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PROSPECTUS
FILED PURSUANT TO
Rule 424(b)(3)
Registration No. 333-39819
THE MAXIM GROUP, INC.
OFFER TO EXCHANGE
UP TO $100,000,000 OF
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
FOR ANY AND ALL OF THE OUTSTANDING
9 1/4% SENIOR SUBORDINATED NOTES DUE 2007
--------------
LOGO
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON JANUARY 15, 1998, UNLESS EXTENDED.
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The Maxim Group, Inc., a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and, together with this Prospectus, the "Exchange Offer"), to
exchange an aggregate of up to $100,000,000 principal amount of 9 1/4% Senior
Subordinated Notes due 2007, Series B (the "Exchange Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), for an identical face amount of the issued and outstanding 9 1/4%
Senior Subordinated Notes due 2007 (the "144A Notes" and, together with the
Exchange Notes, the "Notes") of the Company from the Holders (as defined
herein) thereof in integral multiples of $1,000. As of the date of this
Prospectus, there is $100,000,000 in aggregate principal amount of the 144A
Notes outstanding. The terms of the Exchange Notes are identical in all
material respects to the 144A Notes, except that the Exchange Notes have been
registered under the Securities Act, and therefore will not bear legends
restricting their transfer and will not contain certain provisions providing
for an increase in the interest rate payable on the 144A Notes under certain
circumstances relating to the Registration Rights Agreement (as defined
herein), which provisions will terminate as to all of the Notes upon the
consummation of the Exchange Offer. The Exchange Notes will be obligations of
the Company evidencing the same indebtedness as the 144A Notes, and will be
entitled to the benefits of the same Indenture (as defined herein). See "The
Exchange Offer."
Interest on the Exchange Notes will accrue from the date of issuance thereof
and will be payable semi-annually on April 15 and October 15 of each year,
commencing April 15, 1998. The Exchange Notes will mature on October 15, 2007.
The Exchange Notes are redeemable, in whole or in part, for cash at any time
on or after October 15, 2002, at the option of the Company, at the redemption
prices set forth herein, together with accrued and unpaid interest, if any, to
the redemption date. In addition, at the option of the Company, up to 30% of
the original aggregate principal amount of the Exchange Notes may be redeemed
on or prior to October 15, 2000 at the redemption price set forth herein
together with accrued and unpaid interest, if any, to the redemption date with
the net proceeds of one or more Public Equity Offerings (as defined herein) of
the Company, provided that at least $70 million of the aggregate principal
amount of the Exchange Notes remains outstanding following such redemption.
Upon the occurrence of a Change of Control (as defined herein), the Company
will be required to make an offer to repurchase all or any part of each
holder's Exchange Notes at a cash purchase price equal to 101% of the
principal amount thereof, together with accrued and unpaid interest, if any,
to the date of purchase. There can be no assurance that the Company will have
sufficient funds necessary to repurchase the Exchange Notes upon the
occurrence of a Change of Control. The provisions of the Indenture allow the
Company to incur additional indebtedness, including Senior Indebtedness (as
defined herein), subject to certain limitations. The provisions of the
Indenture do not require the Company to repurchase the Exchange Notes in the
event of highly leveraged or certain other transactions if such transaction is
not a transaction defined as a Change of Control. See "Description of the
Exchange Notes."
The Exchange Notes will be unsecured senior subordinated obligations of the
Company and, as such, will be subordinated in right of payment to all existing
and future Senior Indebtedness of the Company. The Exchange Notes will rank
pari passu in right of payment with all other existing and future senior
subordinated indebtedness, if any, of the Company, and senior in right of
payment to all existing and future subordinated indebtedness, if any, of the
Company. THE COMPANY HAS NOT ISSUED, AND DOES NOT HAVE ANY CURRENT
ARRANGEMENTS TO ISSUE, ANY SIGNIFICANT ADDITIONAL INDEBTEDNESS TO WHICH THE
NOTES WOULD BE SENIOR, SUBORDINATE OR RANK PARI PASSU IN RIGHT OF PAYMENT. THE
NOTES WILL BE EFFECTIVELY SUBORDINATE TO ESSENTIALLY ALL OF THE CURRENTLY
OUTSTANDING INDEBTEDNESS OF THE COMPANY AND ITS SUBSIDIARIES. The Exchange
Notes will be fully and unconditionally guaranteed, jointly and severally, on
a senior subordinated basis (the "Guarantees"), by all of the
(cover page continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE.
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.
UNTIL MARCH 11, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
The date of this Prospectus is December 11, 1997.
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Company's subsidiaries (the "Guarantors" and, together with the Company, the
"Issuers"). The Guarantees will be unsecured senior subordinated obligations
of the Guarantors and will be subordinated to all existing and future
Guarantor Senior Indebtedness (as defined herein) which includes all
indebtedness under the Credit Facility and the Summerville Loan (each as
defined herein). As of July 31, 1997, on a pro forma basis after giving effect
to the Offering and the application of the estimated net proceeds therefrom,
the Credit Facility and the Summerville Loan, the Issuers would have had
approximately $133.7 million in aggregate principal amount of indebtedness
outstanding, of which approximately $33.7 million would have ranked senior in
right of payment to the Exchange Notes and the Guarantees. See "Description of
the Exchange Notes--Ranking." As of the date of this Prospectus, approximately
50% of the consolidated assets of the Company were held by the Guarantors and
the majority of the Company's cash flow and net income was generated by the
Guarantors. Therefore, the Company's ability to make interest and principal
payments when due to holders of the Exchange Notes is dependent, in part, upon
the receipt of sufficient funds from its subsidiaries.
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "MXG."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of 144A Notes being tendered for exchange. The date of acceptance and
exchange of the 144A Notes (the "Exchange Date") will be when, as and if the
Company has given oral or written notice thereof to the Exchange Agent. 144A
Notes tendered pursuant to the Exchange Offer may be withdrawn at any time
prior to the Expiration Date. The Company will not receive any proceeds from
the Exchange Offer. The Company and the Guarantors will pay certain expenses
incident to the Exchange Offer. The Exchange Offer will expire on January 15,
1998 (the "Expiration Date"). The Company does not currently intend to extend
the Expiration Date.
The 144A Notes were offered and sold on October 16, 1997 at a price of
$992.95 per $1,000 principal amount of 144A Notes in a transaction not
registered under the Securities Act in reliance upon an exemption from the
registration requirements thereof (the "144A Notes Offering"). In general, the
144A Notes may not be offered or sold unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act.
The Exchange Notes are being offered hereby in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement.
Based on interpretations by the staff of the Commission set forth in no-action
letters issued to third parties, the Company believes that the Exchange Notes
issued pursuant to the Exchange Offer in exchange for 144A Notes may be
offered for resale, resold or otherwise transferred by any Holder thereof
(other than any such Holder that is an "affiliate" of the Company within the
meaning of Rule 405 promulgated under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired in the ordinary course of
such Holder's business and such Holder does not intend to participate and has
no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. In some cases, certain broker-dealers may
be required to deliver a prospectus in connection with the resale of such
Exchange Notes.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with any resale of Exchange Notes
received in exchange for such 144A Notes where such 144A Notes were acquired
by such broker-dealer for its own account as a result of market-making
activities or other trading activities (other than 144A Notes acquired
directly from the Company). The Company has agreed that it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale.
The 144A Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. Prior to this
Exchange Offer, there has been no public market for the 144A Notes or the
Exchange Notes. If a market for the Exchange Notes should develop, the
Exchange Notes could trade at a discount from their principal amount. Although
the Company intends to list the Exchange Notes on the New York Stock Exchange,
there can be no assurance that the application will be approved. The Initial
Purchasers (as defined herein) have indicated to the Company that they intend
to make a market in the Exchange Notes, but are not obligated to do so and
such market-making activities may be discontinued at any time. As a result, no
assurance can be given that an active trading market for the Exchange Notes
will develop.
The Exchange Notes issued pursuant to this Exchange Offer will be issued in
the form of Global Exchange Notes (as defined herein), which will be deposited
with, or on behalf of, The Depository Trust Company (the "Depository" or
"DTC") and registered in its name or in the name of Cede & Co., its nominee.
Beneficial interests in the Global Exchange Notes representing the Exchange
Notes will be shown on, and transfers thereof will be effected through,
records maintained by DTC and its participants. Notwithstanding the foregoing,
144A Notes held in certificated form will be exchanged solely for Certificated
Exchange Notes (as defined herein). After the initial issuance of the Global
Exchange Notes, Certificated Exchange Notes will be issued in exchange for the
Global Exchange Notes only on the terms set forth in the Indenture. See
"Description of the Exchange Notes--Book-Entry, Delivery and Form."
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. These 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 CarpetMAX Flooring Idea Gallery(TM) stores; (ii) potential
acquisitions by the Company; (iii) the Company's financing plans; (iv) trends
affecting the Company's financial condition or results of operations; and (v)
the Company's business and growth strategies. 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. Among others, factors that could adversely affect actual results and
performance include local and regional economic conditions in the areas served
by the Company, the level of consumer spending for floorcovering products,
competition among floorcovering retailers and carpet manufacturers, changes in
merchandise mixes, site selection and related traffic and demographic
patterns, inventory management and turnover levels, realization of cost
savings, and the Company's success in integrating recent and potential future
acquisitions. The accompanying information contained and incorporated by
reference 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 additional factors that could adversely affect actual
results and performance. Prospective investors are urged to carefully consider
such factors.
All forward-looking statements attributable to the Company are expressly
qualified in their entirety by the foregoing cautionary statement.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed by the Company may be inspected and copied (at
prescribed rates) at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at
the Commissions regional offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The Commission also maintains a World Wide Web site
containing such reports, proxy statements and other information, at
http://www.sec.gov. Quotations relating to the Company's Common Stock appear
on the New York Stock Exchange and such reports, proxy statements and other
information concerning the Company can also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has agreed that, if at any time while the 144A Notes are
restricted securities within the meaning of the Securities Act or the Company
is not subject to the informational requirements of the Exchange Act, the
Company will furnish to holders of the 144A Notes and to prospective
purchasers designated by such holders the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act to permit compliance with
Rule 144A in connection with resales of the 144A Notes.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended January
31, 1997; (ii) the Company's Amendment No. 1 on Form 10-K/A dated October 9,
1997 to its Annual Report on Form 10-K for the fiscal year ended January 31,
1997; (iii) the Company's Amendment No. 2 on Form 10-K/A dated October 14,
1997 to its Annual Report on Form 10-K for the fiscal year ended January 31,
1997; (iv) the Company's Amendment No. 3 on Form 10-K/A dated October 15, 1997
to its Annual Report on Form 10-K/A for the fiscal year ended January 31,
1997; (v) the Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1997; (vi) the Company's Quarterly Report on Form 10-Q for the
quarter ended July 31, 1997; (vii) the Company's Current Report on Form 8-K
dated September 25, 1997 and (viii) the Company's Current Report on Form 8-K
dated October 16, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, prior to the consummation of the Exchange Offer,
shall be deemed to be incorporated by reference herein and to be part hereof
from the date of the filing of such reports and 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 the 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 statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
UNTIL MARCH 11, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
THOMAS P. LEAHEY, EXECUTIVE VICE PRESIDENT, FINANCE AND TREASURER, THE MAXIM
GROUP, INC., 210 TOWNPARK DRIVE, KENNESAW, GEORGIA 30144, (770) 590-9369. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE
BY JANUARY 8, 1998 (DATE FIVE BUSINESS DAYS PRIOR TO THE DATE ON WHICH THE
FINAL INVESTMENT DECISION MUST BE MADE).
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information contained in this Prospectus and
the Consolidated Financial Statements and the related notes included and
incorporated herein by reference. References herein to the "Company" refer to
The Maxim Group, Inc. and its consolidated subsidiaries, unless the context
otherwise requires. The term "fiscal" when used in this Prospectus shall mean
the twelve month period ending March 31 for the fiscal years ended March 31,
1993, 1994 and 1995, the ten month period ending January 31 for the fiscal year
ended January 31, 1996, and the twelve month period ending January 31 for the
fiscal years thereafter. The Consolidated Financial Statements of the Company
give retroactive effect to the merger of a wholly-owned subsidiary of the
Company and GCO, Inc. on September 28, 1994 and the merger of a wholly-owned
subsidiary of the Company and Image Industries, Inc. ("Image") on August 30,
1996, which transactions were accounted for as poolings-of-interests. Except as
otherwise indicated, industry data in this Prospectus are for calendar 1996 and
are derived from selected reports prepared by FloorCovering Weekly, an industry
trade publication.
THE COMPANY
The Company operates and franchises one of the largest floorcovering
distribution networks in North America through two retail floorcovering
concepts: CarpetMAX(R), a full-service floorcovering store format, and Georgia
Carpet Outlets(TM) ("GCO(R)"), a cash-and-carry discount floorcovering store
format. In addition, the Company, through Image, is one of the largest
manufacturers of polyester carpeting in the United States. As a vertically
integrated carpet manufacturer and a leading floorcovering retailer, the
Company believes that it is well positioned to continue its leadership and
growth in the approximately $15 billion floorcovering industry. For the twelve
months ended July 31, 1997, the Company's total revenues and EBITDA (as defined
herein) were $338.9 million and $37.2 million, respectively.
Since commencing operations in 1991 as a franchisor of floorcovering stores,
the Company has grown its franchise network to include 377 franchise dealers
operating 448 CarpetMAX stores and 101 GCO stores in 49 states. The Company's
fees from franchise services consist of up front membership fees, either
ongoing royalties or product brokerage fees and fees for services such as
advertising and employee training. The rapid growth of the Company's franchise
network resulted in the development of an integrated retail infrastructure,
including store development, marketing, advertising, credit, sales training and
product sourcing resources. In an effort to leverage this retail
infrastructure, the Company began acquiring existing CarpetMAX franchisees in
fiscal 1995 and opening Company-owned stores in fiscal 1996. The Company
currently owns 57 CarpetMAX stores and six GCO stores.
The Company has further developed its full-service retail format to offer
customers a wide selection of competitively priced floorcovering products
through CarpetMAX Flooring Idea Gallery stores (the "Gallery" stores). The
Company's Gallery stores are typically 6,500 square feet in size and offer
approximately 20,000 SKUs, including an extensive merchandising mix of carpet,
area rugs, hardwood flooring, ceramic tile, vinyl flooring, laminates and
stone. Gallery stores are located in prime retail locations with high consumer
visibility and are staffed with specialized floorcovering sales associates.
Gallery stores offer a wide range of services, including interior design
consulting, measuring, delivery and installation, and unconditional
satisfaction guarantees. The Company's strategy is to expand its ownership and
operation of Gallery stores. The Company currently operates 21 Gallery stores,
including 10 stores which were converted into Gallery stores from the original
CarpetMAX format. For the twelve months ended July 31, 1997, franchise
operations and Company-owned stores together accounted for 49.3% and 25.0% of
the Company's total revenues and EBITDA, respectively.
Through Image, the Company is one of the largest manufacturers of polyester
carpeting and one of the largest recyclers of polyethylene terephthalate
("PET") soft drink bottles in the United States. The Company converts PET
bottles into PET flake and pellet and polyester fiber which is either sold to
third parties or spun
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into carpet yarn, the raw material used in manufacturing polyester carpet.
Image's vertically integrated operations provide the Company's retail network
with a captive source of low cost, high quality private label polyester
carpeting with a price advantage relative to competitors. The Company believes
that polyester carpeting, which currently accounts for approximately 6% of
industry-wide carpet sales, will enjoy market share growth because of certain
advantages over other carpet fibers such as nylon, including superior stain
resistance and vibrant coloring. For the twelve months ended July 31, 1997,
Image sold 25.7 million square yards of polyester carpeting through the
Company's retail distribution network (13.7% of total Image sales volume) and
to over 6,000 independent domestic and international retailers and
distributors. For the twelve months ended July 31, 1997, Image accounted for
50.7% and 75.0%, of the Company's total revenues and EBITDA, respectively.
The mailing address of the Company's principal executive office is 210
TownPark Drive, Kennesaw, Georgia 30144, and its telephone number is (770) 590-
9369.
STRENGTHS
The Company believes that its extensive retail network, combined with its
manufacturing operations, positions the Company for continued growth in
revenues and EBITDA. Several of the Company's key business strengths include:
Distinct Retailing Strategies. The Company's retail floorcovering sales are
diversified across the residential replacement, home builder and specified
contract markets. CarpetMAX offers a wide selection of floorcovering products
with a high level of customer service to a broad consumer spectrum, while GCO
offers discount floorcovering products to the cash-and-carry, do-it-yourself
customer. The Company believes that the breadth of its retail network and the
diversity of its targeted customer markets helps to mitigate the impact of
changes in local competitive or economic conditions on revenues.
Significant Product Sourcing Capabilities. The Company's large retail network
provides significant purchasing power which enables the Company to realize
advantageous pricing, delivery terms and merchandising programs. The Company
has established close relationships with major suppliers across all
floorcovering categories. By capitalizing on suppliers' production and delivery
capabilities, the Company offers one of the largest selections of high quality
floorcovering products, generally on a private label and just-in-time basis,
thereby minimizing inventory risk and maximizing retail profitability.
Furthermore, Image's carpet manufacturing capacity provides the Company with a
captive source of high quality carpet products to support its expanding retail
network.
Extensive Retailing Infrastructure. In order to service its retail
floorcovering network, the Company has built an extensive retail
infrastructure, including store development, marketing, advertising, credit
program, sales and management training, and product sourcing resources. The
Company will continue to leverage these resources to support the opening of new
Gallery stores and the expansion of other distribution channels. In addition,
the Company has assembled a strong management team with an average of more than
10 years of retailing experience.
Diversified Cash Flow Streams. The Company's established franchise operations
generate stable cash flows, with a low overhead structure, from brokerage fees
earned on CarpetMAX franchisees' purchases, royalties earned on GCO
franchisees' store sales and other related fees for advertising, training and
distribution services. In addition, Image provides a strong and growing source
of cash flow, as it uses the Company's affiliated distribution network of
Company-owned and franchised floorcovering retailers to distribute high margin,
value added polyester carpet. Cash flow generated from franchise operations and
Image's operations provide a stable base to fund capital expenditures,
including the roll-out of Company-owned Gallery stores.
Strong Financial Position. The Company's total revenues and EBITDA have
increased from $122.6 million and $16.6 million, respectively, in fiscal 1994
to $338.9 million and $37.2 million, respectively, for the twelve months ended
July 31, 1997. The Company's strong financial performance has provided it with
the financial flexibility to fund its growth objectives with a combination of
cash flow from operations, proceeds from the issuance of the Company's Common
Stock and bank borrowings.
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BUSINESS STRATEGY
The Company's strategic objective is to establish the largest and most
profitable floorcovering distribution network in North America. To achieve this
objective, the Company is pursuing the following strategies:
Expand Company-Owned Store Base. A key element of the Company's growth
strategy is to expand its ownership and operation of Gallery stores by opening
approximately 60 Gallery stores over the next 18 months principally in existing
and contiguous market areas. 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 believes that the
roll-out of Gallery stores will enhance profitability as the Company further
leverages its retail infrastructure.
Expand GCO Franchise Network. The Company's strategy is to expand its
franchise network by adding approximately 25 GCO franchises per year, further
leveraging its retail and manufacturing infrastructure. The Company believes
that the expansion of the GCO franchise network complements the expansion of
the Gallery store base given their alternative operating formats. Further, with
only 70 of the 265 areas of dominant influence ("ADI") currently covered by GCO
stores, the Company believes significant growth opportunities exist.
Increase Manufacturing Capacity. In order to capitalize on the increasing
demand for polyester fiber, the Company is in the process of expanding its
fiber extrusion capacity. The additional capacity, which is expected to become
fully operational by the end of calendar 1998, will increase Image's annual
fiber production capacity to 150 million pounds from 100 million pounds. The
additional capacity will enable the Company to continue to optimize Image's
profitability by shifting output from lower margin commodity products such as
PET pellet and flake to higher margin polyester fiber and carpet.
Pursue Selected Acquisitions. The Company believes it is uniquely positioned
to capitalize on the consolidation occurring in the retail floorcovering
industry and thereby further its goal of becoming the largest floorcovering
distribution network in North America. Although the Company's primary focus is
on opening Company-owned Gallery stores, the Company intends to selectively
pursue the acquisition of independent floorcovering retailers in new markets
which offer the potential for the Company to build substantial market share. In
addition, the Company may selectively acquire existing CarpetMAX franchisees to
provide a platform for new store openings.
RECENT DEVELOPMENTS
On August 26, 1997, the Company entered into a $130.0 million credit facility
(and as amended on September 24, 1997, the "Credit Facility") which provides
for a (i) revolving credit facility of up to $70.0 million, (ii) a term loan in
the amount of $29.0 million and (iii) a special purpose letter of credit in the
amount of up to $31.0 million for use as credit support for the Summerville
Loan to be used to finance the expansion of Image's fiber extrusion
capabilities at its plant in Summerville, Georgia. The proceeds from the Credit
Facility were used primarily to repay outstanding indebtedness under the
Company's prior credit facility and provide the Company with additional working
capital. The Company used a portion of the net proceeds from the 144A Notes
Offering to repay all borrowings outstanding under the Credit Facility. See
"Use of Proceeds." Upon completion of the 144A Notes Offering, the commitments
under the revolving credit facility were permanently reduced to $50.0 million.
In connection with the Company's efforts to increase sales to smaller
commercial and residential construction and renovation projects managed by
general contractors (the "builder market"), in July 1997, the Company acquired
Tri-R of Orlando, Inc. ("Tri-R"), a CarpetMAX franchisee in Orlando, Florida
with a presence in the Orlando area builder market, for approximately $4
million, consisting of a cash payment of $968,000 and the issuance of $3
million in Company Common Stock. The acquisition agreement provides that
additional consideration in the form of cash or Company Common Stock may be
issued based on the profitability of Tri-R over the next three years. This
acquisition provides the Company with the Orlando, Florida territory (including
one existing store), which the Company believes will be an attractive region
for opening new Company-owned Gallery stores. See "Business--Builder and
Specified Contract Operations."
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THE 144A NOTES OFFERING
The 144A Notes............ The 144A Notes were sold by the Company in the
144A Notes Offering on October 16, 1997, and
were subsequently resold to Qualified
Institutional Buyers (as defined herein)
pursuant to Rule 144A under the Securities Act
in a manner exempt from registration under the
Securities Act. See "Plan of Distribution."
Registration Rights
Agreement................. In connection with the 144A Notes Offering, the
Company entered into the Registration Rights
Agreement, which grants Holders of the 144A
Notes certain exchange and registration rights.
The Exchange Offer is intended to satisfy such
exchange and registration rights, which
generally terminate upon the consummation of
the Exchange Offer. See "The Exchange Offer--
Purpose and Effect of the Exchange Offer ."
THE EXCHANGE OFFER
Securities Offered........ $100,000,000 in aggregate principal amount of 9
1/4% Senior Subordinated Notes due 2007, Series
B.
The Exchange Offer........ $1,000 principal amount of the Exchange Notes
in exchange for each $1,000 principal amount of
144A Notes. As of the date hereof, $100,000,000
in aggregate principal amount of 144A Notes are
outstanding. The Company will issue the
Exchange Notes to Holders on or promptly after
the Expiration Date. The terms of the Exchange
Notes are substantially identical in all
material respects (including principal amount,
interest rate and maturity) to the terms of the
144A Notes for which they may be exchanged
pursuant to the Exchange Offer, except that the
Exchange Notes are freely transferable by
holders thereof (other than as provided
herein), and are not subject to any covenant
regarding registration under the Securities
Act. See "The Exchange Offer." Other than
compliance with applicable federal and state
securities laws, including the requirement that
the Registration Statement be declared
effective by the Commission, there are no
material federal or state regulatory
requirements to be complied with in connection
with the Exchange Offer.
Interest Payments......... The Exchange Notes will bear interest from
October 16, 1997, the date of issuance of the
144A Notes, or the most recent interest payment
date to which interest on such 144A Notes has
been paid, whichever is later. Accordingly,
Holders of 144A Notes that are accepted for
exchange will not receive interest on such 144A
Notes that is accrued but unpaid at the time of
tender, but such interest will be payable on
the first interest payment date after the
Expiration Date. See "The Exchange Offer--
Interest on the Exchange Notes."
Minimum Condition......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of 144A
Notes being tendered for exchange. See "The
Exchange Offer--Conditions."
6
<PAGE>
Expiration Date........... 5:00 p.m., New York City time, on January 15,
1998 unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange
Offer is extended. See "The Exchange Offer--
Expiration Date; Extensions; Amendments."
Exchange Date............. The date of acceptance for exchange of the 144A
Notes will be when, as and if the Company has
given oral or written notice thereof to the
Exchange Agent.
Withdrawal Rights......... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange Offer--
Withdrawal of Tenders."
Acceptance of 144A Notes
and Delivery of Exchange
Notes.................... The Company will accept for exchange any and
all 144A Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
Conditions to the The Exchange Offer is subject to certain
Exchange Offer............ customary conditions, concerning, among other
things, changes to existing law and
governmental approvals, which may be waived by
the Company. See "The Exchange Offer--
Conditions."
Procedures for Tendering
144A Notes...............
To tender pursuant to the Exchange Offer, a
Holder must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof, have the signatures therein
guaranteed if required by Instruction 4 of the
Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the 144A Notes and any
other required documentation to the Exchange
Agent (as defined herein) at the address set
forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. See "The Exchange
Offer-- Procedures for Tendering" and "Plan of
Distribution." By executing the Letter of
Transmittal, each Holder will represent to the
Company that, among other things, the Holder or
the person receiving such Exchange Notes,
whether or not such person is the Holder, is
acquiring the Exchange Notes in the ordinary
course of business and that neither the Holder
nor any such other person intends to
participate or has any arrangement or
understanding with any person to participate in
the distribution of such Exchange Notes. In
lieu of physical delivery of the certificates
representing 144A Notes, tendering Holders may
transfer 144A Notes pursuant to the procedure
for book-entry transfer as set forth under "The
Exchange Offer--Procedures for Tendering."
Special Procedures for
Beneficial Owners........
Any beneficial owner whose 144A Notes are
registered in the name of a broker, commercial
bank, trust company or other nominee and who
wishes to tender in the Exchange Offer should
contact such registered
7
<PAGE>
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to
tender on such beneficial owner's own behalf,
such beneficial owner must, prior to completing
and executing the Letter of Transmittal and
delivering the 144A Notes, either make
appropriate arrangements to register ownership
of the 144A Notes in such beneficial owner's
name or obtain a properly completed bond power
from the registered holder. The transfer of
registered ownership may take considerable
time. See "The Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery
Procedures................ Holders of 144A Notes who wish to tender their
144A Notes and whose 144A Notes are not
immediately available or who cannot deliver
their 144A Notes, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply
with the requirements for book-entry transfer)
prior to the Expiration Date must tender their
144A Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Federal Income Tax
Consequences.............. The issuance of the Exchange Notes to Holders
pursuant to the terms set forth in this
Prospectus will not constitute an exchange for
federal income tax purposes. Consequently, no
gain or loss would be recognized by Holders
upon receipt of the Exchange Notes. See
"Certain Federal Income Tax Consequences of the
Exchange Offer."
Use of Proceeds........... There will be no proceeds to the Company from
the exchange of 144A Notes pursuant to the
Exchange Offer. See "Use of Proceeds."
Exchange Agent............ State Street Bank and Trust Company is serving
as exchange agent (the "Exchange Agent") in
connection with the Exchange Offer. See "The
Exchange Offer--Exchange Agent."
Effect on the Holders of
144A Notes................ As a result of the making of, and upon
acceptance for exchange of all validly tendered
144A Notes pursuant to the terms of, the
Exchange Offer, the Company and the Guarantors
will have fulfilled the covenant contained in
the Registration Rights Agreement (the
"Registration Rights Agreement") dated October
16, 1997 among the Issuers, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, First
Union Capital Markets Corp. and Wheat, First
Securities, Inc. (the "Initial Purchasers")
and, accordingly, there will be no increase in
the interest rate on the 144A Notes pursuant to
the terms of the Registration Rights Agreement,
and the holders of the 144A Notes will have no
further registration or other rights under the
Registration Rights Agreement. Holders of the
144A Notes who do not tender their 144A Notes
in the Exchange Offer will continue to hold
such 144A Notes and will be entitled to all the
rights and subject to all the limitations
applicable thereto under the Indenture dated
October 16, 1997 among the Company, as issuer,
the Guarantors, as guarantors, and State Street
Bank and Trust Company, as Trustee, relating to
the 144A Notes and the Exchange Notes (the
"Indenture") except for any such rights under
the Registration Rights Agreement that by their
terms terminate or cease to have further
effectiveness as a result of the making of, and
the acceptance for exchange of all validly
tendered 144A Notes pursuant to, the Exchange
Offer. All untendered 144A Notes will continue
to be
8
<PAGE>
subject to the restrictions on transfer
provided for in the 144A Notes and the
Indenture. To the extent that the 144A Notes
are tendered and accepted in the Exchange
Offer, the trading market for untendered 144A
Notes could be adversely affected.
Consequence of Failure to
Exchange.................. Holders of 144A Notes who do not exchange their
Notes for Exchange Notes pursuant to the
Exchange Offer will continue to be subject to
the restrictions on transfer of such 144A Notes
as set forth in the legend thereon as a
consequence of the offer or sale of the 144A
Notes pursuant to an exemption from, or in a
transaction not subject to, the registration
requirements of the Securities Act and the
applicable state securities laws. The Issuers
do not currently anticipate that they will
register any 144A Notes and the related
Guarantees which are not exchanged pursuant to
the Exchange Offer under the Securities Act
after the Expiration Date.
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the 144A Notes (which they replace) except that (i) the Exchange Notes have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof, and (ii) the holders of Exchange Notes
generally will not be entitled to further registration rights under the
Registration Rights Agreement, which rights generally will be satisfied when
the Exchange Offer is consummated. The Exchange Notes will evidence the same
debt as the 144A Notes and will be entitled to the benefits of the Indenture.
See "Description of the Exchange Notes."
Securities Offered........ $100,000,000 aggregate principal amount of 9
1/4% Senior Subordinated Notes due 2007, Series
B.
Maturity Date............. October 15, 2007.
Interest Payment Dates.... April 15 and October 15 of each year,
commencing April 15, 1998.
Optional Redemption....... The Exchange Notes are redeemable, in whole or
in part, for cash at any time on or after
October 15, 2002 at the option of the Company,
in whole or in part, at the redemption prices
set forth herein, together with accrued and
unpaid interest, if any, to the redemption
date. In addition, at the option of the
Company, up to 30% of the original aggregate
principal amount of the Exchange Notes may be
redeemed on or prior to October 15, 2000 at the
redemption price set forth herein together with
accrued and unpaid interest, if any, to the
redemption date with the net proceeds of one or
more Public Equity Offerings of the Company,
provided that at least $70 million aggregate
principal amount of the Exchange Notes remains
outstanding following such redemption. See
"Description of the Exchange Notes--Optional
Redemption."
Guarantees................ The Exchange Notes will be guaranteed, jointly
and severally, on a senior subordinated basis,
by all of the Company's subsidiaries. See
"Description of the Exchange Notes--
Guarantees."
Ranking................... The Exchange Notes will be unsecured senior
subordinated obligations of the Company and, as
such, will be subordinated in right of payment
to all existing and future Senior Indebtedness
of the Company. The
9
<PAGE>
Exchange Notes will rank pari passu in right of
payment with all other existing and future
senior subordinated indebtedness, if any, of
the Company, and senior in right of payment to
all existing and future Subordinated
Indebtedness, if any, of the Company. The
Company has not issued, and does not have any
current arrangements to issue, any significant
additional indebtedness to which the Notes
would be senior, subordinate or pari passu in
right of payment. The Notes will be effectively
subordinate to essentially all of the currently
outstanding indebtedness of the Company and its
subsidiaries. The Guarantees will be unsecured
senior subordinated obligations of the
Guarantors and will be subordinated to all
existing and future Guarantor Senior
Indebtedness, which includes all indebtedness
under the Credit Facility and the Summerville
Loan. As of July 31, 1997, on a pro forma basis
after giving effect to the 144A Notes Offering
and the application of the net proceeds
therefrom, the Credit Facility and the
Summerville Loan, the Company and the
Guarantors would have had approximately $133.7
million in aggregate principal amount of
Indebtedness outstanding, of which
approximately $33.7 million would have ranked
senior in right of payment to the Exchange
Notes and the Guarantees. See "Description of
the Exchange Notes--Ranking."
Change of Control......... Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
repurchase all or any part of each holder's
Exchange Notes at a cash purchase price equal
to 101% of the principal amount thereof,
together with accrued and unpaid interest, if
any, to the date of purchase. There can be no
assurance that the Company will have sufficient
funds necessary to repurchase the Exchange
Notes upon the occurrence of a Change of
Control. See "Description of the Exchange
Notes--Certain Covenants--Purchase of Notes
Upon a Change of Control."
Restrictive Covenants..... The indenture relating to the Exchange Notes
(the "Indenture") will contain certain
restrictive covenants, including, but not
limited to, covenants with respect to the
following matters: (i) limitation on
indebtedness; (ii) limitation on restricted
payments; (iii) limitation on transactions with
affiliates; (iv) limitation on liens; (v)
limitation on senior subordinated indebtedness;
(vi) limitation on sale of assets; (vii)
limitation on guarantees by subsidiaries;
(viii) limitation on transfer of assets to
subsidiaries; (ix) limitation on dividend and
other payment restrictions affecting
subsidiaries; (x) restrictions on the issuance
of capital stock of subsidiaries; (xi)
restrictions on mergers, consolidations and the
transfer of all or substantially all of the
assets of the Company; and (xii) limitation on
unrestricted subsidiaries. See "Description of
the Exchange Notes--Certain Covenants."
The interest rate on the 144A Notes is subject
to increase under certain circumstances if the
Issuers are not in compliance with their
obligations under the Registration Rights
Agreement. See "Exchange Offer; Registration
Rights."
Absence of Public Market
for the Exchange Notes... The Exchange Notes will be new securities for
which there is currently no established trading
market. Although the Company intends to apply
10
<PAGE>
for listing of the Exchange Notes on the New
York Stock Exchange, there can be no assurance
that the Company's application will be approved
or that an active trading market for the
Exchange Notes will develop or continue after
the Offering. The Company has been advised by
the Initial Purchasers that they presently
intend to make a market in the Exchange Notes,
although they are under no obligation to do so
and may discontinue any market-making
activities at any time without notice. No
assurance can be given as to the liquidity of
the trading market for the Exchange Notes or
that an active public market for the Exchange
Notes will develop. If an active trading market
for the Exchange Notes does not develop, the
market price and liquidity of the Exchange
Notes may be adversely affected. If the
Exchange Notes are traded, they may trade at a
discount from their initial offering price,
depending on prevailing interest rates, the
market for similar securities, the performance
of the Company and certain other factors. See
"Risk Factors--Restrictions on Resale; Absence
of Public Market for the Exchange Notes."
RISK FACTORS
See "Risk Factors" beginning on page 14 for a discussion of certain factors
that should be considered by holders of the 144A Notes before deciding to
tender 144A Notes in the Exchange Offer. Such risk factors include:
. The Company has substantial indebtedness and, as a result, significant
debt service obligations;
. Payment on the Exchange Notes will be subordinated to the prior payment
in full of all future and existing Senior Indebtedness;
. The Company's ability to repay the Exchange Notes is dependent, in part,
upon receipt of funds from the Company's subsidiaries, and although the
Exchange Notes are guaranteed by the Guarantors, such Guarantees, under
certain circumstances may be invalid or released;
. The Company has limited history of opening and operating Company-owned
stores, and is subject to risks associated with the management of its
growth and the roll out of its Gallery stores;
. The Company's business is highly competitive;
. The Company's quarterly operating results fluctuate and due to the nature
of the floorcovering industry, its business exhibits some measure of
seasonality;
. The Company is dependent on the services of its executive officers and
faces a competitive labor market;
. The Company is subject to risks associated with the availability of low
cost materials;
. The Company is subject to risks associated with dependence on suppliers
for floorcovering products and distribution;
. The Company is subject to environmental liability;
. The Company is subject to the risk associated with the effect of carpet
and other floorcovering products on indoor air quality;
. The Company is subject to the risk associated with the restrictions
imposed by the terms of its indebtedness;
11
<PAGE>
. There can be no assurance that the Company will be able to repurchase
some or all of the Exchange Notes upon a Change of Control;
. The Exchange Notes are new securities for which there is no prior market;
. Holders desiring to tender 144A Notes in exchange for Exchange Notes are
responsible for complying with Exchange Offer procedures; and
. The 144A Notes are subject to certain restrictions upon transfer.
RECENT FINANCIAL RESULTS
On November 24, 1997, the Company announced results for the three and nine
month periods ended October 31, 1997. The Company's total revenues for the
three months ended October 31, 1997 were $98.3 million compared to $82.1
million in the prior year period. Total revenues for the nine months ended
October 31, 1997 were $276.8 million compared to $231.5 million in the prior
year period. Net income for the three months ended October 31, 1997 was $4.4
million or $0.26 per share, as compared to a loss of $1.1 million or $.08 per
share in the prior year period. Net income for the nine months ended October
31, 1997 was $12.2 million or $0.73 per share, as compared to net income of
$48,000 in the prior year period. Net income for the three and nine month
periods ended October 31, 1997 includes an extraordinary charge of $0.8 million
or $0.05 per share, net of tax benefits, for the early retirement of debt.
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following information should be read in conjunction with "Selected
Consolidated Financial and Operating Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the notes thereto included and
incorporated by reference herein.
<TABLE>
<CAPTION>
TEN
FISCAL YEAR ENDED MARCH MONTHS FISCAL YEAR SIX MONTHS
31, ENDED ENDED ENDED JULY 31,
--------------------------- JANUARY 31, JANUARY 31, ------------------
1993 1994 1995 1996(A) 1997 1996 1997
------- -------- -------- ----------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $98,851 $122,591 $203,341 $227,551 $309,721 $149,323 $178,468
Cost of sales.......... 71,570 85,847 139,521 161,723 222,290 108,630 122,226
------- -------- -------- -------- -------- -------- --------
Gross profit........... 27,281 36,744 63,820 65,828 87,431 40,693 56,242
Selling, general, and
administrative
expenses.............. 17,417 23,669 46,870 59,197 72,366 36,259 41,163
Operating income(b).... 9,864 2,687 16,450 62 10,165 4,434 15,079
Interest expense....... 3,844 1,886 1,839 4,695 7,006 3,213 2,663
Earnings (loss) before
income taxes and
extraordinary income.. 5,942 845 15,429 (4,140) 4,074 1,790 12,725
Net earnings (loss).... 4,995 659 9,642 (4,245) 2,145 1,160 7,836
BALANCE SHEET DATA:
Cash and cash
equivalents........... $636 $3,972 $2,365 $4,207 $6,439 $3,464 $4,925
Trade accounts
receivable, net....... 11,682 14,779 29,882 33,037 43,487 38,392 49,974
Inventories............ 15,226 17,768 38,137 49,170 42,148 43,967 47,168
Property and equipment,
net................... 30,946 40,448 68,832 93,879 101,403 95,926 107,332
Total assets........... 63,809 95,281 162,473 202,085 219,673 203,946 244,194
Total debt............. 35,054 21,620 57,459 94,185 96,289 91,635 70,395
Stockholders' equity... 30,960 50,053 71,424 72,150 76,154 73,896 123,755
OTHER FINANCIAL DATA:
Image revenues(c)...... $89,480 $103,257 $127,250 $128,260 $162,681 $79,231 $88,278
Franchised revenues.... 5,172 11,873 18,764 25,761 40,877 15,430 23,300
Company-owned store
revenues.............. 4,199 7,461 57,327 73,530 106,163 54,662 66,890
EBITDA, as adjusted
(d)................... 13,002 16,951 22,993 15,132 26,498 10,538 21,233
Depreciation and
amortization.......... 3,216 3,832 5,225 8,008 10,518 5,535 5,845
Capital expenditures... 4,439 12,734 25,941 15,580 17,444 7,051 11,837
Gross margin........... 27.6% 30.0% 31.4% 28.9% 28.2% 27.3% 31.5%
EBITDA, as adjusted,
margin................ 13.2% 13.8% 11.3% 6.6% 8.6% 7.1% 11.9%
Ratio of EBITDA, as
adjusted, to interest
expense............... 3.4x 9.0x 12.5x 3.2x 3.8x 3.3x 8.0x
Ratio of total debt to
EBITDA, as adjusted... 2.7x 1.3x 2.5x -- 3.6x -- --
SELECTED OPERATING DATA:
End of period:
Company-owned stores.. 8 8 51 59 57 57 60
Franchise territories. 148 233 325 377 368 353 377
</TABLE>
- --------
(a) On January 31, 1996, the Company changed its fiscal year end from March 31
to January 31.
