<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. One to
Quarterly Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended July 31, 1998
Commission File Number 1-13099
THE MAXIM GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-2060334
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
210 TownPark Drive, Kennesaw, Georgia 30144
- ---------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (678) 355-4000
-----------------------
N/A
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(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
Yes No X
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, $.001 par value 19,038,347
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Class Outstanding at October 1, 1999
Explanatory Note:
During the course of the fiscal 1999 year-end financial audit process, The Maxim
Group, Inc. ("Maxim" or the "Company") recorded certain adjustments to its
previously reported interim results. The most significant of the adjustments
affecting the quarterly period ended July 31, 1998 related to certain vendor
support funds recognized in the Company's operating results during the quarter,
reductions to the previously reported nonrecurring charge, and a gain on the
sale of equipment. It was determined that certain revenue related to vendor
support funds was incorrectly recorded. Certain components of the nonrecurring
charge were revised and a gain on the sale of certain equipment previously
reflected in the Company's quarter ended April 30, 1998 is recorded in the
revised results for the quarter ended July 31, 1998.
As a result of the adjustments recorded by the Company, the Company has revised
its reported results of operations for the three and six month periods ended
July 31, 1998. This Form 10-Q/A reports the effects of these adjustments.
The following Items are amended hereby:
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
<PAGE> 2
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Information)
<TABLE>
<CAPTION>
July 31,
1998
(As Restated January 31,
Assets See Note 2) 1998
- --------------------------------------------------------------------------- ------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents, including restricted cash of $12,618 at
July 31, 1998 and $22,786 at January 31, 1998 $ 25,030 $ 28,880
Current portion of franchise license fees receivable, net of allowance
for doubtful accounts of $383 at July 31, 1998 and $528 at
January 31, 1998 2,791 3,107
Trade accounts receivable, net of allowance for doubtful accounts of
$2,594 at July 31, 1998 and $1,917 at January 31, 1998 60,585 56,432
Accounts receivable from officers and employees 1,202 1,593
Current portion of notes receivable from franchisees and related
parties, net of allowance for doubtful accounts of $252 at July 31,
1998 and $261 at January 31, 1998 1,562 1,165
Inventories 64,808 54,693
Refundable income taxes 1,986 2,558
Deferred income taxes 5,804 5,714
Prepaid expenses 4,340 3,406
-------- --------
Total current assets 168,108 157,548
Property and equipment, net of accumulated depreciation and
amortization of $54,971 at July 31, 1998 and $48,039 at January 31,
1998 157,639 137,207
Franchise license fees receivable, less current portion, net of allowance
for doubtful accounts of $210 at July 31, 1998 and January 31, 1998 4,619 2,718
Notes receivable from franchisees, less current portion 4,001 3,506
Intangible assets, net of accumulated amortization of $1,993 at July 31,
1998 and $1,626 at January 31, 1998 11,453 13,640
Other assets 9,279 6,875
-------- --------
$355,099 $321,494
======== ========
Liabilities And Stockholders' Equity
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Current liabilities:
Current portion of long-term debt $ 150 $ 384
Current portion of capital lease obligations 503 501
Rebates payable to franchisees 3,773 3,975
Accounts payable 19,417 23,376
Accrued expenses 40,037 14,333
Deferred revenue 3,281 1,750
Deposits 5,444 2,897
-------- --------
Total current liabilities 72,605 47,216
Long-term debt, less current portion 169,025 129,349
Capital lease obligations, less current portion 1,174 1,429
Deferred taxes 712 9,725
-------- --------
Total liabilities 243,516 187,719
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000 shares authorized, no
shares issued or outstanding 0 0
Common stock, $.001 par value; 25,000 shares authorized,
17,577 shares issued at July 31, 1998 and 17,352 shares
issued at January 31, 1998 18 17
Additional paid-in capital 121,437 119,264
Retained earnings 9,106 29,388
Treasury stock, 1,455 shares at July 31, 1998 and 1,221 shares
at January 31, 1998 (18,978) (14,894)
-------- --------
Total stockholders' equity 111,583 133,775
