<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
---------------------
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended January 31, 1998
------------------------------
Commission File No. 1-13099
THE MAXIM GROUP, INC.
A Delaware Corporation
(IRS Employer Identification No. 58-2060334)
210 TownPark Drive
Kennesaw, Georgia 30144
(770) 590-9369
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
Common Stock, $.001 par value New York Stock Exchange, Inc.
9-1/4% Senior Subordinated Notes Due 2007 New York Stock Exchange, Inc.
- ----------------------------------------- -------------------------------
(Title of each class) (Name of each exchange on which
registered)
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (10,727,683 shares) on April 15, 1998 was
approximately $193,000,000 based on the closing price of the registrant's common
stock as reported on the New York Stock Exchange on April 15, 1998. For the
purposes of this response, officers, directors and holders of 5% or more of the
registrant's common stock are considered the affiliates of the registrant at
that date.
The number of shares outstanding of the registrant's common stock, as of April
15, 1998: 16,306,360 shares of $.001 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE> 2
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Report and include statements regarding the intent,
belief or current expectations of the Company, its directors or its officers
with respect to, among other things: (i) the timing, magnitude and costs of the
roll-out of the 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 customer 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 in this Report, including, without
limitation, the information set forth under the headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as in the Company's Securities Act filings, 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 statements.
ITEM 1. BUSINESS.
The Maxim Group, Inc. (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 OutletsTM ("GCO(R)"), a cash-and-carry discount
floorcovering store format. In addition, the Company, through its Image
Industries, Inc. subsidiary ("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.
Since commencing operations in 1991 as a franchisor of floorcovering
stores, the Company has grown its franchise network to include 380 franchise
territories, within which there are 463 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 71 CarpetMAX stores (including 31 Gallery 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
<PAGE> 3
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 31
Gallery stores, including eight stores which were converted into Gallery stores
from the original CarpetMAX format.
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 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 year
ended January 31, 1998, Image sold 3.0 million square yards of polyester
carpeting through the Company's retail distribution network (10.4% of total
Image sales volume). Images sells to over 6,000 independent domestic and
international retailers and distributors.
INDUSTRY OVERVIEW
According to Floor Focus, an industry trade publication, 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 Industries, Inc. ("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 account for the
remainder of industry sales. The 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
-2-
<PAGE> 4
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 it for continued growth. 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 stores (both franchised and company-owned) offer 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 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.
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 50 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.
-3-
<PAGE> 5
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
64 of the 211 Dominant Metropolitan Areas in the United States ("DMAs")
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 April 1, 1998, the Company had
acquired 15 full-service floorcovering companies operating under the CarpetMAX
brand name. In April 1995, the Company began opening Company-owned CarpetMAX
stores and as of April 1, 1998, the Company had opened 71 CarpetMAX stores,
including 31 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 30 Gallery stores during the remainder
of fiscal 1999 in existing, contiguous and targeted new markets. The Company
currently operates 31 Gallery stores, including eight 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
-4-
<PAGE> 6
10,000 square feet of retail selling space and unlike CarpetMAX or Gallery
stores, a GCO store maintains all of its products in inventory. 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. As of April 1, 1998, the Company had (i) 101 GCO franchise stores
operating in 64 of the 211 DMAs in the United States and (ii) 279 franchise
territories, within which there are approximately 463 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 trademark
or other proprietary marks associated with the CarpetMAX franchise system 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 MAXCARETM franchises to
address the increased demand for carpet and upholstery cleaning services. As of
April 1, 1998, the Company has sold 41 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 net delivered
sales and 3% on net delivered sales over $500,000 during a year. Within the next
several months, the Company intends to modify several aspects of the GCO
franchise network by, among other things, offering to future and existing
franchisees a reduced royalty rate of 3% on net delivered sales between $500,000
and $1.5 million, 2-1/2% on net delivered sales between $1.5 million and $2.0
million, and 2% on net delivered sales over $2.0 million during a year. The GCO
franchise agreement requires franchisees to purchase all advertising 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. In order to take advantage of
increasing demand for hard surface flooring materials among the GCO customer
base, GCO recently entered into an agreement with Color Tile, LLC ("Color
Tile") under which GCO may offer to its franchisees the right to use the Color
Tile (R) trademark in conjunction with the sale of hard surface floor covering
materials in GCO franchised outlets. This arrangement requires the franchisee
to pay GCO a one-time license fee of $5,000 plus royalties at the normal rate.
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 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. GCO offers
area development agreements, under which a franchisee commits to opening
multiple stores in a single market area in exchange for discounted initial
franchise fees. GCO also offers other expansion incentives to existing
franchisees and CarpetMAX dealers, including discounted franchise fees under
certain circumstances.
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 floorcovering products, CarpetMAX franchisees also have access to
-5-
<PAGE> 7
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.
Within the next several months, the Company intends to modify several
aspects of the CarpetMAX franchise network by, among other things, selecting
designated suppliers for the CarpetMAX system, instituting enhancements to the
franchise system to help increase demand for CarpetMAX branded products,
instituting additional obligations by the franchisees more in line with
franchisee obligations in more traditional franchise systems and revamping the
way franchisees pay for services offered by the Company.
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, wood refurbishing, pressure washing and related
services to both individuals and businesses. These services are provided using
proprietary cleaning machines which are mounted in vans 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. 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.
In addition to the initial franchise fee, all MAXCARE franchisees must
purchase one or more specially equipped vans and carpet and wood cleaning
machines and accessories from the Company before they begin operations. 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.
-6-
<PAGE> 8
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>
<CAPTION>
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, and Dal-Tile International
Laminates................................... Perstop 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 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
-7-
<PAGE> 9
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 254
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 or opening 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.
Based on the assessment of the Company's information technology
personnel, management presently believes that with the planned conversion to new
software and hardware and the planned modifications to existing software and
hardware, the affects of the Year 2000 issue will be mitigated. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
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. 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
-8-
<PAGE> 10
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. 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 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 1,500 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
-9-
<PAGE> 11
and chemicals. Although the Company currently has the capacity to convert
approximately 80.0 million pounds of fiber into polyester carpet annually, in
fiscal 1998 the Company converted only 74 million pounds of fiber into carpet.
The Company intends to manufacture additional polyester carpet by utilizing this
additional capacity.
During fiscal 1998, 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 48 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 1998, a total of 58 companies purchased
approximately 67 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 to upper 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 65 full-time sales representatives and 12
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 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.
-10-
<PAGE> 12
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 cooperative buying
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 1997
sales were estimated to represent approximately 26% of the total industry sales.
In addition, carpet sales by Mohawk Industries, Inc. in 1997 were estimated to
represent approximately 14% 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.
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 GalleryTM, MAXCARE,TM
MAXCARE-Professional Cleaning SystemsTM and CariselleTM. 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 OutletsTM" and design and word marks consisting of "GCO Carpet
OutletsTM" or "Georgia Carpet OutletsTM." Image uses several trademarks in the
marketing of its polyester fiber and carpet, including Duratron(R), Duratron
GoldTM, Image Resist-Gard(R), Resistron(R), Ecolon(R), Permalon(R),
Enviro-Tech(R), ImageTM 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 April 1, 1998, the Company employed approximately 2,660 persons,
including approximately 760 persons at its retail operations and approximately
1,670 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.
-11-
<PAGE> 13
State laws that regulate the offer and sale of franchises and the
franchisor-franchisee relationship currently exist in a substantial number of
states. Such laws generally require registration of the franchise offering
circular with state authorities prior to the offer or sale of franchises and
regulate the franchise relationship by, for example, requiring the franchisor to
deal with its franchisees in good faith, prohibiting misrepresentations and
interference with the right of free association among franchisees, limiting the
imposition of standards of performance on a franchisee and regulating
discrimination against franchisees in charges, royalties or fees. Although such
laws may restrict a franchisor in the termination of a franchise agreement by,
for example, requiring "good cause" to exist as a basis for the termination,
advance notice to the franchisee of the termination, an opportunity to cure a
default and a requirement to repurchase inventory or other compensation, these
provisions have not had a significant effect on the Company's franchise
operations.
The Company is not aware of any pending franchise legislation which in
its view is likely to have a material adverse effect on the operations of the
Company. The Company is aware, however, that various legislative proposals have
been or are being debated at both the state and federal levels which could
result in new laws regulating the offer and sale of franchises and other aspects
of the franchisor-franchisee relationship. It is possible that such legislation,
if enacted, could adversely affect the Company's franchise operations. The
Company believes, however, that its operations comply in all material respects
with current federal and state franchise regulations.
The Company is also subject to numerous existing and proposed state and
federal laws and regulations designed to protect the environment from wastes and
emissions of hazardous substances. Management believes it is either in material
compliance with all currently applicable laws and regulations or is acting in
accordance with the appropriate variances or similar arrangements. The Company
believes that compliance with current laws and regulations will not require
significant capital expenditures or have a material adverse effect on its
operations. However, the enactment of new or expanded environmental regulations
could adversely affect the Company's operations.
Each Company-owned store and franchise location is subject to licensing
and regulation by a number of governmental authorities, which may include
health, sanitation, safety, fire, building and other agencies in the state or
municipality in which the business is located. Difficulties in obtaining or
failure to obtain the required licenses or approvals could delay or prevent the
procurement of new Company store sites or franchises in a particular area.
ITEM 2. 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 April 1, 1998, the Company also leased 65 facilities and owned 12
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:
-12-
<PAGE> 14
<TABLE>
<CAPTION>
APPROXIMATE
ENCLOSED AREA
IMAGE LOCATIONS PRIMARY USE (SQUARE FEET)
--------------- ----------- -------------
<S> <C> <C>
Armuchee, Georgia(1)...................... Executive Office, Carpet Tufting, 232,000
Finishing and Storage
Calhoun, Georgia(2)....................... PET Storage 92,000
Lylerly, Georgia(2)....................... PET Storage 54,000
Rome, Georgia(1).......................... Carpet Dyeing and Sample Processing 216,000
Rome, Georgia(1).......................... PET Storage 140,000
PET Storage 41,000
Rome, Georgia(1).......................... Yarn Spinning 211,000
Shannon, Georgia(1)....................... Finished Carpet Storage and Distribution 308,000
Summerville, Georgia(1)................... PET Sortation, Granulation, Washing, 366,000
Fiber Extrusion and PET Pellet
Extrusion, Storage and Shipping
Talladega, Alabama(1)..................... Yarn Spinning 82,000
Melville, New York(2)..................... PET Purchasing Office 425
Dillon, South Carolina(1)................. Yarn Spinning 102,000
</TABLE>
- ----------
(1) These plants are owned, with the exception that the plant in
Summerville, Georgia is leased pursuant to a capital lease from the
Development Authority of the City of Summerville, Georgia. 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.
(2) These facilities are leased under leases which expire within the next
three years. Management believes that these leases can be renewed on
substantially the same terms and conditions as the existing leases.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter ended January 31,
1998 to a vote of security holders of the Company.
-13-
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the New York Stock Exchange
under the symbol "MXG." The Common Stock began trading on the New York Stock
Exchange on June 27, 1997. The Common Stock had previously traded on the Nasdaq
National Market. The following table sets forth for the periods indicated the
high and low sales prices of the Common Stock as reported by the New York Stock
Exchange and the Nasdaq National Market, as applicable.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal year ended January 31, 1997
First Quarter................................... $12.50 $ 9.38
Second Quarter.................................. 15.50 11.25
Third Quarter................................... 17.00 12.00
Fourth Quarter.................................. 17.50 14.00
Fiscal period ended January 31, 1998
First Quarter................................... $17.13 $ 9.87
Second Quarter.................................. 14.87 9.87
Third Quarter................................... 17.38 14.00
Fourth Quarter.................................. 17.06 13.75
</TABLE>
As of April 15, 1998, there were approximately 211 holders of record of
the Common Stock. Management of the Company believes that there are in excess of
1,400 beneficial holders of its Common Stock.
The Company has never declared or paid any dividends on its capital
stock. The Company currently anticipates that all of its earnings will be
retained for development of the Company's business, and does not anticipate
paying any cash dividends in the foreseeable future. Future cash dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's future earnings, operations,
capital requirements and surplus, general financial condition, contractual
restrictions, and such other factors as the Board of Directors may deem
relevant. Currently, the Company is restricted in its ability to declare or pay
cash dividends under the terms of its Credit Facility and Senior Notes (each as
defined herein).
-14-
<PAGE> 16
ITEM 6. SELECTED FINANCIAL 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, 1997
and 1998 and for the ten month period ended January 31, 1996 and the years ended
January 31, 1997 and 1998 have been audited by Arthur Andersen LLP, independent
public accountants. 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 "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
TEN
FISCAL YEAR MONTHS FISCAL YEAR
ENDED MARCH 31, ENDED ENDED JANUARY 31,
-------------------------- JANUARY 31, --------------------------
1994 1995 1996(1) 1997 1998
--------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales of floorcovering products ......... $ 106,237 $ 174,935 $ 186,568 $ 250,968 $ 303,560
Fees from franchise services ............ 9,688 13,876 13,432 26,336 29,860
Fiber and PET sales ..................... 5,297 12,886 24,072 28,853 26,059
Other ................................... 1,369 1,644 3,479 3,564 5,648
--------- --------- --------- --------- ---------
Total revenues ...................... 122,591 203,341 227,551 309,721 365,127
Cost of sales ............................... 85,847 139,521 161,723 222,290 249,381
--------- --------- --------- --------- ---------
Gross profit ............................ 36,744 63,820 65,828 87,431 115,746
Selling, general, and administrative expenses 23,669 46,870 59,197 72,366 83,955
Replacement stock option charge ............. 10,388(2) -- -- -- --
Goodwill impairment charge .................. -- -- 6,569(3) -- --
Merger-related costs ........................ -- 500(4) -- 4,900(5) --
Other (income) expense:
Interest income ......................... (307) (397) (415) (613) (1,233)
Interest expense ........................ 1,886 1,839 4,695 7,006 6,948
Interest expense-related parties ......... 977 -- -- -- --
Other .................................... 263 (421) (78) (302) (394)
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes
and extraordinary items .................. 845 15,429 (4,140) 4,074 26,470
Income tax expense .......................... 376 5,787 105 1,929 10,314
--------- --------- --------- --------- ---------
Net earnings (loss) before extraordinary
items ................................... 469 9,642 (4,245) 2,145 16,156
Extraordinary income (charge) ............... 190 -- -- -- (785)
--------- --------- --------- --------- ---------
Net earnings (loss) ......................... $ 659 $ 9,642 $ (4,245) $ 2,145 $ 15,371
========= ========= ========= ========= =========
Earnings (loss) per share:
Basic.................................... $ $ $ (0.32) $ 0.16 $ 0.95
========= ========= ========= ========= =========
Diluted.................................. $ $ $ (0.32) $ 0.15 $ 0.92
========= ========= ========= ========= =========
</TABLE>
-15-
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ........... $ 3,972 $ 2,365 $ 4,207 $ 6,439 $ 28,880
Trade accounts receivable, net ...... 14,779 29,882 33,037 43,487 56,432
Inventories ......................... 17,768 38,137 49,170 42,148 54,693
Property and equipment, net ......... 40,448 68,832 93,879 101,403 137,207
Total assets ........................ 95,281 162,423 202,085 219,673 321,494
Total debt .......................... 21,620 57,459 94,185 96,289 131,663
Stockholders' equity ................ 50,053 71,424 72,150 76,154 133,775
OTHER FINANCIAL DATA:
Image revenues (6) .................. $103,257 $127,250 $128,260 $162,681 $178,011
Franchise revenues .................. 11,873 18,764 25,761 40,877 49,519
Company-owned store revenues ........ 7,461 57,327 73,530 106,163 137,597
EBITDA, as adjusted (7) ............. 16,951 22,993 15,132 26,498 45,368
Depreciation and amortization ....... 3,832 5,225 8,008 10,518 11,950
Capital expenditures ................ 12,734 25,941 15,580 17,444 47,673
Gross margin ........................ 30.0% 31.4% 28.9% 28.2% 31.7%
EBITDA, as adjusted, margin ......... 13.8% 11.3% 6.6% 8.6% 12.4%
Ratio of earnings to fixed charges(8) 1.4x 6.3x -- 1.5x 4.0x
SELECTED OPERATING DATA:
End of period:
Company-owned stores .............. 8 51 59 57 65
Franchise territories ............. 233 325 377 368 373
</TABLE>
- -------------
(1) On January 31, 1996, the Company changed its fiscal year end from March
31 to January 31.