(b) Operating income includes non-recurring charges of $10.4 million, $500,000,
$6.6 million and $4.9 million for fiscal 1994, 1995, 1996 and 1997,
respectively.
(c) Includes revenues generated from carpet, fiber and PET sales.
(d) EBITDA, as adjusted is defined as earnings before interest, taxes,
depreciation, amortization and non-recurring charges. While EBITDA should
not be construed as a substitute for operating income or as a better
measure of liquidity than cash flows from operating activities, which are
determined in accordance with generally accepted accounting principles, it
is a measure commonly used in the Company's industry and is included herein
because management believes it is useful and provides additional
information with respect to the ability of the Company to meet future debt
service, capital expenditures and working capital requirements. EBITDA, as
adjusted, reported above excludes non-recurring charges of $10.4 million,
$500,000, $6.6 million and $4.9 million for fiscal 1994, 1995, 1996 and
1997, respectively.
13
<PAGE>
RISK FACTORS
Holders of 144A Notes should carefully consider the following risk factors
in addition to the other information contained herein before deciding to
tender 144A Notes in the Exchange Offer. The risk factors set forth below are
generally applicable to the 144A Notes as well as the Exchange Notes.
SUBSTANTIAL LEVERAGE
The Company has substantial indebtedness and, as a result, significant debt
service obligations. As of July 31, 1997, after giving pro forma effect to the
144A Notes Offering and the application of the net proceeds therefrom, the
Credit Facility and the Summerville Loan, the Company would have had
approximately $133.7 million of long-term debt which would have represented
approximately 51.9% of its total capitalization. See "Capitalization." In
addition, the Indenture and the Company's other debt instruments will allow
the Company to incur additional indebtedness, including Senior Indebtedness or
secured indebtedness in the future subject to certain limitations set forth
therein. See "Description of the Exchange Notes--Certain Covenants" and
"Description of Certain Indebtedness." As of July 31, 1997, after giving pro
forma effect to the 144A Notes Offering and the application of the net
proceeds therefrom, the Credit Facility and the Summerville Loan, the Company
would have had an aggregate of $50.0 million of available borrowings under the
Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
Company's ability to make payments with respect to the Notes and to satisfy
its other debt obligations will depend upon its future operating performance,
which will be affected by prevailing economic conditions and financial,
business and other factors, certain of which are beyond the Company's control.
Any inability of the Company to service its indebtedness may result in the
acceleration of some or all of the Company's indebtedness which would have a
material adverse effect upon the Company's financial condition.
Upon the issuance of the 144A Notes, the Company's interest expense
increased compared to prior years. The Company believes, based on current
circumstances, that the Company's cash flow, together with available
borrowings under the Credit Facility, will be sufficient to service its debt
requirements as they become due for the foreseeable future. Significant
assumptions underlie this belief, including, among other things, that the
Company will succeed in implementing its business strategy and that there will
be no material adverse developments in the business, liquidity or capital
requirements of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business--Business Strategy." If the Company is unable to
service its indebtedness, it will be required to adopt alternative strategies,
which may include actions such as reducing or delaying capital expenditures,
curtailing or eliminating the opening of Company-owned stores, selling assets,
restructuring or refinancing its indebtedness or seeking additional equity
capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all.
The degree to which the Company is leveraged could have important
consequences to holders of the Exchange Notes, including: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions or general corporate purposes may be
impaired; (ii) a substantial portion of the Company's cash flows from
operations may be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for its
operations; (iii) certain of the Company's indebtedness contains financial and
other restrictive covenants, including those restricting the incurrence of
additional indebtedness, the creation of liens, the sale of assets, ratio of
total debt to total capitalization, ratio of total debt to earnings before
interest, taxes, depreciation, amortization and rental expense ("EBITDAR"),
ratio of senior debt to EBITDAR and certain interest coverage ratios; (iv)
certain of the Company's borrowings are and will continue to be at variable
rates of interest which exposes the Company to the risk of greater interest
rates; and (v) the Company may be more leveraged than certain of its
competitors, which may place the Company at a relative competitive
disadvantage and make the Company more vulnerable to changing economic
conditions.
14
<PAGE>
SUBORDINATION OF THE EXCHANGE NOTES AND THE GUARANTEES; RISK OF NON-PAYMENT;
ASSET ENCUMBRANCES
The payment of principal of, premium, if any, and interest on the Exchange
Notes will be subordinated to the prior payment in full of all existing and
future Senior Indebtedness of the Company, which includes all indebtedness
under the Credit Facility and the Summerville Loan. Therefore, in the event of
a liquidation, dissolution, reorganization or any similar proceeding regarding
the Company, the assets of the Company will be available to pay obligations on
the Exchange Notes only after Senior Indebtedness has been paid in full, and
there may not be sufficient assets to pay amounts due on all or any of the
Exchange Notes. In addition, the Company may not pay principal of, premium, if
any, interest on or any other amounts owing in respect of the Exchange Notes,
make any deposit pursuant to defeasance provisions or purchase, redeem or
otherwise retire the Exchange Notes, if any Senior Indebtedness is not paid
when due or any other default on Senior Indebtedness occurs and the maturity
of such indebtedness is accelerated in accordance with its terms unless, in
either case, such default has been cured or waived, any such acceleration has
been rescinded or such indebtedness has been repaid in full. Moreover, under
certain circumstances, if any non-payment default exists with respect to
Designated Senior Indebtedness (as defined herein), the Company may not make
any payments on the Notes for a specified time, unless such default is cured
or waived, any acceleration of such indebtedness has been rescinded or such
indebtedness has been repaid in full. See "Description of the Exchange Notes--
Ranking." As of July 31, 1997, on a pro forma basis after giving effect to the
144A Notes Offering and the application of the net proceeds therefrom, the
Credit Facility and the Summerville Loan, the Company would have had
approximately $33.7 million in aggregate principal amount of Senior
Indebtedness outstanding which ranked senior in right of payment to the
Exchange Notes. Under the terms of the Indenture governing the Exchange Notes,
and the Company's other debt instruments, the Company may incur additional
indebtedness, including future Senior Indebtedness or secured indebtedness.
See "Description of the Exchange Notes--Certain Covenants."
The Guarantees will be unsecured senior subordinated obligations of the
Guarantors and will be subordinated to all existing and future Guarantor
Senior Indebtedness, which includes all indebtedness of the Guarantors under
the Credit Facility and the Summerville Loan. As of July 31, 1997, on a pro
forma basis after giving effect to the 144A Notes Offering and the application
of the net proceeds therefrom, the Credit Facility and the Summerville Loan,
the Guarantors would have had outstanding approximately $1.1 million in
aggregate principal amount of Guarantor Senior Indebtedness which ranked
senior in right of payment to the Guarantees.
The Exchange Notes will not be secured by any of the Company's assets.
Certain of the Company's other indebtedness, including indebtedness under the
Credit Facility and the Summerville Loan, is secured by certain of the
Company's assets, and the terms of the Indenture and the instruments governing
the Company's other indebtedness permit the Company to incur certain
additional senior secured indebtedness. If the Company becomes insolvent or is
liquidated, or if payment under any of the instruments governing the Company's
secured indebtedness is accelerated, the lenders under such instruments would
be entitled to exercise the remedies available to a secured lender under
applicable law and pursuant to instruments governing such indebtedness.
Accordingly, such lenders will have a prior claim on the Company's assets
securing their indebtedness. In any such events, because the Exchange Notes
will not be secured by any of the Company's assets, it is possible that there
would be no assets remaining from which claims of the holders of the Exchange
Notes could be satisfied or, if any such assets remained, such assets might be
insufficient to satisfy such claims in full. See "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Description of Certain Other
Indebtedness" and "Description of the Exchange Notes."
DEPENDENCE UPON OPERATIONS OF SUBSIDIARIES; POSSIBLE INVALIDITY OF GUARANTEES;
POTENTIAL RELEASE OF GUARANTEES
The Exchange Notes are the obligations of the Company. As of the date of
this Prospectus, approximately 50% of the consolidated assets of the Company
was held by the Guarantors and the majority of the Company's cash flow and net
income was generated by the Guarantors. Therefore, the Company's ability to
make interest
15
<PAGE>
and principal payments when due to holders of the Exchange Notes is dependent,
in part, upon the receipt of sufficient funds from its subsidiaries.
The Company's obligations under the Exchange Notes will be guaranteed,
jointly and severally, on a senior subordinated basis by each of the
Guarantors, which consist of all of the Company's subsidiaries. To the extent
that a court were to find, pursuant to federal or state fraudulent transfer
laws or otherwise, that (i) a Guarantee was incurred by a Guarantor with
intent to hinder, delay or defraud any present or future creditor or the
Guarantor contemplated insolvency with a design to prefer one or more
creditors to the exclusion in whole or in part of others; or (ii) such
Guarantor did not receive fair consideration or reasonably equivalent value
for issuing its Guarantee and such Guarantor (a) was insolvent, (b) was
rendered insolvent by reason of the issuance of such Guarantee, (c) was
engaged or about to engage in a business or transaction for which the
remaining assets of such Guarantor constituted unreasonably small capital to
carry on its business or (d) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured, the court
could avoid or subordinate such Guarantee in favor of the Guarantor's other
creditors. Among other things, a legal challenge of a Guarantee on fraudulent
conveyance grounds may focus on the benefits, if any, realized by the
Guarantor as a result of the issuance by the Company of the Exchange Notes.
The measure of insolvency of a Guarantor for purposes of the foregoing will
vary depending upon the law of the relevant jurisdiction. Generally, however,
a company would be considered insolvent for purposes of the foregoing if the
sum of the company's debts is greater than all of the company's property at
fair valuation, or if the present fair saleable value of the company's assets
is less than the amount that will be required to pay its probable liability on
its existing debts as they become absolute and mature. There can be no
assurance as to what standards a court would apply to determine whether a
Guarantor was solvent at the relevant time. To the extent any Guarantee were
to be avoided as a fraudulent conveyance or held unenforceable for any other
reason, holders of the Exchange Notes would cease to have any claim in respect
of such Guarantor and would be creditors solely of the Company and any
Guarantor whose Guarantee was not avoided or held unenforceable. In such
event, the claims of the holders of the Exchange Notes against the issuer of
an invalid Guarantee would be subject to the prior payment in full of all
liabilities of such Guarantor. There can be no assurance that, after providing
for all prior claims, there would be sufficient assets to satisfy the claims
of the holders of the Exchange Notes relating to any voided Guarantee.
Based upon financial and other information currently available to it, the
Company believes that the Exchange Notes and the Guarantees are being incurred
for proper purposes and in good faith and that the Company and each Guarantor
is solvent and will continue to be solvent after issuing the Exchange Notes or
its Guarantee, as the case may be, will have sufficient capital for carrying
on its business after such issuance and will be able to pay its debts as they
mature. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Description of Certain Other Indebtedness" and
"Description of the Exchange Notes."
Any Guarantee of a Guarantor may be released at any time upon any sale,
exchange or transfer by the Company of the stock of such Guarantor or all or
substantially all of the assets of such Guarantor to a non-affiliate. See
"Description of the Exchange Notes."
LIMITED HISTORY OF OPENING AND OPERATING COMPANY-OWNED STORES; RISKS
ASSOCIATED WITH GALLERY STORE ROLL-OUT; MANAGEMENT OF GROWTH
The Company has only limited experience in the acquisition, construction and
direct management of Company-owned stores. Since April 1995, the Company has
opened 14 CarpetMAX stores (10 of which have been converted into Gallery
stores) and 11 new Gallery stores. The Company's growth and future operating
results depend principally on its ability to open and operate stores during
the remainder of fiscal 1998 and fiscal 1999. See "Business--Business
Strategy." The success of the Company's planned Gallery store roll-out is
dependent upon a number of factors including: (i) the availability of new
store locations in which the Company is not prohibited from opening Company-
owned stores pursuant to existing franchise agreements; (ii) the negotiation
of acceptable purchase or lease terms; (iii) the Company's financial resources
and its ability to control the operational aspects of its growth; and (iv) the
ability to hire, train and assimilate management and store-level
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employees. The Company also competes for site locations with other businesses
which seek the same demographics and location characteristics. Moreover, the
Company may experience substantial delays in the opening of Company-owned
Gallery stores as well as increased expenses as a result of adverse weather
conditions and may experience substantial delays, increased expense or loss of
potential sites due to complexities associated with the regulatory and permit
processes. To the extent that the Company underestimates the cost to complete
the Gallery store roll-out or is unable to meet its contemplated opening
schedule and successfully integrate new Gallery stores into its ongoing
business, the Company's results of operations could be materially and
adversely affected. Although the Company believes that it can obtain suitable
sites for its projected Gallery store expansion and that its management and
systems controls will be adequate to support this growth, there can be no
assurance that the Company will be able to achieve the planned expansion on a
timely basis, if at all, that the Gallery store concept will be accepted in
the marketplace or that it will achieve planned operating results or results
comparable with the Company's existing CarpetMAX stores.
The Company's growth and future operating results also depend on its ability
to expand its carpet manufacturing capacity and add new franchises. As part of
its growth, the Company intends to increase Image's annual fiber production
capacity from 100 million pounds to 150 million pounds by the end of calendar
1998. The Company may experience substantial delays in its planned
manufacturing expansion, as well as increased expenses associated with any
unexpected expansion costs. To the extent that the Company underestimates the
cost of expansion, the Company's results of operations could be materially
adversely affected. 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 the existing franchisees.
Additionally, the Company's growth and profitability will be significantly
dependent on the Company's ability to upgrade and integrate all of its
operations into a new management information system, accounting system,
internal controls and purchasing systems. The inability of the Company to
accomplish such upgrades and integration on a timely basis or at all, 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 Company is currently developing a centralized information system to
integrate the Company's store operations and financial data. There can be no
assurance that the development of such information system will be successful,
or accomplished within the anticipated time frame, if at all. If the Company
is unable to manage its growth effectively, the Company's business, results of
operations and financial condition could be materially adversely affected.
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"), one of the Company's significant suppliers and 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., New York Carpet World, Inc. and several other prominent dealers and
has opened a number of retail stores such that Shaw has become a major
competitor. In addition, large retailers also provide significant competition,
including The Home Depot, Inc., Lowe's Corporation 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.
According to Floor Focus, an industry trade publication, the 10 largest carpet
manufacturers accounted for approximately 85% of total U.S. carpet shipments
in 1996. 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."
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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 the second and third fiscal quarters, due
primarily to the effects of winter weather on home improvement projects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results and Seasonality."
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 has entered into an 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 PET
bottles, is important to the profitability of the Company's manufacturing
operations. An increase in the demand for post-consumer 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,
post-consumer PET bottle prices have fluctuated dramatically, most notably in
fiscal 1996 when prices increased 150% and 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. In addition, the Company
plans to expand its fiber production capacity, which will increase its
requirements for PET bottles by up to approximately 40%. 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 twelve months ended July 31, 1997, Image's
operations accounted for approximately 50.7% and 75.0% of the Company's total
revenues and EBITDA, respectively. Any decrease in the profitability of these
manufacturing operations would have an adverse effect on the Company's overall
results of operations.
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DEPENDENCE ON SUPPLIERS FOR FLOORCOVERING PRODUCTS AND DISTRIBUTION
The Company's retail network relies on several large independent
floorcovering manufacturers for the production of floorcovering products.
These manufacturers include Shaw and Mohawk Industries, Inc., which supplied
approximately 33.0% and 15.0%, respectively, of the Company's floorcovering
purchases for the twelve months ended July 31, 1997. 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 these 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
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 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.
The Company is subject to federal regulations and state laws that regulate
the offer and sale of franchisees and the franchiser-franchisee relationship.
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.
INDOOR AIR QUALITY
The effect of carpet 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 carpet, or the public
perception thereof, could have a material adverse effect on the Company's
operations and those of its franchisees.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture governing the terms of the Exchange Notes will contain certain
covenants limiting, subject to certain exceptions, the incurrence of
additional indebtedness, the payment of dividends, the redemption of capital
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stock, the making of certain investments, the issuance of capital stock of
subsidiaries, the creation of liens and other restrictions affecting the
Company's subsidiaries, the issuance of guarantees, transactions with
affiliates, asset sales and certain mergers and consolidations. A breach of
any of these covenants could result in an event of default under the
Indenture. In addition, the Credit Facility contains other restrictive
covenants and requires the Company to satisfy certain financial tests,
including maintaining certain ratios relating to levels of total debt,
consolidated senior debt, and EBITDAR (as defined herein). The Company's
ability to comply with such covenants and to satisfy such financial tests may
be affected by events beyond its control. A breach of any of these covenants
could result in an event of default under the Credit Facility and the
Indenture. In the event of a default under the Credit Facility, the lenders
thereunder could elect to declare all amounts borrowed, together with accrued
interest, to be immediately due and payable, and the lenders under the Credit
Facility could terminate all commitments thereunder and, if such borrowed
amounts are not paid, to enforce their rights pursuant to the security
interests on, or commence litigation that could ultimately result in a sale
of, certain assets of the Company. In addition, a default under the Credit
Facility could constitute a cross-default under the Indenture, and a default
under the Indenture could constitute a cross-default under the Credit
Facility. See "Description of Certain Other Indebtedness" and "Description of
the Exchange Notes--Certain Covenants."
POTENTIAL FAILURE TO MAKE PAYMENT UNDER A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Exchange
Notes may require the Company to purchase all or a portion of such holder's
Exchange Notes at 101% of the principal amount of the Exchange Notes, together
with accrued and unpaid interest, if any, to the date of purchase. In such
circumstances, the Company may be required to (i) repay all or a portion of
the outstanding principal of, and pay any accrued interest on, its Senior
Indebtedness, or (ii) obtain any requisite consent from its lenders to permit
the purchase. If the Company is unable to repay all of such indebtedness or is
unable to obtain the necessary consents, the Company may be unable to offer to
purchase the Exchange Notes, which will constitute an Event of Default under
the Indenture. There can be no assurance that the Company will have sufficient
funds available at the time of any Change of Control to make any debt payment
(including purchases of Exchange Notes) as described above or that the Company
will be able to refinance its outstanding indebtedness in order to permit it
to repurchase the Exchange Notes or, if such refinancing were to occur that
such financing will be on terms favorable to the Company. See "Description of
the Exchange Notes--Certain Covenants--Purchase of Notes Upon a Change of
Control."
The events that constitute a Change of Control under the Indenture may also
be events of default under the Credit Facility or other Senior Indebtedness of
the Company. Such events may permit the holders under such debt instruments to
reduce the borrowings thereunder or accelerate the debt and, if the debt is
not paid, to enforce their rights pursuant to security interests on, or
commence litigation that could ultimately result in a sale of, certain assets
of the Company, thereby limiting the Company's ability to purchase the
Exchange Notes.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the 144A Notes. The
144A Notes were offered and sold in October 1997 to "Qualified Institutional
Buyers" (as defined in Rule 144A under the Securities Act) and certain other
qualified buyers and are eligible for trading in the Private Offering, Resale,
and Trading through Automated Linkages ("PORTAL") market.
The Exchange Notes will be new securities for which there currently is no
established trading market. Although the Company intends to apply for listing
of the Exchange Notes on the New York Stock Exchange, there can be no
assurance that the Company's application will be approved or that an active
trading market for the Exchange Notes will develop or continue after the
Exchange Offer. Although the Initial Purchasers have informed the Company that
they currently intend to make a market in the Exchange Notes, the Initial
Purchasers are not obligated to do so, and any such market making may be
discontinued at any time without notice. The liquidity of any market for the
Exchange Notes will depend upon the number of holders of the Exchange Notes,
the interest of securities dealers in making a market in the Exchange Notes
and other factors. Accordingly, there
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can be no assurance as to the development or liquidity of any market for the
Exchange Notes. If an active trading market for the Exchange Notes does not
develop, the market price and liquidity of the Exchange Notes may be adversely
affected. If the Exchange Notes are traded, they may trade at a discount from
their initial offering price, depending upon prevailing interest rates, the
market for similar securities, the performance of the Company and certain
other factors. The liquidity of, and trading markets for, the Exchange Notes
may also be adversely affected by general declines in the market for non-
investment grade debt. Such declines may adversely affect the liquidity of,
and trading markets for, the Exchange Notes, independent of the financial
performance of or prospects for the Company.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of
securities similar to the Exchange Notes. There can be no assurance that the
market, if any, for the Exchange Notes will not be subject to similar
disruptions. Any such disruptions may have an adverse effect on the holders of
the Exchange Notes.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes for 144A Notes pursuant to the Exchange Offer
will be made only after timely receipt by the Exchange Agent of such 144A
Notes, a properly completed, duly executed Letter of Transmittal (or
compliance with the procedure for book-entry transfer if delivery of 144A
Notes is to be made by book-entry transfer to an account maintained by the
Exchange Agent at the DTC) and all other required documents. Therefore,
Holders desiring to tender their 144A Notes in exchange for Exchange Notes
should allow sufficient time to ensure timely delivery. The Company is under
no duty to give notification of defects or irregularities with respect to the
tenders of 144A Notes for exchange. Any 144A Notes that are not tendered or
are tendered but not accepted will, following the consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof and, upon consummation of the Exchange Offer, the registration rights
under the Registration Rights Agreement generally will terminate. In addition,
any Holder who tenders pursuant to the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale. Each broker-dealer that receives Exchange Notes
for its own account in exchange for 144A Notes, where such 144A Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. See "The Exchange
Offer."
RESTRICTIONS ON TRANSFER
The 144A Notes were offered and sold by the Company in a private offering
exempt from registration pursuant to the Securities Act and have been resold
pursuant to Rule 144A and other exemptions under the Securities Act. As a
result, the 144A Notes may not be reoffered or resold by purchasers except
pursuant to an effective registration statement under the Securities Act, or
pursuant to an applicable exemption from such registration, and in each case
in compliance with certain other conditions and restrictions. The 144A Notes
are legended to restrict transfer as aforesaid and the 144A Notes that remain
outstanding after consummation of the Exchange Offer will continue to bear
such a legend. In addition, upon consummation of the Exchange Offer, holders
of the 144A Notes that remain outstanding will not be entitled to any rights
under the Registration Rights Agreement that by their terms terminate or cease
to have further effectiveness as a result of the making of this Exchange
Offer, including an increase in the interest rates on the 144A Notes. The
Company does not currently anticipate that it will register the 144A Notes
under the Securities Act.
The 144A Notes were issued to, and the Company believes are currently owned
by, a small number of beneficial owners. Although the 144A Notes have been
designated for trading in the PORTAL market, to the extent that 144A Notes are
tendered and accepted in connection with the Exchange Offer, any trading
market for 144A Notes that remain outstanding after the Exchange Offer could
be adversely affected.
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Each Holder (other than any Holder who is an affiliate or promoter of the
Company) who duly exchanges 144A Notes for Exchange Notes in the Exchange
Offer will receive Exchange Notes that are freely transferable under the
Securities Act. Holders who participate in the Exchange Offer should be aware,
however, that if they accept the Exchange Offer for the purpose of engaging in
a distribution, the Exchange Notes may not be publicly reoffered or resold
without complying with the registration and prospectus delivery requirements
of the Securities Act. As a result, each Holder accepting the Exchange Offer
will be deemed to have represented, by its acceptance of the Exchange Offer,
that it acquired the Exchange Notes in the ordinary course of business and
that it is not engaged in, and does not intend to engage in, a distribution of
the Exchange Notes. If existing Commission interpretations permitting free
transferability of the Exchange Notes following the Exchange Offer are changed
prior to consummation of the Exchange Offer, the Company will use its best
efforts to register the 144A Notes for resale under the Securities Act. See
"Prospectus Summary--The Exchange Offer" and "The Exchange Offer--Resale of
Exchange Notes."
The 144A Notes currently may be sold pursuant to the restrictions set forth
in Rule 144A under the Securities Act or pursuant to another available
exemption under the Securities Act without registration under the Securities
Act. To the extent that 144A Notes are tendered and accepted in the Exchange
Offer, the trading market for the untendered and tendered but unaccepted 144A
Notes could be adversely affected.
THE EXCHANGE OFFER
The following discussion sets forth or summarizes what the Company believes
are the material terms of the Exchange Offer, including those set forth in the
Letter of Transmittal distributed with this Prospectus. This summary is
qualified in its entirety by reference to the full text of the documents
underlying the Exchange Offer, including the Letter of Transmittal and the
Registration Rights Agreement, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part, and are
incorporated by reference herein.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of 144A Notes pursuant to the Purchase
Agreement, dated October 9, 1997 (the "Purchase Agreement"), between the
Company and the Initial Purchasers, the Initial Purchasers became entitled to
the benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company must use its best
efforts to (a) file a registration statement in connection with a registered
exchange offer within 30 days after October 16, 1997, the date the 144A Notes
were issued (the "Issue Date"), (b) use reasonable best efforts to cause such
registration statement to become effective under the Securities Act within 90
days of the Issue Date, (c) use reasonable best efforts to keep such
registration statement effective until the closing of the Exchange Offer and
(d) cause such registered exchange offer to be consummated within 120 days
after the Issue Date. Within the applicable time periods, the Company will
endeavor to register under the Securities Act all of the Exchange Notes
pursuant to a registration statement under which the Company will offer each
Holder of 144A Notes the opportunity to exchange any and all of the
outstanding 144A Notes held by such Holder for Exchange Notes in an aggregate
principal amount equal to the aggregate principal amount of 144A Notes
tendered for exchange by such Holder. Subject to limited exceptions, the
Exchange Offer being made hereby, if commenced and consummated within such
applicable time periods, will satisfy those requirements under the
Registration Rights Agreement. A copy of the Registration Rights Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The term "Holder" with respect to the Exchange Offer
means any person in whose name the 144A Notes are registered on the books of
the Company or any other person who has obtained a properly completed bond
power from the registered holder.
Because the Exchange Offer is for any and all 144A Notes, the principal
amount of 144A Notes tendered and exchanged in the Exchange Offer will reduce
the principal amount of 144A Notes outstanding. Following
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the consummation of the Exchange Offer, Holders who did not tender their 144A
Notes generally will not have any further registration rights under the
Registration Rights Agreement, but such 144A Notes will continue to accrue
interest and remain subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such 144A Notes could be adversely affected.
Holders of 144A Notes seeking liquidity in their investment would have to rely
on exemptions to registration requirements under the securities laws,
including the Securities Act. Although the 144A Notes have been designated as
eligible for trading in the PORTAL market, because it is expected that the
holders of the 144A Notes will elect to exchange such 144A Notes for Exchange
Notes due to the absence of restrictions on the resale of Exchange Notes under
the Securities Act, the Company anticipates that the liquidity of the market
for any 144A Notes remaining after the consummation of the Exchange Offer may
be substantially limited.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all
144A Notes properly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Company will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
outstanding 144A Notes accepted in the Exchange Offer. Holders may tender some
or all of their 144A Notes pursuant to the Exchange Offer.
The form and terms of the Exchange Notes are the same as the form and terms
of the 144A Notes except that (i) the Exchange Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof and (ii) the holders of Exchange Notes generally will not be
entitled to certain rights under the Registration Rights Agreement, which
rights generally will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the 144A Notes and will be
entitled to the benefits of the Indenture.
Holders of 144A Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer.
The Company shall be deemed to have accepted validly tendered 144A Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of 144A Notes for the purposes of receiving the Exchange Notes from the
Company and delivering Exchange Notes to such Holders.
If any tendered 144A Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted 144A Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders of 144A Notes who tender pursuant to the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
144A Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes, in connection with the
Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Exchange Offer shall remain open for acceptance for a period of not less
than 30 days after notice is mailed to Holders (the "Exchange Period"). The
Expiration Date will be 5:00 p.m., New York City time, on January 15, 1998,
unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date will be the latest business day to which the
Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the record
Holders an announcement thereof, each prior to 9:00 a.m., New
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York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay accepting any 144A Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept
144A Notes not previously accepted if any of the conditions set forth under
"--Conditions" shall have occurred and shall not have been waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written
notice thereof. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose
such amendment in a manner reasonably calculated to inform the Holders of such
amendment and the Company will extend the Exchange Offer for a period of five
to ten business days, depending upon the significance of the amendment and the
manner of disclosure to Holders, if the Exchange Offer would otherwise expire
during such five to ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
Interest on the Exchange Notes is payable semi-annually on April 15 and
October 15 of each year at the rate of 9 1/4% per annum. The Exchange Notes
will bear interest from October 16, 1997, the date of issuance of the 144A
Notes, or the most recent interest payment date to which interest on such 144A
Notes has been paid, whichever is later. Accordingly, Holders of 144A Notes
that are accepted for exchange will not receive interest that is accrued but
unpaid on the 144A Notes at the time of tender, but such interest will be
payable in respect of the Exchange Notes delivered in exchange for such 144A
Notes on the first interest payment date after the Expiration Date.
PROCEDURES FOR TENDERING
Only a Holder of 144A Notes may tender such 144A Notes pursuant to the
Exchange Offer. To tender pursuant to the Exchange Offer, a Holder must
complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by Instruction 4 of the
Letter of Transmittal, and mail or otherwise deliver such Letter of
Transmittal or such facsimile, together with the 144A Notes and any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date (or comply with the procedure for book-entry
transfer described below if delivery of 144A Notes is to be made by book-entry
transfer to an account maintained by the Exchange Agent at the DTC).
Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
The tender by a Holder of 144A Notes and the acceptance thereof by the
Company will constitute an agreement between such Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF 144A NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR 144A NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT SUCH TENDER FOR SUCH HOLDERS.
24
<PAGE>
Any beneficial holder whose 144A Notes are registered in the name of such
holder's broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact such registered holder promptly and
instruct such registered holder to tender on his behalf. If such beneficial
holder wishes to tender on such beneficial holder's behalf, such beneficial
holder must, prior to completing and executing the Letter of Transmittal and
delivering his 144A Notes, either make appropriate arrangements to register
ownership of the 144A Notes in such holder's name or obtain a properly
completed bond power from the registered holder. The transfer of record
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program or
the Stock Exchange Medallion Program (an "Eligible Institution") unless the
144A Notes tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any 144A Notes listed therein, such 144A Notes must be endorsed or
accompanied by appropriate bond powers and a proxy which authorizes such
person to tender the 144A Notes on behalf of the registered holder, in each
case signed as the name of the registered holder or holders appears on the
144A Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any 144A Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
144A Notes at the DTC for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in the DTC may make book-entry delivery of the 144A Notes by
causing the DTC to transfer such 144A Notes into the Exchange Agent's account
with respect to the 144A Notes in accordance with the DTC's procedures for
such transfer. Delivery of documents to the DTC does not constitute delivery
to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered 144A Notes and withdrawal of the tendered
144A Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all 144A Notes not properly tendered or any 144A Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
irregularities or conditions of tender as to particular 144A Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including, the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of 144A Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or
irregularities with respect to tenders of 144A Notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of 144A
Notes will not be deemed to have been made until such irregularities have been
cured or waived. Any 144A Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost to such Holder by the Exchange
Agent to the tendering Holders of 144A Notes, unless otherwise provided in the
Letter of Transmittal, as soon as practicable following the Expiration Date.
25
<PAGE>
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their 144A Notes and (i) whose 144A Notes are not
immediately available, or (ii) who cannot deliver their 144A Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent (or
comply with the procedures for book-entry transfer) prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the 144A Notes, the
certificate or registration number or numbers of such 144A Notes and
the principal amount of 144A Notes tendered, stating that the tender is
being made thereby, and guaranteeing that, within five business days
after the Expiration Date, the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the 144A Notes
to be tendered in proper form for transfer (or a confirmation of book-
entry transfer of such 144A Notes into the Exchange Agent's account at
the Depository) and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered 144A Notes in proper form for transfer (or a confirmation of
book-entry transfer of such 144A Notes into the Exchange Agent's
account at the Depository) and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five
business days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of 144A Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of 144A Notes pursuant to the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at the address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the 144A Notes to be withdrawn
(the "Depositor"), (ii) identify the 144A Notes to be withdrawn (including the
certificate or registration number(s) and principal amount of such 144A Notes,
or, in the case of notes transferred by book-entry transfer, the name and
number of the account at the DTC to be credited), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such 144A Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee (as defined herein) with respect to the 144A Notes register
the transfer of such 144A Notes into the name of the Depositor withdrawing the
tender, (iv) specify the name in which any such 144A Notes are to be
registered, if different from that of the Depositor and (v) include a
statement that such Holder is withdrawing such Holder's election to have such
144A Notes exchanged. All questions as to the validity, form and eligibility
(including time of receipt) of such withdrawal notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any 144A Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the 144A Notes so withdrawn are validly retendered. Any
144A Notes which have been tendered but which are not accepted for payment
will be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn 144A Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering" at any time
prior to the Expiration Date.
26
<PAGE>
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange Exchange Notes for, any
144A Notes, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such 144A Notes, if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange
Offer which, in the sole judgment of the Company, might impair the
ability of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the
reasonable judgment of the Company, might materially impair the ability
of the Company to proceed with the Exchange Offer; or
(c) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation
of the Exchange Offer; or
(d) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law, statute, rule
or regulation) which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may (i) terminate the Exchange Offer
and refuse to accept any 144A Notes and return all tendered 144A Notes to the
tendering Holders, (ii) extend the Exchange Offer and retain all 144A Notes
tendered prior to the expiration of the Exchange Offer subject, however, to
the rights of Holders to withdraw such 144A Notes (see "--Withdrawals of
Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered 144A Notes which have not been
withdrawn. Moreover, regardless of whether any of such conditions has
occurred, the Company may amend the Exchange Offer in any manner which, in its
good faith judgment, is advantageous to holders of the 144A Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right, and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time. If the Company waives or
amends the foregoing conditions, it will, if required by law, extend the
Exchange Offer for five to ten business days from the date that the Company
first gives notice, by public announcement or otherwise, of such waiver or
amendment, if the Exchange Offer would otherwise expire within such five to
ten business-day period. Any determination by the Company concerning the
events described above will be final and binding upon all parties.
In addition, the Company will not accept for exchange any 144A Notes
tendered, and no Exchange Notes will be issued in exchange for any such 144A
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the Indenture is not qualified under the Trust Indenture Act of 1939,
as amended. In any such event, the Company is required to use every reasonable
effort to obtain the withdrawal of any stop order at the earliest possible
time.
The Exchange Offer is not conditioned upon any minimum principal amount of
144A Notes being tendered for exchange.
27
<PAGE>
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Mail By Facsimile By Hand or Overnight
(registered or certified Transmission: Courier:
mail recommended): (617) 664-5395
State Street Bank and
State Street Bank and Trust Company
Trust Company Corporate Trust
Corporate Trust Department
Department To Confirm by Telephone 4th Floor
P.O. Box 778 or for Information Call: Two International Place
Boston, MA 02102-0078 (617) 664-5587 Boston, MA 02110
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone or in person by officers and regular employees of
the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The Company will,
however, pay the Exchange Agent reasonable and customary fees for its services
and will reimburse the Exchange Agent for its reasonable out-of-pocket
expenses in connection therewith and pay other registration expenses,
including fees and expenses of the Trustee, filing fees, blue sky fees and
printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of 144A Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or 144A Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the 144A
Notes tendered, or if tendered 144A Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of 144A Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering Holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the 144A
Notes, which is the aggregate principal amount of the 144A Notes, as reflected
in the Company's accounting records on the date of exchange. Accordingly, no
gain or loss for accounting purposes will be recognized in connection with the
Exchange Offer. The cost of the Exchange Offer will be deferred and amortized
over the term of the Exchange Notes.
RESALE OF THE EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letters, and there can be no assurance that the Commission would
make a similar determination with respect to the Exchange Notes. Based on
these interpretations by the staff of the Commission, the Company believes
that the Exchange Notes would, in general, be freely transferable after the
Exchange Offer by any holder of such Exchange Notes (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
of the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes
acquired pursuant to the Exchange Offer
28
<PAGE>
are obtained in the ordinary course of such holder's business, and such holder
does not intend to participate, and has no arrangement or understanding to
participate in the distribution of such Exchange Notes. Any holder who tenders
pursuant to the Exchange Offer with the intention to participate, or for the
purpose of participating, in a distribution of the Exchange Notes may not rely
on the position of the staff of the Commission enunciated in Exxon Capital
Holdings Corporation (available May 13, 1988) or Morgan Stanley & Co.,
Incorporated (available June 5, 1991) or similar interpretive letters, but
rather must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction. In
addition, any such resale transaction should be covered by an effective
registration statement containing the selling security holders information
required by Item 507 of Regulation S-K promulgated by the Commission. Since
the Commission has not considered the Exchange Offer in the context of a no-
action letter, there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for 144A Notes, where such 144A Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
may be a statutory underwriter and must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Company
has agreed to make available a prospectus meeting the requirements of the
Securities Act to any such broker-dealer for use in connection with any resale
of any Exchange Notes acquired in the Exchange Offer. A broker-dealer which
delivers such a prospectus to purchasers in connection with such resales will
be subject to certain of the civil liability provisions under the Securities
Act and will be bound by the provisions of the Registration Rights Agreement
(including certain indemnification rights and obligations).
