<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended July 31, 1998
Commission File Number 1-13099
THE MAXIM GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-2060334
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
210 Town Park Drive, Kennesaw, Georgia 30144
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 590-9369
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N/A
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(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, $.001 par value 19,252,827
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Class Outstanding at September 8, 1998
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PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Information)
(Unaudited)
<TABLE>
<CAPTION>
July 31, January 31,
Assets 1998 1998
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<S> <C> <C>
Current assets:
Cash and cash equivalents, including restricted cash of $12,618 at
July 31, 1998 and $22,786 at January 31, 1998 $ 25,030 $ 28,880
Current portion of franchise license fees receivable, net of allowance
for doubtful accounts of $383 at July 31, 1998 and $528 at
January 31, 1998 2,791 3,107
Trade accounts receivable, net of allowance for doubtful accounts of
$2,594 at July 31, 1998 and $1,917 at January 31, 1998 69,461 56,432
Accounts receivable from officers and employees 1,531 1,593
Current portion of notes receivable from franchisees and related
parties, net of allowance for doubtful accounts of $252 at July 31,
1998 and $261 at January 31, 1998 1,562 1,165
Inventories 64,808 54,693
Refundable income taxes 1,986 2,558
Deferred income taxes 5,804 5,714
Prepaid expenses 4,444 3,406
-------- --------
Total current assets 177,417 157,548
Property and equipment, net of accumulated depreciation and
amortization of $54,930 at July 31, 1998 and $48,039 at January 31,
1998 156,662 137,207
Franchise license fees receivable, less current portion, net of allowance
for doubtful accounts of $210 at July 31, 1998 and January 31, 1998 4,619 2,718
Notes receivable from franchisees, less current portion 4,001 3,506
Intangible assets, net of accumulated amortization of $1,993 at July 31,
1998 and $1,626 at January 31, 1998 11,453 13,640
Other assets 9,279 6,875
-------- --------
$363,431 $321,494
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(In Thousands, Except Per Share Information)
(Unaudited)
<TABLE>
<CAPTION>
July 31, January 31,
Liabilities And Stockholders' Equity 1998 1998
- ------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 150 $ 384
Current portion of capital lease obligations 503 501
Rebates payable to franchisees 3,773 3,975
Accounts payable 19,369 23,376
Accrued expenses 40,367 14,333
Deferred revenue 2,554 1,750
Deposits 5,444 2,897
--------- ---------
Total current liabilities 72,160 47,216
Long-term debt, less current portion 169,025 129,349
Capital lease obligations, less current portion 1,174 1,429
Deferred taxes 3,676 9,725
--------- ---------
Total liabilities 246,035 187,719
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Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000 shares authorized, no
shares issued or outstanding 0 0
Common stock, $.001 par value; 25,000 shares authorized,
17,577 shares issued at July 31, 1998 and 17,352 shares
issued at January 31, 1998 18 17
Additional paid-in capital 121,214 119,264
Retained earnings 15,142 29,388
Treasury stock, 1,455 shares at July 31, 1998 and 1,221 shares
at January 31, 1998 (18,978) (14,894)
--------- ---------
Total stockholders' equity 117,396 133,775
--------- ---------
$ 363,431 $ 321,494
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
July 31, July 31,
1998 1997
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<S> <C> <C>
Revenues:
Sales of floorcovering products $ 86,849 $ 76,881
Fiber and PET sales 5,209 6,741
Fees from franchise services 11,995 7,292
Other 1,823 1,329
--------- ---------
Total revenues 105,876 92,243
Cost of sales 73,425 63,071
--------- ---------
Gross profit 32,451 29,172
Selling, general, and administrative expenses 22,097 20,725
Interest income (32) (131)
Interest expense 2,836 1,262
Other (120) (49)
Nonrecurring charges 33,000 0
--------- ---------
(Loss) earnings before income tax (benefit) expense (25,330) 7,365
Income tax (benefit) expense (7,540) 2,780
--------- ---------
Net (loss) earnings $ (17,790) $ 4,585
========= =========
(Loss) earnings per common share:
Basic $ (1.09) $ 0.28
========= =========
Diluted $ (1.09) $ 0.28
========= =========
Weighted average number of common shares outstanding:
Basic 16,305 16,294
========= =========
Diluted 16,305 16,615
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Information)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
July 31, July 31,
1998 1997
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<S> <C> <C>