(2) 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 12 of Notes to Consolidated Financial Statements.
(3) 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations--Year Ended January 31, 1997
Compared to Ten Month Period Ended January 31, 1996--Goodwill
Impairment" and Note 2 of Notes to Consolidated Financial Statements.
(4) Represents a non-recurring charge of $500,000 related to the merger
with GCO, Inc. which was accounted for as a pooling-of-interests.
(5) 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.
(6) Includes revenues generated from carpet, fiber and PET sales.
-16-
<PAGE> 18
(7) 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, and the
extraordinary charge of $785,000 in fiscal 1998.
(8) 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.
ITEM 7. 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 Report. 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 periods ended January 31, 1998 and
1997 and compares the twelve month period ended January 31, 1997 with the ten
month period ended January 31, 1996. 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). As
a result of these acquisitions, the Company has recorded goodwill of $15.5
million (net of a goodwill impairment charge of $6.6 million recorded in fiscal
1996), which is being amortized over 20 years. 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 years ended January 31, 1997 and 1998 reflect the costs and expenses
associated with the new store openings and the new distribution center and
headquarters.
As of April 1, 1998, the Company's retail network consisted of 71
Company-owned CarpetMAX stores (including 31 Gallery stores), six Company-owned
GCO stores and 380 franchise territories, within which there are approximately
463 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 fiscal 1998 accounted for approximately 83.1%, 8.2% and 7.1% of the
Company's total revenues, respectively. Sales of floorcovering products include
sales of floorcovering products by Company-owned retail stores, as well
-17-
<PAGE> 19
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 recognized 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 recognized at time of store opening), as well as royalties of 5% on the
first $500,000 of net delivered sales and 3% on net delivered 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 1998, Image accounted for approximately 52.5%
and 48.8%, respectively, of the Company's total revenues and approximately 65.4%
and 70.4%, respectively, of the Company's EBITDA.
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 YEARS
TEN MONTHS ENDED
ENDED JANUARY 31,
JANUARY 31, --------------------------
1996(1) 1997 1998
----------- ------------ ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales of floorcovering products . 82.0% 81.0% 83.1%
Fees from franchise services .... 5.9 8.5 8.2
Fiber and PET sales ............. 10.6 9.3 7.1
Other ........................... 1.5 1.2 1.6
----- ----- -----
Total revenues ............ 100.0 100.0 100.0
===== ===== =====
Cost of sales ...................... 71.1 71.8 68.3
----- ----- -----
Gross profit .................... 28.9 28.2 31.7
Selling, general, and administrative
expenses ........................ 26.0 23.4 23.0
Goodwill impairment charge ......... 2.9(2) -- --
Merger-related costs ............... -- 1.6(3) --
Other (income) expense:
Interest income ................. (0.2) (0.2) (0.3)
Interest expense ................ 2.1 2.2 1.9
Other ........................... (0.1) (0.1) (0.1)
Income tax expense ................. 0.1 0.6 2.8
Extraordinary charge ............... -- -- 0.2
----- ----- -----
Net earnings (loss) ............. (1.9)% 0.7% 4.2%
===== ===== =====
</TABLE>
- ------------
(1) On January 31, 1996, the Company changed its fiscal year end from March
31 to January 31.
(2) 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 "--Results of
Operations--Year Ended January 31, 1997 Compared to Ten Month Period
Ended
-18-
<PAGE> 20
January 31, 1996--Goodwill Impairment" and Note 2 of Notes to
Consolidated Financial Statements.
(3) 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.
YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED JANUARY 31, 1997
Total Revenues. Total revenues increased 17.9% to $365.1 million for
the year ended January 31, 1998 ("fiscal 1998") from $309.7 million for the year
ended January 31, 1997 ("fiscal 1997"). The components of total revenues are
discussed below:
Sales of Floorcovering Products. Sales of floorcovering
products increased 21.0% to $303.6 million for fiscal 1998 from $251.0
million for fiscal 1997. Sales of floorcovering products in
company-owned stores increased 29.6% to $137.6 million for fiscal 1998
from $106.2 million for fiscal 1997. 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
increased same-store sales. 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 14.6% to $152.0 million for fiscal 1998 from $132.6
million for fiscal 1997. Unit sales of manufactured carpet increased
22.3% to 27.4 million square yards for fiscal 1998 from 22.4 million
square yards for fiscal 1997. Sales from the Company's two distribution
centers amounted to $14.0 million for fiscal 1998 compared to $12.2
million for fiscal 1997.
Fees From Franchise Services. Fees from franchise services,
which include franchise license fees and royalties, brokering of
floorcovering products, and advertising, increased 13.7% to $29.9
million for fiscal 1998 from $26.3 million for fiscal 1997. 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 9.7% to
$26.1 million for fiscal 1998 from $28.9 million for fiscal 1997. Unit
sales increased 13.1% to 64.0 million pounds for fiscal 1998 from 56.6
million pounds for fiscal 1997. The unit sales increase was the net
result of an increase in PET sales, partially offset by a decline in
fiber sales, as additional pounds of fiber were allocated to carpet
manufacturing. The average selling price per pound of fiber and PET
declined by 20.0% compared to the prior year period, resulting in lower
revenue despite higher shipments during the period.
Gross Profit. Gross profit increased 32.4% to $115.7 million for fiscal
1998 from $87.4 million for fiscal 1997. As a percentage of total revenue, gross
profit was 31.7% for fiscal 1998 compared to 28.2% for fiscal 1997. Contributing
to the increase in gross profit as a percentage of total revenue 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 lower
cost of raw materials at Image.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.0% to $84.0 million for fiscal 1998 from
$72.4 million for fiscal 1997. 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
-19-
<PAGE> 21
addition of sales people to service newly created territories. As a percentage
of total revenue, selling, general and administrative expenses decreased to
23.0% for fiscal 1998 from 23.4% for fiscal 1997 as a result of spreading fixed
costs over a larger revenue base.
Interest Expense, Net. Net interest expense decreased 10.6% to $5.7
million for fiscal 1998 from $6.4 million for fiscal 1997 due principally to a
reduction in debt of approximately $47.9 million with the net proceeds from a
public offering in February 1997. In October 1997, the Company completed the
sale of $100 million of 9-1/4% Senior Subordinated Notes which increased
interest expense in the last quarter of fiscal 1998.
Income Tax Expense. The Company recorded income tax expense of $10.3
million for fiscal 1998 compared to $1.9 million for fiscal 1997. The increase
in tax expense is due to higher net income for fiscal 1998, as compared to
fiscal 1997. The effective tax rate for fiscal 1998 was 39.0%.
Extraordinary Charge. An extraordinary charge was recorded in fiscal
1998 for the write-off of unamortized financing fees associated with the
Company's credit facility, which was replaced during fiscal 1998. The resultant
one-time charge amounted to $785,000, net of an income tax benefit of
approximately $546,000.
Net Earnings. As a result of the foregoing factors, the Company
recorded net earnings of $15.4 million for fiscal 1998 compared to net earnings
of $2.1 million for fiscal 1997.
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 the ten month period ended January 31, 1996
("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 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
-20-
<PAGE> 22
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.
Several non-recurring items also impacted fiscal 1996 expenses. 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 in fiscal 1996
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
for fiscal 1996. See Note 2 of Notes to Consolidated Financial Statements.
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.
-21-
<PAGE> 23
QUARTERLY RESULTS AND SEASONALITY
Set forth below is certain summary information with respect to the
Company's operations for the most recent eight fiscal quarters. Historically,
the Company's retail floorcovering sales are subject to some seasonal
fluctuation typical to this industry, with higher sales occurring in the summer
and fall months of the Company's 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 1997 FISCAL 1998
--------------------------------------------- -------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- -------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues ..... $73,242 $76,081 $ 82,139 $78,259 $86,225 $92,243 $98,328 $88,331
Gross profit ....... 20,284 20,408 23,836 22,903 27,070 29,172 31,476 28,028
Operating profit ... 3,159 1,275 5,843 4,788 6,632 8,447 9,821 6,891
Net earnings
(loss) ............. 1,152 8 (1,112)(1) 2,097 3,251 4,585 4,397(2) 3,138
</TABLE>
- ------------
(1) Includes merger-related costs of $4.7 million.
(2) Includes extraordinary charge of $785,000, net of tax benefit.
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 equity and debt securities, 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, the 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 April 1, 1998, the Company had repurchased 1.2 million shares of its
Common Stock in the open market for a total purchase price of $14.9 million.
These purchases were financed from borrowings under the Company's Credit
Facility (as defined herein). The ability of the Company to repurchase its own
shares is limited by the terms of the Senior Notes (as defined herein) and the
Credit Facility.
Credit Facility. On August 26, 1997 and as amended on September 24,
1997, the Company established a credit facility providing for aggregate
commitments of $110 million (the "Credit Facility"). The Credit Facility
consists of (i) a $50.0 million revolving credit facility of which $40.0 million
was available for borrowings on April 1, 1998, 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
Image's fiber extrusion capabilities at its plant in Summerville, Georgia that
matures in September 2017. As of April 1, 1998, the Company had $10.0 million
outstanding under the revolving credit facility and no borrowings outstanding
under 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
-22-
<PAGE> 24
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 "Item 12. Certain Relationships and Related 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.
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 a loan agreement
between Image and the Authority, 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.
Senior Notes. On October 16, 1997, the Company completed the sale of
$100 million of 9-1/4% Senior Subordinated Notes ("Senior Notes") due 2007 to
institutional buyers in a private offering under Rule 144A promulgated under the
Securities Act of 1933 (the "Notes Offering"). The net proceeds to the Company
from the offering of the Senior Notes were approximately $96 million, net of an
issue discount and fees and related costs. The Company used the net proceeds
from the offering of the Senior Notes to repay all borrowings outstanding under
its revolving credit agreements of approximately $82.7 million and for general
corporate purposes, including capital expenditures.
Each of the Company's subsidiaries have fully and unconditionally
guaranteed the Senior Notes on a joint and several basis. The guarantor
subsidiaries comprise all of the direct and indirect subsidiaries of the
Company. The Company has not presented separate financial statements and other
disclosures concerning the guarantor subsidiaries because management has
determined that such information is not material to investors. There are no
significant restrictions on the ability of the guarantor subsidiaries to make
distributions to the Company.
Synthetic Lease Financing. On April 9, 1998, the Company and its
subsidiaries established a $13 million short-term end-loaded lease facility,
also referred to as a synthetic lease facility, with First Union National Bank
(the "Bridge Facility"). Under the Bridge Facility, which is scheduled to mature
no later than July 31, 1998, the Company has the ability to direct First Union
to make loans to First Security Bank National Association (the "Trustee"), in
its capacity as the owner-trustee, principally for acquisition or expansion of
CarpetMAX store locations, which financed locations are then leased back by the
Trustee to the Company or a designated subsidiary.
The Company is presently negotiating with First Union to establish a
long-term synthetic lease facility (the "Permanent Facility") in an amount of
not less than $50 million. The Permanent Facility will be used to repay the
Bridge Facility, to further finance the acquisition or expansion of CarpetMAX
store locations and to expand the Company's Gallery franchise program, all under
a master lease arrangement with one or more trustees yet to be determined. It is
anticipated that the Permanent Facility will be established during the second
quarter of fiscal 1999.
Other Debt. As of January 31, 1998, the Company also had approximately
$400,000 of debt outstanding under various term loans at interest rates ranging
from 6.0% to 13.0%.
-23-
<PAGE> 25
Cash Flows. During fiscal 1998, operating activities used $3.2 million
compared to $17.8 million provided in fiscal 1997. The decrease in cash provided
by operating activities resulted primarily from an increase in accounts
receivables and inventories. The increase in accounts receivables and
inventories was mainly due to higher sales of floorcovering products to
franchisees and other carpet retailers.
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 fiscal 1998, investing activities used $49.0 million compared to
$18.7 million for fiscal 1997. The increase is primarily due to an increase in
capital expenditures relating to manufacturing operations, the purchase of
carpet retailers, and the purchase of real estate for the expansion of retail
stores.
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.
During fiscal 1998 financing activities provided $74.6 million compared
to $3.1 million provided in fiscal 1997. This increase is primarily due to
proceeds received from the issuance of common stock in a pubic offering and the
issuance of Senior Notes, partially offset by the Company's repurchase of Common
Stock and repayment of amounts outstanding under its credit facilities.
During fiscal 1997, financing activities provided $3.1 million compared
to $36.5 million provided in fiscal 1996. This decrease is primarily due to
decreased borrowings during fiscal 1997, in connection with reduced uses for
investing activities and improved cash flows from operations.
Capital Expenditures. The Company anticipates that it will require
approximately $15 million for the remainder of fiscal 1999 to (i) open
approximately 35 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 $125,000, net of supplier participations and
landlord allowances, which average approximately $50,000 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 $28 million during the remainder of fiscal 1999 for
capital expenditures at Image, including approximately $12 million associated
with the expansion of Image's polyester fiber production capacity.
The Company believes that the net proceeds from the Notes Offering,
borrowings under the Credit Facility, the Summerville Loan and cash flows from
operating activities will be adequate to meet the Company's working capital
needs, planned capital expenditures and debt service obligations through fiscal
1999. As the Company's debt matures, the Company may need to refinance such
debt. There can be no assurance that such debt can be refinanced or, if so,
whether it can be refinanced on terms acceptable to the Company. If the Company
is unable to service its indebtedness, it will be required to
-24-
<PAGE> 26
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.
YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on the assessment of the Company's information technology
personnel, management presently believes that with the planned conversion to new
software and hardware and the planned modifications to existing software and
hardware, the affects of the Year 2000 issue will be mitigated. All costs
associated with analyzing the Year 2000 issue or making conversions to existing
software are being expensed as incurred.
The Company is planning formal communications with all of its
significant suppliers of goods and services to determine the extent to which the
Company's operations and systems are vulnerable to those third parties' failure
to remediate their own Year 2000 issues. There can be no guarantee that the
systems of other companies on which the Company's operations and systems rely
will be timely converted and would not have an adverse effect on the Company's
results of operations.
The Company will utilize predominantly internal resources to reprogram,
or replace, and test the Company's software for Year 2000 compliance by June
1999, which is prior to any anticipated impact on its operating systems.
Management has not estimated a total cost of the Year 2000 issues; however, such
costs are not expected to have a material effect on the results of operations
during any quarterly or annual reporting period.
The costs to the Company of Year 2000 compliance and the date on which
the Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurance that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
-25-
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed with this report:
Report of Independent Public Accountants
Consolidated Balance Sheets - January 31, 1998 and 1997
Consolidated Statements of Operations - Years ended January
31, 1998 and 1997 and Ten Months ended January 31, 1996
Consolidated Statements of Stockholders' Equity - Years ended
January 31, 1998 and 1997 and Ten Months ended January 31,
1996
Consolidated Statements of Cash Flows - Years ended January
31, 1998 and 1997 and Ten Months ended January 31, 1996
Notes to Consolidated Financial Statements
-26-
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended January 31, 1998 and 1997 and the ten months
ended January 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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, 1998 and 1997, and the results of their
operations and their cash flows for the years ended January 31, 1998 and 1997
and the ten months ended January 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 2, 1998
27
<PAGE> 29
Page 1 of 2
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $22,786 at 1998 $ 28,880 $ 6,439
Current portion of franchise license fees receivable, net of allowance for
doubtful accounts of $528 and $328 at 1998 and 1997, respectively 3,107 2,070
Trade accounts receivable, net of allowance for doubtful accounts of $1,917
and $1,380 at 1998 and 1997, respectively 56,432 43,487
Accounts receivable from officers and employees 1,593 1,195
Current portion of notes receivable from franchisees and related parties,
net of allowance for doubtful accounts of $261 and $351 at 1998 and 1997,
respectively 1,165 1,034
Inventories 54,693 42,148
Refundable income taxes 2,558 1,311
Deferred income taxes 5,714 3,859
Prepaid expenses 3,406 2,526
--------- ----------
Total current assets 157,548 104,069
PROPERTY, PLANT, AND EQUIPMENT, NET 137,207 101,403
FRANCHISE LICENSE FEES RECEIVABLE, LESS CURRENT PORTION, NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $210 AT 1998 AND 1997 2,718 1,349
NOTES RECEIVABLE FROM FRANCHISEES, LESS CURRENT PORTION 3,506 477
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $1,626 AND $1,232 AT 1998
AND 1997, RESPECTIVELY 13,640 10,204
OTHER ASSETS 6,875 2,171
--------- ----------
$ 321,494 $ 219,673
========= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
28
<PAGE> 30
Page 2 of 2
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 384 $ 2,532
Current portion of capital lease obligations 501 537
Rebates payable to franchisees 3,975 3,471
Accounts payable 23,376 23,583
Accrued expenses 14,333 12,232
Deferred revenue 1,750 967
Deposits 2,897 2,460
--------- ---------
Total current liabilities 47,216 45,782
LONG-TERM DEBT, LESS CURRENT PORTION 129,349 91,100
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 1,429 2,120
DEFERRED INCOME TAXES 9,725 4,517
--------- ---------
Total liabilities 187,719 143,519
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 1,000
shares authorized, no shares issued
or outstanding -- --
Common stock, $.001 par value; 25,000
shares authorized, 17,352 and 12,800
shares issued at 1998 and 1997, respectively 17 13
Additional paid-in capital 119,264 62,124
Retained earnings 29,388 14,017
Treasury stock, 1,221 shares at 1998, at cost (14,894) --
--------- ---------
Total stockholders' equity 133,775 76,154
--------- ---------
$ 321,494 $ 219,673
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
29
<PAGE> 31
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1998 AND 1997
AND THE TEN MONTHS ENDED JANUARY 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Sales of floorcovering products $ 303,560 $ 250,968 $ 186,568
Fees from franchise services 29,860 26,336 13,432
Fiber and PET sales 26,059 28,853 24,072
Other 5,648 3,564 3,479
--------- --------- ---------
Total revenues 365,127 309,721 227,551
COST OF SALES 249,381 222,290 161,723
--------- --------- ---------
Gross profit 115,746 87,431 65,828
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 83,955 72,366 59,197
GOODWILL IMPAIRMENT CHARGE -- -- 6,569
MERGER--RELATED COSTS -- 4,900 --
OTHER (INCOME) EXPENSE:
Interest income (1,233) (613) (415)
Interest expense 6,948 7,006 4,695
Other, net (394) (302) (78)
--------- --------- ---------
Earnings (loss) before income taxes
and extraordinary charge 26,470 4,074 (4,140)
INCOME TAX EXPENSE 10,314 1,929 105
--------- --------- ---------
Earnings (loss) before extraordinary
charge 16,156 2,145 (4,245)
EXTRAORDINARY CHARGE--EARLY RETIREMENT OF DEBT,
NET OF INCOME TAX BENEFIT 785 -- --
--------- --------- ---------
NET EARNINGS (LOSS) $ 15,371 $ 2,145 $ (4,245)
========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Earnings (loss) before extraordinary charge $ 1.00 $ 0.16 $ (0.32)
Extraordinary charge (0.05) -- --
--------- --------- ---------
Basic earnings (loss) $ 0.95 $ 0.16 $ (0.32)
========= ========= =========
Diluted:
Earnings (loss) before extraordinary charge $ 0.96 $ 0.15 $ (0.32)
Extraordinary charge (0.04) -- --
--------- --------- ---------
Diluted earnings (loss) $ 0.92 $ 0.15 $ (0.32)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 16,158 13,468 13,301
========= ========= =========
Diluted 16,766 13,937 13,301
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
30
<PAGE> 32
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1998 AND 1997
AND THE TEN MONTHS ENDED JANUARY 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
---------- ------ ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 11,927,157 $12 $ 55,421 $15,991 $ $ 71,424
-
Issuance of stock 442,857 - 4,825 - - 4,825
Stock options exercised 27,266 - 146 - - 146
Net loss - - - (4,245) - (4,245)
---------- --- --------- ------- -------- --------
BALANCE, JANUARY 31, 1996 12,397,280 12 60,392 11,746 - 72,150
Purchase and retirement of treasury (28,000) - (336) - - (336)
shares
Issuance of stock 93,333 - 1,278 - - 1,278
Stock options exercised 95,576 - 719 - - 719
Pooling of Bailey & Roberts 242,288 1 71 126 - 198
Net earnings - - - 2,145 - 2,145
---------- --- --------- ------- -------- --------
BALANCE, JANUARY 31, 1997 12,800,477 13 62,124 14,017 - 76,154
Purchase of 1,221,000 treasury shares - - - - (14,894) (14,894)
Issuance of stock 3,372,365 3 50,240 - - 50,243
Stock options exercised 1,179,679 1 6,900 - - 6,901
Net earnings - - - 15,371 - 15,371
---------- --- --------- ------- -------- --------
BALANCE, JANUARY 31, 1998 17,352,521 $17 $119,264 $29,388 $(14,894) $133,775
========== === ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
31
<PAGE> 33
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1998 AND 1997
AND THE TEN MONTHS ENDED JANUARY 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 15,371 $ 2,145 $ (4,245)
--------- --------- ---------
Adjustments to reconcile net earnings (loss) to
net cash provided by (used
in) operating activities:
Goodwill impairment charge -- -- 6,569
Depreciation and amortization 11,950 10,518 8,008
Deferred income taxes 3,353 335 (2,370)
Loss on sale of assets 469 367 124
Changes in assets and liabilities:
Increase in receivables (18,651) (10,254) (2,652)
Decrease (increase) in inventories (12,410) 7,544 (10,098)
Decrease (increase) in refundable income taxes (1,247) 866 (1,118)
Increase in prepaid expenses and other assets (5,575) (1,865) (365)
Increase in rebates payable, accounts
payable, accrued expenses,
deferred revenue, and deposits 3,518 8,164 955
--------- --------- ---------
Total adjustments (18,593) 15,675 (947)
--------- --------- ---------
Net cash provided by (used in)
operating activities (3,222) 17,820 (5,192)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (47,673) (17,444) (15,580)
Proceeds from sale of assets 52 47 34
Acquisitions, net of cash acquired (1,339) (1,284) (13,875)
--------- --------- ---------
Net cash used in investing activities (48,960) (18,681) (29,421)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 47,243 606 --
Proceeds from exercise of stock options 6,901 719 146
Purchase of treasury stock (14,894) (336) --
Net proceeds from issuance of debt 162,580 89,806 37,718
Principal payments on long-term debt (126,478) (87,241) (1,179)
Principal payments on capital lease obligations (729) (461) (230)
--------- --------- ---------
Net cash provided by financing activities 74,623 3,093 36,455
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 22,441 2,232 1,842
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,439 4,207 2,365
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,880 $ 6,439 $ 4,207
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4,956 $ 7,123 $ 4,073
========= ========= =========
Income taxes $ 6,672 $ 293 $ 3,189
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued in connection with
acquisitions $ 3,000 $ 672 $ 4,825
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
32
<PAGE> 34
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Maxim Group, Inc. and subsidiaries (the "Company" or "Maxim") 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, 1998, the Company had 373 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 on
any one vendor for product purchases and that the loss of any single
vendor would not have a significant adverse effect on the Company's
results of operations.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The Maxim
Group, Inc. and all wholly owned subsidiaries. Upon consolidation, all
intercompany accounts, transactions, and profits are eliminated. The
financial statements give retroactive effect to the merger of the Company
and Image on August 30, 1996, which was accounted for as a
pooling-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 on 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
33
<PAGE> 35
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 January 31, 1998 and 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. Restricted cash of $22,786 at January 31,
1998 consists of proceeds received from the sale of facility revenue bonds
to finance the expansion of Image's fiber extrusion capabilities at one of
its plants.
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.
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, 1998 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, 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
34
<PAGE> 36
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>
1998 1997
------- -------
<S> <C> <C>
Retail $18,055 $15,500
Image 36,638 26,648
------- -------
$54,693 $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 consolidated 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 using 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:
<TABLE>
<S> <C>
Buildings 10 to 40 years
Leasehold improvements 3 to 20 years
Machinery and equipment 5 to 10 years
Furniture and fixtures 5 to 7 years
Transportation equipment 5 to 12 years
</TABLE>
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 $652, $564, and $668 was charged to earnings in 1998 and
1997 and the ten months ended January 31, 1996, respectively.
Organizational costs have been deferred and are being amortized over 60
months using the straight-line method.
35
<PAGE> 37
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.
SELF-INSURANCE
The Company is self-insured for health care and workers' compensation up
to predetermined amounts above which third-party insurance applies. Losses
are accrued based on the Company's estimates of the aggregate liability
for claims incurred using certain actuarial assumptions followed in the
insurance industry and based on Company experience.
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
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
specifies the computation, presentation, and disclosure requirements for
earnings per share. All prior period earnings per share data has been
restated to conform with the provisions of SFAS No. 128. The per share
amounts reported under SFAS No. 128 are not materially different than
those calculated and presented under the previous method of calculation as
specified under Accounting Principles Board ("APB") Opinion No. 15.
Basic earnings per common share is computed by dividing net earnings by
the weighted average number of common shares outstanding during each
period. Diluted earnings per common share assumes exercise of outstanding
stock options and the conversion into common stock during the periods
outstanding.
A reconciliation of net earnings (loss) and the weighted average number of
common shares outstanding used to calculate basic and diluted earnings
(loss) per common share for the years ended January 31, 1998 and 1997, and
the ten months ended January 31, 1996 are as follows (in thousands, except
per share data):
36
<PAGE> 38
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Basic earnings per common share:
Weighted average number of common shares
outstanding 16,158,000 13,468,000 13,301,000
============ ============ ============
Earnings (loss) before extraordinary charge $ 16,156 $ 2,145 $ (4,245)
Extraordinary charge (785) -- --
------------ ------------ ------------
Net earnings (loss) $ 15,371 $ 2,145 $ (4,245)
============ ============ ============
Basic earnings (loss) per common share:
Earnings (loss) before
extraordinary charge $ 1.00 $ 0.16 $ (0.32)
Extraordinary charge (0.05) -- --
------------ ------------ ------------
Basic earnings (loss) $ 0.95 $ 0.16 $ (0.32)
============ ============ ============
Diluted earnings per common share:
Weighted average number of common shares
outstanding 16,158,000 13,468,000 13,301,000
Shares issued upon assumed exercise of
outstanding stock options 608,000 469,000 (a)
------------ ------------ ------------
Weighted average number of common and
common equivalent shares outstanding 16,766,000 13,937,000 13,301,000
============ ============ ============
Earnings (loss) before extraordinary charge $ 16,156 $ 2,145 $ (4,245)
Extraordinary charge (785) -- --
------------ ------------ ------------
Net earnings (loss) $ 15,371 $ 2,145 $ (4,245)
============ ============ ============
Diluted earnings (loss) per common share:
Earnings (loss) before
extraordinary charge $ 0.96 $ 0.15 $ (0.32)
Extraordinary charge (0.04) -- --
------------ ------------ ------------
Diluted earnings (loss) $ 0.92 $ 0.15 $ (0.32)
============ ============ ============
</TABLE>
(a) Common equivalent shares are antidilutive for
the ten months ended January 31, 1996.
37
<PAGE> 39
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Effective in
fiscal year 1997, the Company adopted the disclosure option of SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires that
companies who 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 and cash
equivalents, 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 the company's credit facility and
Summerville loan approximates their fair values, because interest rates on
the debt are periodically adjusted and approximate current market rates.
The estimated fair value for the Company's senior subordinated notes was
based on quoted market prices or current rates for similar instruments
with the same maturities. The estimated fair value of the Company's senior
subordinated notes at January 31, 1998 was approximately $101,250 compared
with a carrying value of $99,316.
RECLASSIFICATIONS
Certain prior year financial statement balances have been reclassified to
conform with the current year presentation.
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 that 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.
38
<PAGE> 40
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 ten months ended January 31, 1996
are presented below:
<TABLE>
<CAPTION>
NET
EARNINGS
REVENUES (LOSS)
-------- -------
<S> <C> <C>
The Maxim Group, Inc. $ 99,290 $(7,274)
Image Industries, Inc. 128,261 3,029
-------- -------
Total $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 program
included selected franchisees and other independent dealers. The Company
issued $11,100 of common stock (803,436 shares) and paid cash of
approximately $15,531 to consummate those acquisitions accounted for under
the purchase method. As a result of these acquisitions, the Company has
recorded goodwill of $15,500 (net of goodwill impairment charge of
$6,569), which is being amortized over 20 years.