By tendering pursuant to the Exchange Offer, each Holder will represent to
the Company, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of its business,
(ii) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of the
Exchange Notes and (iii) the holder and any such other person acknowledge that
if they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such holder incurring liability
under the Securities Act for which such holder is not indemnified by the
Company. Further, by tendering in the Exchange Offer, each holder that may be
deemed an "affiliate" (as defined in Rule 405 of the Securities Act) of the
Company will represent to the Company that such holder understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by that Holder without registration under the Securities
Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have
been registered or qualified for sale in such jurisdiction or an exemption
from registration or qualification is available and is complied with. The
Company and the Guarantors have agreed, pursuant to the Registration Rights
Agreement and subject to certain specified limitations therein, to register or
qualify the Exchange Notes for offer or sale under the securities or blue sky
laws of such jurisdictions as any holder of the Exchange Notes reasonably
requests in writing. Such registration or qualification may require the
imposition of restrictions or conditions (including suitability requirements
for offerees or purchasers) in connection with the offer or sale of any
Exchange Notes.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Issuers to effect the Exchange
Offer, or if for any other reason the Exchange Offer Registration Statement is
not declared effective within 90 days of the date of original issuance of the
144A Notes or the Exchange Offer is not consummated within 120 days of the
date of original issuance of the 144A Notes, or upon the request of any of the
Initial Purchasers, or if a holder of the 144A Notes is not permitted by
applicable law to participate in the Exchange Offer or elects to participate
in the Exchange Offer but does not receive fully
29
<PAGE>
tradable Exchange Notes pursuant to the Exchange Offer, the Issuers will, in
lieu of effecting the registration of the Exchange Notes pursuant to the
Exchange Offer Registration Statement and at the Issuers cost, (a) as promptly
as practicable, file with the Commission a shelf registration statement (the
"Shelf Registration Statement") covering resales of the 144A Notes, (b) use
their best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act by the 120th day after the date of original
issuance of the 144A Notes and (c) use their best efforts to keep effective
the Shelf Registration Statement for a period of two years after its effective
date (or for such shorter period that will terminate when all of the 144A
Notes covered by the Shelf Registration Statement have been sold pursuant
thereto or cease to be outstanding).
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement, and
Holders of 144A Notes who do not tender their 144A Notes generally will not
have any further registration rights under the Registration Rights Agreement
or otherwise. Accordingly, any Holder that does not exchange such Holder's
144A Notes for Exchange Notes will continue to hold the untendered 144A Notes
and will be entitled to all the rights and limitations applicable thereto
under the Indenture, except to the extent that such rights or limitations, by
their terms, terminate or cease to have further effectiveness as a result of
the Exchange Offer.
The 144A Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such 144A Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) pursuant to an effective registration statement under the Securities Act,
(iii) so long as the 144A Notes are eligible for resale pursuant to Rule 144A
under the Securities Act, to a Qualified Institutional Buyer in a transaction
meeting the requirements of Rule 144A, (iv) outside the United States to a
foreign person pursuant to the exemption from the registration requirements of
the Securities Act provided by Regulation S thereunder, (v) pursuant to an
exemption from registration under the Securities Act provided by Rule 144
thereunder (if available) or (vi) to an accredited investor as such term is
defined under Rule 501 of the Securities Act in a transaction exempt from the
registration requirements of the Securities Act, in each case in accordance
with any applicable securities laws of any state of the United States or other
applicable jurisdiction. See "Risk Factors--Restrictions on Transfer."
OTHER
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to accept. Holders are urged to consult their
financial and tax advisors in making their own decision on what action to
take.
The Company may in the future seek to acquire untendered 144A Notes, to the
extent permitted by applicable law, in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plans to acquire any 144A Notes that are not tendered in the
Exchange Offer or to file a registration statement to permit resales of any
untendered 144A Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Department regulations (the "Regulations") and existing administrative
interpretations and court decisions. There can be no assurance that the
Internal Revenue Service (the "IRS") will not take a contrary view, and no
ruling from the IRS has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to Holders. Certain Holders of the 144A Notes (including
insurance companies, tax-exempt organizations, financial institutions, broker-
dealers, foreign corporations and persons who are not citizens or residents of
the United States) may be subject to special rules not discussed below. EACH
HOLDER OF A 144A NOTE SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES OF EXCHANGING SUCH HOLDER'S 144A NOTES FOR
EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS.
30
<PAGE>
The issuance of the Exchange Notes to Holders of the 144A Notes pursuant to
the terms set forth in this Prospectus will not constitute an exchange for
United States federal income tax purposes because such exchange does not
represent a significant modification of the debt instruments. Consequently, no
gain or loss would be recognized by Holders of the 144A Notes upon receipt of
the Exchange Notes, and ownership of the Exchange Notes will be considered a
continuation of ownership of the 144A Notes. For purposes of determining gain
or loss upon the subsequent sale or exchange of the Exchange Notes, a Holder's
basis in the Exchange Notes should be the same as such Holder's basis in the
144A Notes exchanged therefor. A Holder's holding period for the Exchange
Notes should include the Holder's holding period for the 144A Notes exchanged
therefor.
See also "Description of Certain Federal Income Tax Consequences of an
Investment in the Exchange Notes."
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes pursuant
to the Exchange Offer. The net proceeds to the Company from the 144A Notes
Offering were approximately $95.9 million. The Company used the net proceeds
from the 144A Notes Offering to repay all borrowings outstanding under the
Credit Facility and for general corporate purposes, including working capital
to fund the Company's retail expansion and for potential acquisitions. The
Company currently has no agreements or understandings with respect to any
acquisition and no portion of the net proceeds was allocated to specific
acquisitions. The indebtedness under the Credit Facility was incurred
primarily to refinance the existing debt of the Company as well as to provide
the Company with additional working capital. Amounts repaid under the
revolving portion of the Credit Facility may be reborrowed.
CAPITALIZATION
The following table sets forth the capitalization of the Company at July 31,
1997 (i) on an actual basis and (ii) as adjusted to give effect to the 144A
Notes Offering, the application of the net proceeds therefrom, the Credit
Facility and the Summerville Loan. See "Use of Proceeds" and the Company's
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JULY 31, 1997
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt: (a)
Credit facility (b)....................................... $66,700 $ --
Summerville Loan (c)...................................... -- 30,000
Capital lease obligations................................. 2,405 2,405
144A Notes ............................................... -- 100,000
Other long-term debt...................................... 1,290 1,290
-------- --------
Total long-term debt..................................... 70,395 133,695
Total stockholders' equity................................. 123,755 123,755
-------- --------
Total capitalization................................... $194,150 $257,450
======== ========
</TABLE>
- --------
(a) Includes current portion of long-term debt. For information regarding the
Company's long-term liabilities, see Note 9 of Notes to Consolidated
Financial Statements.
(b) After giving effect to the 144A Notes Offering and the application of the
net proceeds therefrom, the Credit Facility and the Summerville Loan, the
Company has $50.0 million in available borrowings under the Credit
Facility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and
"Description of Certain Other Indebtedness."
(c) For information regarding the Summerville Loan, see "Description of
Certain Other Indebtedness--Summerville Loan."
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth certain selected consolidated financial data
and operating data of the Company for the periods indicated which have been
derived from the Consolidated Financial Statements of the Company. The
Consolidated Financial Statements of the Company as of January 31, 1996 and
1997 and for the ten month period ended January 31, 1996 and the year ended
January 31, 1997 have been audited by Arthur Andersen LLP, independent public
accountants. The Consolidated Financial Statements of the Company for the year
ended March 31, 1995 have been audited by KPMG Peat Marwick LLP, independent
auditors. The selected financial data as of and for the years ended March 31,
1993, 1994 and 1995 and as of and for the six month periods ended July 31,
1996 and 1997 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 six months ended July 31, 1997 are not necessarily indicative of the
results that may be expected for the entire year ending January 31, 1998.
These 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 give
retroactive effect to the merger of a wholly-owned subsidiary of the Company
and GCO, Inc. on September 28, 1994 and the merger of a wholly-owned
subsidiary of the Company and Image on August 30, 1996, which transactions
were accounted for as poolings-of-interests. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
TEN FISCAL
FISCAL YEAR ENDED MARCH MONTHS YEAR SIX MONTHS
31, ENDED ENDED ENDED JULY 31,
----------------------------- JANUARY 31, JANUARY 31, ------------------
1993 1994 1995 1996(A) 1997 1996 1997
------- -------- -------- ----------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Sales of floorcovering
products............. $88,676 $106,237 $174,935 $186,568 $250,968 $117,414 $148,371
Fees from franchise
services............. 5,113 9,688 13,876 13,432 26,336 13,062 14,573
Fiber and PET sales... 4,583 5,297 12,886 24,072 28,853 17,167 12,513
Other................. 479 1,369 1,644 3,479 3,564 1,680 3,011
------- -------- -------- -------- -------- -------- --------
Total revenues....... 98,851 122,591 203,341 227,551 309,721 149,323 178,468
Cost of sales.......... 71,570 85,847 139,521 161,723 222,290 108,630 122,226
------- -------- -------- -------- -------- -------- --------
Gross profit......... 27,281 36,744 63,820 65,828 87,431 40,693 56,242
Selling, general, and
administrative
expenses.............. 17,417 23,669 46,870 59,197 72,366 36,259 41,163
Replacement stock
option charge......... -- 10,388(b) -- -- -- -- --
Goodwill impairment
charge................ -- -- -- 6,569(c) -- -- --
Merger-related costs... -- -- 500(d) -- 4,900(e) -- --
Other (income) expense:
Interest income...... (20) (307) (397) (415) (613) (311) (225)
Interest expense..... 3,844 1,886 1,839 4,695 7,006 3,213 2,663
Interest expense-
related parties..... -- 977 -- -- -- -- --
Other................ 98 263 (421) (78) (302) (258) (84)
------- -------- -------- -------- -------- -------- --------
Earnings (loss) before
income taxes
and extraordinary
income................ 5,942 845 15,429 (4,140) 4,074 1,790 12,725
Income tax expense..... 947 376 5,787 105 1,929 630 4,889
------- -------- -------- -------- -------- -------- --------
Net earnings (loss)
before extraordinary
income................ 4,995 469 9,642 (4,245) 2,145 1,160 7,836
Extraordinary income... -- 190 -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net earnings (loss).... $4,995 $659 $9,642 $(4,245) $2,145 $1,160 $7,836
======= ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash
equivalents........... $636 $3,972 $2,365 $4,207 $6,439 $3,464 $4,925
Trade accounts
receivable, net....... 11,682 14,779 29,882 33,037 43,487 38,392 49,974
Inventories............ 15,226 17,768 38,137 49,170 42,148 43,967 47,168
Property and equipment,
net................... 30,946 40,448 68,832 93,879 101,403 95,926 107,332
Total assets........... 63,809 95,281 162,423 202,085 219,673 203,946 244,194
Total debt............. 35,054 21,620 57,459 94,185 96,289 91,635 70,395
Stockholders' equity... 30,960 50,053 71,424 72,150 76,154 73,896 123,755
</TABLE>
(continued on following page)
32
<PAGE>
<TABLE>
<CAPTION>
TEN FISCAL
FISCAL YEAR ENDED MONTHS YEAR SIX MONTHS
MARCH 31, ENDED ENDED ENDED JULY 31,
--------------------------- JANUARY 31, JANUARY 31, ----------------
1993 1994 1995 1996(A) 1997 1996 1997
------- -------- -------- ----------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Image revenues(f)...... $89,480 $103,257 $127,250 $128,260 $162,681 $79,231 $88,278
Franchised revenues.... 5,172 11,873 18,764 25,761 40,877 15,430 23,300
Company-owned store
revenues.............. 4,199 7,461 57,327 73,530 106,163 54,662 66,890
EBITDA, as adjusted(g). 13,002 16,951 22,993 15,132 26,498 10,538 21,233
Depreciation and
amortization.......... 3,216 3,832 5,225 8,008 10,518 5,535 5,845
Capital expenditures... 4,439 12,734 25,941 15,580 17,444 7,051 11,837
Gross margin........... 27.6% 30.0% 31.4% 28.9% 28.2% 27.3% 31.5%
EBITDA, as adjusted,
margin................ 13.2% 13.8% 11.3% 6.6% 8.6% 7.1% 11.9%
Ratio of earnings to
fixed charges(h)...... 2.5x 1.4x 6.3x -- 1.5x 1.4x 4.6x
SELECTED OPERATING DATA:
End of period:
Company-owned stores.. 8 8 51 59 57 57 60
Franchise territories. 148 233 325 377 368 353 377
</TABLE>
- --------
(a) On January 31, 1996, the Company changed its fiscal year end from March 31
to January 31.
(b) 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 Note 13 of Notes to Consolidated Financial Statements.
(c) 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--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.
(d) Represents a non-recurring charge of $500,000 related to the merger with
GCO, Inc. which was accounted for as a pooling-of-interests.
(e) Represents a non-recurring charge of $4.9 million related to the mergers
with Image and Bailey & Roberts Flooring, Inc. ("Bailey & Roberts") which
were accounted for as poolings-of-interests.
(f) Includes revenues generated from carpet, fiber and PET sales.
(g) EBITDA, as adjusted, is defined as earnings before interest, taxes,
depreciation, amortization and non-recurring charges. While EBITDA should
not be construed as a substitute for operating income or as a better
measure of liquidity than cash flows from operating activities, which are
determined in accordance with generally accepted accounting principles, it
is a measure commonly used in the Company's industry and is included
herein because management believes it is useful and provides additional
information with respect to the ability of the Company to meet future debt
service, capital expenditures and working capital requirements. EBITDA, as
adjusted, reported above excludes non-recurring charges of $10.4 million,
$500,000, $6.6 million and $4.9 million for fiscal 1994, 1995, 1996 and
1997, respectively.
(h) For purposes of computing the ratios, earnings represent income (loss)
before income taxes, the cumulative effect of accounting changes plus
fixed charges. Fixed charges represent interest expense and that portion
of rent expense under all lease commitments deemed to represent an
appropriate interest factor. Earnings were inadequate to cover fixed
charges for the ten months ended January 31, 1996. The amount of the
deficiency for this period was $4.1 million.
33
<PAGE>
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 twelve month period ended January 31, 1997 with
the ten month period ended January 31, 1996 and compares the ten month period
ended January 31, 1996 with the twelve month period ended March 31, 1995.
Thus, the periods are not entirely comparable. On August 30, 1996, a wholly-
owned subsidiary of 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, Inc. (accounted for as a pooling-of-
interests). Acquisitions accounted for under the purchase method of accounting
resulted in the Company originally recording goodwill of $17.9 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
year ended January 31, 1997 reflect the costs and expenses associated with the
new store openings and the new distribution center and headquarters.
The Company's retail network currently consists of 57 Company-owned
CarpetMAX stores (including 21 Gallery stores), six Company-owned GCO stores
and 377 franchise dealers operating approximately 448 CarpetMAX stores and 101
GCO stores.
The Company's revenues primarily consist of (i) sales of floorcovering
products, (ii) fees from franchising services and (iii) sales of fiber and
PET, which during the six months ended July 31, 1997 accounted for
approximately 83.1%, 8.2% and 7.0% of the Company's total revenues,
respectively. Sales of floorcovering products include sales of floorcovering
products by Company-owned retail stores, as well as sales of manufactured
carpet by Image. Franchise fees are generated from three primary sources: (i)
CarpetMAX franchisees remit a one-time franchise fee of $35,000 (revenue
booked at time of franchise agreement signing), as well as a brokerage fee on
certain floorcovering products purchased by the franchisee; (ii) GCO
franchisees remit a one-time franchise fee of $25,000 (revenue booked at time
of store opening), as well as royalties of 5% on the first $500,000 of gross
sales and 3% on gross sales over $500,000 during the year; and (iii) franchise
service fees for services such as advertising, which are offered to all
CarpetMAX franchisees on a fee for service basis, and are required to be
purchased by all GCO franchisees. Fiber sales consist of polyester fiber sold
to the home furnishings industry, while PET flake and pellet is sold to other
manufacturers for multiple uses, including fiber fill, food and non-food
containers, package strapping and plastic sheeting. During fiscal 1997 and the
six months ended July 31, 1997, Image accounted for approximately 52.5% and
49.5%, respectively, of the Company's total revenues and approximately 65.4%
and 78.4%, respectively, of the Company's EBITDA.
34
<PAGE>
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>
FISCAL YEAR TEN MONTHS FISCAL YEAR
ENDED ENDED ENDED SIX MONTHS
ENDED JULY 31,
--------------
MARCH 31, JANUARY 31, JANUARY 31,
1995 1996(A) 1997 1996 1997
----------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Sales of floorcovering
products............... 86.0% 82.0% 81.0% 78.6% 83.1%
Fees from franchise
services............... 6.7 5.9 8.5 8.8 8.2
Fiber and PET sales..... 6.3 10.6 9.3 11.5 7.0
Other................... 1.0 1.5 1.2 1.1 1.7
----- ----- ----- ------- -------
Total revenues......... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ======= =======
Cost of sales............ 68.6% 71.1% 71.8% 72.7% 68.5%
----- ----- ----- ------- -------
Gross profit............ 31.4 28.9 28.2 27.3 31.5
Selling, general, and
administrative expenses. 23.1 26.0 23.4 24.2 23.1
Goodwill impairment
charge.................. -- 2.9(b) -- -- --
Merger-related costs..... 0.2(c) -- 1.6(d) -- --
Other (income) expense:
Interest income......... (0.2) (0.2) (0.2) (0.2) (0.1)
Interest expense........ 1.0 2.1 2.2 2.1 1.5
Other................... (0.2) (0.1) (0.1) -- --
----- ----- ----- ------- -------
Income tax expense....... 2.9 0.1 0.6 0.4 2.6
----- ----- ----- ------- -------
Net earnings (loss)..... 4.7% (1.9)% 0.7% 0.8% 4.4%
===== ===== ===== ======= =======
</TABLE>
- --------
(a) On January 31, 1996, the Company changed its fiscal year end from March 31
to January 31.
(b) 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--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.
(c) Represents a non-recurring charge of $500,000 related to the merger with
GCO, Inc. which was accounted for as a pooling-of-interests.
(d) Represents a non-recurring charge of $4.9 million related to the mergers
with Image and Bailey & Roberts which were accounted for as poolings-of-
interests.
SIX MONTHS ENDED JULY 31, 1997 COMPARED TO SIX MONTHS ENDED JULY 31, 1996
Total Revenues. Total revenues increased 19.6% to $178.5 million for the six
months ended July 31, 1997 from $149.3 million for the six months ended July
31, 1996. The primary components of total revenues are discussed below.
Sales of Floorcovering Products. Sales of floorcovering products
increased 26.4% to $148.4 million for the six months ended July 31, 1997
from $117.4 million for the six months ended July 31, 1996. Sales of
floorcovering products in Company-owned stores increased 33.8% to $66.9
million for the six months ended July 31, 1997 from $50.0 million for the
six months ended July 31, 1996. The growth in retail sales of floorcovering
products was primarily due to the impact 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 23.0% to $75.4 million for the
six months ended July 31, 1997 from $61.3 million for the six months ended
July 31, 1996. Unit sales of manufactured carpet increased 25.5% to 12.8
million square yards for the six months ended July 31, 1997 from 10.2
million square yards for the six months ended July 31, 1996. Sales from the
Company's two distribution centers amounted to $6.1 million for each of the
six months ended July 31, 1997 and 1996, largely representing sales to the
Company's franchisees.
35
<PAGE>
Fees from Franchise Services. Fees from franchise services, which include
franchise license fees and royalties, brokering of floorcovering products
and advertising, increased 11.5% to $14.6 million for the six months ended
July 31, 1997 from $13.1 million for the six months ended July 31, 1996.
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 decreased 27.3% to $12.5
million for the six months ended July 31, 1997 from $17.2 million for the
six months ended July 31, 1996, due to a 30.0% decline in the average
selling price per pound of fiber and PET sales for the six months ended
July 31, 1997 compared to the six months ended July 31, 1996, partially
offset by a 4.8% increase in unit sales to 32.6 million pounds for the six
months ended July 31, 1997 from 31.1 million pounds for the six months
ended July 31, 1996.
Gross Profit. Gross profit increased 38.1% to $56.2 million for the six
months ended July 31, 1997 from $40.7 million for the six months ended July
31, 1996. As a percentage of total revenues, gross profit was 31.5% for the
six months ended July 31, 1997 compared to 27.3% for the six months ended July
31, 1996. Contributing to the increase in gross profit as a percentage of
total revenues 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 and a significantly lower cost of raw materials at
Image.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 13.5% to $41.2 million for the six months
ended July 31, 1997 from $36.3 million for the six months ended July 31, 1996.
Increases in operating expenses on an absolute basis reflect an overall growth
in the size of the Company's operations required to serve the growing retail
base, as well as increased selling costs at Image related to the addition of
12 new sales people to service newly created territories. As a percentage of
total revenues, selling, general and administrative expenses decreased to
23.1% for the six months ended July 31, 1997 from 24.3% for the six months
ended July 31, 1996 as a result of spreading fixed costs over a larger revenue
base.
Interest Expense, Net. Net interest expense decreased 17.2% to $2.4 million
for the six months ended July 31, 1997 from $2.9 million for the six months
ended July 31, 1996 due principally to a reduction in debt of approximately
$48.0 million with the net proceeds from a public equity offering in February
1997.
Income Tax Expense. The Company recorded income tax expense of $4.9 million
for the six months ended July 31, 1997 compared to $630,000 for the six months
ended July 31, 1996, due to higher net income for the six months ended July
31, 1997, as compared to the prior year period. The effective tax rate for the
six months ended July 31, 1997 was 38.4%.
Net Earnings. As a result of the foregoing factors, the Company recorded net
earnings of $7.8 million for the six months ended July 31, 1997 compared to
$1.2 million for the six months ended July 31, 1996.
YEAR ENDED JANUARY 31, 1997 COMPARED TO TEN MONTH PERIOD ENDED JANUARY 31,
1996
Total Revenues. Total revenues increased 36.1% to $309.7 million fiscal 1997
from $227.6 million for fiscal 1996. The primary components of total revenues
are discussed below.
Sales of Floorcovering Products. Sales of floorcovering products
increased 34.5% to $251.0 million for fiscal 1997 from $186.6 million for
fiscal 1996. Sales of floorcovering products in Company-owned stores
increased 44.5% to $106.2 million for fiscal 1997 from $73.5 million for
fiscal 1996. The growth in retail sales of floorcovering products was
primarily due to the impact 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
36
<PAGE>
manufactured carpet increased 30.0% to $132.6 million for fiscal 1997 from
$102.0 million for fiscal 1996. Unit sales of manufactured carpet increased
31.8% to 22.4 million square yards for fiscal 1997 from 17.0 million square
yards for fiscal 1996. Sales from the Company's two distribution centers
amounted to $12.2 million for fiscal 1997 and $11.1 million for fiscal
1996, 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 96.3% to $26.3 million for fiscal 1997 from
$13.4 million for fiscal 1996. 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 19.9% to $28.9
million for fiscal 1997 from $24.1 million for fiscal 1996. Unit sales
increased 48.3% to 56.8 million pounds for fiscal 1997 from 38.3 million
pounds for fiscal 1996 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 20.1% decline in the average selling
price per pound of fiber and PET sales for fiscal 1997 compared to fiscal
1996.
Gross Profit. Gross profit increased 32.8% to $87.4 million for fiscal 1997
from $65.8 million for fiscal 1996. As a percentage of total revenues, gross
profit was 28.2% for fiscal 1997 compared to 28.9% for fiscal 1996. The
Company recognized a charge in the amount of $700,000 in fiscal 1997 to
increase reserves for discounts and warranties at its manufacturing
subsidiary, Image. Also contributing to the decrease in gross profit as a
percentage of total revenues 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 22.3% to $72.4 million for fiscal 1997 from
$59.2 million for fiscal 1996. As a percentage of total revenues, selling,
general and administrative expenses decreased to 23.4% for fiscal 1997 from
26.0% for fiscal 1996 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 $4.9
million for fiscal 1997 relating to the mergers with Image and Bailey &
Roberts which were accounted for as poolings-of-interests. The charge includes
both transaction costs, as well as severance costs and the elimination of
redundant systems.
Interest Expense, Net. Net interest expense increased 48.8% to $6.4 million
for fiscal 1997 from $4.3 million for fiscal 1996 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 $1.9 million
for fiscal 1997 compared to $100,000 for fiscal 1996. Income tax expense for
fiscal 1997 reflects the impact of non-deductible expenses associated with the
merger with Image and Bailey and Roberts. The effective tax rate for fiscal
1997 was 47.3%.
Net Earnings. As a result of the foregoing factors, the Company recorded net
earnings of $2.1 million for fiscal 1997 compared to a net loss of $4.2
million for fiscal 1996.
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 primary 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
37
<PAGE>
stores increased 51.9% to $73.5 million for fiscal 1996 from $48.4 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 included in the Company's sales only 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 to
increased average unit selling prices. Sales from the Company's two
distribution centers amounted to $11.1 million during fiscal 1996 and $12.7
million during 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 total revenues, gross
profit was 28.9% in fiscal 1996 compared to 31.4% for fiscal 1995. Gross
profit as a percentage of total revenues 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 total 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 December 1995, the Company
announced the execution of a letter of intent for the merger of the Company
into Shaw which negotiations were subsequently terminated on January 12, 1996
resulting in non-recurring merger transaction costs and material interruptions
to advertising, brokerage and franchise revenue in fiscal 1996. In addition,
the Company incurred additional expenses resulting from the move to the new
headquarters 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. See Note 2 of Notes to Consolidated Financial Statements.
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.
38
<PAGE>
Interest Expense, Net. 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
headquarters 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 $100,000 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.
QUARTERLY RESULTS AND SEASONALITY
Set forth below is certain summary information with respect to the Company's
operations for the most recent ten fiscal quarters. Historically, the
Company's retail floorcovering sales are subject to some seasonal fluctuation
typical to its industry, with higher sales occurring in the summer and fall
months of the second and third quarters, and lower sales occurring during the
fourth quarter holiday season. Increases occur in the second quarter as
construction schedules increase during the summer, and the largest increase
occurs in the third quarter as a consequence of a combination of ongoing
construction, fall and pre-Christmas home remodeling.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997 FISCAL 1998
---------------------------------- ----------------------------------- ---------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER(A) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ---------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $63,554 $69,186 $73,742 $21,069 $73,242 $76,081 $82,139 $78,259 $86,225 $92,243
Gross profit............ 20,696 20,646 20,531 3,995 20,284 20,408 23,836 22,903 27,070 29,172
Operating profit (loss). 5,013 3,253 4,345 (12,549)(b) 3,159 1,275 5,843 4,588 6,632 8,447
Net earnings (loss)..... 2,595 1,867 1,079 (9,786)(b) 1,152 8 (1,112)(c) 2,097 3,251 4,585
</TABLE>
- --------
(a)Includes only January 1996 as a result of a change of the Company's fiscal
year end.
(b)Includes goodwill impairment charge of $6.6 million.
(c)Includes merger-related costs of $4.7 million.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's primary capital requirements are for new store
openings, investments in the manufacturing operations, working capital and
acquisitions. The Company historically has met its capital requirements
through a combination of cash flow from operations, net proceeds from the sale
of the Company's Common Stock, bank lines of credit and standard payment terms
from suppliers.
In March 1997, the Board of Directors of the Company authorized management
to repurchase up to 1,000,000 shares of Common Stock of the Company. In
October 1997, Board of Directors of the Company authorized management of the
Company to repurchase up to an additional 1,000,000 shares of Common Stock. As
of December 1, 1997, the Company had repurchased 1,221,000 shares of its
Common Stock in the open market for a total of $14.9 million. These purchases
were financed from borrowings under the Company's revolving credit facility
and proceeds from the 144A Notes Offering. The ability of the Company to
repurchase its own shares is limited by the terms of the Notes and the Credit
Facility. See "Description of the Exchange Notes -- Certain Covenants --
Limitation on Restricted Payments."
Credit Facility. On August 26, 1997, the Company established the Credit
Facility providing for aggregate commitments of $130.0 million. The Credit
Facility consists of (i) a $70.0 million revolving credit facility of which
$22.6 million was available for borrowings on August 31, 1997, and which
matures in August 2000, (ii) a $29.0 million term loan that matures in
December 2002, and (iii) a special purpose letter of credit in the amount of
up to $31.0 million for use as credit support for the Summerville Loan to be
used to finance the expansion of
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Image's fiber extrusion capabilities at its plant in Summerville, Georgia that
matures in September 2017. Upon completion of the 144A Notes Offering, the
commitments under the revolving credit facility were permanently reduced to
$50.0 million. As of October 31, 1997, the Company had no borrowings
outstanding under either the revolving credit facility or the term loan. No
amounts have been drawn on the letter of credit. Amounts outstanding under the
Credit Facility bear interest at a variable rate based on LIBOR or the prime
rate, at the Company's option. The Credit Facility contains customary
covenants. The Company has obtained waivers of certain of these covenants in
connection with its investment in a company in which A.J. Nassar, the
President and Chief Executive Officer of the Company, is a director and
shareholder and in connection with certain loans to Mr. Nassar. See "Certain
Transactions." As of the date hereof, the Company was in compliance with, or
obtained waivers of all violations of, all covenants under the Credit
Facility. The Company used a portion of the net proceeds from the 144A Notes
Offering to repay all of the borrowings outstanding under the Credit Facility
prior to the sale of the 144A Notes. See "Use of Proceeds" and "Description of
Certain Other Indebtedness--Credit Facility."
Summerville Loan. Effective September 1, 1997, the Development Authority of
the City of Summerville, Georgia (the "Authority") issued Exempt Facility
Revenue Bonds in an aggregate principal amount of $30.0 million (the "Facility
Revenue Bonds"). On September 17, 1997 the Authority loaned (the "Summerville
Loan") the proceeds from the sale of the Facility Revenue Bonds to Image to
finance, in whole or in part, the expansion of Image's fiber extrusion
capabilities at its plant in Summerville, Georgia. The Facility Revenue Bonds
and the interest thereon are special, limited obligations of the Authority
payable solely from the revenues and income derived from the Loan Agreement
(as defined herein), which revenues and income have been pledged and assigned
by Image to secure payment thereof, and funds which may be drawn under the
special purpose letter of credit described above. The Facility Revenue Bonds
and the Summerville Loan will mature on September 1, 2017 and the interest
rate of the Facility Revenue Bonds is to be determined from time to time based
on the minimum rate of interest that would be necessary to sell the Facility
Revenue Bonds in a secondary market at the principal amount thereof. The
interest rate on the Summerville Loan equals the interest rate on the Facility
Revenue Bonds. See "Description of Certain Other Indebtedness--Summerville
Loan."
Other Debt. As of August 31, 1997, the Company also had approximately $1.3
million of debt outstanding under various term loans at interest rates ranging
from 6.0% to 13.0%.
Cash Flows. During the six months ended July 31, 1997, operating activities
provided $431,000 compared to $8.3 million for the six months ended July 31,
1996. The decrease in cash provided by operating activities resulted primarily
from an increase in inventories and accounts receivable. The increase in
inventories and accounts receivable was partially due to higher sales of
floorcovering products to franchisees and other carpet retailers. Also
contributing was an increase in accounts payable and accrued expenses relating
to construction in progress.
During fiscal 1997, operating activities provided $17.8 million compared to
a use of $5.2 million for fiscal 1996. 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. The decrease in inventory was also
partially due to higher sales of floorcovering products to franchisees and
other carpet retailers. Also contributing was an increase in accounts payable
and accrued expenses relating to construction in progress.
During the six months ended July 31, 1997, investing activities used $12.8
million compared to $7.1 million for the six months ended July 31, 1996. The
increase is primarily due to an increase in capital expenditures relating to
manufacturing operations and the purchase of a carpet retailer.
During fiscal 1997, investing activities used $18.7 million compared to
$29.4 million for fiscal 1996. The decrease is primarily due to a decrease in
acquisitions during fiscal 1997, which was partially offset by a $1.9 million
increase in capital expenditures.
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During the six months ended July 31, 1997, financing activities provided
cash of $10.9 million compared to cash used of $2.0 million in the six months
ended July 31, 1996. This increase is primarily due to proceeds received from
the issuance of the Company's Common Stock in a public offering.
During fiscal 1997, financing activities provided cash of $3.1 million
compared to cash provided of $36.5 million in fiscal 1996. 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 $85 million for the remainder of fiscal 1998 and in fiscal 1999
to (i) open approximately 60 new Gallery stores (assuming approximately 60% of
such stores will be located on Company-owned property and the remainder on
leased property), (ii) reconfigure three existing CarpetMAX stores, (iii)
expand its manufacturing capacity and (iv) upgrade its management information
systems. The Company estimates that capital expenditures to open a new Gallery
store at a leased location will average approximately $100,000, net of
supplier participations and landlord allowances, which average approximately
$75,000 per store. The Company estimates that capital expenditures to open a
Company-owned location will average approximately $1.0 million, net of
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 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. The Company anticipates that it will require approximately $36
million during the remainder of fiscal 1998 and in fiscal 1999 for capital
expenditures at Image, including approximately $29 million associated with the
expansion of Image's polyester fiber production capacity. The total cost of
this project is expected to be approximately $30 million during the remainder
of fiscal 1998 and fiscal 1999.
The Company believes that the net proceeds from the 144A Notes Offering,
borrowings under the Credit Facility, the Summerville Loan and cash flows from
operating activities will be adequate to meet the Company's working capital
needs, planned capital expenditures and debt service obligations through
fiscal 1999. As the Company's debt matures, the Company may need to refinance
such debt. There can be no assurance that such debt can be refinanced or, if
so, whether it can be refinanced on terms acceptable to the Company. If the
Company is unable to service its indebtedness, it will be required to adopt
alternative strategies, which may include actions such as reducing or delaying
capital expenditures, selling assets, restructuring or refinancing its
indebtedness or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on satisfactory terms, if at
all.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," effective for fiscal years and interim periods
ending after December 15, 1997. The Company has not evaluated the impact of
this pronouncement on its results of operations.
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BUSINESS
The Company operates and franchises one of the largest floorcovering
distribution networks in North America through two retail floorcovering
concepts: CarpetMAX, a full-service floorcovering store format, and GCO, a
cash-and-carry discount floorcovering store format. In addition, the Company,
through Image, is one of the largest manufacturers of polyester carpeting in
the United States. As a vertically integrated carpet manufacturer and a
leading floorcovering retailer, the Company believes that it is well
positioned to continue its leadership and growth in the approximately $15
billion floorcovering industry. For the twelve months ended July 31, 1997, the
Company's total revenues and EBITDA were $338.9 million and $37.2 million,
respectively.
Since commencing operations in 1991 as a franchisor of floorcovering stores,
the Company has grown its franchise network to include 377 franchise dealers
operating 448 CarpetMAX stores and 101 GCO stores in 49 states. The Company's
fees from franchise services consist of up front membership fees, either
ongoing royalties or product brokerage fees and fees for services such as
advertising and employee training. The rapid growth of the Company's franchise
network resulted in the development of an integrated retail infrastructure,
including store development, marketing, advertising, credit, sales training
and product sourcing resources. In an effort to leverage this retail
infrastructure, the Company began acquiring existing CarpetMAX franchisees in
fiscal 1995 and opening Company-owned stores in fiscal 1996. The Company
currently owns 57 CarpetMAX stores and six GCO stores.
The Company has further developed its full-service retail format to offer
customers a wide selection of competitively priced floorcovering products
through Gallery stores. The Company's Gallery stores are typically 6,500
square feet in size and offer approximately 20,000 SKUs, including an
extensive merchandising mix of carpet, area rugs, hardwood flooring, ceramic
tile, vinyl flooring, laminates and stone. Gallery stores are located in prime
retail locations with high consumer visibility and are staffed with
specialized floorcovering sales associates. Gallery stores offer a wide range
of services, including interior design consulting, measuring, delivery and
installation, and unconditional satisfaction guarantees. The Company's
strategy is to expand its ownership and operation of Gallery stores. The
Company currently operates 21 Gallery stores, including 10 stores which were
converted into Gallery stores from the original CarpetMAX format. For the
twelve months ended July 31, 1997, franchise operations and Company-owned
stores together accounted for 49.3% and 25.0% of the Company's total revenues
and EBITDA, respectively.
Through Image, the Company is one of the largest manufacturers of polyester
carpeting and one of the largest recyclers of PET soft drink bottles in the
United States. The Company converts PET bottles into PET flake and pellet and
polyester fiber which is either sold to third parties or spun into carpet
yarn, the raw material used in manufacturing polyester carpet. Image's
vertically integrated operations provide the Company's retail network with a
captive source of low cost, high quality private label polyester carpeting
with a price advantage relative to competitors. The Company believes that
polyester carpeting, which currently accounts for approximately 6% of
industry-wide carpet sales, will enjoy market share growth because of certain
advantages over other carpet fibers such as nylon, including superior stain
resistance and vibrant coloring. For the twelve months ended July 31, 1997,
Image sold 25.7 million square yards of polyester carpeting through the
Company's retail distribution network (13.7% of total Image sales volume) and
to over 6,000 independent domestic and international retailers and
distributors. For the twelve months ended July 31, 1997, Image accounted for
50.7% and 75.0%, of the Company's total revenues and EBITDA, respectively.
INDUSTRY OVERVIEW
According to Floor Focus, the carpet manufacturing industry has
substantially consolidated since 1986, and the Company believes that the
domestic retail floorcovering industry is also consolidating. For example,
Shaw, the largest domestic carpet manufacturer, has entered the retail
floorcovering market by acquiring independent retailers and building company-
owned stores. The approximately $15 billion floorcovering industry, however,
is still highly fragmented. With over 25,000 companies selling floorcoverings,
independent specialty flooring retailers account for 67.5% of industry sales,
while other vendors such as home centers, furniture stores, department stores
and mass merchants operate stores which account for the remainder of industry
sales. The
42
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typical independent floorcovering retailer operates a single store with
limited product selection and service. As a result, the Company believes that
most independent retailers face distinct competitive disadvantages, including
limited purchasing power for products and services, lack of national brand
name recognition, lack of product breadth and knowledge, and effective asset
management, merchandising, selling and store management techniques. The
floorcovering market consists of three distinct segments: residential
replacement (52% of industry sales, including full service and cash-and-
carry), specified contract (25% of industry sales) and builder (23% of
industry sales).
According to Floor Focus, the carpet manufacturing industry expanded
modestly in 1996 with total industry volume shipments up approximately 1.5% to
$10.0 billion from $9.8 billion in 1995. Floor Focus estimates that the total
value of broadloom carpet sales in 1996 was approximately $8.1 billion. It is
further estimated that polyester, nylon and polypropylene carpet comprised
approximately 6%, 62% and 31%, respectively, of the total carpet market in
calendar year 1996.
The recycled PET industry comprises a portion of the general plastics
recycling industry. The National Association for Plastic Container Recovery
("NAPCOR") reported that the recycled PET industry generated approximately 2.2
billion pounds of PET and high density polyethylene in 1996, of which PET
bottles comprised 48% with approximately 562 million pounds of PET bottles
recycled. However, the recycling rate for PET bottles decreased to 26% in 1996
from 32% in 1995, due to, among other factors, the production of certain types
of PET bottles which are less likely to be recycled. According to NAPCOR,
fiber is the largest use of recycled PET, increasing from approximately 277
million pounds in 1995 to 292 million pounds in 1996. The Freedonia Group, an
international industry study and database company, reports that the U.S.
market demand for recycled PET is expected to grow annually by 11% through the
year 2000 primarily due to expanding markets in fiber application uses in
apparel, carpet and other commercial textiles.
STRENGTHS
The Company believes that its extensive retail network, combined with its
manufacturing operations, positions the Company for continued growth in
revenues and EBITDA. Several of the Company's key business strengths include:
Distinct Retailing Strategies. The Company's retail floorcovering sales are
diversified across the residential replacement, home builder and specified
contract markets. CarpetMAX offers a wide selection of floorcovering products
with a high level of customer service to a broad consumer spectrum, while GCO
offers discount floorcovering products to the cash-and-carry, do-it-yourself
customer. The Company believes that the breadth of its retail network and the
diversity of its targeted customer markets helps to mitigate the impact of
changes in local competitive or economic conditions on revenues.