Revenues:
Sales of floorcovering products $ 167,985 $ 148,371
Fiber and PET sales 12,174 12,513
Fees from franchise services 21,282 14,573
Other 3,972 3,011
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Total revenues 205,413 178,468
Cost of sales 143,200 122,226
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Gross profit 62,213 56,242
Selling, general, and administrative expenses 44,299 41,163
Interest income (418) (225)
Interest expense 5,200 2,663
Other (307) (84)
Nonrecurring charges 33,000 0
--------- ---------
(Loss) earnings before income tax (benefit) expense (19,561) 12,725
Income tax (benefit) expense (5,315) 4,889
--------- ---------
Net (loss) earnings $ (14,246) $ 7,836
========= =========
(Loss) earnings per common share
Basic $ (0.87) $ 0.48
========= =========
Diluted $ (0.87) $ 0.47
========= =========
Weighted average number of common shares outstanding
Basic 16,364 16,202
========= =========
Diluted 16,364 16,623
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, Except Per Share Information)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
July 31, July 31,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $(14,246) $ 7,836
-------- --------
Adjustments to reconcile net (loss) earnings to net
cash (used in) provided by
operating activities:
Nonrecurring charges 33,000 0
Depreciation and amortization 7,011 5,845
Deferred income taxes (6,139) 3,293
Changes in assets and liabilities:
Increase in receivables (20,244) (8,557)
Increase in inventories (10,515) (4,884)
Decrease in refundable income taxes 572 334
Increase in prepaid expenses and other assets (3,583) (3,847)
Increase in rebates and accounts payable,
accrued expenses, deferred
revenue, and deposits 4,405 411
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Total adjustments 4,507 (7,405)
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Net cash (used in) provided by operating activities (9,739) 431
-------- --------
Cash flows from investing activities:
Capital expenditures (28,878) (11,837)
Acquisitions, net of cash acquired (2,289) (977)
-------- --------
Net cash used in investing activities (31,167) (12,814)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 0 47,240
Proceeds from exercise of options, net 1,950 463
Purchase of treasury stock (4,083) (10,938)
Borrowings under revolving credit agreement 39,442 0
Repayments of revolving credit agreement 0 (25,642)
Principal payments on capital lease obligations (253) (254)
-------- --------
Net cash provided by financing activities 37,056 10,869
-------- --------
Net decrease in cash (3,850) (1,514)
Cash, beginning of period 28,880 6,439
-------- --------
Cash, end of period $ 25,030 $ 4,925
======== ========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 5,052 $ 4,067
======== ========
Income taxes $ 145 $ 1,346
======== ========
Supplemental disclosure of noncash investing and financing activities:
Common stock issued in connection with acquisitions $ 0 $ 3,000
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Information)
(Unaudited)
1. Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1998 Form
10-K as filed with the Securities and Exchange Commission.
The results of operations for the periods presented are not necessarily
indicative of the operating results for the full year.
2. Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
July 31, January 31,
1998 1998
-------- ---------
<S> <C> <C>
Raw materials $16,339 $14,809
Work in process 4,139 3,363
Finished goods 44,330 36,521
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$64,808 $54,693
======= =======
</TABLE>
3. Senior Subordinated Notes
On October 16, 1997, the Company completed the sale of $100 million of
9-1/4% Senior Subordinated Notes ("Notes") due 2007, to institutional
buyers in a private offering under Rule 144A promulgated under the
Securities Act of 1933. The net proceeds to the Company from the offering
of the Notes were approximately $96 million, net of an issue discount and
fees and related costs. The Company used the net proceeds from the
offering of the Notes to repay all borrowings outstanding under its
revolving credit agreements of
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<PAGE> 8
approximately $82.7 million and for general corporate purposes, including
capital expenditures.
Each of the Company's subsidiaries has fully and unconditionally
guaranteed the Notes on a joint and several basis. The guarantor
subsidiaries comprise all of the direct and indirect subsidiaries of the
Company. The Company has not presented separate financial statements and
other disclosures concerning the guarantor subsidiaries because management
has determined that such information is not material to investors. There
are no significant restrictions on the ability of the guarantor
subsidiaries to make distributions to the Company.
