<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 9, 1998
-------------------------------
The Maxim Group, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-13099 58-2060334
- -------------------------------------------------------------------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
210 TownPark Drive, Kennesaw, Georgia 30144
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 590-9369
----------------------------
Not applicable
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired:
Shaw Residential Retail Group:
Report of Independent Public Accountants
Combined Balance Sheets -- July 4, 1998 (unaudited),
January 3, 1998 and December 28, 1996
Combined Statements of Operations -- For the twenty-six weeks
ended July 4, 1998 (unaudited) and June 28, 1997
(unaudited), year ended January 3, 1998 and the
period from inception (February 7, 1996) through
December 28, 1996
Combined Statements of Changes in Investment by Shaw
Industries, Inc. -- For the twenty-six weeks ended
July 4, 1998 (unaudited), year ended January 3, 1998
and the period from inception (February 7, 1996)
through December 28, 1996
Combined Statements of Cash Flows -- For the twenty-six weeks
ended July 4, 1998 (unaudited) and June 28, 1997
(unaudited), year ended January 3, 1998 and the
period from inception (February 7, 1996) through
December 28, 1996
Notes to Combined Financial Statements
New York Carpet World, Inc.:
Report of Independent Public Accountants
Consolidated and Combined Statement of Operations -- For the
six months ended June 30, 1996
Consolidated and Combined Statement of Changes in
Stockholders' Equity -- For the six months ended June
30, 1996
Consolidated and Combined Statement of Cash Flows -- For the
six months ended June 30, 1996
Notes to Consolidated and Combined Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheet -- December 31, 1995
Consolidated Statement of Income -- Year ended December 31,
1995
Consolidated Statement of Stockholders' Equity --
Year ended December 31, 1995
Consolidated Statement of Cash Flows -- Year ended December
31, 1995
Summary of Accounting Policies
Notes to Consolidated Financial Statements
Indemnification. The financial statements of New York Carpet
World, Inc. as of, and for the year ended, December 31, 1995
included in this Current Report on Form 8-K and incorporated
by reference to the Company's Registration Statements on Form
S-8, file numbers 33-80984, 33-81002, 333-19691, 333-19693,
333-47299 and 333-59423, have been audited by BDO Seidman,
LLP, independent public accountants, as indicated in their
report with respect thereto. Shaw Industries, Inc. has agreed
to indemnify BDO Seidman, LLP for costs and expenses that BDO
Seidman, LLP might incur in successfully defending itself
against litigation resulting from the inclusion of its report
in this Current Report on Form 8-K. Such indemnification,
however, shall be null and void should BDO Seidman, LLP be
found by a court to be guilty of professional malpractice.
Carpetland USA, Inc.:
Report of Independent Auditors
Balance Sheet -- February 29, 1996
Statement of Operations -- Year ended February 29, 1996
Statement of Changes in Shareholders' Equity -- Year ended
February 29, 1996
Statement of Cash Flows -- Year ended February 29, 1996
Notes to Financial Statements
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<PAGE> 3
(b) Pro Forma Financial Information:
Introduction
Pro Forma Condensed Balance Sheet -- July 31, 1998
Pro Forma Condensed Statements of Operations -- year ended
January 31, 1998 and six months ended July 31, 1998
Notes to Pro Forma Financial Statements
(c) Exhibits:
2.1 Agreement and Plan of Merger, dated as of June
23, 1998, between The Maxim Group, Inc., CMAX
Acquisition, Inc., Shaw Industries, Inc. and Shaw
Carpet Showplace, Inc. (incorporated by reference
from the Company's Current Report on Form 8-K dated
June 23, 1998).
2.1.1 Amendment, dated August 9, 1998, to Agreement
and Plan of Merger, dated as of June 23, 1998,
between The Maxim Group, Inc., CMAX Acquisition,
Inc., Shaw Industries, Inc. and Shaw Carpet
Showplace, Inc. (incorporated by reference from the
Company's Current Report on Form 8-K dated August 9,
1998).
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of BDO Seidman, LLP.
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<PAGE> 4
SHAW RESIDENTIAL RETAIL GROUP
COMBINED FINANCIAL STATEMENTS
AS OF JULY 4, 1998, JANUARY 3, 1998, AND DECEMBER 28, 1996
TOGETHER WITH
AUDITORS' REPORT
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Shaw Industries, Inc.:
We have audited the accompanying combined balance sheets of SHAW RESIDENTIAL
RETAIL GROUP (a division of Shaw Carpet Showplace, Inc., a wholly owned
subsidiary of Shaw Industries, Inc.) as of January 3, 1998 and December 28, 1996
and the related combined statements of operations, changes in investment by Shaw
Industries, Inc., and cash flows for the year ended January 3, 1998 and the
period from inception (February 7, 1996) through December 28, 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 Shaw Residential Retail Group
as of January 3, 1998 and December 28, 1996 and the results of their operations
and their cash flows for the year ended January 3, 1998 and the period from
inception (February 7, 1996) through December 28, 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 22, 1998
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<PAGE> 6
SHAW RESIDENTIAL RETAIL GROUP
COMBINED BALANCE SHEETS
JULY 4, 1998, JANUARY 3, 1998 AND DECEMBER, 28 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 4, January 3, December 28,
1998 1998 1996
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,980 $ 11,208 $ 11,109
Trade accounts receivable, net of allowance for
doubtful accounts of $2,039, $3,574, and
$2,452 at July 4, 1998, January 3, 1998, and
December 28, 1996, respectively 14,727 19,524 12,066
Related party receivables 0 1,698 1,759
Other receivables 4,321 4,159 2,720
Inventories 45,801 48,593 52,522
Deferred tax asset 5,537 4,568 411
Other current assets 4,583 3,584 3,354
-------- -------- --------
Total current assets 85,949 93,334 83,941
PROPERTY, PLANT, AND EQUIPMENT, NET 19,090 23,902 18,704
GOODWILL, NET 133,667 134,491 94,456
OTHER ASSETS 3,133 2,983 3,626
-------- -------- --------
$241,839 $254,710 $200,727
======== ======== ========
</TABLE>
-6-
<PAGE> 7
LIABILITIES AND INVESTMENT BY SHAW INDUSTRIES, INC.
<TABLE>
<CAPTION>
JULY 4, January 3, December 28,
1998 1998 1996
-------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt and
capital lease obligations $ 288 $ 1,026 $ 1,268
Accounts payable 4,800 10,079 16,418
Related party payables 46,116 32,348 3,969
Accrued expenses 21,517 35,853 43,616
-------- -------- --------
Total current liabilities 72,721 79,306 65,271
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, LESS CURRENT MATURITIES 1,244 2,049 3,044
DEFERRED INCOME TAXES 5,537 4,568 411
OTHER LIABILITIES 1,047 1,965 0
-------- -------- --------
Total liabilities 80,549 87,888 68,726
COMMITMENTS AND CONTINGENCIES (NOTE 8)
INVESTMENT BY SHAW INDUSTRIES,
INC. (NOTE 1) 161,290 166,822 132,001
-------- -------- --------
$241,839 $254,710 $200,727
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined
balance sheets.
-7-
<PAGE> 8
SHAW RESIDENTIAL RETAIL GROUP
COMBINED STATEMENTS OF OPERATIONS
FOR THE 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997,
FOR THE YEAR ENDED JANUARY 3, 1998, AND
FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1996)
THROUGH DECEMBER 28, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
26 Weeks Ended Fiscal Year Ended
------------------------ ----------------------------
JULY 4, June 28, January 3, December 28,
1998 1997 1998 1996
-------- -------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $ 266,944 $ 283,252 $ 583,843 $330,871
COST OF SALES, INCLUDING PURCHASES FROM SHAW
INDUSTRIES, INC. TOTALING $89,436, $60,175,
$140,619, AND $30,673, RESPECTIVELY 165,082 174,758 366,578 198,268
--------- --------- --------- --------
Gross profit 101,862 108,494 217,265 132,603
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE,
INCLUDING COSTS ALLOCATED FROM SHAW INDUSTRIES,
INC. TOTALING $4,226 $5,950, $26,732, AND $0,
RESPECTIVELY 114,669 125,902 254,002 127,211
OTHER EXPENSE (INCOME):
Interest expense, net 289 0 146 258
Preopening costs 0 0 735 0
Store closing costs 0 0 14,711 0
Other expense (income) 115 (64) 230 1,557
--------- --------- --------- --------
(Loss) earnings before income taxes (13,211) (17,344) (52,559) 3,577
PROVISION FOR INCOME TAXES 0 0 0 3,247
--------- --------- --------- --------
NET (LOSS) EARNINGS $ (13,211) $ (17,344) $ (52,559) $ 330
========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these
combined statements.
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<PAGE> 9
SHAW RESIDENTIAL RETAIL GROUP
COMBINED STATEMENTS OF CHANGES IN INVESTMENT
BY SHAW INDUSTRIES, INC.
FOR THE 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997,
FOR THE YEAR ENDED JANUARY 3, 1998, AND
FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1996)
THROUGH DECEMBER 28, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, FEBRUARY 7, 1996 $ 0
Net investment by Shaw Industries, Inc. 131,671
Net earnings for the period from inception (February 7, 1996) through
December 28, 1996 330
---------
BALANCE, DECEMBER 28, 1996 132,001
Net investment by Shaw Industries, Inc. 87,380
Net loss for the year ended January 3, 1998 (52,559)
---------
BALANCE, JANUARY 3, 1998 166,822
Net investment by Shaw Industries, Inc. (unaudited) 7,679
Net loss for the 26 weeks ended July 4, 1998 (unaudited) (13,211)
---------
BALANCE, JULY 4, 1998 (UNAUDITED) $ 161,290
=========
</TABLE>
The accompanying notes are an integral part of these
combined statements.
