MAXIM GROUP INC /, 10-Q, 1999-11-12

MAXIM GROUP INC /
10-Q, 1999-11-12
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<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 10-Q

---------------

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 7, 1999

------------------------

Commission File No. 1-13099

THE MAXIM GROUP, INC.

A Delaware Corporation
(IRS Employer Identification No. 58-2060334)
210 TownPark Drive
Kennesaw, Georgia 30144
(678) 355-4000

Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:

<TABLE>
<S> <C>
Common Stock, $.001 par value New York Stock Exchange, Inc.
9 1/4% Senior Subordinated Notes Due 2007 New York Stock Exchange, Inc.
- -------------------------------------------- --------------------------------------------
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE
ON WHICH REGISTERED)
</TABLE>

Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:

Common Stock, $.001 par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ____

Indicate the number of shares outstanding of the registrant's classes of
common Stock, as of the latest practicable date:

<TABLE>
<S> <C>
Common Stock, $.001 par value 19,072,532
- -------------------------------------------- --------------------------------------------
Class Outstanding at November 1, 1999
</TABLE>

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<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

THE MAXIM GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
AUGUST 7, JANUARY 31,
1999 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 54,573 $ 89,901
Current portion of franchise license fees receivable........ 1,708 2,013
Current portion of notes receivables........................ 2,318 3,405
Receivables................................................. 61,453 52,607
Inventories................................................. 62,232 58,744
Refundable income taxes..................................... 4,726 --
Deferred income taxes....................................... 7,361 7,361
Prepaid expenses............................................ 9,176 6,316
-------- --------
Total current assets.................................... 203,547 220,347
Property, plant and equipment, net.......................... 81,137 71,766
Franchise license fees receivable, less current portion..... 4,734 2,337
Notes receivable from franchisees, less current portion..... 6,966 8,228
Deferred income taxes....................................... 1,065 1,065
Intangible assets........................................... 85,527 71,341
Other assets................................................ 15,462 13,684
-------- --------
Total assets................................................ $398,438 $388,768
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt........................... $ 27,047 $ 16,952
Senior subordinated notes................................... 95,445 99,387
Current portion of capital lease obligations................ 6,588 6,635
Accounts payable............................................ 30,496 26,706
Rebates payable to franchisees.............................. 7,873 749
Deposits.................................................... 17,752 14,769
Deferred revenue............................................ 4,665 2,254
Income taxes payable........................................ -- 2,633
Other accrued liabilities................................... 42,821 55,827
-------- --------
Total current liabilities............................... 232,687 225,912
-------- --------
Long-term debt, less current portion........................ 6,403 4
-------- --------
Capital lease obligations, less current portion............. 1,247 1,469
-------- --------
Other long-term liabilities................................. -- 516
-------- --------
Stockholders' equity:
Common stock-shares issued: 21,326,184 and 21,315,664 as
of August 7, 1999 and January 31, 1999.................. 21 21
Additional paid-in capital................................ 186,553 185,828
Retained earnings......................................... 6,345 9,836
Treasury stock--shares at cost: 2,365,900 as of August 7,
1999 and January 31, 1999, respectively................. (34,818) (34,818)
-------- --------
Total stockholders' equity.............................. 158,101 160,867
-------- --------
Total liabilities and stockholders' equity.................. $398,438 $388,768
======== ========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

2
<PAGE>
THE MAXIM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
AUGUST 7, JULY 31, AUGUST 7, JULY 31,
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales of floor covering products.................. $191,201 $ 86,157 $371,769 $166,818
Fees from franchise services...................... 10,438 2,392 21,738 9,249
Fiber and PET sales............................... -- 5,209 -- 12,174
Other............................................. 867 1,823 1,579 3,972
-------- -------- -------- --------
Total revenues.................................. 202,506 95,581 395,086 192,213

Cost of sales....................................... 126,251 72,821 245,157 142,385
-------- -------- -------- --------
Gross profit...................................... 76,255 22,760 149,929 49,828
Selling, general and administrative expenses........ 77,970 23,405 150,655 45,795
Nonrecurring charges................................ -- 28,531 -- 28,531
-------- -------- -------- --------
Operating loss...................................... (1,715) (29,176) (726) (24,498)

Other income (expense):
Interest income................................... 802 32 1,969 418
Interest expense.................................. (3,162) (2,926) (5,961) (5,385)
Other, net........................................ 270 956 349 904
-------- -------- -------- --------
Loss before income taxes and extraordinary
charge.......................................... (3,805) (31,114) (4,369) (28,561)
Benefit for income taxes............................ 1,114 9,514 1,152 8,279
-------- -------- -------- --------
Loss before extraordinary charge.................. (2,691) (21,600) (3,217) (20,282)
Extraordinary charge on early retirement of debt,
net of tax benefit................................ -- -- (274) --
-------- -------- -------- --------
Net loss............................................ $ (2,691) $(21,600) $ (3,491) $(20,282)
======== ======== ======== ========

Basic loss per share before extraordinary charge.... $ (0.14) $ (1.32) $ (0.17) $ (1.24)
Extraordinary charge per share...................... -- -- (0.01) --
-------- -------- -------- --------
Basic loss per share................................ $ (0.14) $ (1.32) $ (0.18) $ (1.24)
======== ======== ======== ========

Diluted loss per share before extraordinary
charge............................................ $ (0.14) $ (1.32) $ (0.17) $ (1.24)
Extraordinary charge per share...................... -- -- (0.01) --
-------- -------- -------- --------
Diluted loss per share.............................. $ (0.14) $ (1.32) $ (0.18) $ (1.24)
======== ======== ======== ========

Weighted average common shares...................... 19,156 16,305 19,156 16,364
======== ======== ======== ========
Weighted average common shares and equivalents...... 19,156 16,305 19,156 16,364
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