-------- --------
$355,099 $321,494
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- --------------------------
July 31, July 31,
1998 1998
(As Restated July 31, (As Restated July 31,
See Note 2) 1997 See Note 2) 1997
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Sales of floor covering products $ 86,157 $ 76,881 $ 166,818 $ 148,371
Fiber and PET sales 5,209 6,741 12,174 12,513
Fees from franchise services 2,392 7,292 9,249 14,573
Other 1,823 1,329 3,972 3,011
--------- --------- --------- ---------
Total revenues 95,581 92,243 192,213 178,468
Cost of sales 72,821 63,071 142,385 122,226
--------- --------- --------- ---------
Gross profit 22,760 29,172 49,828 56,242
Selling, general, and administrative expenses 23,405 20,725 45,795 41,163
Interest income (32) (131) (418) (225)
Interest expense 2,926 1,262 5,385 2,663
Other (956) (49) (904) (84)
Nonrecurring charges 28,531 0 28,531 0
--------- --------- --------- ---------
(Loss) earnings before income (31,114) 7,365 (28,561) 12,725
tax (benefit) expense
Income tax (benefit) expense (9,514) 2,780 (8,279) 4,889
--------- --------- --------- ---------
Net (loss) earnings $ (21,600) $ 4,585 $ (20,282) $ 7,836
========= ========= ========= =========
(Loss) earnings per common share:
Basic $ (1.32) $ 0.28 $ (1.24) $ 0.48
========= ========= ========= =========
Diluted $ (1.32) $ 0.28 $ (1.24) $ 0.47
========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic 16,305 16,294 16,364 16,202
========= ========= ========= =========
Diluted 16,305 16,615 16,364 16,623
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE MAXIM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
July 31,
1998
(As Restated July 31,
See Note 2) 1997
------------ --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $(20,282) $ 7,836
-------- --------
Adjustments to reconcile net (loss) earnings to net
cash (used in) provided by
operating activities:
Nonrecurring charges 7,540 0
Depreciation and amortization 7,447 5,845
Deferred income taxes (9,103) 3,293
Changes in assets and liabilities:
Increase in receivables (6,170) (8,557)
Increase in inventories (10,515) (4,884)
Decrease in refundable income taxes 572 334
Increase in prepaid expenses and other assets (2,808) (3,847)
Increase in rebates and accounts payable,
accrued expenses, deferred
revenue, and deposits 23,357 411
-------- --------
Total adjustments 10,320 (7,405)
-------- --------
Net cash (used in) provided by operating activities (9,962) 431
-------- --------
Cash flows from investing activities:
Capital expenditures (28,878) (11,837)
Acquisitions, net of cash acquired (2,289) (977)
-------- --------
Net cash used in investing activities (31,167) (12,814)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 0 47,240
Proceeds from exercise of options, net 2,174 463
Purchase of treasury stock (4,084) (10,938)
Borrowings under revolving credit agreement 39,442 0
Repayments of revolving credit agreement 0 (25,642)
Principal payments on capital lease obligations (253) (254)
-------- --------
Net cash provided by financing activities 37,279 10,869
-------- --------
Net decrease in cash (3,850) (1,514)
Cash, beginning of period 28,880 6,439
-------- --------
Cash, end of period $ 25,030 $ 4,925
======== ========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 5,052 $ 4,067
======== ========
Income taxes $ 145 $ 1,346
======== ========
Supplemental disclosure of noncash investing and financing activities:
Common stock issued in connection with acquisitions $ 0 $ 3,000
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE MAXIM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Information)
(Unaudited)
1. Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1998 Form
10-K as filed with the Securities and Exchange Commission.
The results of operations for the periods presented are not necessarily
indicative of the operating results for the full year.
2. Restatement
During the course of the fiscal 1999 year-end financial audit process,
the Company recorded certain adjustments to its previously reported
interim results. The most significant of the adjustments affecting the
quarterly period ended July 31, 1998 related to certain vendor support
funds recognized in the Company's operating results during the quarter,
reductions to the previously reported nonrecurring charge, and a gain on
the sale of equipment. It was determined that certain revenue related to
vendor support funds was incorrectly recorded. Certain components of the
nonrecurring charge were revised and a gain on the sale of certain
equipment previously reflected in the Company's quarter ended April 30,
1998 is recorded in the revised results for the quarter ended July 31,
1998.
