<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 MAY 8, 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 ____ No _X_
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>
MAY 8, JANUARY 31,
1999 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 46,296 $ 89,901
Current portion of franchisee license fees receivable....... 307 2,013
Current portion of notes receivable......................... 2,404 3,405
Receivables................................................. 65,019 52,607
Inventories................................................. 64,613 58,744
Refundable income taxes..................................... 4,476 --
Deferred income taxes....................................... 7,361 7,361
Prepaid expenses............................................ 7,930 6,316
-------- --------
Total current assets.................................... 198,406 220,347
Property, plant and equipment, net.......................... 80,322 71,766
Franchise license fees receivable, less current portion..... 4,734 2,337
Notes receivable from franchisees, less current portion..... 9,585 8,228
Deferred income taxes....................................... 1,065 1,065
Intangible assets........................................... 76,836 71,341
Other assets................................................ 12,376 13,684
-------- --------
Total assets................................................ $383,324 $388,768
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt........................... $ 17,123 $ 16,952
Senior subordinated notes................................... 95,428 99,387
Current portion of capital lease obligations................ 6,589 6,635
Accounts payable............................................ 27,892 26,706
Rebates payable to franchisees.............................. 4,540 749
Deposits.................................................... 18,533 14,769
Deferred revenue............................................ 5,215 2,254
Income taxes payable........................................ -- 2,633
Other accrued liabilities................................... 42,470 55,827
-------- --------
Total current liabilities............................... 217,790 225,912
-------- --------
Long-term debt, less current portion........................ 3,351 4
-------- --------
Capital lease obligations, less current portion............. 1,391 1,469
-------- --------
Other long-term liabilities................................. -- 516
-------- --------
Stockholders' equity:
Common stock-shares issued: 21,326,184 and 21,315,664 as
of May 8, 1999 and January 31, 1999, respectively....... 21 21
Additional paid-in capital................................ 186,553 185,828
Retained earnings......................................... 9,036 9,836
Treasury stock-shares at cost: 2,365,900 as of May 8, 1999
and January 31, 1999, respectively...................... (34,818) (34,818)
-------- --------
Total stockholders' equity.............................. 160,792 160,867
-------- --------
Total liabilities and stockholders' equity.................. $383,324 $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
-----------------------
MAY 8, APRIL 30,
1999 1998
-------- ---------
<S> <C> <C>
Revenues:
Sales of floor covering products.......................... $180,568 $80,661
Fees from franchise services.............................. 11,300 6,857
Fiber and PET sales....................................... -- 6,965
Other..................................................... 712 2,149
-------- -------
Total revenues.......................................... 192,580 96,632
Cost of sales............................................... 118,906 69,564
-------- -------
Gross profit.............................................. 73,674 27,068
Selling, general and administrative expenses................ 72,685 22,390
-------- -------
Operating income.......................................... 989 4,678
Other income (expense):
Interest income........................................... 1,167 386
Interest expense.......................................... (2,799) (2,459)
Other, net................................................ 79 (52)
-------- -------
(Loss) income before income taxes and extraordinary
charge.................................................... (564) 2,553
Benefit (provision) for income taxes........................ 38 (1,235)
-------- -------
(Loss) income before extraordinary charge................... (526) 1,318
Extraordinary charge on early retirement of debt, net of tax
benefit................................................... (274) --
-------- -------
Net (loss) income........................................... $ (800) $ 1,318
======== =======
Basic (loss) earnings per share before extraordinary
charge.................................................... $ (0.03) $ 0.08
Extraordinary charge per share.............................. (0.01) --
-------- -------
Basic (loss) earnings per share............................. $ (0.04) $ 0.08
======== =======
Diluted (loss) earnings per share before extraordinary
charge.................................................... $ (0.03) $ 0.08
Extraordinary charge per share.............................. (0.01) --
-------- -------
Diluted (loss) earnings per share........................... $ (0.04) $ 0.08
======== =======
Weighted average common shares.............................. 19,153 16,424
======== =======
Weighted average common shares and equivalents.............. 19,153 17,247
======== =======
</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>
THREE MONTHS ENDED
-----------------------
MAY 8, APRIL 30,
1999 1998
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $ (800) $ 1,318
Adjustments to reconcile net (loss) income to net cash
(used in) operating activities:
Depreciation and amortization........................... 2,856 3,372
Deferred income taxes................................... -- 695
Changes in operating assets and liabilities, net of
effects of acquisitions:
Receivables........................................... (11,407) (6,229)
Inventories........................................... (4,189) (4,264)
Refundable income taxes............................... (4,476) 572
Prepaid expenses and other assets..................... (410) (4,510)
Accounts payable and other liabilities................ (3,935) (987)
-------- --------
Net cash (used in) operating activities..................... (22,361) (10,033)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (9,120) (14,172)
Acquisitions, net of cash acquired........................ (8,042) --
-------- --------
Net cash (used in) investing activities..................... (17,162) (14,172)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options................... 325 1,348
Purchase of treasury stock................................ -- (1,760)
Long-term debt proceeds................................... -- 17,114
Principal payments on capital lease obligations........... (124) (129)
Early extinguishment of debt.............................. (4,283) --
-------- --------
Net cash (used in) provided by financing activities......... (4,082) 16,573
-------- --------
Net decrease in cash and cash equivalents................... (43,605) (7,632)
Cash and cash equivalents at beginning of period............ 89,901 28,880
-------- --------
Cash and cash equivalents at end of period.................. $ 46,296 $ 21,248
======== ========
</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 Standard
("SFAS") No. 130, "Reporting Comprehensive Income," was the same as net income
(loss) for the three months ended May 8, 1999 and April 30, 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 May 8, 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").
