to the shares shown as beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY
PRIOR TO THE OWNED
OFFERING(1) SHARES AFTER THE OFFERING(1)
-------------------- BEING ---------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
---------------- --------- -------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C>
DIRECTORS, EXECUTIVE OFFICERS AND
PRINCIPAL STOCKHOLDERS:
Richard A. Kaplan............................ 915,000 7.1% 0 915,000 5.7%
7 Far View Hill
Rochester, New York 14620
A.J. Nassar(2)............................... 826,440 6.3 0 826,440 5.1
210 TownPark Drive
Kennesaw, Georgia 30144
M.B. Seretean(3)............................. 502,000 3.8 0 502,000 3.1
H. Stanley Padgett(4)........................ 454,497 3.4 0 454,497 2.8
Larry M. Miller(5)........................... 445,178 3.4 0 445,178 2.8
Ronald McSwain(6)............................ 406,500 3.2 60,000 346,500 2.2
Herb Wolk.................................... 320,000 2.5 120,000 200,000 1.3
Dicky W. McAdams(7).......................... 214,728 1.7 184,225 30,503 *
James W. Inglis(8)........................... 150,000 1.2 0 150,000 *
J. Michael Nixon(9).......................... 85,000 * 0 85,000 *
Thomas P. Leahey(10)......................... 55,000 * 0 55,000 *
Sandra Fowler(11)............................ 33,000 * 0 33,000 *
H. Gene Harper(10)........................... 16,464 * 0 16,464 *
The Kaufmann Fund, Inc.(12).................. 750,000 5.9 0 750,000 4.7
140 E. 45th Street, 43rd Floor
New York, New York 10017
All directors and executive officers as a
group
(13 persons)............................... 4,423,807 31.1 4,059,582 23.3
OTHER SELLING STOCKHOLDERS:
Hugh D. Bennett(13).......................... 60,002 * 60,002 0 0
</TABLE>
- ---------------
* Less than one percent
(1) "Beneficial Ownership" includes shares for which an individual, directly or
indirectly, has or shares voting or investment power or both and also
includes 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 12,799,077 shares outstanding as of
January 16, 1997, except for certain parties who hold presently exercisable
options to purchase shares. The percentages for those parties who hold
presently exercisable options are based upon the sum of 12,799,077 shares
plus the number of shares subject to presently exercisable options held by
them, as indicated in the following notes.
(2) Includes 321,440 shares of Common Stock subject to presently exercisable
stock options.
(3) Includes 250,000 shares of Common Stock subject to presently exercisable
stock options.
(4) Includes 441,320 shares of Common Stock subject to presently exercisable
stock options.
(5) Includes 155,020 shares of Common Stock subject to presently exercisable
stock options.
35
<PAGE> 36
(6) Includes 30,500 shares owned by a foundation and a trust with respect to
which Mr. McSwain serves as trustee.
(7) Includes 10,000 shares of Common Stock subject to presently exercisable
stock options.
(8) Includes 100,000 shares of Common Stock subject to presently exercisable
stock options.
(9) Includes 40,000 shares of Common Stock subject to presently exercisable
stock options.
(10) Represents shares of Common Stock subject to presently exercisable stock
options.
(11) Includes 30,000 shares of Common Stock subject to presently exercisable
stock options.
(12) Based on a Schedule 13G dated April 30, 1996 filed by The Kaufmann Fund.
The Company makes no representation as to the accuracy or completeness of
the information reported.
(13) Represents shares of Common Stock subject to presently exercisable stock
options. The Company has agreed to reimburse Mr. Bennett for the
underwriting discounts and commissions applicable to his shares in the
amount of $55,202.
36
<PAGE> 37
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 16,034,852 shares
of Common Stock outstanding (16,574,852 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, a total of
12,281,498 shares, including all of the 3,600,000 shares of Common Stock sold in
this Offering, will be freely tradable without restriction or limitation under
the Securities Act. The remaining 3,753,354 shares are "Restricted Securities"
shares within the meaning of Rule 144 adopted under the Securities Act (the
"Restricted Securities"). The Restricted Securities were issued and sold by the
Company in private transactions in reliance upon exemptions from registration
under the Securities Act and may not be sold except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act.
Approximately 3,378,236 Restricted Securities are currently eligible for
sale in the public market pursuant to Rule 144. In general, under Rule 144 as
currently in effect, any affiliate of the Company or any person (or persons
whose shares are aggregated in accordance with Rule 144) who has beneficially
owned Restricted Securities for at least two years would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1.0% of the outstanding shares of Common Stock (approximately 160,349
shares based upon the number of shares outstanding after the Offering) or the
reported average weekly trading volume in the over-the-counter market for the
four weeks preceding the sale. Sales under Rule 144 are also subject to certain
manner of sale restrictions and notice requirements and to the availability of
current public information concerning the Company. Persons who have not been
affiliates of the Company and who have held their shares for more than three
years are entitled to sell Restricted Securities without regard to the volume,
manner of sale, notice and public information requirements of Rule 144.
As of January 16, 1997, outstanding options to purchase 2,663,355 shares of
Common Stock were held by certain officers, directors and employees of the
Company pursuant to the Company's 1993 Stock Option Plan and RSO Plan and an
aggregate of 269,260 shares were available for the grant of future options
thereunder. The Company has filed a registration statement to register shares of
Common Stock issuable upon the exercise of stock options under the 1993 Stock
Option Plan and the RSO Plan. As of January 16, 1997, an aggregate of 2,003,753
shares were subject to presently exercisable stock options. Shares issued upon
the exercise of stock options are available for sale in the open market.