The Bailey & Roberts acquisition, in which the Company issued 242,288
shares, was 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 February 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
39
<PAGE> 41
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, 1998 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land and improvements $ 5,289 $ 4,331
Buildings and leasehold improvements 46,377 40,882
Machinery and equipment 95,128 83,886
Furniture and fixtures 4,869 3,344
Transportation equipment 3,313 3,207
Construction in progress 30,270 3,267
-------- --------
185,246 138,917
Less accumulated depreciation
and amortization 48,039 37,514
-------- --------
$137,207 $101,403
======== ========
</TABLE>
5. INVENTORIES
Inventories at January 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Raw materials $ 14,809 $ 9,097
Work in process 3,363 3,271
Finished goods 36,521 29,780
-------- --------
Total $ 54,693 $ 42,148
======== ========
</TABLE>
6. ACCOUNTS RECEIVABLE FROM OFFICERS AND EMPLOYEES
The Company has made loans to certain officers and employees with terms of
one to five years and with interest rates approximating prime rate.
7. NOTES RECEIVABLE FROM FRANCHISEES AND RELATED PARTIES
The Company has made loans to certain franchisees totaling $4,910 and
$1,830 at January 31, 1998 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.
40
<PAGE> 42
In addition, the Company has made unsecured loans to franchisees and
outside directors at an interest rate of 7%, totaling $32 at each of
January 31, 1998 and 1997.
8. LONG-TERM DEBT
Long-term debt at January 31, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
9.25% Senior subordinated notes due
in 2007, net of discount $ 99,316 $ -
Credit facility - -
Prior credit facility - 93,000
Summerville loan due in 2017 30,000 -
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 2000 417 632
-------- -------
129,733 93,632
Less current portion 384 2,532
-------- -------
Long-term debt, less current portion $129,349 $91,100
======== =======
</TABLE>
The aggregate annual maturities of long-term debt subsequent to January
31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending January 31:
<S> <C>
1999 $ 384
2000 33
2001 -
2002 -
2003 -
2004 and thereafter 129,316
--------
$129,733
========
</TABLE>
On October 16, 1997, the Company completed the sale of $100,000 of 9 1/4%
Senior Subordinated Notes ("Notes"), due 2007, to institutional buyers in
a private offering under Rule 144A promulgated under the Securities Act of
1933. The net proceeds to the Company from the offering of the Notes were
approximately $96,000, net of an issue discount and fees and related
costs. The Company used the net proceeds from the offering
41
<PAGE> 43
of the Notes to repay all borrowings outstanding under its revolving
credit agreements of approximately $82,700 and for general corporate
purposes, including capital expenditures.
Each of the Company's subsidiaries have fully and unconditionally
guaranteed the Notes on a joint and several basis. The guarantor
subsidiaries comprise all of the direct and indirect subsidiaries of the
Company. The Company has not presented separate financial statements and
other disclosures concerning the guarantor subsidiaries because management
has determined that such information is not material to investors. There
are no significant restrictions on the ability of the guarantor
subsidiaries to make distributions to the Company.
On August 26, 1997, as amended on September 24, 1997, the Company entered
into a $110,000 credit facility (the "Credit Facility") to replace the
outstanding facility. The Credit Facility consists of (i) a $50,000
revolving facility that matures three years from the closing of the Credit
Facility, (ii) a $29,000 term facility that matures five years from the
closing of the Credit Facility, and (iii) a $31,000 letter of credit to
back the issuance of the tax-exempt facility revenue bonds used to finance
the expansion of the Company's fiber extrusion capabilities. There were no
borrowings outstanding under the Credit Facility as of January 31, 1998.
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 its subsidiaries, as well as the
capital stock of all the subsidiaries. Amounts outstanding under the
Credit Facility bear interest at a variable rate equal to, at the
Company's option, (i) the base rate (defined as the greater of the prime
rate or the federal funds rate plus one-half of one percent) or (ii) the
adjusted LIBOR rate, in each case plus the applicable margin. The
applicable margin is 0% for loans which bear interest at the base rate and
ranges from .50% to 1.25% for loans which bear interest at the adjusted
LIBOR rate. The Company is required to pay the Lenders under the Credit
Facility, on a quarterly basis, a commitment fee ranging from .1875% to
.25%. The Company is required to pay administration fees 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 of certain investments, loans,
advances, and acquisitions; and the consummation of certain transactions,
such as mergers or consolidations. 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.
On August 30, 1996, the Company entered into an agreement with a bank that
provided three credit facilities aggregating $125,000 (the "Prior Credit
Facility"). The Prior Credit Facility was executed in conjunction with the
merger of the Company and Image. Borrowings under the Prior Credit
Facility were used to refinance the existing debt. The Prior Credit
Facility consisted of (i) a $65,000 revolving facility, (ii) a $30,000
term facility that matured in December 2001, and (iii) a $30,000 term
facility that matured 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
42
<PAGE> 44
borrowed under the revolving facility were limited to the sum of 80% of
eligible accounts receivable and 40% of eligible inventory. A fee of .5%
per annum was charged on the unused revolving facility. The interest rate
charged was 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 Prior Credit Facility was 8.26%. The
Prior Credit Facility was repaid August 26, 1997 from the Credit Facility
proceeds.
An extraordinary charge was recorded in fiscal 1998 for the write-off of
unamortized financing fees associated with the Prior Credit Facility. The
resultant one-time charge amounted to $785, net of an income tax benefit
of $546.
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 $30,000 (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
Summerville Loan agreement, in 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.
As of January 31, 1998, the weighted average interest rate on the Facility
Revenue Bonds was 3.7%.
9. LEASES
The Company is a party to noncancelable lease agreements involving
property and equipment, which extend for varying periods up to 20 years.
Certain of these leases have options to renew at varying terms.
Rental expense for operating leases amounted to $6,431, $5,225, and $4,026
for the years ended January 31, 1998 and 1997 and the ten months ended
January 31, 1996, respectively, including $473 in 1998, $328 in 1997, and
$334 in 1996 paid to related parties.
43
<PAGE> 45
Included in property, plant, and equipment are the following assets held
under capital leases:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER TOTAL
------ ------ ------
<S> <C> <C> <C>
January 31, 1998:
Buildings and leasehold improvements $2,389 $1,080 $3,469
Machinery and equipment - 469 469
------ ------ ------
Assets under capital leases 2,389 1,549 3,938
Less accumulated amortization 1,157 489 1,646
------ ------ ------
Assets under capital leases, net $1,232 $1,060 $2,292
====== ====== ======
January 31, 1997:
Buildings and leasehold 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>
Minimum future lease obligations on long-term noncancelable leases in
effect at January 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES
-------------------------------
RELATED OPERATING
PARTY OTHER TOTAL LEASES
------ ---- ------ -------
<C> <C> <C> <C> <C>
Year ending January 31:
1999 $ 359 $206 $ 565 $ 6,928
2000 384 205 589 5,880
2001 274 161 435 4,429
2002 231 128 359 3,929
2003 204 2 206 3,446
2004 and thereafter 74 0 74 8,926
------ ---- ------ -------
Total minimum lease payments 1,526 702 2,228 $33,538
Less amounts representing interest 216 82 298 =======
Less current portion 317 184 501
------ ---- ------
$ 993 $436 $1,429
====== ==== ======
</TABLE>
44
<PAGE> 46
10. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended January 31, 1998:
U.S. federal $4,806 $ 4,402 $ 9,208
State and local 636 470 1,106
------ ------- -------
$5,442 $ 4,872 $10,314
====== ======= =======
Year ended January 31, 1997:
U.S. federal $ 953 $ 824 $ 1,777
State and local 146 6 152
------ ------- -------
$1,099 $ 830 $ 1,929
====== ======= =======
Ten months ended January 31, 1996:
U.S. federal $1,051 $ (858) $ 193
State and local 119 (207) (88)
------ ------- -------
$1,170 $(1,065) $ 105
====== ======= =======
</TABLE>
Income tax expense (benefit) differed from the amounts computed by
applying the U.S. federal income tax rate of 35% to pretax earnings (loss)
as a result of the following:
<TABLE>
<CAPTION>
YEAR Year Ten Months
ENDED Ended Ended
JANUARY 31, January 31, January 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) $ 9,265 $1,385 $(1,408)
Increase (reduction) in income taxes resulting from:
Goodwill impairment charge - - 1,110
Nondeductible merger costs - 430 -
Nondeductible expenses 218 243 199
State and local income taxes, net of
federal income tax benefit 719 100 (60)
Other, net 112 (229) 264
------- ------ -------
$10,314 $1,929 $ 105
======= ====== =======
</TABLE>
45
<PAGE> 47
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) at January 31, 1998 and
1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Deductible goodwill $ 1,035 $ 1,114
Accounts receivable, principally due
to allowance for doubtful accounts 1,094 869
Inventories, principally due to
additional costs inventoried for tax
purposes 1,448 1,161
Accrued expenses 1,865 1,941
Special chargereplacement stock options 116 3,126
Net operating loss and credit carryforwards 1,307 769
Other, net 762 1,161
-------- --------
Total deferred tax assets 7,627 10,141
Deferred tax liabilities:
Plant and equipment, principally due to
difference in depreciation (11,162) (9,605)
Deferred franchise and other revenue (13) (538)
Other, net (463) (656)
-------- --------
Total deferred tax liabilities (11,638) (10,799)
-------- --------
Net deferred tax liabilities $ (4,011) $ (658)
======== ========
</TABLE>
No valuation allowance was recorded against deferred tax assets at January
31, 1998 and 1997. The Company's management believes that 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 2010. Utilization of
net operating loss carryforwards may be limited by the alternative minimum
tax provisions.
11. RELATED-PARTY TRANSACTIONS
Certain of the directors also own franchises which utilize the services of
the Company. Trade accounts receivable at January 31, 1998 and 1997
include amounts due from these affiliated companies of $2 and $21,
respectively. In addition, rebates payable to franchisees at January 31,
1998 and 1997 include amounts due to affiliated franchises of $103 and
$81, respectively.
Included in fees from brokering floorcovering products for the year ended
January 31, 1998 and 1997 and the ten months ended January 31, 1996 are
$295, $157, and $76, respectively, earned from services provided to
affiliated franchises. Included in franchise services for the years ended
January 31, 1998 and 1997 and the ten months ended January 31, 1996 are
$107, $95, and $106, respectively, from services purchased by affiliated
franchises.
46
<PAGE> 48
Included in sales of floorcovering products for the years ended January
31, 1998 and 1997 and the ten months ended January 31, 1996 are $2, $110,
and $216, respectively, for carpet purchased by affiliated franchises.
Included in other revenues for the years ended January 31, 1998 and 1997
and the ten months ended January 31, 1996 are $6, $39, and $9,
respectively, for purchases by affiliated franchises.
Included in interest expense for the years ended January 31, 1998 and 1997
and the ten months ended January 31, 1996 are approximately $0, $10, and
$0, respectively, of interest on notes payable to stockholders.
In August 1997, the Company invested $1,000 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. This investment has been included in other assets in the
accompanying consolidated balance sheets.
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 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 is a company-owned store, which has entered
into a five-year lease agreement with Kevodrew, providing for annual lease
payments of $89.
As of July 31, 1998, Mr. Nassar had a note payable to the Company for
$1,000, accruing interest at an annual rate of 8%. The note is to be
repaid in five annual installments of $200 per year (plus accrued
interest) commencing July 1, 1998.
12. STOCKHOLDERS' EQUITY
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 Prior Credit Facility.
In March 1997, the board of directors authorized the purchase of up to
1,000,000 shares of the Company's common stock. In October 1997, the board
of directors increased the authorization for stock repurchase to 2,000,000
shares. As of January 31, 1998, the Company had repurchased 1,221,000
shares in the open market.
The Company adopted a stock option plan in fiscal 1994 which, as amended,
provides for the granting of incentive and nonqualified stock options for
up to 3,000,000 shares of common stock to key employees and directors at
an exercise price of at least 100% of fair
47
<PAGE> 49
market value at the date of grant. Information relating to stock options
granted under the Company's stock option plan, is summarized as of January
31, 1998, 1997, and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Options outstanding at beginning of fiscal year 1,455,508 821,308 634,210
Options granted 1,309,527 771,000 395,400
Options canceled (282,562) (41,224) (181,036)
Options exercised (148,918) (95,576) (27,266)
--------- --------- -------
Options outstanding at end of fiscal year 2,333,555 1,455,508 821,308
========= ========= =======
Option prices per share (excluding replacement
stock options):
Options granted $10.00-$16.00 $9.75-$15.50 $9.00-$11.75
Options canceled $10.25-$15.50 $5.25-$13.50 $5.25-$15.50
Options exercised $ 5.25-$14.50 $5.25-$11.75 $5.25-$10.50
Options outstanding at end of fiscal year $ 5.25-$16.00 $5.25-$15.50 $5.25-$14.50
Weighted average option prices per share:
Options granted $ 12.97 $ 11.91 $ 9.80
Options canceled $ 13.05 $ 11.81 $ 10.07
Options exercised $ 9.26 $ 7.21 $ 6.84
Options outstanding at end of fiscal year $ 10.56 $ 10.24 $ 8.46
</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 15, 2002. In addition, the Company granted options to
purchase 495,000 shares of common stock to three of its outside directors
at an exercise price of $5.25 to $15.00 per share, of which 480,000 shares
have been exercised.
At January 31, 1998, the outstanding options had a weighted average
remaining contractual life of approximately 8.5 years and there were
1,264,462 options currently exercisable with option prices ranging from
$5.25 to $15.50 with a weighted average exercise price of $10.74.
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, 1998, 303,060 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
48
<PAGE> 50
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 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 Opinion
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 Opinion No. 25; however, the Company has computed for pro forma
disclosure purposes the value of all options granted during fiscal 1998
and 1997 and the ten months ended January 31, 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 1998, 1997, and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate 5.95%-6.75% 5.5%-6.8% 5.5%-6.8%
Expected dividend yield - - -
Expected lives 7.5 YEARS 7.5 years 7.5 years
Expected volatility 49% 50% 50%
</TABLE>
The weighted average fair values of awards granted in fiscal 1998 and 1997
and the ten months ended January 31, 1996 were $6.93, $7.59, and $6.03,
respectively. The total value of the options granted during the years
ended January 31, 1998 and 1997 and the ten months ended January 31, 1996
was computed as approximately $7,014, $4,779, and $2,100, 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 years ended January
31, 1998 and 1997 and the ten months ended January 31, 1996 would have
decreased to the following pro forma amounts:
49
<PAGE> 51
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Pro forma net earnings (loss):
As reported in the financial statements $15,371 $2,145 $(4,245)
Pro forma in accordance with SFAS No. 123 14,096 1,560 (4,309)
Pro forma diluted earnings (loss) per common share:
As reported in the financial statements $ 0.92 $ 0.15 $(0.32)
Pro forma in accordance with SFAS No. 123 0.84 0.11 (0.32)
</TABLE>
13. EMPLOYMENT AGREEMENTS
On June 4, 1997, the Company entered into a three-year employment
agreement with A. J. Nassar, the president and chief executive officer of
the Company. The employment agreement, as amended, provides for an annual
base salary of $600, plus an annual bonus of $200, for each fiscal year
the Company obtains certain earnings targets established by the board of
directors. In the event of a change in control of the Company, Mr. Nassar
will be entitled, during the term of his employment agreement, to
terminate his employment with the Company and, subject to certain
adjustments, to receive a lump-sum 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, for the balance of his term of employment
(not to exceed 24 months), his annual base salary. In addition, all
unvested stock options will become immediately exercisable.