During the three month period ended October 31, 1998, the Company's
restricted payments exceeded that allowed under the Indenture. As of May 8, 1999
and January 31, 1999, the Company was
5
<PAGE>
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(CONTINUED)
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 May 8, 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 three months ended May 8, 1999, the Company acquired 7 retail
locations for aggregate consideration of approximately $8,530,000. Subsequent to
the three months ended May 8, 1999, the Company acquired 8 retail locations for
aggregate consideration of approximately $12,170,000. 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 of the assets of Image had occurred on
February 1, 1998. The pro
6
<PAGE>
NOTE 3. ACQUISITIONS. (CONTINUED)
forma 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
-----------------------
MAY 8, APRIL 30,
1999 1998
(IN THOUSANDS) -------- ---------
<S> <C> <C>
Net revenue............................................ $192,580 $185,848
Net loss............................................... (800) (2,048)
Basic loss per share................................... $ (0.04) $ (0.10)
Diluted loss per share................................. (0.04) (0.10)
</TABLE>
NOTE 4. INVENTORIES.
Inventories consist of the following:
<TABLE>
<CAPTION>
MAY 8, JANUARY 31,
1999 1999
(IN THOUSANDS) -------- -----------
<S> <C> <C>
Raw materials.......................................... $ 309 $ 309
Finished goods......................................... 64,304 58,435
------- -------
Total.................................................. $64,613 $58,744
======= =======
</TABLE>
On a segment basis, the Company's inventories consist of the following:
<TABLE>
<CAPTION>
MAY 8, JANUARY 31,
1999 1999
(IN THOUSANDS) -------- -----------
<S> <C> <C>
Retail................................................. $62,796 $56,927
Image.................................................. 1,817 1,817
------- -------
Total.................................................. $64,613 $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 May 8, 1999, $19,365,000 of the nonrecurring charges
were incurred, with $4,348,000 remaining in the reserve, which is included in
accrued liabilities on the accompanying condensed 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 May 8,
1999 and January 31, 1999 are as follows:
<TABLE>
<CAPTION>
JANUARY 31, MAY 8,
1999 AMOUNT 1999
BALANCE INCURRED BALANCE
(IN THOUSANDS) ----------- -------- --------
<S> <C> <C> <C>
Claim reserves.............................................. $3,195 $ (191) $3,004
Store closure and carrying costs............................ 2,822 (1,478) 1,344
------ ------- ------
$6,017 $(1,669) $4,348
====== ======= ======
</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.
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 occurred 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.
8
<PAGE>
NOTE 7. SEGMENT INFORMATION. (CONTINUED)
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 May 8, 1999:
Revenues............................ $ -- $176,769 $ 21,627 $(5,816) $192,580
Operating income (loss)............. -- (3,661) 4,650 -- 989
Interest expense.................... -- 901 2,898 (1,000) 2,799
Income tax benefit (provision)...... -- 122 (84) -- 38
Extraordinary charge................ -- -- 274 -- 274
Net (loss) income................... -- (4,343) 3,543 -- (800)
Total assets........................ 7,168 222,507 153,649 -- 383,324
------- -------- -------- ------- --------
Three Months Ended April 30, 1998:
Revenues............................ $48,584 $ 39,799 $ 12,080 $(3,831) $ 96,632
Operating income (loss)............. 4,431 (660) 959 (52) 4,678
Interest expense.................... 1,429 854 2,251 (2,075) 2,459
Income tax benefit (provision)...... (1,216) 856 (875) -- (1,235)
Net (loss) income................... 2,070 (1,442) 690 -- 1,318
------- -------- -------- ------- --------
</TABLE>
NOTE 8. SUBSEQUENT EVENTS.