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<PAGE> 10
SHAW RESIDENTIAL RETAIL GROUP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997,
FOR THE YEAR ENDED JANUARY 3, 1998, AND
FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1996)
THROUGH DECEMBER 28, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
26 Weeks Ended Fiscal Year Ended
------------------- ------------------------
JULY 4, June 28, January 3, December 28,
1998 1997 1998 1996
--------- -------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $(13,211) $(17,344) $(52,559) $ 330
-------- -------- -------- ---------
Adjustments to reconcile net (loss) earnings to net cash
(used in) provided by operating activities:
Depreciation and amortization 6,328 5,491 10,981 4,403
Changes in operating assets and liabilities:
Trade accounts receivable 4,869 (3,028) 263 (2,575)
Related party receivables 1,698 1,759 61 (1,759)
Inventories 2,792 7,127 18,286 6,156
Accounts payable (5,279) 38,822 (12,990) (22,771)
Related party payables 13,768 (3,969) 28,379 3,969
Accrued expenses (41,986) (23,417) (15,235) 27,428
Other, net (1,383) 3,373 1,430 (116)
-------- -------- -------- ---------
Total adjustments (19,193) 26,158 31,175 14,735
-------- -------- -------- ---------
Net cash (used in) provided by operating
activities (32,404) 8,814 (21,384) 15,065
-------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures 0 (7,241) (2,827) (1,763)
Retirements of fixed assets, net 1,834 0 0 0
-------- -------- -------- ---------
Net cash provided by (used in) investing
activities 1,834 (7,241) (2,827) (1,763)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 31,885 311 29,892 0
Principal payments on long-term debt and capital lease
obligations (1,543) (2,374) (7,681) (2,895)
Cash acquired from contributed entities 0 1,610 2,099 1,849
Distribution of capital 0 0 0 (1,147)
-------- -------- -------- ---------
Net cash provided by (used in) financing
activities 30,342 (453) 24,310 (2,193)
-------- -------- -------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (288) 1,120 99 11,109
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,208 11,109 11,109 0
-------- -------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,980 $ 12,229 $11,208 $11,109
======== ======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 289 $ 73 $ 146 $ 42
======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these
combined statements.
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<PAGE> 11
SHAW RESIDENTIAL RETAIL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
JULY 4, 1998, JANUARY 3, 1998 AND DECEMBER 28, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Shaw Residential Retail Group (the "Company" or the "Group") operates
retail floorcovering outlets throughout the United States and was formed on
February 7, 1996 ("Inception"). The Group's stores offer a wide variety of
carpet, linoleum, vinyl and ceramic tile, and other floorcovering products
for residential use. It has heretofore been operated as a division of Shaw
Carpet Showplace, Inc., a wholly owned subsidiary of Shaw Industries, Inc.
("Shaw"), and is headquartered in Dalton, Georgia.
On August 9, 1998, substantially all of the assets and selected liabilities
of the Group were sold to The Maxim Group, Inc. ("Maxim") for $25,000,000
in cash, a note payable to Shaw of approximately $18,048,000 and 3,150,000
shares of Maxim's common stock (the "Sale") subject to post-closing
adjustments.
FISCAL PERIOD
The Group's fiscal year-end is the Saturday closest to December 31. Fiscal
1997 consisted of 53 weeks while fiscal 1996 consisted of 52 weeks.
BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of the
Group. The accompanying combined financial statements do not include
information relating to Shaw Carpet Showplace stores, a distinct retail
concept also operated by Shaw Carpet Showplace, Inc. Intragroup balances
and transactions have been eliminated.
As indicated above, the accompanying combined financial statements present
the financial position, results of operations, and cash flows of the Group
as if it were a separate entity for all periods presented. In accordance
with Staff Accounting Bulletin No. 54 of the Securities and Exchange
Commission.
Shaw performs certain services and incurs certain costs for the Group.
Services provided include tax, treasury, risk management, employee
benefits, legal, data processing,
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<PAGE> 12
application of cash receipts and other general corporate services. The
costs of these services provided by Shaw have been allocated to the Group
based on a combination of estimated use of the services and the relative
sales of the Group's business to the total consolidated operations of Shaw.
Corporate costs of Shaw totaling $26,732,000 have been allocated to the
Group for the year ended January 3, 1998. No such services were provided to
the Group during the period from Inception through December 28, 1996. In
the opinion of management, the method of allocating these costs is
reasonable. However, the costs of services charged to the Group are not
necessarily indicative of the costs that would have been incurred if the
Group had performed these functions. Subsequent to the transfer of
substantially all of the assets and selected liabilities to Maxim referred
to above, the Group performs these functions using its own resources or
purchased services, including services purchased from Shaw during a
transition period.
Shaw administers its self-insurance programs on a corporate-wide basis and
charges its individual participating subsidiaries and divisions based on
estimated claims and loss experience. The accompanying combined balance
sheets include accruals for workers' compensation and employee group health
claims.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Group recognizes revenue upon installation or delivery of the
merchandise, depending on the terms of the sale.
CASH AND CASH EQUIVALENTS
The Group considers all investments with an original maturity of three
months or less to be cash equivalents.
TRADE ACCOUNTS RECEIVABLE
The Group accounts for receivables sold to a financial institution under
its private label credit card financing program in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". Approximately $43,296,000 and $0 of accounts receivable sold
under this program were outstanding at January 3, 1998 and December 28,
1996, respectively. At January 3, 1998, the Group had recorded a liability
of approximately $3,816,000 for recourse provisions under this financing
program.
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<PAGE> 13
INVENTORIES
Inventories, consisting primarily of floorcovering products held for
resale, are recorded at the lower of cost or market, with cost determined
on a specific identification basis and market determined based on the lower
of replacement cost or estimated realizable value.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is recorded at cost. Renewals and
betterments are capitalized; maintenance, repairs, and minor replacements
are charged to expense as incurred. The cost and accumulated depreciation
of property retired or otherwise disposed of are removed from the accounts,
and any gains or losses thereon are included in income for the period.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, as follows:
Buildings 15 to 39 years
Leasehold improvements Related lease terms
Machinery and equipment 5 to 14 years
GOODWILL
Costs in excess of the fair value of net assets of businesses acquired are
recorded as goodwill and amortized on a straight-line basis over 20 years.
The recoverability of goodwill is periodically reviewed by management based
on current and anticipated conditions. The Group evaluates the carrying
value of goodwill in relation to the operating performance and future
undiscounted cash flows of the underlying businesses and adjusts the
carrying amount of the goodwill if the unamortized balance exceeds the
estimate of future undiscounted cash flows. Accumulated amortization was
approximately $9,449,000 and $2,866,000 at January 3, 1998 and December 28,
1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Group's financial instruments consist primarily of cash, trade accounts
receivable, accounts payable and long-term debt. The carrying amounts of
cash, trade accounts receivable and accounts payable approximate their fair
values due to the short-term maturity of such instruments. The carrying
amount of long-term debt approximates its fair value, as interest rates on
debt approximate current market rates.
EMPLOYEE BENEFIT PLANS
Certain of the Group's employees who meet eligibility requirements are
included in a Shaw-sponsored defined contribution plan. Shaw's Retirement
Savings Plan provides, among other things, for voluntary contributions by
employees not to exceed 15% of their gross salaries and wages. Shaw
provides matching contributions of 25% to 50% based on the employee's
contributions.
PREOPENING EXPENSES
Preopening and start-up expenses applicable to new stores are expensed as
incurred.
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<PAGE> 14
ADVERTISING COSTS
The costs of the Group's advertising activities are expensed as incurred
and are reflected as operating expenses in the accompanying combined
statements of operations.
OCCUPANCY COSTS
Occupancy costs, consisting primarily of depreciation of store assets,
rent, utilities and property taxes are reflected as costs of goods sold in
the accompanying combined statements of operations. Occupancy cost was
approximately $22,302,000, $22,142,000, $47,840,000, and $22,033,000 for
the 26 week periods ended July 4, 1998 and June 28, 1997, the year ended
January 3, 1998, and the period from Inception through December 28, 1996,
respectively.
INCOME TAXES
For federal and state income tax purposes, the operations of the Group have
been included in Shaw's consolidated tax returns. Income taxes in the
accompanying combined financial statements have been computed assuming that
the Group was a stand-alone entity.
The group accounts for income taxes based on the liability method of
accounting and, consequently, 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.
INVESTMENT BY SHAW INDUSTRIES, INC.
Investment by Shaw Industries, Inc. represents the net, noninterest bearing
assets invested in the Group by Shaw.
INTERIM FINANCIAL INFORMATION
The combined financial statements and related information for the 26 week
periods ended July 4, 1998 and June 28, 1997 are unaudited and have been
prepared in accordance with the Securities and Exchange Commission's
requirements for such interim financial statements. The unaudited interim
combined financial statements 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
necessary to present fairly the Group's financial position, results of
operations and cash flows at the dates and for the periods presented have
been included. All such interim adjustments are of a normal recurring
nature.
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<PAGE> 15
included herein. Interim results of operations are not necessarily
indicative of the results to be expected for a full year.