4. Nonrecurring Charges
During the period ended July 31, 1998, the Company reevaluated its retail
strategy. As a result of the assessment, the Company made the
determination that it would amend its franchise agreement, close certain
Company-owned stores, and write down the value of certain retail assets
including goodwill.
The Company recorded a $33 million charge for certain nonrecurring items
during the period ended July 31,1998. On June 1, 1998 the Company amended
its franchise agreement with the majority of its members, whereby the
Company established certain requirements for more uniformity in the
appearance and merchandising of the franchise stores. As part of the
amended franchise agreement, the number of vendors available to franchise
members through the Company, to buy from and earn rebates, has been
reduced. The Company has recorded allowances for receivables due from
vendors replaced in the amended franchise agreement and has also
established a reserve to settle claims from certain parties. In addition,
the Company has written down to fair value certain assets made obsolete by
the amended franchise agreement. The Company also accrued for the costs of
closing 14 Company-owned retail stores. The Company anticipates all stores
will be closed within six months.
In connection with the reevaluation of the Company's retail strategy
described above, the Company analyzed the performance of its Company owned
retail regions. This analysis indicated that significant strategic and
operational changes would be necessary in some stores, including changes
in the customer mix, location, store design, and merchandising. These
factors also caused management to assess the realizability of the goodwill
recorded for these regions.
The determination of goodwill impairment was made by comparing the
unamortized goodwill balance for each region to the estimate of the
related region's undiscounted future cash flows. The assumptions used
reflected earnings, market and industry conditions, as well as current
operating plans. The assessment indicated a permanent impairment of
goodwill related to certain of the regions, therefore such goodwill was
written down to fair market value which resulted in a write-off totaling
$4.2 million.
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The major components of the nonrecurring charges are as follows:
<TABLE>
<CAPTION>
CHARGE
TO
INITIAL RELATED REMAINING
CHARGE ASSETS BALANCE
------ ------ -------
<S> <C> <C> <C>
Vendors' receivable allowances $ 5,300 $ 5,300 $ 0
Claims' reserves $10,700 $ 0 $10,700
Write-down of equipment 2,100 2,100 0
Store closure and carrying costs 10,700 700 10,000
Write-down of goodwill 4,200 4,200 0
------- ------- -------
$33,000 $12,300 $20,700
======= ======= =======
</TABLE>
5. Acquisitions
On July 14, 1998 the Company executed a non-binding letter of intent to
purchase the stock of CarpetsPlus of America, LLC, a floorcovering buying
group. The acquisition is expected to close by October 31, 1998.
6. Subsequent Event
Effective August 9, 1998, the Company acquired substantially all of the
residential retail store assets of Shaw Industries, Inc. and its wholly
owned subsidiary, Shaw Carpet Showplace, Inc. (collectively, "Shaw"),
pursuant to an Agreement and Plan of Merger dated as of June 23, 1998.
These assets include 266 retail stores with annual revenues of
approximately $584 million and are being operated through the Company's
newly organized Maxim Retail Stores, Inc. subsidiary. The Company intends
to continue operating the residential retail stores acquired from Shaw as
retail floorcovering stores. Under the terms of the Merger Agreement, the
Company issued to Shaw 3,150,000 shares of common stock of the Company and
a one-year note in the principal amount of $18 million and paid Shaw $25
million in cash.