3
<PAGE>
THE MAXIM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
AUGUST 7, JULY 31,
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (3,491) $(20,282)
Adjustments to reconcile net loss to net cash used in
operating activities:
Nonrecurring charges...................................... -- 7,540
Depreciation and amortization............................. 6,022 7,447
Deferred income taxes..................................... (45) (9,103)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Receivables............................................. (4,162) (6,170)
Inventories............................................. (827) (10,515)
Refundable income taxes................................. (4,726) 572
Prepaid expenses and other assets....................... (5,107) (2,808)
Accounts payable and other liabilities.................. (1,377) 23,357
-------- --------
Net cash (used in) operating activities..................... (13,713) (9,962)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (11,377) (28,878)
Acquisitions, net of cash acquired........................ (14,511) (2,289)
-------- --------
Net cash used in investing activities....................... (25,888) (31,167)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options................... 325 2,174
Purchase of treasury stock................................ -- (4,084)
Long-term debt proceeds................................... 8,500 39,442
Principal payments on capital lease obligations........... (269) (253)
Early extinguishment of debt.............................. (4,283) --
-------- --------
Net cash provided by financing activities................... 4,273 37,279
-------- --------
Net decrease in cash and cash equivalents................... (35,328) (3,850)
Cash and cash equivalents at beginning of period............ 89,901 28,880
-------- --------
Cash and cash equivalents at end of period.................. $ 54,573 $ 25,030
======== ========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

4
<PAGE>
THE MAXIM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

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 adjustments)
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 Annual Report on
Form 10-K for the fiscal year ended January 31, 1999, as filed with the
Securities and Exchange Commission.

Comprehensive loss, as defined by Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", was the same as
net loss for the three and six months ended August 7, 1999 and July 31, 1998.

The results of operations for the periods presented are not necessarily
indicative of the operating results for the year.

DESCRIPTION OF BUSINESS

The Maxim Group, Inc. and subsidiaries (the "Company" or "Maxim") are
engaged in retail and commercial sales of floor covering products throughout
North America through a network of Company-owned retail stores and a network of
franchisees. The Company is also engaged in the sale of franchises for the
retail floor covering industry and other related products and services to its
franchises. Substantially all of the assets of Image Industries, Inc. ("Image"),
a wholly owned manufacturing subsidiary of Maxim, were sold on January 29, 1999.
Image was engaged in the manufacturing of residential carpet and plastics
recycling.

RISK FACTORS

The Company relies on several large floor covering manufacturers for the
supply of its floor covering products. While the Company believes there are a
number of alternative manufacturers capable of supplying and distributing its
products, delays in obtaining alternative sources, if necessary, could have a
significant adverse effect on the Company's results of operations.

The Company also has certain other risk factors, which include, but are not
limited to, risks associated with integration of acquisitions and new computer
systems, litigation, competition, possible economic downturns and changes in
laws and regulations.

GOING CONCERN

The accompanying condensed consolidated financial statements of the Company
have been presented on a going concern basis which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.

As of August 7, 1999 and January 31, 1999, the Company was not in compliance
with a certain restricted payment covenant contained in the Indenture which
references the Company's $100 million 9 1/4% senior subordinated notes (the
"Senior Notes").

5
<PAGE>
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(CONTINUED)

less than 25% of the Senior Notes may declare all unpaid principal plus any
accrued interest of all of the Senior Notes due and payable. Accordingly, the
Senior Notes are classified as a current liability in the accompanying
consolidated balance sheets as of August 7, 1999 and January 31, 1999.

As of November 1, 1999, the Company's available borrowings under its Senior
Credit Facility plus cash on hand were not sufficient to repay the Senior Notes
if such Senior Notes were declared due and payable.

The Company is currently negotiating with the holders of the Senior Notes to
obtain the requisite consent to waive the default. Any such consent may include,
among other things, the redemption of a portion of the Senior Notes, the payment
of a consent fee by Maxim and a higher interest rate on the Senior Notes which
remain outstanding. There can be no assurance that any such waiver will be
granted. If a waiver is not obtained by Maxim, repayment of the Senior Notes may
be accelerated, as discussed above.

Additionally, the Company is currently in negotiations with its senior
lenders to amend its Senior Credit Facility to allow for enhanced availability,
an extended maturity date, and improved advance ratios on existing collateral.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS.

During June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement established accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows derivative
gains and losses to offset related results on the hedged item in the statements
of operations and requires that a company formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000, although
earlier adoption is permitted. SFAS No. 133 cannot be applied retroactively. The
Company does not believe this Statement will have a material impact on the
financial statements.

NOTE 3. ACQUISITIONS.

During the six months ended August 7, 1999, the Company acquired 15 retail
locations for aggregate consideration of approximately $20,700,000. The related
purchase agreements, also provide for additional consideration to be paid based
on certain locations future financial performance.

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"). The acquisition
has been recorded using the purchase method of accounting. On January 29, 1999,
the Company sold substantially all of the assets of its Image subsidiary. The
operating results of the retail stores acquired from Shaw are included in the
Company's consolidated statements of operations from the date of acquisition.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company as if the acquisition of the retail store assets of
Shaw and the disposition of all the assets of Image had occurred on February 1,
1998. The pro forma

6
<PAGE>
NOTE 3. ACQUISITIONS. (CONTINUED)

expenses include the recurring costs that are directly attributable to the
acquisition, such as interest expense and amortization of goodwill, and their
related tax effects.

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- -------------------------------
(IN THOUSANDS) AUGUST 7, 1999 JULY 31, 1998 AUGUST 7, 1999 JULY 31, 1998
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue..................... $202,506 $182,794 $395,086 $368,642
Net loss........................ (2,691) (24,714) (3,491) (26,760)

Basic loss per share............ $ (0.14) $ (1.27) $ (0.18) $ (1.37)
Diluted loss per share.......... (0.14) (1.27) (0.18) (1.37)
</TABLE>

NOTE 4. INVENTORIES.

Inventories consist of the following:

<TABLE>
<CAPTION>
AUGUST 7, JANUARY 31,
(IN THOUSANDS) 1999 1999
--------- -----------
<S> <C> <C>
Raw materials.......................................... $ 309 $ 309
Finished goods......................................... 61,923 58,435
------- -------
Total.................................................. $62,232 $58,744
======= =======
</TABLE>

On a segment basis, the Company's inventories consist of the following:

<TABLE>
<CAPTION>
AUGUST 7, JANUARY 31,
(IN THOUSANDS) 1999 1999
--------- -----------
<S> <C> <C>
Retail................................................. $60,415 $56,927
Image.................................................. 1,817 1,817
------- -------
Total.................................................. $62,232 $58,744
======= =======
</TABLE>

NOTE 5. NONRECURRING CHARGES.