2. ACQUISITIONS
The following acquisitions were accounted for under the purchase method of
accounting, applying the provisions of Accounting Principles Board ("APB")
Opinion No. 16, and as a result, the Group recorded the tangible and
identifiable intangible assets and liabilities of the acquired businesses
at their estimated fair values with the excess of the purchase price over
these amounts being recorded as goodwill which is amortized over 20 years.
The accompanying combined financial statements reflect the operations of
the acquired businesses for the periods after their respective dates of
acquisition. During the periods presented in the accompanying combined
financial statements, Shaw acquired numerous entities which were
contributed to the Group, the most significant of which are as follows:
Effective February 7, 1996, Shaw acquired substantially all of the net
assets of Carpetland USA, a residential floorcovering retailer. The
purchase price was approximately $36,200,000 and resulted in goodwill of
approximately $30,970,000 at the acquisition date.
Effective July 31, 1996, Shaw acquired substantially all of the net assets
of New York Carpet World, Inc. and subsidiaries, a residential
floorcovering retailer. The purchase price was approximately $94,000,000
and resulted in goodwill of approximately $60,864,000 at the acquisition
date.
Effective January 1, 1997, Shaw acquired substantially all of the net
assets of The Carpet Exchange, a residential floorcovering retailer. The
purchase price was approximately $22,000,000 and resulted in goodwill of
approximately $18,000,000 at the acquisition date.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at January 3, 1998 and December 28, 1996 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land and improvements $ 73 $ 73
Buildings and leasehold improvements 21,563 13,303
Machinery and equipment 10,545 8,082
------- -------
32,181 21,458
Less accumulated depreciation and amortization (8,279) (2,754)
------- -------
$23,902 $18,704
======= =======
</TABLE>
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<PAGE> 16
Depreciation expense for the year ended January 3, 1998 and the period from
Inception through December 28, 1996 was approximately $4,398,000 and
$1,537,000, respectively, and is recorded in operating expense in the
accompanying combined statements of operations.
4. ACCRUED EXPENSES
Accrued expenses at January 3, 1998 and December 28, 1996 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Customer deposits $ 9,199 $ 5,753
Accrued payroll 4,526 6,185
Other accrued expenses 22,128 31,678
------- -------
Total $35,853 $43,616
======= =======
</TABLE>
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at January 3, 1998 and
December 28, 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Equipment note payable to a bank, 6.6% interest rate,
matures September 1998 $ 69 $ 156
Equipment note payable to a bank, 8.25% interest rate,
matures November 2005 455 494
Installment note payable to a bank, 6.9% interest rate,
matures August 2005 249 273
Capitalized leases 2,302 3,389
------ ------
3,075 4,312
Less current portion 1,026 1,268
------ ------
$2,049 $3,044
====== ======
</TABLE>
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<PAGE> 17
The aggregate annual maturities of long-term debt and capital lease
obligations during the years subsequent to January 3, 1998 are as follows
(in thousands):
<TABLE>
<S> <C>
1998 $1,026
1999 1,032
2000 334
2001 285
2002 93
2003 and thereafter 305
------
$3,075
======
</TABLE>
6. INCOME TAXES
The current provision for income taxes consisted of the following for the
year ended January 3, 1998 and the period from Inception through December
28, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ------
<S> <C> <C>
U.S. federal $ 0 $2,767
State and local 0 480
---- ------
$ 0 $3,247
==== ======
</TABLE>
The differences between the federal statutory income tax rate and the
Group's effective tax rate were as follows at January 3, 1998 and December
28, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Federal statutory rate $(17,870) $ 1,427
State income taxes, net of federal tax benefit (3,101) 0
Nondeductible goodwill 296 3
Change in valuation allowance 10,723 2,935
Other, net 9,952 (1,118)
-------- -------
$ 0 $ 3,247
======== =======
</TABLE>
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<PAGE> 18
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at January 3, 1998 and
December 28, 1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Property, plant, and equipment $ 361 $ (31)
Accounts receivable, principally due to
allowance for doubtful accounts 1,502 820
Inventories, principally due to additional costs
inventoried for tax purposes 809 1,187
Accrued expenses 1,026 1,466
Net operating loss carryforwards 13,889 0
--------- ---------
Total gross deferred income tax assets
17,587 3,442
Deferred income tax liabilities:
State tax expense (298) (298)
Lease expense (227) (41)
Other, net (3,404) (168)
--------- ---------
Total gross deferred income tax
liabilities (3,929) (507)
--------- ---------
Net deferred income tax assets 13,658 2,935
Less valuation allowance (13,658) (2,935)
--------- ---------
$ 0 $ 0
========= =========
</TABLE>
7. CHARGE TO RECORD STORE CLOSING COSTS
In December 1997, the Group announced a plan to close approximately 52
retail stores which resulted in a charge to operations of $14,711,000
consisting primarily of reductions in the carrying value of long-lived
assets of approximately $3,600,000 and reserves for exit costs and
employee termination benefits of approximately $8,836,000 and $2,335,000,
respectively. The stores to be closed had combined net sales of
approximately $90,000,000 in 1997, but contributed negatively to the
Group's profitability.
-18-
<PAGE> 19
8. COMMITMENTS AND CONTINGENCIES
LEGAL
The Group is party to several lawsuits incidental to its various activities
and incurred in the ordinary course of business. The Group believes that it
has meritorious defenses in each case. After consultation with counsel, it
is the opinion of management that, although there can be no assurance
given, none of the claims, when resolved, will have a material adverse
effect on the Group.
LEASES
The Company is a party to noncancellable 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 $30,016,000 and $12,644,000
for the year ended January 3, 1998 and the period from Inception through
December 28, 1996, respectively.
The Group has entered into several capitalized leases for machinery and
equipment at a cost of $1,291,000 at January 3, 1998 and December 28, 1996.
These assets are amortized on a straight-line basis over the lease terms
and amortization is included in depreciation expense. Accumulated
amortization of capital lease cost was $483,000 and $193,000 at January 3,
1998 and December 28, 1996, respectively. The related obligations are
included in long-term debt.
Minimum future lease obligations on long-term noncancellable leases in
effect at January 3, 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL
CAPITAL OPERATING FUTURE
LEASES LEASES PAYMENTS
------- --------- ---------
<S> <C> <C> <C>
1998 $1,226 $ 24,888 $ 26,114
1999 1,141 23,139 24,280
2000 323 21,876 22,199
2001 213 19,914 20,127
2002 6 13,156 13,162
2003 and thereafter 0 39,348 39,348
------ -------- --------
Total minimum lease payments 2,909 $142,321 $145,230
Less amount representing interest 607 ======== ========
------
$2,302
======
</TABLE>
-19-
<PAGE> 20
NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS AND SCHEDULES
AS OF JUNE 30, 1996
TOGETHER WITH
AUDITORS' REPORT
-20-
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Shaw Industries, Inc.:
We have audited the accompanying consolidated and combined statements of
operations, stockholders' equity, and cash flows of NEW YORK CARPET WORLD, INC.
(a Michigan corporation) AND SUBSIDIARIES (see Note 1) for the six-month period
ended June 30, 1996. These financial statements are the responsibility of Shaw
Industries, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of New York
Carpet World, Inc. and subsidiaries for the six-month period ended June 30,
1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 22, 1998
-21-
<PAGE> 22
NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
NET SALES $ 215,588
COST OF SALES 120,189
---------
Gross profit 95,399
---------
OPERATING EXPENSES 107,789
---------
OTHER EXPENSE (INCOME)
Loss on disposal of assets 222
Interest income (103)
Interest expense 1,102
Franchise income (93)
---------
1,128
---------
Loss before income taxes and minority interest (13,518)
PROVISION FOR INCOME TAXES 91
MINORITY INTERESTS IN NET INCOME OF SUBSIDIARIES 29
---------
NET LOSS $ (13,638)
=========
</TABLE>
The accompanying notes are an integral part of this consolidated and combined
statement.
-22-
<PAGE> 23
NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 2 $174 $16,665 $ 18,451 $ 35,290
Net loss 0 0 0 (13,638) (13,638)
Dividends paid 0 0 0 (3,905) (3,905)
Distribution of life insurance
policies 0 0 0 (733) (733)
Contributed capital 0 0 10,131 0 10,131
-- ---- ------- -------- --------
BALANCE, JUNE 30, 1996 2 $174 $26,796 $ 175 $ 27,145
== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated and combined
statement.
-23-
<PAGE> 24
NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,638)
--------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,215
Minority interest in net income of subsidiaries 29
Loss on disposal of fixed assets 222
Changes in operating assets and liabilities:
Accounts receivable 2,937
Employee advances 59
Inventories (1,632)
Related party receivables 355
Prepaid expenses and other current assets 2,141
Customer deposits 2,053
Accounts payable 2,156
Accrued liabilities 2,076
Other current liabilities 248
--------
Total adjustments 11,859
--------
Net cash used in operating activities (1,779)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,410)
Purchase of minority interests (1,950)
Proceeds from the sale of fixed assets 13
--------
Net cash used in investing activities (3,347)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from stockholders 10,131
Principal payments under capital lease obligations (368)
Repayment of debt (58)
Payment of dividends to stockholders (3,905)
Other (220)
--------
Net cash provided by financing activities 5,580
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS 454
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 792
--------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,246
========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 929
========
Income taxes $ 526
========
</TABLE>
The accompanying notes are an integral part of this consolidated and combined
statement.