The Company, its executive officers and directors and each of the Selling
Stockholders (who, upon completion of the Offering, will own in the aggregate
4,059,582 shares of Common Stock) have each agreed that they will not, directly
or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell, or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or other capital stock
of the Company or any securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock or other capital stock of the
Company, or any right to purchase or acquire Common Stock or other capital stock
of the Company, for a period of 180 days after the date of this Prospectus,
without the prior consent of Prudential Securities Incorporated, on behalf of
the Underwriters, except for bona fide gifts or transfers effected by such
stockholders other than on any securities exchange or in the over-the-counter
market to donees or transferees that agree to be bound by similar agreements and
except for issuances by the Company pursuant to the exercise of certain stock
options outstanding upon completion of this Offering.
The Company is unable to predict the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price for the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, could
adversely affect the market price for the Common Stock and could impair the
Company's future ability to obtain capital through offerings of equity
securities.
Following the Offering, the Company may issue its Common Stock from time to
time in connection with the acquisition of stock or assets of other companies.
Such securities may be issued in transactions exempt from registration under the
Securities Act.
37
<PAGE> 38
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, The Robinson-Humphrey Company, Inc. and Wheat, First
Securities, Inc. are acting as representatives of the Underwriters (the
"Representatives"), severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth below
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated.......................... 1,200,000
The Robinson-Humphrey Company, Inc.......................... 1,200,000
Wheat, First Securities, Inc................................ 1,200,000
---------
Total........................................... 3,600,000
=========
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.
The Underwriters, through their representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$0.55 per share; and that such dealers may reallow a concession of $0.10 per
share to certain other dealers. After the public offering, the offering price
and the concession may be changed by the Representatives.
The Company has granted the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
540,000 additional shares of Common Stock at the public offering price, less
underwriting discounts, as set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to 3,600,000.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Company, its directors and executive officers and each of the Selling
Stockholders who, upon completion of this Offering, will own in the aggregate
4,059,582 shares, have agreed not to, directly or indirectly, offer, sell, offer
to sell, contract to sell, pledge, grant any option to purchase or otherwise
sell or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock or any securities convertible
into, or exercisable or exchangeable for, any shares of Common Stock or other
capital stock of the Company, or any right to purchase or acquire Common Stock
or other capital stock of the Company for a period of 180 days after the date of
this Prospectus without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except for bona fide gifts or
transfers effected by such stockholders other than on any securities exchange or
in the over-the-counter market to donees or transferees that agree to be bound
by similar agreements and except for issuances by the Company pursuant to the
exercise of certain stock options outstanding upon completion of this Offering.
In connection with this Offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may have engaged in passive market making transactions in the Common Stock on
the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act
during the two business day period before the commencement of offers of sales of
the Common Stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the
38
<PAGE> 39
highest independent bid for such security; if all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Smith, Gambrell & Russell,
LLP, Atlanta, Georgia. Certain legal matters related to the Offering will be
passed upon for the Underwriters by King & Spalding, Atlanta, Georgia.
EXPERTS
The consolidated financial statements of the Company as of and for the
ten-months ended January 31, 1996, included herein and incorporated by reference
in the Company's Transition Report (Form 10-K), have been audited by Arthur
Andersen LLP, independent public accountants, as set forth in their reports
thereon included and incorporated herein by reference in reliance upon such
reports given upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of the Company 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 in reliance upon the report of
KPMG Peat Marwick LLP, independent auditors, 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 June 29, 1996 and July 1, 1995 and
for each of the years in the three year period ended June 29, 1996, have been
incorporated by reference herein in reliance upon the report of KPMG Peat
Marwick LLP, independent auditors, incorporated by reference herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to certain informational requirements of the 1934
Act and, in accordance therewith, files reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained at prescribed rates by writing to the Securities and Exchange
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains a World Wide Web site, containing such
reports, proxy and information statements and other information regarding the
Company, at "http://www.sec.gov". In addition, such reports, proxy statements
and other information concerning the Company may be inspected at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006-1506.
The Company has filed a Registration Statement on Form S-3 (together with
all amendments and exhibits filed or to be filed in connection therewith, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements
contained herein concerning the provisions of documents are necessarily
summaries of such documents, and each statement is qualified in its entirety by
reference to the copy of the applicable document filed with the Commission.
39
<PAGE> 40
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission (File No.
0-22232) pursuant to the 1934 Act are hereby incorporated in this Prospectus by
reference:
1. The Company's Transition Report on Form 10-K for the ten months ended
January 31, 1996;
2. The Company's Amendment No. 1 on Form 10-K/A dated October 15, 1996 to
its Transition Report on Form 10-K for the ten months ended January 31,
1996;
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1996;
4. The Company's Quarterly Report on Form 10-Q for the quarter ended July
31, 1996;
5. The Company's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1996;
6. The Company's Current Report on Form 8-K dated May 31, 1996;
7. The Company's Current Report on Form 8-K dated August 30, 1996;
8. The Company's Amendment No. 1 on Form 8-K/A dated November 15, 1996 to
its Current Report on Form 8-K dated August 30, 1996.
9. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A as filed with the
Commission on August 12, 1993 and as amended by Amendment No. 1 on Form
8-A/A as filed with the Commission on August 26, 1993.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the 1934 Act subsequent to the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the respective dates of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified and superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a Prospectus
is delivered, upon written or oral request of such person, a copy of any and all
of the information that has been incorporated by reference in this Prospectus
(excluding exhibits unless such exhibits are specifically incorporated by
reference into such documents). Please direct such requests to the Secretary,
The Maxim Group, Inc., 210 TownPark Drive, Kennesaw, Georgia 30144, telephone
number (770) 590-9369.
