-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J/Qh9YUuKGmyEQ9M/v30VpIcmwvooordGslKYzuEFEnSLj0UUDFYOKFFrc8gWeEc ruEpLUgCwxyv0GlEtbgdJw== 0000912057-99-001497.txt : 19991020 0000912057-99-001497.hdr.sgml : 19991020 ACCESSION NUMBER: 0000912057-99-001497 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19991019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXIM GROUP INC / CENTRAL INDEX KEY: 0000910468 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700] IRS NUMBER: 582060334 STATE OF INCORPORATION: DE FISCAL YEAR END: 0205 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13099 FILM NUMBER: 99730318 BUSINESS ADDRESS: STREET 1: 210 TOWNPARK DR CITY: KENNESAW STATE: GA ZIP: 30144 BUSINESS PHONE: 6783554000 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K --------------------- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended January 31, 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: 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) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] The aggregate market value of the common stock of the registrant held by nonaffiliates of the registrant (18,084,863 shares) on October 1, 1999 was approximately $97,206,000 based on the closing price of the registrant's common stock as reported on the New York Stock Exchange on October 1, 1999. For the purposes of this response, officers, directors and holders of 10% or more of the registrant's common stock are considered the affiliates of the registrant at that date. The number of shares outstanding of the registrant's common stock, as of October 1, 1999: 19,038,347 shares of $.001 par value common stock. DOCUMENTS INCORPORATED BY REFERENCE None. PART I NOTICE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K 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 The Maxim Group, Inc. ("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-K, 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." You are urged to carefully consider such factors. 2 ITEM 1. BUSINESS. GENERAL The Maxim Group, Inc. ("Maxim" or the "Company") operates and franchises one of the largest floor covering distribution networks in North America through several retail floor covering concepts. These include, but are not limited to, CarpetMAX(R), New York Carpet World, The Carpet Exchange, and Carpetland USA, each a full-service floor covering store format (collectively, the "Maxim Brands"), and GCO Carpet Outlets ("GCO(R)"), a cash-and-carry discount floor covering store format. Maxim also owns CarpetsPlus of America, LLC ("CarpetsPlus"), a national resource network comprised of independent floor covering dealers. To enhance Maxim's strategy of becoming a true national retailer, Maxim intends to change the Maxim Brands to a single brand operating under the name "Flooring America." Since commencing operations in 1991 as a franchisor of CarpetMAX floor covering stores, Maxim has grown its franchise floor covering networks to include other retail floor covering concepts. As of October 1, 1999, Maxim had 782 franchise members in 49 states, within which there were 515 CarpetMAX stores, 113 GCO stores and 292 CarpetsPlus stores. The growth of Maxim's franchise network resulted in the development of an integrated retail infrastructure, including store development, marketing, advertising, credit programs, sales training and product sourcing resources. In an effort to expand this retail infrastructure, Maxim began acquiring selected floor covering retailers, including CarpetMAX franchisees, in fiscal 1995 and began opening Company-owned stores in fiscal 1996. In August 1998, Maxim significantly expanded its network of Company-owned stores by acquiring substantially all of the retail store assets of Shaw Industries, Inc. ("Shaw"). These assets included 266 retail floor covering stores, each of which operated under one of ten different brand names, including New York Carpet World, Carpetland USA and The Carpet Exchange. As of October 1, 1999, Maxim owned and operated a total of 323 flooring centers, which include the stores acquired from Shaw as well as 59 CarpetMAX stores and 12 GCO stores. Maxim's full-service retail formats offer customers a wide selection of competitively priced floor covering products. These flooring centers offer approximately 15,000 stock keeping units ("SKUs"), including an extensive merchandising mix of carpet, area rugs, hardwood flooring, ceramic tile, vinyl flooring, laminates and stone. Maxim Brand flooring centers are typically located in prime retail locations with high consumer visibility and are staffed with specialized floor covering sales associates. These stores offer a wide range of services, including interior design consulting, measuring, delivery and installation. In order to focus its full efforts and resources on its retail operations, Maxim sold in January 1999 substantially all of the assets of its Image Industries, Inc. subsidiary to Aladdin Manufacturing Corporation, a subsidiary of Mohawk Industries, Inc. The total consideration of approximately $210.7 million included the assumption of approximately $48.1 million of related debt and short-term liabilities. Image Industries, Inc. ("Image") is a leading plastics recycler and manufacturer of polyester fiber and carpet, with annual sales of approximately $200 million. 3 During the year ended January 31, 1999, Maxim operated three reportable segments: (i) retail; (ii) manufacturing; and (iii) franchise services. The retail segment is a highly integrated chain of floor covering stores and distribution support centers. The manufacturing segment includes the operations of Image. With the sale of substantially all the assets of Image in January 1999, Maxim no longer engages in manufacturing operations. The franchise services segment includes store development, marketing, advertising, production, consumer credit, training and product sourcing, as well as interest expense and corporate non-operating items not directly relating to the manufacturing or retail segments. See Note 18 to Maxim's Consolidated Financial Statements included elsewhere herein for certain financial information relating to these three segments. MATTERS RELATING TO RESTATEMENT OF FINANCIAL RESULTS On April 6, 1999, Maxim issued a press release announcing revenues of $684.4 million, a net loss of $3.0 million and a loss per diluted share of $0.17 for the year ended January 31, 1999. On May 18, 1999, Maxim announced that, as a result of the year-end financial audit process, Maxim would record certain adjustments to these previously reported financial results for fiscal 1999, as well as for certain of the quarters therein. In response, and after considering the recommendations of Maxim's auditors, the Audit Committee of Maxim's Board of Directors in turn recommended to the Maxim Board that a Special Committee of the Board be appointed to, among other things, initiate a formal inquiry into Maxim's accounting practices. The Special Committee was appointed and so authorized by Maxim's Board and retained the law firm of Smith, Gambrell & Russell, LLP to assist in the investigation, which, in turn, retained the forensic audit group of Arthur Andersen LLP to assist in conducting the review and to provide advice on accounting matters. As a result of a review of accounting records performed under the direction of the Special Committee and completion of the year-end audit process, Maxim announced restated financial results for the fiscal year ended January 31, 1999 and each of the quarters therein on October 11, 1999. For the year ended January 31, 1999, Maxim reported restated revenues of $664.4 million, a net loss of $19.6 million and a loss per diluted share of $1.10. These restated results included changes in recognition and/or timing of certain vendor support funds, certain expense accruals and asset write-downs. No adjustments are necessary for periods prior to fiscal 1999. Maxim has restated its previously issued financial statements for the three quarters ended April 30, 1998, July 31, 1998 and October 31, 1998 by filing amended Quarterly Reports on Form 10-Q/A for the three quarters ended April 30, 1998, July 31, 1998 and October 31, 1998, respectively. See Note 20 to Maxim's Consolidated Financial Statements for information relating to these quarterly restatements. Maxim has undertaken steps to improve controls and procedures to ensure the integrity of its financial reporting, and that process will continue under the direction of its new Chief Financial Officer. The Special Committee is currently completing its review of information in anticipation of making a final report to the Board of Directors as soon as practicable. Since the May 18, 1999 announcement that Maxim would be restating financial results for fiscal 1999 and certain of the quarters therein, 11 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 commenced an informal inquiry in connection with the matters relating to the restatement. See "Item 3. Legal