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<PAGE> 10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total Revenues. Total revenues increased 14.8% to $105.9 million for the
three months ended July 31, 1998 from $92.2 million for the three months
ended July 31, 1997. Total revenues increased 15.1% to $205.4 million for
the six months ended July 31, 1998 from $178.5 million reported in the
prior year period. The components of total revenues are discussed below:
Sales of Floorcovering Products. Sales of floorcovering products
increased 13.0% to $86.8 million for the three months ended July 31,
1998 from $76.9 million for the three months ended July 31, 1997, and
increased 13.2% to $168.0 for the six months ended July 31, 1998 from
$148.4 million in the prior year period. Sales of floorcovering
products in Company-owned stores increased 10.5% to $40.2 million for
the three months ended July 31, 1998 from $36.4 million for the three
months ended July 31, 1997, and increased 14.1% to $76.3 million for
the six months ended July 31, 1998 from $66.9 million in the prior year
period. The growth in retail sales of floorcovering products was
primarily due to internal growth. Sales of manufactured carpet
increased 13.0% to $42.3 million for the three months ended July 31,
1998 from $37.5 million for the three months ended July 31, 1997, and
increased 9.6% to $82.6 million for the six-months ended July 31, 1998
from $75.4 million in the prior year period. Unit sales of manufactured
carpet increased 21.0% to 7.5 million square yards for the three months
ended July 31, 1998 from 6.2 million square yards for the three months
ended July 31, 1997, and increased 14.1% to 14.6 million square yards
for the six months ended July 31, 1998 from 12.8 million square yards
in the prior year period. Sales from the Company's two distribution
centers amounted to $4.3 million for the three months ended July 31,
1998 and $3.0 million for the three months ended July 31, 1997, and
$9.1 million for the six months ended July 31, 1998 and $6.1 million in
the prior year period, largely representing sales to the Company's
franchisees.
Fees From Franchise Services. Fees from franchise services, which
include franchise license fees and royalties, brokering of
floorcovering products, and advertising, increased 64.4% to $12.0
million for the three months ended July 31, 1998 from $7.3 million for
the three months ended July 31, 1997, and increased 46.0% to $21.3 for
the six months ended July 31, 1998 from $14.6 million in the prior year
period. 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.
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<PAGE> 11
Fiber and PET Sales. Sales of fiber and polyethylene terephthalate
("PET") decreased 22.7% to $5.2 million for the three months ended July
31, 1998 from $6.7 million for the three months ended July 31, 1997,
and decreased 2.7% to $12.2 million for the six months ended July 31,
1998 from $12.5 million in the prior year period. Unit sales decreased
29.1% to 12.2 million pounds for the three months ended July 31, 1998
from 17.2 million pounds for the three months ended July 31, 1997, and
decreased 12.6% to 28.5 million pounds for the six months ended July
31, 1998 from 32.6 million pounds in the prior year period. The unit
sales decrease was the result of increased demand from the Company's
carpet operations.
Gross Profit. Gross profit increased 11.2% to $32.5 million for the three
months ended July 31, 1998 from $29.2 million for the three months ended
July 31, 1997, and increased 10.6% to $62.2 million for the six months
ended July 31, 1998 from $56.2 million in the prior year period. As a
percentage of sales, gross profit was 30.7% for the three months ended
July 31, 1998 compared to 31.6% for the three months ended July 31, 1997
and 30.3% for the six months ended July 31, 1998 compared to 31.5% in the
prior year period. Contributing to the decrease in gross profit as a
percentage of sales was the continuing change in the retail business mix
of the Company to a revenue base consisting principally of the net sales
of floor covering products and a higher cost of raw materials at the
Company's manufacturing subsidiary, Image Industries, Inc. ("Image").
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased 6.6% to $22.1 million for the three
months ended July 31, 1998 from $20.7 million for the three months ended
July 31, 1997, and increased 7.6% to $44.3 million for the six months
ended July 31, 1998 from $41.2 million in the prior year period. Increases
in operating expenses on an absolute basis reflect an overall growth in
the size of the Company's operations required to serve a growing retail
base as well as increased selling costs at Image related to newly created
territories. As a percentage of revenues, selling, general, and
administrative expenses decreased to 20.9% for the three months ended July
31, 1998 from 22.5% for the three months ended July 31, 1997 and decreased
to 21.6% from 23.1% for the six months ended July 31, 1998 as compared to
the prior year period as a result of spreading fixed costs over a larger
revenue base.
Interest Expense. Interest expense increased 125.0% to $2.8 million for
the three months ended July 31, 1998 from $1.3 million for the three
months ended July 31, 1997, and increased 95.3% to $5.2 million for the
six months ended July 31, 1998 from $2.7 million in the prior year period,
due principally to the Company having a higher debt balance and a higher
interest rate during the six months ended July 31, 1998 as compared to the
prior year period. In October 1997, the Company sold $100 million of
9-1/4% senior subordinated notes, see "Liquidity and Capital Resources."