As a result of the adjustments recorded by the Company, the Company has
revised its reported results of operations for the three and six month
periods ended July 31, 1998. This Form 10-Q/A reports the effects of these
adjustments.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, 1998 July 31, 1998
-------------------- --------------------
As As
Previously Previously
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Sales of floor covering products $ 86,849 $ 86,157 $167,985 $166,818
Fees from franchise services 11,995 2,392 21,282 9,249
Total revenues 105,876 95,581 205,413 192,213
Cost of sales 73,425 72,821 143,200 142,385
Gross profit 32,451 22,760 62,213 49,828
Selling, general, and administrative expenses 22,097 23,405 44,299 45,795
Interest expense 2,836 2,926 5,200 5,385
Other (income) (120) (956) (307) (904)
Nonrecurring charges 33,000 28,531 33,000 28,531
(Loss) earnings before income tax (benefit)
expense (25,330) (31,114) (19,561) (28,561)
Income tax (benefit) (7,540) (9,514) (5,315) (8,279)
Net (loss) earnings (17,790) (21,600) (14,246) (20,282)
Earnings per common share:
Basic $ (1.09) $ (1.32) $ (0.87) $ (1.24)
Diluted (1.09) (1.32) (0.87) (1.24)
</TABLE>
<TABLE>
<CAPTION>
July 31, 1998
----------------------
As
Previously
Reported Restated
<S> <C> <C>
Trade accounts receivable, net $ 69,461 $ 60,585
Prepaid expenses 4,444 4,340
Property and equipment, net 156,662 157,639
Accounts payable 19,369 19,417
Accrued expenses 40,367 40,037
Deferred revenue 2,554 3,281
Deferred taxes, long-term liability 3,676 712
Additional paid-in capital 121,214 121,437
Retained earnings 15,142 9,106
</TABLE>
3. Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
July 31, January 31,
1998 1998
-------- ---------
<S> <C> <C>
Raw materials $16,339 $14,809
Work in process 4,139 3,363
Finished goods 44,330 36,521
------- -------
$64,808 $54,693
======= =======
</TABLE>
4. Senior Subordinated Notes
On October 16, 1997, the Company completed the sale of $100 million of
9-1/4% Senior Subordinated Notes ("Notes") due 2007, to institutional
buyers in a private offering under Rule 144A promulgated under the
Securities Act of 1933. The net proceeds to the Company from the offering
of the Notes were approximately $96 million, net of an issue discount and
fees and related costs. The Company used the net proceeds from the
offering of the Notes to repay all borrowings outstanding under its
revolving credit agreements of
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<PAGE> 6
approximately $82.7 million and for general corporate purposes, including
capital expenditures.
Each of the Company's operating subsidiaries has fully and
unconditionally guaranteed the Notes on a joint and several basis. The
guarantor subsidiaries comprise all of the direct and indirect
subsidiaries of the Company. The Company has not presented separate
financial statements and other disclosures concerning the guarantor
subsidiaries because management has determined that such information is
not material to investors. There are no significant restrictions on the
ability of the guarantor subsidiaries to make distributions to the
Company.
5. Nonrecurring Charges
During the period ended July 31, 1998, the Company reevaluated its retail
strategy. As a result of the assessment, the Company made the
determination that it would amend its franchise agreement, close certain
Company-owned stores, and write-down the value of certain retail assets
including goodwill.
The Company recorded a $28.5 million charge for certain nonrecurring items
during the period ended July 31,1998. On June 1, 1998 the Company amended
its franchise agreement with the majority of its members, whereby the
Company established certain requirements for more uniformity in the
appearance and merchandising of the franchise stores. As part of the
amended franchise agreement, the number of vendors available to franchise
members through the Company, to buy from and earn rebates, was reduced.
The Company wrote-off certain receivables due from vendors and has also
established a reserve to settle claims from certain parties. In addition,
the Company has written down to fair value certain assets made obsolete by
the amended franchise agreement. The Company also accrued for the costs of
closing 15 Company-owned retail stores. The Company anticipated all stores
would be closed within six months.
In connection with the reevaluation of the Company's retail strategy
described above, the Company analyzed the performance of its Company-owned
retail regions. This analysis indicated that significant strategic and
operational changes would be necessary in some stores, including changes
in the customer mix, location, store design, and merchandising. These
factors also caused management to assess the realizability of the goodwill
recorded for these regions.
The determination of goodwill impairment was made by comparing the
unamortized goodwill balance for each region to the estimate of the
related region's undiscounted future cash flows. The assumptions used
reflected earnings, market and industry conditions, as well as current
operating plans. The assessment indicated a permanent impairment of
goodwill related to certain of the regions, therefore such goodwill was
written down to fair market value which resulted in a write-off totaling
$4.2 million.
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<PAGE> 7
The major components of the nonrecurring charges are as follows:
<TABLE>
<CAPTION>
CHARGE
TO
INITIAL RELATED REMAINING
CHARGE ASSETS BALANCE
------ ------ -------
<S> <C> <C> <C>
Write-off of vendor receivables $ 2,439 $ 2,439 $ 0
Claim reserves 10,700 0 10,700
Write-down of equipment 492 492 0
Store closure and carrying costs 10,700 700 10,000
Write-down of goodwill 4,200 4,200 0
------- ------- -------
$28,531 $ 7,831 $20,700
======= ======= =======
</TABLE>
6. Acquisitions
On July 14, 1998 the Company executed a non-binding letter of intent to
purchase the stock of CarpetsPlus of America, LLC, a floor covering buying
group. The acquisition is expected to close by October 31, 1998.