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 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 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
9
<PAGE>
NOTE 8. SUBSEQUENT EVENTS. (CONTINUED)
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.
SENIOR SUBORDINATED NOTES
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 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
subsequently 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 its carpet manufacturing
operations of its Image subsidiary in January 1999 for total consideration of
$210.7 million which included the subsidiary 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 product 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 months ended May 8, 1999, Maxim operated two reportable
segments: retail and franchise services. During the three months ended
April 30, 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.
11
<PAGE>
On February 1, 1999, Maxim changed its fiscal year from January 31 to the
first Saturday following January 31. Accordingly, the first quarter of the
fiscal year ending February 5, 2000 consists of the 14-week period ended May 8,
1999 compared to a 13-week period in the prior year. Financial results for the
three months ended April 30, 1998 have not been restated to reflect the effects
of the change in fiscal year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 8, 1999 COMPARED TO THREE MONTHS ENDED APRIL 30, 1998
TOTAL REVENUES. Total revenues increased 99.3% to $192.6 million for the
three months ended May 8, 1999 from $96.6 million for the three months ended
April 30, 1998. The components of total revenues, exclusive of the effect of
intersegment eliminations, are discussed below. Intersegment eliminations, which
totaled $5.8 million for the three months ended May 8, 1999 and $3.8 million for
the three months ended April 30, 1998, include certain intercompany allocations.
RETAIL REVENUE. Retail revenue consists of sales of floor covering
products by Maxim's retail stores. Retail revenues increased 344.2% to
$176.8 million for the three months ended May 8, 1999 from $39.8 million for
the three months ended April 30, 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, to internal 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 79.0% to $21.6 million for the three months ended May 8, 1999 from
$12.1 million for the three months ended April 30, 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 April 30, 1998 was
$48.6 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 172.2% to $73.7 million for the three
months ended May 8, 1999 from $27.1 million for the three months ended
April 30, 1998. As a percentage of total revenue, gross profit was 38.3% for the
three months ended May 8, 1999, compared to 28.0% for the three months ended
April 30, 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 224.6% to $72.7 million for the three months
ended May 8, 1999, from $22.4 million for the three months ended April 30, 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 37.7% for the three months ended May 8, 1999, from 23.2% for the
three months ended April 30, 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
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comprises a substantial portion of Maxim's operations in future periods.
Increases in consulting/professional fees, legal and bad debt expenses also
contributed to the overall increase in selling, general and administrative
expenses in the three months ended May 8, 1999.
OPERATING INCOME/LOSS. Operating income decreased to $989,000 for the three
months ended May 8, 1999, from $4.7 million for the three months ended
April 30, 1998. The components of operating income, exclusive of the effect of
intersegment eliminations, are discussed below. Intersegment eliminations
totaled $52,000 in the three months ended April 30, 1998.
RETAIL OPERATING INCOME/LOSS. Retail operating loss increased to a loss
of $3.7 million for the three months ended May 8, 1999 from loss of $660,000
for the three months ended April 30, 1998. This increase 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 increased to $4.7 million for the three months ended May 8, 1999 from
$1.0 million for the three months ended April 30, 1998. This $3.7 million
increase was a result of increased revenue during the three months ended
May 8, 1999.
MANUFACTURING OPERATING INCOME/LOSS. Manufacturing operating income for
the three months ended April 30, 1998 was $4.4 million. 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 13.8% to $2.8 million for the
three months ended May 8, 1999, from $2.5 million for the three months ended
April 30, 1998 due principally to a higher interest rate during the three months
ended May 8, 1999. See "Liquidity and Capital Resources."
INCOME TAX (PROVISION) BENEFIT. Maxim recorded an income tax benefit of
$38,000 for the three months ended May 8, 1999, compared to a $1.2 million
provision for the three months ended April 30, 1998. The decrease in income
taxes is due to Maxim recording of a pre-tax loss in the three months ended
May 8, 1999.