Nonrecurring Charges. The Company recorded a $33 million charge for
certain nonrecurring items for the period ending July 31, 1998. On June 1,
1998, the Company amended its franchise agreement with the majority of its
members, whereby the Company established certain requirements for more
uniformity in the appearance and merchandising of the franchise stores.
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<PAGE> 12
As part of the amended franchise agreement, the number of vendors
available to buy from and earn rebates has been reduced. The Company has
recorded allowances for receivables due from vendors replaced in the
amended franchise agreement and has also established a reserve to settle
claims from certain parties.
In addition, the Company has written down to fair value certain assets
made obsolete by the amended franchise agreement. The Company also accrued
for the costs of closing 14 Company-owned retail stores. The Company
anticipates all stores will be closed within six months.
In connection with the reevaluation of the Company's retail strategy
described above, the Company analyzed the performance of its Company owned
retail regions. This analysis indicated that significant strategic and
operational changes would be necessary in some stores, including changes
in the customer mix, location, store design, and merchandising. These
factors also caused management to assess the realizability of the goodwill
recorded for these regions.
The determination of goodwill impairment was made by comparing the
unamortized goodwill balance for each region to the estimate of the
related region's undiscounted future cash flows. The assumptions used
reflected the earnings, market, and industry conditions, as well as
current operating plans. The assessment indicated a permanent impairment
of goodwill related to certain of the regions, therefore such goodwill was
written down to fair market value which resulted in a write-off totaling
$4.2 million.
Income Tax Expense. The Company recorded an income tax benefit of $7.5
million for the three months ended July 31, 1998 compared to a $2.8
million expense for the three months ended July 31, 1997, and a $5.3
million tax benefit for the six months ended July 31, 1998 compared to
$4.9 million expense in the prior year period. The decrease in income tax
expense is due to the Company recording a loss from a nonrecurring charge
for the three and six months ended July 31, 1998, as compared to the prior
year periods.
Net Earnings. As a result of the foregoing factors, the Company recorded a
net loss of $17.8 million for the three months ended July 31, 1998
compared to net earnings of $4.6 million for the three months ended July
31, 1997, and a net loss of $14.2 million for the six months ended July
31, 1998 compared to net earnings of $7.8 million in the prior year
period.
Liquidity and Capital Resources
General. The Company's primary capital requirements are for new store
openings, investments in the manufacturing operations, working capital and
acquisitions. The Company historically has met its capital requirements
through a combination of cash flow from operations, net proceeds from the
sale of equity and debt securities, bank lines of credit, and standard
payment terms.
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<PAGE> 13
In March 1997, the Board of Directors of the Company authorized management
to repurchase up to one million shares of common stock of the Company. In
October 1997, the Board of Directors of the Company authorized management
to repurchase up to an additional one million shares of the common stock
of the Company. As of September 8, 1998, the Company had repurchased
1,528,300 shares of its common stock in the open market for a total of
$20.4 million. These purchases were, and any future purchases will be,
financed from borrowings under the Company's revolving credit facility.
Credit Facility. On August 26, 1997 (as amended on September 24, 1997 and
August 7, 1998), the Company established a credit facility providing for
aggregate commitments of $141 million (the "Credit Facility"). The Credit
Facility consists of (i) a $110 million revolving credit facility, of
which $39.8 million was available for borrowings on September 8, 1998 and
(ii) a special-purpose letter of credit in the amount of up to $31 million
for use as credit support for the Summerville Loan (defined below) to be
used to finance the expansion of Image's fiber extrusion capabilities at
its plant in Summerville, Georgia. As of September 8, 1998, the Company
had $70.2 million outstanding under the revolving credit facility. No
amounts have been drawn on the letter of credit. Amounts outstanding under
the Credit Facility bear interest at a variable rate based on LIBOR or the
prime rate, at the Company's option. The Credit Facility contains
customary covenants. As of September 8, 1998, the Company was in
compliance with, or had obtained waivers of all violations of, all
covenants under the Credit Facility.
The Credit Facility, as amended, expires on October 6, 1998. The Company
has accepted a $141 million committed credit facility ("Committed
Facility") to refinance the current Credit Facility at maturity. The
Committed Facility consists of (i) a $95 million five-year revolving
credit facility, (ii) a $15 million 364 day line of credit, and (iii) a
$31 million letter of credit to support the Summerville Loan.