7. Subsequent Event
Effective August 9, 1998, the Company acquired substantially all of the
residential retail store assets of Shaw Industries, Inc. and its wholly
owned subsidiary, Shaw Carpet Showplace, Inc. (collectively, "Shaw"),
pursuant to an Agreement and Plan of Merger dated as of June 23, 1998.
These assets include 266 retail stores with annual revenues of
approximately $584 million and are being operated through the Company's
newly organized Maxim Retail Stores, Inc. subsidiary. The Company intends
to continue operating the residential retail stores acquired from Shaw as
retail floorcovering stores. Under the terms of the Merger Agreement, the
Company issued to Shaw 3,150,000 shares of common stock of the Company and
a one-year note in the principal amount of $18 million (adjusted to $11.5
million after giving effect to purchase price adjustments), paid
Shaw $25 million in cash and assumed certain liabilities.
Subsequent to July 31, 1998, the Company has amended its senior credit
facility, consummated significant acquisitions and dispositions, defaulted
a certain restricted payment covenant contained in the indenture which
references the Company's $100 million Senior Subordinated Notes due
October 2007 and other debt instruments including its senior credit
facility and certain leases, and has been named as a party to legal and
regulatory proceedings. Accordingly, the financial statements in this
Quarterly Report on Form 10-Q/A should be read in conjunction with the
Company's Annual Report on Form 10-K filing for the fiscal year ended
January 31, 1999 as filed with the Securities and Exchange Commission.
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<PAGE> 8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total Revenues. Total revenues increased 3.6% to $95.6 million for the
three months ended July 31, 1998 from $92.2 million for the three months
ended July 31, 1997. Total revenues increased 7.7% to $192.2 million for
the six months ended July 31, 1998 from $178.5 million reported in the
prior year period. The components of total revenues are discussed below:
Sales of Floor Covering Products. Sales of floor covering products
increased 12.1% to $86.2 million for the three months ended July 31,
1998 from $76.9 million for the three months ended July 31, 1997, and
increased 12.4% to $166.8 million for the six months ended July 31,
1998 from $148.4 million in the prior year period. Sales of
floor covering products in Company-owned stores increased 10.4% to
$40.2 million for the three months ended July 31, 1998 from $36.4
million for the three months ended July 31, 1997, and increased 14.1%
to $76.3 million for the six months ended July 31, 1998 from $66.9
million in the prior year period. The growth in retail sales of
floor covering products was primarily due to internal growth. Sales of
manufactured carpet increased 10.7% to $41.5 million for the three
months ended July 31, 1998 from $37.5 million for the three months
ended July 31, 1997, and increased 8.5% to $81.8 million for the
six-months ended July 31, 1998 from $75.4 million in the prior year
period. Unit sales of manufactured carpet increased 21.0% to 7.5
million square yards for the three months ended July 31, 1998 from 6.2
million square yards for the three months ended July 31, 1997, and
increased 14.1% to 14.6 million square yards for the six months ended
July 31, 1998 from 12.8 million square yards in the prior year period.
Sales from the Company's two distribution centers amounted to $4.5
million for the three months ended July 31, 1998 and $3.0 million for
the three months ended July 31, 1997, and $8.7 million for the six
months ended July 31, 1998 and $6.1 million in the prior year period,
largely representing sales to the Company's franchisees.
Fees From Franchise Services. Fees from franchise services, which
include franchise license fees and royalties, brokering of
floor covering products, and advertising, decreased 67.2% to $2.4
million for the three months ended July 31, 1998 from $7.3 million for
the three months ended July 31, 1997, and decreased 36.5% to $9.2
million for the six months ended July 31, 1998 from $14.6 million in
the prior year period.
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<PAGE> 9
Fiber and PET Sales. Sales of fiber and polyethylene terephthalate
("PET") decreased 22.7% to $5.2 million for the three months ended July
31, 1998 from $6.7 million for the three months ended July 31, 1997,
and decreased 2.7% to $12.2 million for the six months ended July 31,
1998 from $12.5 million in the prior year period. Unit sales decreased
29.1% to 12.2 million pounds for the three months ended July 31, 1998
from 17.2 million pounds for the three months ended July 31, 1997, and
decreased 12.6% to 28.5 million pounds for the six months ended July
31, 1998 from 32.6 million pounds in the prior year period. The unit
sales decrease was the result of increased demand from the Company's
carpet operations.