-24-
<PAGE> 25
NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
New York Carpet World, Inc. (the "Company" or "New York") is engaged in
retail, wholesale, and commercial distribution of carpet, linoleum,
vinyl and ceramic tile, and other floor covering products for
residential and commercial purposes throughout the midwest, northeast,
and southeast United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of New York
Carpet World, Inc. and all majority-owned subsidiaries. New York Carpet
World of Florida, Inc., New York Carpet World of St. Louis, Inc., New
York Carpet World of New England, Inc., and New York Carpet World
Franchising, Inc. are separate corporations under common control and
management, and have also been combined in the accompanying financial
statements. All material intercompany accounts and transactions have
been eliminated.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash is defined as cash in bank and cash on hand.
REVENUE RECOGNITION
The Company and its subsidiaries recognize revenue upon delivery of
merchandise to the customer. Customers' deposits represent amounts
received on uncompleted transactions.
INCOME TAXES
Deferred income taxes are recorded to reflect the future tax
consequences of temporary differences between the financial reporting
bases and tax bases of the Company's assets and liabilities.
-25-
<PAGE> 26
MINORITY INTERESTS
Minority interests in consolidated subsidiaries represents that portion
of stockholders' equity and consolidated net income attributable to the
minority interests. Losses in excess of the minority interest's capital
are not allocated to minority owners.
2. DEPRECIATION EXPENSE
The Company depreciates its fixed assets on a straight-line basis over
their estimated useful lives, ranging from 3 to 10 years. Depreciation
expense for the six months ended June 30, 1996 was approximately
$1,180,000 and is recorded in operating expense in the accompanying
statement of operations.
3. INCOME TAXES
The Company and four of its consolidated subsidiaries have elected,
with the consent of its stockholders, to be treated as Subchapter S
corporations for federal income tax purposes. This election provides,
among other things, that the corporation's taxable income is taxable to
the individual stockholders. Accordingly, taxes on income included in
the consolidated statement of operations represent income taxes
incurred only by those subsidiaries which are taxed separately as
regular corporations. The income before taxes and minority interests
attributable to these taxable corporations was approximately $242,072
for the six-month period ended June 30, 1996.
The current provision for income taxes consists of the following:
<TABLE>
<S> <C>
U.S. federal $78,000
State and local 13,000
-------
$91,000
=======
</TABLE>
The provision for income taxes differs from the amount computed by
applying a combined state and U.S. federal income tax rate of 39.9% to
pretax loss as a result of the following:
<TABLE>
<S> <C>
Expected benefit from federal and state taxes, at
statutory rates $(5,394,000)
Exclusion of losses of Subchapter S corporations 5,485,000
-----------
$ 91,000
===========
</TABLE>
4. RELATED-PARTY TRANSACTIONS
Net sales of $780,502 for the six-month period ended June 30, 1996 were
made to two affiliated partnerships which are owned 50% by three of the
stockholders of New York Carpet World, Inc.
-26-
<PAGE> 27
5. STOCKHOLDERS' EQUITY
During the six-month period ended June 30, 1996, the Company
distributed interests in split-dollar life insurance policies to
certain of its stockholders and certain members of management. These
distributions are reflected as deductions in the accompanying
consolidated and combined statement of stockholders' equity.
During the six-month period ended June 30, 1996, the Company received
cash contributions from certain of its stockholders for the purpose of
funding certain obligations and for the buyout of certain minority
interests.
6. EMPLOYEE BENEFIT PLAN
The Company has a qualified defined contribution cash option
profit-sharing plan for all eligible employees of the Company. The
Company's contribution to the plan is equal to one-half of the amount
of salary reduction elected by each participant, with limits based on
years of service with the Company. Any additional contribution, as
determined by the board of directors, is discretionary but may not
exceed 25% of the annual aggregate compensation (as defined) paid to
all participating employees. The contributions to the plan for the
six-month period ended June 30, 1996 were $54,026.
7. MANAGEMENT RETIREMENT PLAN OBLIGATION
The Company has entered into retirement plan agreements with certain
members of management whereby the Company is obligated to pay each
employee participating in the plan annual payments for fifteen years,
beginning at age 65. If the employee dies prior to age 65, the Company
is obligated to pay the employee's beneficiary annual amounts for a
period of 15 years. The Company is informally funding these agreements
with the purchase of whole life insurance on each employee
participating in the plan. The expense charged to operations with
respect to the plan for the six-month period ended June 30, 1996 was
$961,200.
8. COMMITMENTS AND CONTINGENCIES
WORKERS' COMPENSATION COSTS
The Company is self-insured for workers' compensation claims in all
states in which it does business. However, the self-insurance limits
vary by geographic area. In Michigan, the Company is self-insured up to
$350,000 per occurrence and approximately $1,000,000 in the aggregate.
If Michigan claims in a plan year were to exceed $5,000,000, the
Company would be responsible for all claims in excess of that amount.
In states other than Michigan, the Company is self-insured for workers'
compensation claims up to $250,000 per occurrence and $2,500,000 in the
aggregate.
-27-
<PAGE> 28
The Company recognizes the estimated total costs for self-insured
workers' compensation claims, including claims incurred but not
reported.
LEGAL
The Company is party to several lawsuits incidental to its various
activities and incurred in the ordinary course of business. The Company
believes that it has meritorious claims and defenses in each case.
After consultation with counsel, it is of the opinion of management
that, although there can be no assurance given, none of the associated
claims, when resolved, will have a material adverse effect on the
Company.
9. SUBSEQUENT EVENT
Effective July 1, 1996, the Company was purchased by Shaw Industries,
Inc. ("Shaw") for $35,000,000 in cash and a $35,000,000 promissory note
payable on January 15, 1997. The Company also entered into an earnout
agreement with Shaw which provided for an additional payment of up to
$30,000,000. This earnout agreement was rescinded on October 31, 1996
and was replaced by an agreement which provided for a cash payment of
$24,000,000 by June 30, 1999.
-28-
<PAGE> 29
NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholders and Board of Directors
New York Carpet World, Inc.
Southfield, Michigan
We have audited the accompanying consolidated balance sheet of New York Carpet
World, Inc. and subsidiaries as of December 31, 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
York Carpet World, Inc. and subsidiaries at December 31, 1995 and the
consolidated results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Troy, Michigan
March 29, 1996
-29-
<PAGE> 31
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
===============================================================================
December 31, 1995
- -------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 791,795
Receivables
Trade, less allowance of $750,000
for possible losses 10,895,672
Related parties (Note 1) 1,529,946
Note (Note 2) 855,232
Officers and employees 359,858
Inventories (Note 3) 48,346,608
Prepaid expenses and other current assets 2,764,012
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 65,543,123
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Fixtures and equipment 13,944,863
Leasehold improvements 12,189,109
Leased property under capital leases (Note 6) 6,172,804
Delivery equipment 3,336,509
- -------------------------------------------------------------------------------
35,643,285
Less accumulated depreciation and amortization 22,553,951
- -------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 13,089,334
- -------------------------------------------------------------------------------
OTHER
Cash surrender value of life insurance - management (Note 9) 1,738,593
Cash surrender value of life insurance - officers ($10,600,000
face value), less loans and accrued interest of
$2,382,260 (Note 10) 627,408
Deposits and other assets 1,153,446
Receivable - related parties (Note 1) 612,503
- -------------------------------------------------------------------------------
TOTAL OTHER ASSETS 4,131,950
- -------------------------------------------------------------------------------
$ 82,764,407
===============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
-30-
<PAGE> 32
<TABLE>
<CAPTION>
==============================================================================
December 31, 1995
- ------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, bank (Note 4) $ 500,000
Accounts payable 23,981,285
Customers' deposits 5,210,587
Accruals
Compensation 5,021,550
Taxes, other than on income 885,244
Other (Note 11) 4,759,885
Current obligations under capital leases (Note 6) 691,413
Current maturities of long-term debt (Note 5) 117,556
- ------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 41,167,520
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES,
less current obligations (Note 6) 2,969,766
LONG-TERM DEBT, less current maturities (Note 5) 650,151
MANAGEMENT RETIREMENT PLAN OBLIGATION (Note 9) 2,538,812
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 47,326,249
- ------------------------------------------------------------------------------
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 148,034
- ------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 6, 8, 10 and 11)
STOCKHOLDERS' EQUITY (Note 10)
Common stock, Class A voting, $100 par - shares
authorized, 1,000; issued and outstanding, 600 60,000
Common stock, Class B non-voting, $100 par - shares
authorized, 1,500; issued and outstanding, 1,140 114,000
Additional paid-in capital 16,664,932
Retained earnings 18,451,192
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 35,290,124
- ------------------------------------------------------------------------------
$82,764,407
==============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
-31-
<PAGE> 33
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
============================================================================
Year Ended December 31, 1995
- ----------------------------------------------------------------------------
<S> <C>
NET SALES $ 434,135,900
COST OF SALES 245,976,814
- ----------------------------------------------------------------------------
GROSS PROFIT 188,159,086
OPERATING EXPENSES 186,667,184
- ----------------------------------------------------------------------------
OPERATING INCOME 1,491,902
- ----------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest Expense
Capital leases (814,408)
Other (862,802)
Interest income 353,529
Franchise income 278,870
- ----------------------------------------------------------------------------
TOTAL OTHER EXPENSE, NET (1,044,811)
- ----------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME AND MINORITY INTERESTS 447,091
TAXES ON INCOME (Note 7) 36,000
- ----------------------------------------------------------------------------
INCOME BEFORE MINORITY INTERESTS 411,091
MINORITY INTERESTS IN NET INCOME OF
CONSOLIDATED SUBSIDIARIES (44,678)
- ----------------------------------------------------------------------------
NET INCOME $ 366,413
============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
-32-
<PAGE> 34
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------------
Class A Voting Class B Non-Voting Additional
---------------------- -------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995 600 $60,000 1,140 $114,000 $6,793,164 $ 28,125,549
Net income -- -- -- -- -- 366,413
Dividends -- -- -- -- -- (10,040,770)
Additional paid-in capital
New York Carpet World of
New England, Inc. -- -- -- -- 3,670,000 --
Additional paid-in capital
New York Carpet World of
Florida, Inc. -- -- -- -- 1,455,000 --
Additional paid-in capital
New York Carpet World of
St. Louis, Inc. -- -- -- -- 4,746,768 --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 600 $ 60,000 1,140 $ 114,000 $16,664,932 $18,451,192
==============================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
-33-
<PAGE> 35
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
===============================================================================================
Year Ended December 31, 1995
- -----------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 366,413
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation 2,130,582
Amortization 556,645
Minority interests in net income of consolidated subsidiaries 44,678
Gain on disposal of assets (181)
Changes in operating assets and liabilities
Increase in receivables (3,675,106)
Increase in inventories (1,254,086)
Increase in prepaids and other current assets (1,926,417)
Decrease in other assets 191,448
Increase in accounts payable 778,707
Decrease in customers' deposits (300,333)
Increase in accruals 1,982,209
Increase in management retirement plan obligation 113,103
- -----------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (992,338)
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (3,813,587)
Proceeds from disposal of assets 52,432
- -----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,761,155)
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution by stockholders 6,361,000
Dividends paid to stockholders (10,040,770)
Principal payments under capital lease obligations (738,694)
Reduction of long-term debt (79,190)
Dividends paid to minority interests (39,000)
- ------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (4,536,654)
- -----------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND EQUIVALENTS (9,290,147)
CASH AND EQUIVALENTS, at beginning of year 10,081,942
- -----------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, at end of year $ 791,795
===============================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
-34-
<PAGE> 36
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
===========================================================================
BUSINESS The Company's operations include the retail,
wholesale and commercial distribution of carpet,
linoleum, vinyl and ceramic tile and other floor
covering products for residential and commercial
purposes throughout the midwest, northeast and
southeast United States.