Summerville Loan. Effective September 1, 1997, the Development Authority
of the city of Summerville, Georgia (the "Authority"), issued Exempt
Facility Revenue Bonds in an aggregate principal amount of $30 million
(the "Facility Revenue Bonds"). On September 17, 1997, the Authority
loaned (the "Summerville Loan") the proceeds from the sale of the Facility
Revenue Bonds to Image to finance, in whole or in part, the expansion of
Image's fiber extrusion capabilities at its plant in Summerville, Georgia.
The Facility Revenue Bonds and the interest thereon are special, limited
obligations of the Authority, payable solely from the revenues and income
derived from a loan agreement between Image and the Authority, which
payment thereof and funds which may be drawn under the special-purpose
letter of credit described above. The Facility Revenue Bonds and the
Summerville Loan will mature on September 1, 2017, and the interest rate
of the Facility Revenue Bonds is to be determined from time to time based
on the minimum rate of interest that would be necessary to sell the
Facility Revenue Bonds in a secondary market at the principal amount
thereof. The interest rate on the Summerville Loan equals the interest
rate on the Facility Revenue Bonds.
Senior Notes. On October 16, 1997, the Company completed the sale of $100
million of 9-1/4% senior subordinated notes ("Senior Notes") due 2007.
Each of the Company's subsidiaries has fully and unconditionally
guaranteed the Senior Notes on a joint and several basis. The guarantor
subsidiaries comprise all of the direct and indirect
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<PAGE> 14
subsidiaries of the Company. The Company has not presented separate
financial statements and other disclosures concerning the guarantor
subsidiaries because management has determined that such information is
not material to investors. There are no significant restrictions on the
ability of the guarantor subsidiaries to make distributions to the
Company.
Cash Flows. During the six months ended July 31, 1998, operating
activities used $9.7 million of cash compared to $431,000 cash provided in
the six months ended July 31, 1997. The decrease in cash provided by
operating activities resulted primarily from an increase in inventories
and accounts receivable. The increase in inventories and accounts
receivable was partially due to higher sales of floorcovering products to
franchisees and other carpet retailers.
During the six months ended July 31, 1998, investing activities used cash
in the amount of $31.2 million compared to $12.8 million for the six
months ended July 31, 1997. The increase is primarily due to an increase
in capital expenditures relating to manufacturing operations and the
expansion of the retail business.
During the six months ended July 31, 1998, financing activities provided
cash of $37.1 million compared to $10.9 million in the six months ended
July 31, 1997. This increase is primarily due to proceeds received from
borrowings under the Company's revolving credit agreement.
Capital Expenditures. The Company anticipates that it will require
approximately $15 million for the remainder of fiscal 1999 to (i) open
approximately 10 new Gallery stores (assuming approximately 50% of such
stores will be located on Company-owned property and the remainder on
leased property), (ii) reconfigure three existing CarpetMAX stores, and
(iii) upgrade its management information systems. The actual costs that
the Company will incur in opening new Gallery stores cannot be predicted
with precision because the opening costs will vary based upon geographic
location, the size of the store, the amount of supplier contributions and
the extent of the buildout required at the selected site. The Company
anticipates that it will require approximately $10 million during the
remainder of fiscal 1999 for capital expenditures at Image, including the
expansion of Image's polyester fiber production capacity.
The Company believes that the net proceeds from the Notes Offering,
borrowings under the Credit Facility, the Summerville Loan, and cash flows
from operating activities will be adequate to meet the Company's working
capital needs, planned capital expenditures, and debt service obligations
through fiscal 1999. As the Company's debt matures, the Company may need
to refinance such debt. There can be no assurance that such debt can be
refinanced or, if so, whether it can be refinanced on terms acceptable to
the Company. If the Company is unable to service its indebtedness, it will
be required to adopt alternative strategies, which may include actions
such as reducing or delaying capital expenditures, selling assets,
restructuring, or refinancing its indebtedness or seeking additional
equity capital. There can be no assurance that any of these strategies
could be effected on satisfactory terms, if at all.