Gross Profit. Gross profit decreased 22.0% to $22.8 million for the three
months ended July 31, 1998 from $29.2 million for the three months ended
July 31, 1997, and decreased 11.4% to $49.8 million for the six months
ended July 31, 1998 from $56.2 million in the prior year period. As a
percentage of sales, gross profit was 23.8% for the three months ended
July 31, 1998 compared to 31.6% for the three months ended July 31, 1997
and 25.9% for the six months ended July 31, 1998 compared to 31.5% in the
prior year period. Contributing to the decrease in gross profit as a
percentage of sales was the continuing change in the retail business mix
of the Company to a revenue base consisting principally of the net sales
of floor covering products and a higher cost of raw materials at the
Company's manufacturing subsidiary, Image Industries, Inc. ("Image").
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased 12.9% to $23.4 million for the three
months ended July 31, 1998 from $20.7 million for the three months ended
July 31, 1997, and increased 11.3% to $45.8 million for the six months
ended July 31, 1998 from $41.2 million in the prior year period. Increases
in operating expenses on an absolute basis reflect an overall growth in
the size of the Company's operations required to serve a growing retail
base as well as increased selling costs at Image related to newly created
territories. As a percentage of revenues, selling, general, and
administrative expenses increased to 24.5% for the three months ended July
31, 1998 from 22.5% for the three months ended July 31, 1997 and increased
to 23.8% from 23.1% for the six months ended July 31, 1998 as compared to
the prior year period.
Interest Expense. Interest expense increased 131.9% to $2.9 million for
the three months ended July 31, 1998 from $1.3 million for the three
months ended July 31, 1997, and increased 102.2% to $5.4 million for the
six months ended July 31, 1998 from $2.7 million in the prior year period,
due principally to the Company having a higher debt balance and a higher
interest rate during the six months ended July 31, 1998 as compared to the
prior year period. In October 1997, the Company sold $100 million of
9-1/4% senior subordinated notes, see "Liquidity and Capital Resources."
Nonrecurring Charges. The Company recorded a $28.5 million charge for
certain nonrecurring items for the period ending July 31, 1998. On June 1,
1998, the Company amended its franchise agreement with the majority of its
members, whereby the Company established certain requirements for more
uniformity in the appearance and merchandising of the franchise stores.
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<PAGE> 10
As part of the amended franchise agreement, the number of vendors
available to buy from and earn rebates was reduced. The Company
wrote-off receivables due from vendors and has also established a reserve
to settle claims from certain parties.
In addition, the Company has written down to fair value certain assets
made obsolete by the amended franchise agreement. The Company also accrued
for the costs of closing 15 Company-owned retail stores. The Company
anticipates all stores will be closed within six months.
In connection with the reevaluation of the Company's retail strategy
described above, the Company analyzed the performance of its Company owned
retail regions. This analysis indicated that significant strategic and
operational changes would be necessary in some stores, including changes
in the customer mix, location, store design, and merchandising. These
factors also caused management to assess the realizability of the goodwill
recorded for these regions.
The determination of goodwill impairment was made by comparing the
unamortized goodwill balance for each region to the estimate of the
related region's undiscounted future cash flows. The assumptions used
reflected the earnings, market, and industry conditions, as well as
current operating plans. The assessment indicated a permanent impairment
of goodwill related to certain of the regions, therefore such goodwill was
written down to fair market value which resulted in a write-off totaling
$4.2 million.
Income Tax Expense. The Company recorded an income tax benefit of $9.5
million for the three months ended July 31, 1998 compared to a $2.8
million expense for the three months ended July 31, 1997, and a $8.3
million tax benefit for the six months ended July 31, 1998 compared to
$4.9 million expense in the prior year period. The decrease in income tax
expense is due to the Company recording a loss for the three and six
months ended July 31, 1998, as compared to the prior year periods.
Net Earnings. As a result of the foregoing factors, the Company recorded a
net loss of $21.6 million for the three months ended July 31, 1998
compared to net earnings of $4.6 million for the three months ended July
31, 1997, and a net loss of $20.3 million for the six months ended July
31, 1998 compared to net earnings of $7.8 million in the prior year
period.
Liquidity and Capital Resources
General. The Company's primary capital requirements are for new store
openings, investments in the manufacturing operations, working capital and
acquisitions. The Company historically has met its capital requirements
through a combination of cash flow from operations, net proceeds from the
sale of equity and debt securities, bank lines of credit, and standard
payment terms.
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<PAGE> 11
In March 1997, the Board of Directors of the Company authorized management
to repurchase up to one million shares of common stock of the Company. In
October 1997, the Board of Directors of the Company authorized management
to repurchase up to an additional one million shares of the common stock
of the Company. As of September 8, 1998, the Company had repurchased
1,528,300 shares of its common stock in the open market for a total of
$20.4 million. These purchases were, and any future purchases will be,
financed from borrowings under the Company's revolving credit facility.