40
<PAGE> 41
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheets at March 31, 1995, January 31,
1996 and October 31, 1996 (unaudited)..................... F-4
Consolidated Statements of Operations for the years ended
March 31, 1994 and 1995, the ten months ended January 31,
1996, and the nine months ended September 30, 1995 and
October 31, 1996 (unaudited).............................. F-5
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1994 and 1995, the ten months ended
January 31, 1996, and the Nine Months ended October 31,
1996 (unaudited).......................................... F-6
Consolidated Statements of Cash Flows for the years ended
March 31, 1994 and 1995, the ten-months ended January 31,
1996, and the nine months ended September 30, 1995 and
October 31, 1996 (unaudited).............................. F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 42
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.
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
December 16, 1996
F-2
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
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 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.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 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.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
December 23, 1996
F-3
<PAGE> 44
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995, JANUARY 31, 1996, AND OCTOBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31, OCTOBER 31,
1995 1996 1996
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $195, $1,028, and $181
at March 31, 1995, January 31, 1996, and October 31, 1996, respectively....... $ 2,365 $ 4,207 $ 5,145
Current portion of franchise license fees receivable, net of allowance for
doubtful accounts of $103, $175, and $338 at March 31, 1995, January 31, 1996,
and October 31, 1996, respectively............................................ 1,787 1,894 1,985
Trade accounts receivable, net of allowance for doubtful accounts of $734,
$1,605, and $1,273 at March 31, 1995, January 31, 1996, and October 31, 1996,
respectively.................................................................. 29,883 33,037 43,551
Accounts receivable from officers and employees (Note 6)........................ 411 615 817
Current portion of notes receivable from franchisees and related parties, net of
allowance for doubtful accounts of $0, $383, and $0 at March 31, 1995, January
31, 1996, and October 31, 1996, respectively (Note 7)......................... 557 1,008 1,314
Inventories (Note 5)............................................................ 38,137 49,170 38,955
Refundable income taxes (Note 11)............................................... 1,059 2,176 1,754
Deferred income taxes (Note 11)................................................. 760 2,080 1,294
Prepaid expenses................................................................ 1,446 2,091 2,472
-------- -------- --------
Total current assets.................................................... 76,405 96,278 97,287
PROPERTY, PLANT, AND EQUIPMENT, net (Notes 4 and 10)............................ 68,832 93,879 98,200
FRANCHISE LICENSE FEES RECEIVABLE, less current portion, net of allowance for
doubtful accounts of $210 at March 31, 1995, January 31, 1996, and October 31,
1996.......................................................................... 2,107 2,091 1,864
NOTES RECEIVABLE FROM FRANCHISEES, less current portion......................... 450 0 661
DEFERRED LICENSE FEE, net of accumulated amortization (Note 8).................. 880 341 0
INTANGIBLE ASSETS, net of accumulated amortization of $443, $704, and $1,026 at
March 31, 1995, January 31, 1996, and October 31, 1996, respectively (Notes 2
and 3)........................................................................ 13,478 8,960 9,753
OTHER ASSETS.................................................................... 321 536 2,379
-------- -------- --------
$162,473 $ 202,085 $ 210,144
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 9).................................... $ 912 $ 919 $ 534
Current portion of capital lease obligations (Note 10)........................ 512 556 529
Rebates payable to franchisees................................................ 1,752 3,673 2,986
Accounts payable.............................................................. 19,495 17,167 20,370
Accrued expenses.............................................................. 6,250 9,147 14,281
Deferred revenue.............................................................. 441 1,284 1,189
Deposits...................................................................... 2,199 2,076 2,847
-------- -------- --------
Total current liabilities............................................... 31,561 34,822 42,736
LONG-TERM DEBT, less current portion (Note 9)................................... 53,194 90,147 90,447
CAPITAL LEASE OBLIGATIONS, less current portion (Note 10)....................... 2,841 2,563 2,211
DEFERRED INCOME TAXES (Note 11)................................................. 3,453 2,403 1,813
-------- -------- --------
Total liabilities....................................................... 91,049 129,935 137,207
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 10, 14 and 16)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 1,000 shares authorized, no shares issued or
outstanding................................................................. 0 0 0
Common stock, $.001 par value; 25,000 shares authorized, 11,927, 12,397, and
12,489 shares issued and outstanding at March 31, 1995, January 31, 1996,
and October 31, 1996, respectively.......................................... 12 12 12
Additional paid-in capital.................................................... 55,421 60,392 61,131
Retained earnings............................................................. 15,991 11,746 11,794
-------- -------- --------
Total stockholders' equity.............................................. 71,424 72,150 72,937
-------- -------- --------
$162,473 $ 202,085 $ 210,144
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 45
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 NINE MONTHS ENDED SEPTEMBER 30, 1995 AND OCTOBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
TEN
YEARS ENDED MARCH MONTHS NINE MONTHS ENDED
31, ENDED ---------------------------
------------------- JANUARY 31, SEPTEMBER 30, OCTOBER 31,
1994 1995 1996 1995 1996
-------- -------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales of floorcovering products (Note
12)................................. $106,237 $174,935 $ 186,568 $ 161,733 $ 185,735
Fees from franchise services (Note