Recent Accounting Pronouncements
Effective with the three months ended April 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130 ("FAS 130"),
Reporting Comprehensive Income." FAS 130 establishes standards for
reporting and display of comprehensive income and its components in
financial statements. FAS 130 did not have an impact on the Company's
financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures About Segments of an Enterprise and
Related Information", which is effective for fiscal years beginning after
December 15, 1997. FAS 131 establishes reporting standards for public
companies concerning operating segments and related disclosures about
products and services, geographic areas and major customers. FAS 131 will
be adopted with the Company's Annual Report for the fiscal year ending
January 31, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", which is effective for fiscal years beginning after June 15,
1999. Early adoption is encouraged. FAS 133 establishes accounting and
reporting standards for derivative instruments and transactions involving
hedge accounting. The Company does not anticipate this statement will
have an impact on its financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
of Start-Up Activities", which is effective for fiscal years beginning
after December 15, 1998. SOP 98-5 requires entities to expense certain
start-up costs and organization costs as they are incurred. The Company
does not anticipate that this statement will have an impact on its
financial statements.
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
-14-
<PAGE> 15
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 systems,
management presently believes that with the planned conversion to new
software and hardware and the planned modifications to existing software
and hardware, the effects of the year 2000 issue will be timely resolved.
The Company is in the process of conducting an inventory and business risk
assessment of its non-information technology systems. These
non-information technology systems include items such as embedded
technology including microcontrollers used in the Company's manufacturing
processes. The Company will develop remediation plans for such
non-information technology systems if its business risk assessment
indicates such is warranted. All costs associated with analyzing the year
2000 issue or making conversions to existing systems 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 will not have an adverse effect
on the Company's results of operations. The Company will utilize
predominately 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.
Forward-Looking Statements. This Report contains statements that
constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Those statements appear in a number of places in this Report
and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect
to, among other things: (i) the timing, magnitude and costs of the
roll-out of the Gallery Stores; (ii) potential acquisitions by the
Company; (iii) the Company's financing plans; (iv) trends affecting the
Company's financial condition or results of operations; (v) the Company's
business and growth strategies; and (vi) the declaration and payment of
dividends. Any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and actual results
may differ materially from those projected in the forward-looking
statements as a result of various factors. The accompanying information
contained in this Report, including without limitation the information set
forth under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operations," identifies important
factors that could cause such differences.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
-15-
<PAGE> 16
PART II--OTHER INFORMATION
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 26, 1998, the Company held its 1998 Annual Meeting of
Shareholders. At the meeting, the following persons were elected to serve
on the Company's board of directors for a term of three years and until
their successors are elected and have qualified: David E. Cicchinelli and
James W. Inglis. The number of votes cast for and against the election of
each nominee for director was as follows:
<TABLE>
<CAPTION>
DIRECTOR FOR AGAINST
-------- --- -------
<S> <C> <C>
David E. Cicchinelli 13,356,830 214,762
James W. Inglis 13,359,330 212,262
</TABLE>
In addition, the Company's shareholders approved an amendment to the
Company's 1993 Stock Option Plan to increase the number of shares
available for grant thereunder from 3,000,000 shares to 4,000,000 shares.
The number of votes cast in favor of adoption of the amendment to the 1993
Stock Option Plan was 7,804,628 and the number of votes cast against
adoption of the amendment was 519,385. There were 6,611,599 abstentions
and broker nonvotes.
ITEM 5--OTHER INFORMATION
As set forth in the Company's 1998 Proxy Statement, proposals of
shareholders intended to be presented at the Company's 1999 Annual Meeting
of Shareholders must be received at the Company's principal executive
offices by January 30, 1999 in order to be eligible for inclusion in the
Company's proxy statement and form of proxy for that meeting.
With respect to any such proposals received by the Company after April 19,
1999, the persons named in the form of proxy solicited by management in
connection with the 1999 annual meeting of shareholders of the Company
will have discretionary authority to vote on any such shareholder
proposals in accordance with their judgment of what is in the best
interests of the Company.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<S> <C>
11 Statements Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule (for SEC use only)
27.2 Restated Financial Data Schedule (for SEC use only)
</TABLE>
-16-
<PAGE> 17
(B) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended July
31, 1998: Current Report on Form 8-K dated June 23, 1998 (reporting
agreement to acquire substantially all of the residential retail store
assets of Shaw Industries, Inc.)
-17-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MAXIM GROUP, INC.