Credit Facility. On August 26, 1997 (as amended on September 24, 1997 and
August 7, 1998), the Company established a credit facility providing for
aggregate commitments of $141 million (the "Credit Facility"). The Credit
Facility consists of (i) a $110 million revolving credit facility, of
which $39.8 million was available for borrowings on September 8, 1998 and
(ii) a special-purpose letter of credit in the amount of up to $31 million
for use as credit support for the Summerville Loan (defined below) to be
used to finance the expansion of Image's fiber extrusion capabilities at
its plant in Summerville, Georgia. As of September 8, 1998, the Company
had $70.2 million outstanding under the revolving credit facility. No
amounts have been drawn on the letter of credit. Amounts outstanding under
the Credit Facility bear interest at a variable rate based on LIBOR or the
prime rate, at the Company's option. The Credit Facility contains
customary covenants. As of September 8, 1998, the Company was in
compliance with, or had obtained waivers of all violations of, all
covenants under the Credit Facility.
The Credit Facility, as amended, expires on October 6, 1998. The Company
has accepted a $141 million committed credit facility ("Committed
Facility") to refinance the current Credit Facility at maturity. The
Committed Facility consists of (i) a $95 million five-year revolving
credit facility, (ii) a $15 million 364 day line of credit, and (iii) a
$31 million letter of credit to support the Summerville Loan.
Summerville Loan. Effective September 1, 1997, the Development Authority
of the city of Summerville, Georgia (the "Authority"), issued Exempt
Facility Revenue Bonds in an aggregate principal amount of $30 million
(the "Facility Revenue Bonds"). On September 17, 1997, the Authority
loaned (the "Summerville Loan") the proceeds from the sale of the Facility
Revenue Bonds to Image to finance, in whole or in part, the expansion of
Image's fiber extrusion capabilities at its plant in Summerville, Georgia.
The Facility Revenue Bonds and the interest thereon are special, limited
obligations of the Authority, payable solely from the revenues and income
derived from a loan agreement between Image and the Authority, which
payment thereof and funds which may be drawn under the special-purpose
letter of credit described above. The Facility Revenue Bonds and the
Summerville Loan will mature on September 1, 2017, and the interest rate
of the Facility Revenue Bonds is to be determined from time to time based
on the minimum rate of interest that would be necessary to sell the
Facility Revenue Bonds in a secondary market at the principal amount
thereof. The interest rate on the Summerville Loan equals the interest
rate on the Facility Revenue Bonds.
Senior Notes. On October 16, 1997, the Company completed the sale of $100
million of 9-1/4% senior subordinated notes ("Senior Notes") due 2007.
Each of the Company's operating subsidiaries has fully and
unconditionally guaranteed the Senior Notes on a joint and several basis.
The guarantor subsidiaries comprise all of the direct and indirect
-11-
<PAGE> 12
subsidiaries of the Company. The Company has not presented separate
financial statements and other disclosures concerning the guarantor
subsidiaries because management has determined that such information is
not material to investors. There are no significant restrictions on the
ability of the guarantor subsidiaries to make distributions to the
Company.
Cash Flows. During the six months ended July 31, 1998, operating
activities used $10.0 million of cash compared to $431,000 cash provided
in the six months ended July 31, 1997. The decrease in cash provided by
operating activities resulted primarily from an increase in inventories
and accounts receivable. The increase in inventories and accounts
receivable was partially due to higher sales of floor covering products to
franchisees and other carpet retailers.
During the six months ended July 31, 1998, investing activities used cash
in the amount of $31.2 million compared to $12.8 million for the six
months ended July 31, 1997. The increase is primarily due to an increase
in capital expenditures relating to manufacturing operations and the
expansion of the retail business.
During the six months ended July 31, 1998, financing activities provided
cash of $37.3 million compared to $10.9 million in the six months ended
July 31, 1997. This increase is primarily due to proceeds received from
borrowings under the Company's revolving credit agreement.
Capital Expenditures. The Company anticipates that it will require
approximately $15 million for the remainder of fiscal 1999 to (i) open
approximately 10 new Gallery stores (assuming approximately 50% of such
stores will be located on Company-owned property and the remainder on
leased property), (ii) reconfigure three existing CarpetMAX stores, and
(iii) upgrade its management information systems. The actual costs that
the Company will incur in opening new Gallery stores cannot be predicted
with precision because the opening costs will vary based upon geographic
location, the size of the store, the amount of supplier contributions and
the extent of the buildout required at the selected site. The Company
anticipates that it will require approximately $10 million during the
remainder of fiscal 1999 for capital expenditures at Image, including the
expansion of Image's polyester fiber production capacity.