PRINCIPLES OF The consolidated financial statements include the
CONSOLIDATION accounts of New York Carpet World, Inc., and all
majority-owned subsidiaries. New York Carpet World
of Florida, Inc., New York Carpet World of St.
Louis, Inc., New York Carpet World of New England,
Inc. and New York Carpet World Franchising, Inc.,
separate corporations under common control and
management, have also been combined in the
accompanying financial statements. All material
intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES In preparing financial statements in conformity with
generally accepted accounting principles, management
is required to make estimates and assumptions that
affect (1) the reported amounts of assets and
liabilities and the disclosure of contingent assets
and liabilities as of the date of the financial
statements, and (2) revenues and expenses during the
reporting period. Actual results could differ from
these estimates which are made.
FAIR VALUE OF In 1995, the Company adopted SFAS No. 107,
FINANCIAL "Disclosures About Fair Value of Financial
INSTRUMENTS Instruments", which requires disclosure of fair
value information about certain financial
instruments. The carrying amounts of the Company's
financial instruments, which consist of cash,
receivables, notes payable, accounts payable and
long-term debt, approximate their fair values.
CONCENTRATION OF Financial instruments which potentially subject the
CREDIT RISK Company to concentrations of credit risk consist
principally of temporary cash investments and trade
receivables.
The Company places its temporary cash investments
with high credit qualified financial institutions.
At times, the amount of cash on deposit in banks may
be in excess of the respective financial
institutions' FDIC insurance limit.
-35-
<PAGE> 37
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
===============================================================================
Concentrations of credit risk with respect to trade
receivables are limited due to the large number of
customers comprising the Company's customer base, and
their dispersion across many different industries and
geographies. As of December 31, 1995, the Company had
no significant concentrations of credit risk related
to trade receivables.
INVENTORIES Inventories, consisting of floorcovering held for
resale, are valued at cost not in excess of market.
Cost is determined using both the last-in, first-out
(LIFO) and first-in, first-out (FIFO) methods for
specific inventories. LIFO inventories represented
approximately 53% of inventories at December 31,
1995.
PROPERTY, Property and equipment are stated at cost.
EQUIPMENT, Depreciation and amortization are computed over the
DEPRECIATION AND estimated useful lives of the assets using both
AMORTIZATION straight-line and accelerated methods.
PRE-OPENING Pre-opening and start-up expenses applicable to new
EXPENSES stores are expensed as incurred.
REVENUE RECOGNITION The Company and its subsidiaries recognize revenue
upon delivery of merchandise to the customer.
Customers' deposits represent amounts received on
uncompleted transactions.
ADVERTISING COSTS The Company expenses the costs of advertising as
incurred. Advertising expense was approximately
$29,700,000 for the year ended December 31, 1995.
INCOME TAX Deferred income taxes are recorded to reflect the
future tax consequences of temporary differences
between the financial reporting bases and tax bases
of the Company's assets and liabilities.
-36-
<PAGE> 38
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
==============================================================================
MINORITY INTERESTS Minority interests in consolidated subsidiaries
represents that portion of stockholders' equity and
consolidated net income attributable to the minority
interests. Losses in excess of the minority interest
in a subsidiary's or combined corporation's capital
is reflected as a part of the consolidated net loss
attributable to the parent.
STATEMENTS OF CASH For purposes of the statements of cash flows, cash is
FLOWS defined as currency on hand, demand deposits with
banks or other financial institutions, and highly
liquid money market funds.
-37-
<PAGE> 39
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================
1. RELATED PARTY During the year ended December 31, 1995, net sales
TRANSACTIONS of approximately $1,900,000 were made to an
affiliated partnership which is owned 50% by three of
the stockholders of New York Carpet World, Inc. The
Company had trade receivables due from this
affiliated partnership at December 31, 1995 of
$1,255,964. The Company also has receivables due from
other related entities totalling $273,982 at
December 31, 1995.
At December 31, 1995, the Company had non-interest
bearing receivables of $612,503 due from three of
its stockholders. The receivables represent the
Company's interest in the death benefits of split
dollar life insurance policies on the three
stockholders.
2. NOTE RECEIVABLE At December 31, 1995, the Company had an $826,000
note receivable and related accrued interest income
of $29,232 due from a vendor. The note receivable
bore interest at 8%, was due on demand and
collateralized by certain equipment. The note
receivable and related accrued interest income was
collected in February 1996.
3. INVENTORIES If the first-in, first-out (FIFO) method of inventory
valuation had been used by the Company, inventories
would have been approximately $2,750,000 higher than
reported at December 31, 1995.
4. LINE-OF-CREDIT At December 31, 1995, the Company had a $15,000,000
unsecured line-of-credit with a bank. Amounts
borrowed are due on demand and bear interest at the
bank's prime rate (8.5% at December 31, 1995). At
December 31, 1995, the balance outstanding under the
line-of-credit was $500,000.
-38-
<PAGE> 40
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
=============================================================================
In accordance with the terms of the line-of-credit
agreement, the Company is required to maintain
minimum levels of working capital and net worth and
debt to equity levels. At December 31, 1995, the
Company was in compliance with these requirements.
5. LONG-TERM Long-term debt consists of:
DEBT
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------
<S> <C>
Promissory note payable, secured by
equipment, payable $7,897 monthly,
including interest at 6.60% $ 237,720
Promissory note payable, secured by
equipment, payable $6,536 monthly,
including interest at 8.25% 529,987
-----------------------------------------------------
767,707
Less current maturities 117,556
-----------------------------------------------------
TOTAL LONG-TERM DEBT $ 650,151
=====================================================
</TABLE>
The aggregate amounts of long-term debt maturing in
each of the following years are as follows: 1996 -
$117,556; 1997 - $126,190; 1998 - $111,646; 1999 -
$46,131; 2000 - $50,084; 2001 and later years
$316,100.
6. LEASES The Company leases various warehouse and retail
locations, many of which are owned individually, or
through related partnerships, by the stockholders of
the Company. Leases which meet certain criteria are
classified as capital leases, and assets and related
liabilities are recorded at amounts equal to the
lesser of the present value of future minimum lease
payments or the fair value of the leased properties
at the inception of the lease term. Leases which do
not meet such criteria are classified as operating
leases and related rentals are charged to expense as
incurred.
-39-
<PAGE> 41
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
<TABLE>
<CAPTION>
The following is an analysis of leased property under capital leases:
December 31, 1995
- -------------------------------------------------------------------------------
<S> <C>
Retail and warehouse facilities $ 6,172,804
Less accumulated amortization 4,675,308
- -------------------------------------------------------------------------------
NET LEASED PROPERTY UNDER CAPITAL LEASES $ 1,497,496
===============================================================================
As of December 31, 1995, future net minimum lease payments under capital
leases, and future minimum rental payments required under operating leases that
have initial or remaining noncancelable terms in excess of one year, are as
follows:
<CAPTION>
Capital Operating
Leases Leases
- -------------------------------------------------------------------------------
<S> <C> <C>
1996 $ 1,367,000 $ 13,223,000
1997 1,186,000 12,083,000
1998 1,147,000 9,551,000
1999 1,147,000 8,455,000
2000 329,000 7,728,000
Later years 219,000 26,573,000
- -------------------------------------------------------------------------------
TOTAL MINIMUM LEASE PAYMENTS 5,395,000 $ 77,613,000
=============
Less amount representing interest 1,733,821
- -------------------------------------------------------------------------------
PRESENT VALUE OF NET MINIMUM LEASE
PAYMENTS 3,661,179
Less current obligations 691,413
- -------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS UNDER CAPITAL
LEASES $ 2,969,766
===============================================================================
</TABLE>
Amortization expense under capital lease agreements was $556,645 for the year
ended December 31, 1995.