Proceedings." INDUSTRY OVERVIEW Currently, the retail floor covering industry has in excess of $20 billion in annual sales. The industry is segregated into three distinct markets: residential replacement (including full-service stores and cash-and-carry outlets); specified contract (commercial); and builder business. Maxim believes that the residential replacement market comprises approximately 50% of the total North American residential floor covering market, with the specified contract and builder markets making up the remainder of the residential floor covering industry. The domestic retail floor covering industry is highly fragmented, with independent retail floor covering dealers operating over 25,000 locations. Home centers, furniture stores, department stores and mass merchants also offer floor covering products to the consumer. Despite a recent trend towards consolidation, Maxim believes that the retail floor covering industry remains characterized by a large number of small local and regional companies, none of which has a national brand name. The typical independent floor covering retailer operates a single store with limited product selection and service. As a result, Maxim believes that most independent floor covering retailers are at a competitive disadvantage, with limited purchasing power for products and service and no national brand name recognition. Other challenges of smaller retailers include effective asset management, merchandising, selling and store management techniques. MAXIM'S BUSINESS STRATEGY Maxim's objective is to establish the largest and most profitable residential and commercial floor covering distribution network in North America. Maxim has built an integrated floor covering distribution network, consisting of both Company-owned and franchised retail stores, supported by Maxim's extensive specialty retailing capabilities in product sourcing, store development, marketing and advertising, credit, personnel training and franchise support. 4 The cornerstone of Maxim's business strategy is focused on operating the Maxim Brands under a full-service floor covering retail concept that is designed to create competitive advantages over traditional floor covering stores. The principal elements of this strategy include: BROAD SELECTION OF PRODUCTS AND SERVICES. Maxim Brand flooring centers are one-stop, full-service floor covering stores for customers seeking a broad selection of carpet and other floor covering products. These flooring centers generally offer approximately 15,000 SKUs of floor covering products, including carpet, area rugs, hardwood flooring, ceramic tile, vinyl flooring, laminates, stone and resilient surfaces from leading global floor covering manufacturers. Maxim Brand stores typically carry a much broader selection of high quality floor covering products and offer a more comprehensive range of related services than those normally featured at traditional independently owned and operated floor covering outlets. PROVIDE A "POINT-OF-SALE" CUSTOMER FRIENDLY ENVIRONMENT WITH SUPERIOR SERVICE. Maxim believes that, at the point-of-sale, a customer friendly shopping environment and high level of customer service are important competitive advantages. The size and format of the typical Maxim Brand flooring center, along with a well-trained professional staff, emphasizes customer care and is designed to create a more comfortable, enjoyable and productive shopping experience. The Maxim Brand point-of-sale concept provides the customer with one-stop shopping, including selection, installation and on-going maintenance. In addition, Maxim Brand stores offer customers added conveniences, including a proprietary credit program, interior design consulting, delivery and installation services and a 100% satisfaction guarantee policy. DISTINCT RETAILING STRATEGIES. Maxim's retail floor covering sales are diversified across the residential replacement, home building and specified contract markets. Maxim Brand flooring centers (both franchised and Company-owned) offer a wide selection of high quality floor covering products with a high level of service to the customer, while GCO Carpet Outlets offer discount floor covering products to the cash-and-carry customer. Maxim believes that the breadth of its retail network and the diversity of its targeted customer base helps mitigate the negative impact on revenues that normally occur because of adverse changes in local competitive or economic conditions. ESTABLISH A NATIONAL BRAND. To enhance Maxim's strategy of becoming a true national retailer, Maxim intends to change the Maxim Brands to a single brand operating under the name "Flooring America." In an effort to reconcile territorial conflicts between Maxim's Company-owned stores and stores operated by franchisees under the "CarpetMAX" trade name, Maxim will focus on becoming a national retailer. Maxim believes that the new name will also help ensure that customers focus on flooring products rather than the multiple identities of the Maxim Brands. Store conversions from Maxim Brands to Flooring America commenced in October 1999 and extend through September 2000. To further support the consolidation to one brand, Maxim intends to offer its CarpetMAX franchisees the opportunity to convert their CarpetMAX stores to franchised Flooring America outlets pursuant to a franchise agreement similar to the current CarpetMAX franchise agreement, but with additional obligations and restrictions placed upon the franchisee more consistent with a typical franchise agreement. Maxim intends to build brand name awareness for Flooring America stores through community involvement, charitable acts and grass roots advertising efforts. To that end, Maxim has become a corporate sponsor for the Special Olympics and has chosen Cathy Rigby to act as its national spokesperson. SIGNIFICANT PRODUCT SOURCING CAPABILITIES. Maxim's large retail network provides significant purchasing power, enabling Maxim to receive advantageous pricing, delivery terms and merchandising programs from floor covering manufacturers. Maxim has established close relationships with major suppliers across all floor covering categories. By capitalizing on suppliers' production and delivery flexibility, Maxim offers its customers one of the largest selections of high quality floor covering products, generally on a just-in-time basis, thereby minimizing inventory 5 requirements while helping to maximize profitability. EXTENSIVE RETAILING INFRASTRUCTURE. In order to service its retail floor covering network, Maxim has built an extensive retail infrastructure, including store development, marketing, advertising, credit programs, sales and management training, and product sourcing resources. Maxim will continue to leverage these resources to support the opening of new Company-owned and franchised stores. OPERATING STRATEGY Maxim's strategic objective is to establish the largest and most profitable floor covering distribution network in North America. To achieve this objective, Maxim is pursuing the following strategies: INTEGRATE THE SHAW RETAIL STORES. A major strategic initiative was the acquisition of the Shaw retail stores during fiscal 1999. Maxim has begun to re-merchandise these stores, integrate their operations into Maxim's retail network, offer sales and management training to employees, and adopt a common reporting platform. Maxim expects these integration activities to continue beyond the end of the current fiscal year. EXPAND COMPANY-OWNED STORE BASE WITHIN ESTABLISHED MARKETS. Maxim expects to expand its ownership and operation of Company-owned stores by opening approximately 12 stores over fiscal year 2000, principally in existing or contiguous market areas. Maxim targets market areas with significant new residential building activity and/or more established communities where remodeling is likely to occur. Maxim believes that the continued rollout of Company-owned flooring centers will enhance profitability as Maxim leverages its retail infrastructure. EXPAND GCO FRANCHISE NETWORK. Maxim's strategy is to expand its franchise network by adding approximately 15 GCO franchised stores per year. Maxim believes that the expansion of the GCO franchise network complements Maxim's full service store base by giving price conscious customers an alternative offering. Further, with only 62 of the 211 Dominant Metropolitan Areas in the United States ("DMAs") currently covered by GCO Carpet Outlets, Maxim believes significant growth opportunities exist for the GCO Carpet Outlet concept. PENETRATE NEW DISTRIBUTION CHANNELS. Maxim intends to leverage its size by offering floor covering products and services to nontraditional markets such as insurance restoration, real estate selling organizations, homebuilders, and mortgage companies. EXPAND PRODUCT OFFERINGS AND SERVICES FOR EACH DISTRIBUTION FORMAT. Maxim believes that by offering new products and services to its customers, such 6 as consumer credit programs, installation and post-sale maintenance products and services, Maxim will increase retail productivity through more frequent and larger customer transactions. MERCHANDISING STRATEGY Maxim's merchandising strategy includes the re-branding of its retail stores to the Flooring America brand in order to increase the brand name recognition of Maxim Brand stores. Also, the product mix in the stores acquired from Shaw has been shifted to introduce a greater variety of floor covering products. In addition, Maxim has introduced initiatives to change the merchandise mix at many of its Maxim Brand retail stores to better serve its customers, while minimizing its inventory investment by relying on vendors to supply products on a just-in-time basis. RETAIL OPERATIONS Maxim's Company-owned retail stores are currently operated through a number of formats. The following table displays, for each major format, the number of Company-owned stores as of October 1, 1999:
ACQUIRED SHAW RETAIL STORES ---------------------------------------------------- NEW YORK THE CARPET CARPETMAX GCO CARPET WORLD CARPETLAND USA EXCHANGE OTHERS --------- --- ------------ -------------- ---------- ------ 59 12 141 33 24 54
CARPETMAX STORES. CarpetMAX stores carry a broad variety of CarpetMAX private label floor covering products from leading manufacturers. In April 1995, Maxim began opening Company-owned CarpetMAX stores and as of October 1, 1999, Maxim owned 59 CarpetMAX stores, including 27 Gallery stores. In November 1996, Maxim introduced a new concept in the design and operation of retail floor covering stores (currently known as CarpetMAX(R) Flooring Idea "Gallery") as the prototype format for most new Company-owned stores. These standardized 6,500 square foot stores located in Class A strip shopping retail space feature modern high-tech fixtures and displays, eye- 7 catching signage, bright lighting, a greeting area, a play and rest area for kids, departmentalized product displays, a working area for interfacing with customers and separate areas dedicated to the various product lines offered. The Gallery store provides customers with a "one-stop" shopping experience for all of their floor covering needs, catering primarily to consumers seeking a wide selection of high quality products. With a greater emphasis on hard surface floor covering products than a typical CarpetMAX store, Maxim believes that in certain markets the Gallery store meets increased consumer demand for alternatives to traditional carpet products. GCO CARPET OUTLETS. GCO caters to the cash-and-carry floor covering market through 12 discount floor covering stores under the name "GCO Carpet Outlets(R)." GCO stores average approximately 10,000 square feet of retail space that maintain in-store inventory. Generally, GCO Carpet Outlets derive more than 70% of their revenues from the sale of carpet, with the balance consisting of pad, hardwood and vinyl flooring sales. GCO Carpet Outlets cater primarily to price sensitive customers who do not require the higher levels of customer service and broad selection of products. Customers typically include "do-it-yourself" homeowners, homebuilders, rental property owners and property managers. In contrast to the full service operations of Maxim Brand stores, GCO Carpet Outlets do not offer delivery or installation services. Instead, customers requiring these services are provided a list of recommended independent contractors. Floor covering products are sold with a limited warranty. ACQUIRED SHAW RETAIL STORES. In August 1998, Maxim acquired 266 retail floor covering stores from Shaw. Each of these stores currently operates under one of ten brand names, including The Carpet Exchange, Carpetland USA and New York Carpet World. The various name brands acquired from Shaw operate under different business models with differing product and customer mixes. 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 Flooring America brand, adjusting merchandising fixtures and displays, closing certain stores and reviewing current operational practices at each store. RETAIL INFRASTRUCTURE SUPPLIER RELATIONSHIPS. Maxim believes it obtains quality products at a low cost due to the collective purchasing volume of Maxim's consolidated retail network and its relationships with major floor covering suppliers. The ability of Maxim to purchase certain private label products creates significant buying opportunities. In addition, Maxim's use of its suppliers' efficient distribution networks permits it to maintain low inventory levels at Maxim Brand stores. Maxim offers a full range of floor covering products from leading manufacturers. The following table lists a sampling of Maxim's major suppliers of certain of its floor covering products: 8 BROADLOOM CARPET: - - Shaw Industries, Inc. - - Mohawk Industries, Inc. VINYL FLOORING: - - Armstrong World Industries, Inc. HARDWOOD FLOORING: - - Triangle Pacific Corporation and its divisions CERAMIC TILE: - - Casa Italia - - EPC America - - Shaw Ceramics - - Stiles Tile Works LAMINATES: - - Perstop Flooring AB (Pergo) - - Formica Flooring Each of these suppliers is one of the leaders in its respective floor covering category. Maxim's suppliers also include niche carpet, vinyl, hardwood, laminate and ceramic tile producers worldwide, as well as leading manufacturers and importers of area rugs and other decorative floor covering products. ADVERTISING AND PROMOTION. Maxim, through its in-house, state-of-the-art production facilities, develops for its own use and the use of its franchisees high quality, creative marketing and promotion programs. These programs include television, radio, print and direct mail campaigns, sales literature and point-of-purchase programs. Maxim maintains on-site multi-track audio recording studios, a television production facility and a full-service media department and has produced nationwide advertising campaigns. Customized advertising packages are available to franchisees at lower rates than those charged by most advertising or production companies. RETAIL MANAGEMENT AND SALES TRAINING. Maxim focuses on enhancing retail productivity by applying proven techniques to train its store managers and sales representatives. All Company-owned store management and sales and operating personnel receive intensive training in a variety of areas ranging from product knowledge to sales and service techniques. Maxim offers a variety of training programs to its franchisees on a fee basis. These programs range from daily classes to intensive one-week programs. Store personnel receive a comprehensive training and orientation program, which emphasizes Maxim's advertising and marketing support, proprietary credit programs, store operations and general business practices. 9 To further enhance its training capabilities, Maxim utilizes an interactive digital video and audio satellite communications system. The training system utilizes interactive communication capabilities to broadcast training and merchandising programs to Company-owned stores and franchised stores. Broadcasts disseminate information about sales training, new technology, new products, merchandising, product specials and design trends. SITE SELECTION AND STORE DEVELOPMENT AND DESIGN. Maxim has an in-house store development department with responsibility for site selection, contract negotiation and build-out of stores. In locating new sites, the store development department evaluates the economic conditions, demographics, growth and customer base of potential markets, as well as possible competition. For new stores, Maxim also targets areas with significant new residential building activity or older, more established communities where remodeling is likely to occur. Within each market, Maxim seeks to locate flooring centers in prime retail locations with high consumer visibility. Maxim's strategy is to open multiple stores within each market to achieve management, operating and advertising efficiencies and to help create barriers to competitive entry or expansion. The interior store design includes a pre-determined product mix, fixtures and display systems, and point-of-sale merchandising signage and promotional materials. MANAGEMENT INFORMATION SYSTEMS. Most Company-owned stores are currently operating their businesses with the information systems that were in place at the time of acquisition or opening by Maxim. Using its current information systems, Maxim obtains information on a daily basis detailing sales, closing ratios and various other data relating to retail store operations. Maxim is currently integrating its systems to provide operating units with appropriate management information and to streamline transaction processing. All information system functions relating to the stores acquired from Shaw are transitioning from Shaw to Maxim. Despite some difficulties, the primary challenge of developing a skilled staff and technical infrastructure has been substantially completed. The remaining issues concern the timing of change