12)................................. 9,688 13,876 13,432 12,146 19,684
Fiber and PET sales.................... 5,297 12,886 24,072 15,928 23,458
Other (Note 12)........................ 1,369 1,644 3,479 2,208 2,585
-------- -------- -------- -------- --------
Total revenues................. 122,591 203,341 227,551 192,015 231,462
Cost of sales............................ 85,847 139,521 161,723 132,351 166,934
-------- -------- -------- -------- --------
Gross profit........................ 36,744 63,820 65,828 59,664 64,528
Selling, general, and administrative
expenses............................... 23,669 46,870 59,197 47,053 54,104
Special charge-replacement stock
options................................ 10,388 0 0 0 0
Goodwill impairment charge (Note 2)...... 0 0 6,569 0 0
Merger-related costs (Note 3)............ -- 500 0 0 4,700
Other (income) expense:
Interest income........................ (307) (397) (415) (274) (452)
Interest expense....................... 909 1,839 4,695 3,300 5,040
Interest expense-related parties....... 977 0 0 0 0
Other.................................. 263 (421) (78) (417) (426)
-------- -------- -------- -------- --------
Earnings (loss) before income
taxes............................. 845 15,429 (4,140) 10,002 1,562
Income tax expense (Note 11)............. 376 5,787 105 3,656 1,514
-------- -------- -------- -------- --------
Net earnings (loss) before extraordinary
item................................... 469 9,642 (4,245) 6,346 48
Extraordinary income (Note 18)........... 190 0 0 0 0
-------- -------- -------- -------- --------
Net earnings (loss)...................... $ 659 $ 9,642 $ (4,245) $ 6,346 $ 48
======== ======== ======== ======== ========
Earnings (loss) per common and common
equivalent share....................... $ 0.06 $ 0.72 $ (0.32) $ 0.47 $ 0.00
======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding... 11,161 13,301 13,301 13,546 13,791
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 46
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995,
THE TEN MONTHS ENDED JANUARY 31, 1996
AND THE NINE MONTHS ENDED OCTOBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1993........................ 8,836,206 $ 9 $ 25,261 $ 5,690 $30,960
Redemption and cancellation of 178,218 shares
of common stock (Note 13)................. (178,218) 0 (107) 0 (107)
Sale of common stock, less underwriting and
issuance costs of $1,603 (Note 13)........ 1,822,600 2 7,963 0 7,965
Exercise of redeemable common stock purchase
warrants (Note 13)........................ 26,898 0 188 0 188
Issuance of replacement stock options (Note
13)....................................... 0 0 10,388 0 10,388
Net earnings for the year.................... 0 0 0 659 659
---------- --- ------- ------ -------
Balance, March 31, 1994........................ 10,507,486 11 43,693 6,349 50,053
Exercise of redeemable common stock purchase
warrants, net of $46 in redemption costs
(Note 13)................................. 880,517 1 6,124 0 6,125
Issuance of stock............................ 520,654 0 7,010 0 7,010
Stock options exercised...................... 18,500 0 97 0 97
Cancellation of underwriter's warrants (Note
13)....................................... 0 0 (1,503) 0 (1,503)
Net earnings for the year.................... 0 0 0 9,642 9,642
---------- --- ------- ------ -------
Balance, March 31, 1995........................ 11,927,157 12 55,421 15,991 71,424
Issuance of stock............................ 442,857 0 4,825 0 4,825
Stock options exercised...................... 27,266 0 146 0 146
Net loss for the ten months ended January 31,
1996...................................... 0 0 0 (4,245) (4,245)
---------- --- ------- ------ -------
Balance, January 31, 1996...................... 12,397,280 12 60,392 11,746 72,150
Retirement of treasury shares................ (28,000) 0 (336) 0 (336)
Issuance of stock............................ 50,000 0 606 0 606
Stock options exercised...................... 69,900 0 469 0 469
Net earnings for the nine months ended
October 31, 1996.......................... 0 0 0 48 48
---------- --- ------- ------ -------
Balance, October 31, 1996 (unaudited).......... 12,489,180 $ 12 $ 61,131 $ 11,794 $72,937
========== === ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 47
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 NINE MONTHS ENDED SEPTEMBER 30, 1995 AND OCTOBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
TEN MONTHS
YEARS ENDED ENDED NINE MONTHS ENDED
MARCH 31, JANUARY ---------------------------
------------------- 31, SEPTEMBER 30, OCTOBER 31,
1994 1995 1996 1995 1996
-------- -------- ---------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................... $ 659 $ 9,642 $ (4,245) $ 6,346 $ 48
-------- -------- -------- -------- --------
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Impairment write-down of goodwill.................... 0 0 6,569 0 0
Depreciation and amortization........................ 3,832 5,225 8,008 4,904 7,974
Bad debt provision................................... 108 515 1,349 250 375
Deferred income taxes................................ (2,117) 2,329 (2,370) 1,291 196
(Gain) loss on sale of assets........................ 142 (7) 124 0 0
Special charge -- replacement stock options.......... 10,388 0 0 0 0
Extraordinary item................................... (190) 0 0 0 0
Changes in assets and liabilities:
Increase in receivables.............................. (5,675) (10,477) (4,001) (10,779) (11,058)
(Increase) decrease in inventories................... (2,866) (10,801) (10,098) (18,682) 10,737
(Increase) decrease in refundable income taxes....... 0 (1,059) (1,118) (178) 422
(Increase) decrease in prepaid expenses and other
assets............................................. (49) 24 (365) 524 (2,223)
Increase in accounts payable, rebates payable,
accrued expenses, and deposits and deferred
revenue............................................ 1,972 6,708 955 3,160 6,601
-------- -------- -------- -------- --------
Total adjustments................................ 5,545 (7,543) (947) (19,510) 13,024
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities..................................... 6,204 2,099 (5,192) (13,164) 13,072
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures................................... (12,734) (25,941) (15,580) (28,334) (11,461)
Proceeds from sale of assets........................... 79 127 34 0 0
Acquisitions, net of cash acquired..................... 0 (12,635) (13,875) (4,354) (946)
Deferred license fee payments.......................... (1,035) 0 0 0 0
-------- -------- -------- -------- --------
Net cash used in investing activities............ (13,690) (38,449) (29,421) (32,688) (12,407)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net............ 23,665 2 0 0 606