Significant Product Sourcing Capabilities. The Company's large retail
network provides significant purchasing power which enables the Company to
realize advantageous pricing, delivery terms and merchandising programs. The
Company has established close relationships with major suppliers across all
floorcovering categories. By capitalizing on suppliers' production and
delivery capabilities, the Company offers one of the largest selections of
high quality floorcovering products, generally on a private label and just-in-
time basis, thereby minimizing inventory risk and maximizing retail
profitability. Furthermore, Image's carpet manufacturing capacity provides the
Company with a captive source of high quality carpet products to support its
expanding retail network.
Extensive Retailing Infrastructure. In order to service its retail
floorcovering network, the Company has built an extensive retail
infrastructure, including store development, marketing, advertising, credit
program, sales and management training, and product sourcing resources. The
Company will continue to leverage these resources to support the opening of
new Gallery stores and the expansion of other distribution channels. In
addition, the Company has assembled a strong management team with an average
of more than 10 years of retailing experience.
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Diversified Cash Flow Streams. The Company's established franchise
operations generate stable cash flows, with a low overhead structure, from
brokerage fees earned on CarpetMAX franchisees' purchases, royalties earned on
GCO franchisees' store sales and other related fees for advertising, training
and distribution services. In addition, Image provides a strong and growing
source of cash flow, as it uses the Company's affiliated distribution network
of Company-owned and franchised floorcovering retailers to distribute high
margin, value added polyester carpet. Cash flow generated from franchise
operations and Image's operations provide a stable base to fund capital
expenditures, including the roll-out of Company-owned Gallery stores.
Strong Financial Position. The Company's total revenues and EBITDA have
increased from $122.6 million and $16.6 million, respectively, in fiscal 1994
to $338.9 million and $37.2 million, respectively, for the twelve months ended
July 31, 1997. The Company's strong financial performance has provided it with
the financial flexibility to fund its growth objectives with a combination of
cash flow from operations, proceeds from the issuance of the Company's Common
Stock and bank borrowings.
BUSINESS STRATEGY
The Company's strategic objective is to establish the largest and most
profitable floorcovering distribution network in North America. To achieve
this objective, the Company is pursuing the following strategies:
Expand Company-Owned Store Base. A key element of the Company's growth
strategy is to expand its ownership and operation of Gallery stores by opening
approximately 60 Gallery stores over the next 18 months principally in
existing and contiguous market areas. 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 believes that the
roll-out of Gallery stores will enhance profitability as the Company further
leverages its retail infrastructure.
Expand GCO Franchise Network. The Company's strategy is to expand its
franchise network by adding approximately 25 GCO franchises per year, further
leveraging its retail and manufacturing infrastructure. The Company believes
that the expansion of the GCO franchise network complements the expansion of
the Gallery store base given their alternative operating formats. Further,
with only 70 of the 265 ADIs currently covered by GCO stores, the Company
believes significant growth opportunities exist.
Increase Manufacturing Capacity. In order to capitalize on the increasing
demand for polyester fiber, the Company is in the process of expanding its
fiber extrusion capacity. The additional capacity, which is expected to become
fully operational by the end of calendar 1998, will increase Image's annual
fiber production capacity to 150 million pounds from 100 million pounds. The
additional capacity will enable the Company to continue to optimize Image's
profitability by shifting output from lower margin commodity products such as
PET pellet and flake to higher margin polyester fiber and carpet.
Pursue Selected Acquisitions. The Company believes it is uniquely positioned
to capitalize on the consolidation occurring in the retail floorcovering
industry and thereby further its goal of becoming the largest floorcovering
distribution network in North America. Although the Company's primary focus is
on opening Company-owned Gallery stores, the Company intends to selectively
pursue the acquisition of independent floorcovering retailers in new markets
which offer the potential for the Company to build substantial market share.
In addition, the Company may selectively acquire existing CarpetMAX
franchisees to provide a platform for new store openings.
RETAIL OPERATIONS
CarpetMAX Stores. CarpetMAX stores carry a broad variety of CarpetMAX
private label floorcovering products from leading manufacturers, including
high quality polyester carpets manufactured by Image. In May 1994, the Company
commenced a store acquisition strategy and as of October 31, 1997, the Company
had acquired 14 full-service floorcovering operations currently representing
35 stores operating under the CarpetMAX brand name. In April 1995, the Company
began opening Company-owned CarpetMAX stores and
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as of the date hereof, the Company had opened 14 CarpetMAX stores (10 of which
have been converted into Gallery stores) and eleven new Gallery stores. The
Company currently operates 57 CarpetMAX stores, including 21 Gallery 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 approximately 60 Gallery stores during the remainder
of fiscal 1998 and fiscal 1999 in existing, contiguous and targeted new
markets. The Company currently operates 21 Gallery stores, including 10
converted CarpetMAX stores.
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 is 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, 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 20,000 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
CarpetMAX store, the Company believes that the Gallery store will meet
increasing consumer demand for alternatives to traditional carpet products.
Georgia Carpet Outlets. GCO operates six discount floorcovering stores under
the name "GCO Carpet Outlets(R)" catering to the cash-and-carry floorcovering
market. GCO stores average approximately 10,000 square feet of retail selling
space and unlike CarpetMAX or Gallery stores, a GCO store maintains all of its
products in inventory. Replacement inventory is provided through the Company's
distribution center in Summerville, Georgia. GCO stores derive more than 70%
of their revenues from the sale of carpet, with the balance consisting of pad,
hardwood and vinyl flooring sales. GCO caters primarily to cash-and-carry
consumers who are price sensitive and 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.
FRANCHISE OPERATIONS
The Company is the largest franchisor of floorcovering stores in the United
States. The Company currently has (i) 101 GCO franchise stores operating in 70
of the 265 ADIs in the United States and (ii) 276 franchise dealers operating
approximately 448 CarpetMAX stores. Because of the different nature of their
business, CarpetMAX and GCO franchisees may be established in the same
territory. The Company markets GCO franchises to CarpetMAX franchisees;
however, the Company does not permit GCO 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 three franchisees
operating both GCO and CarpetMAX franchises. In addition to GCO and CarpetMAX
franchises, in February 1997, the Company began to offer maxCARE(TM)
franchises to address the increased demand for carpet and upholstery cleaning
services. As of the date hereof, the Company has sold 18 maxCARE franchises.
GCO Franchise Network. The Company generates revenues from GCO franchisees
through both up-front fees from store openings and royalty fees based on store
sales. The GCO franchise fee is $25,000 and each 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. The GCO franchise agreement requires
franchisees to purchase all advertising
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media services from the Company and to spend approximately 5% to 15% of
budgeted gross revenues per quarter on such services. To serve the needs of
its franchisees, the Company has continued to expand the scope of services
available to GCO franchisees. The Company now offers services relating to site
selection, merchandising, advertising and promotion, management and sales
training, credit, information systems and other store operations.
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 "Exclusive Territory"). Provided that the franchisee is
not in default, the Company may not grant more than one GCO franchise within
an Exclusive Territory, nor may the Company or any affiliate of the Company
operate a Company-owned discount floorcovering store using the licensed marks
or the GCO franchise system within an Exclusive Territory without the
franchisee's consent. Major metropolitan market areas, however, may be divided
into a number of Exclusive Territories. GCO franchise agreements have a term
of 10 years, may be renewed for two additional consecutive terms of five years
and may be terminated by (i) the franchisee in the event that the Company
breaches the franchise agreement or (ii) the Company upon the occurrence of
certain events of default as set forth in the franchise agreement.
CarpetMAX Franchise Network. The Company generates revenues from CarpetMAX
franchisees through three primary sources: franchise fees, brokerage fees from
franchisees' 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. The CarpetMAX franchise agreement requires
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
franchisee is not in default, as defined in the franchise agreement, 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.
CarpetMAX franchise agreements have an indefinite term and generally may be
terminated by (i) the franchisee in the event that the Company breaches the
franchise agreement or, within three days of execution of the franchise
agreement, the franchisee disapproves of the initial price list provided to
the franchisee for the various floorcovering products and services provided by
the Company or (ii) the Company upon the occurrence of certain events of
default as set forth in the franchise agreement.
maxCARE Franchise Network. Under the maxCARE System, franchisees offer
carpet and upholstery cleaning and related services to both individuals and
businesses. These services are provided using a proprietary maxCARE carpet
cleaning machine which is mounted in a van bearing the Company's distinctive
colors and signage. Each maxCARE franchisee receives an exclusive operating
territory, which is typically one or more counties within a state, where such
franchisee is required to offer the products and services specified by the
Company. The Company expects a significant number of maxCARE franchises will
be operated by CarpetMAX franchisees or other entities who currently operate
retail businesses that are complementary with the services offered by maxCARE
franchises. Each maxCARE franchisee is required to purchase certain products
from the Company and may purchase services from several of the Company's
divisions including Maxim Marketing and Humax. Each franchisee must pay an
initial franchise fee based upon the population in the franchisee's operating
territory, with a minimum initial franchise fee of $12,500. maxCARE franchise
agreements have a term of 10 years, may be renewed for one additional term of
10 years and may be terminated by (i) the franchisee in the event that the
Company breaches the franchise agreement or (ii) the Company upon the
occurrence of certain events of default as set forth in the franchise
agreement.
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<PAGE>
In addition to the initial franchise fee, all maxCARE franchisees must
purchase one or more MaxMaster Systems from the Company before they begin
operations. The MaxMaster System includes (i) the MaxMaster carpet cleaning
machine, which is mounted in a specially equipped van and (ii) an accessory
packet which is installed in the van and which includes upholstery wands, a
maintenance kit, hoses, fresh water tank, chemical shelf, storage box arranger
and other accessories. All franchisees must pay a royalty of between 4% to 6%
of their gross sales, subject to a minimum monthly royalty payment of $200 per
month during the first year, with minimum monthly royalty increases of $200
per month during each successive year, up to a maximum of $1,000 per month
during the fifth year and thereafter. All franchisees must contribute 2% of
gross sales to a national advertising fund administered by the Company and
must spend not less than 8% of gross sales on local advertising.
RETAIL INFRASTRUCTURE
Supplier Relationships. The Company believes it obtains high quality
products at a low cost due to the collective 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. In addition, the Company's
use of its suppliers' efficient distribution networks permits it to maintain
low inventory levels.
In addition to Image's carpet products, the Company offers a full range of
floorcovering products from other leading manufacturers. The following table
lists the Company's major suppliers of certain of its floorcovering products.
<TABLE>
FLOORCOVERING PRODUCTS MANUFACTURER
---------------------- ------------
<S> <C>
Broadloom Carpet...... Shaw Industries, Inc., Mohawk Industries, Inc.,
Milliken & Co., Beaulieu of America, Inc., Queen Carpet
Corporation and World Carpet, Inc.
Vinyl Flooring........ Armstrong World Industries, Inc., Mannington Resilient Floors, Inc.
and Congoleum Corporation
Hardwood Flooring..... Bruce Hardwood Floors and Hartco Hardwood Floors (each a division
of Triangle Pacific Corporation) and Harris-Tarkett, Inc.
Ceramic Tile.......... American Marazzi Tile, Inc. and Dal-Tile International
Laminates............. Perstorp Flooring AB (Pergo), Wilsonart International, Inc. (a division of
PreMark International) and Duralast (a division of Mills Pride Company)
</TABLE>
Each of these suppliers is one of the leaders 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 retail 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.
To further expand and develop the national brand awareness of CarpetMAX
floorcovering products and services, the Company has utilized a comprehensive
national and regional marketing strategy that emphasizes
47
<PAGE>
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. The Company offers a
variety of training programs to its CarpetMAX franchisees on a fee basis.
These programs range from daily classes to intensive one-week programs. 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, proprietary credit program, store
operations, general business practices and inter-company operations.
To further enhance its training capabilities, the Company utilizes an
interactive digital video and audio satellite communications system 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, contract
negotiation and build-out of Company-owned and franchised GCO stores to
accelerate store openings and minimize opening costs. In locating sites, the
store development department evaluates the economic conditions, demographics,
growth and customer base of potential markets as well as possible competition.
The Company also targets areas with significant new residential building
activity or older, more established communities where remodeling is likely to
occur. Within each market, the Company seeks to locate Gallery stores in prime
retail locations with high consumer visibility. The Company's strategy is to
open multiple stores within each market to achieve management, operating and
advertising efficiencies and to create barriers to competitive entry or
expansion. 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. 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.
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. Using its current information systems, 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. The Company has worked 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.
Installation of the new information system began in August 1997 and the
Company expects to complete implementation of the system by the end of
calendar 1999.
48
<PAGE>
BUILDER AND SPECIFIED CONTRACT OPERATIONS
To expand market share and enhance its management expertise in the builder
market of the floorcovering industry, the Company has acquired companies with
excellent reputations in the builder market, including Tri-R, a CarpetMAX
franchisee with a presence in the Orlando, Florida area builder market. The
Company services the builder market primarily in local areas where it has
established regional service centers and a base of CarpetMAX stores. By
leveraging the established infrastructure available in these local markets,
the Company seeks to utilize its extensive merchandise mix, product displays,
sales personnel and customer service capabilities to cater to the builder
customer's needs. Through the recent acquisition of a leading company in the
Tennessee specified contract market, the Company is developing its presence in
the specified contract market of the floorcovering industry. The specified
contract business caters primarily to the floorcovering requirements of larger
commercial customers. The Company serves specified contract customers from the
project specification stage through securing, delivering, installing and
maintaining the floorcovering product.
CUSTOMER SERVICE
The Company seeks to differentiate itself from other independent and large
retailers through its service offerings. Accordingly, CarpetMAX and Gallery
stores offer retail customers the following services:
Interior Design and Product Selection. CarpetMAX and Gallery 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 ensure customer satisfaction, the Company offers a 30-day
unconditional satisfaction guarantee. CarpetMAX sales professionals seek
opportunities to visit a customer's home or commercial location to verify
proper installation and to identify additional sales opportunities.
Delivery and Installation. CarpetMAX and Gallery 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. This consumer credit program is marketed as the
"Wall-to-Wall" credit program and is exclusively for the use of the Company's
CarpetMAX and Gallery 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 and Gallery 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. For the six
months ended July 31, 1997, approximately 10% of the Company's retail sales
were to customers who financed their purchases through the Wall-to-Wall credit
program. The Company also offers longer term (up to three years) third-party
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, a wholly-owned subsidiary of the Company merged with
Image, a leading manufacturer of polyester carpet, to establish a captive
source of low cost, high quality private label polyester carpeting with a
price advantage relative to its competitors due to its vertically integrated
operations. Image is vertically integrated from the recycling of PET bottles
and other post-consumer and post-industrial PET waste
49
<PAGE>
materials through the manufacturing of polyester fiber and carpet products.
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 began manufacturing carpets in 1976 primarily
for the residential market. Image designs, manufactures and markets 57 carpet
styles and maintains approximately 1,400 SKUs consisting of a range of colors,
densities and textures. Image's carpet manufacturing operations include yarn
spinning, tufting, dyeing and finishing operations. The principal raw
materials used in Image's carpet manufacturing operations are polyester fiber,
synthetic backing materials and various dyes and chemicals. Although the
Company currently has the capacity to convert approximately 70.0 million
pounds of fiber into polyester carpet annually, in fiscal 1997 the Company
converted only 57.6 million pounds of fiber into carpet. The Company intends
to manufacture additional polyester carpet by utilizing this additional
capacity.
During fiscal 1997, Image purchased recycled PET from approximately 360
suppliers for conversion into clean PET resin. Image extrudes clean PET resin
into polyester fiber, which it spins into carpet face yarn. Image's yarn
spinning mills produce either spun polyester yarn or polyester/nylon blended
yarn primarily from the polyester fiber produced internally. The staple fiber
is drawn until the desired size is produced, and then the ends are twisted
together to create a continuous strand. After twisting, the yarn is then heat-
set and wound onto cones. Image's spinning mills currently have a total
production capacity of approximately 45 million pounds of spun yarn per year.
Additional yarn spinning conversion is performed on a contract basis by
several third-party contractors with whom Image enjoys a long-term
relationship.
The yarn produced in Image's spinning mills is then tufted into undyed and
unfinished carpet and later dyed and finished into one of the Company's
various carpet styles. The process of tufting involves needling the yarn into
a primary backing at the desired pile height. This process produces a large
roll of undyed carpet. Image has tufting capacity of approximately 27.0
million square yards per year. Image utilizes a sophisticated dyeing system
which involves the placing of a roll of carpet in a heated, pressurized
chamber containing water, chemicals and dyes. Image dyes carpet manufactured
from both clear and green polyester fiber into a wide variety of colors. Image
currently has dyeing capacity of approximately 27.0 million square yards per
year. After dyeing, the carpet is ready for the final processes required to
convert tufted and dyed rolls into a finished product. The rolls receive an
application of adhesive, a sturdy secondary backing, and are dried or "cured"
through the circulation of heated air in a finishing oven. A small amount of
fiber is then sheared from the top of the carpet, and the rolls receive a
final inspection. Image has finishing capacity of approximately 30.0 million
square yards per year.
Image converts approximately 52% of its clean PET into polyester carpet. The
balance is sold as PET flake and pellet to producers of packaging and other
materials or converted into polyester fiber and sold to home furnishings
producers. During fiscal 1997, a total of 59 companies purchased approximately
32.6 million pounds of fiber and PET produced by Image. Over the next 12
months, Image expects to install an additional recycling and extrusion line
capable of extruding 50.0 million pounds of staple polyester fiber annually.
Carpet Marketing and Sales. Image has positioned its products in the medium
price range for carpets sold domestically and in the low price range for
carpets sold internationally and emphasizes quality, style and service. Image
markets its carpets domestically and internationally through a direct sales
force of approximately 66 full-time sales representatives and eight
independent sales agents. Image's carpets are sold through over 6,000
independent retailers and distributors. Following its merger with a wholly-
owned subsidiary of 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.
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
50
<PAGE>
into the retail floorcovering sector. Pursuant to this strategy, Shaw has
acquired Carpetland USA, Inc., New York Carpet World, Inc. and several other
prominent dealers and has opened a number of retail stores such that Shaw has
become a major competitor. In addition, large retailers also provide
significant competition, including The Home Depot, Inc., Lowe's Corporation
and Sears, Roebuck & Co. The principal areas of competition within the retail
floorcovering industry include store location, product selection and
merchandising, customer service and price. The Company believes that there are
two primary competitors to its CarpetMAX 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 1996 sales were estimated to represent approximately 28% of the total
industry sales. In addition, carpet sales by Mohawk Industries, Inc. in 1996
were estimated to represent approximately 18% 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. 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.
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, a suburb
of Atlanta. 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.
As of December 1, 1997, the Company also leased 63 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
AREA
(SQUARE
IMAGE LOCATIONS PRIMARY USE FEET)
--------------- ----------- -----------
<S> <C> <C>
Armuchee, Georgia(a).... Executive Office, Carpet Tufting, 232,000
Finishing and Storage
Calhoun, Georgia(b)..... PET Storage 92,000
Lylerly, Georgia(b)..... PET Storage 54,000
Rome, Georgia(a)........ Carpet Dyeing and Sample Processing 216,000
Rome, Georgia(b)........ PET Storage 140,000
PET Storage 41,000
Rome, Georgia(a)........ Yarn Spinning 211,000
Shannon, Georgia(a)..... Finished Carpet Storage and Distribution 308,000
Summerville, Georgia(a). PET Sortation, Granulation, Washing, Fiber 366,000
Fiber Extrusion and PET Pellet
Extrusion, Storage and Shipping
Talladega, Alabama(a)... Yarn Spinning 82,000
Melville, New York(b)... PET Purchasing Office 425
Dillon, South
Carolina(a)............ Yarn Spinning 102,000
</TABLE>
51
<PAGE>
- --------
(a) These plants are owned, with the exception that the plant in Summerville,
Georgia is leased pursuant to a capital lease from the Authority. 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; 44 acres
at Summerville, Georgia; and 35 acres at Shannon, Georgia.
(b) 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.
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), CARPET MAX(R), CARPETMAX THE NATIONAL
CARPET EXCHANGE(R), MAKING A WORLD OF DIFFERENCE(R) and CARPETMAX Making a
World of Difference(R). The Company has also applied for registration of
several other marks including carpetMAX Flooring Idea Gallery(TM), maxCARE(TM)
and maxCARE-Professional Cleaning Systems(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 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(R),
Enviro-Tech(R), Image(TM) and Classique(R).
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 August 31, 1997, the Company employed approximately 2,600 persons,
including approximately 900 persons at its retail operations and approximately
1,700 persons at its manufacturing operations. No employee is a party to any
collective bargaining agreement and the Company believes that 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.
52
<PAGE>
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.
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 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.
53
<PAGE>
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
---- --- -------------------------
<C> <C> <S>
M.B. Seretean.............. 73 Chairman of the Board
President, Chief Executive Officer and
A.J. Nassar................ 41 Director
James W. Inglis............ 54 Chief Operating Officer, Senior Executive
Vice President and Director
Senior Executive Vice President and Director;
H. Stanley Padgett......... 50 President of Image
Executive Vice President, Finance and
Thomas P. Leahey........... 36 Treasurer
Sandra Fowler.............. 35 Executive Vice President, Administration
Herbert A. Biggers......... 47 Executive Vice President, Operations
H. Gene Harper............. 36 Chief Financial Officer and Secretary
David E. Cicchinelli....... 45 Director
Richard A. Kaplan.......... 52 Chairman Emeritus and Director
J. Michael Nixon........... 52 Director
Herb Wolk.................. 65 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. Mr. Nassar also serves as a director of North
Atlantic Acquisition Corp.
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. Mr. Inglis
serves as a director of K&G Men's Center, Inc., a clothing retailer.
H. Stanley Padgett has served as a Senior Executive Vice President and
Director of the Company since August 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. Mr. Padgett was elected to the Board of
Directors of the Company in August 1996 in accordance with the terms of the
merger agreement with Image.
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 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.
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<PAGE>
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.
Herbert A. Biggers has served as Executive Vice President, Operations of the
Company since August 1997 and as President of CarpetMAX Retail from April 1997
to August 1997. From July 1996 to April 1997, Mr. Biggers served as the
Company's Senior Vice President of Retail Operations. 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.
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.
David E. Cicchinelli has served as a director of the Company since October
1997. Mr. Cicchinelli has served as the President and Chief Executive Officer
of Color Tile, Inc., a retail floorcovering company, since April 1996. Prior
to joining Color Tile, Inc., Mr. Cicchinelli served as the President and Chief
Operating Officer of Carpetland USA, Inc., a retail floorcovering company,
from 1984 to April 1996.
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 Worksmart International, Inc., a personnel
consulting company, since 1995. Mr. Kaplan served as Chairman of the Board of
Richland Industries Corp., a retail floorcovering chain based in Rochester,
New York, from 1972 to 1995.
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.
Ben S. Wu, age 46, has served as Senior Vice President of Real Estate
Operations of the Company 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 33, has served as Vice President of Marketing of the
Company 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.
Paul R. Renn, age 42, has served as Director of the Company's Idea Gallery
Store program since June 1996. Mr. Renn served as Retail Regional Manager of
the Company from October 1995 through June 1996. Prior to joining the Company,
Mr. Renn served as a franchise sales person for Abbey Carpet from April 1995
to October 1995, and as a general manager for The Carpet Exchange, Inc., a
retail floor covering company, from 1989 to 1995.
55
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain summary information for fiscal 1997,
1996 and 1995 concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and the other executive
officers of the Company whose total annual salary and bonus exceeded $100,000
during fiscal 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- ------------
OTHER NUMBER OF
NAME AND ANNUAL OPTIONS OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(A) AWARDED COMPENSATION
------------------ ---- -------- ------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
A.J. Nassar............. 1997 $229,479 $ -- $2,295 200,000 --
President and Chief 1996(b) 165,456 25,000 1,654 142,400(c) --
Executive Officer 1995 205,750 -- 1,653 110,000(d) --
James W. Inglis......... 1997(e) $175,176 $ -- $ -- 200,000 $116,250(f)
Chief Operating Officer
H. Stanley Padgett...... 1997(g) $170,200 $ -- $ -- -- --
Senior Executive 1996(h) 284,200 -- -- -- --
Vice President 1995(i) 262,500 20,000 -- -- --
Larry M. Miller(j) ..... 1997(g) $138,500 $ -- $ -- -- --
1996(h) 231,900 -- -- -- --
1995(i) 212,500 20,000 -- -- --
</TABLE>
- --------
(a) Represents the Company's matching contribution under its 401(k) plan.
(b) Represents compensation for the ten month period ended January 31, 1996,
which period was the result of a change in the fiscal year end of the
Company from March 31 to January 31.
(c) Includes options to purchase 40,000 shares of Common Stock which were
subsequently canceled.
(d) Includes options to purchase 62,400 shares of Common Stock which were
subsequently canceled.
(e) Mr. Inglis joined the Company in May 1996.
(f) Represents the discount to fair market value in connection with the
purchase by Mr. Inglis of 50,000 shares of Common Stock from the Company
in May 1996.
(g) Amounts indicated include compensation paid to Messrs. Miller and Padgett
by (i) the Company and Image subsequent to the acquisition of Image by the
Company on August 30, 1996 and (ii) Image for the period from June 30,
1996 to August 30, 1996.
(h) Represents compensation paid to Messrs. Miller and Padgett by Image for
its fiscal year ended June 29, 1996.
(i) Represents compensation paid to Messrs. Miller and Padgett by Image for
its fiscal year ended July 1, 1995.
(j) Mr. Miller served as a Senior Executive Vice President of the Company and
on the Board of Directors of the Company until August 1997.
EMPLOYMENT AGREEMENTS
On June 4, 1997, the Company entered into an Employment Agreement with A.J.
Nassar, pursuant to which Mr. Nassar will serve as Chief Executive Officer of
the Company. The Employment Agreement is for a term of three years, expiring
on June 4, 2000, and provides for an annual base salary of $400,000 plus an
annual bonus of $200,000 for each fiscal year in which the Company attains
certain earnings targets established by the Board of Directors. The Employment
Agreement will automatically renew unless it is earlier terminated or either
the Company or Mr. Nassar elect not to renew the Employment Agreement. The
Employment Agreement provides for certain severance payments to be paid to Mr.
Nassar in the event of a change in control of the Company. In the event of a
change in control, Mr. Nassar will be entitled, during the term of his
Employment Agreement, to
56
<PAGE>
terminate his employment with the Company and, subject to certain adjustments,
to receive a lump sum cash payment equal to two years' salary, as well as 12
months' provision of employee benefits and a pro rata portion of his annual
bonus. In the event Mr. Nassar is terminated by the Company without cause, he
will receive during the balance of his term of employment (not to exceed 24
months), the annual base salary which would otherwise be payable to Mr. Nassar
had he remained in the employ of the Company. In addition, all unvested stock
options will become immediately exercisable and Mr. Nassar will receive 12
months provision of employee benefits and a pro rata portion of his annual
bonus. The Employment Agreement contains non-compete and non-solicitation
provisions, effective through the actual date of termination of the Employment
Agreement and for a period of two years thereafter.
On August 30, 1996 and again on July 30, 1997, H. Stanley Padgett entered
into amendments to his employment agreement with Image. Under the amended
agreement, which will expire on July 30, 2000, Mr. Padgett serves as a Senior
Executive Vice President of the Company and as the President and Chief
Executive Officer of Image. Mr. Padgett will be entitled to receive an annual
base salary of $295,000 which is subject to increase at the discretion of the
Compensation Committee, plus certain specified benefits and other benefits
generally available to other senior executive officers of Image. The
employment agreement provides that the Compensation Committee may also grant
an annual bonus to Mr. Padgett. In the event that Mr. Padgett's employment is
terminated without cause, as defined under the agreement, he is entitled to a
severance payment equal to the salary which would be owed to him through the
remainder of the term of the agreement, but in no event less than one years'
then-current salary, as well as a bonus equal to the average of the two prior
years annual bonuses. In addition, certain benefits shall be continued for a
period of six months, and all unvested options held by Mr. Padgett which would
vest in the year of termination shall vest in full. In the event of
termination of Mr. Padgett's employment for any reason other than cause within
12 months after a change in control, the Company shall pay Mr. Padgett an
amount equal to his annual base salary as then in effect, in lieu of any other
severance payment, and shall continue certain benefits, including a company
automobile and medical, life and disability insurance, for a period of six
months. If Mr. Padgett's employment is terminated for cause, or if he
voluntarily terminates his employment with Image, he shall not be entitled to
a severance payment or bonus and shall be subject to a one-year noncompetition
covenant. Termination of employment includes death, disability, voluntary
termination by the employee or involuntary termination by Image with or
without cause, which would include a material change in position or
responsibility.
On August 30, 1996, and again on June 30, 1997, Larry M. Miller entered into
amendments to his employment agreement with Image. Mr. Miller's amended
employment agreement contains substantially the same terms as described above
for Mr. Padgett except that under the amended employment agreement, which
expires on December 31, 1997, Mr. Miller serves as the Marketing Advisor of
Image and is entitled to receive a base salary of $240,000. In addition, in
August 1997, the Company made a lump sum payment of $175,000 to Mr. Miller
pursuant to the terms of his employment agreement. In the event that Mr.
Miller's employment is terminated without cause, Mr. Miller is entitled to a
severance payment equal to the salary which would be owed to him through the
remainder of the term of the agreement. In addition, certain benefits would be
continued until December 31, 1997 and all unvested options held by Mr. Miller
which would vest prior to the end of his term of employment shall vest in
full. If Mr. Miller's employment is terminated for cause, or if he voluntarily
terminates his employment with Image, Mr. Miller shall not be entitled to a
severance payment. Under the terms of the amended employment agreement, after
December 31, 1997, Mr. Miller is not bound by any non-competition or non-
solicitation covenants contained in the amended employment agreement. The
amended employment agreement further requires Mr. Miller to resign from the
Board of Directors of the Company on or before December 31, 1997. Mr. Miller
resigned from the Board of Directors of the Company and as a Senior Executive
Vice President of the Company in August 1997.
DIRECTORS' FEES
Directors of the Company who are compensated as officers of the Company
serve without compensation for their services as directors. All directors of
the Company are reimbursed by the Company for all out-of-pocket
57
<PAGE>
expenses reasonably incurred by them in the discharge of their duties as
directors, including out-of-pocket expenses incurred in attending meetings of
the Board of Directors and of any committees of the Board of Directors. In
addition, from time to time, certain of the Company's outside directors assist
in conducting workshops and orientation sessions for the Company's
franchisees, for which they customarily have been paid consulting fees of
$10,000 annually.
In addition, the Company has from time to time granted options to purchase
Common Stock to certain of its outside directors. Option grants are generally
exercisable over a period of ten years at an exercise price equal to the fair
market value of the Company's Common Stock on the date of grant. The following
directors have been granted stock options by the Company: M.B. Seretean
(options to purchase 425,000 shares of Common Stock), J. Michael Nixon
(options to purchase 55,000 shares of Common Stock) and David E. Cicchinelli
(options to purchase 15,000 shares of Common Stock).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as members of the Compensation Committee of the
Board of Directors during fiscal 1997: Ronald McSwain and M.B. Seretean. None
of the members of the Compensation Committee has been an officer or employee
of the Company or any of its subsidiaries. Except as set forth herein under
"Certain Transactions," there were no material transactions between the
Company and any of the members of the Compensation Committee during fiscal
1997.
STOCK OPTION PLAN
The Company has adopted a 1993 Stock Option Plan, as amended (the "1993
Plan") for employees who are contributing significantly to the management or
operation of the business of the Company or its subsidiaries as determined by
the Company's Board of Directors or the committee administering the 1993 Plan.
The 1993 Plan provides for the grant of options to purchase up to 3,000,000
shares of the Company's Common Stock at the discretion of the Board of
Directors of the Company or a committee designated by the Board of Directors
to administer the 1993 Plan. The option exercise price must be at least 100%
(110% in the case incentive stock options granted to a holder of 10% or more
of the Common Stock) of the fair market value of the Common Stock on the date
the option is granted and the options are exercisable by the holder thereof in
full at any time prior to their expiration in accordance with the terms of the
1993 Plan. Stock options granted pursuant to the 1993 Plan will expire on or
before (1) the date which is the tenth anniversary of the date the option is
granted, or (2) the date which is the fifth anniversary of the date an
incentive stock option is granted in the event that the option is granted to a
key employee who owns more than 10% of the total combined voting power of all
classes of stock of the Company or any subsidiary of the Company.
The following table provides certain information concerning individual
grants of stock options under the 1993 Plan made during fiscal 1997 to the
Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS EXERCISE PRICE APPRECIATION
GRANTED TO OR BASE FOR
OPTIONS EMPLOYEES IN PRICE OPTION TERM (A)
GRANTED FISCAL ($ PER EXPIRATION ---------------------
NAME (#) YEAR SHARE) DATE 5% 10%
---- ------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
A.J. Nassar............. 200,000(b) 26% $11.25 4/26/06 $1,415,000 $3,586,000
James W. Inglis......... 200,000(c) 26% $11.25 4/26/06 $1,415,000 $3,586,000
H. Stanley Padgett...... -- -- -- -- -- --
Larry M. Miller......... -- -- -- -- -- --
</TABLE>
- --------
(a) The dollar amounts under these columns represent the potential realizable
value of each grant of option assuming that the market price of the
Company's Common Stock appreciates in value from the date of grant at the
5% and 10% annual rates prescribed by the Commission and therefore are not
intended to forecast possible future appreciation, if any, of the price of
the Company's Common Stock.
(b) Options are immediately exercisable. In addition, on May 1, 1997, Mr.
Nassar was granted an option to purchase 175,000 shares of Common Stock at
an exercise price of $11.00 per share, which options are immediately
exercisable.
(c) Options to purchase 100,000 shares of Common Stock are immediately
exercisable. Options to purchase 100,000 shares of Common Stock are
exercisable in increments of 20% per year commencing on April 26, 1997.
58
<PAGE>
The following table provides certain information concerning the value of
unexercised options held by the Named Executive Officers as of January 31,
1997. No stock options were exercised during fiscal 1997 by the Named
Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL YEAR THE-MONEY OPTIONS AT
END FISCAL YEAR-END(A)
------------------------- ------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABE
---- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
A. J. Nassar................. 321,440 28,560 $1,912,248 $141,372
James W. Inglis.............. 100,000 100,000 $525,000 $525,000
H. Stanley Padgett........... 441,320 -- $6,864,600 $ --
Larry M. Miller.............. 155,020 -- $2,556,280 $ --
</TABLE>
- --------
(a) Dollar values were calculated by determining the difference between the
fair market value of the underlying securities at January 31, 1997 ($16.50
per share) and the exercise price of the options.
EMPLOYEE RETIREMENT SAVINGS PLAN
The Company has established a savings and profit-sharing plan that qualifies
as a tax-deferred savings plan under Section 401(k) of the Internal Revenue
Code (the "401(k) Plan") for its salaried employees who are at least 21 years
old and who have completed one year of service with the Company. Under the
401(k) Plan, eligible employees may contribute up to 20% of their gross salary
to the 401(k) Plan or $9,650 whichever is less. Each participating employee is
fully vested in contributions made by such employee. The Company presently
matches 25% of the amount contributed by an employee up to 6% of the
employee's salary, but the Company's policy regarding matching contributions
may be changed annually in the discretion of the Board of Directors. All
amounts contributed under the 401(k) Plan are invested in one or more
investment accounts administered by an independent plan administrator.
59
<PAGE>
CERTAIN TRANSACTIONS
In August 1995, the Company loaned $820,987 to Kevodrew Realty, Inc.
("Kevodrew") a company controlled by A.J. Nassar, the President and Chief
Executive Officer of the Company, which loan bore interest at an annual rate
of prime. These funds were loaned to Kevodrew to provide interim financing for
the purchase by Kevodrew of a retail shopping center in Louisville, Kentucky.
This loan was repaid in May 1996. A primary tenant in the shopping center is a
Company-owned store, which has entered into a five-year lease agreement with
Kevodrew providing for annual lease payments of $89,155. In addition to the
foregoing, the Company loaned to Mr. Nassar an additional $141,650, $349,265
and $318,104 during fiscal 1995, 1996 and 1997, respectively. On September 19,
1997, the Company loaned Mr. Nassar an additional $738,100, which loan was
repaid with interest on September 24, 1997. The Company subsequently obtained
a waiver of certain covenants under the Credit Facility in connection with
this loan.
As of September 25, 1997, a total of $1.0 million was owed to the Company by
Mr. Nassar. The largest aggregate amount of indebtedness outstanding from Mr.
Nassar to the Company since the beginning of fiscal 1997 was $1.8 million. All
amounts owed by Mr. Nassar bear interest at an annual rate of 8%. Mr. Nassar
has agreed to repay all outstanding obligations to the Company in five annual
installments of $200,000 per year (plus accrued interest) commencing on March
1, 1998. Certain of the loans made to Mr. Nassar in the past were done without
prior approval of the Board of Directors of the Company, but were later
ratified by the Board. All borrowings were made by Mr. Nassar to fund certain
of his personal expenses. No additional loans will be made by the Company to
Mr. Nassar. The Company may in the future, however, make loans to other
officers and employees in furtherance of proper corporate purposes.
In September 1997, Kevodrew entered into an agreement to purchase a retail
shopping center in Brandon, Florida. This transaction is expected to close in
March 1998. A primary tenant in the shopping center is a Company-owned store,
which has a lease agreement expiring in April 1998 providing for annual lease
payments of $83,000, subject to adjustment for changes in the consumer price
index.
In August 1997, the Company invested $1.0 million in North Atlantic
Acquisition Corp. ("North Atlantic"), a blind pool investment vehicle. A.J.
Nassar, the President and Chief Executive Officer of the Company, is a
director and a shareholder of North Atlantic. At the time of the Company's
investment in North Atlantic, Mr. Nassar owned 14.1% of the outstanding Class
A common stock of North Atlantic. As a result of North Atlantic's recently
completed initial public offering, Mr. Nassar's percentage of ownership has
been reduced to 1.7% of the outstanding shares of Class A common stock. The
Company subsequently obtained a waiver of certain covenants under the Credit
Facility in connection with its investment in North Atlantic.
GCO leases two facilities in Montgomery, Alabama, from Dicky W. McAdams, a
former director, who served on the Board of Directors of the Company from 1991
to August 1997, and the former Chairman of GCO. One of these facilities is
owned directly by Mr. McAdams and the other facility is owned by a partnership
in which Mr. McAdams has a 50% interest. Lease payments to Mr. McAdams and the
partnership totaled $147,039, $162,887 and $170,990 in fiscal 1995, 1996 and
1997, respectively.
In connection with the employment by the Company of James W. Inglis as its
Chief Operating Officer and Senior Executive Vice President, the Company
issued to Mr. Inglis on May 15, 1996 50,000 shares of the Company's Common
Stock at a purchase price of $9.80 per share. This represented a discount of
$116,250 or $2.325 per share, based on the closing price of the Company's
Common Stock as previously reported on The Nasdaq National Market on May 15,
1996, which was charged to earnings in the quarter ended July 31, 1996.
Currently, the Company's Common Stock is listed on the New York Stock
Exchange.
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<PAGE>
Richard A. Kaplan and Herb Wolk, directors of the Company, and Ronald
McSwain, a former director of the Company, own or owned floorcovering
retailers which are franchisees of the Company. The following table sets forth
for the periods indicated, the amounts paid to the Company by the franchisees
controlled by these directors and rebates received by these franchisees.