-40-
<PAGE> 42
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Rent expense under operating lease agreements was as
follows for the year ended December 31, 1995:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
<S> <C>
Minimum rent $ 14,300,000
Contingent rent 600,000
-----------------------------------------------------
$ 14,900,000
=====================================================
</TABLE>
Contingent rents are based upon a percentage of gross
sales as specified in the various lease agreements.
7. TAXES ON The Company and four of its combined corporations
INCOME have elected, with the consent of its stockholders,
to be treated as Subchapter S corporations for
federal income tax purposes. This election provides,
among other things, that the corporation's taxable
income is taxable to the individual stockholders.
Accordingly, taxes on income included in the
consolidated statements of income represent income
taxes incurred only by those subsidiaries which are
taxed separately as regular corporations. The income
before taxes on income and minority interests
attributable to these regular corporations was
$139,462 for the year ended December 31, 1995.
8. EMPLOYEE The Company has a qualified defined contribution cash
BENEFIT PLAN option profit-sharing plan for all eligible
employees of the Company. The Company's contribution
to the plan is equal to one-half of the amount of
salary reduction elected by each participant,
limited to either a $25 maximum per participant or
$50 maximum for those with five years or more of
service with the Company. Any additional
contribution, as determined by the Board of
Directors, is discretionary but may not exceed 25
percent of the annual aggregate compensation (as
defined) paid to all participating employees. The
contribution to the plan for the year ended
December 31, 1995 was $58,115.
-41-
<PAGE> 43
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
9. MANAGEMENT The Company has entered into retirement plan
RETIREMENT PLAN agreements with certain members of management
OBLIGATION whereby the Company is obligated to pay each
employee participating in the plan annual payments
for fifteen years, beginning at age 65. If the
employee dies prior to age 65, the Company is
obligated to pay the employee's beneficiary annual
amounts for a period of fifteen years. The present
value of the accrued benefit for the employees
participating in the plan is approximately
$2,538,812 at December 31, 1995 and is considered a
long-term liability. The Company is informally
funding these agreements with the purchase of whole
life insurance on each employee participating in the
plan. The expense charged to operations with respect
to the plan for the year ended December 31, 1995
was $106,744.
10. STOCK The Company has entered into a stock redemption
REDEMPTION agreement with three related corporations and
certain stockholders whereby, upon the death of a
stockholder, the corporations shall repurchase the
decedent's shares of stock at the greater of (1) 50%
of the aggregate book value of the corporations as
defined in the agreement or (2) the life insurance
proceeds actually received by the corporations under
any life insurance policy on the life of the
deceased. The corporations have approximately
$7,000,000 of life insurance (net of loans and
accrued interest) on the stockholders for the
purpose of repurchasing the decedent's shares in
such an event.
Under certain circumstances and for a five year
period subsequent to the death of a stockholder, the
agreement requires the corporations to remit to the
legal representative of the deceased stockholder a
portion of the corporations' earnings represented by
the deceased stockholder's stock ownership
percentage multiplied by earnings as defined in the
agreement. Such additional amounts shall constitute
additional purchase price for the deceased
stockholder's shares of stock.
-42-
<PAGE> 44
NEW YORK CARPET WORLD, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. COMMITMENTS WORKERS' COMPENSATION COSTS
AND
CONTINGENCIES The Company is self-insured for workers'
compensation claims in all states in which it does
business. However, the self-insurance limits vary by
geographic area. In Michigan, the Company is
self-insured up to $350,000 per occurrence and
approximately $1,000,000 in the aggregate. If
Michigan claims in a plan year were ever to exceed
$5,000,000, the Company would be responsible for all
claims in excess of that amount. In states other
than Michigan, the Company is self-insured for
workers' compensation claims up to $250,000 per
occurrence and $2,500,000 in the aggregate.
The Company recognizes the estimated total costs for
self-insured workers' compensation claims, including
claims incurred but not reported. The estimated
liability for workers' compensation claims at
December 31, 1995 was $555,000 and is included in
other accruals in the consolidated balance sheet.
MEDICAL COSTS
The Company is self-insured for medical claims up to
an annual deductible of $175,000 per person. The
Company recognizes the estimated total costs for
self-insured medical claims, including claims
incurred but not reported. The estimated liability
for medical claims of $560,000 at December 31, 1995
is included in other accruals in the consolidated
balance sheet.
LITIGATION
At December 31, 1995, the Company is a defendant in
several lawsuits. To the extent that the lawsuits
may be found in favor of the plaintiffs, and to the
extent that these matters may not be covered by the
Company's insurance, the Company may be liable in
these matters. In the opinion of management, such
liabilities, if any, would not have a material
effect on the consolidated financial position of the
Company.
-43-
<PAGE> 45
LETTERS OF CREDIT
The Company utilizes letters of credit to back
certain insurance policies and aggregate
approximately $1,600,000 at December 31, 1995.
<TABLE>
<CAPTION>
<S> <C> <C>
12. SUPPLEMENTAL Year Ended December 31, 1995
DISCLOSURES OF -----------------------------------------------------
CASH FLOW CASH PAID DURING THE YEAR FOR
INFORMATION Interest $ 1,671,210
Income tax 8,081
=====================================================
</TABLE>
During the year ended December 31, 1995, the
stockholders converted notes payable and the related
accrued interest totalling $3,525,768 into
additional paid-in capital. In addition, the Company
financed the purchase of property and equipment in
the amount of $532,860.
-44-
<PAGE> 46
Carpetland USA, Inc.
Financial Statements
Year ended February 29, 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors
Financial Statements
Balance Sheet
Statement of Operations
Statement of Cash Flows
Statement of Changes in Shareholders' Equity
Notes to Financial Statements
</TABLE>
<PAGE> 47
Report of Independent Auditors
To the Board
Carpetland USA, Inc.
We have audited the accompanying balance sheet of Carpetland USA, Inc.
(effective February 19, 1996, a wholly owned subsidiary of Shaw Industries,
Inc.) as of February 29, 1996, and the related statements of operations, cash
flows, and changes in shareholders' equity, for the year then ended. These
financial statements are the responsibility of the Carpetland USA, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Carpetland USA, Inc. at
February 29, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
June 26, 1996
-46-
<PAGE> 48
Carpetland USA, Inc.
Balance Sheet
February 29, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 334,000
Accounts receivable from customers, net of allowance for doubtful
accounts of $666,000 2,433,000
Receivable from franchisees 328,000
Inventories 5,401,000
Prepaid expenses and other current assets 2,401,000
-----------
Total current assets 10,897,000
Property and equipment, at cost, net of accumulated depreciation and
amortization 4,057,000
Other assets 67,000
===========
Total assets $15,021,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 3,455,000
Trade accounts payable to Parent 386,000
Customer deposits 3,384,000
Accrued expenses 3,116,000
-----------
Total current liabilities 10,341,000
Shareholders' Equity:
Common stock, $1 par value: Authorized 10,000 shares; 4,510
shares issued
5,000
Additional paid-in capital 1,134,000
Retained earnings 3,699,000
-----------
4,838,000
Less cost of treasury shares: 87 shares 158,000
-----------
Total shareholders' equity 4,680,000
===========
Total liabilities and shareholders' equity $15,021,000
===========
</TABLE>
See accompanying notes.
-47-
<PAGE> 49
Carpetland USA, Inc.
Statement of Operations
Year ended February 29, 1996
<TABLE>
<S> <C>
INCOME
Net sales $ 82,755,000
License fees 2,760,000
Other 1,562,000
------------
87,077,000
COSTS AND EXPENSES
Costs of goods sold 44,990,000
Selling 12,630,000
Payroll 20,133,000
Occupancy 7,730,000
Administrative 3,393,000
Interest 19,000
------------
Total costs and expenses 88,895,000
------------
Loss before income taxes 1,818,000
Income taxes 366,000
------------
Net loss $ 2,184,000
============
</TABLE>
See accompanying notes.
-48-
<PAGE> 50
Carpetland USA, Inc.
Statements of Cash Flows
Year ended February 29, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $(2,184,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 1,116,000
Bad debts 196,000
Change in operating assets and liabilities:
Accounts receivable from customers 14,000
Receivable from franchises 135,000
Inventories 159,000
Prepaid expenses and other current assets 61,000
Other assets 61,000
Accounts payable 971,000
Customer deposits 1,776,000
Accrued expenses (238,000)
-----------
Net cash provided by operating activities 2,067,000
-----------
INVESTING ACTIVITIES
Purchases of property and equipment (1,736,000)
Issuance of notes receivable from officers/shareholders (161,000)
Payments of notes receivable from officers/shareholders 433,000
-----------
Net cash used by investing activities (1,464,000)
-----------
FINANCING ACTIVITIES
Repayment of debt (139,000)
Repurchase of stock from officers/employees (158,000)
Dividends paid (4,471,000)
-----------
Net cash used by financing activities (4,768,000)
-----------
Net decrease in cash and cash equivalents (4,165,000)
Cash and cash equivalents at beginning of year 4,499,000
===========
Cash and cash equivalents at end of year $ 334,000
===========
</TABLE>
See accompanying notes.