Proceeds from exercise of warrants and options, net.... 188 6,222 146 182 469
Purchase of underwriter's warrants..................... 0 (1,503) 0 (1,503) 0
Purchase of treasury stock............................. (107) 0 0 0 (336)
Net proceeds from issuance (repayments of) of debt..... (11,587) 33,278 37,718 44,563 (86)
Principal payments on long-term debt................... (1,324) (3,051) (954) 0 0
Payments for loan costs................................ 0 0 (225) 0 0
Principal payments on capital lease obligations........ (8) (348) (230) (272) (380)
-------- -------- -------- -------- --------
Net cash provided by financing activities........ 10,827 34,600 36,455 42,970 273
-------- -------- -------- -------- --------
Net increase (decrease) in cash.......................... 3,341 (1,750) 1,842 (2,882) 938
Cash, beginning of period................................ 774 4,115 2,365 3,002 4,207
-------- -------- -------- -------- --------
Cash, end of period...................................... $ 4,115 $ 2,365 $ 4,207 $ 120 $ 5,145
======== ======== ======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................. $ 720 $ 2,386 $ 4,073 $ 3,278 $ 5,094
======== ======== ======== ======== ========
Income taxes......................................... $ 2,935 $ 5,130 $ 3,189 $ 2,335 $ 219
======== ======== ======== ======== ========
Supplemental disclosures of noncash investing and
financing activities:
Common stock issued in connection with acquisitions.... $ 0 $ 7,010 $ 4,825 $ 5,520 $ 0
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 48
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994 AND 1995 AND JANUARY 31, 1996 AND OCTOBER 31, 1996 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
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 floorcovering products. The Company is
also engaged in the sale of franchise licensing agreements for the retail
floorcovering industry and other related products and services to its
franchisees. At January 31, 1996, the Company had 377 franchisees under
contract. Image Industries, Inc. ("Image"), a wholly owned subsidiary of Maxim,
is engaged in the manufacturing of residential carpet and plastics recycling.
The carpet is made from polyester fiber which Image produces internally. The
plastics recycling products, primarily PET (polyethylene terephthalate) flake,
PET pellet, and polyester fiber are sold domestically. These plastics recycling
products are the result of converting PET post-consumer plastics into flake,
pellet, or polyester fiber. The plastics recycling products are either used
internally in the manufacturing of carpet or sold externally to various
customers. Management does not believe that the Company is dependent upon any
one vendor for product purchases and that 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 mergers of the Company and GCO, Inc.
("GCO") on September 28, 1994 and the Company and Image on August 30, 1996, both
of which were accounted for as poolings 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 floorcovering products, the amount of sales of the
Company's floorcovering 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.
F-8
<PAGE> 49
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The condensed consolidated Statement of Operations (unaudited) for the ten
months ended January 31, 1995 is as follows:
<TABLE>
<S> <C>
Revenues.................................................................. $164,929
Cost of sales............................................................. 113,398
--------
Gross profit.............................................................. 51,531
Selling, general and administrative expenses.............................. 37,147
--------
Operating income.......................................................... 14,384
Other expense............................................................. 1,138
Income taxes.............................................................. 5,300
--------
Net earnings.............................................................. $ 7,946
========
Earnings per common and common equivalent share........................... $ .62
========
</TABLE>
Cash and Cash Equivalents
Cash balances include short-term interest-bearing deposits.
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
floorcoverings not installed by the Company or its authorized installers. Sales
from the manufacturing operations are recognized at the time related goods are
shipped.
Fees From Brokering Floor Covering Products and Advertising Fees
The Company negotiates volume rebates with various floorcovering
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.
F-9
<PAGE> 50
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 for
retail sales, and Image applies the standard cost method, both of which
approximate the first-in, first-out method.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost, which includes
interest on funds borrowed to finance construction. 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.
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 15 to 20 years. Amortization of
approximately $327 and $668 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 over 60
months using the straight-line method.
Deferred Loan Costs
Deferred loan costs, which are included in other assets, represent fees and
expenses incurred to obtain long-term debt. The costs are amortized to expense
over the life of the related financing agreement.
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
All share and per share data have been adjusted to give retroactive effect
to the merger of the Company with GCO and Image. 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.
Weighted average common and common equivalent shares include the dilutive effect
of the 1,133,856 Replacement Stock Options for all years presented (Note 13).
F-10
<PAGE> 51
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Reclassifications
Certain prior year financial statement balances have been reclassified to
conform with the current period presentation.
Interim Unaudited Data for the Nine Months Ended September 30, 1995 and
October 31, 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 October 31, 1996 and the results of the
Company's operations and its cash flows for the nine months ended September 30,
1995 and October 31, 1996 in conformity with generally accepted accounting
principles. The results of operations for the nine months ended October 31, 1996
are not necessarily indicative of the results to be expected for the year.
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. 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.