EXTRAORDINARY CHARGE. The extraordinary charge recorded in the three months
ended May 8, 1999, resulted from the repurchase of $4.0 million principal amount
Senior Notes and the write-off of unamortized financing fees and discount
associated with the purchase of the Senior Notes. The total charge amounted to
$295,000, which was tax effected by $21,000 and discount for the three months
ended May 8, 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 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 $75.0
million. The credit facility (the "Senior Credit Facility") This Senior consists
of a revolving facility that matures May 18, 2002. Borrowings under the
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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 the amended 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% 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 and 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 aggregate principal amount of Senior Notes
outstanding may declare all unpaid principal of, premium, if any, and accrued
and unpaid interest of 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 the
accompanying condensed unaudited balance sheet. 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.
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
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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 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, as
discussed above.
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. The
loan proceeds may then 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 May 8, 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.
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 May 8, 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 May 8, 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 sheet
as of May 8, 1999 and January 31, 1999.
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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.
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.
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 on 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 judgment 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 three months ended in May 8, 1999, operating
activities used $22.4 million compared to $10.0 million used in the three months
ended April 30, 1998. The increase in cash used in operating activities resulted
primarily from an increase in accounts receivable and inventories. The increase
in accounts receivable and inventories was mainly due to higher sales of floor
covering products to franchisees and other carpet retailers.
During the three months ended May 8, 1999, investing activities used
$17.2 million compared to using $14.2 million in the three months ended
April 30, 1998. The change is primarily due to reduced levels of capital
expenditures offset by increased funds used to purchase additional retail
locations.
During the three months ended May 8, 1999, financing activities used
$4.1 million compared to providing $16.6 million for the three months ended
April 30, 1998. This change resulted from the early extinguishment of debt for
the three months ended May 8, 1999 as compared to the increase in of debt during
the three months ended April 30, 1998.
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
occurred in the summer and fall months during Maxim's second and third quarters,
and lower sales occurred during the fourth quarter holiday season. Increases
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occur in the second quarter as construction schedules increase during the
summer, and the largest increase occurs in the third quarter due to of 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 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 May 8, 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 $115.9 million of debt consisting of it Senior Notes
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 Maxim's low overall floating interest rate
exposure at May 8, 1999, a
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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 May 8, 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 the 9 1/4% Senior Subordinated Notes of Maxim
were issued. See "Part 1. 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 REPORTS ON FORM 8-Q
<TABLE>
<CAPTION>
(A) Exhibits
<S> <C>
10.23.4 Fourth Amendment to Credit Agreement, dated October 21,
1999, among the Company, as Borrower, the Domestic
Subsidiaries of the Company, as Guarantors, Bank of America
(formerly NationsBank, N.A.), as Administrative Agent, and
the Lenders party thereto.
27.1 Financial Data Schedule for (for SEC use only)
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended May 8, 1999.
</TABLE>
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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>
Exhibit 10.23.4
FOURTH AMENDMENT TO
CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Agreement") is entered
into as of October 21, 1999 among The Maxim Group, Inc., a Delaware corporation
(the "Borrower"), the Domestic Subsidiaries of the Borrower, as Guarantors, Bank
of America, N.A. (formerly NationsBank, N.A.), as Administrative Agent (in such
capacity, the "Administrative Agent") and the Lenders party thereto. Capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings given to them in the Credit Agreement.
RECITALS
WHEREAS, the Borrower, the Guarantors, the Administrative Agent and the
Lenders are parties to that certain Amended and Restated Credit Agreement dated
as of May 18, 1999 (as amended by that certain First Amendment to Credit
Agreement and Forbearance dated as of July 23, 1999 (the "First Amendment"),
that certain Second Amendment to Credit Agreement, Forbearance and Waiver dated
as of September 7, 1999 (the "Second Amendment") and that certain Third
Amendment to Credit Agreement and Forbearance dated as of October 11, 1999 (the
"Third Amendment") and as further amended, modified, supplemented, extended or
restated from time to time, the "Credit Agreement");
WHEREAS, the Borrower has requested that the Administrative Agent and
the Lenders agree to, and the Administrative Agent and the Lenders are, upon and
subject to the terms and conditions specified in this Agreement, willing to
increase the amount currently available under the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. REAFFIRMATION OF EXISTING DEBT. The Credit Parties acknowledge and
confirm that (a) the Borrower's obligation to repay the outstanding principal
amount of the Loans and reimburse the Issuing Lender for any drawing on a Letter
of Credit is unconditional and not subject to any offsets, defenses or
counterclaims, (b) the Administrative Agent, on behalf of the Lenders, has a
valid and enforceable first priority perfected security interest in the
Collateral, (c) the Administrative Agent and the Lenders have performed fully
all of their respective obligations under the Credit Agreement and the other
Credit Documents, and (d) by entering into this Agreement, the Administrative
Agent and the Lenders do not waive or release any term or condition of the
Credit Agreement or any of the other Credit Documents or any of their rights or
remedies under such Credit Documents or applicable law or any of the obligations
of any Credit Party thereunder.