During the three month period ended July 31, 1998, the Company reevaluated
its business strategy and determined to expand its focus on its retail
operations. As a result of the revised retail strategy, the Company amended the
franchise agreement for one of its franchised line of retail stores, closed
certain Company-owned stores, and wrote down to fair value certain retail
assets, including goodwill. The Company estimated that the changes to the
franchise agreement would result in franchisee claims brought against the
Company. The Company recorded a $28,531,000 charge for these nonrecurring items
during the three-month period ended July 31, 1998. The initial charge was
subsequently reduced by $4,818,000, as revised estimates for franchisee claim
reserves and store closure costs were less than initially expected. The revised
estimates were offset in part by a ten store net increase in the number of
stores to be closed. As of August 7, 1999, $20,835,000 of the nonrecurring
charges were incurred, with $2,878,000 remaining in the reserve, which is
included in accrued liabilities on the accompanying balance sheet.

7
<PAGE>
NOTE 5. NONRECURRING CHARGES. (CONTINUED)

The major components of the nonrecurring charge balance, the remainder of
which is included in other accrued liabilities on the balance sheet at
August 7, 1999 and January 31, 1999, are as follows:

<TABLE>
<CAPTION>
JANUARY 31, AUGUST 7,
(IN THOUSANDS) 1999 AMOUNT 1999
BALANCE INCURRED BALANCE
----------- --------- ---------
<S> <C> <C> <C>
Claim reserves.............................................. $3,195 $ (490) $2,705
Store closure & carrying costs.............................. 2,822 (2,649) 173
------ ------- ------
$6,017 $(3,139) $2,878
====== ======= ======
</TABLE>

NOTE 6. DEBT

In March 1999, the Company purchased the principal amount of $4,000,000 of
its Senior Notes in the open market. The amount paid approximated the face
amount of the Senior Notes.

CREDIT FACILITY

On May 18, 1999, the Company entered into an amended and restated credit
facility, which provides for aggregate commitments of $75.0 million (the "Senior
Credit Facility"). The Senior Credit Facility consists of a revolving facility
that matures May 18, 2002. Borrowings under the Senior Credit Facility are
secured by accounts receivable, inventories, certain real and personal property,
and certain intangible assets of Maxim and its subsidiaries, as well as the
capital stock of all of its subsidiaries. As additional collateral security for
the Senior Credit Facility, the Company has established a cash collateral
account with the lenders. As of November 10, 1999 the cash collateral account
balance was $42,600,000 million. As of November 10, 1999, the Company had
$5,800,000 available under the revolver. Amounts outstanding under the Senior
Credit Facility bear interest at various variable rates. The Senior Credit
Facility contains a number of covenants customary for credit transactions of
this type and requires the Company to meet certain financial ratios. Because of
the Company's violation of various covenants (principally related to failures to
provide required financial information and other documentation), certain events
of default exist under the Senior Credit Facility. The Company and its Senior
Credit Facility lenders have entered into a forebearance agreement with respect
to such events of default, which forebearance currently extends to November 15,
1999. The Company is currently in discussions with its Senior Credit Facility
lenders to amend or replace the Senior Credit Facility. The negotiations involve
enhanced credit availability, a new maturity date and improved advance ratios on
existing collateral.

Amounts outstanding under the Senior Credit Facility bear interest at a
variable rate equal to, at the Company's option, (i) the base rate (defined as
the greater of the prime rate or the federal funds rate plus one-half of one
percent) or (ii) the adjusted LIBOR rate, in each case plus the applicable
margin. The applicable margin ranges from 1.25% to 2.50% for loans that bear
interest at the adjusted LIBOR rate. The Company is required to pay the lenders
under the Senior Credit Facility, on a quarterly basis, a commitment fee ranging
from 0.25% to 0.50% of the unused portion of the Senior Credit Facility. The
Company is required to pay administration fees quarterly. The Senior Credit
Facility contains a number of covenants, including, among others, covenants
restricting the Company and certain of its subsidiaries with respect to the
incurrence of indebtedness (including contingent obligations); the creation of
liens; the sale, lease, assignment, transfer, or other disposition of assets;
the making of certain investments, loans, advances, and acquisitions; the
consummation of certain transactions, such as mergers or consolidations.
Further, the Senior Credit Facility contains cross default provisions related to
the Company's other indebtedness. The Senior Credit Facility requires the
Company to meet certain financial ratios and covenants, including debt to
equity, debt to capital, minimum tangible net worth, minimum EBITDAR and fixed
charges.

8
<PAGE>
NOTE 7. SEGMENT INFORMATION.

SFAS No. 131--"Disclosures about Segments of an Enterprise and Related
Information"--became effective for fiscal year 1999 and for all succeeding
interim reporting periods. In accordance with the requirements of SFAS No. 131,
the Company has identified three reportable segments through which it conducts
its operating activities: retail, manufacturing and franchise services. These
three segments reflect an aggregation of the operating segments used by Company
management for making decisions and assessing performance. Management determines
operating segments based primarily upon the operations' line of business and
geographic location. Operating segments were aggregated into reportable segments
based upon characteristics such as products and services, operating methods,
customers, and distribution methods. The retail segment is comprised of retail
floor covering stores and distribution support centers. The manufacturing
segment is comprised of the operations of Image. With the sale of substantially
all the assets of Image on January 29, 1999, Maxim no longer engages in
manufacturing operations. The franchise services segment includes store
development, marketing, advertising, production, consumer credit, training and
product sourcing activities as well as interest expense and corporate
non-operating items not directly relating to the manufacturing or retail
segments.

Intersegment sales and transfers occured as carpet was transferred from
Image to the Company's retail segment. The retail segment purchases advertising,
training or product sourcing services from the franchise services segment.
Intersegment transactions are accounted for on the same basis as transactions
with third parties.

Identifiable assets consist of cash, property, plant and equipment used in
the operations of the segment, as well as inventory, receivables and other
assets directly related to the segment. The Company has no assets located
outside the United States.