overs to avoid business interruptions. The hardware has been upgraded for the store network and Maxim has implemented SAP modules covering general ledger, human resources and payroll functions. One of the Company's regions is currently operating on SAP Retail to validate the fit for all Company-owned stores. BUILDER AND SPECIFIED CONTRACT OPERATIONS To expand market share and enhance its management expertise in the builder market of the floor covering industry, Maxim has acquired companies with excellent reputations in this market. Maxim services the builder market primarily in local areas where it has established regional service centers and a base of CarpetMAX stores. The specified contract business caters primarily to the floor covering requirements of larger commercial customers. By leveraging 10 the established infrastructure available in these local markets, Maxim seeks to utilize its extensive merchandise mix, product displays, sales personnel and customer service capabilities to cater to the builders' needs. CUSTOMER SERVICE Maxim seeks to differentiate itself from other independent and large retailers through its customer service offerings. Accordingly, Maxim Brand flooring centers offer retail customers the following services: INTERIOR DESIGN AND PRODUCT SELECTION. Sales professionals assist customers in all aspects of selecting floor covering (including assessment of interior design preferences), coordination with other home furnishings and decorating preferences, and product layout and measuring. To ensure customer satisfaction, Maxim offers a 30-day unconditional satisfaction guarantee. Maxim Brand sales professionals seek opportunities to visit a customer's home or commercial location to verify proper installation and to identify additional sales opportunities. DELIVERY AND INSTALLATION. Maxim Brand flooring centers rely on local contractors for the installation of floor covering products. Installation is often the final contact with customers, therefore Maxim has developed the "Ten Point Must System," a merit-based training program for its installation subcontractors, to guarantee consistent, high quality installation services. CONSUMER CREDIT PROGRAM. Maxim, in affiliation with a national provider of consumer financing, began offering consumer credit to its customers in November 1996. This consumer credit program is marketed as the "Wall-to-Wall" credit program and is exclusively for the use of Maxim Brand stores and participating franchisees. Maxim believes these credit programs enhance closing ratios and lead to higher average ticket purchases. Maxim uses a pre-approved listing service, which enables it to solicit sales from 100% credit pre-approved potential customers. With 60-day, 90-day, 6-month and 12-month interest-free programs, plus revolving credit packages, Maxim offers a variety of credit plans to its customers. Maxim also offers longer term (up to two years) third-party consumer credit financing for its customers. Under certain circumstances, Maxim may be contingently liable for the credit extended. Maxim receives a percentage of interest attributable to accounts outstanding. FRANCHISE OPERATIONS Maxim is the largest franchisor of floor covering stores in the United States. As of October 1, 1999, Maxim had (i) 113 GCO franchised stores operating in 62 of the 211 DMAs in the United States and (ii) 376 CarpetMAX 11 franchise territories, within which there were approximately 515 CarpetMAX stores. Because of the different nature of their business, CarpetMAX and GCO franchisees may be established in the same geographic territory. In addition to the GCO and CarpetMAX franchises, in February 1997, Maxim began to offer MaxCARE(R) franchises to address the increased demand for carpet and upholstery cleaning services and wood refurbishing. As of October 1, 1999, Maxim had sold 86 MaxCARE franchises. Finally, in November 1998 following the acquisition of the CarpetsPlus dealership system, Maxim began to offer CarpetsPlus franchises to unaffiliated large, full-service retail floor covering dealers who sought enhanced purchasing power without the structure and brand affiliation associated with a CarpetMAX franchise. The following table sets forth the number of franchised flooring centers/locations for each of Maxim's franchise concepts:
October 1, January 31, --------------- ------------------------------ 1999 1999 1998 1997 --------------- ---- ---- ---- CarpetMax 515(1) 572 463 457 GCO 113 110 101 102 CarpetsPlus 292(2) 250(2) -- -- MaxCARE 86 61 24 -- Other 29 30 -- --
(1) The decrease in the number of CarpetMAX franchise stores from 572 on January 31, 1999 to 515 on October 1, 1999 was due to store closures, bankruptcies, terminations, voluntary departures, and conversions to CarpetsPlus. (2) Assumes that all CarpetsPlus dealers convert to the new CarpetsPlus franchise system. CARPETMAX FRANCHISE NETWORK. Maxim generates revenues from CarpetMAX franchisees through two primary sources: initial franchise fees and rebates, commissions or fees paid by suppliers based on franchisees' purchases of floor covering products. The current form of the CarpetMAX franchise agreement requires the payment of an initial one-time franchise fee and requires the franchisees to purchase at least 90% of their total purchases of floor covering products from suppliers designated by Maxim and sanctioned by the CarpetMAX Merchandise Committee. In addition to having access to floor covering products at lower cost, CarpetMAX franchisees also have access to CarpetMAX private label products and specials. In June 1998, Maxim modified the CarpetMAX(R) franchise program by (i) selectively reducing the number of designated suppliers to enhance the buying leverage of its franchisees and to help ensure that suppliers focus their efforts on CarpetMAX branded products, (ii) offering, at no charge, many of the services previously offered on a fee for service basis, and (iii) instituting additional obligations to be undertaken by franchisees which are consistent with traditional franchisee obligations, such as signage requirements. CarpetMAX franchisees have the exclusive right to operate a CarpetMAX 12 franchise utilizing the CarpetMAX trademarks within a specific geographic area (the "Exclusive Area"). Provided the franchisee is not in default of its franchise agreement, Maxim may not license another CarpetMAX franchisee to operate within the other franchisee's Exclusive Area, nor may Maxim or any affiliate of Maxim operate a CarpetMAX store within the Exclusive Area without the franchisee's consent. However, Maxim generally reserves the right to operate other branded concepts offering floor covering products within the Exclusive Area. CarpetMAX franchise agreements have an indefinite term and generally may be terminated by (i) the franchisee in the event that Maxim materially breaches the franchise agreement or, within three days of execution of the franchise agreement, if the franchisee disapproves of the initial price list provided to the franchisee for the various floor covering products offered through the CarpetMAX system or (ii) Maxim upon the occurrence of certain events of default listed in the franchise agreement. GCO FRANCHISE NETWORK. Maxim generates revenues from GCO franchisees through both initial franchise fees paid upon store openings and royalty fees based on store sales. The GCO initial franchise fee ranges from $5,000 to $25,000 depending on whether the franchisee is an existing GCO or CarpetMAX franchisee. Each franchisee pays a royalty of 3% on net delivered sales between $500,000 and $1.5 million, 2-1/2% on net delivered sales between $1.5 million and $2.0 million, and 2% on net delivered sales over $2.0 million during a year. The GCO franchise agreement requires franchisees to spend approximately 5% to 15% of their gross revenues budgeted per quarter on advertising and promotional activities. To serve the needs of its franchisees, Maxim has continued to expand the scope of services available to GCO franchisees. For example, Maxim now offers services relating to site selection assistance, merchandising, advertising and promotion, management and sales training, consumer credit, information systems and other store operations. In order to take advantage of increasing demand for hard surface flooring materials among the GCO customer base, Maxim entered into an agreement with Color Tile, LLC ("Color Tile"). Under the agreement, Maxim may offer to GCO franchisees the right to sell Color Tile (R) hard surface floor covering materials in franchised GCO carpet outlets. This arrangement requires the franchisee to pay Maxim license fees in addition to royalties based on gross revenues, including sales of Color Tile products. GCO franchisees have limited exclusivity to use the GCO business concept and service marks, logos, slogans and other identifying features within a specific geographic area (the "Protected Territory"), provided that the franchisee is not in default of its