2. REVOLVING LOAN COMMITMENT. Section 2.1(a) of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
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(a) REVOLVING LOAN COMMITMENT. Subject to the terms and
conditions set forth herein, each Lender severally agrees to make
revolving loans (each a "REVOLVING LOAN" and collectively the
"REVOLVING LOANS") to the Borrower, in Dollars, at any time and from
time to time, during the period from and including the Effective Date
to but not including the Maturity Date (or such earlier date if the
Revolving Committed Amount has been terminated as provided herein);
PROVIDED, HOWEVER, that (i) the sum of the aggregate amount of
Revolving Loans outstanding plus the aggregate amount of LOC
Obligations outstanding plus the aggregate amount of Synthetic Lease
Obligations outstanding shall not exceed the lesser of (x) the
Revolving Committed Amount, (y) the Borrowing Base Assets and (z)
$37,500,000 and (ii) with respect to each individual Lender, the
Lender's pro rata share of outstanding Revolving Loans plus such
Lender's pro rata share of outstanding LOC Obligations plus such
Lender's pro rata share of the aggregate amount of the outstanding
Synthetic Lease Obligations shall not exceed such Lender's Revolving
Loan Commitment Percentage of the Revolving Committed Amount. Subject
to the terms of this Credit Agreement (including Section 3.3), the
Borrower may borrow, repay and reborrow Revolving Loans.
3. RELEASE. The Credit Parties hereby release the Administrative Agent,
the Lenders, and the Administrative Agent's and the Lenders' respective
officers, employees, representatives, agents, counsel and directors from any and
all actions, causes of action, claims, demands, damages and liabilities of
whatever kind or nature, in law or in equity, now known or unknown, suspected or
unsuspected to the extent that any of the foregoing arises from any action or
failure to act on or prior to the date hereof.
4. CONDITIONS PRECEDENT. The effectiveness of this Agreement is subject
to the satisfaction of each of the following conditions:
(a) The Administrative Agent shall have received original
counterparts of this Agreement duly executed by the Credit Parties, the
Administrative Agent and the Lenders.
(b) The Borrower shall have delivered to the Administrative
Agent an opinion of counsel to the Credit Parties in form and substance
satisfactory to the Administrative Agent as to the due authorization,
execution, delivery and enforceability of this Agreement.
(c) The Administrative Agent shall have received original
counterparts of (i) an assignment of cash collateral account in form
and substance satisfactory to the Administrative Agent and (ii) an
amendment to assignment of money market fund in form and substance
satisfactory to the Administrative Agent, each duly executed by the
Borrower and Bank of America, N.A., as agent for the Lenders and the
TROL Lenders, and (iii) an account control agreement in form and
substance satisfactory to the Administrative Agent, duly executed by
the Borrower, Bank of America, N.A., as agent for the Lenders and the
TROL Lenders, and Nations Institutional Reserves.
2
<PAGE>
(d) The Administrative Agent shall have received such other
documents and information as it deems reasonably necessary.
5. MISCELLANEOUS.
(a) The term "Credit Agreement" as used in each of the Credit
Documents shall hereafter mean the Credit Agreement as amended by this
Agreement. Except as herein specifically agreed, the Credit Agreement,
and the obligations of the Credit Parties thereunder and under the
other Credit Documents, are hereby ratified and confirmed and shall
remain in full force and effect according to their terms.
(b) The Credit Parties hereby represent and warrant as
follows:
(i) Each Credit Party has taken all necessary action
to authorize the execution, delivery and performance of this Agreement.
(ii) This Agreement has been duly executed and
delivered by each Credit Party and constitutes each such Credit Party's
legal, valid and binding obligations, enforceable in accordance with
its terms, except as such enforceability may be subject to (i)
bankruptcy, insolvency, reorganization, fraudulent conveyance or
transfer, moratorium or similar laws affecting creditors' rights
generally and (ii) general principles of equity (regardless of whether
such enforceability is considered in a proceeding at law or in equity).