Dated: September 8, 1998 By: /s/ A. J. Nassar
----------------------------------------
A. J. Nassar, President and
Chief Executive Officer
Dated: September 8, 1998 By: /s/ Gary Brugliera
----------------------------------------
Gary Brugliera, Chief Financial Officer
-18-
<PAGE> 1
EXHIBIT 11
THE MAXIM GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS
PER COMMON AND COMMON EQUIVALENT SHARE
(In Thousands, Except Per Share Information)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
July 31, July 31,
1998 1997
-------- --------
<S> <C> <C>
Basic:
Net (loss) earnings $(17,790) $ 4,585
-------- --------
Weighted average number of common shares outstanding 16,305 16,294
-------- --------
Basic (loss) earnings per common share $ (1.09) $ 0.28
-------- --------
Diluted:
Net (loss) earnings $(17,790) $ 4,585
-------- --------
Shares:
Weighted average number of common shares outstanding 16,305 16,294
Shares issuable from assumed exercise of outstanding stock
options N/A (a) 321
-------- --------
Weighted average number of common and common equivalent shares(b) 16,305 16,615
-------- --------
Diluted (loss) earnings per common share $ (1.09) $ 0.28
-------- --------
</TABLE>
(a) Common equivalent shares are antidilutive for
the three months ended July 31, 1998.
(b) Common equivalent shares represent stock
options granted to key employees and directors.
<PAGE> 2
THE MAXIM GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS
PER COMMON AND COMMON EQUIVALENT SHARE
(In Thousands, Except Per Share Information)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
July 31, July 31,
1998 1997
-------- --------
<S> <C> <C>
Basic:
Net (loss) earnings $(14,246) $ 7,836
-------- --------
Weighted average number of common shares outstanding 16,364 16,202
-------- --------
Basic (loss) earnings per common share $ (0.87) $ 0.48
-------- --------
Diluted:
Net (loss) earnings $(14,246) $ 7,836
-------- --------
Shares:
Weighted average number of common shares outstanding 16,364 16,202
Shares issuable from assumed exercise of outstanding stock
options N/A (a) 421
-------- --------
Weighted average number of common and common
equivalent shares(b) 16,364 16,623
-------- --------
Diluted (loss) earnings per common share $ (0.87) $ 0.47
-------- --------
</TABLE>
(a) Common equivalent shares are antidilutive for
the six months ended July 31, 1998.
(b) Common equivalent shares represent stock
options granted to key employees and directors.
<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 JULY
31, 1998 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR
THE PERIOD ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 25,030
<SECURITIES> 0
<RECEIVABLES> 87,404
<ALLOWANCES> 3,439
<INVENTORY> 64,808
<CURRENT-ASSETS> 177,417
<PP&E> 211,592
<DEPRECIATION> 54,930
<TOTAL-ASSETS> 363,431
<CURRENT-LIABILITIES> 72,160
<BONDS> 169,025
0
0
<COMMON> 18
<OTHER-SE> 117,396
<TOTAL-LIABILITY-AND-EQUITY> 363,431
<SALES> 205,413
<TOTAL-REVENUES> 205,413
<CGS> 143,200
<TOTAL-COSTS> 44,299
<OTHER-EXPENSES> 307
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 5,200
<INCOME-PRETAX> (19,561)
<INCOME-TAX> (5,315)
<INCOME-CONTINUING> (14,246)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,246)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
</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 JULY
31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR
THE PERIOD ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 4,925
<SECURITIES> 0
<RECEIVABLES> 56,865
<ALLOWANCES> 2,285
<INVENTORY> 47,168
<CURRENT-ASSETS> 114,074
<PP&E> 149,833
<DEPRECIATION> 42,501
<TOTAL-ASSETS> 241,194
<CURRENT-LIABILITIES> 46,488
<BONDS> 65,247
0
123,755
<COMMON> 16
<OTHER-SE> 123,755
<TOTAL-LIABILITY-AND-EQUITY> 241,194
<SALES> 178,468
<TOTAL-REVENUES> 178,468
<CGS> 122,226
<TOTAL-COSTS> 41,163
<OTHER-EXPENSES> 84
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 2,663
<INCOME-PRETAX> 12,725
<INCOME-TAX> 4,889
<INCOME-CONTINUING> 7,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,836
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
</TABLE>