franchise agreement and subject to certain limitations and exceptions. Maxim may not grant more than one GCO Carpet Outlet franchise within a Protected Territory, nor may Maxim or any affiliate of Maxim, operate a Company-owned discount floor covering store using the GCO marks or the GCO franchise system within a Protected Territory without the franchisee's consent. GCO franchise agreements have a term of 10 years, may 13 be renewed for additional consecutive terms of five years and may be terminated by (i) the franchisee in the event that Maxim fails to cure a material breach of the franchise agreement or (ii) Maxim upon the occurrence of certain events of default as set forth in the franchise agreement. GCO offers area development agreements, under which a franchisee commits to opening multiple stores in a single market area in exchange for discounted initial franchise fees. GCO also offers other expansion incentives to existing franchisees and CarpetMAX dealers, including discounted franchise fees under certain circumstances. CARPETSPLUS FRANCHISE NETWORK. Effective September 25, 1998, Maxim acquired CarpetsPlus of America, LLC, a national resource network specializing in the retail flooring industry. The acquired company operated a loosely affiliated group of large full-service retail floor covering dealers, which offered its group members enhanced buying power. Effective November 1998, Maxim offered CarpetPlus franchises to independent unaffiliated retail floor covering dealers to (i) take advantage of their cumulative purchasing power to obtain favorable pricing from selected suppliers, (ii) use the "CarpetsPlus(TM)" and other related trademarks, (iii) purchase private-label CarpetsPlus products, (iv) obtain assistance in strategic product selection and store design and layouts and, (v) obtain rebates on purchases of floor covering products. The CarpetsPlus franchise program is intended to supplement the franchisee's current business activities and does not require the franchisee to change any aspect of its business. Each CarpetsPlus franchisee receives an exclusive territory within which no other franchised CarpetsPlus store will be located. There are no signage requirements. The initial membership fee is $7,500 to operate the franchise from the franchisee's existing retail floor covering store. If the franchisee wants to operate additional retail floor covering stores within the franchise, the franchisee must pay an additional membership fee of $5,000 per store. Franchisees do not pay royalty fees or advertising fees. Maxim receives rebates or commissions based upon CarpetsPlus franchisees' purchases from the designated suppliers and distributors. CarpetsPlus franchise agreements have an indefinite term and may be terminated by the franchisee for any reason upon 90 days' prior notice to Maxim and by Maxim upon the occurrence of certain events of default listed in the franchise agreement. All CarpetsPlus franchisees are required to purchase no less than 50% of their total purchases of floor covering products from suppliers or distributors designated by Maxim. MAXCARE FRANCHISE NETWORK. Under the MaxCARE system, franchisees offer carpet, upholstery cleaning and wood refurbishing, and related services to both individuals and businesses. These services are provided using standardized equipment, which is mounted in vans or trucks bearing MaxCARE's distinctive colors and signage. Each MaxCARE franchisee receives an exclusive operating territory, which typically includes one or more counties 14 within a state. All franchisees are required to offer the products and services specified by Maxim. Maxim expects a significant number of MaxCARE franchises will be operated by CarpetMAX franchisees or other entities that currently operate retail businesses that are complementary with the services offered through MaxCARE franchises. Each MaxCARE franchisee is required to purchase certain products from Maxim and may purchase services from several of Maxim's divisions including Maxim Marketing. Each franchisee must pay an initial franchise fee based upon the population in the franchisee's operating territory, with a minimum initial franchise fee of $12,500. The payment of the franchise fee is generally financed over a period of five years. MaxCARE franchise agreements have a term of 10 years, may be renewed for one additional term of 10 years and may be terminated by (i) the franchisee in the event that Maxim fails to cure a material breach of the franchise agreement or (ii) Maxim upon the occurrence of certain events of default listed in the franchise agreement. In addition to the initial franchise fee, all MaxCARE franchisees must purchase one or more specially equipped vans, carpet and wood cleaning machines and accessories from Maxim or its designated suppliers before they begin operations. All franchisees must pay a royalty of 6% of their gross sales, subject to a minimum monthly royalty payment of $200 per month during the first year, with minimum monthly royalty increases of $200 per month during each successive year, up to a maximum of $1,000 per month during the fifth year and thereafter. All franchisees must contribute 2% of gross sales to a national advertising fund administered by Maxim and must spend not less than 8% of gross sales on local advertising. COMPETITION Competition in the retail floor covering market is intense due to the significant number of retailers. Large retailers of floor coverings who provide significant competition include The Home Depot, Inc., Lowe's Corporation and Sears, Roebuck & Co. The principal areas of competition within the retail floor covering industry include store location, product selection, merchandising, customer service and price. Maxim believes that there are two primary competitors to its CarpetMAX franchise business: Carpet One and Abbey Rug. Maxim distinguishes its CarpetMAX franchise system from its competition by offering a full range of services to its franchise members in addition to the traditional services of purchasing and merchandising. Management believes that CarpetMAX competitors subcontract most services (except floor covering purchasing) to outside vendors. TRADEMARKS, SERVICE MARKS, TRADE NAMES AND COMMERCIAL SYMBOLS Maxim has registered a number of marks with the U.S. Patent and Trademark Office including CARPETMAX(R), CARPET MAX(R), CARPETMAX -THE NATIONAL CARPET EXCHANGE(R), MAKING A WORLD OF 15 DIFFERENCE(R), CarpetMax Making a World of Difference(R), MaxCARE(R), MaxCARE-Professional Cleaning Systems(R), Carpetland USA(R), New York Carpet World(R), GCO(R) and GCO CARPET OUTLETS(R). Maxim has also applied for registration of several other marks including CarpetMAX Flooring Idea Gallery(TM), CarpetsPlus(TM) and design and word marks for Flooring America (TM). GCO also uses a number of service marks in association with its standard GCO franchise including a word mark consisting of the words "GCO Carpet Outlets(TM)," and design and word marks consisting of "GCO Carpet Outlets(TM)" or "Georgia Carpet Outlets(TM)." EMPLOYEES As of October 1, 1999, Maxim employed approximately 4,142 persons. No employee is a party to any collective bargaining agreement. GOVERNMENTAL REGULATION Maxim is subject to Federal Trade Commission ("FTC") regulations governing the offer and sale of franchises. The FTC's Trade Regulation Rule on Franchising requires Maxim to furnish to prospective franchisees a franchise-offering circular containing certain information prescribed by the FTC rule. State laws that regulate the offer and sale of franchises and the franchisor-franchisee relationship currently exist in a substantial number of states. Such laws generally require registration of the franchise offering circular with state authorities prior to the offer or sale of franchises and regulate the franchise relationship by, for example, requiring the franchisor to deal with its franchisees in good faith, prohibiting misrepresentations and interference with the right of free association among franchisees, limiting the imposition of standards of performance on a franchisee and regulating discrimination against franchisees in charges, royalties or fees. Although such laws may restrict a franchisor in the termination of a franchise agreement by, for example, requiring "good cause" to exist as a basis for the termination, advance notice to the franchisee of the termination, an opportunity to cure a default and a requirement to repurchase inventory or other compensation, these provisions have not had a significant effect on Maxim's franchise operations. Maxim is not currently aware of any pending franchise legislation, which in its view would have a material adverse effect on the operations of Maxim. However, various legislative proposals have been or are being debated at both the state and federal levels, which could result in new laws regulating the offer and sale of franchises and other aspects of the franchisor-franchisee relationship. It is possible that such legislation, if enacted, could affect Maxim's franchise operations. Maxim believes, however, that its operations comply in all material respects with current federal and state franchise regulations. 