<TABLE>
<CAPTION>
FRANCHISE INTERSEGMENT
MANUFACTURING RETAIL SERVICES ELIMINATIONS TOTAL
(IN THOUSANDS) ------------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Three Months Ended August 7, 1999:
Revenues............................ $ -- $188,965 $ 20,274 $ (6,733) $202,506
Operating (loss) income............. 165 (2,899) 1,019 -- (1,715)
Interest expense.................... -- 559 3,092 (489) 3,162
Income tax (provision) benefit...... -- (68) 1,182 -- 1,114
Net (loss) income................... 179 (3,300) 430 -- (2,691)
Total assets........................ 2,038 230,894 165,506 -- 398,438
------- -------- -------- -------- --------
Three Months Ended July 31, 1998:
Revenues............................ $49,140 $ 43,464 $ 10,443 $ (7,466) $ 95,581
Nonrecurring charges................ -- -- 28,531 -- 28,531
Operating income (loss)............. 3,951 1,804 (32,763) (2,168) (29,176)
Interest expense.................... 1,408 919 2,767 (2,168) 2,926
Income tax (provision) benefit...... (923) (137) 10,574 -- 9,514
Net (loss) income................... 1,504 7 (23,111) -- (21,600)
------- -------- -------- -------- --------
Six Months Ended August 7, 1999:
Revenues............................ $ -- $365,734 $ 41,901 $(12,549) $395,086
Operating income (loss)............. 165 (6,560) 5,669 -- (726)
Interest expense.................... -- 1,460 5,990 (1,489) 5,961
Income tax benefit.................. -- 54 1,098 -- 1,152
Extraordinary charge................ -- -- 274 -- 274
Net (loss) income................... 179 (7,643) 3,973 -- (3,491)
------- -------- -------- -------- --------
</TABLE>

9
<PAGE>
NOTE 7. SEGMENT INFORMATION. (CONTINUED)

ITEM 8. SUBSEQUENT EVENT

In an effort to resolve the pending default of the Senior Notes, Maxim has
reached an agreement in principle with an ad hoc committee consisting of
Noteholders who own a majority of the principal amount of the outstanding Senior
Notes. Pursuant to the agreement in principle, Maxim has commenced an offer to
purchase not less than $40.0 million of Senior Notes at a purchase price of
102%, plus accrued and unpaid interest and other fees and charges. Maxim is
required to pay a cash consent fee of $50 per $1,000 principal amount of Senior
Notes to those Noteholders who consent to the default waiver and whose Senior
Notes are not purchased by Maxim.

The following additional terms would apply to Senior Notes which are not
purchased by Maxim:

- The interest rate will increase from 9 1/4% per annum to 12 3/4% per annum
and will increase by 25 basis points on October 15, 2000 and further
increase every six months thereafter (increasing instead by 50 basis
points if the bond rating assigned to the Senior Notes by Standard &
Poor's is less than "B-");

- The Senior Notes will be secured by a second lien on certain assets;

- Maxim will, on an annual basis beginning on February 7, 2001, be required
to consummate an offer to purchase not less than $10.0 million of
outstanding Senior Notes at a purchase price of 102%, plus accrued and
unpaid interest and other fees and charges (increasing to 103% if the bond
rating assigned to the Senior Notes by Standard & Poor's is less than
"B");

- Maxim will be required to consummate an offer to purchase any Senior Notes
which remain outstanding on October 15, 2002 at a price of 106.375%, plus
accrued and unpaid interest and other fees and charges, and

- Maxim will be required to maintain a fixed charge coverage ratio to be
determined.

Consummation of the transactions contemplated by the agreement in principle
is subject to, among other things, negotiation of an amended or replacement
senior credit facility acceptable to Maxim and the Noteholders, receipt of
consents from Noteholders representing at least a majority in aggregate
principal amount of outstanding Senior Notes, and certain other customary
conditions. Maxim expects to complete the transactions contemplated by the
agreement in principle during the fourth quarter of fiscal 2000. There can be no
assurance that such a waiver will ultimately be granted. If a waiver is not
obtained by Maxim, repayment of the Senior Notes may be accelerated.

10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF MAXIM, INCLUDING THE NOTES THERETO
CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q.

GENERAL

During the year ended January 31, 1999, Maxim acquired the retail store
assets of Shaw Industries, Inc. for consideration of 3,150,000 shares of Maxim's
common stock valued at $55.2 million, an $18.0 million promissory note, adjusted
to $11.5 million after the effect of purchase price adjustments, and
$25.0 million in cash. These assets were purchased effective August 9, 1998, and
included 266 retail floor covering centers. The acquisition of these assets
resulted in a substantial increase in the number of Company-owned stores. As
reflected in the following discussion, the acquisition of these assets
materially impacted Maxim's financial condition and results of operations.

The acquired retail stores are currently being integrated into Maxim. Maxim
is evaluating the strengths of the acquired brands and is currently making
merchandise shifts to maximize the stores' potential. Changes will include
rebranding of these stores to the newly established Flooring America brand,
adjusting merchandising fixtures and displays, closing certain stores and
reviewing current operational practices at each store.

The Shaw retail stores incurred significant losses in periods prior to their
acquisition by Maxim. These stores historically operated at a lower profit level
than those typical in the retail flooring industry. To the extent such
conditions continue before and after Maxim's integration of these stores, such
conditions may affect not only the operation of the acquired stores, but also
the consolidated results of operations of Maxim. Moreover, the acquired stores'
geographic areas and product lines overlapped with the Company's existing stores
in certain areas causing the need to close or remodel certain stores.

In order to focus its full efforts and resources on the growth and
efficiency of the retail operations, Maxim sold the carpet manufacturing
operations of its Image subsidiary in January 1999 for total consideration of
$210.7 million which included the assumption of $48.1 million in debt and
short-term liabilities. With this sale of Maxim's manufacturing assets,
management believes that Maxim is positioned as one of the leading retailers of
flooring products on an exclusive basis. As of November 1, 1999, Maxim's retail
network consisted of 323 Company-owned stores and 1,035 franchise centers/
locations.

During the three and six months ended August 7, 1999, Maxim operated two
reportable segments: retail and franchise services. During the three and six
months ended July 31, 1998, Maxim operated a third reportable segment,
manufacturing. The retail segment is a chain of stores and support centers. The
franchise services segment includes franchise fees and related activities,
general corporate charges, interest expense and corporate non-operating items
not directly relating to the manufacturing or retail segments. See Note 7 to
Maxim's Consolidated Financial Statements for certain financial information
relating to these three segments.

On February 1, 1999, Maxim changed its fiscal year end from January 31 to
the first Saturday following January 31. Accordingly, the second quarter of the
fiscal year ending February 5, 2000 consists of the 13-week period ended
August 7, 1999. Financial results for the three and six month ended July 31,
1998 have not been restated to reflect the effects of the change in fiscal year.