Rebate payments to these franchisees by the Company represent a pass through
of volume rebates paid by various floorcovering manufacturers to the Company.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996 FISCAL 1997
--------------------- --------------------- ---------------------
AMOUNTS PAID AMOUNTS PAID AMOUNTS PAID
NAME TO COMPANY REBATES TO COMPANY REBATES TO COMPANY REBATES
---- ------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Kaplan....... $106,682 $74,118 $55,187 $35,909 $ -- $ --
Ronald McSwain.......... 323,175 274,550 242,550 206,453 330,602 210,113
Herb Wolk............... 72,134 48,328 47,604 26,863 61,485 25,553
-------- -------- -------- -------- -------- --------
Total................. $501,991 $396,996 $345,341 $269,225 $392,087 $235,666
======== ======== ======== ======== ======== ========
</TABLE>
The ability of the Company to enter into future transactions with affiliates
is limited by the terms of the Notes and the Credit Facility. See "Description
of the Exchange Notes--Certain Covenants--Limitation on Transactions with
Affiliates."
61
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of November 1, 1997, with respect
to (i) each person known by the Company to own beneficially more than 5% of
the outstanding shares of Common Stock, (ii) each of the Company's directors,
(iii) each of the Named Executive Officers, and (iv) all directors and
executive officers as a group. Unless otherwise indicated, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF BENEFICIAL OWNER OWNED(A) TOTAL
- ------------------- ---------------- -------------
<S> <C> <C>
Richard A. Kaplan.............................. 918,500 5.5%
7 Far View Hill
Rochester, New York 14620
A.J. Nassar(b)................................. 1,010,960 5.9
210 TownPark Drive
Kennesaw, Georgia 30144
M.B. Seretean(c)............................... 677,000 4.0
H. Stanley Padgett(d).......................... 304,497 1.8
Larry M. Miller(e)............................. 305,978 1.8
Herb Wolk...................................... 200,000 1.2
James W. Inglis(f)............................. 170,000 *
J. Michael Nixon(g)............................ 115,000 *
David E. Cicchinelli........................... 0 0
FMR Corp.(h)................................... 985,700 5.9
82 Devonshire Street,
Boston, Massachusetts 02109
The Kaufmann Fund, Inc.(i)..................... 1,250,000 7.5
140 E. 45th Street, 43rd Floor
New York, New York 10017
All directors and executive officers as a group
(12 persons)(j)............................... 3,518,957 19.4
</TABLE>
- --------
* Less than one percent of outstanding shares
(a) "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 under the Exchange Act. The
percentages are based upon shares outstanding as of November 1, 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 16,615,345 shares plus the
number of shares subject to presently exercisable options held by them, as
indicated in the following notes.
(b) Includes 505,960 shares of Common Stock subject to presently exercisable
stock options.
(c) Includes 425,000 shares of Common Stock subject to presently exercisable
stock options.
(d) Includes 291,320 shares of Common Stock subject to presently exercisable
stock options.
(e) Includes 155,020 shares of Common Stock subject to presently exercisable
stock options.
(f) Includes 120,000 shares of Common Stock subject to presently exercisable
stock options.
(g) Includes 55,000 shares of Common Stock subject to presently exercisable
stock options.
(h) According to a Schedule 13G filed with the Commission on February 12, 1997
by FMR Corp. ("FMR"), Edward C. Johnson and Abigail P. Johnson, Mr.
Johnson is the Chairman of FMR and the owner of 12% of the aggregate
outstanding voting stock of FMR and Ms. Johnson is a director of FMR and
the owner of 24.5% of the aggregate outstanding voting stock of FMR and
each may be deemed to be members of a controlling group with respect to
FMR. The Schedule 13G states that, at December 31, 1996, (i) Fidelity
Management & Research Company, a registered investment adviser and a
wholly-owned subsidiary of FMR ("Fidelity"), was the beneficial owner of
754,300 shares of Common Stock as a result of acting as investment advisor
to various registered investment companies (the "Funds"), (ii) Mr.
Johnson, FMR (through its control of Fidelity) and the Funds each has sole
power to dispose of the 754,300 shares owned by the Funds, and (iii) the
power to vote all of the 754,300 shares resides with the Board of Trustees
of the Funds. The Schedule 13G further states that, at December 31, 1996,
(i) Fidelity Management Trust Company ("Fidelity Management"), a wholly-
owned subsidiary of FMR and a bank as defined in Section 3(a)(6) of the
Exchange Act, is the beneficial owner of 231,400 shares of Common Stock as
a result of it serving as investment manager of the institutional
account(s) and (ii) each of Mr. Johnson and FMR (through its control of
Fidelity Management) has sole voting and dispositive power over 231,400
shares of Common Stock owned by such institutional account(s). The Company
makes no representation as to the accuracy or completeness of the
information reported.
(i) Based on a Schedule 13G filed with the Commission by The Kaufmann Fund on
February 28, 1997. The Company makes no representation as to the accuracy
or completeness of the information reported.
(j) Includes an aggregate of 1,517,280 shares of Common Stock subject to stock
options which are presently exercisable or exercisable within the next 60
days.
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<PAGE>
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
The following summary of certain agreements and instruments of the Company
does not purport to be complete and is qualified in its entirety by reference
to the various agreements and instruments described. Capitalized terms that
are used but not defined in this section have the meanings given such terms in
their respective agreement, unless the context otherwise requires.
CREDIT FACILITY
On August 26, 1997, the Company and the Guarantors, as co-borrowers, entered
into the Credit Facility with the lenders named therein (the "Lenders") and
First Union National Bank, as administrative agent for the Lenders.
The Credit Facility provides for (i) a revolving credit facility (the
"Revolving Credit Facility") of up to $70.0 million (subject to Borrowing Base
availability) which includes a Conventional Letter of Credit subfacility and a
short term "swingline" loan subfacility, (ii) a Term Loan in the amount of
$29.0 million, and (iii) a Special Purpose Letter of Credit in the amount of
up to $31.0 million for use as credit support for the Summerville Loan to be
used to finance the expansion of Image's fiber extrusion capabilities at its
plant in Summerville, Georgia. The total amount of (i) Revolver Loans, and
(ii) Conventional Letter of Credit obligations may not exceed the Borrowing
Base. The "Borrowing Base" is defined as an amount equal to the lesser of (a)
$70 million and (b)(i) for any date of determination prior to April 30, 1998,
an amount equal to four (4) times Consolidated EBITDAR, for the period of four
consecutive fiscal quarters then most recently ended, less an amount equal to
Consolidated Senior Debt at such date, plus an amount equal to Debt
outstanding under the Revolving Credit Facility at such date, and (ii) for any
date of determination on or after April 30, 1998, an amount equal to three and
three quarters (3.75) times Consolidated EBITDAR, for the period of four
consecutive fiscal quarters then most recently ended, less an amount equal to
Consolidated Senior Debt at such date, plus an amount equal to Debt
outstanding under the Revolving Credit Facility at such date. As of October
31, 1997, the Borrowing Base was equal to approximately $50.0 million. On
September 24, 1997, the Company and the Lenders amended the Credit Facility to
provide, among other things, that upon completion of the 144A Notes Offering,
the commitments under the Revolving Credit Facility were permanently reduced
to $50.0 million and the maximum Borrowing Base under the Credit Facility was
reduced from $70.0 million to $50.0 million.
Borrowings under the Credit Facility are secured by the accounts receivable,
inventories, certain real and personal property and certain intangible assets
of the Company and the Guarantors, as well as the capital stock of all the
Guarantors.
The Revolver Loan Commitment expires in August 2000. The Term Loan matures
in December 2002 and all of the Conventional Letters of Credit will mature not
later than August 2000. The Special Purpose Letter of Credit matures on April
15, 2000.
Loans bear interest at a variable rate equal to, at the Company's option,
(i) the Base Rate (defined as the greater of the Prime Rate or the Federal
Funds Rate plus one-half of one percent) or (ii) the adjusted LIBOR Rate, in
each case plus the Applicable Margin. The Applicable Margin is 0% for loans
which bear interest at the Base Rate and ranges from 0.50% to 1.25% for loans
which bear interest at the adjusted LIBOR Rate depending on the Company's
Total Debt to Consolidated EBITDAR ratio.
The Company will be required to pay the Lenders under the Credit Facility,
on a quarterly basis, a commitment fee ranging from 0.1875% to 0.25% depending
on the ratio of Total Debt to Consolidated EBITDAR for the period of four
consecutive quarters ending on the last day of such quarter. The Company will
also be required to pay administration fees, to be computed on an annual basis
and paid quarterly.
The Credit Facility contains a number of covenants, including, among others,
covenants restricting the Company and certain of its subsidiaries with respect
to the incurrence of indebtedness (including contingent obligations); the
creation of liens; the sale, lease, assignment transfer or other disposition
of assets; the making
63
<PAGE>
of certain investments, loans, advances and acquisitions; the consummation of
certain transactions such as mergers or consolidations; transactions with
affiliates; terminating any Governmental Approval or Material Contract;
changing the Company's fiscal year end; winding up, liquidating or dissolving;
and entering into agreements which, among other things, limit the ability to
create Liens. In addition, the Credit Facility contains affirmative covenants
including, among other things, requirements regarding compliance with laws;
preservation of entity existence; maintenance of insurance; payment of taxes
and other obligations; maintenance of properties; environmental compliance;
the keeping of books and records; and the continuance in the same or
complementary lines of business.
The Company has obtained waivers of certain of these covenants in connection
with its investment in North Atlantic and certain loans to A.J. Nassar, the
President and Chief Executive Officer of the Company. See "Certain
Transactions."
The Company and its subsidiaries are also required to comply with certain
financial tests and maintain certain financial ratios. Certain of these
financial tests and ratios include: (i) preventing the ratio of Total Debt to
the sum of Consolidated Net Worth plus Total Debt from exceeding agreed upon
ratios set forth in the Credit Facility; (ii) maintaining a maximum ratio of
Consolidated Senior Debt to Consolidated EBITDAR; (iii) maintaining a minimum
ratio of EBITDAR to Interest Expense plus retail store rental related-expense
and (iv) preventing the ratio of Total Debt to Consolidated EBITDAR from
exceeding agreed upon ratios set forth in the Credit Facility.
The Credit Facility contains customary events of default. An event of
default under the Credit Facility would allow the lenders thereunder to
accelerate or, in certain cases, would automatically cause the acceleration
of, the maturity of the indebtedness under the Credit Facility and would
restrict the ability of the Company to meet its obligations with respect to
the Notes.
SUMMERVILLE LOAN
In connection with the expansion of Image's fiber extrusion capabilities at
its plant in Summerville, Georgia, effective September 1, 1997, the Authority
issued Facility Revenue Bonds in an aggregate principal amount of $30.0
million pursuant to the provisions of the Development Authorities Law of the
State of Georgia, as amended, and the Trust Indenture, dated as of September
1, 1997 (the "Summerville Indenture"), by and between the Authority and
Reliance Trust Company, as trustee thereunder (the "Summerville Trustee"). The
Facility Revenue Bond issuance closed on September 17, 1997. On September 17,
1997, the Authority used the proceeds from the sale of the Facility Revenue
Bonds to make the Summerville Loan to Image to finance, in whole or in part,
the cost of certain solid waste recycling facilities constituting an expansion
of existing fiber manufacturing facilities owned and operated by Image
including land, approximately 200,000 square feet of additional buildings, and
equipment to be used in connection with the manufacture of fiber, to be
located at the site of the existing fiber manufacturing facility of Image
located in Summerville, Georgia. The Summerville Loan was made pursuant to a
loan agreement, dated as of September 1, 1997 (the "Loan Agreement"), under
which Image delivered to the Authority its promissory note in the principal
amount of $30.0 million, dated as of September 1, 1997.
The Facility Revenue Bonds and the Summerville Loan will mature on September
1, 2017. The Facility Revenue Bonds bear interest at the Weekly Rate until the
date on which the interest rate determination method is converted with respect
to the Facility Revenue Bonds. On and after the first Conversion Date, the
Facility Revenue Bonds may bear interest at the Flexible Rate or the Fixed
Rate or the Weekly Rate at the Company's option. While the Bonds bear interest
at the Weekly Rate, interest is payable monthly in arrears on the first day of
each month, commencing October 1, 1997. While the Facility Revenue Bonds bear
interest at the Flexible Rate, interest is payable on the first day after the
last day of each Flexible Rate Term. While the Facility Revenue Bonds bear
interest at a Fixed Rate, interest is payable semiannually in arrears, on each
March 1 and September 1. The Weekly, Flexible and Fixed Rates are determined
by the Remarketing Agent as the minimum rate of
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interest, based upon market conditions, that the Remarketing Agent determines,
in its sole discretion, would be necessary to sell the Facility Revenue Bonds
in a secondary market at the principal amount thereof. The interest rate on
the Summerville Loan equals the interest rate on the Facility Revenue Bonds.
The Facility Revenue Bonds and the interest thereon are special, limited
obligations of the Authority payable solely from (i) the revenues and income
derived from the Loan Agreement, which revenues and income have been pledged
and assigned to the Summerville Trustee to secure payment of the Facility
Revenue Bonds, and (ii) funds which, while the Facility Revenue Bonds bear
interest at the Weekly Rate or the Flexible Rate, may be drawn under the
Special Purpose Letter of Credit described under "--Credit Facility." Pursuant
to the Loan Agreement, Image is obligated to repay such loan by making
payments at such times and in such amounts as shall be required to pay the
principal of, premium, if any, and interest on the Facility Revenue Bonds and
certain other fees and expenses and to make payments sufficient to pay the
purchase price of Facility Revenue Bonds tendered or deemed tendered for
purchase to the extent that other moneys are not available therefor, as
described in the Loan Agreement. The Company's obligations to make loan
payments will be reduced to the extent of moneys which become available as a
result of drawings under the Special Purpose Letter of Credit.
The Facility Revenue Bonds are subject to optional redemption at the request
of the Company and mandatory redemption, including redemption at par, and
optional tender for purchase at the direction of the holders thereof and
mandatory repurchase, in the manner and at the times set forth in the
Summerville Indenture.
As long as the Company is not in default under the Loan Agreement and the
Authority is not obligated to call the Facility Revenue Bonds pursuant to the
terms of the Summerville Indenture, neither the Authority nor the Summerville
Trustee is permitted to redeem any Facility Revenue Bond prior to its maturity
unless requested to do so by the Company. The Loan Agreement contains
customary events of default including, among others, (i) the failure by the
Company to satisfy any payment obligation thereunder, or (ii) an event of
default under the Summerville Indenture or the related reimbursement agreement
thereto. Upon the occurrence of certain events of default, the Summerville
Trustee shall declare all payments under the Summerville Loan immediately due
and payable and may exercise those remedies as provided for in the Summerville
Indenture.
Upon the Determination of Taxability or upon certain circumstances of
redemption of the Facility Revenue Bonds pursuant to the Summerville
Indenture, the Company shall be obligated to prepay the Summerville Loan in
whole or in part. In the event that there has been a Determination of
Taxability in which there has been a determination by the Internal Revenue
Service that the interest on the Facility Revenue Bonds is or was includable
in the gross income of the holder, the Company shall cause moneys sufficient
to pay such holders the principal amount of the Facility Revenue Bonds being
redeemed, together with accrued interest thereon without premium (except as
provided in the Summerville Indenture with respect to Facility Revenue Bonds
which bear interest at the Fixed Rate).
The Facility Revenue Bonds are subject to mandatory repurchase on each
Conversion Date, Interest Payment Date or the date of any Substitute Letter of
Credit delivered pursuant to the Summerville Indenture, as the case may be;
provided, however, the holders shall not have the right or be required to
tender any Facility Revenue Bond for purchase, whether pursuant to an optional
tender or mandatory repurchase, if on such a date the Special Purpose Letter
of Credit is in effect and, following the occurrence of an event of default
under the Summerville Indenture, the Summerville Trustee shall have declared
the principal of, premium, if any and interest on the Facility Revenue Bonds
to be immediately due and payable.
Additionally, the Facility Revenue Bonds are subject to mandatory redemption
by First Union National Bank at a redemption price equal to the principal
amount thereof plus accrued interest to the date of redemption upon an event
of default under the Reimbursement Agreement, or if First Union National Bank
owns Facility Revenue Bonds under the Summerville Indenture and such Facility
Revenue Bonds have not been remarketed. The Facility Revenue Bonds are also
subject to redemption upon termination of the Special Purpose Letter of
Credit, in which event the Summerville Loan shall become immediately due and
payable.
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DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes offered hereby will be issued and the 144A Notes were
issued under an Indenture dated October 16, 1997 (the "Indenture") among the
Company, the Guarantors and State Street Bank and Trust Company, as trustee
(the "Trustee"). References to "(Section )" mean the applicable Section of
the Indenture.
Upon the effectiveness of the Registration Statement of which this
Prospectus forms a part, the Indenture will be subject to and governed by the
Trust Indenture Act. The following summaries of the material provisions of the
Indenture do not purport to be complete, and where reference is made to
particular provisions of the Indenture, such provisions, including the
definitions of certain terms, are qualified in their entirety by reference to
all of the provisions of the Indenture and those terms made a part of the
Indenture by reference to the Trust Indenture Act. A copy of the Indenture is
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, and is incorporated by reference herein. For definitions of
certain capitalized terms used in the following summary, see "--Certain
Definitions."
GENERAL
The Exchange Notes will mature on October 15, 2007, will be limited to
$100,000,000 aggregate principal amount, and will be unsecured senior
subordinated obligations of the Company. Each Exchange Note will bear interest
at the rate set forth on the cover page hereof from October 16, 1997 or from
the most recent interest payment date to which interest has been paid, payable
semiannually on April 15 and October 15 in each year, commencing April 15,
1998, to the Person in whose name the Note (or any predecessor Note) is
registered at the close of business on the April 1 or October 1 next preceding
such interest payment date. Interest will be computed on the basis of a 360-
day year comprised of twelve 30-day months. (Sections 202, 301 and 309)
Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes will be exchangeable and transferable, at the
office or agency of the Company in The City of New York maintained for such
purposes (which initially will be a corporate trust office of the Trustee);
provided, however, that payment of interest may be made at the option of the
Company by check or wire transfer to the Person entitled thereto as shown on
the security register. (Sections 301, 305 and 1002) The Exchange Notes will be
issued only in fully registered form without coupons, in denominations of
$1,000 and any integral multiple thereof. (Section 302) No service charge will
be made for any registration of transfer, exchange or redemption of Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith. (Section 305)
Settlement for the Exchange Notes will be made in same day funds. All
payments of principal and interest will be made by the Company in same day
funds. The Exchange Notes will trade in the Same-Day Funds Settlement System
of The Depository Trust Company (the "DTC") until maturity, and secondary
market trading activity for the Exchange Notes will therefore settle in same
day funds.
GUARANTEES
All of the Company's subsidiaries will, jointly and severally, fully and
unconditionally guarantee the Company's obligations under the Exchange Notes.
In addition, if any Restricted Subsidiary of the Company becomes a guarantor
or obligor in respect of any other Indebtedness of the Company or any of the
Restricted Subsidiaries, the Company shall cause such Restricted Subsidiary to
enter into a supplemental Indenture pursuant to which such Restricted
Subsidiary shall agree to guarantee the Company's obligations under the
Exchange Notes. If the Company defaults in payment of the principal of,
premium, if any, or interest on the Exchange Notes, each of the Guarantors
will be unconditionally, jointly and severally obligated to duly and
punctually pay the same.
The obligations of each Guarantor under its Guarantee are limited to the
maximum amount which, after giving effect to all other contingent and fixed
liabilities of such Guarantor, and after giving effect to any
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collections from or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in
the obligations of such Guarantor under its Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under Federal or state law. Each
Guarantor that makes a payment or distribution under its Guarantee shall be
entitled to a contribution from each other Guarantor in a pro rata amount
based on the net assets of each Guarantor determined in accordance with GAAP.
See "--Certain Covenants--Limitation on Issuances of Guarantees of
Indebtedness."
Notwithstanding the foregoing, but subject to the requirements described
under "--Consolidation, Merger, Sale of Assets, Etc.," any Guarantee by a
Guarantor shall be automatically and unconditionally released and discharged
(i) upon any sale, exchange or transfer, to any Person (other than an
Affiliate of the Company), of all of the Capital Stock of such Restricted
Subsidiary, or all or substantially all of the assets of such Restricted
Subsidiary, pursuant to a transaction which is in compliance with the
Indenture (including, but not limited to, the covenant described in "Certain
Covenants--Limitation on Sale of Assets" below) or (ii) at the request of the
Company, in the event that the lenders under the Credit Facility (or any other
revolving credit or term loan facility entitled to a guarantee from such
Guarantor) unconditionally release such Guarantor from its co-borrower
obligations under such facility. The Company may, at any time, cause a
Restricted Subsidiary to become a Guarantor by executing and delivering a
supplemental indenture providing for the guarantee of payment of the Notes by
such Restricted Subsidiary on the basis provided in the Indenture.
The Guarantees will be unsecured senior subordinated obligations of the
Guarantors and will be subordinated to all existing and future Guarantor
Senior Indebtedness, which includes all indebtedness of the Guarantors as co-
obligors under the Credit Facility. As of July 31, 1997, on a pro forma basis
after giving effect to the 144A Notes Offering and the application of the net
proceeds therefrom, the Credit Facility and the Summerville Loan, the
Guarantors would have had outstanding approximately $1.1 million in aggregate
principal amount of Guarantor Senior Indebtedness which ranked senior in right
of payment to the Guarantees.
OPTIONAL REDEMPTION
(a) The Exchange Notes will be subject to redemption at any time on or after
October 15, 2002, at the option of the Company, in whole or in part, on not
less than 30 nor more than 60 days' prior notice in amounts of $1,000 or an
integral multiple thereof at the following redemption prices (expressed as
percentages of the principal amount), if redeemed during the 12-month period
beginning October 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002............................................................ 104.625%
2003............................................................ 102.313%
2004............................................................ 101.156%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to but not including the redemption date
(subject to the rights of holders of record on relevant record dates to
receive interest due on an interest payment date).
(b) At any time prior to October 15, 2000, the Company may, at its option,
use the net proceeds of one or more Public Equity Offerings to redeem up to an
aggregate of 30% of the aggregate principal amount of Notes originally issued
under the Indenture at a redemption price equal to 109.25% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the redemption date; provided that at least $70 million of the principal
amount of Notes remains outstanding immediately after the occurrence of such
redemption. In order to effect the foregoing redemption, the Company must mail
a notice of redemption no later than 60 days after the closing of the related
Public Equity Offering and must consummate such redemption within 90 days of
the closing of the Public Equity Offering.
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(c) If less than all of the Notes are to be redeemed, the Trustee shall
select the Notes or portions thereof to be redeemed pro rata, by lot or by any
other method the Trustee shall deem fair and reasonable. (Sections 203, 1101,
1105 and 1107)
SINKING FUND
The Exchange Notes will not be entitled to the benefit of any sinking fund.
RANKING
The payment of the principal of, premium, if any, and interest on the
Exchange Notes will be subordinated, as set forth in the Indenture, in right
of payment to the prior payment in full of all Senior Indebtedness. The
Exchange Notes will be senior subordinated indebtedness of the Company ranking
pari passu with all other existing and future senior subordinated indebtedness
of the Company and senior to all existing and future Subordinated Indebtedness
of the Company. (Sections 1301 and 1302) The Company has not issued, and does
not have any current arrangements to issue, any significant additional
indebtedness to which the Notes would be senior, subordinate or pari passu in
right of payment. The Notes will be effectively subordinate to essentially all
of the currently outstanding indebtedness of the Company and its subsidiaries.
Upon the occurrence and during the continuance of any default in the payment
of any principal of, premium, if any, or interest on, or any other obligation
owing in respect of, any Designated Senior Indebtedness beyond any applicable
grace period and after the receipt by the Trustee from representatives of
holders of any Designated Senior Indebtedness (collectively, a "Senior
Representative") of written notice of such default, no payment (other than
payments previously made pursuant to the provisions described under "--
Defeasance or Covenant Defeasance of Indenture") or distribution of any assets
of the Company or any Subsidiary of any kind or character (excluding certain
permitted equity interests or subordinated securities) may be made on account
of the principal of, premium, if any, or interest on, the Exchange Notes, or
on account of the purchase, redemption, defeasance or other acquisition of or
in respect of, the Exchange Notes unless and until such default shall have
been cured or waived or shall have ceased to exist or such Designated Senior
Indebtedness shall have been discharged or paid in full, after which the
Company shall resume making any and all required payments in respect of the
Exchange Notes, including any missed payments.
Upon the occurrence and during the continuance of any non-payment default
with respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may then be accelerated immediately (a "Non-payment Default")
and after the receipt by the Trustee and the Company from a Senior
Representative of written notice of such Non-payment Default, no payment
(other than payments previously made pursuant to the provisions described
under "--Defeasance or Covenant Defeasance of Indenture") or distribution of
any assets of the Company or any Subsidiary of any kind or character
(excluding certain permitted equity interests or subordinated securities) may
be made by the Company or any Subsidiary on account of the principal of,
premium, if any, or interest on the Exchange Notes or on account of the
purchase, redemption, defeasance or other acquisition of, or in respect of,
the Exchange Notes for the period specified below (the "Payment Blockage
Period").
The Payment Blockage Period shall commence upon the receipt of notice of the
Non-payment Default by the Trustee and the Company from a Senior
Representative and shall end on the earliest of (i) the 179th day after such
commencement, (ii) the date on which such Non-payment Default (and all Non-
payment Defaults as to which notice is also given after such Payment Blockage
Period is initiated) is properly cured, waived or ceases to exist or on which
such Designated Senior Indebtedness is discharged or paid in full or (iii) the
date on which such Payment Blockage Period (and all Non-payment Defaults as to
which notice is given after such Payment Blockage Period is initiated) shall
have been terminated by written notice to the Company or the Trustee from the
Senior Representative initiating such Payment Blockage Period, after which, in
the case of each of clauses (i), (ii) and (iii), the Company will promptly
resume making any and all required payments in respect of the Exchange Notes,
including any missed payments. In no event will a Payment Blockage Period
extend beyond 179 days from the date of the receipt by the Company and the
Trustee of the notice initiating such Payment Blockage Period (such 179-day
period referred to as the "Initial Period"). Any number of notices of Non-
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payment Defaults may be given during the Initial Period; provided that during
any period of 365 days only one Payment Blockage Period, during which payment
of principal of, premium, if any, or interest on, the Exchange Notes may not
be made, may commence and the duration of such period may not exceed 179 days.
No Non-payment Default with respect to any Designated Senior Indebtedness that
existed or was continuing on the date of the commencement of any Payment
Blockage Period will be, or can be, made the basis for the commencement of a
second Payment Blockage Period, whether or not within a period of 365
consecutive days, unless such default has been cured or waived for a period of
not less than 90 consecutive days. (Section 1303)
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the holders of the Notes to
accelerate the maturity thereof. See "--Events of Default."
The Indenture will provide that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relative to the Company or
its assets, or any liquidation, dissolution or other winding up of the
Company, whether voluntary or involuntary, or whether or not involving
insolvency or bankruptcy, or any assignment for the benefit of creditors or
any other marshaling of assets or liabilities of the Company, all Senior
Indebtedness must be paid in full before any payment or distribution
(excluding distributions of certain permitted equity interests or subordinated
securities) is made on account of the principal of, premium, if any, or
interest on the Notes or on account of the purchase, redemption, defeasance or
other acquisition of, or in respect of, the Notes (other than payments
previously made pursuant to the provisions described under "--Defeasance or
Covenant Defeasance of Indenture"). (Section 1302)
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes, and funds which would be
otherwise payable to the holders of the Notes will be paid to the holders of
the Senior Indebtedness to the extent necessary to pay the Senior Indebtedness
in full, and the Company may be unable to meet its obligations fully with
respect to the Notes.
"Senior Indebtedness" under the Indenture means the principal of, premium,
if any, and interest (including interest accruing after the filing of a
petition initiating any proceeding under any state, federal or foreign
bankruptcy law whether or not allowable as a claim in such proceeding) and all
other monetary obligations (including fees) on any Indebtedness of the Company
(other than as otherwise provided in this definition), whether outstanding on
the date of the Indenture or thereafter created, incurred or assumed, and
whether at any time owing, actually or contingently, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i)
Indebtedness evidenced by the Notes, (ii) Indebtedness that is by its terms
subordinate or junior in right of payment to any Indebtedness of the Company,
(iii) Indebtedness which, when incurred and without respect to any election
under Section 1111(b) of Title 11 of the United States Code, is without
recourse to the Company, (iv) Indebtedness which is represented by Redeemable
Capital Stock, (v) any liability for foreign, federal, state, local or other
tax owed or owing by the Company to the extent such liability constitutes
Indebtedness, (vi) Indebtedness of the Company to a Subsidiary or any other
Affiliate of the Company or any of such Affiliate's subsidiaries and (vii)
that portion of any Indebtedness which at the time of issuance is issued in
violation of the Indenture.
"Designated Senior Indebtedness" under the Indenture means (i) all Senior
Indebtedness under, or in respect of, the Credit Facility, and (ii) any other
Senior Indebtedness which at the time of determination has an aggregate
principal amount outstanding of at least $10 million and is specifically
designated in the instrument evidencing such Senior Indebtedness or the
agreement under which such Senior Indebtedness arises as "Designated Senior
Indebtedness" by the Company.
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As of July 31, 1997, on a pro forma basis after giving effect to the 144A
Notes Offering and the application of the net proceeds therefrom, the Credit
Facility and the Summerville Loan, the Company would have had outstanding
approximately $33.7 million in aggregate principal amount of Senior
Indebtedness, no Pari Passu Indebtedness and no Subordinated Indebtedness, and
the Guarantors would have had approximately $1.1 million outstanding in
aggregate principal amount of Guarantor Senior Indebtedness.
The Indenture will limit, but not prohibit, the incurrence by the Company
and its Restricted Subsidiaries of additional Indebtedness, and the Indenture
will prohibit the incurrence by the Company of Indebtedness that is
subordinated in right of payment to any Senior Indebtedness of the Company and
senior in right of payment to the Notes.
Each Guarantee of a Guarantor will be an unsecured senior subordinated
obligation of such Guarantor, ranking pari passu with, or senior in right of
payment to, all other existing and future Indebtedness of such Guarantor that
is expressly subordinated to Guarantor Senior Indebtedness. The Indebtedness
evidenced by the Guarantees will be subordinated to Guarantor Senior
Indebtedness to the same extent as the Notes are subordinated to Senior
Indebtedness and during any period when payment on the Notes is blocked by
Designated Senior Indebtedness, payment on the Guarantees is similarly
blocked.
"Guarantor Senior Indebtedness" is defined as the principal of, premium, if
any, and interest (including interest accruing after the filing of a petition
initiating any proceeding under any state, federal or foreign bankruptcy laws
whether or not allowable as a claim in such proceeding) and all other monetary
obligations (including fees) on any Indebtedness of any Guarantor (other than
as otherwise provided in this definition), whether outstanding on the date of
the Indenture or thereafter created, incurred or assumed, and whether at any
time owing, actually or contingent, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to any Guarantee. Notwithstanding the
foregoing, "Guarantor Senior Indebtedness" shall not include (i) Indebtedness
evidenced by the Guarantees, (ii) Indebtedness that is subordinate or junior
in right of payment to any Indebtedness of any Guarantor, (iii) Indebtedness
which when incurred and without respect to any election under Section 1111(b)
of Title 11 of the United States Code, is without recourse to any Guarantor,
(iv) Indebtedness which is represented by Redeemable Capital Stock, (v) any
liability for foreign, federal, state, local or other taxes owed or owing by
any Guarantor to the extent such liability constitutes Indebtedness, (vi)
Indebtedness of any Guarantor to a Subsidiary or any other Affiliate of the
Company or any of such Affiliate's subsidiaries, (vii) Indebtedness evidenced
by any guarantee of any Subordinated Indebtedness or Pari Passu Indebtedness
and (viii) that portion of any Indebtedness which at the time of issuance is
issued in violation of the Indenture.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. The Company will not, and will not permit any of
its Restricted Subsidiaries to, create, issue, incur, assume, guarantee or
otherwise in any manner become directly or indirectly liable for the payment
of or otherwise incur (collectively, "incur"), any Indebtedness (including any
Acquired Indebtedness), unless such Indebtedness is incurred by the Company or
a Guarantor or constitutes Acquired Indebtedness of a Restricted Subsidiary
(which is not a Guarantor) and, in each case, the Company's Consolidated Fixed
Charge Coverage Ratio for the four full fiscal quarters for which financial
statements are available immediately preceding the incurrence of such
Indebtedness taken as one period (and after giving pro forma effect to (i) the
incurrence of such Indebtedness and (if applicable) the application of the net
proceeds therefrom, including the refinancing of other Indebtedness, as if
such Indebtedness was incurred, and the application of such proceeds occurred,
on the first day of such applicable period; (ii) the incurrence, repayment or
retirement of any other Indebtedness by the Company and its Restricted
Subsidiaries since the first day of such applicable period as if such
Indebtedness was incurred, repaid or retired at the beginning of such
applicable period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average daily balance of such Indebtedness during such applicable period);
(iii) in the case of Acquired
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Indebtedness or any acquisition occurring at the time of the incurrence of
such Indebtedness, the related acquisition, assuming such acquisition had been
consummated on the first day of such applicable period; and (iv) any
acquisition or disposition by the Company and its Restricted Subsidiaries of
any company or any business or any assets out of the ordinary course of
business, whether by merger, stock purchase or sale or asset purchase or sale,
or any related repayment of Indebtedness, in each case since the first day of
such applicable period, assuming such acquisition or disposition had been
consummated on the first day of such applicable period) is at least equal to
or greater than 2.00 to 1.