16 Each Company-owned store and franchise location is subject to licensing and regulation by a number of governmental authorities, which may include health, sanitation, safely, fire, building and other agencies in the state or municipality in which the business is located. Difficulties in obtaining, or failure to obtain, the required licenses or approvals could delay or prevent the procurement of new Company-owned store sites or franchises in a particular area. RISK FACTORS AN INVESTMENT IN MAXIM'S COMMON STOCK INVOLVES A SIGNIFICANT DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY THESE RISK FACTORS TOGETHER WITH ALL OF THE INFORMATION INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K BEFORE YOU DECIDE TO PURCHASE ANY OF MAXIM'S SECURITIES. RISKS ASSOCIATED WITH ACQUISITIONS THE INTEGRATION OF NEW BUSINESSES, INCLUDING THE RETAIL STORES ACQUIRED FROM SHAW, HAS RESULTED IN DIFFICULTIES AND MAY CAUSE US TO DEVOTE A DISPROPORTIONATE AMOUNT OF OUR RESOURCES AND OUR MANAGEMENT'S TIME. The process of integrating new businesses into our operations represents a significant challenge. The process of integrating acquired businesses into Maxim's operations may result in difficulties and may require a disproportionate amount of resources and management attention. In particular, prior to their acquisition by Maxim, the Shaw retail stores incurred significant losses and operated at a lower profit level than is typical in the retail floor covering industry. Although Maxim has made improvements in the profitability and sales at these acquired stores, they continue to operate at a loss and have adversely affected our results of operations. To the extent such conditions continue, they may affect, not only the operation of the acquired stores, but also the consolidated results of operations of Maxim in future periods. There can be no assurance that Maxim will be able to operate these stores profitably in the future. In addition, as we expanded our network of Company-owned stores through acquisitions, some of the acquired stores were located in areas within existing CarpetMAX franchisees' exclusive territories. As a result, CarpetMAX franchisees have claimed and may in the future claim that these expansion activities infringe on their exclusive rights. Additionally, such acquisitions could cause these CarpetMAX franchisees to attempt to terminate their franchise agreements and leave the CarpetMAX franchise program, which would impact the revenue we receive from these franchisees. Any such claims by franchisees could result in litigation, which would cause us to expend our resources to defend these claims. 17 ANY FUTURE ACQUISITIONS COULD POTENTIALLY HAVE ADDITIONAL ADVERSE CONSEQUENCES FOR YOU AS A SHAREHOLDER. As a result of future acquisitions, we may: - incur significant charges to earnings as a result of restructuring charges, and - dilute the ownership of shareholders, as we may need to finance these acquisitions through the issuance of additional common stock. In addition, we can not assure you that competition for acquisition candidates will not increase, causing the costs of making acquisitions to increase. MAXIM HAS A RELATIVELY LIMITED HISTORY OF OPENING AND OPERATING COMPANY-OWNED STORES. Maxim has limited experience in the acquisition of property for, construction, opening and direct management of Company-owned stores. Our growth and future operating results depend principally on our ability to manage the newly acquired Shaw retail stores and to open and operate stores during the remainder of fiscal 2000 and beyond. IF WE ARE UNABLE TO SUCCESSFULLY UPGRADE AND INTEGRATE OUR NEW OPERATIONS WITH OUR CURRENT SYSTEMS, IT MAY SIGNIFICANTLY AFFECT OUR GROWTH AND PROFITABILITY. Our growth and profitability is significantly dependent on our ability to upgrade and integrate all of our operations into a new centralized management information, accounting, internal control and purchasing system. We are currently developing a centralized information system to integrate our store operations and financial data. There can be no assurance that the implementation of this new information system will be successful or accomplished in a timely manner. Our inability to implement these upgrades and integration on a timely basis may have an adverse effect on the successful operation of our business and our growth strategy. The SAP Retail enterprise system is currently in a test environment in one Company-owned retail region. The potential rollout plan is currently under evaluation. In the event SAP Retail proves not to be a fit for Maxim's operations, integration of the Company-owned retail network would be delayed. RISKS OF INDEBTEDNESS OUR 9 1/4% SENIOR SUBORDINATED NOTES ARE CURRENTLY IN DEFAULT. Maxim is currently in default of the restricted payment covenant contained 18 in the indenture pursuant to which our senior subordinated notes were issued. The default occurred in September 1998 when Maxim repurchased shares of its common stock in amounts exceeding that permitted by the indenture. So long as the senior subordinated notes are in default, Maxim will not be permitted to make restricted payments, which includes stock repurchases and dividend payments, or engage in certain corporate transactions, including mergers involving Maxim or certain of its subsidiaries. We have reached an agreement in principle with the holders of the senior subordinated notes to waive this default. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Until the default is waived by the note holders or cured, either the trustee or the holders of not less than 25% in aggregate principal amount of senior subordinated notes outstanding may accelerate payment of the senior subordinated notes at any time. There can be no assurance that such waiver will be granted. As of October 1, 1999, $96 million of senior subordinated notes were outstanding. In the event the repayment of the senior subordinated notes is accelerated, we may not have sufficient cash reserves and availability under our senior credit facility to meet this obligation. This uncertainty has led the Company's independent public accountants to include a paragraph in their report on our consolidated financial statements for the year ended January 31, 1999 that questions Maxim's ability to continue as a going concern. See Note 1 to Maxim's Consolidated Financial Statements included elsewhere herein. TO SERVICE OUR CURRENT OBLIGATIONS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. Our ability to make payments to satisfy our debt and other obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, which are beyond our control. Assuming that we can obtain a waiver of the default under the senior subordinated notes and renegotiate our senior credit facility, management believes that available cash reserves and cash flow from operations, together with available borrowings under our senior credit facility, will be sufficient to service our debt obligations as they become due for the foreseeable future. If we are unable to service our debt obligations, we will be required to adopt alternative strategies. These strategies may include: - reducing or delaying our capital expenditures, - curtailing or eliminating the opening of Company-owned stores, - selling assets, - restructuring or refinancing our indebtedness, or - seeking additional equity capital. We can not assure you that any of these strategies could be implemented on satisfactory terms, if at all. Our inability to service our debt obligations may result in the acceleration of some or all of our indebtedness, which would have a material adverse effect on our financial condition. OPERATING RISKS WE COMPETE WITH A SIGNIFICANT NUMBER OF RETAILERS, INCLUDING SOME THAT HAVE GREATER RESOURCES THAN MAXIM. 