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, consisting of a cash payment of $1,750, the issuance of 270,000 shares
of the Company's common stock, valued at $3,611, and an additional $312 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, 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
F-11
<PAGE> 52
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $2,624, consisting of a cash payment of $440, the issuance of 155,254
shares of the Company's common stock, valued at $2,057, and an additional $127
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 $1,806, 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 $613, consisting of a cash
payment of $200, the issuance of 16,760 shares of the Company's common stock,
valued for the purpose of the acquisition at $235, and an additional $178 in
acquisition costs. In addition to the consideration received at closing, the
stockholders 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, which is being amortized over a 20-year period.
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 Company incurred $500 in merger-related costs.
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
GCO...................................................................... 9,283
-------
Total............................................................ $19,334
=======
Net earnings:
The Maxim Group, Inc..................................................... $ 1,823
GCO...................................................................... 642
-------
Total............................................................ $ 2,465
=======
</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, consisting of a cash payment of $2,986 and an
additional $78 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 $2,939, 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, consisting of a cash
payment of $600, the issuance of 32,000 shares of the Company's common stock,
valued for the purpose of the acquisition at $472, and an additional $72 in
acquisition costs. The purchase price has been allocated to the assets acquired
and liabilities assumed
F-12
<PAGE> 53
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on estimates of fair values at the date of acquisition, resulting in
goodwill of $1,304 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 $2,913
consisting of a cash payment of $2,850 and an additional $63 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 $2,177, 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, consisting of a cash
payment of $890 and an additional $58 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
$427, 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 ("Stockholder") and the Company
paid to the Stockholder prepaid rent for the 20-year term in the amount of $200
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, consisting of a cash payment of
$270 and an additional $119 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, 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, consisting of a cash payment of $567, the
issuance of 46,640 shares of the Company's common stock, valued for the purpose
of the acquisition at $635, and an additional $68 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, which is being amortized over 20 years.
Effective April 5, 1995, Image 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 the Company at the transaction's closing was 400,000 shares of
stock, valued at $4,400, and cash of approximately $11,298. The 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 and will be amortized over 15 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 $1,861, consisting
of a cash payment of $1,272, the issuance of 42,857 shares of the Company's
common stock valued at $500 and an additional $138 in acquisition costs. In
addition to the consideration received at closing, the stockholders 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
F-13
<PAGE> 54
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition resulting in goodwill of $1,535 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.
On August 30, 1996, the Company acquired all of the common stock of Image
in exchange for 5,266,285 shares of the Company's common stock. The acquisition
of Image 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 Image. The
Company incurred approximately $4,700 in one-time costs related to the merger
(primarily legal, accounting, investment advisory fees, and merger-related
restructuring charges). This amount has been presented separately in the
accompanying statements of operations as Merger-related costs.
The results of operations previously reported by the separate companies
above and the combined amounts for the years ended March 31, 1994 and 1995 and
the ten months ended January 31, 1996 are presented below:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED
MARCH 31, 1994 YEAR ENDED JANUARY 31, 1996
------------------ MARCH 31, 1995 ------------------
INCOME ----------------- INCOME
REVENUES (LOSS) REVENUES INCOME REVENUES (LOSS)
-------- ------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
The Maxim Group, Inc........... $ 19,334 $ 2,465 $ 76,091 $2,385 $ 99,290 $(7,274)
Image Industries, Inc.......... 103,257 (1,996) 127,250 7,257 128,261 3,028
Extraordinary income........... 0 190 0 0 0 0
-------- ------- -------- ------ -------- -------
Total................ $122,591 $ 659 $203,341 $9,642 $227,551 $(4,246)
======== ======= ======== ====== ======== =======
</TABLE>
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 1995 and January 31, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Land and improvements.............................................. $ 2,795 $ 3,596
Buildings and leasehold improvements............................... 22,798 34,503
Machinery and equipment............................................ 52,015 77,691
Furniture and fixtures............................................. 2,190 2,024
Transportation equipment........................................... 1,340 2,323
Construction in progress........................................... 9,375 1,930
------- -------
90,513 122,067
Less accumulated depreciation and amortization..................... 21,681 28,188
------- -------
$68,832 $93,879
======= =======
</TABLE>
5. INVENTORIES
Inventories at March 31, 1995 and January 31, 1996 consisted of the
following:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Raw materials...................................................... $ 7,809 $16,381
Work in process.................................................... 1,956 2,665
Finished goods..................................................... 28,372 30,124
------- -------
Total.................................................... $38,137 $49,170
======= =======
</TABLE>
F-14
<PAGE> 55
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. 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 tied to the prime rate.
7. NOTES RECEIVABLE FROM FRANCHISEES AND RELATED PARTIES
The Company has made loans to certain franchisees totaling $950 and $502 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 and
$82 at March 31, 1995 and January 31, 1996, respectively (Note 12).
8. 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, which is being amortized over the life of the agreement. Accumulated
amortization totaled $155 and $694 as of March 31, 1995 and January 31, 1996,
respectively.