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RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 7, 1999 COMPARED TO THREE MONTHS ENDED JULY 31, 1998

TOTAL REVENUES. Total revenues increased 111.9% to $202.5 million for the
three months ended August 7, 1999 from $95.6 million for the three months ended
July 31, 1998. The components of total revenues, exclusive of the effect of
intercompany eliminations, are discussed below. Intersegment eliminations, which
totaled $6.7 million for the three months ended August 7, 1999 and $7.5 for the
three months ended July 31, 1998, include certain intercompany allocations.

RETAIL REVENUE. Retail revenue consists of sales of floor covering
products by Maxim's retail stores. Retail revenues increased 334.8% to
$189.0 million for the three months ended August 7, 1999 from $43.5 million
for the three months ended July 31, 1998. The growth in retail sales of
floor covering products was primarily due to the impact of the acquisition
of the retail store assets of Shaw and, to a lesser extent, real same store
sales growth.

FRANCHISE SERVICES REVENUE. Franchise services revenue is generated
from three primary sources: (i) one-time franchise fees from new franchisees
(revenue recognized at time of franchise agreement signing), (ii) brokerage
fees and/or royalties on certain floor covering products purchased by the
franchisee; and (iii) franchise service fees for services and products such
as advertising, which are offered to franchisees. Franchise services revenue
increased 94.1% to $20.3 million for the three months ended August 7, 1999
from $10.4 million for the three months ended July 31, 1998. The increase in
franchise services revenue is due to, among other things, increases in
national accounts revenue, rebates from floor covering vendors and growth in
the demand for franchise services, particularly the MAXCare franchise.

MANUFACTURING REVENUE. Manufacturing revenue included the sale of
manufactured carpet and polyethylene tereptalate ("PET"), fiber and flake.
Manufacturing revenue for the three months ended July 31, 1998 was
$49.1 million. With the sale of substantially all the assets of Image in
January 1999, Maxim no longer engages in manufacturing operations.

GROSS PROFIT. Gross profit increased 235.0% to $76.3 million for the three
months ended August 7, 1999 from $22.8 million for the three months ended
July 31, 1998. As a percentage of total revenue, gross profit was 37.7% for the
three months ended August 7, 1999 compared to 23.8% for the three months ended
July 31, 1998 as a result of the sale of the manufacturing segment in January
1999.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 233.1% to $78.0 million for the three months
ended August 7, 1999 from $23.4 million for the three months ended July 31,
1998. The increase in selling and administrative expenses reflects an overall
growth in the size of Maxim's retail base, including the retail store assets
acquired from Shaw. These stores incurred higher levels of advertising costs
than other Maxim stores. These acquired stores also incurred selling, general
and administrative expense relating to the integration of these stores into
Maxim. As a percentage of total revenue, selling, general and administrative
expenses increased to 38.5% for the three months ended August 7, 1999 from 24.5%
for the three months ended July 31, 1998. The increase in selling, general and
administrative expenses, both as a percentage of revenues and operating expenses
reflected Maxim's changing revenue mix. Selling, general and administrative
expenses of Maxim's retail segment, which operates on a higher cost basis than
the manufacturing segment, increased as a percentage of revenue due to the
purchase of Shaw's retail store assets in August 1998. With the sale of Maxim's
manufacturing operations in January 1999, the retail segment comprises a
substantial portion of Maxim's operations in future periods. Also contributing
to the increase in selling, general and administrative expenses were increases
in advertising, bad debts and compensation expenses.

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OPERATING INCOME/LOSS. Operating loss decreased to $1.7 million for the
three months August 7, 1999 from $29.2 million for the three months ended
July 31, 1998. The components of operating income/loss, exclusive of the effect
of intersegment eliminations, are discussed below. Intersegment eliminations
totaled $2.2 million for the three months ended July 31, 1998.

RETAIL OPERATING INCOME/LOSS. Retail operating income/loss decreased to
a loss of $2.9 million for the three months ended August 7, 1999 from income
of $1.8 million for the three months ended July 31, 1998. This decrease was
primarily due to the impact of the acquisition of the retail store assets of
Shaw. These stores have higher selling, general and administrative expense
related to the advertising, as well as, higher costs related to the
remodeling and rebranding of these stores.

FRANCHISE SERVICES OPERATING INCOME/LOSS. Franchise services operating
income/loss increased to income of $1.0 million for the three months ended
August 7, 1999 from a loss of $32.8 million for the three months ended
July 31, 1998. The loss in the prior period was primarily due to a
$28.5 million nonrecurring charge related to the re-evaluation of the
Company's business strategy.

MANUFACTURING OPERATING INCOME/LOSS. Manufacturing operating income was
$4.0 million for the three months ended July 31, 1998. With the sale of
substantially all the assets of Image in January 1999, Maxim no longer
engages in manufacturing operations.

INTEREST EXPENSE. Interest expense increased 8.1% to $3.2 million for the
three months ended August 7, 1999 from $2.9 million for the three months ended
July 31, 1998, due principally to a higher interest rate during the three months
ended August 7, 1999. See "Liquidity and Capital Resources."

INCOME TAX BENEFIT. Maxim recorded an income tax benefit of $1.1 million
for the three months ended August 7, 1999 compared to a $9.5 million benefit for
the three months ended July 31, 1998. The decrease in income tax benefit is due
to Maxim recording less of a loss for the three month period ended August 7,
1999 as compared to the three month period ended July 31, 1998.

SIX MONTHS ENDED AUGUST 7, 1999 COMPARED TO SIX MONTHS ENDED JULY 31, 1998

TOTAL REVENUES. Total revenues increased 105.5% to $395.1 million for the
six months ended August 7, 1999, from $192.2 million for the six months ended
July 31, 1998. The components of total revenues, exclusive of the effect of
intercompany eliminations, are discussed below. Intersegment eliminations, which
totaled $12.5 million for the six months ended August 7, 1999 and $11.3 million
for the six months ended July 31, 1998, include certain intercompany
allocations.

RETAIL REVENUE. Retail revenues increased 339.3% to $365.7 million for
the six months ended August 7, 1999 from $83.3 million for the six months
ended July 31, 1998. The growth in retail sales of floor covering products
was primarily due to the impact of the acquisition of the retail store
assets of Shaw and, to a lesser extent, real same store sales growth.

FRANCHISE SERVICES REVENUE. Franchise services revenue increased 86.0%
to $41.9 million for the six months ended August 7, 1999 from $22.5 million
for the six months ended July 31, 1998. The increase in franchise services
revenue is due to, among other things, increases in national accounts
revenue, rebates from floor covering vendors and growth in the demand for
franchise services, particularly the MAXCare franchise.