19 Competition in the retail floor covering market is intense due to the significant number of retailers in this market. Larger, more diversified retailers also provide significant competition, including The Home Depot, Inc., Lowe's Corporation and Sears, Roebuck & Co. The principal methods of competition within the retail floor covering industry include store location, product selection, merchandising, customer service and price. We can make no assurance that our competitors will not substantially increase resources devoted to the marketing and sale of products competitive with our products, which could require us to reduce prices or increase spending on product development, marketing and sales. This increased competition could have a material adverse effect on us. OUR EARNINGS MAY FLUCTUATE FROM QUARTER TO QUARTER, WHICH MAY AFFECT THE PRICE OF OUR COMMON STOCK. Our quarterly operating results have fluctuated in the past and are expected to fluctuate in the future as a result of a variety of factors, including: - the timing of store openings and related pre-opening expenses, - weather conditions, - price increases by suppliers, - actions by competitors, - conditions in the carpet manufacturing, home building and improvement markets and the floor covering industry in general, and - regional and national economic conditions and other factors. Moreover, we believe that some of this fluctuation is the result of the fact that our business experiences some measure of seasonality which, Maxim believes, is typical of the floor covering industry. Individual stores generally experience lower net sales, operating results and cash flow from operations and Maxim as a whole experiences lower sales of floor covering products in the first and fourth fiscal quarters than in the second and third fiscal quarters. We believe these lower results of operations are primarily due to the effects of winter weather on home construction and improvement projects. The market price of our securities could be subject to significant fluctuations in response to our operating results and other factors, and we can make no assurance that the market price of our securities will not decline below current levels. A PROLONGED ECONOMIC DOWNTURN IN THE ECONOMY WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. The floor covering industry historically has been adversely impacted by economic downturns. We believe that the industry is significantly influenced by: - consumer behavior, 20 - consumer confidence, - the level of personal discretionary spending, - the condition of the residential and commercial construction industries, - interest rates, - credit availability, and - the overall strength of the economy. Therefore, a prolonged economic downturn could have a material adverse effect on our business operations. OUR SUCCESS IS DEPENDENT UPON, AMONG OTHER THINGS, THE SKILLS, EXPERIENCE AND EFFORTS OF OUR SENIOR MANAGEMENT. The loss of the services of members of senior management could have a material adverse effect on our business and prospects. We have entered into employment agreements with Mr. Nassar, Maxim's Chief Executive Officer, and Mr. Thill, Maxim's new Chief Financial Officer. In addition, we believe that our future success will depend in part upon our ability to continue to attract, retain and motivate highly qualified senior management and other personnel. There is serious competition for highly qualified senior management. WE DEPEND ON A FEW LARGE SUPPLIERS FOR OUR FLOOR COVERING PRODUCTS AND THE DISTRIBUTION OF THESE PRODUCTS. Our retail network relies on several large independent floor covering manufacturers for the supply of certain floor covering products. These manufacturers include Shaw and Mohawk Industries, Inc., which together supplied in excess of 50% of our floor covering purchases during the year ended January 31, 1999. In addition, our retail inventory management is highly dependent on the delivery capabilities of these manufacturers. Any significant change in our relationships with these manufacturers, or in these manufacturers' production or distribution methods could have a material adverse effect on our business operations. Although these manufacturers have been reliable, high quality producers in the past, we can make no assurance that these manufacturers will be willing or able to meet our requirements and our franchisees' requirements on a timely basis or that these manufacturers' pricing and rebate policies will remain competitive. While we believe there are a number of alternative manufacturers capable of supplying and distributing our floor covering products, any delays in obtaining alternative suppliers could have a material adverse effect on our operations and those of our franchisees. In addition, we rely on some of our suppliers to provide us with advertising and other vendor support funds to help support our store operations. If these suppliers do not contribute such vendor support, our results of operations may be adversely affected. 21 MAXIM'S BUSINESS OPERATIONS COULD BE ADVERSELY AFFECTED BY ANY CHANGES IN THE LAWS THAT REGULATE OUR RELATIONSHIPS WITH OUR FRANCHISEES. We are subject to federal regulations and state laws that regulate the offer and sale of franchisees and the franchisor-franchisee relationship. We are not aware of any pending franchise legislation that is likely to have a material adverse effect on our operations. We are aware, however, that various legislative proposals have been or are being debated at both the state and federal levels which could result in new laws regulating the offer and sale of franchises and other aspects of the franchisor-franchisee relationship. It is possible that such legislation, if enacted, could aversely affect our franchise operations. IT IS POSSIBLE THAT OUR COMPUTER SYSTEMS, OR THOSE OF OUR MAJOR SUPPLIERS, WILL FAIL TO OPERATE PROPERLY BEGINNING JANUARY 1, 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. 22 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 $189,000 had been expensed as of January 31, 1999, and approximately $1.6 million remains to be spent as of October 1, 1999. All costs associated with analyzing the Year 2000 issue or making conversions to existing software are being expensed as incurred. The costs to Maxim of Year 2000 compliance and the date on which Maxim believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. 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. THE DISCOVERY OF ADVERSE HEALTH EFFECTS RESULTING FROM CARPET COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND THOSE OF OUR FRANCHISEES. The effect of carpet and other floor covering products on indoor air quality has been the subject of debate in recent years. Although it is uncertain whether emissions from carpet pose a health hazard, there can be no assurance that researchers will not detect hazardous levels of emissions from carpet. The discovery of adverse health effects resulting from carpet, or the public perception of these effects, could have a material adverse effect on our operations and those of our franchisees. RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS WE ARE RESTRICTED IN MANY WAYS BY THE INDENTURE GOVERNING THE TERMS OF OUR SENIOR SUBORDINATED NOTES. The indenture governing the terms of our senior subordinated notes contains covenants which limit our ability to, among other things: - incur additional indebtedness, - pay dividends on the common stock, - redeem our capital stock, - make certain investments, - issue the capital stock of our subsidiaries, - create liens on our subsidiaries and other restrictions affecting our subsidiaries, - issue guarantees, - transact business with affiliates, and - sell assets and/or merge and consolidate with other entities. WE ARE ALSO RESTRICTED BY OUR SENIOR CREDIT FACILITY, WHICH CONTAINS ADDITIONAL RESTRICTIVE COVENANTS AND REQUIRES US TO SATISFY CERTAIN FINANCIAL TESTS. 23 Our senior credit facility contains other restrictive covenants and requires us to satisfy certain financial tests, including maintaining certain ratios relating to levels of total debt, consolidated senior debt, and earnings. Our ability to comply with these covenants and to satisfy these financial tests may be affected by events beyond our control. A breach of any of these covenants could result in an event of default under the senior credit facility and the indenture. In the event of default under the senior credit facility, our lenders could elect to declare all amounts borrowed, together with accrued interest, to be immediately due and payable. The lenders under the senior credit facility could also terminate all commitments under the credit facility and, if such borrowed amounts are not paid, enforce their rights pursuant to the security interests on certain assets of the Company. In addition, default under the senior credit facility could constitute default under the indenture, and vice-versa. Because the senior subordinated notes are currently in default, the credit facility is also deemed to be in default. Maxim's senior lenders have entered into a forbearance agreement with respect to such default, which forbearance currently extends to February 1, 2000. IF THERE IS A CHANGE IN CONTROL OF MAXIM, WE MAY NOT HAVE SUFFICIENT FUNDS TO REPAY THE INDEBTEDNESS, WHICH WE COULD BE REQUIRED TO PAY UNDER THE TERMS OF OUR SENIOR SUBORDINATED NOTES. Upon the occurrence of a change in the control of Maxim, each holder of our senior subordinated notes may require us to purchase all or a portion of the holder's notes at 101% of the principal amount of the notes, with interest accrued, if any, from the last interest payment date. Under these circumstances, we may be required to: - repay all or a portion of the outstanding principal of, and pay any accrued interest on, our senior indebtedness, or - obtain a consent from our lenders to permit the purchase. If we are unable to repay all of the indebtedness or are unable to obtain the necessary consents, we may not be able to offer to purchase the notes, which would cause us to be in default under the indenture. We may not have sufficient funds available at the time of any change in control of Maxim to make any debt payment as described above. Even if we were able to obtain refinancing, we can make no assurance that the financing will be on terms acceptable to us. THE SAME TYPES OF EVENTS THAT WOULD CAUSE US TO BE IN DEFAULT UNDER THE SENIOR SUBORDINATED NOTES MAY ALSO CAUSE US TO BE IN DEFAULT UNDER OUR OTHER INDEBTEDNESS. The events that constitute a change in the control of Maxim under the indenture may also cause us to be in default under the senior credit facility or our other senior indebtedness. Such a default may permit the holders of our debt instruments to reduce their borrowings or accelerate the debt and, if the debt is not paid, to enforce their rights pursuant to security interests on certain of our assets. OTHER RISKS THE ULTIMATE RESOLUTION OF THE CLASS ACTION LAWSUITS AND THE SEC INQUIRY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. 