9. 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 $22,185
Note payable to bank under revolving credit agreement, due June
2001............................................................. 35,005 61,980
Note payable to bank, secured by land and building, interest
payable in monthly installments of $22, including interest at
8.34% with final payment due October 9, 2005..................... 1,107 3,952
Note payable to bank, secured by land and building, payable in
monthly installments of $12, including interest at 7.125%, with
final payment due February 1, 2004............................... 919 857
Note payable to bank, secured by satellite equipment, in monthly
installments of $17, including interest at 9.46%, with final
payment due March 1, 2000........................................ 900 791
Note payable to bank, secured by transportation equipment, in
monthly installments of $9, including interest at 8% with final
payment due November 1, 2000..................................... 0 589
Other debt with interest ranging from approximately 6% to 13%; a
portion secured by vehicles and other property and maturing at
various dates through 2000....................................... 950 712
------- -------
54,106 91,066
Less current portion............................................... 912 919
------- -------
Long-term debt, less current portion............................... $53,194 $90,147
======= =======
</TABLE>
F-15
<PAGE> 56
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate annual maturities of long-term debt subsequent to January 31,
1996 are as follows:
<TABLE>
<S> <C>
Year ending January 31:
1997..................................................................... $ 919
1998..................................................................... 827
1999..................................................................... 22,825
2000..................................................................... 674
2001..................................................................... 722
2002 and thereafter...................................................... 65,099
-------
$91,066
=======
</TABLE>
The revolving line of credit agreement (the "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 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 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
under the Agreement as of January 31, 1996. However, the bank granted a waiver
of such noncompliance and amended the covenant requirements. The Company must
pay an 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 the Agreement.
The note payable to bank was under a revolving line of credit agreement
(the "Facility"), expiring June 30, 2001, bearing interest payable quarterly at
the prime interest rate or Eurodollar rate plus 1.00%. Effective November 6,
1995, the Company renegotiated its Facility with the lender and two other
financial institutions. The restated Facility allows the Company to borrow up to
$70 million with interest payable quarterly at the prime rate (8.5% on January
31, 1996) or Eurodollar rate (approximately 5.26% at January 31, 1996) 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 assumptions of certain types of indebtedness, minimum
earnings levels, interest coverage, and tangible net worth. On January 31, 1996,
the Company was in compliance with all such covenants.
On August 30, 1996, the Company closed on a commitment from a bank for new
credit facilities (the "New Facility") totaling $125 million. The New Facility
was executed in conjunction with the merger of the Company and Image. Borrowings
under the New Facility were used to refinance the existing debt, including
borrowings under the Agreement and Facility, of the Company and Image and will
provide the Company with working capital.
10. 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 $1,373, $2,970, and $4,026
for the years ended March 31, 1994 and 1995 and the ten months ended January 31,
1996, respectively, including $110 in 1994, $462 in 1995, and $334 in 1996 paid
to related parties.
F-16
<PAGE> 57
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1,080 $3,840
Machinery and equipment.................................... 8 357 365
------ ------ ------
Assets under capital leases................................ 2,768 1,437 4,205
Less accumulated amortization.............................. 332 348 680
------ ------ ------
Assets under capital leases, net........................... $2,436 $1,089 $3,525
====== ====== ======
January 31, 1996:
Buildings and improvements................................. $2,760 $1,080 $3,840
Machinery and equipment.................................... 0 571 571
------ ------ ------
Assets under capital leases................................ 2,760 1,651 4,411
Less accumulated amortization.............................. 629 417 1,046
------ ------ ------
Assets under capital leases, net........................... $2,131 $1,234 $3,365
====== ====== ======
</TABLE>
Minimum future lease obligations on long-term noncancelable leases in
effect at January 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES
--------------------------
RELATED- OPERATING
PARTY OTHER TOTAL LEASES
-------- ------ ------ ---------
<S> <C> <C> <C> <C>
Year ending January 31:
1997...................................................... $ 465 $ 294 $ 759 $ 5,446
1998...................................................... 465 211 676 3,408
1999...................................................... 465 191 656 2,629
2000...................................................... 465 175 640 2,175
2001...................................................... 465 126 591 1,394
2002 and thereafter....................................... 600 102 702 3,512
------ ------ ------ -------
Total minimum lease payments...................... 2,925 1,099 4,024 $18,564
=======
Less amounts representing interest.......................... 755 150 905
Less current portion........................................ 320 236 556
------ ------ ------
$1,850 $ 713 $2,563
====== ====== ======
</TABLE>
F-17
<PAGE> 58
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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.............................................. $ 2,258 $ (1,952) $ 306
State and local........................................... 235 (165) 70
------ ------- ------
$ 2,493 $ (2,117) $ 376
====== ======= ======
Year ended March 31, 1995:
U.S. federal.............................................. $ 3,001 $ 2,208 $5,209
State and local........................................... 298 280 578
------ ------- ------
$ 3,299 $ 2,488 $5,787
====== ======= ======
Ten months ended January 31, 1996:
U.S. federal.............................................. $ 1,051 $ (858) $ 193
State and local........................................... 119 (207) (88)
------ ------- ------
$ 1,170 $ (1,065) $ 105
====== ======= ======
</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>
YEAR ENDED TEN MONTHS
MARCH 31, ENDED
------------- JANUARY 31,
1994 1995 1996
---- ------ -----------
<S> <C> <C> <C>
Computed "expected" tax (benefit) expense................... $287 $5,246 $(1,408)
Increase in income taxes resulting from:
Goodwill impairment charge................................ 0 0 1,110
Nondeductible expenses.................................... 22 178 199
State and local income taxes, net of federal income tax
benefit................................................ 46 378 (60)
Other, net................................................ 21 (15) 264
---- ------ ------
$376 $5,787 $ 105
==== ====== ======
</TABLE>
F-18
<PAGE> 59
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 $ 1,244
Accounts receivable, principally due to allowance for doubtful
accounts................................................... 807 976
Inventories, principally due to additional costs inventoried
for tax purposes........................................... 935 1,353
Accrued expenses.............................................. 541 874
Special charge -- replacement stock options................... 3,513 3,249
Net operating loss carryforwards.............................. 1,526 1,315
Other, net.................................................... 17 23
-------- -------
Total gross deferred tax assets....................... 7,339 9,034
Less valuation allowance........................................ 0 0
-------- -------
Net deferred tax assets......................................... 7,339 9,034
-------- -------
Deferred tax liabilities:
Plant and equipment, principally due to difference in
depreciation............................................... (7,375) (7,870)
Deferred franchise and other revenue.......................... (2,146) (1,111)
Amortization of intangible assets............................. (76) (108)
Other, net.................................................... (435) (268)
-------- -------
Total gross deferred tax liabilities.................. (10,032) (9,357)
-------- -------
Net deferred tax liabilities.......................... $ (2,693) $ (323)
======== =======
</TABLE>
No valuation allowance was recorded against deferred tax assets at March
31, 1995 or January 31, 1996. 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. Utilization of net operating loss carryforwards may be limited by the
alternative minimum tax provisions.