MANUFACTURING REVENUE. Manufacturing revenue for the six months ended
July 31, 1998 was $97.7 million. With the sale of substantially all the
assets of Image in January 1999, Maxim no longer engages in manufacturing
operations.

GROSS PROFIT. Gross profit increased 200.9% to $149.9 million for the six
months ended August 7, 1999 from $49.8 million for the six months ended
July 31, 1998. As a percentage of total revenue, gross profit was 37.9% for the
six months ended August 7, 1999 compared to 25.9% for the six months ended
July 31, 1998 as a result of the sale of the manufacturing segment in January
1999.

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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 229.0% to $150.7 million for the six months
ended August 7, 1999 from $45.8 million for the six months ended July 31, 1998.
The increase in selling, general and administrative expenses reflects an overall
growth in the size of Maxim's retail base, including the retail store assets
acquired from Shaw. These stores incurred higher levels of advertising costs
than other Maxim Brands. These acquired stores also incurred selling, general
and administrative expense relating to the integration of these stores into
Maxim. As a percentage of total revenue, selling, general and administrative
expenses increased to 38.1% for the six months ended August 7, 1999 from 23.8%
for the six months ended July 31, 1998. The increase in selling, general and
administrative expenses, both as a percentage of revenues and operating expenses
reflect Maxim's changing revenue mix. Selling, general and administrative
expenses of Maxim's retail segment, which operates on a higher cost basis than
the manufacturing segment, increased as a percentage of revenue due to the
purchase of Shaw's retail store assets in August 1998. With the sale of Maxim's
manufacturing operations in January 1999, the retail segment comprises a
substantial portion of Maxim's operations in future periods. Increases in
advertising, bad debt and compensation expenses also contributed to the increase
in total selling, general and administrative expenses.

OPERATING INCOME/LOSS. Operating income/loss increased to a loss of
$726,000 for the six months ended August 7, 1999 from a loss of $24.5 million
for the six months ended July 31, 1998. The components of operating income/loss,
exclusive of the effect of intersegment eliminations, are discussed below.
Intersegment eliminations totaled $2.2 million for the six months ended
July 31, 1998.

RETAIL OPERATING INCOME/LOSS. Retail operating income/loss decreased to
a loss of $6.6 million for the six months ended August 7, 1999 from income
of $1.1 million for the six months ended July 31, 1998. This decrease was
primarily due to the impact of the acquisition of the retail store assets of
Shaw. These stores have higher selling, general and administrative expense
related to advertising, as well as, higher costs related to the remodeling
of these stores.

FRANCHISE SERVICES OPERATING INCOME/LOSS. Franchise services operating
income/loss increased to income of $5.7 million for the six months ended
August 7, 1999 from a loss of $31.8 million for the six months ended
July 31, 1998. The loss incurred in 1998 was primarily due to $28.5 million
of nonrecurring charges related to the re-evaluation of the Company's
business strategy.

MANUFACTURING OPERATING INCOME/LOSS. Manufacturing operating income was
$8.4 million for the six months ended July 31, 1999. With the sale of
substantially all the assets of Image in January 1999, Maxim no longer
engages in manufacturing operations.

INTEREST EXPENSE. Interest expense increased 10.7% to $6.0 million for the
six months ended August 7, 1999 from $5.4 million for the six months ended
July 31, 1998 due principally to a higher interest rate during fiscal 1999. See
"Liquidity and Capital Resources."

INCOME TAX BENEFIT. Maxim recorded an income tax benefit of $1.2 million
for the six months ended August 7, 1999 compared to a $8.3 million benefit for
the six months ended July 31, 1998. The decrease in income tax benefit is due to
Maxim recording less of a loss for the six months ended August 7, 1999.

EXTRAORDINARY CHARGE. The extraordinary charge recorded in the six months
ended August 7, 1999 resulted from the repurchase of $4.0 million principal
amount Senior Notes and the write-off of unamortized financing fees and
discounts associated with the purchase of the Senior Notes. The total charge
amounted to $295,000, which was tax effected by $21,000 for the six months ended
August 7, 1999.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL. Maxim's primary capital requirements are for new store openings
and working capital. Maxim historically has met its capital requirements through
a combination of cash flow provided by

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operations, net proceeds from the sale of equity and debt securities, bank lines
of credit, disposition of assets, and standard payment terms from suppliers.

STOCK REPURCHASE PROGRAM. In March 1997, the Board of Directors of Maxim
authorized a stock repurchase program pursuant to which Maxim has periodically
repurchased shares of its common stock in the open market. As of November 1,
1999, Maxim had repurchased an aggregate of 2.4 million shares of common stock
in the open market for $34.8 million. These purchases were financed from
borrowings under Maxim's revolving credit facility and cash balances. As
discussed below, the ability of Maxim to repurchase its common shares is limited
by certain restrictions contained in the Indenture relating to Maxim's senior
subordinated notes. See "--Senior Subordinated Notes."

CREDIT FACILITY. On May 18, 1999, Maxim entered into an amended and
restated credit facility, which provides for aggregate commitments of
$75 million (the "Senior Credit Facility"). The Senior Credit Facility consists
of a revolving facility that matures May 18, 2002. Borrowings under the Senior
Credit Facility are secured by accounts receivable, inventories, certain real
and personal property, and certain intangible assets of Maxim and its
subsidiaries, as well as the capital stock of all of its subsidiaries. As
additional collateral security for its obligations under the Senior Credit
Facility, Maxim established a cash collateral account with the lenders. As of
November 10, 1999, the cash collateral account balance was $42.6 million. As of
November 10, 1999, the Company had $5.8 million available under the Senior
Credit Facility. Amounts outstanding under the Senior Credit Facility bear
interest at various variable rates. The Senior Credit Facility contains a number
of covenants customary for credit transactions of this type and requires Maxim
to meet certain financial ratios. Because of Maxim's violation of various
covenants (principally related to failures to provide required financial
information and other documentation), certain events of default exist under the
Senior Credit Facility. Maxim and its Senior Credit Facility lenders have
entered into a forbearance agreement with respect to such events of default,
which forbearance currently extends to November 15, 1999. Maxim is currently in
discussions with its Senior Credit Facility lenders to amend or replace such
facility. The negotiations involve enhanced credit availability, a new maturity
date and improved advance ratios on existing collateral.