-49-
<PAGE> 51
Carpetland USA, Inc.
Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
NUMBER ADDITIONAL NUMBER COST OF
OF COMMON PAID-IN RETAINED OF TREASURY
SHARES STOCK CAPITAL EARNINGS SHARES STOCK TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 28, 1995 4,510.42 $5,000 $1,134,000 $ 7,062,000 $ 8,201,000
Net loss -- -- -- (2,184,000) -- -- (2,184,000)
Dividends declared -- -- -- (1,179,000) -- -- (1,179,000)
Repurchase of shares from
officers/employers -- -- -- -- 87.00 (158,000) (158,000)
---------------------------------------------------------------------------------------
Balance at February 29, 1996 4,510.42 $5,000 $1,134,000 $ 3,699,000 87.00 $(158,000) $ 4,680,000
=======================================================================================
</TABLE>
See accompanying notes.
-50-
<PAGE> 52
Carpetland USA, Inc.
Notes to Financial Statements
February 29, 1996
1. SALE OF THE COMPANY AND BASIS OF PRESENTATION
On February 19, 1996, the shareholders of the Company sold all of their
outstanding shares to Shaw Industries, Inc. (Shaw) for $34.2 million and the
Company became a wholly owned subsidiary of Shaw. The accompanying financial
statements for the Company are presented on the basis of historical cost and do
not reflect any purchase accounting adjustments to be made by Shaw. In
connection with the sale of the Company, certain property was distributed to the
former majority shareholder of the Company (see Note 3). In addition, the
Company made a charitable contribution of $600,000 which is included in
administrative expenses in the accompanying statement of operations.
2. DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company operates and franchises a chain of hardfloor covering retail outlet
stores throughout the United States. The Company's sales are primarily carpeting
sold to a vast array of customers ranging from individuals to contractors.
FRANCHISING OPERATIONS
The Company records license fees charged to its franchisees under the accrual
method of accounting. These fees are determined in accordance with franchise
agreements and are based on a percentage of the franchisees sales volume.
INVENTORIES
Prior to 1992, inventories were valued under the last in, first out (LIFO)
method, which cost approximated the lower of cost on a first in, first out basis
(FIFO) or market. Since 1992, LIFO cost has exceeded market and, accordingly,
inventories are valued at market which approximates FIFO cost.
-51-
<PAGE> 53
Carpetland USA, Inc.
Notes to Financial Statements (continued)
2. DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Property and equipment acquired on or after March 1, 1987 are depreciated under
the straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the estimated useful life of the
property or over the term of the lease, whichever is shorter.
Property, equipment, and leasehold improvements acquired prior to March 1, 1987
are depreciated or amortized over their estimated useful lives under straight
line or declining balance methods.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
Accounting estimates are an integral part of financial statements prepared in
conformity with generally accepted accounting principles. Judgments made by
management affect the amounts and related disclosures of assets, liabilities,
revenues, and expenses reported in the financial statements. Actual results
could differ from these estimates.
-52-
<PAGE> 54
Carpetland USA, Inc.
Notes to Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
The cost and accumulated depreciation relating to property and equipment consist
of the following at February 29, 1996:
<TABLE>
<S> <C>
Land $ --
Buildings --
Signs and equipment 4,462,000
Leasehold improvements 6,440,000
------------
Total cost 10,902,000
Accumulated depreciation and amortization
(6,845,000)
============
Net property and equipment $ 4,057,000
============
</TABLE>
As part of the acquisition of the Company by Shaw (see Note 1), land and
buildings and a Company-owned automobile were distributed to the selling
majority shareholder. The net book value of these assets of $491,000 (with a
cost of $1,354,000) has been recorded as a dividend in the statement of changes
in shareholders' equity.
4. LINE-OF-CREDIT AGREEMENT
As of February 29, 1996, the Company has an unsecured bank line of credit of
$2,000,000 for working capital requirements. The line of credit is renewable
annually and bears interest at the prime rate plus one-half percent. There is a
compensating balance requirement of $150,000. No amounts were borrowed against
the line of credit at February 29, 1996.
5. LEASES
The Company's retail stores are leased under noncancellable operating leases
expiring between 1997 and 2010. Four of the leases require additional rentals
contingent upon sales in excess of specified amounts, in addition to the minimum
annual rentals.
Rentals paid under operating leases and charged to rental expenses were
$3,211,000 in fiscal 1996, including $1,672,000 to related parties prior to the
sale of the Company (see Note 1). Rentals exclude real estate taxes, insurance,
maintenance and other costs, which are applicable to leased property and are
paid by the Company.
-53-
<PAGE> 55
Carpetland USA, Inc.
Notes to Financial Statements (continued)
5. LEASES (CONTINUED)
Future minimum payments under all noncancellable operating leases in effect as
of February 29, 1996, with initial or remaining lease terms of one year or more,
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR TOTAL
----------------------------------------------------
<S> <C>
February 28, 1997 $ 3,406,000
February 28, 1998 3,131,000
February 28, 1999 2,975,000
February 29, 2000 2,855,000
February 28, 2001 2,524,000
Thereafter 13,309,000
============
$ 28,200,000
============
</TABLE>
6. TAXES
Prior to February 19, 1996, the Company elected to be taxed as an S Corporation
under applicable provisions of the Internal Revenue Code. Accordingly, federal
and state taxable income through February 19, 1996 is reported on the individual
shareholder's personal income tax returns.
The Board of Directors declared dividends to reimburse shareholders for their
pro rata share of income taxes at the highest statutory federal income tax rate
and the effective state income tax rate. Such dividends amounted to $688,000 for
fiscal 1996.
The provision for income taxes in the statement of operations represents taxes
for those states that do not recognize the federal S Corporation status and for
state taxes resulting from the termination of the S Corporation.
-54-
<PAGE> 56
Carpetland USA, Inc.
Notes to Financial Statements (continued)
7. CARPETLAND USA SAVINGS AND INVESTMENT PLAN AND TRUST
The Company contributes to the Carpetland USA Savings and Investment Plan (a
defined contribution plan qualified under section 401(k) of the Internal Revenue
Code) which covers substantially all employees. Employees can contribute up to a
maximum of 10% of eligible compensation. The Company makes matching
contributions to the plan equal to 25% of the first 6% contributed by the
employee. In addition, the Company makes a discretionary contribution based
largely on the overall profitability of the Company. Total Company contributions
to the plan totaled $179,000 for fiscal 1996.
8. GUARANTEES
The Company has guaranteed certain leases, mortgages, and other obligations
associated with qualified new franchise operations. The total amount of
guarantees as of February 29, 1996 is $608,000. The maximum amount of guarantees
and loans is limited to $1,500,000.
-55-
<PAGE> 57
THE MAXIM GROUP, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
DOLLARS IN THOUSANDS
INTRODUCTION
The following unaudited pro forma condensed balance sheet and statements of
operations have been prepared to reflect The Maxim Group, Inc.'s (the "Company")
purchase from Shaw Industries, Inc. of substantially all of the assets and the
assumption of selected liabilities of the Shaw Residential Retail Group ("Shaw")
(the "Purchase Transaction"). The Purchase Transaction was effective on August
9, 1998. The consideration paid by the Company to Shaw Industries, Inc. in
connection with the Purchase Transaction was approximately $114,300, consisting
of cash of $25,000, a note of approximately $12,029, and 3,150,000 shares of the
Company's common stock and the assumption of certain liabilities of
approximately $24,900, subject to post-closing adjustments.
The unaudited pro forma condensed statements of operations for the year ended
January 3, 1998 and the six months ended July 31, 1998, and the unaudited pro
forma condensed balance sheet as of January 31, 1998, set forth below, have been
prepared by combining the Company's audited consolidated statement of operations
for the year ended January 31, 1998 with Shaw's audited combined statement of
operations for the year ended January 3, 1998; combining the Company's unaudited
condensed consolidated statement of operations for the six months ended July 31,
1998 with Shaw's unaudited condensed combined statement of operations for the
six months ended June 28, 1998; and combining the Company's unaudited condensed
consolidated balance sheet as of July 31, 1998 with Shaw's unaudited condensed
combined balance sheet as of July 3, 1998.
The unaudited pro forma condensed statements of operations for the year ended
January 31, 1998 and the six months ended July 31, 1998 were prepared as if the
Purchase Transaction had occurred on February 1, 1997 and 1998, respectively.
The unaudited pro forma condensed balance sheet as of July 31, 1998 was prepared
giving effect to the Purchase Transaction on such date.
For purposes of presenting pro forma results, no changes in revenues and
expenses have been made to reflect the result of any modification to operations
that might have been made had the Purchase Transaction been consummated on the
assumed effective date of such transaction. The pro forma expenses include the
recurring costs which are directly attributable to the Purchase Transaction,
such as interest expense and amortization of goodwill, and their related tax
effects. The pro forma adjustments made to the pro forma condensed balance sheet
include (i) adjustments to remove selected Shaw assets not acquired and
liabilities not assumed in the Purchase Transaction, (ii) $25,000 of additional
borrowings under the Company's credit facility, (iii) the payment to Shaw
Industries, Inc. of $25,000 cash, a note in the amount of $18,048 and 3,150,000
shares of the Company's common stock, (iv) execution of the Company's plan to
exit certain of the acquired locations and dispose of certain of the acquired
assets, and (v) the recognition of goodwill resulting from the Purchase
Transaction. The pro forma financial information does not purport to be
indicative of
-56-
<PAGE> 58
the results which would actually have been attained had such transactions been
completed as of the date and for the periods presented or which may be attained
in the future.