Notwithstanding the foregoing, the Company and, to the extent specifically
set forth below, the Restricted Subsidiaries may incur each and all of the
following (collectively, the "Permitted Indebtedness"):
(i) Indebtedness of the Company or any Guarantor under the Credit
Facility and under any revolving credit facility or bank term loans in an
aggregate principal amount at any one time outstanding not to exceed $115
million;
(ii) Indebtedness of the Company pursuant to the Notes and Indebtedness
of any Guarantor pursuant to a Guarantee of the Notes;
(iii) Indebtedness of the Company or any Restricted Subsidiary
outstanding on the date of the Indenture and listed on a schedule thereto;
(iv) Indebtedness of the Company owing to a Restricted Subsidiary;
provided that any Indebtedness of the Company owing to a Restricted
Subsidiary is made pursuant to an intercompany note in the form attached to
the Indenture and is unsecured and subordinated in right of payment from
and after such time as the Notes shall become due and payable (whether at
Stated Maturity, acceleration or otherwise) to the payment and performance
of the Company's obligations under the Notes; provided, further, that any
disposition, pledge or transfer of any such Indebtedness to a Person (other
than a disposition, pledge or transfer to a Restricted Subsidiary) shall be
deemed to be an incurrence of such Indebtedness by the Company not
permitted by this clause (iv);
(v) Indebtedness of a Wholly Owned Restricted Subsidiary owing to the
Company or any Guarantor; provided that any such Indebtedness is made
pursuant to an intercompany note in the form attached to the Indenture;
provided, further, that (a) any disposition, pledge or transfer of any such
Indebtedness to a Person (other than the Company or a Guarantor) shall be
deemed to be an incurrence of such Indebtedness by the obligor not
permitted by this clause (v), and (b) any transaction pursuant to which any
Wholly Owned Restricted Subsidiary, which has Indebtedness owing to the
Company or any Guarantor, ceases to be a Wholly Owned Restricted Subsidiary
shall be deemed to be the incurrence of Indebtedness by such Wholly Owned
Restricted Subsidiary that is not permitted by this clause (v);
(vi) guarantees of any Restricted Subsidiary made in accordance with the
provisions of "--Certain Covenants--Limitation on Issuances of Guarantees
of Indebtedness;"
(vii) obligations of the Company entered into in the ordinary course of
business (a) pursuant to Interest Rate Agreements designed to protect the
Company or any Restricted Subsidiary against fluctuations in interest rates
in respect of Indebtedness of the Company or any Restricted Subsidiary as
long as such obligations do not exceed the aggregate principal amount of
such Indebtedness then outstanding, (b) under any Currency Hedging
Arrangements, which if related to Indebtedness do not increase the amount
of such Indebtedness other than as a result of currency price fluctuations,
or (c) under any Commodity Price Protection Agreements, which if related to
Indebtedness do not increase the amount of such Indebtedness other than as
a result of commodity price fluctuations;
(viii) Indebtedness of the Company or any Guarantor represented by
Capital Lease Obligations or Purchase Money Obligations or other
Indebtedness incurred or assumed in connection with the acquisition or
development of real or personal, movable or immovable, property in each
case incurred for the purpose of financing or refinancing all or any part
of the purchase price or cost of construction or improvement of property
used in the business of the Company or such Guarantor, in an aggregate
principal amount pursuant to this clause (viii) not to exceed $10 million
outstanding at any time;
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(ix) (a) letters of credit (other than the Special Purpose Letter of
Credit) in the ordinary course of business in the aggregate amount of $15
million at any one time outstanding to the extent that such letters of
credit are not drawn upon or, to the extent drawn upon, such drawings are
fully reimbursed by the Company within 10 business days from the receipt by
the Company of a demand for reimbursement thereof (collectively "Undrawn
Letters of Credit") and (b) letters of credit (other than the Special
Purpose Letter of Credit and Undrawn Letters of Credit) and banker's
acceptances in the ordinary course of business in the aggregate amount of
$5 million at any one time outstanding;
(x) any renewals, extensions, substitutions, refundings, refinancings or
replacements (collectively, a "refinancing") of any Indebtedness described
in clauses (ii) and (iii) of this definition of "Permitted Indebtedness,"
including any successive refinancings so long as the aggregate principal
amount of Indebtedness represented thereby (or, if such Indebtedness
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration of the maturity thereof, the
original issue price of such Indebtedness plus any accreted value
attributable thereto since the original issuance of such Indebtedness) is
not increased by such refinancing plus the lesser of (1) the stated amount
of any premium or other payment required to be paid in connection with such
a refinancing pursuant to the terms of the Indebtedness being refinanced or
(2) the amount of premium or other payment actually paid at such time to
refinance the Indebtedness, plus, in either case, the amount of expenses of
the Company or a Restricted Subsidiary incurred in connection with such
refinancing and (A) in the case of any refinancing of Subordinated
Indebtedness, such new Subordinated Indebtedness is (I) made subordinated
to the Notes at least to the same extent as the Subordinated Indebtedness
being refinanced, (II) has an Average Life to Stated Maturity greater than
the lesser of (x) the remaining Average Life to Stated Maturity of the
Subordinated Indebtedness being refinanced or (y) the remaining Average
Life to Stated Maturity of the Notes, and (III) has a Stated Maturity for
its final scheduled principal payment later than the earlier of (x) the
Stated Maturity for the final scheduled principal payment of the
Subordinated Debt being refinanced or (y) the Stated Maturity for the final
scheduled principal payment of the Notes, and (B) in the case of Pari Passu
Indebtedness, such refinancing does not reduce the Average Life to Stated
Maturity or the Stated Maturity of such Pari Passu Indebtedness; and
(xi) Indebtedness of the Company or any Guarantor in addition to that
described in clauses (i) through (x) above, and any renewals, extensions,
substitutions, refinancings or replacements of such Indebtedness, so long
as the aggregate principal amount of all Indebtedness pursuant to this
clause (xi) shall not exceed in the aggregate $25 million at any one time
outstanding. (Section 1008)
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in its shares of Qualified Capital Stock or in
options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, the Company's Capital Stock or any Capital Stock of any
Affiliate of the Company (other than Capital Stock of any Wholly Owned
Restricted Subsidiary) or options, warrants or other rights to acquire such
Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Restricted Subsidiary to any Person (other than (a) to the Company or
any of its Wholly Owned Restricted Subsidiaries or (b) to all holders of
Capital Stock of such Restricted Subsidiary on a pro rata basis); or
(v) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v), other
than any such action that is a Permitted Payment (as defined below),
collectively, "Restricted Payments") (the amount of any such
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Restricted Payment, if other than cash, shall be determined by the board of
directors of the Company, whose determination shall be conclusive and
evidenced by a board resolution), unless (1) immediately before and
immediately after giving effect to such proposed Restricted Payment on a
pro forma basis, no Default or Event of Default shall have occurred and be
continuing and such Restricted Payment shall not be an event which is, or
after notice or lapse of time or both, would be, an "event of default"
under the terms of any Indebtedness of the Company or its Restricted
Subsidiaries; (2) immediately before and immediately after giving effect to
such Restricted Payment on a pro forma basis, the Company could incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) under the
provisions described under "--Limitation on Indebtedness;" and (3) after
giving effect to the proposed Restricted Payment, the aggregate amount of
all such Restricted Payments declared or made after the date of the
Indenture, does not exceed the sum of:
(A) $3.0 million;
(B) 50% of the aggregate cumulative Consolidated Net Income of the
Company accrued on a cumulative basis during the period beginning on
the first day of the fiscal quarter beginning after the date of the
Indenture and ending on the last day of the Company's last fiscal
quarter ending prior to the date of the Restricted Payment (or, if such
aggregate cumulative Consolidated Net Income shall be a loss, minus
100% of such loss);
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any
of its Subsidiaries) of Qualified Capital Stock of the Company or any
options, warrants or rights to purchase such Qualified Capital Stock of
the Company (except, in each case, to the extent such proceeds are used
to purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth below in clause (ii) or (iii) of paragraph
(b) below);
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Restricted
Subsidiaries) upon the exercise of any options, warrants or rights to
purchase Qualified Capital Stock of the Company;
(E) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of
debt securities or Redeemable Capital Stock of the Company or its
Subsidiaries into or for Qualified Capital Stock of the Company plus,
to the extent such debt securities or Redeemable Capital Stock were
issued after the date of the Indenture, the aggregate of Net Cash
Proceeds from their original issuance; and
(F) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the date of the Indenture,
an amount which was treated as a Restricted Payment made after the date
of the Indenture (to the extent not included in Consolidated Net
Income) equal to the lesser of the return of capital with respect to
such Investment and the initial amount of such Investment, in either
case, less the cost of disposition of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(vii) below, so long as there is no Default or Event of Default continuing,
the foregoing provisions shall not prohibit the following actions (each of
clauses (i) through (v) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment shall have been deemed to have been paid on such date of
declaration and shall not have been deemed a "Permitted Payment" for
purposes of the calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement of
any shares of any class of Capital Stock of the Company in exchange for
(including any such exchange pursuant to the exercise of a conversion right
or privilege in connection with which cash is paid in lieu of the issuance
of fractional shares or scrip), or out of the Net Cash Proceeds of a
substantially concurrent issue and sale for cash (other than to a
Subsidiary) of, other shares of Qualified Capital Stock of the Company;
provided that such Net
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Cash Proceeds from the issuance of such shares of Qualified Capital Stock
are excluded from clause (3)(C) of paragraph (a) of this Section;
(iii) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness in
exchange for, or in an amount not in excess of the Net Cash Proceeds of, a
substantially concurrent issuance and sale for cash (other than to any
Subsidiary of the Company) of any Qualified Capital Stock of the Company,
provided that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (3)(C) of paragraph (a) of
this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing")
through the substantially concurrent issuance of new Subordinated
Indebtedness of the Company, provided that any such new Subordinated
Indebtedness (1) shall be in a principal amount that does not exceed the
principal amount so refinanced (or, if such Subordinated Indebtedness
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, then such lesser amount
as of the date of determination), plus the lesser of (I) the stated amount
of any premium or other payment required to be paid in connection with such
a refinancing pursuant to the terms of the Subordinated Indebtedness being
refinanced or (II) the amount of premium or other payment actually paid at
such time to refinance the Subordinated Indebtedness, plus, in either case,
the amount of expenses of the Company incurred in connection with such
refinancing; (2) has an Average Life to Stated Maturity greater than the
lesser of (x) the remaining Average Life to Stated Maturity of the
Subordinated Indebtedness being refinanced or (y) the remaining Average
Life to Stated Maturity of the Notes; (3) has a Stated Maturity for its
final scheduled principal payment later than the earlier of (x) the Stated
Maturity for the final scheduled principal payment of the Subordinated
Indebtedness being refinanced or (y) the Stated Maturity for the final
scheduled principal payment of the Notes; and (4) is expressly subordinated
in right of payment to the Notes at least to the same extent as the
Subordinated Indebtedness to be refinanced;
(v) repurchases of Capital Stock (or warrants or options convertible into
or exchangeable for such Capital Stock) deemed to occur upon exercise of
stock options to the extent that shares of such Capital Stock (or warrants
or options convertible into or exchangeable for such Capital Stock)
represents a portion of the exercise price of such options;
(vi) the repurchase of any Subordinated Indebtedness of the Company or
any Guarantor at a purchase price not greater than 101% of the principal
amount of such Subordinated Indebtedness in the event of a Change of
Control (as defined below) pursuant to a provision similar to the "--
Purchase of Notes upon Change of Control" covenant; provided that prior to
or simultaneously with such repurchase, the Company has made the Change of
Control Offer as provided in such covenant and has repurchased all Notes
validly tendered for payment in connection with such Change of Control
Offer; and
(vii) the repurchase of any Subordinated Indebtedness of the Company or
any Guarantor, at a purchase price not greater than 100% of the principal
amount of such Indebtedness in the event of an Asset Sale pursuant to a
provision similar to the "--Limitation on Sale of Assets" covenant;
provided that prior to such repurchase the Company has made an Offer to
purchase the Notes as provided in such covenant and has repurchased all
Notes validly tendered for payment in connection with such Offer. (Section
1009)
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property
or services) with any Affiliate of the Company (other than the Company or a
Wholly Owned Restricted Subsidiary) unless such transaction or series of
related transactions is entered into in good faith and in writing and (a) such
transaction is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that would be available
in a comparable transaction in arm's-length dealings with an unrelated third
party, (b) with respect to any transaction or series of related transactions
involving aggregate value in excess of $5 million, the Company delivers an
officers' certificate to the Trustee certifying that such transaction or
series of related transactions complies with clause (a) above and (c) with
respect to any transaction or series of related transactions involving
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aggregate payments in excess of $10 million, either (i) such transaction or
series of related transactions has been approved by a majority of the
Disinterested Directors of the Company, or in the event there is only one
Disinterested Director, by such Disinterested Director, or (ii) the Company
delivers to the Trustee a written opinion of an investment banking firm of
national standing or other recognized independent expert with experience
appraising the terms and conditions of the type of transaction or series of
related transactions for which an opinion is required stating that the
transaction or series of related transactions is fair to the Company or such
Restricted Subsidiary from a financial point of view; provided, however, that
this provision shall not apply to any transaction with an officer or director
of the Company entered into in the ordinary course of business (including
compensation and employee benefit arrangements with any officer, director or
employee of the Company, including under any stock option or stock incentive
plans). (Section 1010)
Limitation on Liens. (a) The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur or affirm any
Lien of any kind securing any Pari Passu Indebtedness or Subordinated
Indebtedness (including any assumption, guarantee or other liability with
respect thereto by any Restricted Subsidiary) upon any property or assets
(including any intercompany notes) of the Company or any Subsidiary owned on
the date of the Indenture or acquired after the date of the Indenture, or any
income or profits therefrom, unless the Notes are directly secured equally and
ratably with (or, in the case of Subordinated Indebtedness, prior or senior
thereto, with the same relative priority as the Notes shall have with respect
to such Subordinated Indebtedness) the obligation or liability secured by such
Lien, except for Liens (A) securing any Indebtedness or Acquired Indebtedness
which, in each case, were created prior to (and not created in connection
with, or in contemplation of) the incurrence of such Pari Passu Indebtedness
or Subordinated Indebtedness (including any assumption, guarantee or other
liability with respect thereto by any Restricted Subsidiary) and which
Indebtedness is permitted under the provisions of "--Limitation on
Indebtedness" or (B) securing any Indebtedness incurred in connection with any
refinancing, renewal, substitution or replacement of any such Indebtedness
described in clause (A), so long as the aggregate principal amount of
Indebtedness represented thereby is not increased by such refinancing by an
amount greater than the lesser of (i) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (ii) the amount
of premium or other payment actually paid at such time to refinance the
Indebtedness, plus, in either case, the amount of expenses of the Company
incurred in connection with such refinancing; provided, however, that in the
case of clauses (A) and (B), any such Lien only extends to the assets that
were subject to such Lien securing such Indebtedness prior to the related
acquisition by the Company or its Restricted Subsidiaries.
(b) Notwithstanding the foregoing, any Lien securing the Notes granted
pursuant to clause (a) above shall be automatically and unconditionally
released and discharged upon the release by the holders of the Pari Passu
Indebtedness or Subordinated Indebtedness described in clause (a) above of
their Lien on the property or assets of the Company or any Restricted
Subsidiary (including any deemed release upon payment in full of all
obligations under such Indebtedness), at such time as the holders of all such
Pari Passu Indebtedness or Subordinated Indebtedness also release their Lien
on the property or assets of the Company or such Restricted Subsidiary.
(Section 1011)
Limitation on Senior Subordinated Indebtedness. The Company will not, and
will not permit any Guarantor to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise in any manner become directly or
indirectly liable for or with respect to or otherwise permit to exist any
Indebtedness that is subordinate in right of payment to any Indebtedness of
the Company or such Guarantor, as the case may be, unless such Indebtedness is
also pari passu with the Notes or the Guarantee of such Guarantor or
subordinate in right of payment to the Notes or such Guarantee at least to the
same extent as the Notes or such Guarantee are subordinate in right of payment
to Senior Indebtedness or Senior Indebtedness of such Guarantor, as the case
may be. (Section 1012)
Limitation on Sale of Assets. (a) The Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, consummate an
Asset Sale unless (i) at least 80% of the consideration from
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such Asset Sale is received in cash or Cash Equivalents and (ii) the Company
or such Subsidiary receives consideration at the time of such Asset Sale at
least equal to the Fair Market Value of the shares or assets subject to such
Asset Sale (as determined by the board of directors of the Company and
evidenced in a board resolution). For the purposes of this covenant, "Cash
Equivalents" means (x) the assumption of Indebtedness of the Company or any
Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such
Asset Sale, (y) Temporary Cash Investments, and (z) securities received by the
Company or any Restricted Subsidiary from the transferee that are promptly
converted by the Company or such Restricted Subsidiary into cash.
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness
outstanding as required by the terms thereof, or the Company determines not to
apply such Net Cash Proceeds to the permanent repayment of the Senior
Indebtedness, or if no such Senior Indebtedness is outstanding then, the
Company or a Subsidiary may, within 365 days of the Asset Sale invest the Net
Cash Proceeds in capital expenditures, properties, inventories and other
assets that (as determined by the board of directors of the Company) replace
the properties and assets that were the subject of the Asset Sale or in
capital expenditures, properties, inventories and other assets that will be
used in the businesses of the Company or its Restricted Subsidiaries existing
on the date of the Indenture or in businesses reasonably related thereto. The
amount of such Net Cash Proceeds not used or invested as set forth in this
paragraph constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10 million or
more, the Company will apply the Excess Proceeds to the repayment of the Notes
and any other Pari Passu Indebtedness outstanding with similar provisions
requiring the Company to make an offer to purchase such Indebtedness with the
proceeds from any Asset Sale as follows: (A) the Company will make an offer to
purchase (an "Offer") from all holders of the Notes in accordance with the
procedures set forth in the Indenture in the maximum principal amount
(expressed as a multiple of $1,000) of Notes that may be purchased out of an
amount (the "Note Amount") equal to the product of such Excess Proceeds
multiplied by a fraction, the numerator of which is the outstanding principal
amount of the Notes, and the denominator of which is the sum of the
outstanding principal amount of the Notes and such Pari Passu Indebtedness
(subject to proration in the event such amount is less than the aggregate
Offered Price (as defined herein) of all Notes tendered) and (B) to the extent
required by such Pari Passu Indebtedness to permanently reduce the principal
amount of such Pari Passu Indebtedness, the Company will make an offer to
purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari
Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the excess
of the Excess Proceeds over the Note Amount; provided that in no event will
the Company be required to make a Pari Passu Offer in a Pari Passu Debt Amount
exceeding the principal amount of such Pari Passu Indebtedness plus the amount
of any premium required to be paid to repurchase such Pari Passu Indebtedness.
The offer price for the Notes will be payable in cash in an amount equal to
100% of the principal amount of the Notes plus accrued and unpaid interest, if
any, to the date (the "Offer Date") such Offer is consummated (the "Offered
Price"), in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate Offered Price of the Notes tendered pursuant to the
Offer is less than the Note Amount relating thereto or the aggregate amount of
Pari Passu Indebtedness that is purchased in a Pari Passu Offer is less than
the Pari Passu Debt Amount, the Company may use any remaining Excess Proceeds
for general corporate purposes. If the aggregate principal amount of Notes and
Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. Upon the completion of the purchase of all the Notes tendered
pursuant to an Offer and the completion of a Pari Passu Offer, the amount of
Excess Proceeds, if any, shall be reset at zero.
(d) When the aggregate amount of Excess Proceeds exceeds $10 million, such
Excess Proceeds will, prior to any purchase of Notes described in paragraph
(c) above, be set aside by the Company in a separate account pending (i)
deposit with the depository or a paying agent of the amount required to
purchase the Notes tendered in an Offer or Pari Passu Indebtedness tendered in
a Pari Passu Offer, (ii) delivery by the Company of the Offered Price to the
holders of the Notes tendered in an Offer or Pari Passu Indebtedness tendered
in a Pari Passu Offer and (iii) application, as set forth above, of Excess
Proceeds in the business of the Company and its Subsidiaries
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for general corporate purposes. Such Excess Proceeds may be invested in
Temporary Cash Investments, provided that the maturity date of any such
investment made after the amount of Excess Proceeds exceeds $10 million shall
not be later than the Offer Date. The Company shall be entitled to any
interest or dividends accrued, earned or paid on such Temporary Cash
Investments; provided that the Company shall not withdraw such interest from
the separate account if an Event of Default has occurred and is continuing.
(e) If the Company becomes obligated to make an Offer pursuant to clause (c)
above, the Notes and the Pari Passu Indebtedness shall be purchased by the
Company, at the option of the holders thereof, in whole or in part in integral
multiples of $1,000, on a date that is not earlier than 45 days and not later
than 60 days from the date the notice of the Offer is given to holders, or
such later date as may be necessary for the Company to comply with the
requirements under the Exchange Act.
(f) The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable
securities laws or regulations in connection with an Offer. (Section 1013)
Limitation on Issuances of Guarantees of Indebtedness. (a) The Company will
not permit any Restricted Subsidiary, other than the Guarantors, directly or
indirectly, to secure the payment of any Senior Indebtedness of the Company
and the Company will not, and will not permit any Restricted Subsidiary to,
pledge any intercompany notes representing obligations of any Restricted
Subsidiary (other than the Guarantors) to secure the payment of any Senior
Indebtedness unless in each case such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for
a guarantee of payment of the Notes by such Restricted Subsidiary, which
guarantee shall be on the same terms as the guarantee of the Senior
Indebtedness (if a guarantee of Senior Indebtedness is granted by any such
Restricted Subsidiary) except that the guarantee of the Notes need not be
secured and shall be subordinated to the claims against such Restricted
Subsidiary in respect of Senior Indebtedness to the same extent as the Notes
are subordinated to Senior Indebtedness of the Company under the Indenture.
(b) The Company will not permit any Restricted Subsidiary, directly or
indirectly, to guarantee, assume or in any other manner become liable with
respect to any Indebtedness of the Company unless such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee of the Notes, on the same terms as the guarantee of
such Indebtedness except that (A) such guarantee need not be secured unless
required pursuant to "--Limitation on Liens," (B) if such Indebtedness is by
its terms Senior Indebtedness, any such assumption, guarantee or other
liability of such Restricted Subsidiary with respect to such Indebtedness
shall be senior to such Restricted Subsidiary's Guarantee of the Notes to the
same extent as such Senior Indebtedness is senior to the Notes and (C) if such
Indebtedness is by its terms expressly subordinated to the Notes, any such
assumption, guarantee or other liability of such Restricted Subsidiary with
respect to such Indebtedness shall be subordinated to such Restricted
Subsidiary's Guarantee of the Notes at least to the same extent as such
Indebtedness is subordinated to the Notes.
(c) Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary
of the Notes shall provide by its terms that it (and all Liens securing the
same) shall be automatically and unconditionally released and discharged upon
(i) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary, which transaction is in compliance
with the terms of the Indenture and such Restricted Subsidiary is released
from all guarantees, if any, by it of other Indebtedness of the Company or any
Restricted Subsidiaries or (ii) (with respect to any Guarantees created after
the date of the Indenture) the release by the holders of the Indebtedness of
the Company described in clauses (a) and (b) above of their security interest
or their guarantee by such Restricted Subsidiary (including any deemed release
upon payment in full of all obligations under such Indebtedness), at such time
as (A) no other Indebtedness of the Company has been secured or guaranteed by
such Restricted Subsidiary, as the case may be, or (B) the holders of all such
other Indebtedness which is secured or guaranteed by such Restricted
Subsidiary also release their security interest in, or guarantee by such
Restricted Subsidiary (including any deemed release upon payment in full of
all obligations under such Indebtedness). (Section 1014)
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Restriction on Transfer of Assets. The Company and the Guarantors will not
sell, convey, transfer or otherwise dispose of assets or property to any
Restricted Subsidiaries, except for sales, conveyances, transfers or other
dispositions (a) made in the ordinary course of business or (b) to any
Restricted Subsidiary if such Subsidiary is a Guarantor or simultaneously
executes and delivers a supplemental indenture to the Indenture providing for
a Guarantee of the payment of the Notes by such Restricted Subsidiary on a
senior subordinated basis. For purposes of this provision any sale,
conveyance, transfer, lease or other disposition of property or assets having
a Fair Market Value in excess of (a) $5 million for any sale, conveyance,
transfer or disposition or series of related sales, conveyances, transfers,
leases or dispositions and (b) $10 million in the aggregate for all such
sales, conveyances, transfers, leases or dispositions in any fiscal year of
the Company shall not be considered "in the ordinary course of business."
(Section 1015)
Purchase of Notes Upon a Change of Control. If a Change of Control shall
occur at any time, then each holder of Notes shall have the right to require
that the Company purchase such holder's Notes in whole or in part in integral
multiples of $1,000, at a purchase price (the "Change of Control Purchase
Price") in cash in an amount equal to 101% of the principal amount of such
Notes, plus accrued and unpaid interest, if any, to the date of purchase (the
"Change of Control Purchase Date"), pursuant to the offer described below (the
"Change of Control Offer") and in accordance with the other procedures set
forth in the Indenture.
Within 30 days following any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes, by first-class mail, postage prepaid, at his address
appearing in the security register, stating, among other things: (i) the
purchase price and the purchase date which shall be fixed by the Company on a
business day no earlier than 30 days nor later than 60 days from the date such
notice is mailed, or such later date as is necessary to comply with
requirements under the Act; (ii) that any Note not tendered will continue to
accrue interest, (iii) that, unless the Company defaults in the payment of the
purchase price, any Notes accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of Control
Purchase Date and (iv) certain other procedures that a holder of Notes must
follow to accept a Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. See "--Ranking." The
failure of the Company to make or consummate the Change of Control Offer or
pay the Change of Control Purchase Price when due will give the Trustee and
the holders of the Notes the rights described under "--Events of Default."
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing
law of the Indenture) to represent a specific quantitative test. As a
consequence, in the event the holders of the Notes elected to exercise their
rights under the Indenture and the Company elected to contest such election,
there could be no assurance as to how a court interpreting New York law would
interpret the phrase.
The existence of a holder's right to require the Company to repurchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
In addition to the obligations of the Company under the Indenture with
respect to the Notes in the event of a "Change of Control," substantially all
of the Company's long-term Indebtedness also contains an event of default upon
a "Change of Control" as defined therein which obligates the Company to repay
amounts outstanding under such indebtedness upon an acceleration of the
Indebtedness issued thereunder. See "Description of Certain Other
Indebtedness."
The provisions of the Indenture will not afford holders of Notes the right
to require the Company to repurchase the Notes in the event of a highly
leveraged transaction or certain transactions with the Company's management or
its Affiliates, including a reorganization, restructuring, merger or similar
transaction (including,
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in certain circumstances, an acquisition of the Company by management or its
Affiliates) involving the Company that may adversely affect holders of the
Notes, if such transaction is not a transaction defined as a Change of
Control. A transaction involving the Company's management or its Affiliates,
or a transaction involving a recapitalization of the Company, will result in a
Change of Control if it is the type of transaction specified by such
definition.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the any other applicable securities laws or regulations in
connection with a Change of Control Offer. (Section 1016)
Limitation on Restricted Subsidiary Capital Stock. The Company will not
permit (a) any Restricted Subsidiary of the Company to issue, sell or transfer
any Capital Stock, except for (i) Capital Stock issued or sold to, held by or
transferred to the Company or a Wholly Owned Restricted Subsidiary, and (ii)
Capital Stock issued by a Person prior to the time (A) such Person becomes a
Restricted Subsidiary, (B) such Person merges with or into a Restricted
Subsidiary or (C) a Restricted Subsidiary merges with or into such Person;
provided that such Capital Stock was not issued or incurred by such Person in
anticipation of the type of transaction contemplated by subclause (A), (B) or
(C) or (b) any Person (other than the Company or a Wholly Owned Restricted
Subsidiary) to acquire Capital Stock of any Restricted Subsidiary from the
Company or any Wholly Owned Restricted Subsidiary except, in the case of
clause (a) or (b), upon the acquisition of all the outstanding Capital Stock
of such Restricted Subsidiary in accordance with the terms of the Indenture.
(Section 1017)
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distribution on
its Capital Stock, (ii) pay any Indebtedness owed to the Company or any other
Restricted Subsidiary, (iii) make any Investment in the Company or any other
Restricted Subsidiary or (iv) transfer any of its properties or assets to the
Company or any other Restricted Subsidiary, except for: (a) any agreement in
effect on the date of the Indenture and listed on a schedule thereto; (b) any
encumbrance or restriction, with respect to a Restricted Subsidiary that is
not a Restricted Subsidiary of the Company on the date of the Indenture, in
existence at the time such Person becomes a Restricted Subsidiary of the
Company and not incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary; and (c) any encumbrance or
restriction existing under any agreement that extends, renews, refinances or
replaces the agreements containing the encumbrances or restrictions in the
foregoing clauses (a) and (b), or in this clause (c), provided that the terms
and conditions of any such encumbrances or restrictions are no more
restrictive in any material respect than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced or
replaced. (Section 1018)
Limitations on Unrestricted Subsidiaries. The Company will not make, and
will not permit its Restricted Subsidiaries to make, any Investment in
Unrestricted Subsidiaries if, at the time thereof, the aggregate amount of
such Investments would exceed the amount of Restricted Payments then permitted
to be made pursuant to the "--Limitation on Restricted Payments" covenant. Any
Investments in Unrestricted Subsidiaries permitted to be made pursuant to this
covenant (i) will be treated as a Restricted Payment in calculating the amount
of Restricted Payments made by the Company and (ii) may be made in cash or
property. (Section 1019)
Provision of Financial Statements. The Indenture provides that, whether or
not the Company or any Guarantor is subject to Section 13(a) or 15(d) of the
Exchange Act, the Company and such Guarantor will, to the extent permitted
under the Exchange Act, file with the Commission the annual reports, quarterly
reports and other documents which the Company and such Guarantor would have
been required to file with the Commission pursuant to such Section 13(a) or
15(d) if the Company and such Guarantor were so subject, such documents to be
filed with the Commission on or prior to the date (the "Required Filing Date")
by which the Company and such Guarantor would have been required so to file
such documents if the Company were so subject. The Company and such Guarantor
will also in any event (x) within 15 days of each Required Filing Date (i)
transmit by mail to all holders, as their names and addresses appear in the
security register, without cost to such holders and (ii) file with the Trustee
copies of the annual reports, quarterly reports and other documents which the
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Company and such Guarantor would have been required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the
Company and such Guarantor were subject to either of such Sections and (y) if
filing such documents by the Company and such Guarantor with the Commission is
not permitted under the Exchange Act, promptly upon written request and
payment of the reasonable cost of duplication and delivery, supply copies of
such documents to any prospective holder at the Company's and such Guarantor's
cost. (Section 1020)
Additional Covenants. The Indenture also contains covenants with respect to
the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in The City of New York; (iii) arrangements
regarding the handling of money held in trust; (iv) maintenance of corporate
existence; (v) payment of taxes and other claims; (vi) maintenance of
properties; and (vii) maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of affiliated Persons,
or permit any of its Subsidiaries to enter into any such transaction or series
of related transactions if such transaction or series of related transactions,
in the aggregate, would result in a sale, assignment, conveyance, transfer,
lease or disposition of all or substantially all of the properties and assets
of the Company and its Restricted Subsidiaries on a Consolidated basis to any
other Person or group of affiliated Persons, unless at the time and after
giving effect thereto (i) either (a) the Company will be the continuing
corporation or (b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its
Subsidiaries on a Consolidated basis (the "Surviving Entity") will be a
corporation duly organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and such
Person expressly assumes, by a supplemental indenture, in a form satisfactory
to the Trustee, all the obligations of the Company under the Notes and the
Indenture, as the case may be, and the Notes and the Indenture will remain in
full force and effect as so supplemented; (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis (and
treating any Indebtedness not previously an obligation of the Company or any
of its Restricted Subsidiaries which becomes the obligation of the Company or
any of its Restricted Subsidiaries as a result of such transaction as having
been incurred at the time of such transaction), no Default or Event of Default
will have occurred and be continuing; (iii) immediately after giving effect to
such transaction on a pro forma basis (and treating any Indebtedness not
previously an obligation of the Company or any of its Restricted Subsidiaries
which becomes the obligation of the Company or any of its Subsidiaries as a
result of such transaction as having been incurred at the time of such
transaction), the Consolidated Net Worth of the Company (or the Surviving
Entity if the Company is not the continuing obligor under the Indenture) is
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction; (iv) immediately before and immediately after
giving effect to such transaction on a pro forma basis (on the assumption that
the transaction occurred on the first day of the four-quarter period
immediately prior to the consummation of such transaction with the appropriate
adjustments with respect to the transaction being included in such pro forma
calculation), the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Indenture) could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the provisions of "--
Certain Covenants--Limitation on Indebtedness;" (v) at the time of the
transaction each Guarantor, if any, unless it is the other party to the
transactions described above, will have by supplemental indenture confirmed
that its Guarantees shall apply to such Person's obligations under the
Indenture and the Notes; (vi) at the time of the transaction if any of the
property or assets of the Company or any of its Restricted Subsidiaries would
thereupon become subject to any Lien, the provisions of "--Certain Covenants--
Limitation on Liens" are complied with; and (vii) at the time of the
transaction the Company or the Surviving Entity will have delivered, or caused
to be delivered, to the Trustee, in form and substance reasonably satisfactory
to the Trustee, an officers' certificate and an opinion of counsel, each to
the effect that such consolidation, merger, transfer, sale, assignment,
conveyance, transfer, lease or other transaction and the supplemental
indenture in
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respect thereof comply with the Indenture and that all conditions precedent
therein provided for relating to such transaction have been complied with.
(Section 801)
Each Guarantor shall not, and the Company will not permit a Guarantor to, in
a single transaction or through a series of related transactions, consolidate
with or merge with or into any other Person (other than the Company or any
Restricted Subsidiary) or sell, assign, convey, transfer, lease or otherwise
dispose of all or substantially all of its properties and assets on a
Consolidated basis to any Person or group of affiliated Persons (other than
the Company or any Restricted Subsidiary), or permit any of its Restricted
Subsidiaries to enter into any such transaction or series of related
transactions if such transaction or series of related transactions, in the
aggregate, would result in a sale, assignment, conveyance, transfer, lease or
disposition of all or substantially all of the properties and assets of the
Guarantor and its Restricted Subsidiaries on a Consolidated basis to any other
Person or group of affiliated Persons (other than the Company or any
Guarantor), unless at the time and after giving effect thereto (i) either (a)
the Guarantor will be the continuing corporation or (b) the Person (if other
than the Guarantor ) formed by such consolidation or into which such Guarantor
is merged or the Person which acquires by sale, assignment, conveyance,
transfer, lease or disposition all or substantially all of the properties and
assets of the Guarantor and its Subsidiaries on a Consolidated basis (the
"Surviving Guarantor Entity") will be a corporation duly organized and validly
existing under the laws of the United States of America, any state thereof or
the District of Columbia and such Person expressly assumes, by a supplemental
indenture, in a form satisfactory to the Trustee, all the obligations of such
Guarantor under its Guarantee of the Notes and the Indenture and such
Guarantee will remain in full force and effect; (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis, no
Default or Event of Default will have occurred and be continuing; and (iii) at
the time of the transaction such Guarantor or the Surviving Guarantor Entity
will have delivered, or caused to be delivered, to the Trustee, in form and
substance reasonably satisfactory to the Trustee, an officers' certificate and
an opinion of counsel, each to the effect that such consolidation, merger,
transfer, sale, assignment, conveyance, transfer, lease or other transaction
and the supplemental indenture in respect thereof comply with the Indenture
and that all conditions precedent therein provided for relating to such
transaction have been complied with. (Section 801)
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the two immediately preceding
paragraphs in which the Company or any Guarantor, as the case may be, is not
the continuing corporation, the successor Person formed or remaining shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company or any Guarantor, as the case may be, would be
discharged from all obligations and covenants under the Indenture and the
Notes or its Guarantee, as the case may be. (Section 802)
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any Note
when it becomes due and payable, and such default shall continue for a
period of 30 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Note at its Maturity (upon acceleration, optional
or mandatory redemption, if any, required repurchase or otherwise);
(iii) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under the Indenture
or any Guarantee (other than a default in the performance, or breach, of a
covenant or agreement which is specifically dealt with in clause (i) or
(ii) or in clause (b), (c) or (d) of this clause (iii)) and such default or
breach shall continue for a period of 30 days after written notice has been
given, by certified mail, (x) to the Company by the Trustee or (y) to the
Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes; (b) there shall be a default in
the performance or breach of the provisions described in "--Consolidation,
Merger, Sale of Assets;" (c) the Company shall have failed to make or
consummate an Offer in accordance with the provisions of "--Certain
Covenants--Limitation on Sale of Assets;" or (d) the Company shall have
failed to make or consummate a Change of Control Offer in accordance with
the provisions of "--Certain Covenants--Purchase of Notes Upon a Change of
Control;"
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(iv) one or more defaults shall have occurred under any agreements,
indentures or instruments under which the Company, any Guarantor or any
Restricted Subsidiary then has outstanding Indebtedness in excess of $5
million, individually or in the aggregate, and either (a) such default
results from the failure to pay such Indebtedness at its final maturity or
(b) such default or defaults have resulted in the acceleration of the
maturity of such Indebtedness;
(v) any Guarantee shall for any reason cease to be, or shall for any
reason be asserted in writing by any Guarantor or the Company not to be, in
full force and effect and enforceable in accordance with its terms except
to the extent contemplated by the Indenture and any such Guarantee;
(vi) one or more judgments, orders or decrees for the payment of money in
excess of $5 million, either individually or in the aggregate, shall be
rendered against the Company, any Guarantor or any Restricted Subsidiary or
any of their respective properties and shall not be discharged and either
(a) any creditor shall have commenced an enforcement proceeding upon such
judgment, order or decree or (b) there shall have been a period of 60
consecutive days during which a stay of enforcement of such judgment or
order, by reason of an appeal or otherwise, shall not be in effect;
(vii) any holder or holders of at least $10 million in aggregate
principal amount of Indebtedness of the Company, any Guarantor or any
Restricted Subsidiary after a default under such Indebtedness shall notify
the Trustee of the intended sale or disposition of any assets of the
Company, any Guarantor or any Subsidiary that have been pledged to or for
the benefit of such holder or holders to secure such Indebtedness or shall
commence proceedings, or take any action (including by way of set-off), to
retain in satisfaction of such Indebtedness or to collect on, seize,
dispose of or apply in satisfaction of Indebtedness, assets of the Company,
any Guarantor or any Restricted Subsidiary (including funds on deposit or
held pursuant to lock-box and other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company,
any Guarantor or any Significant Restricted Subsidiary in an involuntary
case or proceeding under any applicable Bankruptcy Law or (b) a decree or
order adjudging the Company, any Guarantor or any Significant Restricted
Subsidiary bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company, any Guarantor or
any Significant Restricted Subsidiary under any applicable federal or state
law, or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company, any Guarantor or
any Significant Restricted Subsidiary or of any substantial part of their
respective properties, or ordering the winding up or liquidation of their
respective affairs, and any such decree or order for relief shall continue
to be in effect, or any such other decree or order shall be unstayed and in
effect, for a period of 60 consecutive days; or
(ix) (a) the Company, any Guarantor or any Significant Restricted
Subsidiary commences a voluntary case or proceeding under any applicable
Bankruptcy Law or any other case or proceeding to be adjudicated bankrupt
or insolvent, (b) the Company, any Guarantor or any Significant Restricted
Subsidiary consents to the entry of a decree or order for relief in respect
of the Company, such Guarantor or such Significant Restricted Subsidiary in
an involuntary case or proceeding under any applicable Bankruptcy Law or to
the commencement of any bankruptcy or insolvency case or proceeding against
it, (c) the Company, any Guarantor or any Significant Restricted Subsidiary
files a petition or answer or consent seeking reorganization or relief
under any applicable federal or state law, (d) the Company, any Guarantor
or any Significant Restricted Subsidiary (I) consents to the filing of such
petition or the appointment of, or taking possession by, a custodian,
receiver, liquidator, assignee, trustee, sequestrator or similar official
of the Company, any Guarantor or such Significant Restricted Subsidiary or
of any substantial part of their respective properties, (II) makes an
assignment for the benefit of creditors or (III) admits in writing its
inability to pay its debts generally as they become due or (e) the Company,
any Guarantor or any Significant Restricted Subsidiary takes any corporate
action in furtherance of any such actions in this paragraph (ix). (Section
501)
If an Event of Default (other than as specified in clauses (viii) and (ix)
of the prior paragraph) shall occur and be continuing with respect to the
Indenture, the Trustee or the holders of not less than 25% in aggregate
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principal amount of the Notes then outstanding may, and the Trustee at the
request of such holders shall, declare all unpaid principal of, premium, if
any, and accrued interest on all Notes to be due and payable, by a notice in
writing to the Company (and to the Trustee if given by the holders of the
Notes) and upon any such declaration, such principal, premium, if any, and
interest shall become due and payable immediately. If an Event of Default
specified in clause (viii) or (ix) of the prior paragraph occurs with respect
to the Company, any Guarantor or any Significant Restricted Subsidiary and is
continuing, then all the Notes shall ipso facto become and be due and payable
immediately in an amount equal to the principal amount of the Notes, together
with accrued and unpaid interest, if any, to the date the Notes become due and
payable, without any declaration or other act on the part of the Trustee or
any holder. Thereupon, the Trustee may, at its discretion, proceed to protect
and enforce the rights of the holders of Notes by appropriate judicial
proceedings.