(iii) No consent, approval, authorization or order
of, or filing, registration or qualification with, any court or
governmental authority or third party is required in connection with
the execution, delivery or performance by any Credit Party of this
Agreement.
(c) The Credit Parties hereby represent and warrant to the
Lenders that (i) the representations and warranties of the Credit
Parties set forth in Section 6 of the Credit Agreement are true and
correct as of the date hereof and (ii) no unwaived event has occurred
and is continuing which constitutes a Default or an Event of Default.
(d) The Guarantors (i) acknowledge and consent to all of the
terms and conditions of this Agreement, (ii) affirm all of their
obligations under the Credit Documents and (iii) agree that this
Agreement and all documents executed in connection herewith do not
operate to reduce or discharge the Guarantors' obligations under the
Credit Agreement or the other Credit Documents.
(e) This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an
original, but all of which shall constitute one and the same
instrument. Delivery of an executed counterpart of this Agreement by
telecopy shall be effective as an original and shall constitute a
3
<PAGE>
representation that an executed original shall be delivered.
(f) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA.
[remainder of page intentionally left blank]
4
<PAGE>
MAXIM FOURTH AMENDMENT
Each of the parties hereto has caused a counterpart of this Agreement
to be duly executed and delivered as of the date first above written.
BORROWER: THE MAXIM GROUP, INC., a Delaware
corporation
By: /s/ Thomas P. Leahey
Name: Thomas P. Leahey
Title: EVP Finance
GUARANTORS: CARPETMAX, L.P., a Georgia limited
partnership
By: The Maxim Group, Inc. as its sole
general partner
By: /s/ Thomas P. Leahey
Name: Thomas P. Leahey
Title: EVP Finance
[SIGNATURES CONTINUE]
<PAGE>
BAILEY & ROBERTS CARPETMAX OF
TENNESSEE, INC., a Tennessee corporation
C & S TEXTILES, INC., an Idaho corporation
CARPETMAX OF UTAH, INC., a Utah corporation
CARPETMAX RETAIL STORES, INC., a Delaware
corporation
CARPETSPLUS OF AMERICA, INC., a Georgia
corporation
GCO, INC., a Nevada corporation
GCO CARPET OUTLET, INC., an Alabama
corporation
INVESTOR MANAGEMENT, INC., an Alabama
corporation
MAXIM EQUIPMENT LEASING COMPANY, INC., a
Georgia corporation
MAXIM RETAIL GROUP, INC., a Georgia
corporation
MAXIM RETAIL STORES, INC., a Georgia
corporation
TRI-R OF ORLANDO, INC., a Georgia
corporation
COLORADO CARPET & RUGS, INC., a Colorado
corporation
MANASOTA CARPET, INC., a Florida corporation
WADSWORTH & OWENS DECORATING CENTER, INC., a
Florida corporation
By: /s/ Thomas P. Leahey
Name: Thomas P. Leahey
Title: of each of the foregoing
Guarantors
BANK OF AMERICA, N.A., individually
in its capacity as a Lender, in its
capacity as Administrative Agent and
in its capacity as Issuing Lender
By: /s/ David H. Dinkins
Name: David H. Dinkins
Title: Vice President
<TABLE> <S> <C>
<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 MAY
8, 1999 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE
QUARTERS ENDED MAY 8, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-08-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> MAY-08-1999
<CASH> 46,296
<SECURITIES> 0
<RECEIVABLES> 90,050
<ALLOWANCES> 8,001
<INVENTORY> 64,613
<CURRENT-ASSETS> 198,406
<PP&E> 80,322
<DEPRECIATION> 13,725
<TOTAL-ASSETS> 383,324
<CURRENT-LIABILITIES> 217,790
<BONDS> 115,902
0
0
<COMMON> 21
<OTHER-SE> 160,771
<TOTAL-LIABILITY-AND-EQUITY> 383,324
<SALES> 192,580
<TOTAL-REVENUES> 192,580
<CGS> 118,906
<TOTAL-COSTS> 72,685
<OTHER-EXPENSES> (79)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,799
<INCOME-PRETAX> (564)
<INCOME-TAX> (38)
<INCOME-CONTINUING> (526)
<DISCONTINUED> 0
<EXTRAORDINARY> (274)
<CHANGES> 0
<NET-INCOME> (800)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