The unaudited pro forma condensed balance sheet reflects the preliminary
allocation of purchase price to the assets acquired and liabilities assumed in
the Purchase Transaction to the Company's tangible and intangible assets and
liabilities. The final allocation of such purchase price, and the resulting
depreciation and amortization expense in the accompanying unaudited pro forma
statements of operations, will differ from the preliminary estimates due to the
final allocation being based on actual closing date amounts of assets and
liabilities, management's final formulation of a plan to exit certain of the
acquired locations, and a final determination of the fair market values of
property and other assets as of the closing date.
-57-
<PAGE> 59
THE MAXIM GROUP, INC.
PRO FORMA CONDENSED BALANCE SHEET
JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
MAXIM SHAW ------------------------ PRO FORMA
JULY 31, 1998 JULY 4, 1998 DEBIT CREDIT TOTAL
------------ ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 25,030 $ 10,980 $ 25,000 (b) $ (25,000)(c) $ 30,347
(5,663)(a)
Trade accounts receivable (net) 69,461 14,727 894 (a) 85,082
Other receivable 4,322 4,321 (3,155)(a) 5,488
Notes receivable 1,562 372 (372)(a) 1,562
Inventory 64,808 45,801 (7,346)(a) 103,263
Deferred tax 5,804 5,537 (5,537)(a) 5,804
Other current assets 6,430 4,211 (684)(a) 9,957
-------- -------- --------
Total current assets 177,417 85,949 241,503
Property and equipment 156,662 19,090 877 (a) (1,800)(d) 174,829
Intangibles 11,453 133,667 29,414 (c) (133,667)(a) 46,667
5,800 (d)
Other assets 17,899 3,133 0 (2,328)(a) 18,704
-------- -------- --------
Total assets $363,431 $241,839 $481,703
-------- -------- --------
LIABILITIES:
Current liabilities:
Accounts payable $ 19,369 $ 50,916 (40,918)(a) $ 29,367
Accrued liabilities 52,138 21,517 (8,735)(a) 4,000 (d) 68,920
Notes payable 0 0 12,029 (c) 12,029
Lease obligations 503 0 503
Current maturities 150 288 (33)(a) 405
-------- -------- --------
Total current liabilities 72,160 72,721 111,224
Lease obligations 1,174 0 1,174
Long-term debt (net) 169,025 1,244 (314)(a) 25,000 (b) 194,955
Other Liabilities 3,676 6,584 (5,675)(a) 4,585
-------- -------- --------
Total liabilities 246,035 80,549 311,938
-------- -------- --------
EQUITY:
Common stock 18 0 3 (c) 21
Paid-in capital 121,214 0 52,366 (c) 173,580
Retained earnings 15,142 0 15,142
Treasury stock (18,978) 0 (18,978)
Investment by Shaw Industries 0 161,290 (101,306)(a) 0
(59,984)(c)
-------- -------- --------
Total equity 117,396 161,290 169,765
-------- -------- -------- -------- --------
Total liabilities and equity $363,431 $241,839 $278,950 $278,950 $481,703
======== ======== ======== ======== ========
</TABLE>
-58-
<PAGE> 60
THE MAXIM GROUP, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MAXIM SHAW
SIX MONTHS SIX MONTHS
ENDED ENDED PRO FORMA PRO FORMA
JULY 31, 1998 JULY 4, 1998 ADJUSTMENTS TOTAL
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 205,413 $266,944 $ 472,357
COST OF SALES 143,200 165,082 308,282
----------- -------- ------------
Gross profit 62,213 101,862 164,075
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 44,299 114,669 $ 881 (e) 159,849
INTEREST EXPENSE, NET 4,782 289 1,405 (f) 6,476
OTHER (INCOME) EXPENSE, NET (307) 115 (192)
NONRECURRING CHARGE 33,000 0 33,000
----------- -------- ------------
LOSS BEFORE INCOME TAXES (19,561) (13,211) (35,058)
INCOME TAX BENEFIT (5,315) 0 (892)(g) (6,207)
----------- -------- -------- ------------
NET LOSS $ (14,246) $(13,211) $ (1,394) $ (28,851)
=========== ======== ======== ===========
EARNINGS PER SHARE (G):
Basic $ (0.87) N/A $ (1.48)
----------- -------- ------------
Diluted $ (0.87) N/A $ (1.48)
----------- -------- ------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (G):
Basic 16,364,000 N/A $19,514,000
----------- -------- ------------
Diluted 16,364,000 N/A $19,514,000
----------- -------- ------------
</TABLE>
-59-
<PAGE> 61
THE MAXIM GROUP, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MAXIM SHAW
FISCAL YEAR FISCAL YEAR
ENDED ENDED PRO FORMA PRO FORMA
JANUARY 31, 1998 JANUARY 3, 1998 ADJUSTMENTS TOTAL
---------------- --------------- ------------ ----------
<S> <C> <C> <C> <C>
REVENUES $ 365,127 $ 583,843 $ 948,970
COST OF SALES 249,381 366,578 615,959
----------- -------- -----------
Gross profit 115,746 217,265 333,011
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 83,955 254,002 $ 1,761 (e) 339,718
INTEREST EXPENSE, NET 5,715 146 2,810 (f) 8,671
OTHER (INCOME) EXPENSE, NET (394) 15,676 15,282
----------- -------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGE 26,470 (52,559) (30,660)
INCOME TAX EXPENSE 10,314 - (1,783)(g) 8,531
EARNINGS (LOSS) BEFORE EXTRAORDINARY ----------- -------- -------- -----------
CHARGE 16,156 (52,559) (39,191)
EXTRAORDINARY CHARGE, NET OF INCOME TAX BENEFIT 785 - 785
----------- --------- ------- -----------
NET EARNINGS (LOSS) $ 15,371 $ (52,559) $ 2,788 $ (39,976)
=========== ========= ======= ===========
EARNINGS PER COMMON SHARE (G):
Basic:
Earnings (loss) before extraordinary charge $ 1.00 N/A $ (2.72)
Extraordinary charge (0.05) N/A (0.04)
----------- -------- -----------
Basic earnings (loss) $ 0.95 N/A $ (2.76)
----------- -------- -----------
Diluted:
Earnings (loss) before extraordinary charge $ 0.96 N/A $ (2.72)
Extraordinary charge (0.04) N/A (0.04)
----------- -------- -----------
Diluted earnings (loss) $ 0.92 N/A $ (2.76)
----------- -------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (G):
Basic 16,158,000 N/A 19,308,000
----------- -------- -----------
Diluted 16,766,000 N/A 19,308,000
----------- -------- -----------
</TABLE>
-60-
<PAGE> 62
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(a) To remove selected Shaw assets not acquired and liabilities not assumed
in the Purchase Transaction.
(b) To recognize $25,000 of additional borrowings under the company's
credit facility.
(c) To recognize the payment to Shaw Industries, Inc. of $25,000 cash, a
promissory note in the amount of $12,029, and 3,150,000 shares of the
Company's common stock at its fair value at the date of issuance and
the excess of the cost of the assets acquired over their fair market
value at the date of acquisition as goodwill.
(d) To recognize (i) liabilities associated with lease obligations of
approximately $4,000 in connection with the Company's preliminary plan
to exit certain of the acquired locations and (ii) the Company's
planned disposal of certain of the acquired assets.
(e) To reflect amortization of goodwill recorded in connection with (c)
above. The Company amortized goodwill on a straight-line basis over a
period of 20 years.
(f) To reflect interest on (i) increased borrowings under the Company's
credit facility at an assumed rate equal to the average LIBOR rate for
the relevant period plus 1.75% (7.39% for the year ended January 31,
1998 and the six months ended July 31, 1998, respectively) and (ii) the
promissory note issued to Shaw Industries, Inc. at a rate of 8%.
(g) To provide for the federal and state tax effects of the pro forma
adjustments in (e) and (f) above.
(h) Net earnings per common share are computed assuming that the 3,150,000
shares of the Company's common stock issued in connection with the
Purchase Transaction are outstanding for the entire periods presented.
-61-
<PAGE> 63
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 hereunto duly authorized.
THE MAXIM GROUP, INC.
By: /s/ Gary F. Brugliera
-------------------------------------
Gary F. Brugliera
Executive Vice President and
Chief Financial Officer
Dated: October 23, 1998
-62-
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION OF EXHIBIT
- ---------- -------------------------------
<S> <C>
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of BDO Seidman, LLP.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Current Report on Form 8-K/A (Amendment No. 1) into the
Company's previously filed Registration Statements on Form S-8 (File Nos.
33-80984, 33-81002, 333-19691, 333-19693, 333-47299 and 333-59423).
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 22, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated June 26, 1996, with respect to
the financial statements of Carpetland USA, Inc. included in this Current
Report on Form 8-K/A (Amendment No. 1) and to the incorporation by reference of
our report into the Maxim Group Inc. previously filed Registration Statements
on Form S-8 (File Nos. 33-80984, 33-81002, 333-19691, 333-19693, 333-47299 and
333-59423).
/s/ ERNST & YOUNG LLP
-----------------------------------
Chicago, Illinois
October 23, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Current Report on Form 8-K/A
(Amendment No. 1) into the Company's previously filed Registration Statements on
Form S-8 (File Nos. 33-80984, 33-81002, 333-19691, 333-19693, 333-47299 and
333-59423).
/s/ BDO SEIDMAN, LLP
Troy, Michigan
October 23, 1998