SENIOR SUBORDINATED NOTES. On October 16, 1997, Maxim issued $100 million
of 9 1/4% Senior Subordinated Notes due 2007 (the "Senior Notes"). The proceeds
to Maxim from the offering of the Senior Notes were approximately $96 million
net of an initial issue discount, fees and related costs. Maxim used the net
proceeds from the offering of the Senior Notes to repay all borrowings then
outstanding under its revolving credit facility of approximately $82.7 million
and for general corporate purposes, including capital expenditures.

Each of Maxim'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 operating subsidiaries of
Maxim. Maxim 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 Maxim.

Maxim is currently in default of the restricted payment covenant contained
in the Indenture (the "Indenture") pursuant to which the Senior Notes were
issued. The default occurred on September 3, 1998 when Maxim repurchased shares
of its common stock in the open market pursuant to its ongoing stock repurchase
program.

On November 12, 1998, Maxim notified the Trustee under the Indenture of its
default of the restricted payment covenant in the Indenture. In accordance with
the terms of the Indenture, the Trustee on November 17, 1998 notified Maxim that
such default would become an event of default on December 17, 1998 (30 days
after the date of the Trustee's notice to Maxim) if not cured or waived prior to
that date. To date, Maxim has not been able to obtain the consent of the
Noteholders for a waiver of this covenant violation. Accordingly, the Trustee or
the holders of not less than 25% in

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aggregate principal amount of Senior Notes outstanding may declare all unpaid
principal of, premium, if any, and accrued and unpaid interest on all such
Senior Notes to be due and payable.

Because either the Trustee or the holders of not less than 25% in aggregate
principal amount of Senior Notes outstanding may accelerate payment of the
Senior Notes, the Senior Notes are classified as a current liability on Maxim's
August 7, 1999 balance sheets. If Maxim receives the requisite consent to the
waiver from the Senior Noteholders, however, the Senior Notes will again be
classified as long-term debt of Maxim.

The following additional terms would apply to Senior Notes which are not
purchased by Maxim:

- The Senior Notes will be secured by a second lien on certain assets;

- Maxim will be required to maintain a fixed charge coverage ratio to be
determined.

SYNTHETIC LEASE FINANCING. Maxim has established a $10.0 million synthetic
lease facility with a lending group with amounts outstanding of approximately
$5.0 million as of November 1, 1999. Under the synthetic lease facility, which
is scheduled to mature no later than November 2003, Maxim has the ability to
direct the lender group to make loans to First Security Bank, National
Association, in its capacity as the co-owner-trustee under the facility. These
loans may be used for acquisition, development or expansion of Maxim's flooring
center locations, which financed locations are then leased back by the
co-owner-trustee to Maxim or a designated subsidiary. Maxim has guaranteed
repayment of the amounts outstanding under the facility. The facility contains
various financial and nonfinancial covenants. As of January 31, 1999, Maxim was
not in compliance with certain of these covenants and Maxim obtained a waiver
from the lenders under the synthetic lease facility. These lenders have waived
such noncompliance and any right to accelerate payment of amounts outstanding
under the facility because of such noncompliance.

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GOING CONCERN The accompanying condensed consolidated financial statements
of the Company have been presented on a going concern basis which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business.

As of August 7, 1999 and January 31, 1999, the Company was not in compliance
with a certain restricted payment covenant contained in the Indenture which
references the Senior Notes.

During the three month period ended October 31, 1998, the Company's
restricted payments exceeded that allowed under the Indenture. As of August 7,
1999 and January 31, 1999, the Company was not in compliance with the terms of
the Indenture and as a result, the trustee or the holders of not less than 25%
of the Senior Notes may declare all unpaid principal plus any accrued interest
of all of the Senior Notes due and payable. Accordingly, the Senior Notes are
classified as a current liability in the accompanying consolidated balance
sheets as of August 7, 1999 and January 31, 1999.

As of November 1, 1999, the Company's available borrowings under its Senior
Credit Facility plus cash on hand were not sufficient to repay the Senior Notes
if declared due and payable.

As described above, the Company is currently negotiating with the holders of
the Senior Notes to obtain the requisite consent to waive the default. Any such
consent may include, among other things, the redemption of a portion of the
Senior Notes, the payment of a consent fee by Maxim and a higher interest rate
on the Senior Notes which remain outstanding. There can be no assurance that
such waiver will be granted. If a waiver is not obtained by Maxim, repayment of
the Senior Notes may be accelerated, as discussed above.

CONTINGENCIES. Since the May 18, 1999 announcement that Maxim would be
restating financial results for fiscal 1999 and certain of the quarters therein,
eleven lawsuits claiming to be class actions have been filed against Maxim and
certain of its current and former executive officers and directors. In addition,
the Securities and Exchange Commission has commenced an informal inquiry in
connection with the matters relating to the restatement.

Management does not believe that it is feasible to predict or determine the
final outcome of the class action lawsuits or the SEC inquiry or their effect on
Maxim's financial results, its business or its management. In addition,
management does not believe it is feasible to estimate the amounts or potential
range of loss with respect thereto. The potential outcomes or resolutions of the
class action lawsuits could include a judgement against Maxim or settlements
that could require substantial payments by Maxim. Potential outcomes of the SEC
inquiry could include administrative or other sanctions being imposed on Maxim
and/or certain of its officers. In addition, the timing of the final resolution
of these matters is uncertain. Material adverse outcomes with respect to the
class action lawsuits or the SEC inquiry could have a material adverse effect on
Maxim's financial condition, results of operations and cash flows.

CASH FLOWS. During the six months ended August 7, 1999, operating
activities used $13.7 million compared to $10.0 million used the six months
ended July 31, 1998. The increase in cash used in operating activities resulted
primarily from an increase in accounts receivable. The increase in accounts
receivable was mainly due to higher sales of floor covering products to
franchisees and other carpet retailers.

During the six months ended August 7, 1999, investing activities used
$25.9 million compared to using $31.2 million for the six months ended July 31,
1998. The decrease in cash used is primarily due to the reduced level of capital
expenditures offset by increased cash used to purchase additional retail
locations.

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During the six months ended August 7, 1999, financing activities provided
$4.3 million compared to $37.3 million provided for the six months ended
July 31, 1998. This decrease is primarily due to the early extinguishment of
$4.0 million principal amount of the senior subordinated notes and reduced
borrowings under the revolving line of credit.