The Company believes that the net proceeds from the Notes Offering,
borrowings under the Credit Facility, the Summerville Loan, and cash flows
from operating activities will be adequate to meet the Company's working
capital needs, planned capital expenditures, and debt service obligations
through fiscal 1999. As the Company's debt matures, the Company may need
to refinance such debt. There can be no assurance that such debt can be
refinanced or, if so, whether it can be refinanced on terms acceptable to
the Company. If the Company is unable to service its indebtedness, it will
be required to adopt alternative strategies, which may include actions
such as reducing or delaying capital expenditures, selling assets,
restructuring, or refinancing its indebtedness or seeking additional
equity capital. There can be no assurance that any of these strategies
could be effected on satisfactory terms, if at all.
Recent Accounting Pronouncements. Effective with the three months ended
April 30, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("FAS 130"), Reporting Comprehensive Income." FAS 130
establishes standards for reporting and display of comprehensive income
and its components in financial statements. FAS 130 did not have an
impact on the Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures About Segments of an Enterprise and
Related Information", which is effective for fiscal years beginning after
December 15, 1997. FAS 131 establishes reporting standards for public
companies concerning operating segments and related disclosures about
products and services, geographic areas and major customers. FAS 131 will
be adopted with the Company's Annual Report for the fiscal year ending
January 31, 1999.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use". SOP
98-1 requires capitalization of certain costs of internal-use software.
Maxim adopted this statement in the first quarter of fiscal 2000, and has
determined that it will have no material impact on the financial
statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", which is effective for fiscal years beginning after June 15,
2000. Early adoption is encouraged. FAS 133 establishes accounting and
reporting standards for derivative instruments and transactions involving
hedge accounting. The Company does not anticipate this statement will
have an impact on its financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
of Start-Up Activities", which is effective for fiscal years beginning
after December 15, 1998. SOP 98-5 requires entities to expense certain
start-up costs and organization costs as they are incurred. The Company
does not anticipate that this statement will have an impact on its
financial statements.
Subsequent Events. Subsequent to July 31, 1998, the Company has amended
its senior credit facility, consummated significant acquisitions and
dispositions, defaulted a certain restricted payment covenant contained in
the indenture which references the Company's $100 million Senior
Subordinated Notes due October 2007 and other debt instruments including
its senior credit facility and certain leases, and has been named as a
party to legal and regulatory proceedings. Accordingly, this Quarterly
Report on Form 10-Q/A should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 1999 as
filed with the Securities and Exchange Commission.
-12-
<PAGE> 13
Year 2000. Maxim has conducted an assessment of its computer systems to
identify the systems that could be affected by the "Year 2000" issue,
which results from computer programs being written using two digits rather
than four to define the applicable year.
Maxim's Year 2000 readiness efforts are being undertaken on a project team
basis with centralized oversight from an external project management firm.
Each project team has developed and is implementing a plan to minimize the
risk of a significant negative impact on its operations. The teams are
performing an inventory of Year 2000 components (software, hardware and
other equipment), assessing which components may expose Maxim to business
interruptions, reprogramming or replacing components as necessary, testing
each component, and returning each component to production. Maxim is
utilizing predominantly internal resources to reprogram, replace, or test
Maxim's software for Year 2000 compliance. Maxim believes the readiness
effort related to critical systems will be completed by the end of the
third fiscal quarter ending November 6, 1999, which is prior to any
anticipated impact on its operating systems. Maxim believes its other
systems will be Year 2000 compliant by December 31, 1999.
Maxim has initiated formal communications with all of its significant
suppliers to determine the extent to which Maxim's operations and systems
are vulnerable to third parties' failure. Key Vendor Initiative
documentation has been received from vendors addressing all Year 2000
compliance issues. No significant business disruptions are expected. Maxim
presently believes that with the planned conversion to new software and
hardware and the planned modifications to existing software and hardware,
the effects of the Year 2000 issue will be timely resolved. All other
equipment, machinery and systems have been identified, replaced or
upgraded as needed.
Maxim's contingency plans at the retail store level include the temporary
use of manual processes, which Maxim occasionally utilizes during system
maintenance. The manual processes have been documented and tested with no
significant revenue loss anticipated.
Maxim currently believes the costs to remediate Year 2000 issues are
approximately $2.8 million, of which $189,000 had been expensed as of
January 31, 1999, and approximately $1.6 million remains to be spent as of
October 1, 1999. All costs associated with analyzing the Year 2000 issue
or making conversions to existing software are being expensed as incurred.