The Company has entered into an employment agreement with Stan Padgett,
senior executive vice president of the Company and chief executive officer
of Image for a term expiring on July 30, 2000. The employment agreement
provides an annual base salary of $295, plus an annual bonus at the
discretion of the board of directors. In the event that Mr. Padgett's
employment is terminated without cause, he is entitled to a severance
payment equal to the salary which would be owed him through the remainder
of the term of the agreement, but in no event less than one year's then
current salary, as well as a bonus equal to the average of the two prior
years' annual bonuses.
The Company has entered into employment agreements with certain executive
officers of acquired companies, the terms of which expire at various times
through 2002. Such agreements provide for base salaries of approximately
$950, certain severance provisions, and additional bonuses at the
discretion of the board of directors.
14. EMPLOYEE BENEFIT PLAN
Effective April 1, 1994, the Company instituted a 401(k) retirement
savings plan (the "Plan"), which is open to all 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 $891 and $171, respectively, for
the
50
<PAGE> 52
year ended January 31, 1998, $850 and $169, respectively, for the year
ended January 31, 1997, and $822 and $128, respectively, for the ten
months ended January 31, 1996.
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 years ended January 31,
1998 and 1997 and the ten months ended January 31, 1996.
15. COMMITMENTS AND CONTINGENCIES
The Company has made certain commitments to expand Image's fiber extrusion
capabilities at one of its plants. As of January 31, 1998, the open
commitments relating to this facility were approximately $5,200. Other
Company commitments include purchase commitments for raw materials at
prevailing market rates.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
16. BUSINESS AND CREDIT CONCENTRATION
In fiscal years 1998 and 1997 and the ten months ended January 31, 1996,
export sales accounted for approximately 5%, 6%, and 8%, respectively, of
the Company's net revenues. Export sales are principally to customers in
the Middle East, Europe, and Canada. Sales to Middle Eastern customers
totaled 4%, 4%, and 5% of net revenues in fiscal years 1998 and 1997 and
ten months ended January 31, 1996, respectively.
51
<PAGE> 53
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Year ended January 31, 1998:
Net revenues $86,225 $92,243 $98,328 $88,331
======= ======= ======= =======
Gross profit $27,070 $29,172 $31,476 $28,028
======= ======= ======= =======
Earnings before extraordinary charge $ 3,251 $ 4,585 $ 5,182 $ 3,138
Extraordinary charge -- -- (785) --
------- ------- ------- -------
Net earnings $ 3,251 $ 4,585 $ 4,397 $ 3,138
======= ======= ======= =======
Basic earnings per common share before
extraordinary charge $ 0.20 $ 0.28 $ 0.32 $ 0.20
Extraordinary charge -- -- (0.05) --
------- ------- ------- -------
Basic earnings per common share $ 0.20 $ 0.28 $ 0.27 $ 0.20
======= ======= ======= =======
Diluted earnings per common share before
extraordinary charge $ 0.20 $ 0.28 $ 0.31 $ 0.19
Extraordinary charge -- -- (0.05) --
------- ------- ------- -------
Diluted earnings per common share $ 0.20 $ 0.28 $ 0.26 $ 0.19
======= ======= ======= =======
Year ended January 31, 1997:
Net sales $73,242 $76,081 $82,139 $78,259
======= ======= ======= =======
Gross profit 20,284 20,408 23,836 22,903
======= ======= ======= =======
Net earnings (loss) 1,152 8 (1,112) 2,097
======= ======= ======= =======
Basic earnings (loss) per share $ 0.09 $ -- $ (0.08) $ 0.15
======= ======= ======= =======
Diluted earnings (loss) per share $ 0.08 $ -- $ (0.08) $ 0.15
======= ======= ======= =======
</TABLE>
52
<PAGE> 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no occurrence requiring a response to this Item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
M.B. Seretean.................... 73 Chairman of the Board
A.J. Nassar...................... 41 President, Chief Executive Officer and Director
H. Stanley Padgett............... 50 Senior Executive Vice President and Director; President of Image
Herb Biggers..................... 47 Chief Operating Officer
Thomas P. Leahey................. 36 Executive Vice President, Finance and Treasurer
Mack Hale........................ 56 Executive Vice President, Merchandising
Sandra Fowler.................... 35 Executive Vice President, Administration
H. Gene Harper................... 37 Chief Financial Officer and Secretary
David E. Cicchinelli............. 45 Director
James W. Inglis.................. 54 Director
Richard A. Kaplan................ 52 Chairman Emeritus and Director
J. Michael Nixon................. 53 Director
Herb Wolk........................ 66 Director
</TABLE>
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., a blind pool investment company.
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
-53-
<PAGE> 55
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.
Herb Biggers has served in various capacities with the Company since
July 1996, including Chief Operating Officer since March 1998. 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.
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.
Mack Hale has served in various capacities with the Company since May
1993, including Executive Vice President, Merchandising since April 1998. From
January 1992 to May 1993, Mr. Hale served as Executive Vice President of
Unituft, Inc., a floorcovering marketing support company. Mr. Hale served as
Vice President of Sales and Director of Marketing of Mohawk Industries, Inc., a
major carpet manufacturer, from 1983 to 1991. At Mohawk, Mr. Hale was
responsible for all marketing and promotional functions. Prior to his employment
at Mohawk, Mr. Hale served as Vice President, Sales of Horizon Industries, Inc.,
a major carpet manufacturer.
Sandra Fowler has served as Executive Vice President, Administration of
the Company since September 1993. From 1982 to September 1993, Ms. Fowler served
in various capacities with Shaw, the nation's largest carpet manufacturer,
including Manager of Corporate Accounts, where she acted as the liaison between
that company and its corporate customers in all areas, ranging from sales to
administration.
H. Gene Harper has served as Chief Financial Officer and Secretary of
the Company since September 1994. Mr. Harper was employed by KPMG Peat Marwick
LLP from 1983 to September 1994 as a senior manager in the audit department.
David E. Cicchinelli has served as a director of the Company since
October 1997. Mr. Cicchinelli has been a management consultant since November
1997 and served as the President and Chief Executive Officer of Color Tile,
Inc., a retail floorcovering company, from April 1996 to October 1997. 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.
James W. Inglis has served as a director of the Company since May 1996
and served as its Chief Operating Officer and Senior Executive Vice President
from May 1996 to March 1998. Mr. Inglis has served as consultant to the Company
since March 1998. 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 Mens Center, Inc., a
clothing retailer.
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.
-54-
<PAGE> 56
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.
Paul R. Renn, age 42, has served as President of the Company's Maxim
Retail Group since October 1997 and 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.
Cristina L. Smith, age 33, has served as Vice President of Marketing
since November 1996. Prior to joining the Company, Ms. Smith was a Marketing and
Advertising Manager for the Expo division of The Home Depot, Inc. from March
1995 to November 1996. She began her retail marketing career with Mercantile
Corporation in 1987 as a Computer Graphic Designer and left as Director of
Newspaper Advertising and Catalogs to join Pet Stuff in 1993, where she served
as the Creative Director until March 1995.
BOARD OF DIRECTORS
The Board of Directors of the Company currently consists of eight
persons. The Company's Certificate of Incorporation provides that the Board of
Directors shall consist of not less than three nor more than 15 members, the
precise number to be determined from time to time by the Board of Directors. At
the Company's 1996 Annual Meeting of Shareholders held in August 1996, the Board
of Directors was classified into three classes, as nearly equal in number as
possible, each of which, after initial terms of one, two and three years, will
serve for three years, with one class being elected each year. Directors may be
removed only for cause and only upon the affirmative vote of the holders of not
less than 75% of the total number of votes entitled to be cast by shareholders
of the Company. The executive officers of the Company are appointed by the Board
of Directors and hold office at the pleasure of the Board.
The Company's Board of Directors has four standing committees -- the
Audit Committee, the Compensation Committee, the Stock Option Committee and the
Directors' Nominating Committee. The Audit Committee, which is comprised of
Messrs. Kaplan and Nixon, has been assigned the principal functions of: (i)
recommending the independent auditors; (ii) reviewing and approving the annual
report of the independent auditors; (iii) approving the annual financial
statements; and (iv) reviewing and approving summary reports of the auditor's
findings and recommendations. The Compensation Committee, which is comprised of
Messrs. Kaplan, Nixon, Seretean and Wolk has been assigned the functions of
approving and monitoring the remuneration arrangements for senior management.
The Stock Option Committee, which is comprised of Messrs. Kaplan and Wolk, has
been assigned the functions of administering the Company's 1993 Stock Option
Plan and granting options thereunder. The Directors' Nominating Committee, which
is comprised of Messrs. Kaplan, Nassar and Wolk, has been assigned the functions
of making recommendations to the full Board for the selection of director
nominees.
-55-
<PAGE> 57
There are no family relationships between any director or executive
officer and any other director or executive officer of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than 10% of the
outstanding Common Stock of the Company, to file with the Securities and
Exchange Commission reports of changes in ownership of the Common Stock of the
Company held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all forms
they file under this regulation. To the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and
representations that no other reports were required, during the year ended
January 31, 1998, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% shareholders were complied with,
except for Richard A. Kaplan, a director of the Company, who failed to file on
a timely basis one report relating to one transaction.
Although it is not the Company's obligation to make filings pursuant to
Section 16 of the Securities Exchange Act of 1934, the Company has adopted a
policy requiring all Section 16 reporting persons to report monthly to the Chief
Financial Officer of the Company as to whether any transactions in the Company's
Common Stock occurred during the previous month.
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides certain summary information for the fiscal
years ended January 31, 1998 and 1997 and for the ten month transition period
ended January 31, 1996 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 the fiscal year ended January 31, 1998 (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(1) AWARDED COMPENSATION
------------------ ---- ------ ----- -------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
A.J. Nassar ............... 1998 $350,012 $265,000 $2,375 275,000 --
President and Chief 1997 229,479 -- 2,295 200,000 --
Executive Officer 1996(2) 165,456 25,000 1,654 142,400(3) --
James W. Inglis ........... 1998 $218,384 $ 75,000 $ -- -- --
Chief Operating Officer 1997(4) 175,176 -- -- 200,000 $116,250(5)
H. Stanley Padgett ........ 1998 $295,000 $ -- $ -- 25,000 $ 10,926
Senior Executive 1997(6) 170,200 -- -- -- --
Vice President 1996(7) 284,200 -- -- -- --
Herb Biggers .............. 1998 $173,828 $ 11,250 $ -- 50,000 --
Chief Operating Officer 1997(8) 51,330 21,250 -- 50,000 $ 5,626
Thomas P. Leahey .......... 1998 $ 96,147 $ 30,000 $1,436 25,000 --
Executive Vice President, 1997 75,762 6,195 1,125 -- --
Finance 1996(2) 58,286 -- -- -- --
</TABLE>
- -------------
-56-
<PAGE> 58
(1) Represents the Company's matching contribution under its 401(k) plan.
(2) Represents compensation for the ten-month period ended January 31,
1996, which period was the result of a change in the fiscal year end of
the Company from March 31 to January 31.
(3) Includes options to purchase 40,000 shares of common stock which were
subsequently canceled.
(4) Mr. Inglis joined the Company in May 1996 and served as its Chief
Operating Officer until March 1998.
(5) 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.
(6) Amounts indicated include compensation paid to Mr. 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.
(7) Represents compensation paid to Mr. Padgett by Image for its fiscal
year ended June 29, 1996.
(8) Mr. Biggers joined the Company in July 1996 and became its Chief
Operating Officer in March 1998.
EMPLOYMENT AGREEMENTS
On June 4, 1997, the Company entered into an Employment Agreement with
A.J. Nassar, pursuant to which Mr. Nassar serves as Chief Executive Officer of
the Company. The Employment Agreement, which was amended on January 1, 1998, is
for a term of three years, expiring on June 4, 2000, and provides for an annual
base salary of $600,000 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 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
-57-
<PAGE> 59
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.
COMPENSATION OF DIRECTORS
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 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as members of the Compensation Committee
of the Board of Directors during the fiscal year ended January 31, 1998. Richard
A. Kaplan, J. Michael Nixon, M.B. Seretean and Herb Wolk. 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 under "Item 13. Certain Relationships
and Related Transactions," there were no material transactions between the
Company and any of the members of the Compensation Committee during the fiscal
year ended January 31, 1998.
STOCK OPTION PLAN
The Company has adopted a 1993 Stock Option Plan (the "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 Plan. The Plan provides
for the grant of options to purchase up to 3,000,000 shares of 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 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 Plan. Stock options granted pursuant to the
Plan will expire on or before (1) the date which is the tenth anniversary of the
date the option is granted, or (2) the date which is the fifth anniversary of
the date 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.
-58-
<PAGE> 60
The following table provides certain information concerning individual
grants of stock options under the Plan made during the fiscal year ended January
31, 1998 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
OPTIONS EXERCISE STOCK PRICE
GRANTED TO OR BASE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE OPTION TERM(1)
GRANTED FISCAL ($ PER EXPIRATION --------------------------
NAME (#) YEAR SHARE) DATE 5% 10%
---- --------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
A.J. Nassar ............. 175,000(2) 13.5% $11.00 5/1/07 $1,210,621 $3,067,954
200,000(2) 15.3% 13.75 11/1/07 1,729,459 4,382,791
James W. Inglis ......... -- -- -- -- -- --
H. Stanley Padgett ...... 25,000(3) 1.9% 13.75 11/1/07 216,182 547,849
Herb Biggers ............ 50,000(4) 3.8% 11.50 5/1/07 361,614 916,402
Thomas P. Leahey ........ 10,000(4) 0.8% 10.00 5/1/07 62,889 159,374
15,000(3) 1.2% 13.75 11/1/07 129,709 328,709
</TABLE>
(1) The dollar amounts under these columns represent the potential
realizable value of each grant of option assuming that the market price
of the Company's Common Stock appreciates in value from the date of
grant at the 5% and 10% annual rates prescribed by the SEC and
therefore are not intended to forecast possible future appreciation, if
any, of the price of the Company's Common Stock.
(2) Options are immediately exercisable.
(3) Options vest in increments of 20% per year commencing on November 1,
1998.
(4) Options vest in increments of 20% per year commencing on May 1, 1998.