CAPITAL EXPENDITURES. Maxim anticipates that it will require approximately
$30.0 million for fiscal 2000, of which approximately $20.0 million has been
spent through November 1, 1999, to (i) rebrand its various retail formats under
the singular Flooring America name, including signage and interior store
changes, (ii) reconfigure existing stores including certain of the stores
acquired from Shaw, and (iii) upgrade its management information systems.

SEASONALITY

Historically, Maxim's retail floor covering sales are subject to some
seasonal fluctuation typical to the floor covering industry. Higher sales occur
in the summer and fall months during Maxim's second and third quarters, and
lower sales occur during the fourth quarter holiday season. Increases occur in
the second quarter as construction schedules increase during the summer, and the
largest increase occurs in the third quarter due to a combination of ongoing
construction and pre-Christmas home remodeling.

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. A business contingency plan has been
developed utilizing five professional project managers to implement the plan.
The plan includes a business systems implementation schedule listing all issues
related to the Year 2000. The issues include identification of changes needed,
costs, completion dates and staffing.

Maxim currently believes the costs to remediate Year 2000 issues are
approximately $2.8 million, of which approximately $1.5 million remains to be
spent as of November 1, 1999. All costs associated with analyzing the Year 2000
issue or making conversions to existing software are being expensed as

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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. There can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated.

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.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements that constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements appear in a number of places in this Report and include statements
regarding the intent, belief or current expectations of Maxim, its directors or
its officers with respect to, among other things:

- trends affecting Maxim's financial condition or results of operations,

- potential acquisitions by Maxim,

- Maxim's business and growth strategies,

- Maxim's ability to successfully integrate acquired businesses,

- the timing, magnitude and costs of the roll-out of new flooring centers,
and

- Maxim's financing plans.

You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. Among others, factors that could
adversely affect actual results and performance include:

- local and regional economic conditions in the areas served by Maxim,

- the level of customer spending for floor covering products,

- competition among floor covering retailers and carpet manufacturers,

- changes in merchandise mixes, site selection and related traffic and
demographic patterns,

- availability of financing,

- inventory management and turnover levels,

- realization of cost savings,

- Maxim's success in integrating recent and potential future acquisitions,
and

- the resolution or outcome of the pending litigation and government inquiry
relating to the restatement of previously announced financial results for
fiscal 1999 and for each of the quarters therein.

The accompanying information contained in this Form 10-Q, as well as in
Maxim's other 1934 Act filings, identifies important additional factors that
could adversely affect actual results and performance. See "Item 1.
Business-Risk Factors" in Maxim's Annual Report on Form 10-K for the year ended
January 31, 1999. You are urged to carefully consider such factors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY. Maxim has limited exposure to market volatility
in interest rates. As of August 7, 1999, exposure from interest rates was not
material to Maxim's financial position, results of operations, or cash flows, as
$95.4 million of Maxim's $128.9 million of debt has been fixed at a rate of
9 1/4% until 2007. In the event that the 9 1/4% notes are called by the
noteholders or the Company elects to purchase the Senior Notes, the Company will
be subject to interest rate volatility based on the market's forward curve. The
Company also had two interest rate swap agreements for a total notional amount
of less than $2.5 million. These swap agreements were terminated in May 1999.
Based on

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Maxim's low overall floating interest rate exposure at August 7, 1999, a
near-term 100 basis point change in interest rates would not materially effect
Maxim's financial statements.

COMMODITY PRICE AND FOREIGN CURRENCY SENSITIVITY. Increases or decreases in
the market price of carpet, hardwood and vinyl flooring may affect the valuation
of Maxim's inventories and purchases and, accordingly, Maxim's earnings. Maxim
does not use futures or options contracts to manage volatility with respect to
this exposure. The potential increase in cost of inventories and purchases based
on commodity activity is generally also reflected as a corresponding increase in
Maxim's prices, and therefore, is not material to Maxim's financial position and
results of operations.

The majority of Maxim's sales and purchases are denominated in U.S. dollars
and it is Maxim's policy to eliminate short-term exchange rate volatility in the
event foreign currency transactions occur. As of August 7, 1999, there was no
exposure to foreign currency exchange rate volatility.

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PART II. OTHER INFORMATION

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Maxim is currently in default of the restricted payment covenant contained
in the indenture pursuant to which its 9 1/4% Senior Subordinated Notes were
issued. See "Part I. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Senior
Subordinated Notes" included elsewhere herein for additional information
concerning this default.

ITEM 6. EXHIBITS AND REPOTS ON FORM 8-K

(A) Exhibits

27.1 Financial Data Schedule (For SEC use only)

(B) Reports on Form 8-K

The following report on Form 8-K was filed during the three months ended
August 7, 1999: current report on Form 8-K dated February 1, 1999, regarding
change in fiscal year.

22
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

<TABLE>
<S> <C> <C>
THE MAXIM GROUP, INC.

By: /s/ A. J. NASSAR
-----------------------------------------
A. J. Nassar,
President and Chief Executive Officer
Dated: November 12, 1999

By: /s/ STEPHEN P. COBURN
-----------------------------------------
Stephen P. Coburn,
Principal Accounting Officer
Dated: November 12, 1999
</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF THE MAXIM GROUP, INC. AND SUBSIDIARIES AS OF
AUGUST 7, 1999 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOW
FOR THE PERIOD ENDED AUGUST 7, 1999 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> FEB-05-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> AUG-07-1999
<CASH> 54,573
<SECURITIES> 0
<RECEIVABLES> 85,175
<ALLOWANCES> 7,996
<INVENTORY> 62,232
<CURRENT-ASSETS> 203,547
<PP&E> 81,137
<DEPRECIATION> 15,172
<TOTAL-ASSETS> 398,438
<CURRENT-LIABILITIES> 232,687
<BONDS> 128,895
0
0
<COMMON> 21
<OTHER-SE> 158,080
<TOTAL-LIABILITY-AND-EQUITY> 398,438
<SALES> 395,086
<TOTAL-REVENUES> 395,086
<CGS> 245,157
<TOTAL-COSTS> 150,655
<OTHER-EXPENSES> (349)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,961
<INCOME-PRETAX> (4,369)
<INCOME-TAX> 1,152
<INCOME-CONTINUING> (3,217)
<DISCONTINUED> 0
<EXTRAORDINARY> (274)
<CHANGES> 0
<NET-INCOME> (3,491)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)

</TABLE>