The costs to Maxim of Year 2000 compliance and the date on which Maxim
believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of
certain resources, third party modification plans and other factors. A
Business Contingency Plan has been developed utilizing five professional
project managers to implement the plan. A Business Systems Implementation
schedule lists all issues related to the Year 2000. The issues including
identification of changes needed, costs, completion dates and staffing.
The plan is in the final stages of completion and will result in minimal
Year 2000 effect on the company's operations.
Risks include the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant hardware, software,
computer codes and similar uncertainties. Such risks could result in a
system failure of miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities. Also, there is the risk that the systems of other companies
upon which Maxim's operations and systems rely will not be converted
timely and will have an adverse effect on Maxim's results of operations.
Forward-Looking Statements. This Report contains statements that
constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Those statements appear in a number of places in this Report
and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect
to, among other things: (i) the timing, magnitude and costs of the
roll-out of the Gallery Stores; (ii) potential acquisitions by the
Company; (iii) the Company's financing plans; (iv) trends affecting the
Company's financial condition or results of operations; (v) the Company's
business and growth strategies; and (vi) the declaration and payment of
dividends. Any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and actual results
may differ materially from those projected in the forward-looking
statements as a result of various factors. The accompanying information
contained in this Report, including without limitation the information set
forth under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operations," identifies important
factors that could cause such differences.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
-13-
<PAGE> 14
PART II--OTHER INFORMATION
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<S> <C>
11 Statements Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule for six month period ended July 31, 1998
(for SEC use only)
27.2 Restated Financial Data Schedule for six month period ended July
31, 1997 (for SEC use only)*
</TABLE>
---------------
* Previously Filed
-14-
<PAGE> 15
(B) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended July
31, 1998: Current Report on Form 8-K dated June 23, 1998 (reporting
agreement to acquire substantially all of the residential retail store
assets of Shaw Industries, Inc.)
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MAXIM GROUP, INC.
Dated: October 18, 1999 By: /s/ A. J. Nassar
----------------------------------------
A. J. Nassar, President and
Chief Executive Officer
Dated: October 18, 1999 By: /s/ Stephen P. Coburn
----------------------------------------
Stephen P. Coburn,
Principal Accounting Officer
-16-
<PAGE> 1
EXHIBIT 11
THE MAXIM GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS
PER COMMON AND COMMON EQUIVALENT SHARE
(In Thousands, Except Per Share Information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
July 31, July 31,
1998 1998
(As Restated July 31, (As Restated July 31,
See note 2) 1997 See note 2) 1997
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Basic:
Net (loss) earnings $(21,600) $ 4,585 $(20,282) $ 7,836
-------- -------- -------- --------
Weighted average number of common shares outstanding 16,305 16,294 16,364 16,202
-------- -------- -------- --------
Basic (loss) earnings per common share $ (1.32) $ 0.28 $ (1.24) $ 0.48
-------- -------- -------- --------
Diluted:
Net (loss) earnings $(21,600) $ 4,585 $(20,282) $ 7,836
-------- -------- -------- --------
Shares:
Weighted average number of common shares outstanding 16,305 16,294 16,364 16,202
Shares issuable from assumed exercise of outstanding stock
options N/A (a) 321 N/A (a) 421
-------- -------- -------- --------
Weighted average number of common and common
equivalent shares(b) 16,305 16,615 16,364 16,623
-------- -------- -------- --------
Diluted (loss) earnings per common share $ (1.32) $ 0.28 $ (1.24) $ 0.47
-------- -------- -------- --------
</TABLE>
(a) Common equivalent shares are antidilutive for
the three and six months ended July 31, 1998.
(b) Common equivalent shares represent stock
options granted to key employees and directors.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF THE MAXIM GROUP, INC. AND SUBSIDIARIES AS OF JULY
31, 1998 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR
THE PERIOD ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-01-1998
<CASH> 25,030
<SECURITIES> 0
<RECEIVABLES> 78,199
<ALLOWANCES> 3,439
<INVENTORY> 64,808
<CURRENT-ASSETS> 168,108
<PP&E> 212,610
<DEPRECIATION> 54,971
<TOTAL-ASSETS> 355,099
<CURRENT-LIABILITIES> 72,605
<BONDS> 169,025
0
0
<COMMON> 18
<OTHER-SE> 111,565
<TOTAL-LIABILITY-AND-EQUITY> 355,099
<SALES> 192,213
<TOTAL-REVENUES> 192,213
<CGS> 142,385
<TOTAL-COSTS> 45,795
<OTHER-EXPENSES> (904)
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 5,385
<INCOME-PRETAX> (28,561)
<INCOME-TAX> (8,279)
<INCOME-CONTINUING> (20,282)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,282)
<EPS-BASIC> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>