-59-
<PAGE> 61
The following table provides certain information concerning options
exercised during fiscal 1998 and the value of unexercised options held by the
Named Executive Officers as of January 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR END AT FISCAL YEAR-END (A)
SHARES ------------------- ----------------------
ACQUIRED ON VALUE EXER- UNEXER- EXER- UNEXER-
NAME EXERCISE (#) REALIZED($) CISABLE CISABLE CISABLE CISABLE
- ---- ------------ ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
A.J. Nassar ............. -- -- 705,960 19,040 $3,824,852 $103,768
James W. Inglis ......... -- -- 120,000 80,000 690,000 460,000
H. Stanley Padgett ...... 275,000 $4,231,250 166,320 25,000 2,413,010 81,250
Herb Biggers ............ -- -- 10,000 90,000 50,000 475,000
Thomas P. Leahey ........ -- -- 55,000 25,000 620,000 118,750
</TABLE>
- ---------------------------
(a) Dollar values were calculated by determining the difference between the
closing price of $17.00 per share of common stock, as reported by the New
York Stock Exchange on January 31, 1998, 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 $9,500, 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.
-60-
<PAGE> 62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of the Common Stock as of April 15, 1998, 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>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) TOTAL
- ------------------- --------------------- -------------
<S> <C> <C>
Richard A. Kaplan......................................... 930,000 5.7%
7 Far View Hill
Rochester, New York 14620
A.J. Nassar(2)............................................ 1,210,960 7.1
210 TownPark Drive
Kennesaw, Georgia 30144
M.B. Seretean............................................. 677,000 4.2
H. Stanley
Padgett(3)..................................... 179,497 1.1
Herb Biggers(4)........................................... 20,000 *
Thomas P. Leahey(5)....................................... 57,000 *
David E. Cicchinelli...................................... 0 0
James W. Inglis(6)........................................ 190,000 1.2
J. Michael Nixon.......................................... 115,000 *
Herb Wolk................................................. 200,000 1.2
FMR Corp.(7).............................................. 1,206,100 7.4
82 Devonshire Street
Boston, Massachusetts 02109
Wellington Management Company, LLP(8)..................... 1,002,700 6.5
75 State Street
Boston, Massachusetts 02109
Cumberland Associates LLC(9).............................. 876,700 5.4
1114 Avenue of the Americas
New York, New York 10036
All directors and executive
officers as a group
(13 persons)(10)........................................ 3,685,836 21.1
</TABLE>
- --------------------
*Less than one percent of outstanding shares
(1) "Beneficial Ownership" includes shares for which an individual,
directly or indirectly, has or shares voting or investment power or
both and also includes options which are exercisable within sixty days
of the date hereof. Beneficial ownership as reported in the above table
has been determined in accordance with Rule 13d-3 of the Securities
Exchange Act of 1934. The percentages are based upon 16,306,360 shares
outstanding as of April 15, 1998, 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 16,306,360 shares plus the number of shares subject to presently
exercisable options held by them, as indicated in the following notes.
(2) Includes 705,960 shares of Common Stock subject to stock options
exercisable within the next 60 days.
-61-
<PAGE> 63
(3) Includes 166,320 shares of Common Stock subject to stock options
exercisable within the next 60 days.
(4) Includes 20,000 shares of Common Stock subject to stock options
exercisable within the next 60 days.
(5) Includes 57,000 shares of Common Stock subject to stock options
exercisable within the next 60 days.
(6) Includes 140,000 shares of Common Stock subject to stock options
exercisable within the next 60 days.
(7) According to a Schedule 13G dated February 14, 1998 filed with the
Commission by FMR Corp. ("FMR"), Edward C. Johnson 3d 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 (i) Fidelity Management &
Research Company, a registered investment adviser and a wholly-owned
subsidiary of FMR ("Fidelity"), is the beneficial owner of 956,400
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 956,400 shares owned by the Funds, and
(iii) the power to vote all of the 956,400 shares resides with the
Board of Trustees of the Funds. The Schedule 13G further states that
(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 249,700 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 249,700 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.
(8) Based on a Schedule 13G dated January 14, 1998 filed with the
Commission by Wellington Management Company, LLP ("WMC"). The Company
makes no representation as to the accuracy or completeness of the
information reported.
(9) Based on a Schedule 13G dated April 6, 1998 filed with the Commission
by Cumberland Associates LLC. The Company makes no representation as to
the accuracy or completeness of the information reported.
(10) Includes an aggregate of 1,192,659 shares of Common Stock subject to
stock options exercisable within the next 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As of April 1, 1998, a total of $1.0 million was owed to the Company by
A.J. Nassar, the Company's President and Chief Executive Officer. The largest
aggregate amount of indebtedness outstanding from Mr. Nassar to the Company
since the beginning of fiscal 1998 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 July 1, 1998 and on each March 1
thereafter until maturity. 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
-62-
<PAGE> 64
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 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 initial public offering in
late 1997, Mr. Nassar's percentage of ownership was reduced to 1.7% of the
outstanding shares of Class A common stock.
Kevodrew Realty, Inc. ("Kevodrew"), a company controlled by A. J.
Nassar, leases space to a Company-owned store in Louisville, Kentucky. Payments
by the Company to Kevodrew pursuant to this lease totaled $89,983 in fiscal
1998.
In March 1998, the Company entered into a three-year consulting
agreement with James W. Inglis, a director of the Company and its former Chief
Operating Officer. The consulting agreement, which is cancelable upon thirty
days notice by either party, provides for Mr. Inglis to receive an annual
consulting fee of $100,000, for which he will oversee merchandising and
marketing of the Company's CarpetMAX stores. The consulting agreement contains
non-compete provisions, effective through the actual date of termination of the
consulting agreement.
In January 1998, the Company loaned $100,000 to Herb Biggers, the
Company's Chief Operating Officer and Executive Vice President--Operations. This
loan bears interest at an annual rate of 8.5%, payable monthly, with principal
due on demand. This loan was made to Mr. Biggers to fund certain of his personal
expenses. The maximum aggregate amount of indebtedness outstanding for Mr.
Biggers to the Company since the beginning of fiscal 1998 was $102,000. As of
April 1, 1998, $102,000 was owed by Mr. Biggers to the Company.
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 $167,568 in fiscal 1998.
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 1996 FISCAL 1997 FISCAL 1998
------------------------ ------------------------ ------------------------
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 ....... $ 55,187 $ 35,909 $ -- $ -- $ -- $ --
Ronald McSwain .......... 242,550 206,453 330,602 210,113 465,048 231,743
Herb Wolk ............... 47,604 26,863 61,485 25,553 134,384 72,903
-------- -------- -------- -------- -------- --------
Total ......... $345,341 $269,225 $392,087 $235,666 $599,432 $304,646
======== ======== ======== ======== ======== ========
</TABLE>
The ability of the Company to enter into future transactions with
affiliates is limited by the terms of the Senior Notes and the Credit Facility.
-63-
<PAGE> 65
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. The following financial statements and
accountants' reports have been filed as Item 8 in Part II of this Report:
Report of Independent Public Accountants
Consolidated Balance Sheets - January 31, 1998 and 1997
Consolidated Statements of Operations - Years ended January 31, 1998
and 1997 and Ten Months ended January 31, 1996
Consolidated Statements of Stockholders' Equity - Years ended January
31, 1998 and 1997 and Ten Months ended January 31, 1996
Consolidated Statements of Cash Flows - Years ended January 31, 1998
and 1997 and Ten Months ended January 31, 1996
Notes to Consolidated Financial Statements
2.Financial Statement Schedules.
The following financial statement schedule of The Maxim Group, Inc. for
the years ended January 31, 1998 and 1997 and the ten month transition period
ended January 31, 1996 is included pursuant to Item 8 in Part II of this Report:
<TABLE>
<S> <C> <C>
Report of Independent Public Accountants on Schedule ........ S-1
Schedule II Valuation and Qualifying Accounts ........................... S-2
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or the information required to be set forth therein is included in
the consolidated financial statements or notes thereto.
3. Exhibits.
The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from
either (i) a Registration Statement on Form SB-2 for the Registrant,
Registration No. 33-66926 (referred to as "SB-2"), (ii) Amendments No. 1 and 2
to the Registrant's Registration Statement on Form SB-2 (referred to as "SB-2
Amendment No. 1" and "SB-2 Amendment No. 2", respectively), (iii) the
Registrant's Annual Report on Form 10-KSB for the year ended March 31, 1995
(referred to as "1995 10-K"); (iv) the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995 (referred to as "1995 10-Q"), (v)
a Registration Statement on Form S-3 for the Registrant, Registration No.
333-20105 (referred to as "S- 3"), (vi) the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1997 (referred to as "4-30-97 10-Q"),
(vii) the Registrant's Quarterly Report on Form 10-Q for the quarter ended July
31, 1997 (referred to as "7-31-97 10-Q"), (viii) a Registration Statement on
Form S-4 for the Registrant, Registration No. 333-39819 (referred to as "S-4"),
(ix) a Registration Statement on Form S-4 for the Registrant, Registration No.
333-8713 (referred to as "1996 S-4"), (x) a Registration Statement on Form S-8
for the Registrant, Registration No. 333-47299 (referred to as "S-8") and (xi)
the Registrant's Annual Report on Form 10-K for the year ended January 31, 1997
(referred to as "1997 10- K"). Except as otherwise indicated, the exhibit number
corresponds to the exhibit number in the referenced document.
-64-
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C> <C>
*3.1 - Certificate of Incorporation of the Company (SB-2)
*3.1.1 - Certificate of Amendment dated August 29, 1996 (1997 10-K)
*3.2 - By-Laws of the Company (SB-2)
*3.2.1 - Amendment No. 1 to By-Laws effective August 29, 1996 (1997
10-K)
*4.1 - Specimen Certificate of Common Stock (SB-2 Amendment No. 2)
*4.2 - Indenture dated as of October 16, 1997 between The Maxim Group,
Inc. and its subsidiaries as Guarantors and State Street Bank and
Trust Company, as Trustee (S-4)
*4.5 - Form of The Maxim Group, Inc. 9-1/4% Senior Subordinated Notes
due 2007, Series B (contained in the Indenture filed as Exhibit 4.2)
*10.1 - 1993 Incentive Stock Option Plan (SB-2)
*10.1.1 - Amendment No. 1 to 1993 Incentive Stock Option Plan (1995 10-K)
*10.1.2 - Amendment No. 2 to 1993 Stock Option Plan (1996 S-4)
*10.1.3 - Amendment No. 3 to 1993 Stock Option Plan (S-8)
*10.3 - Form of Franchise Membership Agreement (SB-2 Amendment No.
1, Exhibit 10.3.1)
*10.10 - Employment Agreement dated July 30, 1993 by and between Image
Industries, Inc. and H. Stanley Padgett (S-3, Exhibit 10.4)
*10.11 - Extension of Employment Agreement dated July 30, 1996 by and
between Image Industries, Inc. and H. Stanley Padgett (S-3, Exhibit
10.5)
*10.12 - Amended Employment Agreement dated August 30, 1996 by and
between the Registrant, Image Industries, Inc. and H. Stanley
Padgett (S-3, Exhibit 10.6)
10.12.1 - Second Amendment to Employment Agreement dated July 30, 1997
by and among Image Industries, Inc., H. Stanley Padgett and The
Maxim Group, Inc.
*10.13 - Employment Agreement dated June 4, 1997 between the Company
and A.J. Nassar (4-30-97 10-Q)
*10.13.1 - Amendment No. 1 dated September 25, 1997 to Employment
Agreement dated June 4, 1997 by and between A.J. Nassar and The
Maxim Group, Inc. (S-4)
10.13.2 - Amendment No. 2 dated January 1, 1998 to Employment Agreement
dated June 4, 1997, as amended, by and between A.J. Nassar and
The Maxim Group, Inc.
</TABLE>
-65-
<PAGE> 67
<TABLE>
<S> <C> <C>
*10.22 - Lease Agreement dated October 30, 1995 between Kevodrew Realty,
Inc. and Kinnaird & Francke Interiors, Inc. for lease of retail space
in Louisville, Kentucky (1995 10-Q)
*10.23 - Credit Agreement dated as of August 26, 1997 between the
Company, certain of its subsidiaries and First Union National Bank
as Administrative Agent, NationsBank, N.A. as Documentation
Agent, and Fleet National Bank as Co-Agent regarding $130 million
Credit Facility (7-31-97 10-Q)
10.23.1 - Consent, Waiver and Amendment dated as of September 24, 1997
between the Company, certain of its subsidiaries, First Union
National Bank as Administrative Agent, NationsBank, N.A. as
Documentation Agent, and Fleet National Bank as Co-Agent regarding
$130 million Credit Facility
12.1 - Statement regarding computation of ratios of earnings to fixed
charges
21.1 - Subsidiaries of the Registrant
23.1 - Consent of Arthur Andersen LLP
27.1 - Financial Data Schedule (for SEC use only)
27.2 - Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended January 31, 1998.
-66-
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Maxim Group, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of THE MAXIM GROUP, INC. AND
SUBSIDIARIES as of January 31, 1998 and 1997 and for the years ended January 31,
1998 and 1997 and the ten months ended January 31, 1996 included in the
Company's Annual Report on Form 10-K for the period ended January 31, 1998, and
have issued our report thereon dated April 2, 1998. Our audits were made for the
purpose of forming an opinion on those financial statements taken as a whole.
The schedule listed in the index is the responsibility of the Company's
management, is presented for purposes of complying with the Securities and
Exchange Commission's rules, and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states, in
all material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole for the years ended
January 31, 1998 and 1997 and the ten months ended January 31, 1996.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 2, 1998
S-1
<PAGE> 69
SCHEDULE II
THE MAXIM GROUP, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 31, 1998 AND 1997
AND THE TEN MONTHS ENDED JANUARY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGE TO CHARGES TO BALANCE
BEGINNING COSTS AND OTHER AT END
OF YEAR EXPENSE ACCOUNTS (B) DEDUCTIONS OF YEAR
------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
TEN MONTHS ENDED JANUARY 31, 1996:
Allowance for doubtful accounts (a) $ 980 $1,386 $ 40 $ (801) $1,605
====== ====== ==== ======= ======
YEAR ENDED JANUARY 31, 1997:
Allowance for doubtful accounts (a) $1,605 $ 839 $223 $(1,287) $1,380
====== ====== ==== ======= ======
YEAR ENDED JANUARY 31, 1998:
Allowance for doubtful accounts (a) $1,380 $1,893 $125 $(1,481) $1,917
====== ====== ==== ======= ======
</TABLE>
- -----------------
(a) The Company's other valuation and qualifying accounts are not
significant and are omitted in accordance with Rule 4.02.
(b) These amounts include reserves of acquired operations.
S-2
<PAGE> 70
SIGNATURES
In accordance with the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, in the City of Kennesaw, State of Georgia on
April 30, 1998.
THE MAXIM GROUP, INC.