At any time after a declaration of acceleration, but before a judgment or
decree for payment of the money due has been obtained by the Trustee, the
holders of a majority in aggregate principal amount of Notes outstanding by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if (a) the Company has paid or deposited with
the Trustee a sum sufficient to pay (i) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, (ii) all
overdue interest on all Notes then outstanding, (iii) the principal of and
premium, if any, on any Notes then outstanding which have become due otherwise
than by such declaration of acceleration and interest thereon at a rate borne
by the Notes and (iv) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Notes; and (b) all
Events of Default, other than the non-payment of principal of the Notes which
have become due solely by such declaration of acceleration, have been cured or
waived as provided in the Indenture. (Section 502)
The holders of not less than a majority in aggregate principal amount of the
Notes outstanding may on behalf of the holders of all outstanding Notes waive
any past default under the Indenture and its consequences, except a default in
the payment of the principal of, premium, if any, or interest on any Note or
in respect of a covenant or provision which under the Indenture cannot be
modified or amended without the consent of the holder of each Note affected by
such modification or amendment. (Section 513)
The Company is also required to notify the Trustee within five business days
of the occurrence of any Default. The Company is required to deliver to the
Trustee, on or before a date not more than 60 days after the end of each
fiscal quarter and not more than 120 days after the end of each fiscal year, a
written statement as to compliance with the Indenture, including whether or
not any Default has occurred. (Section 1021) The Trustee is under no
obligation to exercise any of the rights or powers vested in it by the
Indenture at the request or direction of any of the holders of the Notes
unless such holders offer to the Trustee security or indemnity satisfactory to
the Trustee against the costs, expenses and liabilities which might be
incurred thereby. (Section 603)
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, if any, to obtain
payment of claims in certain cases or to realize on certain property received
by it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions, provided that if it acquires any
conflicting interest it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, any Guarantor and any other obligor upon the Notes
discharged with respect to the outstanding Notes ("defeasance"). Such
defeasance means that the Company, any such Guarantor and any other obligor
under the Indenture shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Notes, except for (i) the rights
of holders of such outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated,
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destroyed, lost or stolen Notes, and the maintenance of an office or agency
for payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee and (iv) the defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company and any Guarantor
released with respect to certain covenants that are described in the Indenture
("covenant defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or an Event of Default with respect
to the Notes. In the event covenant defeasance occurs, certain events (not
including non-payment, bankruptcy and insolvency events) described under "--
Events of Default" will no longer constitute an Event of Default with respect
to the Notes. (Sections 401, 402 and 403)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants or a nationally recognized investment
banking firm, to pay and discharge the principal of, premium, if any, and
interest on the outstanding Notes on the Stated Maturity (or on any date after
October 15, 2002 (such date being referred to as the "Defeasance Redemption
Date"), if at or prior to electing either defeasance or covenant defeasance,
the Company has delivered to the Trustee an irrevocable notice to redeem all
of the outstanding Notes on the Defeasance Redemption Date); (ii) in the case
of defeasance, the Company shall have delivered to the Trustee an opinion of
independent counsel in the United States stating that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of independent counsel in the United States shall
confirm that, the holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such defeasance
had not occurred; (iii) in the case of covenant defeasance, the Company shall
have delivered to the Trustee an opinion of independent counsel in the United
States to the effect that the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such covenant defeasance had not occurred; (iv) no Default or Event of
Default (other than a Default or Event of Default under the Indenture
resulting from the borrowing of funds to be applied to such deposit) shall
have occurred and be continuing on the date of such deposit or insofar as
clauses (viii) or (ix) under the first paragraph under "--Events of Default"
are concerned, at any time during the period ending on the 91st day after the
date of deposit; (v) such defeasance or covenant defeasance shall not cause
the Trustee for the Notes to have a conflicting interest as defined in the
Indenture and for purposes of the Trust Indenture Act with respect to any
securities of the Company or any Guarantor; (vi) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a
Default under, the Indenture or any other material agreement or instrument to
which the Company, any Guarantor or any Subsidiary is a party or by which it
is bound; (vii) such defeasance or covenant defeasance shall not result in the
trust arising from such deposit constituting an investment company within the
meaning of the Investment Company Act of 1940, as amended, unless such trust
shall be registered under such Act or exempt from registration thereunder;
(viii) the Company will have delivered to the Trustee an opinion of
independent counsel in the United States to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (ix) the Company shall have delivered
to the Trustee an officers' certificate stating that the deposit was not made
by the Company with the intent of preferring the holders of the Notes or any
Guarantee over the other creditors of the Company or any Guarantor with the
intent of defeating, hindering, delaying or defrauding creditors of the
Company, any Guarantor or others; (x) no event or condition shall exist that
would prevent the Company from making payments of the principal of, premium,
if any, and interest on the Notes on the date of such deposit or at any time
ending on the 91st day after the date of such deposit; and (xi) the Company
will have delivered to the Trustee an officers' certificate and an opinion of
independent counsel, each stating that all conditions precedent provided for
relating to either the defeasance or the covenant defeasance, as the case may
be, have been complied with. (Section 404)
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes as expressly provided for in the Indenture) as to all outstanding Notes
under the Indenture when (a) either (i) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid or Notes whose payment has been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust as provided for in the Indenture) have
been delivered to the Trustee for cancellation or (ii) all Notes not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable, (y) will become due and payable at their Stated Maturity within one
year, or (z) are to be called for redemption within one year under
arrangements satisfactory to the applicable Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company;
and the Company or any Guarantor has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust an amount in United States
dollars sufficient to pay and discharge the entire indebtedness on the Notes
not theretofore delivered to the Trustee for cancellation, including principal
of, premium, if any, and accrued interest at such Maturity, Stated Maturity or
redemption date; (b) the Company or any Guarantor has paid or caused to be
paid all other sums payable under the Indenture by the Company and any
Guarantor; and (c) the Company has delivered to the Trustee an officers'
certificate and an opinion of independent counsel each stating that (i) all
conditions precedent under the Indenture relating to the satisfaction and
discharge of such Indenture have been complied with and (ii) such satisfaction
and discharge will not result in a breach or violation of, or constitute a
default under, the Indenture or any other material agreement or instrument to
which the Company, any Guarantor or any Subsidiary is a party or by which the
Company, any Guarantor or any Subsidiary is bound. (Section 1201)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company,
each Guarantor, if any, and the Trustee with the consent of the holders of at
least a majority of aggregate principal amount of the Notes then outstanding;
provided, however, that no such modification or amendment may, without the
consent of the holder of each outstanding Note affected thereby: (i) change
the Stated Maturity of the principal of, or any installment of interest on, or
change to an earlier date any redemption date of, or waive a default in the
payment of the principal or interest on any such Note or reduce the principal
amount thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or change the coin or currency in which the principal of
any such Note or any premium or the interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment on or after
the Stated Maturity thereof (or, in the case of redemption, on or after the
redemption date); (ii) amend, change or modify the obligation of the Company
to make and consummate an Offer with respect to any Asset Sale or Asset Sales
in accordance with "--Certain Covenants--Limitation on Sale of Assets" or the
obligation of the Company to make and consummate a Change of Control Offer in
the event of a Change of Control in accordance with "--Certain Covenants--
Purchase of Notes Upon a Change of Control," including, in each case,
amending, changing or modifying any definitions relating thereto; (iii) reduce
the percentage in principal amount of such outstanding Notes, the consent of
whose holders is required for any such supplemental indenture, or the consent
of whose holders is required for any waiver or compliance with certain
provisions of the Indenture; (iv) modify any of the provisions relating to
supplemental indentures requiring the consent of holders or relating to the
waiver of past defaults or relating to the waiver of certain covenants, except
to increase the percentage of such outstanding Notes required for such actions
or to provide that certain other provisions of the Indenture cannot be
modified or waived without the consent of the holder of each such Note
affected thereby; (v) except as otherwise permitted under "--Consolidation,
Merger, Sale of Assets," consent to the assignment or transfer by the Company
or any Guarantor of any of its rights and obligations under the Indenture; or
(vi) amend or modify any of the provisions of the Indenture relating to the
subordination of the Notes or any Guarantee thereof in any manner adverse to
the holders of the Notes or any such Guarantee. (Section 902) No amendment or
modification of the Indenture shall adversely affect the rights of any holders
of Senior Indebtedness under the subordination provisions of the Indenture
unless the requisite holders of such issue of Senior Indebtedness affected
thereby shall have consented to such amendment or modification. (Section 909)
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Notwithstanding the foregoing, without the consent of any holders of the
Notes, the Company, any Guarantor, any other obligor under the Notes and the
Trustee may modify or amend the Indenture: (a) to evidence the succession of
another Person to the Company or a Guarantor, and the assumption by any such
successor of the covenants of the Company or such Guarantor in the Indenture
and in the Notes and in any Guarantee in accordance with "--Consolidation,
Merger, Sale of Assets"; (b) to add to the covenants of the Company, any
Guarantor or any other obligor upon the Notes for the benefit of the holders
of the Notes or to surrender any right or power conferred upon the Company or
any Guarantor or any other obligor upon the Notes, as applicable, in the
Indenture, in the Notes or in any Guarantee; (c) to cure any ambiguity, or to
correct or supplement any provision in the Indenture, the Notes or any
Guarantee which may be defective or inconsistent with any other provision in
the Indenture, the Notes or any Guarantee or make any other provisions with
respect to matters or questions arising under the Indenture, the Notes or any
Guarantee; provided that, in each case, such provisions shall not adversely
affect the interest of the holders of the Notes; (d) to comply with the
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act; (e) to add a
Guarantor under the Indenture; (f) to evidence and provide the acceptance of
the appointment of successor Trustee under the Indenture; or (g) to mortgage,
pledge, hypothecate or grant a security interest in favor of the Trustee for
the benefit of the holders of the Notes as additional security for the payment
and performance of the Company's and any Guarantor's obligations under the
Indenture, in any property, or assets, including any of which are required to
be mortgaged, pledged or hypothecated, or in which a security interest is
required to be granted to the Trustee pursuant to the Indenture or otherwise.
(Section 901)
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1022)
GOVERNING LAW
The Indenture and the Guarantees are, and the Exchange Notes will be,
governed by, and construed in accordance with, the laws of the State of New
York, without giving effect to the conflicts of law principles thereof.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition, as the case may be.
Acquired Indebtedness shall be deemed to be incurred on the date of the
related acquisition of assets from any Person or the date the acquired Person
becomes a Restricted Subsidiary, as the case may be.
"Affiliate" means, with respect to any specified Person: (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; (ii) any other Person that
owns, directly or indirectly, 5% or more of such specified Person's Capital
Stock or any officer or director of any such specified Person or other Person
or, with respect to any natural Person, any person having a relationship with
such Person by blood, marriage or adoption not more remote than first cousin;
or (iii) any other Person 5% or more of the Voting Stock of which is
beneficially owned or held directly or indirectly by such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
Sale and Leaseback Transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Subsidiary; (ii) all or substantially all of the properties and
assets of any division or line of business of the Company or its
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Subsidiaries; or (iii) any other properties or assets of the Company or any
Subsidiary other than in the ordinary course of business. For the purposes of
this definition, the term "Asset Sale" shall not include any transfer of
properties and assets (A) that is governed by the provisions described under
"--Consolidation, Merger, Sale of Assets," (B) that is by the Company to any
Guarantor, or by any Subsidiary to the Company or any Wholly Owned Subsidiary
in accordance with the terms of the Indenture, (C) that is of damaged, worn-
out or obsolete equipment in the ordinary course of business or (D) the Fair
Market Value of which in the aggregate does not exceed $1 million.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by
(ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization
or relief of debtors or any amendment to, succession to or change in any such
law.
"Capital Lease Obligation" of any Person means any obligation of such Person
and its Subsidiaries on a Consolidated basis under any capital lease of real
or personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock or other equity interests whether now outstanding or issued
after the date of the Indenture.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed
to have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total
outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board of directors or whose nomination for election by the
stockholders of the Company was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved),
cease for any reason to constitute a majority of such board of directors then
in office; (iii) the Company consolidates with or merges with or into any
Person or conveys, transfers or leases all or substantially all of its assets
to any Person, or any corporation consolidates with or merges into or with the
Company in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities
or other property, other than any such transaction where the outstanding
Voting Stock of the Company is not changed or exchanged at all (except to the
extent necessary to reflect a change in the jurisdiction of incorporation of
the Company) or where (A) the outstanding Voting Stock of the Company is
changed into or exchanged for (x) Voting Stock of the surviving corporation
which is not Redeemable Capital Stock or (y) cash, securities and other
property (other than Capital Stock of the surviving corporation) in an amount
which could be paid by the Company as a Restricted Payment as described under
"--Certain Covenants--Limitation on Restricted Payments" (and such amount
shall be treated as a Restricted Payment subject to the provisions in the
Indenture described under "--Certain Covenants--Limitation on Restricted
Payments") and (B) no "person" or "group" owns immediately after such
transaction, directly or indirectly, more than 50% of the total outstanding
Voting Stock of the surviving corporation; or (iv) the Company is liquidated
or dissolved or adopts a plan of liquidation or dissolution other than in a
transaction which complies with the provisions described under "--
Consolidation, Merger, Sale of Assets."
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing
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and performing the duties now assigned to it under the Trust Indenture Act
then the body performing such duties at such time.
"Commodity Price Protection Agreement" means any forward contract, commodity
swap, commodity option or other similar financial agreement or arrangement
relating to, or the value of which is dependent upon, fluctuations in
commodity prices.
"Common Stock" means the common stock, $.001 par value per share, of the
Company.
"Company" means The Maxim Group, Inc., a corporation incorporated under the
laws of Delaware, until a successor Person shall have become such pursuant to
the applicable provisions of the Indenture, and thereafter "Company" shall
mean such successor Person.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, for any
period, the ratio of (a) the sum of Consolidated Net Income (Loss),
Consolidated Interest Expense, Consolidated Income Tax Expense and
Consolidated Non-cash Charges deducted in computing Consolidated Net Income
(Loss) in each case, for such period, of such Person and its Restricted
Subsidiaries on a Consolidated basis, all determined in accordance with GAAP
to (b) the sum of Consolidated Interest Expense for such period and cash and
non-cash dividends paid on any Preferred Stock of such Person during such
period; provided that (i) in making such computation, the Consolidated
Interest Expense attributable to interest on any Indebtedness computed on a
pro forma basis and (A) bearing a floating interest rate shall be computed as
if the rate in effect on the date of computation had been the applicable rate
for the entire period and (B) which was not outstanding during the period for
which the computation is being made but which bears, at the option of such
Person, a fixed or floating rate of interest, shall be computed by applying at
the option of such Person either the fixed or floating rate and (ii) in making
such computation, the Consolidated Interest Expense of such Person
attributable to interest on any Indebtedness under a revolving credit facility
computed on a pro forma basis shall be computed based upon the average daily
balance of such Indebtedness during the applicable period.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person
and its Consolidated Restricted Subsidiaries for such period as determined in
accordance with GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
Restricted Subsidiaries for such period, on a Consolidated basis, including,
without limitation, (i) amortization of debt discount, (ii) the net costs
associated with Interest Rate Agreements, Currency Hedging Arrangements and
Commodity Price Protection Agreements (including amortization of discounts),
(iii) the interest portion of any deferred payment obligation and (iv) accrued
interest, plus (b) (i) the interest component of the Capital Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
Subsidiaries during such period and (ii) all capitalized interest of such
Person and its Subsidiaries plus (c) the interest expense under any Guaranteed
Debt of such Person and any Restricted Subsidiary to the extent not included
under clause (a)(iv) above.
"Consolidated Net Income (Loss)" of any Person means, for any period, the
Consolidated net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a Consolidated basis as determined in
accordance with GAAP, adjusted, to the extent included in calculating such net
income (or loss), by excluding, without duplication, (i) all extraordinary
gains or losses, net of taxes (less all fees and expenses relating thereto),
(ii) the portion of net income (or loss) of such Person and its Restricted
Subsidiaries on a Consolidated basis allocable to minority interests in
unconsolidated Persons to the extent that cash dividends or distributions have
not actually been received by such Person or one of its Consolidated
Restricted Subsidiaries, (iii) net income (or loss) of any Person combined
with such Person or any of its Restricted Subsidiaries on a "pooling of
interests" basis attributable to any period prior to the date of combination,
(iv) any gain or loss, net of taxes, realized upon the termination of any
employee pension benefit plan, (v) net gains (or losses), net of taxes (less
all fees and expenses relating thereto), in respect of dispositions of assets
other than in the ordinary course of business,
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(vi) the net income of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders, (vii) any
restoration to income of any contingency reserve, net of taxes, except to the
extent provision for such reserve was made out of income accrued at any time
following the date of the Indenture, or (viii) any gain, net of taxes, arising
from the acquisition of any securities, or the extinguishment, under GAAP, of
any Indebtedness of such Person.
"Consolidated Net Worth" of any Person, as of a date, means the Consolidated
stockholders' equity (excluding Redeemable Capital Stock) of such Person and
its Restricted Subsidiaries, as of such date, as determined in accordance with
GAAP.
"Consolidated Non-cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of such Person
and its Restricted Subsidiaries on a Consolidated basis for such period, as
determined in accordance with GAAP (excluding any non-cash charge which
requires an accrual or reserve for cash charges for any future period).
"Consolidation" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its Restricted Subsidiaries if and to the
extent the accounts of such Person and each of its Restricted Subsidiaries
would normally be consolidated with those of such Person, all in accordance
with GAAP. The term "Consolidated" shall have a similar meaning.
"Credit Facility" means the Credit Agreement dated as of August 26, 1997 by
and among the Company and the Guarantors as co-Borrowers, and First Union
National Bank, NationsBank, N.A., Fleet National Bank and the other lenders
named therein, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, as such credit
agreement and/or related documents may be amended, restated, supplemented,
renewed, replaced or otherwise modified from time to time whether or not with
the same agent, trustee, lenders or holders, and, subject to the provisos to
the next sentence, irrespective of any changes in the terms and conditions
thereof. Without limiting the generality of the foregoing, the term "Credit
Facility" shall include any amendment, amendment and restatement, renewal,
extension, restructuring, supplement or modification to the Credit Facility
and all refundings, refinancings and replacements of the Credit Facility,
including any agreement (i) extending the maturity of any Indebtedness
incurred thereunder or contemplated thereby, (ii) adding or deleting borrowers
or guarantors thereunder, so long as borrowers and issuers include the Company
and its successors and assigns, (iii) increasing the amount of Indebtedness
incurred thereunder or available to be borrowed thereunder, provided that on
the date such Indebtedness is incurred it would not exceed the amount
permitted to be incurred by clause (i) of the definition of Permitted
Indebtedness or (iv) otherwise altering the terms and conditions thereof;
provided, further, that in the case of clauses (i) through (iv), any such
agreement is not prohibited by the terms of the Indenture.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar
agreements or arrangements designed to protect against the fluctuations in
currency values.
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the board of directors of the Company who
does not have any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions. No non-
management director shall be deemed not to be a Disinterested Director by
reason of his or her receipt of reasonable and customary director's fees or
the participation in reasonable and customary director's stock grant, stock
option or stock benefit plans, or such other form of director remuneration as
is reasonable and customary.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which are in effect on the date of the Indenture.
"Guarantee" means the guarantee by any Guarantor of the Company's Indenture
Obligations pursuant to a guarantee given in accordance with the Indenture.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person referred to in the definition of Indebtedness below
guaranteed directly or indirectly in any manner by such Person, or in effect
guaranteed directly or indirectly by such Person through an agreement (i) to
pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to
assure the holder of such Indebtedness against loss, (iii) to supply funds to,
or in any other manner invest in, the debtor (including any agreement to pay
for property or services without requiring that such property be received or
such services be rendered), (iv) to maintain working capital or equity capital
of the debtor, or otherwise to maintain the net worth, solvency or other
financial condition of the debtor or (v) otherwise to assure a creditor
against loss; provided that the term "guarantee" shall not include
endorsements for collection or deposit, in either case in the ordinary course
of business.
"Guarantor" means the Subsidiaries listed as guarantors in the Indenture and
any other Subsidiary which is a guarantor of the Notes, including any Person
that is required after the date of the Indenture to execute a guarantee of the
Notes pursuant to the "Limitations on Liens" covenant or the "Limitation on
Issuance of Guarantees of Indebtedness" covenant until a successor replaces
such party pursuant to the applicable provisions of the Indenture and,
thereafter, shall mean such successor.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of
such Person in connection with any letters of credit issued under letter of
credit facilities, acceptance facilities or other similar facilities
outstanding, (ii) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments, (iii) all indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even if the rights and remedies
of the seller or lender under such agreement in the event of default are
limited to repossession or sale of such property), but excluding trade
payables arising in the ordinary course of business, (iv) all obligations
under Interest Rate Agreements, Currency Hedging Arrangements or Commodity
Price Protection Agreements of such Person, (v) all Capital Lease Obligations
of such Person, (vi) all Indebtedness referred to in clauses (i) through (v)
above of other Persons and all dividends of other Persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien, upon or
with respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness; provided, however, that
the amount determined to be Indebtedness of such Person due to such Lien under
this clause (vi) shall not exceed the Fair Market Value of the property
(including, without limitation, accounts and contract rights) subject to such
Lien, (vii) all Guaranteed Debt of such Person, (viii) all Redeemable Capital
Stock issued by such Person valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid dividends,
and (ix) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any liability of the types referred to
in clauses (i) through (viii) above. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Redeemable
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Capital Stock as if such Redeemable Capital Stock were purchased on any date
on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the Fair Market
Value of such Redeemable Capital Stock, such Fair Market Value to be
determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the Notes including any Guarantor, to pay
principal of, premium, if any, and interest when due and payable, and all
other amounts due or to become due under or in connection with the Indenture,
the Notes and the performance of all other obligations to the Trustee and the
holders under the Indenture and the Notes, according to the respective terms
thereof.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate
swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase, acquisition or ownership by such Person of any Capital Stock,
bonds, notes, debentures or other securities issued or owned by any other
Person and all other items that would be classified as investments on a
balance sheet prepared in accordance with GAAP.
"Issue Date" means the original issue date of the Notes under the Indenture.
"Lien" means any mortgage or deed of trust, charge, pledge, lien (statutory
or otherwise), privilege, security interest, assignment, deposit, arrangement,
easement, hypothecation, claim, preference, priority or other encumbrance upon
or with respect to any property of any kind (including any conditional sale,
capital lease or other title retention agreement, any leases in the nature
thereof, and any agreement to give any security interest), real or personal,
movable or immovable, now owned or hereafter acquired.
"Maturity" means, when used with respect to the Notes, the date on which the
principal of the Notes becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date or the
redemption date and whether by declaration of acceleration, Offer in respect
of Excess Proceeds, Change of Control Offer in respect of a Change of Control,
call for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof (without duplication in respect of all Asset Sales) in
the form of cash or Temporary Cash Investments including payments in respect
of deferred payment obligations when received in the form of, or stock or
other assets when disposed of for, cash or Temporary Cash Investments (except
to the extent that such obligations are financed or sold with recourse to the
Company or any Restricted Subsidiary) net of (i) brokerage commissions and
other reasonable fees and expenses (including fees and expenses of counsel and
investment bankers) related to such Asset Sale, (ii) provisions for all taxes
payable as a result of such Asset Sale, (iii) payments made to retire
Indebtedness where payment of such Indebtedness is secured by the assets or
properties the subject of such Asset Sale, (iv) amounts required to be paid to
any Person (other than the Company or any Restricted Subsidiary) owning a
beneficial interest in the assets subject to the Asset Sale and (v)
appropriate amounts to be provided by the Company or any Subsidiary, as the
case may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an officers'
certificate delivered to the Trustee and (b) with respect to any issuance or
sale of Capital Stock or options, warrants or rights to purchase Capital
Stock, or debt securities or Capital Stock that have been converted into or
exchanged for Capital Stock as referred to under "--Certain
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Covenants--Limitation on Restricted Payments," the proceeds of such issuance
or sale in the form of cash or Temporary Cash Investments including payments
in respect of deferred payment obligations when received in the form of, or
stock or other assets when disposed of for, cash or Temporary Cash Investments
(except to the extent that such obligations are financed or sold with recourse
to the Company or any Restricted Subsidiary), net of attorneys' fees,
accountants' fees and brokerage, consultation, underwriting and other fees and
expenses actually incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
"Pari Passu Indebtedness" means (a) any Indebtedness of the Company which
ranks pari passu in right of payment to the Notes and (b) with respect to any
Guarantee, Indebtedness which ranks pari passu in right of payment to such
Guarantee.
"Permitted Investment" means (i) Investments in any Wholly Owned Restricted
Subsidiary or any Person which, as a result of such Investment, (a) becomes a
Wholly Owned Restricted Subsidiary or (b) is merged or consolidated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or any Wholly Owned Restricted Subsidiary; (ii)
Indebtedness of the Company or a Restricted Subsidiary described under clauses
(iv), (v), (vi) and (vii) of the definition of "Permitted Indebtedness";
(iii) Temporary Cash Investments; (iv) Investments in any of the Notes; (v)
Investments acquired by the Company or any Restricted Subsidiary in connection
with an Asset Sale permitted under "--Certain Covenants--Limitation on Sale of
Assets" to the extent such Investments are non-cash proceeds as permitted
under such covenant; (vi) Investments in existence on the date of the
Indenture; (vii) guarantees of Indebtedness of a Wholly Owned Restricted
Subsidiary given by the Company or another Wholly Owned Restricted Subsidiary
and guarantees of Indebtedness of the Company given by any Restricted
Subsidiary, in each case, in accordance with the terms of the Indenture;
(viii) Investments in prepaid expenses; (ix) Investments represented by
accounts receivable created or acquired in the ordinary course of business;
(x) loans or advances to the Company's franchisees in the ordinary course of
business in an aggregate amount of $20 million at any one time outstanding;
(xi) loans to executive officers of the Company in the ordinary course of
business, not to exceed, together with loans to executive officers of the
Company then outstanding, $1 million; and (xii) any other Investments in the
aggregate amount of $1 million at any one time outstanding.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering with gross proceeds
to the Company of at least $25 million pursuant to a registration statement
that has been declared effective by the Commission (other than a registration
statement on Form S-8 or otherwise relating to equity securities issuable
under any employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and its Restricted Subsidiaries
and any additions and accessions thereto, which are purchased by the Company
and its Restricted Subsidiaries at any time after the Notes are issued;
provided that (i) the security agreement or conditional sales or other title
retention contract pursuant to which the Lien on such assets is created
(collectively a "Purchase Money Security Agreement") shall be entered into
within 90 days after the purchase or substantial completion of the
construction of such assets and shall at all times be confined solely to the
assets so purchased or acquired, any additions and accessions thereto and any
proceeds therefrom, (ii) at no time shall the aggregate principal amount of
the outstanding Indebtedness secured thereby be increased, except in
connection with the purchase of additions and accessions thereto and except in
respect of fees and other obligations in respect of such Indebtedness and
(iii) (A) the aggregate outstanding principal amount of
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Indebtedness secured thereby (determined on a per asset basis in the case of
any additions and accessions) shall not at the time such Purchase Money
Security Agreement is entered into exceed 100% of the purchase price to the
Company and its Restricted Subsidiaries of the assets subject thereto or (B)
the Indebtedness secured thereby shall be with recourse solely to the assets
so purchased or acquired, any additions and accessions thereto and any
proceeds therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable
or otherwise, is or upon the happening of an event or passage of time would
be, required to be redeemed prior to any Stated Maturity of the principal of
the Notes or is redeemable at the option of the holder thereof at any time
prior to any such Stated Maturity, or is convertible into or exchangeable for
debt securities at any time prior to any such Stated Maturity at the option of
the holder thereof.
"Restricted Subsidiary" means any Person, a majority of the equity ownership
or the Voting Stock of which is at the time owned, directly or indirectly, by
the Company or by one or more other Restricted Subsidiaries, or by the Company
and one or more other Restricted Subsidiaries; provided that any Unrestricted
Subsidiary shall not be deemed a Restricted Subsidiary under the Notes.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which the Company or a Restricted Subsidiary sells or
transfers any property or asset in connection with the leasing, or the resale
against installment payments, of such property or asset to the seller or
transferor.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Significant Restricted Subsidiary" means, at any particular time, any
Restricted Subsidiary that, together with the Subsidiaries of such Restricted
Subsidiary (i) for the most recent fiscal year of the Company accounted for
more than 10% of the Consolidated revenues of the Company and its Subsidiaries
or (ii) at the end of such fiscal year, was the owner (beneficial or
otherwise) of more than 10% of the Consolidated assets of the Company and its
Restricted Subsidiaries, all as calculated in accordance with GAAP and shown
on the Consolidated financial statements of the Company and its Restricted
Subsidiaries.
"Special Purpose Letter of Credit" means the letter of credit of up to $31
million issued by First Union National Bank under the Credit Facility pursuant
to the terms of the Reimbursement Agreement dated as of September 1, 1997,
among the Company, the Guarantors and First Union National Bank.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such installment
of interest, as the case may be, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor
subordinated in right of payment to the Notes or the Guarantee of such
Guarantor, as the case may be.
"Subsidiary" means any Restricted Subsidiary or Unrestricted Subsidiary.
"Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than one year after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof, and
guaranteed fully as to principal, premium, if any, and interest by the United
States of America, (ii) any certificate of deposit, maturing not more than one
year after the date of acquisition, issued by, or time deposit of, a
commercial banking institution that is a member of the Federal Reserve System
and that has combined capital and surplus and undivided profits of not less
than $500 million, whose debt has a rating, at the time as of which
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any investment therein is made, of "P-1" (or higher) according to Moody's
Investors Service, Inc. ("Moody's") or any successor rating agency or "A-1"
(or higher) according to Standard & Poor's Ratings Group, a division of McGraw
Hill, Inc. ("S&P"), or any successor rating agency, (iii) commercial paper,
maturing not more than one year after the date of acquisition, issued by a
corporation (other than an Affiliate or Subsidiary of the Company) organized
and existing under the laws of the United States of America with a rating, at
the time as of which any investment therein is made, of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P and (iv) any money
market deposit accounts issued or offered by a domestic commercial bank having
capital and surplus in excess of $500 million; provided that the short term
debt of such commercial bank has a rating, at the time of Investment, of "P-1"
(or higher) according to Moody's or "A-1" (or higher) according to S&P.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or
any successor statute.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all
of the following conditions apply: (a) neither the Company nor any of its
Restricted Subsidiaries provides credit support for Indebtedness of such
Subsidiary (including any undertaking, agreement or instrument evidencing such
Indebtedness), except Restricted Payments permitted to be made pursuant to the
"--Certain Covenants--Limitations on Restricted Payments" covenant, to the
extent the provision of such credit support is deemed to be a Restricted
Payment at the time of the provision of such credit support, (b) such
Subsidiary is not liable, directly or indirectly, with respect to any
Indebtedness other than Unrestricted Subsidiary Indebtedness, except
Restricted Payments permitted to be made pursuant to the "--Certain
Covenants--Limitations on Restricted Payments" covenant, to the extent such
Subsidiary's liability, direct or indirect, is deemed to be a Restricted
Payment, (c) any Investment in such Subsidiary made as a result of designating
such Subsidiary an Unrestricted Subsidiary shall not violate the provisions of
the "--Certain Covenants--Limitation on Unrestricted Subsidiaries" covenant
and such Unrestricted Subsidiary is not party to any agreement, contract,
arrangement or understanding at such time with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company or, in the event such condition
is not satisfied, the value of such agreement, contract, arrangement or
understanding to such Unrestricted Subsidiary shall be deemed a Restricted
Payment; and (d) such Unrestricted Subsidiary does not own any Capital Stock
in any Restricted Subsidiary of the Company which is not simultaneously being
designated an Unrestricted Subsidiary. Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by filing with the
Trustee a board resolution giving effect to such designation and an officers'
certificate certifying that such designation complies with the foregoing
conditions and shall be deemed a Restricted Payment on the date of designation
in an amount equal to the greater of (1) the net book value of such Investment
or (2) the fair market value of such Investment as determined in good faith by
the Company's Board of Directors. The Board of Directors of the Company may
designate any Unrestricted Subsidiary as a Restricted Subsidiary; provided
that (i) immediately after giving effect to such designation, the Company
could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the restrictions under the "--Certain Covenants--
Limitation on Indebtedness" covenant and (ii) all Indebtedness of such
Unrestricted Subsidiary shall be deemed to be incurred on the date such
Unrestricted Subsidiary becomes a Restricted Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Restricted Subsidiary is directly or indirectly liable (by
virtue of the Company or any such Restricted Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), except Guaranteed Debt of the Company or any Restricted
Subsidiary to any Affiliate, in which case (unless the incurrence of such
Guaranteed Debt resulted in a Restricted Payment at the time of incurrence)
the Company shall be deemed to have made a
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Restricted Payment equal to the principal amount of any such Indebtedness to
the extent guaranteed at the time such Affiliate is designated an Unrestricted
Subsidiary and (ii) which, upon the occurrence of a default with respect
thereto, does not result in, or permit any holder of any Indebtedness of the
Company or any Restricted Subsidiary to declare, a default on such
Indebtedness of the Company or any Subsidiary or cause the payment thereof to
be accelerated or payable prior to its Stated Maturity.
"Voting Stock" means Capital Stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of a corporation (irrespective of whether or not at the time Capital Stock of
any other class or classes shall have or might have voting power by reason of
the happening of any contingency).
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which is owned by the Company or another Wholly Owned
Restricted Subsidiary.
BOOK-ENTRY DELIVERY AND FORM
The 144A Notes offered and sold to Qualified Institutional Buyers (as
defined in Rule 144A under the Securities Act)("QIBs") in reliance on Rule
144A under the Securities Act are represented by a single, permanent Global
Note in definitive, fully registered book-entry form (the "Rule 144A Global
Note") and are registered in the name of Cede & Co., as nominee of DTC on
behalf of purchasers of the 144A Notes represented thereby for credit to the
respective accounts of such purchasers (or to such other accounts as they may
direct) at DTC.
The certificates representing the Exchange Notes will be issued in fully
registered form. Except as described in the next paragraph, the Exchange Notes
initially will be represented by a single, permanent global Exchange Note, in
definitive, fully registered form without interest coupons (the "Global
Exchange Note" and together with the Rule 144A Global Note, the "Global
Notes") and will be deposited with the Trustee as custodian for DTC and
registered in the name of Cede & Co. or such other nominee as DTC may
designate. The Global Exchange Note (and any Exchange Notes issued in exchange
therefor) will be subject to certain restrictions on transfer set forth
therein and in the Indenture and will bear the respective legends regarding
such restrictions.
Holders of Exchange Notes who elect to take physical delivery of their
certificates instead of holding their interest through the Global Exchange
Note (collectively referred to herein as the "Non-Global Holders") will be
issued in registered form a certificated Exchange Note ("Certificated Exchange
Note"). Upon the transfer of any Certificated Exchange Note initially issued
to a Non-Global Holder, such Certificated Exchange Note will, unless the
transferee requests otherwise or the Global Exchange Note has previously been
exchanged in whole for Certificated Exchange Notes, be exchanged for an
interest in the Global Exchange Note.
The Global Exchange Note
The Company expects that pursuant to procedures established by DTC (a) upon
deposit of the Exchange Global Note, DTC or its custodian will credit on its
internal system portions of the Global Exchange Note, which shall be comprised
of the corresponding respective amount of the Global Exchange Note to the
respective accounts of persons who have accounts with such depositary and (b)
ownership of the Exchange Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC or
its nominee (with respect to interests of Participants (as defined below) and
the records of Participants (with respect to interests of persons other than
Participants)). Ownership of beneficial interests in the Global Exchange Note
will be limited to persons who have accounts with DTC ("Participants") or
persons who hold interests through Participants. Holders may hold their
interests in the Global Exchange Note directly through DTC if they are
Participants in such system, or indirectly through organizations which are
Participants in such system.
So long as DTC or its nominee is the registered owner or holder of any of
the Exchange Notes, DTC or such nominee will be considered the sole owner or
holder of such Exchange Notes represented by the Global Exchange Note for all
purposes under the Indenture and under the Exchange Notes represented thereby.
No beneficial owner of an interest in the Global Exchange Note will be able to
transfer such interest except in accordance with the applicable procedures of
DTC in addition to those provided for under the Indenture.
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Payments of the principal of, premium, if any, and interest on the Global
Exchange Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee or any Paying Agent
under the Indenture will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in the Global Exchange Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium, if any, and interest on the Global Exchange Note
will credit Participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the principal amount of the Global
Exchange Note as shown on the records of DTC or its nominee. The Company also
expects that payments by Participants to owners of beneficial interests in the
Global Exchange Note held through such Participants will be governed by
standing instructions and customary practice as is now the case with Exchange
Notes held for the accounts of customers registered in the names of nominees
for such customers. Such payment will be the responsibility of such
Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a Certificated Exchange Note for any reason,
including to sell Exchange Notes to persons in states which require physical
delivery of such Exchange Notes or to pledge such Exchange Notes, such holder
must transfer its interest in the Global Exchange Note in accordance with the
normal procedures of DTC and in accordance with the procedures set forth in
the Indenture.
Any beneficial interest in one of the Global Notes that is transferred to a
person who takes delivery in the form of an interest in the other Global Note
will, upon transfer, cease to be an interest in such Global Note and become an
interest in the other Global Note and, accordingly, will thereafter be subject
to all transfer restrictions, if any, and other procedures applicable to
beneficial interests in such other Global Note for as long as it remains such
an interest.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
Participants to whose account the DTC interests in the Global Exchange Note
are credited and only in respect of the aggregate principal amount as to which
such Participant or Participants has or have given such direction. However, if
there is an Event of Default under the Indenture, DTC will exchange the Global
Exchange Note for Certificated Exchange Notes, which it will distribute to its
Participants and which, in the case of Certificated Exchange Notes, will be
legended.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Participant, either directly or indirectly.
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Exchange Note among
Participants of DTC, it is under no obligation to perform such procedures, and
such procedures may be discontinued at any time. None of the Company, the
Trustee, Registrar or the Paying Agent will have any responsibility for the
performance by DTC or its direct or indirect Participants of its obligations
under the rules and procedures governing its operations.
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Certificated Notes
Interests in the Global Exchange Note will be exchanged for Certificated
Exchange Notes if (i) DTC notifies the Company that it is unwilling or unable
to continue as depositary for the Global Exchange Note, or DTC ceases to be a
"Clearing Agency" registered under the Exchange Act, and a successor
depositary is not appointed by the Company within 90 days, or (ii) an Event of
Default has occurred and is continuing with respect to the Notes. Upon the
occurrence of any of the events described in the proceeding sentence, the
Company will cause the appropriate Certificated Exchange Notes to be
delivered.
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DESCRIPTION OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE EXCHANGE NOTES
The following is a summary of the material United States federal income tax
consequences of the acquisition, ownership and disposition of the Exchange
Notes by a United States Holder (as defined below). This summary deals only
with United States Holders that will hold the Exchange Notes as capital
assets. The discussion does not cover all aspects of federal taxation that may
be relevant to, or the actual tax effect that any of the matters described
herein will have on, the acquisition, ownership or disposition of the Exchange
Notes by particular investors, and does not address state, local, foreign or
other tax laws. In particular, this summary does not discuss all of the tax
considerations that may be relevant to certain types of investors subject to
special treatment under the federal income tax laws (such as banks, insurance
companies, investors liable for the alternative minimum tax, individual
retirement accounts and other tax-deferred accounts, tax-exempt organizations,
dealers in securities or currencies, investors that will hold the Exchange
Notes as part of straddles, hedging transactions or conversion transactions
for federal tax purposes or investors whose functional currency is not United
States dollars). Furthermore, the discussion below is based on provisions of
the Code, and regulations, rulings, and judicial decisions thereunder as of
the date hereof, and such authorities may be repealed, revoked or modified so
as to result in U.S. federal income tax consequences different from those
discussed below. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP, OR DISPOSITION
OF EXCHANGE NOTES SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISORS CONCERNING
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR
SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION.
As used herein, the term "United States Holder" means a beneficial owner of
the Exchange Notes that is (i) a citizen or resident of the United States for
United States federal income tax purposes, (ii) a corporation created or
organized under the laws of the United States or any State thereof, (iii) a
person or entity that is otherwise subject to United States federal income tax
on a net income basis in respect of income derived from the Exchange Notes, or
(iv) a partnership to the extent the interest therein is owned by a person who
is described in clause (i), (ii) or (iii) of this paragraph.
INTEREST
Interest paid on an Exchange Note will be taxable to a United States Holder
as ordinary income at the time it is received or accrued, depending on the
holder's method of accounting for tax purposes.
ORIGINAL ISSUE DISCOUNT
Under the applicable provisions of the Code (including the de minimis rule
of Code Section 1273(a)(3)), the 144A Notes were issued with no original issue
discount for federal income tax purposes. Because the Exchange Notes are
treated as a continuation of the 144A Notes, there would also be no original
issue discount applicable to the Exchange Notes.
PURCHASE, SALE, EXCHANGE, RETIREMENT AND REDEMPTION OF THE EXCHANGE NOTES
In general (with certain exceptions described below), a United States
Holder's tax basis in an Exchange Note will equal the price paid for the 144A
Notes for which such Exchange Note was exchanged pursuant to the Exchange
Offer. A United States Holder generally will recognize gain or loss on the
sale, exchange, retirement, redemption or other disposition of an Exchange
Note (or portion thereof) equal to the difference between the amount realized
on such disposition and the United States Holder's tax basis in the Exchange
Note (or portion thereof). Except to the extent attributable to accrued but
unpaid interest, gain or loss recognized on such disposition of an Exchange
Note will be capital gain or loss and will be long-term capital gain or loss
if such Exchange Note were held for more than one year and will be subject to
tax at a reduced rate if such Exchange Note were held for more than 18 months.
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BOND PREMIUM
If a United States Holder acquires an Exchange Note or acquired a 144A Note,
in each case, for an amount more than the amount payable at maturity (or at an
earlier call date if a smaller premium would result), the Holder may elect to
amortize and deduct such bond premium on a yield to maturity basis. Once made,
such an election applies to all bonds (other than bonds the interest on which
is excludable from gross income) held by the United States Holder at the
beginning of the first taxable year to which the election applies or
thereafter acquired by the United States Holder, unless the IRS consents to a
revocation of the election. The basis of an Exchange Note will be reduced by
any amortizable bond premium taken as a deduction.