12. 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 and $85,
respectively. In addition, rebates payable to franchisees at March 31, 1995 and
January 31, 1996 include amounts due to stockholder-owned franchises of $72 and
$26, 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,
$105, and $76, 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 $518, $318, and $106,
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 $55, $176, and $216, 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 $52, $18, and $9, 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, $0, and $0,
respectively, of interest on notes payable to stockholders.
In August 1995, the Company loaned $821 to Kevodrew Realty, Inc.
("Kevodrew"), a company controlled by A. J. Nassar, the President and Chief
Executive Officer of the Company, 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 on May 22,
F-19
<PAGE> 60
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996. 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.
As of October 31, 1996, Mr. Nassar had a demand note with the Company for
$732 accruing interest at the prime rate.
13. 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 $6,359.
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, consisting of $5 in legal costs and $1,498, 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 2,000,000
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 (excluding replacement stock
options):
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>
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.
F-20
<PAGE> 61
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective August 10, 1993, Image adopted a Plan and Agreement of Conversion
(the "Conversion") in which all previously outstanding vested and unvested stock
options and unvested stock appreciation units were 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, Image recognized a noncash,
nonrecurring charge of approximately $10,388 (pre-tax) in the fiscal year ending
March 31, 1994. In connection with the Conversion, Image has granted the option
holders certain protections against possible tax consequences associated with
the grant of the options. At January 31, 1996, 955,774 replacement stock options
were outstanding.
Image also adopted a stock option plan (the "Stock Option Plan") which
provides for the grant of stock options to selected participants, including
officers and key employees of Image. On August 10, 1993, Image granted 41,318
fully vested incentive options to Image'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 Image employees at
$12.38 per share.
In connection with the merger between the Company and Image, all
outstanding options under the Image Plan and Agreement of Conversion and the
Stock Option Plan were converted into like options to purchase shares in the
combined entity.
14. 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 $1,616, certain severance provisions, and
additional bonuses at the discretion of the board of directors.
Effective August 10, 1993, Image entered into three-year employment
agreements with two 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 $535 per year. In connection with the merger, these two agreements were
extended to August 1998.
15. EMPLOYEE BENEFIT PLAN
Effective April 1, 1994, the Company instituted a 401(k) retirement savings
plan (the "Plan"), which is open to all Maxim 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 $125 and $21, respectively, for the year ended March 31, 1995 and $211 and
$24 for the ten months ended January 31, 1996, respectively.
Effective October 1, 1994, a defined contribution plan (the "Image Plan")
covering all employees of Image was created. The Image Plan is open to all
employees who are 21 or older and who have completed six months of service.
Participants may defer a portion of their pretax earnings, up to the annual
limit per the Internal Revenue Service. Image has not made any contributions for
the fiscal year ended March 31, 1995 and the ten month period ended January 31,
1996.
16. 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.
F-21
<PAGE> 62
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. BUSINESS AND CREDIT CONCENTRATION
In fiscal years 1994, 1995, and 1996, export sales accounted for
approximately 21%, 11%, and 8%, 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 18%, 8%, and 5% of net sales in fiscal years
1994, 1995, and 1996, respectively.
In 1994, 1995, and 1996, one customer accounted for approximately 18%, 8%,
and 4%, respectively, of the Company's net sales.
18. GAIN ON EXTINGUISHMENT OF DEBT
During the fiscal year ended March 31, 1994, the Company recognized an
extraordinary gain of approximately $764 on the extinguishment of long-term debt
owed to two stockholders, which was partially offset by the write-off of
approximately $457 of deferred loan costs on debt prepaid with the proceeds of
the Initial Public Offering.
F-22
<PAGE> 63
============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 7
Use of Proceeds............................. 11
Price Range of Common Stock................. 11
Dividend Policy............................. 12
Capitalization.............................. 12
Selected Consolidated Financial and
Operating Data............................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 15
Business.................................... 21
Management.................................. 33
Principal and Selling Stockholders.......... 35
Shares Eligible for Future Sale............. 37
Underwriting................................ 38
Legal Matters............................... 39
Experts..................................... 39
Available Information....................... 39
Incorporation of Certain Documents
by Reference.............................. 40
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
============================================================
============================================================
3,600,000 Shares
THE MAXIM GROUP, INC.
(THE MAXIM GROUP LOGO)
Common Stock
------------------------
PROSPECTUS
------------------------
PRUDENTIAL SECURITIES INCORPORATED
THE ROBINSON-HUMPHREY
COMPANY, INC.
WHEAT FIRST BUTCHER SINGER
February 18, 1997
============================================================