By: /s/ A.J. Nassar
-------------------------------------
A.J. Nassar
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ A.J. Nassar President, Chief Executive April 30, 1998
- -------------------------------- Officer and Director
A.J. Nassar (principal executive officer)
/s/ Thomas P. Leahey Executive Vice President, April 30, 1998
- -------------------------------- Finance and Treasurer
Thomas P. Leahey (principal financial officer)
/s/ H. Gene Harper Chief Financial Officer and April 30, 1998
- -------------------------------- Secretary (principal
H. Gene Harper accounting officer)
/s/ H. Stanley Padgett Senior Executive Vice April 30, 1998
- -------------------------------- President and Director
H. Stanley Padgett
/s/ David E. Cicchinelli Director April 30, 1998
- --------------------------------
David E. Cicchinelli
/s/ James W. Inglis Director April 30, 1998
- --------------------------------
James W. Inglis
/s/ Richard A. Kaplan Director April 30, 1998
- --------------------------------
Richard A. Kaplan
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Michael Nixon Director April 30, 1998
- --------------------------------
J. Michael Nixon
/s/ M.B. Seretean Chairman of the Board April 30, 1998
- --------------------------------
M.B. Seretean
/s/ Herb Wolk Director April 30, 1998
- --------------------------------
Herb Wolk
</TABLE>
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
10.12.1 Second Amendment to Employment Agreement
dated July 30, 1997 by and among Image
Industries, Inc., H. Stanley Padgett and
The Maxim Group, Inc.
10.13.2 Amendment No. 2 dated January 1,
1998 to Employment Agreement dated
June 4, 1997, as amended, by and
between A.J. Nassar and The Maxim
Group, Inc.
10.23.1 Consent, Waiver and Amendment
dated as of September 24, 1997
between the Company, certain of its
subsidiaries, First Union National
Bank as Administrative Agent,
NationsBank, N.A. as Documentation
Agent, and Fleet National Bank as Co-
Agent regarding $130 million Credit
Facility
12.1 Statement regarding computation of
ratios of earnings to fixed charges
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only)
27.2 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 10.12.1
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (hereinafter called
"Amendment") made and entered into as of the 30th day of July, 1997, by and
among IMAGE INDUSTRIES, INC., a Delaware corporation (hereinafter called the
"Company"), H. STAN PADGETT, a resident of Georgia (hereinafter called
"Employee") and THE MAXIM GROUP, INC., a Delaware corporation (hereinafter
called "Maxim").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Employee and Company entered into an Employment Agreement dated
July 30, 1993, as amended (the "Agreement"), which the parties wish to hereby
amend;
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants contained herein and other good and valuable considerations the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:
1. Amendments. From and after the date hereof, the Agreement is hereby
amended by deleting from Section 6 of the Agreement the words "for a period of
five (5) years thereafter" and substituting in lieu thereof the words "until
July 30, 2000".
2. Continued Effect. Except as hereby amended, the Agreement shall be
unchanged and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have set forth their hands and
seals, effective as of the date first above written.
/s/ H. Stan Padgett
----------------------------------------
H. STAN PADGETT
IMAGE INDUSTRIES, INC.
By: /s/ Larry M. Miller
-------------------------------------
Name: Larry M. Miller
-----------------------------------
Title: Chairman of the Board
----------------------------------
THE MAXIM GROUP, INC.
By: /s/ A.J. Nassar
-------------------------------------
Name: A.J. Nassar
-----------------------------------
Title: President
----------------------------------
<PAGE> 1
EXHIBIT 10.13.2
AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT ("Amendment No. 2" ) is
made and entered into by and between A.J. Nassar ("Executive") and The Maxim
Group, Inc. (the "Company") effective as of the 1st day of January, 1998.
WHEREAS, Executive and the Company are parties to that certain
Employment Agreement, dated June 4, 1997 (the "Agreement"); and
WHEREAS, Executive and the Company previously amended the Agreement
pursuant to that certain Amendment No. 1 to Employment Agreement, dated as of
September 25, 1997 ("Amendment No.
1"), and wish to further amend the Agreement as set forth below;
NOW, THEREFORE, for and in consideration of the mutual premises and
representations contained herein, and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
to amend the Agreement as follows:
1. Capitalized terms used but not otherwise defined herein shall have
the meaning as set forth in the Agreement.
2. Section 4.1 of the Agreement is hereby amended, effective as of the
date hereof, by deleting Section 4.1 in its entirety and substituting in lieu
thereof the following new Section 4.1:
4.1 Base Salary. During the Term of Employment, Executive
shall be paid an annual base salary (hereinafter "Base Salary"),
which shall be paid in equal installments in accordance with the
Company's normal pay practices, but not less frequently then monthly.
Executive's Base Salary shall be $600,000. The Board of Directors of
the Company shall review Executive's Base Salary for the subsequent
one-year period.
3. Except as expressly amended in Amendment No. 1 and this Amendment
No. 2, the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 as
of the date first written above.
"COMPANY"
THE MAXIM GROUP, INC.
By: /s/ M.B. Seretean
-------------------------------
M. B. Seretean
Title: Chairman
"EXECUTIVE"
By: /s/ A.J. Nassar
-------------------------------
A.J. Nassar
<PAGE> 1
EXHIBIT 10.23.1
September 24, 1997
The Maxim Group, Inc. for Itself
And the Borrowers Identified on
The Signature Pages Hereto
210 TownPark Drive
Kennesaw, Georgia 30144
Attention: Thomas P. Leahey
Executive Vice President/Finance
Re: Consent, Waiver and Amendment
Gentlemen:
Reference is made to the Credit Agreement, as amended (the "Credit
Agreement"), dated as of August 26, 1997, among The Maxim Group, Inc. ("Maxim"),
certain Subsidiaries of Maxim identified on the signature pages thereto, the
financial institutions who are or may become party thereto (the "Lenders"),
First Union National Bank, as Administrative Agent for the Lenders, NationsBank,
N.A., as Documentation Agent, and Fleet National Bank, as Co-Agent. Capitalized
terms used herein and not defined herein have the meanings ascribed thereto in
the Credit Agreement.
Maxim has indicated that: (a) it will offer to issue up to $100,000,000 in
aggregate principal amount of its Senior Subordinated Notes due 2007 (the
"Subordinated Notes"), pursuant to an Indenture (the "Indenture"), by and among
Maxim, all of the Subsidiaries of Maxim, as guarantors, and State Street Bank
and Trust Company, as Trustee; (b) each Subordinated Note will be guaranteed by
all of the Subsidiaries of Maxim, pursuant to the guarantee ("Guarantee") set
forth on such Subordinated Note; and (c) Maxim made a loan of approximately
$738,100 to A.J. Nassar on September 19, 1997 (the "Employee Loan") in violation
of Sections 9.4 and 9.7 of the Credit Agreement. Maxim has further indicated
that it will use the proceeds of the offer and sale of the Subordinated Notes
to, among other things, (i) prepay the entire outstanding principal amount of
the Term Loan, together with accrued interest and all other fees or amounts, if
any, required to be paid in connection with such prepayment, (ii) repay certain
outstanding Revolver Loans, together with accrued interest and all other fees or
amounts, if any, required to be paid in connection with such repayment, so that
after giving effect to such repayment, the aggregate principal amount of all
outstanding Revolver Loans will equal or be less than $50,000,000, and (iii)
permanently reduce the aggregate Revolver Loan Commitment from $70,000,000 to
$50,000,000, so that after giving effect to the foregoing the Aggregate
Commitments under the Credit Facilities shall equal $80,616,438.36 (the "New
Commitment Amount"). Borrowers hereby represent and warrant to the Lenders that,
<PAGE> 2
The Maxim Group, Inc.
September 24, 1997
Page 2
except for the items described in the next succeeding paragraph for which
consents, waivers or amendments have been requested, the offer and sale of the
Subordinated Notes and the anticipated use of the proceeds from the sale of the
Subordinated Notes, does not, and when consummated, will not, violate any term
or provision of the Credit Agreement or create a Default or Event of Default
thereunder.
The Borrowers have jointly and severally requested (A) the written approval
of Required Lenders to the terms and conditions of the Indenture (including the
forms of Subordinated Notes contained therein), (B) the written approval of the
Required Lenders to the terms and conditions of each Guarantee, (C) the
amendment of Section 8.1 of the Credit Agreement to increase the required ratio
of Total Debt to Total Capitalization contained therein from .55 to 1.0. to .60
to 1.0, (D) the amendment of Schedule 1.1, Section 1.1 (definition of "Borrowing
Base"), Section 2.1 and Section 2.5 of the Credit Agreement and Exhibit L (form
of Borrowing Base Certificate) and Exhibit D (form of Officer's Compliance
Certificate) to the Credit Agreement, in order to enable Borrowers to reduce the
aggregate Revolver Loan Commitment from $70,000,000 to $50,000,000, so that
after giving effect to the foregoing the Aggregate Commitments under the Credit
Facilities shall equal the New Commitment Amount, (E) an extension of the time
periods in which Maxim is required to obtain certain landlord agreements and
complete certain real property records searches, as set forth in that certain
letter agreement dated August 26, 1997 (the "Letter Agreement"), executed
pursuant to Section 4.2(f)(v) of the Credit Agreement by Maxim, on behalf of the
Borrowers, and the Administrative Agent, (F) a waiver of Section 9.10(b) of the
Credit Agreement in order to permit the Borrowers to be bound by the covenant
contained in Section 1009 of the Indenture, restricting the ability of Borrowers
to make certain distributions in respect to their capital stock, and (G) a
waiver of the provisions of Sections 9.4 and 9.7 of the Credit Agreement that
were violated by Maxim as a result of the Employee Loan. In addition, in order
to protect the respective interests of the Borrowers and the Lenders under the
Security Agreement and any Hedging Agreements entered into by Borrowers, the
Borrowers and each Lender signatory hereto, constituting Required Lenders, have
agreed to amend the Security Agreement in certain respects as hereinafter
provided.
Borrowers hereby represent and warrant to Administrative Agent and Lenders
that (i) the Debt of Maxim outstanding under the Credit Facilities constitutes
"Senior Indebtedness" (as such term is defined in the Indenture) and the Debt of
the Subsidiaries of Maxim outstanding under the Credit Facilities constitutes
"Guarantor Senior Indebtedness" (as such term is defined in the Indenture), and
(ii) A.J. Nassar has repaid to Maxim the entire amount of the Employee Loan. In
reliance upon the representations, warranties and undertakings provided by each
of the Borrowers to the Administrative Agent and Lenders by which the Borrowers
have requested such approvals, waivers and amendments, each of the Lenders
signatory hereto, constituting Required Lenders, hereby:
<PAGE> 3
The Maxim Group, Inc.
September 24, 1997
Page 3
(a) approves of the terms and conditions of the Indenture
(including the forms of Subordinated Notes and Guarantees contained therein) as
required under Section 9.1(j) and Section 9.2 of the Credit Agreement, and
approves of the form and terms of the negative pledge contained in the Indenture
as required under Section 9.10(a) of the Credit Agreement, provided that such
approvals are made in reliance upon the specific representations and warranties
of Maxim that, and each such approval, and each of the amendments set forth in
clauses (b) and (c) below shall be of no force or effect whatsoever unless, (x)
the form and substance of the final fully executed Indenture, including the
terms of the Subordinated Notes and the Guarantees contained therein (other than
the provisions contained therein relating to subordination, negative covenants,
financial covenants and events of default) will be substantially the same as set
forth in the draft of the Indenture dated September 17, 1997 (the "Indenture
Draft") (a copy of which is attached hereto), (y) the form and substance of the
subordination provisions contained in the final fully executed Indenture will be
the same as those set forth in the Indenture Draft, and (z) the negative
covenants, the financial covenants and the events of default contained in the
final fully executed Indenture will not be materially more restrictive to the
Company than as set forth in the Indenture Draft.
(b) agrees that Section 8.1 of the Credit Agreement be, and it
hereby is, amended by amending and restating said Section to read in its
entirety as follows:
"SECTION 8.1 Total Debt to Total Capitalization. As
of any fiscal quarter end, permit the ratio of (a)
Total Debt of Maxim and its Subsidiaries as of such
date to (b) the sum of (i) Consolidated Net Worth of
Maxim and its Subsidiaries plus (ii) Total Debt of
Maxim and its Subsidiaries, each as of such date, to
exceed a ratio of .60 to 1.0.";
(c) agrees that (i) Schedule 1.1 of the Credit Agreement be, and
it hereby is, amended by (1) reducing the aggregate Revolver Loan Commitment set
forth therein from $70,000,000 to $50,000,000, (2) reducing the Aggregate
Commitments under the Credit Facilities from $130,000,000 to the New Commitment
Amount, and (3) making a corresponding reduction in each Lender's Revolver Loan
Commitment based upon such Lender's actual share of the New Commitment Amount,
(ii) the definition of "Borrowing Base" in Section 1.1 of the Credit Agreement
be amended, and it hereby is, amended by deleting the figure "$70,000,000" that
appears in such definition and replacing it with the figure "$50,000,000," (iii)
Section 2.1 of the Credit Agreement be, and it hereby is, amended by deleting
the words and figure "seventy million dollars ($70,000,000)" that appear in the
eighth line of such Section and replacing them with the words and figure "fifty
million dollars ($50,000,000)," (iv) Section 2.5 of the Credit Agreement be, and
it hereby is, amended by deleting the figure "$70,000,000" that appears in each
such Section and replacing it with the figure "$50,000,000," (v) Exhibit D (form
of Officer's Compliance Certificate)
<PAGE> 4
The Maxim Group, Inc.
September 24, 1997
Page 4
to the Credit Agreement be, and it hereby is, amended by deleting the Total Debt
to Total Capitalization ratio of ".55 to 1.0" contained in paragraph A(4) to
Schedule 1 to Exhibit D and replacing it with the ratio of ".60 to 1.0," and
(vi) Exhibit L (form of Borrowing Base Certificate) to the Credit Agreement be,
and it hereby is, amended by deleting the figure "$70,000,000" that appears in
paragraph 4 of Exhibit A to the Borrowing Base Certificate and replacing it with
the figure "$50,000,000"; provided, however, that none of the amendments
contained in this clause (c) shall become effective until such time as the sale
of the Subordinated Notes has been fully consummated, the aggregate principal
amount of all Revolver Loans then outstanding equals or is less than $50,000,000
and the Lenders have received all accrued interest and all other fees and
amounts, if any, required to be paid by Borrowers to Lenders under the Credit
Agreement in connection with the repayment in full of the Term Loan and any
Revolver Loans;
(d) agrees that the time period in which Maxim is required to
obtain certain landlord agreements and complete certain real property records
searches, as set forth in paragraph 2 and paragraph 3, respectively, of the
Letter Agreement, is hereby extended in each case from thirty (30) days to forty
(40) days;
(e) agrees that Section 4 of the Security Agreement be, and it
hereby is, amended by adding a new paragraph (g) thereto to read as follows:
"(g) Hedging Agreements. With respect to any Hedging Agreement
that is or becomes subject to a Security Interest hereunder:
(i) notwithstanding anything to the contrary contained in
Section 4(a)(ix)(A), 4(b)(iv), 7(a)(iv) or 8 of this
Agreement, each party to that Hedging Agreement may exercise
its right to designate an "Early Termination Date" under that
Hedging Agreement or otherwise terminate the transactions
governed by that Hedging Agreement prior to their respective
stated maturities without notice to or the consent of the
Administrative Agent or any Lender, provided that the market
value thereof would be computed and become payable using the
"Second Method and Market Quotation" basis as provided under
either the 1992 ISDA Master Agreement (Multi-Currency - Cross
Border) or the 1992 ISDA Master Agreement (Local Currency -
Single Jurisdiction) as published by the International Swap
Dealers Association, Inc. ("ISDA"), as reflected in that
Hedging Agreement, and if the
<PAGE> 5
The Maxim Group, Inc.