MARKET DISCOUNT
The purchase of an Exchange Note or the receipt of an Exchange Note in
exchange for a 144A Note purchased other than at original issue may be
affected by the market discount provisions of the Code. These rules generally
provide that, subject to a statutorily defined de minimis exception, if a
United States Holder purchases an Exchange Note (or purchased a 144A Note) at
a "market discount," as defined below, and thereafter recognizes gain upon a
disposition of the Exchange Note (including dispositions by gift or
redemption), the lesser of such gain (or appreciation, in the case of a gift)
or the portion of the market discount that has accrued ("accrued market
discount") while the Exchange Note (and its predecessor 144A Note, if any) was
held by such United States Holder will be treated as ordinary interest income
at the time of disposition rather than as capital gain. For an Exchange Note
or a 144A Note, "market discount" is the excess of the stated redemption price
at maturity over the tax basis immediately after its acquisition by a United
States Holder. Market discount generally will accrue ratably during the period
from the date of acquisition to the maturity date of the Exchange Note, unless
the United States Holder elects to accrue such discount on the basis of the
constant yield method. Such an election applies only to the Exchange Note with
respect to which it is made and is irrevocable.
In lieu of including the accrued market discount in income at the time of
disposition, a United States Holder of an Exchange Note acquired at a market
discount (or acquired in exchange for a 144A Note acquired at a market
discount) may elect to include the accrued market discount in income currently
either ratably or using the constant yield method. Once made, such an election
applies to all other obligations that the United States Holder purchases at a
market discount during the taxable year for which the election is made and in
all subsequent taxable years of the United States Holder, unless the IRS
consents to a revocation of the election. If an election is made to include
accrued market discount in income currently, the basis of an Exchange Note
(or, where applicable, a predecessor 144A Note) in the hands of the United
States Holder will be increased by the accrued market discount thereon as it
is includible in income. A United States Holder of a market discount Exchange
Note who does not elect to include market discount in income currently
generally will be required to defer deductions for interest on borrowings
allocable to such Exchange Note, if any, in an amount not exceeding the
accrued market discount on such Exchange Note until the maturity or
disposition of such Exchange Note.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments of interest on, and the proceeds of sale or other disposition of
the Exchange Notes payable to a United States Holder may be subject to
information reporting requirements and backup withholding at a rate of 31%
will apply to such payments if, among other things, the United States Holder
fails to provide an accurate taxpayer identification number or to report all
interest and dividends required to be shown on its federal income tax returns.
Certain United States Holders (including, among others, corporations) are not
subject to backup withholding on such payments. United States Holders should
consult their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption.
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PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broder-Dealer in connection with resales of Exchange
Notes received in exchange for 144A Notes where such 144A Notes were acquired
as a result of market-making activities or other trading activities. The
Company has agreed that it will make this Prospectus, as amended or
supplemented available to any Participating Broker-Dealer for use in
connection with any such resale and Participating Broker-Dealers shall be
authorized to deliver this Prospectus in connection with the sale or transfer
of the Exchange Notes. In addition, until March 11, 1998 (90 days after the
date of this Prospectus), all dealers effecting transactions in the Exchange
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time, in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-
Dealer that resells the Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer. Any broker or dealer that participates
in a distribution of such Exchange Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
Exchange Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that, by acknowledging that it will deliver and
by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement of this Prospectus to any Participating Broker-Dealer
that requests such documents in the Letter of Transmittal. See "The Exchange
Offer."
The Company and the Guarantors have agreed to pay certain expenses incident
to the Exchange Offer and will indemnify the holders of the 144A Notes against
certain liabilities, including certain liabilities that may arise under the
Securities Act.
LEGAL MATTERS
Certain legal matters have been passed upon for the Company by Smith,
Gambrell & Russell, LLP, Atlanta, Georgia.
EXPERTS
The Consolidated Financial Statements and schedules included in this
Prospectus and incorporated by reference elsewhere in the Registration
Statement, to the extent and for the periods indicated in their reports, have
been audited by Arthur Andersen LLP, independent public accountants, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
The consolidated statements of operations, stockholders' equity and cash
flows of the Company for the year 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.
100
<PAGE>
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 January 31, 1996 and 1997 and July 31,
1997 (unaudited)........................................................ F-4
Consolidated Statements of Operations for the year ended March 31, 1995,
the ten months ended January 31, 1996, the year ended January 31, 1997,
and the six months ended July 31, 1996 and 1997 (unaudited)............. F-6
Consolidated Statements of Stockholders' Equity for the year ended March
31, 1995, the ten months ended January 31, 1996, the year ended January
31, 1997, and the six months ended July 31, 1997 (unaudited)............ F-7
Consolidated Statements of Cash Flows for the year ended March 31, 1995,
the ten months ended January 31, 1996, the year ended January 31, 1997,
and the six months ended July 31, 1996 and 1997 (unaudited)............. F-8
Notes to Consolidated Financial Statements............................... F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The Maxim Group, Inc.:
We have audited the accompanying consolidated balance sheets of THE MAXIM
GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of January 31, 1996
and 1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the ten months ended January 31, 1996 and the year
ended January 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Maxim Group, Inc. and
subsidiaries as of January 31, 1996 and 1997 and the results of their
operations and their cash flows for the ten months ended January 31, 1996 and
the year ended January 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 10, 1997
(Except with respect to the matter discussed in Note 20, as to which the date
is October 16, 1997.)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
The Maxim Group, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of The Maxim Group, Inc. (a Delaware
corporation) and subsidiaries for the year 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of The Maxim Group, Inc. and subsidiaries for the year ended March 31,
1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
December 23, 1996
F-3
<PAGE>
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1996 AND 1997 AND JULY 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
-----------------
JULY 31,
1996 1997 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted
cash of $1,028 and $621 at January 31, 1996 and
1997, respectively, and $256 at July 31, 1997.. $ 4,207 $ 6,439 $ 4,925
Current portion of franchise license fees
receivable, net of allowance for doubtful
accounts of $175 and $328 at January 31, 1996
and 1997, respectively, and $352 at July 31,
1997........................................... 1,894 2,070 2,474
Trade accounts receivable, net of allowance for
doubtful accounts of $1,605 and $1,380 at
January 31, 1996 and 1997, respectively, and
$1,582 at July 31, 1997........................ 33,037 43,487 49,974
Accounts receivable from officers and employees
(Note 6)....................................... 615 1,195 899
Current portion of notes receivable from
franchisees and related parties, net of
allowance for doubtful accounts of $383 and
$351 at January 31, 1996 and 1997,
respectively, and $351 at July 31, 1997 (Note
7)............................................. 1,008 1,034 1,233
Inventories (Note 5)............................ 49,170 42,148 47,168
Refundable income taxes......................... 2,176 1,311 976
Deferred income taxes (Note 11)................. 2,080 3,859 2,870
Prepaid expenses................................ 2,091 2,526 3,555
-------- -------- --------
Total current assets............................. 96,278 104,069 114,074
Property, plant, and equipment, net (Notes 4 and
10)............................................. 93,879 101,403 107,332
Franchise license fees receivable, less current
portion, net of allowance for doubtful accounts
of $210 at January 31, 1996 and 1997 and $240 at
July 31, 1997................................... 2,091 1,349 1,345
Notes receivable from franchisees, less current
portion......................................... 0 477 2,503
Deferred license fee, net of accumulated
amortization (Note 8)........................... 341 0 0
Intangible assets, net of accumulated
amortization of $704 and $1,232 at January 31,
1996 and 1997, respectively, and $1,314 at July
31, 1997 (Notes 2 and 3) ....................... 8,960 10,204 13,943
Other assets..................................... 536 2,171 4,997
-------- -------- --------
$202,085 $219,673 $244,194
======== ======== ========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
JANUARY 31,
----------------- JULY 31,
1996 1997 1997
LIABILITIES AND STOCKHOLDERS' EQUITY -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 9)...... $ 919 $ 2,532 $ 2,743
Current portion of capital lease obligations
(Note 10)...................................... 556 537 521
Rebates payable to franchisees.................. 3,673 3,471 3,761
Accounts payable................................ 17,167 23,583 20,604
Accrued expenses................................ 9,147 12,232 13,437
Deferred revenue................................ 1,284 967 2,613
Deposits........................................ 2,076 2,460 2,809
-------- -------- --------
Total current liabilities....................... 34,822 45,782 46,488
Long-Term Debt, Less Current Portion (Note 9).... 90,147 91,100 65,247
Capital Lease Obligations, Less Current Portion
(Note 10)........................................ 2,563 2,120 1,884
Deferred Income Taxes (Note 11).................. 2,403 4,517 6,820
-------- -------- --------
Total liabilities............................... 129,935 143,519 120,439
-------- -------- --------
Commitments and Contingencies (Notes 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, 12,397, 12,800 and 16,407 shares
issued and outstanding at January 31, 1996 and
1997 and July 31, 1997, respectively........... 12 13 16
Additional paid-in capital...................... 60,392 62,124 112,824
Treasury stock, at cost; 952,000 shares at July
31, 1997....................................... 0 0 (10,938)
Retained earnings............................... 11,746 14,017 21,853
-------- -------- --------
Total stockholders' equity...................... 72,150 76,154 123,755
-------- -------- --------
$202,085 $219,673 $244,194
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE>
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1995,
THE TEN MONTHS ENDED JANUARY 31, 1996,
THE YEAR ENDED JANUARY 31, 1997,
AND THE SIX MONTHS ENDED JULY 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED TEN MONTHS YEAR ENDED ENDED JULY 31,
MARCH 31, ENDED JANUARY 31, JANUARY 31, ------------------
1995 1996 1997 1996 1997
---------- ----------------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales of floorcovering
products (Note 12).... $174,935 $186,568 $250,968 $117,414 $148,371
Fees from franchise
services (Note 12).... 13,876 13,432 26,336 13,062 14,573
Fiber and PET sales.... 12,886 24,072 28,853 17,167 12,513
Other (Note 12)........ 1,644 3,479 3,564 1,680 3,011
-------- -------- -------- -------- --------
Total revenues...... 203,341 227,551 309,721 149,323 178,468
Cost of Sales....... 139,521 161,723 222,290 108,630 122,226
-------- -------- -------- -------- --------
Gross profit........ 63,820 65,828 87,431 40,693 56,242
Selling, general, and
administrative
expenses............... 46,870 59,197 72,366 36,259 41,163
Goodwill impairment
charge (Note 2)........ 0 6,569 0 0 0
Merger-related costs
(Note 3)............... 500 0 4,900 0 0
Other (income) expense:
Interest income........ (397) (415) (613) (311) (225)
Interest expense....... 1,839 4,695 7,006 3,213 2,663
Other.................. (421) (78) (302) (258) (84)
-------- -------- -------- -------- --------
Earnings (loss) be-
fore income taxes.. 15,429 (4,140) 4,074 1,790 12,725
Income tax expense (Note
11).................... 5,787 105 1,929 630 4,889
-------- -------- -------- -------- --------
Net earnings (loss)..... $ 9,642 $ (4,245) $ 2,145 $ 1,160 $ 7,836
======== ======== ======== ======== ========
Earnings (loss) per
common and common
equivalent share....... $ 0.72 $ (0.32) $ 0.15 $ 0.08 $ .47
======== ======== ======== ======== ========
Weighted average number
of common and common
equivalent shares
outstanding............ 13,301 13,301 13,937 13,696 16,623
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1995,
THE TEN MONTHS ENDED JANUARY 31, 1996,
THE YEAR ENDED JANUARY 31, 1997
AND THE SIX MONTHS ENDED JULY 31, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
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.................. 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...................... 0 0 0 (4,245) (4,245)
---------- --- -------- ------- --------
Balance, January 31, 1996..... 12,397,280 12 60,392 11,746 72,150
Acquisition and retirement of
treasury shares.............. (28,000) 0 (336) 0 (336)
Issuance of stock............. 93,333 0 1,278 0 1,278
Stock options exercised....... 95,576 0 719 0 719
Pooling of Bailey and Roberts
(Note 3)..................... 242,288 1 71 126 198
Net earnings.................. 0 0 0 2,145 2,145
---------- --- -------- ------- --------
Balance, January 31, 1997..... 12,800,477 13 62,124 14,017 76,154
Acquisition of 952,000
treasury shares.............. 0 0 (10,938) 0 (10,938)
Issuance of stock............. 3,175,773 3 47,237 47,240
Stock options exercised....... 159,447 0 463 463
Net earnings for the six
months ended July 31, 1997... 0 0 0 7,836 7,836
---------- --- -------- ------- --------
Balance, July 31, 1997
(unaudited).................. 16,135,697 $16 $ 98,886 $21,853 $120,755
========== === ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1995, THE TEN MONTHS ENDED JANUARY 31, 1996,
THE YEAR ENDED JANUARY 31, 1997 AND THE SIX MONTHS ENDED JULY 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS SIX MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED JULY 31,
MARCH 31, JANUARY 31, JANUARY 31, ------------------
1995 1996 1997 1996 1997
---------- ----------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net earnings (loss).... $ 9,642 $ (4,245) $ 2,145 $ 1,160 $ 7,836
-------- -------- -------- -------- --------
Adjustments to reconcile
net earnings (loss) to
net cash provided by
(used in) operating
activities:
Impairment write-down
of goodwill.......... 0 6,569 0 0 0
Depreciation and
amortization......... 5,225 8,008 10,518 5,535 5,845
Deferred income taxes. 2,329 (2,370) 335 80 3,293
Loss (gain) on sale of
assets............... (7) 124 367 60 0
Changes in assets and
liabilities:
Increase in
receivables.......... (9,962) (2,652) (10,254) (4,564) (8,557)
Decrease (increase) in
inventories.......... (10,801) (10,098) 7,544 5,203 (4,884)
Decrease (increase) in
refundable income
taxes................ (1,059) (1,118) 866 799 334
(Increase) decrease in
prepaid expenses and
other assets......... 24 (365) (1,865) (2,514) (3,847)
Increase in rebates
payable, accounts
payable, accrued
expenses, deferred
revenue, and
deposits............. 6,708 955 8,164 2,574 411
-------- -------- -------- -------- --------
Total adjustments..... (7,543) (947) 15,675 7,173 (7,405)
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities........... 2,099 (5,192) 17,820 8,333 431
-------- -------- -------- -------- --------
Cash Flows From Invest-
ing Activities:
Capital expenditures... (25,941) (15,580) (17,444) (7,111) (11,837)
Proceeds from sale of
assets................ 127 34 47 0 0
Acquisitions, net of
cash acquired......... (12,635) (13,875) (1,284) 0 (977)
-------- -------- -------- -------- --------
Net cash used in
investing activities. (38,449) (29,421) (18,681) (7,111) (12,814)
-------- -------- -------- -------- --------
Cash Flows From Financ-
ing Activities:
Proceeds from issuance
of common stock, net.. 2 0 606 0 47,240
Proceeds from exercise
of warrants and
options, net.......... 6,222 146 719 922 463
Purchase of
underwriter's
warrants.............. (1,503) 0 0 0 0
Purchase of treasury
stock................. 0 0 (336) (336) (10,938)
Net proceeds from
issuance of debt...... 33,278 37,718 89,806 39,450 21,358
Principal payments on
long-term debt........ (3,051) (1,179) (87,241) (41,757) (47,000)
Principal payments on
capital lease
obligations........... (348) (230) (461) (244) (254)
-------- -------- -------- -------- --------
Net cash provided by
financing activities. 34,600 36,455 3,093 (1,965) 10,869
-------- -------- -------- -------- --------
Net increase (decrease)
in cash................ (1,750) 1,842 2,232 (743) (1,514)
Cash, beginning of peri-
od..................... 4,115 2,365 4,207 4,207 6,439
-------- -------- -------- -------- --------
Cash, end of period..... $ 2,365 $ 4,207 $ 6,439 $ 3,464 $ 4,925
======== ======== ======== ======== ========
Supplemental disclosures
of cash flow informa-
tion:
Cash paid during the
period for:
Interest.............. $ 2,386 $ 4,073 $ 7,123 $ 3,184 $ 4,067
======== ======== ======== ======== ========
Income taxes........... $ 5,130 $ 3,189 $ 293 $ 450 $ 1,346
======== ======== ======== ======== ========
Supplemental disclosures
of noncash investing
and financing
activities:
Common stock issued in
connection with
acquisitions.......... $ 7,010 $ 4,825 $ 672 $ 0 $ 3,000
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995, JANUARY 31, 1996 AND 1997, AND JULY 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
1. DESRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Maxim Group, Inc. and subsidiaries (the "Company" or "Maxim") are
engaged in retail and commercial sales of floorcovering products. The Company
is also engaged in the sale of franchises for the retail floorcovering
industry and other related products and services to its franchisees. At
January 31, 1997, the Company had 368 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. Plastics recycling products
are the result of converting postconsumer plastics into polyethylene
terephthalate ("PET") flake, pellet, or polyester fiber. The recycled plastics
products are either used internally in the manufacturing of carpet or are 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 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 in fiscal year
1996. As a result, the fiscal year ended January 31, 1996 contains ten months.
The fiscal years ended March 31, 1995 and January 31, 1997 contain 12 months.
CASH AND CASH EQUIVALENTS
Cash balances include short-term interest-bearing deposits with original
maturities of 90 days or less. Short-term investments are stated at cost,
which approximates fair value.
ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION
Revenue from retail and commercial sales is recognized upon completion of
the installation of floorcoverings 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.
F-9
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recognizes franchise license fees as income on the date the
related 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 January 31, 1996 or 1997, 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.
FEES FROM FRANCHISE SERVICES
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.
The Company develops and offers its franchisees marketing and promotional
programs, including television, radio, print, and direct mail campaigns and
sales literature. Advertising production fees, excluding direct mail, are
considered earned once the ad is produced, and the related media commission
fees, if applicable, are considered earned once the commercial is aired.
Direct mail commissions are earned on the date of the franchisee's promotion
or sale.
INVENTORIES
Inventories, consisting of goods held for resale, are recorded at the lower
of cost or market. Cost is determined on a specific identification basis for
retail sales, and Image applies the standard cost method, both of which
approximate the first-in, first-out method. The Company's inventories consist
of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Retail.......................................... $14,862 $15,500
Image........................................... 34,308 26,648
------- -------
$49,170 $42,148
======= =======
</TABLE>
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.
The Company's buildings, furniture, fixtures, and equipment are depreciated
using the straight-line method over the estimated useful lives of the assets.
Improvements to leased premises are amortized on the straight-line method over
the life of the lease or the useful life of the improvement, whichever is
shorter. The Company's property and equipment are depreciated using the
following estimated useful lives:
Buildings 10 to 40 years
Leasehold improvements 3 to 20 years
Machinery and equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
Transportation equipment 5 to 12 years
F-10
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $668 and $564 was charged to earnings in 1996 and 1997,
respectively.
Organizational costs have been deferred and are being amortized over 60
months using the straight-line method.
REALIZATION OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of its long-lived
assets, including goodwill, in relation to their operating performance and
future undiscounted cash flows of the underlying businesses. The Company
adjusts the carrying amount of the assets or goodwill if the unamortized
balance exceeds the estimate of future cash flows (Note 2).
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 through January 31, 1996 and 932,615 for the year ended January 31,
1997 (Note 13).
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Effective in fiscal year 1997, the Company adopted the disclosure
option of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 requires that
companies which do not choose to account for stock-based compensation as
prescribed by the statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted. Additionally,
certain other disclosures are required with respect to stock compensation and
the assumptions used to determine the pro forma effects of SFAS No. 123.
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.
F-11
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain prior year financial statement balances have been reclassified to
conform with the current year presentation.
INTERIM UNAUDITED DATA FOR THE SIX MONTHS ENDED JULY 31, 1996 AND 1997
In the opinion of management, the unaudited consolidated financial
statements contain all the normal and recurring adjustments necessary to
present fairly the financial position of the Company as of July 31, 1997 and
the results of the Company's operations and its cash flows for the six months
ended July 31, 1996 and 1997 in conformity with generally accepted accounting
principles. The results of operations for the six months ended July 31, 1997
are not necessarily indicative of the results to be expected for the year.
2. GOODWILL IMPAIRMENT
Certain of the Company's acquisitions did not perform as anticipated at the
time of purchase. Several acquired stores were closed, management was
replaced, and a loss of revenues was experienced from building contracts in
certain locations. The poor financial results of these stores through the end
of fiscal 1996 led management to reevaluate operations. This analysis
indicated significant strategic and operational changes would be necessary at
some stores, including changes in the customer mix, location, store design,
and merchandising. These factors also caused management to assess the
realizability of the goodwill recorded for these 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 acquisitions. 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
recorded during fiscal 1996.
3. ACQUISITIONS
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). In addition, the Company incurred an
additional $200 in merger-related costs related to the merger with Bailey &
Roberts Flooring, Inc. ("Bailey & Roberts"). These amounts have 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, 1995 and the ten
months ended January 31, 1996 are presented below:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
MARCH 31, 1995 JANUARY 31, 1996
--------------- ----------------
INCOME
REVENUES INCOME REVENUES (LOSS)
-------- ------ -------- -------
<S> <C> <C> <C> <C>
The Maxim Group, Inc.......................... $ 76,091 $2,385 $ 99,290 $(7,274)
Image Industries, Inc......................... 127,250 7,257 128,261 3,029
-------- ------ -------- -------
Total......................................... $203,341 $9,642 $227,551 $(4,245)
======== ====== ======== =======
</TABLE>
In May 1994, the Company commenced a strategy of acquiring independent
floorcovering retailers, with the goal of building a company-owned chain of
stores in addition to the franchise network. This acquisition
F-12
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
program included selected franchisees and other independent dealers. Through
January 31, 1997, the Company has acquired 14 retail floorcovering companies,
currently representing 57 stores. The Company issued $8,100 of common stock
(606,844 shares) and paid cash of approximately $14,200 to consummate those
acquisitions accounted for under the purchase method. As a result of these
acquisitions, the Company has recorded goodwill of $11,300 (net of goodwill
impairment charge of $6,600), which is being amortized over 20 years. The GCO
and Bailey & Roberts acquisitions, in which the Company issued 790,603 and
242,288 shares, respectively, were accounted for as a pooling of interests.
The consolidated financial statements of the Company were not restated for
the Bailey & Roberts merger for the periods prior to the merger, November 1,
1996, as the effect of the restatement would not have been material to such
periods.
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.
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at January 31, 1996 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Land and improvements........................................ $ 3,596 $ 4,331
Buildings and leasehold improvements......................... 34,503 40,882
Machinery and equipment...................................... 77,691 83,886
Furniture and fixtures....................................... 2,024 3,344
Transportation equipment..................................... 2,323 3,207
Construction in progress..................................... 1,930 3,267
-------- --------
122,067 138,917
Less accumulated depreciation and amortization............... 28,188 37,514
-------- --------
$ 93,879 $101,403
======== ========
</TABLE>
5. INVENTORIES
Inventories at January 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Raw materials............................................. $16,381 $ 9,097
Work in process........................................... 2,665 3,271
Finished goods............................................ 30,124 29,780
------- -------
Total................................................. $49,170 $42,148
======= =======
</TABLE>
6. ACCOUNTS RECEIVABLE FROM OFFICER 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.
F-13
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES RECEIVABLE FROM FRANCHISEES AND RELATED PARTIES
The Company has made loans to certain franchisees totaling $926 and $1,479
at January 31, 1996 and 1997, 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 an interest rate of 7%, totaling $82 and $32 at January 31, 1996
and 1997, 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 $694 and $1,035 as of January 31, 1996 and
1997, respectively.
9. LONG-TERM DEBT
Long-term debt at January 31, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Credit facility................................................ $ 0 $93,000
Revolving line-of-credit agreement............................. 22,185 0
Note payable to bank under revolving credit agreement.......... 61,980 0
Other debt with interest ranging from approximately 6% to 13%;
a portion secured by land, building, transportation equipment,
and other property and maturing at various dates through 2004. 6,901 632
------- -------
91,066 93,632
Less current portion........................................... 919 2,532
------- -------
Long-term debt, less current portion........................... $90,147 $91,100
======= =======
</TABLE>
The aggregate annual maturities of long-term debt subsequent to January 31,
1997 are as follows:
<TABLE>
<S> <C>
Year ending January 31:
1998............................................................. $ 2,532
1999............................................................. 8,344
2000............................................................. 41,314
2001............................................................. 8,254
2002............................................................. 9,563
2003 and thereafter.............................................. 23,625
-------
$93,632
=======
</TABLE>
On August 30, 1996, the Company entered into an agreement with a bank that
provided three credit facilities aggregating $125,000 (the "Credit Facility").
The Credit Facility was executed in conjunction with the merger of the Company
and Image. Borrowings under the Credit Facility were used to refinance the
existing debt. The Credit Facility consists of (i) a $65,000 revolving
facility, of which $3,300 was available for borrowings on January 31, 1997 and
which matures August 1999, (ii) a $30,000 term facility that matures in
December 2001, and (iii) a $30,000 term facility that matures in September
2003. As of January 31, 1997, the Company had fully borrowed amounts available
under both term facilities and had $33,000 outstanding under the revolving
facility. Amounts borrowed under the revolving facility are limited to the sum
of 80% of eligible accounts receivable and 40% of eligible inventory. A fee of
.5% per annum is charged on the unused revolving facility. Amounts
F-14
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 31, 1997,
the weighted average interest rate on amounts outstanding under the Credit
Facility was 8.26%. The Credit Facility requires the Company to meet certain
financial ratios and covenants, including debt to equity, minimum tangible net
worth, interest coverage, and fixed charge coverage, each as defined. The
revolving credit agreement contains other covenants which establish
limitations on dividends, acquisitions, additional indebtedness, and limit
annual capital expenditures to $18 million through the fiscal year ended
January 31, 1998. As of January 31, 1997, the Company was not in compliance
with one of its debt coverage financial covenants under the Credit Facility.
However, the bank granted a waiver for such noncompliance through April 30,
1997.
Maxim's prior revolving line of credit agreement (the "Agreement") was
amended during fiscal 1996 to provide borrowings of up to $23,000. The
interest rate charged varied 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 were 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 was repaid August 30, 1996 from the Credit Facility's proceeds.
Image's prior 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%. Effective
November 6, 1995, the Company renegotiated its Facility with the lender and
two other financial institutions. The restated Facility allowed the Company to
borrow up to $70,000, 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%. The borrowings under the agreement were secured by a first
priority lien on all assets. The Facility was repaid August 30, 1996 from the
Credit Facility's proceeds.
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 $2,970, $4,026, and $5,225
for the year ended March 31, 1996, the ten months ended January 31, 1996, and
the year ended January 31, 1997, respectively, including $462 in 1995, $334 in
1996, and $328 in 1997 paid to related parties.
Included in property and equipment are the following assets held under
capital leases:
<TABLE>
<CAPTION>
RELATED-PARTY OTHER TOTAL
------------- ------ ------
<S> <C> <C> <C>
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
====== ====== ======
January 31, 1997:
Buildings and improvements........................ $2,760 $1,080 $3,840
Machinery and equipment........................... 75 626 701
------ ------ ------
Assets under capital leases...................... 2,835 1,706 4,541
Less accumulated amortization..................... 1,033 567 1,600
------ ------ ------
Assets under capital leases, net................... $1,802 $1,139 $2,941
====== ====== ======
</TABLE>
F-15
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Minimum future lease obligations on long-term noncancelable leases in effect
at January 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES
-------------------------- OPERATING
RELATED-PARTY OTHER TOTAL LEASES
------------- ----- ------ ---------
<S> <C> <C> <C> <C>
Year ending January 31:
1998....................................... $ 473 $238 $ 711 $ 4,777
1999....................................... 471 214 685 3,842
2000....................................... 467 200 667 3,071
2001....................................... 335 149 484 1,742
2002....................................... 263 111 374 1,355
2003 and thereafter........................ 234 0 234 2,274
------ ---- ------ -------
Total minimum lease payments............. 2,243 912 3,155 $17,061
=======
Less amounts representing interest......... 367 131 498
Less current portion....................... 350 187 537
------ ---- ------
$1,526 $594 $2,120
====== ==== ======
</TABLE>
11. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
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
====== ======= ======
Year ended January 31, 1997:
U.S. federal...................................... $ 953 $ 824 $1,777
State and local................................... 146 6 152
------ ------- ------
$1,099 $ 830 $1,929
====== ======= ======
</TABLE>
Income tax expense (benefit) differed from the amounts computed by applying
the U.S. federal income tax rate of 34% to pretax earnings (loss) as a result
of the following:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
MARCH 31, 1995 JANUARY 31, 1996 JANUARY 31, 1997
-------------- ---------------- ----------------
<S> <C> <C> <C>
Computed "expected" tax
expense (benefit)......... $5,246 $(1,408) $1,385
Increase in income taxes
resulting from:
Goodwill impairment
charge................... 0 1,110 0
Nondeductible merger
costs.................... 0 0 430
Nondeductible expenses.... 178 199 243
State and local income
taxes, net of federal
income tax benefit....... 378 (60) 100
Other, net................ (15) 264 (229)
------ ------- ------
$5,787 $ 105 $1,929
====== ======= ======
</TABLE>
F-16
<PAGE>
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 January 31, 1996 and 1997
are presented below:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Deductible goodwill...................................... $ 1,244 $ 1,114
Accounts receivable, principally due to allowance for
doubtful accounts....................................... 976 869
Inventories, principally due to additional costs
inventoried for tax purposes............................ 1,353 1,161
Accrued expenses......................................... 874 1,941
Special charge--replacement stock options................ 3,249 3,126
Net operating loss and credit carryforwards.............. 1,315 769
Other, net............................................... 23 1,161
------- -------
Total deferred tax assets............................. 9,034 10,141
Deferred tax liabilities:
Plant and equipment, principally due to difference in
depreciation............................................ (7,870) (9,605)
Deferred franchise and other revenue..................... (1,111) (538)
Other, net............................................... (376) (656)
------- -------
Total deferred tax liabilities........................ (9,357) (10,799)
------- -------
Net deferred tax liabilities.............................. $ (323) $ (658)
======= =======
</TABLE>
No valuation allowance was recorded against deferred tax assets at January
31, 1996 or 1997. The Company's management believes the existing net temporary
differences comprising total deferred tax assets will reverse during periods
in which the Company will generate net taxable income. The Company's net
operating loss carryforwards expire in 2009. 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 January 31, 1996 and 1997 include
amounts due from these affiliated companies of $85 and $21, respectively. In
addition, rebates payable to franchisees at January 31, 1996 and 1997 include
amounts due to director-owned franchises of $26 and $81, respectively.
Included in fees from brokering floorcovering products for the year ended
March 31, 1995, the ten months ended January 31, 1996, and the year ended
January 31, 1997 are $76, $105, and $157, respectively, earned from services
provided to affiliated franchises. Included in franchise services for the year
ended March 31, 1995, the ten months ended January 31, 1996, and the year
ended January 31, 1997 are $318, $106, and $95, respectively, from services
purchased by affiliated franchises.
Included in sales of floorcovering products for the year ended March 31,
1995, the ten months ended January 31, 1996, and the year ended January 31,
1997 are $176, $216, and $110, respectively, for carpet purchased by
affiliated franchises.
Included in other revenues for the year ended March 31, 1995, the ten months
ended January 31, 1996, and the year ended January 31, 1997 are $18, $9, and
$39, respectively, for purchases by affiliated franchises.
Included in interest expense for the year ended March 31, 1995, the ten
months ended January 31, 1996, and the year ended January 31, 1997 are
approximately $0, $0, and $10, respectively, of interest on notes payable to
stockholders.
F-17
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 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 January 31, 1997, Mr. Nassar had a demand note payable to the Company
for $809, accruing interest at the prime rate.
13. STOCKHOLDERS' EQUITY
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 IPO 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 January 31, 1996 and 1997, as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Options outstanding at beginning of fiscal year... 634,210 821,308
Options granted................................... 395,400 771,000
Options canceled.................................. (181,036) (41,224)
Options exercised................................. (27,266) (95,576)
------------ ------------
Options outstanding at end of fiscal year......... 821,308 1,455,508
============ ============
Option prices per share (excluding replacement
stock options):
Options granted during the fiscal year............ $9.00-$11.75 $9.75-$15.50
Options canceled.................................. $5.25-$15.50 $5.25-$13.50
Options exercised................................. $5.25-$10.50 $5.25-$11.75
Options outstanding at end of fiscal year......... $5.25-$14.50 $5.25-$15.50
</TABLE>
The majority of the employee options become exercisable in increments
ranging from 20% to 33 1/3% per year beginning on September 30, 1994 and
ending on November 27, 2001. 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 250,000 are currently
exercisable.
F-18
<PAGE>
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 (pretax) 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, 1997,
932,615 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 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 Conversion and the Stock Option Plan were converted
into like options to purchase shares in the combined entity.
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for employee stock options or similar equity instruments.
However, it also allows an entity to continue to measure compensation cost for
those plans using the method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with
the accounting in APB No. 25 must make pro forma disclosures of net earnings
and earnings per share as if the fair value-based method of accounting defined
in the statement had been applied.
The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during fiscal 1997 and 1996 using
the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the
following weighted average assumptions used for grants in fiscal 1996 and
1997:
<TABLE>
<S> <C>
Risk-free interest rate......................................... 5.5%-6.8%
Expected dividend yield......................................... 0%
Expected lives.................................................. 7.5 years
Expected volatility............................................. 50%
</TABLE>
The total value of the options granted during the ten months ended January
31, 1996 and the year ended January 31, 1997 was computed as approximately
$2,100 and $4,779, respectively, which would be amortized over the vesting
period of the options. Options vest equally over five years. If the Company
had accounted for these plans in accordance with SFAS No. 123, the Company's
reported pro forma net earnings and pro forma net earnings per share for the
ten months ended January 31, 1996 and the year ended January 31, 1997 would
have decreased to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
Pro forma net earnings (loss):
As reported in the financial statements...................... $(4,245) $2,145
Pro forma in accordance with SFAS No. 123.................... (4,309) 1,560
Pro forma net earnings (loss) per common and common equivalent
share:
As reported in the financial statements...................... $ (.32) $ .15
Pro forma in accordance with SFAS No. 123.................... $ (.32) $ .11
</TABLE>
F-19
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. EMPLOYMENT AGREEMENTS
The Company has entered into separate three-year employment agreements with
certain key officers. These contracts provide for aggregate base salaries of
approximately $1,000, 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. EMPLOYMENT 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 $822 and $128, respectively, for the ten months ended January 31,
1996 and $850 and $169, respectively, for the year ended January 31, 1997.
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. The Company has not made any
contributions to the Image Plan for the ten months ended January 31, 1996 or
the year ended January 31, 1997.
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.
17. BUSINESS AND CREDIT CONCENTRATION
In fiscal years 1995, 1996, and 1997, export sales accounted for
approximately 11%, 8%, and 6%, 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 8%, 5%, and 4% of net sales
in fiscal years 1995, 1996, and 1997, respectively.
In 1995, 1996, and 1997, one customer accounted for approximately 8%, 4%,
and 2%, respectively, of the Company's net sales.
F-20
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Ten months ended January 31, 1996:
Maxim net sales...................... $27,989 $31,849 $31,364 $ 8,088
Image net sales...................... 35,565 37,337 42,378 12,981
------- ------- ------- -------
Total Company net sales.............. 63,554 69,186 73,742 21,069
------- ------- ------- -------
Maxim gross profit................... 11,974 13,681 13,181 1,646
Image gross profit................... 8,722 6,965 7,350 2,309
------- ------- ------- -------
Total Company gross profit........... 20,696 20,646 20,531 3,955
------- ------- ------- -------
Maxim net earnings (loss)............ 919 1,212 418 (9,823)
Image net earnings................... 1,676 655 661 37
------- ------- ------- -------
Total Company net earnings (loss).... 2,595 1,867 1,079 (9,786)(a)
------- ------- ------- -------
Maxim net earnings (loss) per share.. 0.07 0.09 0.03 (0.73)
Image net earnings per share......... 0.12 0.05 0.05 0.00
------- ------- ------- -------
Total Company net earnings (loss) per
share............................... 0.19 0.14 0.08 (0.73)
------- ------- ------- -------
Year ended January 31, 1997:
Maxim net sales...................... $33,655 $36,438 $38,110 $38,838
Image net sales...................... 39,587 39,643 44,029 39,421
------- ------- ------- -------
Total Company net sales.............. 73,242 76,081 82,139 78,259
------- ------- ------- -------
Maxim gross profit................... 13,643 13,320 13,991 13,426
Image gross profit................... 6,641 7,088 9,845 9,477
------- ------- ------- -------
Total Company gross profit........... 20,284 20,408 23,836 22,903
------- ------- ------- -------
Maxim net earnings (loss)............ 1,007 (92) (2,171) 521
Image net earnings (loss)............ 145 100 1,059 1,576
------- ------- ------- -------
Total Company net earnings (loss).... 1,152 8 (1,112)(b) 2,097
------- ------- ------- -------
Maxim net earnings (loss) per share.. 0.07 (0.01) (0.16) 0.04
Image net earnings (loss) per share.. 0.01 0.01 0.08 0.11
------- ------- ------- -------
Total Company net earnings (loss) per
share............................... 0.08 0.00 (0.08) 0.15
------- ------- ------- -------
</TABLE>
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(a) Includes a goodwill impairment charge of $6,569 (pre-tax).
(b) Includes merger-related costs of $4,700 (pre-tax).
19. SUBSEQUENT EVENT
On February 18, 1997, the Company sold 3,175,773 shares of its common stock
to the public. The Company received approximately $47,900 of proceeds from the
offering, and such proceeds were utilized to reduce amounts outstanding under
the Company's Credit Facility.
F-21
<PAGE>
THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20.SUBSEQUENT EVENT
On October 16, 1997, the Company sold $100,000 of 9 1/4% Senior Subordinated
Notes due 2007 (the "Notes") in a private transaction. The proceeds to the
Company, net of an issue discount, fees and related costs, were approximately
$95,900. The Company used approximately $82,700 of the net proceeds to repay
all borrowings outstanding under its credit facility. The Company will use the
remaining proceeds for general corporate purposes. In connection with the
offering, the Company entered into a registration rights agreement which
grants holders of the Notes certain exchange and registration rights. The
Notes are fully and unconditionally guaranteed by all of the Company's
subsidiaries on a joint and several basis.
F-22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE ISSUERS OR ANY OF THE INITIAL PURCHASERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
EXCHANGE NOTES OR GUARANTEES IN ANY JURISDICTION WHERE, 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 AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGES IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE ISSUERS SINCE THE DATE
HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cautionary Notice Regarding Forward-Looking Statements.................... 1
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 14
The Exchange Offer........................................................ 22
Certain Federal Income Tax Consequences of the Exchange Offer............. 30
Use of Proceeds........................................................... 31
Capitalization............................................................ 31
Selected Consolidated Financial and
Operating Data........................................................... 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 34
Business.................................................................. 42
Management................................................................ 54
Executive Compensation.................................................... 56
Certain Transactions...................................................... 60
Principal Shareholders.................................................... 62
Description of Certain Other Indebtedness................................. 63
Description of the Exchange Notes......................................... 66
Description of Certain Federal Income Tax Consequences of an Investment in
the Exchange Notes....................................................... 98
Plan of Distribution...................................................... 100
Legal Matters............................................................. 100
Experts................................................................... 100
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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LOGO
THE MAXIM GROUP, INC.
OFFER TO EXCHANGE UP TO $100,000,000 9 1/4% SENIOR SUBORDINATED NOTES DUE 2007,
SERIES B FOR
9 1/4% SENIOR SUBORDINATED
NOTES DUE 2007
----------------------
PROSPECTUS
----------------------
DECEMBER 11, 1997
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