September 24, 1997
Page 5
amount thereof would be payable to the Grantor, that amount
would be paid in accordance with the terms of this Agreement;
and
(ii) notwithstanding anything to the contrary contained in
Section 7(a)(iv) or 8 of this Agreement, the Administrative
Agent shall not have the right to sell, transfer, or assign
that Hedging Agreement upon the occurrence or continuance of
an Event of Default, but the only manner in which the
Administrative Agent may realize upon that Hedging Agreement
under Section 8 of this Agreement shall be to provide the
parties to that Hedging Agreement with notice the effect of
which would cause the transactions under that Hedging
Agreement to be terminated, the market value thereof to be
computed and to become payable using the "Second Method and
Market Quotation" basis as provided under either the 1992 ISDA
Master Agreement (Multi-Currency Cross Border) or the 1992
ISDA Master Agreement (Local Currency - Single Jurisdiction)
as published by the ISDA, as reflected in that Hedging
Agreement, and if the amount thereof would be payable to
Grantor, that amount would be paid in accordance with Sections
4(b)(ii) and 6(b) of this Security Agreement.";
(f) consents to the covenant contained in Section 1009 of the
Indenture, restricting the ability of the Borrowers to make certain
distributions in respect of their capital stock, and waives enforcement of
subsection (b) of Section 9.10 of the Credit Agreement with respect to the
Borrowers agreeing to be bound by said covenant contained in Section 1009 of the
Indenture;
(g) waives enforcement of Sections 9.4 and 9.7 of the Credit
Agreement with respect to the Employee Loan; and
(h) agrees that, upon the effectiveness of the amendments set
forth in clause (c) above, the maximum amount of its share of the New Commitment
Amount shall be the amount set forth opposite its name on the signature pages
hereto.
The approval in clause (a) of the immediately preceding paragraph
applies solely to the Default and Event of Default (1) under Sections 9.1 and
9.2 of the Credit Agreement that otherwise would result from the issuance of the
Subordinated Notes by Maxim and the issuance of the
<PAGE> 6
The Maxim Group, Inc.
September 24, 1997
Page 6
Guarantees by certain Subsidiaries of Maxim without such approval, and (2) under
Section 9.10(a) of the Credit Agreement that would otherwise result from the
inclusion of the negative pledge provision in the Indenture without such
approval. The waiver in clause (f) of the immediately preceding paragraph
applies solely to the Default and Event of Default under Section 9.10(b) of the
Credit Agreement that otherwise would result from the agreement of the Borrowers
to be bound by the covenant contained in Section 1009 of the Indenture without
such waiver. The waiver in clause (g) of the immediately preceding paragraph
applies solely to the Default and Event of Default under Sections 9.4 and 9.7 of
the Credit Agreement that otherwise would exist without such waiver as a result
of the Employee Loan. Without limiting the foregoing sentence, each of the
Lenders expressly reserves any and all rights it may have under the Credit
Agreement or any other Loan Documents arising out of or in connection with any
Default or Event of Default thereunder and not specifically waived herein.
Except as expressly modified by this consent, waiver and amendment
agreement, the terms and provisions of the Credit Agreement, are hereby ratified
and confirmed and shall continue in full force and effect. Without limiting any
conditions to effectiveness set forth above, the consent, waivers and amendments
provided herein (1) are to be effective only upon receipt by the Administrative
Agent of an execution counterpart of this consent, waiver and amendment
agreement signed by the Required Lenders and by each of the Borrowers listed
below; and are conditioned upon the correctness of all representations and
warranties, and upon full compliance by each Borrower with each of the
undertakings and terms provided in any oral or written requests for this
consent, waiver and amendment agreement and in this consent, waiver and
amendment agreement itself, and (2) will be of no further force and effect if
Borrowers' fail to satisfy the conditions referred to in clauses (x), (y) and
(z) of the proviso above or fail to provide the Administrative Agent with a true
and complete copy of the fully-executed counterparts of the Indenture promptly
after the execution thereof by all parties thereto.
In consideration of the approvals, waivers and amendments granted by the
Required Lenders herein, each Borrower hereby agrees that it shall not enter
into or consent to any amendment of the Indenture (including, without
limitation, the forms of Subordinated Notes and Guarantees contained therein) on
or after the date hereof without the prior written consent of the Required
Lenders. Maxim hereby agrees that it shall promptly (and in any event within
five (5) Business Days), upon its becoming aware of or receiving notice of any
change in the Person designated or appointed as "Trustee" (as such term is
defined in the Indenture) under the Indenture, give notice to the Administrative
Agent and each Lender of such change. Each Borrower further agrees that the
failure of any Borrower to comply with the preceding sentences in this paragraph
shall be deemed to be an "Event of Default" under the Credit Agreement.
<PAGE> 7
The Maxim Group, Inc.
September 24, 1997
Page 7
Please evidence your acknowledgment of and agreement to the foregoing by
executing this letter below in the place indicated.
Sincerely,
Maximum amount FIRST UNION NATIONAL BANK, as
of New Commitment Administrative Agent and Lender
Amount:
$35,000,000
By: /s/ Daniel L. Evans
-------------------------
Name: Daniel L. Evans
---------------------
Title: Senior Vice President
---------------------
(Signatures continue on following page)
<PAGE> 8
The Maxim Group, Inc.
September 24, 1997
Page 8
Each term of the foregoing consented to
as of September 24, 1997.
FLEET NATIONAL BANK, as Lender Maximum amount of
New Commitment Amount:
$25,000,000
By: /s/ Oliver Bennett
------------------
Name: Oliver Bennett
--------------
Title: Vice President
--------------
(Signatures continue on following page)
<PAGE> 9
The Maxim Group, Inc.
September 24, 1997
Page 9
Each term of the foregoing consented to
as of September 24, 1997.
NATIONSBANK, N.A., as Lender Maximum amount of
New Commitment Amount:
$25,000,000
By: /s/ David H. Dinkins
--------------------
Name:
-------------------
Title:
------------------
(Signatures continue on following page)
<PAGE> 10
The Maxim Group, Inc.
September 24, 1997
Page 10
Each term of the foregoing consented to
as of September 24, 1997.
SUNTRUST NATIONAL, ATLANTA, as Lender Maximum amount of
New Commitment Amount:
$20,000,000
By: /s/ Bradley J. Staples
------------------------------
Name: Bradley J. Staples
----------------------------
Title: Assistant Vice President
---------------------------
By: /s/ David W. Pender
------------------------------
Name: David W. Pender
----------------------------
Title: Group Vice President
----------------------------
(Signatures continue on following page)
<PAGE> 11
The Maxim Group, Inc.
September 24, 1997
Page 11
Accepted and agreed to as of
the date above first written:
THE MAXIM GROUP, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name: Thomas P. Leahey
------------------------------------
Title: Executive Vice President-Finance
-----------------------------------
IMAGE INDUSTRIES, INC.
By: /s/ Gene Harper
----------------------------------------------
Name: Gene Harper
-------------------------------------
Title: Assistant Secretary
------------------------------------
KINNAIRD & FRANCKE
INTERIORS, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
KINNAIRD & FRANCKE DRAPERY CO., INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
(Signatures continue on following page)
<PAGE> 12
The Maxim Group, Inc.
September 24, 1997
Page 12
FIRST QUALITY, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
STEVE PETERSON INTERIORS
& ASSOCIATES, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
BAY AREA CARPETS, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
CARPET WORLD, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
(Signatures continue on following page)
<PAGE> 13
The Maxim Group, Inc.
September 24, 1997
Page 13
RNA ENTERPRISES, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
GCO, INC.
By: /s/ Gene Harper
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
DUBOSE CARPETS & FLOORS, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
RUGS N REMNANTS, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
(Signatures continue on following page)
<PAGE> 14
The Maxim Group, Inc.
September 24, 1997
Page 14
CARPET GALLERY, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
LOSANTVILLE CARPET OUTLET, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
AMERICAN CARPETS & INTERIORS, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
INVESTOR MANAGEMENT, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
(Signatures continue on following page)
<PAGE> 15
The Maxim Group, Inc.
September 24, 1997
Page 15
GCO CARPET OUTLET, INC.
By: /s/ Gene Harper
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
MAXIM RETAIL GROUP, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
CARPET COUNTY, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
CARPETMAX, L.P.
By: The Maxim Group, Inc., as its sole
general partner
By: /s/ Thomas P. Leahey
--------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
(Signatures continue on following page)
<PAGE> 16
The Maxim Group, Inc.
September 24, 1997
Page 16
TRI-R OF ORLANDO, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
CARPETMAX OF PALM BEACH, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
CREDITMAX CORP.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
CARPETMAX OF NEW MEXICO, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
(Signatures continue on following page)
<PAGE> 17
The Maxim Group, Inc.
September 24, 1997
Page 17
CARPETMAX OF CHARLOTTE, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
CLOUD CARPETS, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
CARPETMAX ALABAMA CONTRACT, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
BAILEY & ROBERTS CARPETMAX OF
TENNESSEE, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
(Signatures continue on following page)
<PAGE> 18
The Maxim Group, Inc.
September 24, 1997
Page 18
MAXIM EQUIPMENT LEASING
COMPANY, INC.
By: /s/ Thomas P. Leahey
----------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
<PAGE> 1
EXHIBIT 12.1
THE MAXIM GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR YEAR TEN MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, JANUARY 31, JANUARY 31, JANUARY 31,
1994 1995 1996 1997 1998
--------- --------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EARNINGS:
Earnings (loss) before provision
for income taxes per
consolidated statement
of operations ................ $ 845 $15,429 $(4,140) $ 4,074 $26,470
ADD:
Portion of rents representative
of the interest factor ........ 420 1,066 1,396 1,796 1,994
Interest on indebtedness ...... 1,886 1,839 4,695 7,006 6,948
------ ------- ------- ------- -------
Income as adjusted ............ $3,151 $18,334 $ 1,951 $12,876 $35,412
====== ======= ======= ======= =======
FIXED CHARGES:
Portion of rents representative
of the interest factor ...... 420 1,066 1,396 1,796 1,994
Interest on indebtedness ...... 1,886 1,839 4,695 7,006 6,948
------ ------- ------- ------- -------
Fixed charges ................. $2,306 $ 2,905 $ 6,091 $ 8,802 $ 8,942
====== ======= ======= ======= =======
Ratio of earnings to fixed
charges ..................... 1.4x 6.3x ---(1) 1.5x 4.0x
</TABLE>
- ----------------------
(1) Earnings were inadequate to cover fixed charges for the ten months
ended January 31, 1996. The amount of the deficiency for the period was
$4.1 million.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Bailey & Roberts Carpetmax of Tennessee, Inc., a Tennessee corporation
CarpetMAX, L.P., a Georgia limited partnership
CarpetMAX Alabama Contract, Inc., an Alabama corporation
CarpetMAX of Alabama, Inc., a Georgia corporation
CarpetMAX of Charlotte, Inc., a Georgia corporation
CarpetMAX of Florida, Inc., a Delaware corporation
CarpetMAX of Indiana, Inc., an Indiana corporation
CarpetMAX of Iowa, Inc., a Georgia corporation
CarpetMAX of Jacksonville, Inc., a Georgia corporation
CarpetMAX of Kentucky, Inc., a Delaware corporation
CarpetMAX of New Mexico, Inc., a Georgia corporation
CarpetMAX of North Carolina, Inc., a Georgia corporation
CarpetMAX of Palm Beach, Inc., a Georgia corporation
CarpetMAX of Utah, Inc., a Utah corporation
Cloud Carpets, Inc., a Georgia corporation
Creditmax Corporation, a Georgia corporation
DuBose Carpets & Floors, Inc., a Delaware corporation
GCO Carpet Outlet, Inc., an Alabama corporation
GCO, Inc., a Nevada corporation
Image Industries, Inc., a Delaware corporation
Investor Management, Inc., an Alabama corporation
Maxim Equipment Leasing Company, Inc., a Georgia corporation
Maxim Retail Group, Inc., a Georgia corporation
RNA Enterprises, Inc., a Delaware corporation
Rugs N Remnants, Inc., a Texas corporation
Tri-R of Orlando, Inc., a Georgia corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 33- 80984, 33-81002, 333-19691,
333-19693 and 333-47299).
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MAXIM GROUP, INC. FOR THE YEAR ENDED JANUARY 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 28,880
<SECURITIES> 0
<RECEIVABLES> 71,437
<ALLOWANCES> 2,916
<INVENTORY> 54,693
<CURRENT-ASSETS> 157,548
<PP&E> 185,246
<DEPRECIATION> 48,039
<TOTAL-ASSETS> 321,494
<CURRENT-LIABILITIES> 47,216
<BONDS> 129,349
0
0
<COMMON> 17
<OTHER-SE> (14,894)
<TOTAL-LIABILITY-AND-EQUITY> 321,494
<SALES> 365,127
<TOTAL-REVENUES> 365,127
<CGS> 249,381
<TOTAL-COSTS> 249,381
<OTHER-EXPENSES> 83,955
<LOSS-PROVISION> 1,893
<INTEREST-EXPENSE> 6,948
<INCOME-PRETAX> 26,470
<INCOME-TAX> 10,314
<INCOME-CONTINUING> 16,156
<DISCONTINUED> 0
<EXTRAORDINARY> 785
<CHANGES> 0
<NET-INCOME> 15,371
<EPS-PRIMARY> .95<F1>
<EPS-DILUTED> .92
<FN>
<F1>Tag (EPS-PRIMARY) Denotes Basic EPS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF THE MAXIM GROUP, INC. AND SUBSIDIARIES AS OF
JANUARY 31, 1997 AND THE RESTATED CONSOLIDATED STATEMENTS OF INCOME AND CASH
FLOWS FOR THE YEAR ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 6,439
<SECURITIES> 0
<RECEIVABLES> 49,845
<ALLOWANCES> 2,059
<INVENTORY> 43,487
<CURRENT-ASSETS> 104,069
<PP&E> 138,917
<DEPRECIATION> 37,514
<TOTAL-ASSETS> 219,673
<CURRENT-LIABILITIES> 45,782
<BONDS> 91,100
0
0
<COMMON> 13
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 219,673
<SALES> 309,721
<TOTAL-REVENUES> 309,721
<CGS> 222,290
<TOTAL-COSTS> 72,366
<OTHER-EXPENSES> 302
<LOSS-PROVISION> 375
<INTEREST-EXPENSE> 7,006
<INCOME-PRETAX> 4,074
<INCOME-TAX> 1,929
<INCOME-CONTINUING> 2,145
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,145
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
<FN>
<F1>Tag (EPS-PRIMARY) Denotes Basic EPS.
</FN>
</TABLE>