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 commenced an informal inquiry in connection with the matters relating to the restatement. See "Item 3. Legal Proceedings." While we have made all adjustments considered necessary in restating our financial statements, we can provide no assurances that additional adjustments will not be necessary as a result of a review by the SEC. We do not believe that it is feasible to predict or determine the final outcome of the class action lawsuits or the SEC inquiry and their effect on Maxim's financial results, its business or its management. In addition, it is not 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 us or settlements that could require substantial payments by us. 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. We believe that material adverse outcomes with respect to the class action lawsuits or the SEC inquiry could have a material adverse effect on our financial condition, results of operations and cash flows. 24 MAXIM'S CERTIFICATE OF INCORPORATION CONTAINS PROVISIONS THAT COULD SERVE TO DETER OR PREVENT TAKE-OVER ATTEMPTS BY A POTENTIAL PURCHASER OF SHARES OF OUR COMMON STOCK WHO WOULD BE WILLING TO PAY A PREMIUM OVER MARKET PRICE. Our Certificate of Incorporation contains provisions which give the board of directors the ability to deter or prevent a merger with, or a sale of control to a third party even though a majority of our stockholders may vote in favor of such a transaction. We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which may have the effect of delaying, deferring, or preventing a change in control of Maxim by limiting transactions between Maxim and those stockholders who generally own 15% or more of our outstanding capital stock. In addition, our Certificate of Incorporation includes a number of additional anti-takeover provisions which: - require a staggered board of directors, which means that only one-third of the members of our board of directors is elected each year, - limit the ability of stockholders to call special meetings, - eliminate stockholder action by unanimous consent, - restrict the ability of the stockholders to amend certain provisions of the Certificate of Incorporation, - permit the board of directors to amend our Bylaws without stockholder consent, and - authorize the issuance of up to 1,000,000 shares of preferred stock by the board of directors without stockholder action. These provisions make it more difficult for a third party to achieve a change in control of Maxim through the acquisition of a large block of our common stock and may have the effect of encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. As a result, you may be deprived of opportunities to sell some or all of your shares at prices that represent a premium over market price. ITEM 2. PROPERTIES. As of October 1, 1999, Maxim leased approximately 259 facilities and owned approximately 64 facilities, through which it conducts its retail operations. Maxim's corporate staff is located in an owned 150,000 square foot facility on a 13-acre site in Kennesaw, Georgia, a suburb of Atlanta. ITEM 3. LEGAL PROCEEDINGS. 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. Each of these actions was filed in the U. S. District Court for the Northern District of Georgia. The plaintiffs in these actions purport to represent a class of all persons who purchased or otherwise acquired the common stock of Maxim between August 31, 1998 and May 19, 1999. The Complaints allege that Maxim and certain of its current and former officers and directors violated the federal securities laws by, among other things, issuing materially false and misleading statements regarding Maxim's financial results for fiscal 1999 and for certain quarters therein, which had the effect of artificially inflating the market price of Maxim's common stock. The Complaints allege that by virtue of this conduct the defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the "34 Act") and SEC Rule 10b-5 thereunder. The Complaints also allege that the individual defendants were controlling persons within the meaning of Section 20 of the 1934 Act and are therefore liable to the plaintiffs on that basis as well. The Complaints seek compensatory and punitive damages along with pre-judgment interest, reasonable attorneys fees, expert witness fees and other costs. On August 16, 1999, the defendants moved to dismiss all the complaints on the grounds that they do not plead sufficient facts to set forth a fraud claim. The proposed lead plaintiff, Rudman Partners, LP, has opposed the motion and sought leave to file a consolidated, amended complaint. Maxim and its named officers and directors intend to vigorously defend these claims. These actions have only recently been filed, however, and it is not possible at this time to determine the outcome of these lawsuits or the effect of their resolution on Maxim's financial position or operating results. Management believes that Maxim's defenses have merit; however, there can be no assurance that Maxim will be successful in its defense or that these lawsuits will not have a material adverse effect on Maxim's results of operations for some period or on Maxim's financial position. See "Item 1. Business--Risk Factors." Maxim has made a claim under its directors and officers liability insurance policy with respect to the litigation. There can be no assurance, however, that this policy will be sufficient to cover all liability in the event of an adverse outcome in the lawsuits. Since the May 18, 1999 announcement that Maxim would be restating financial results for fiscal 1999 and certain of the quarters therein, the Securities and Exchange Commission commenced an informal inquiry in connection with the matters relating to the restatement. The SEC may convert the informal inquiry into a formal investigation of the matters relating to the restatement. The staff of the SEC has advised Maxim that its inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred. Except as discussed above, there are no material pending legal proceedings to which Maxim is a 25 party or of which any of its properties are subject; nor are there material proceedings known to Maxim to be contemplated by any governmental authority; nor are there material proceedings known to Maxim in which any director, officer or affiliate or any principal security holder of Maxim, or any associate of any of the foregoing is a party or has an interest adverse to Maxim. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On December 17, 1998, Maxim held a Special Meeting of Shareholders to approve an amendment to its Certificate of Incorporation and an amendment to its 1993 Stock Option Plan. At the meeting, Maxim's shareholders approved an amendment to Maxim's Certificate of Incorporation to increase the number of authorized shares of common stock from 25 million shares to 75 million shares. The number of votes cast in favor of adoption of the amendment to the Certificate of Incorporation was 16,502,599 and the number of votes cast against adoption of the amendment was 2,417,017. There were 6,451 abstentions and broker non-votes. At the meeting, Maxim's shareholders also approved an amendment to Maxim's 1993 Stock Option Plan to increase the number of shares available for grant thereunder from 4,000,000 shares to 5,000,000 shares. The number of votes cast in favor of adoption of the amendment to the 1993 Stock Option Plan was 9,606,070 and the number of votes cast against adoption of the amendment was 2,807,984. There were 6,512,013 abstentions and broker non-votes. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Maxim's common stock is traded on the New York Stock Exchange under the symbol "MXG." The common stock began trading on the New York Stock Exchange on June 27, 1997. The common stock had previously traded on the Nasdaq National Market. The following table sets forth for the periods indicated the high and low sales prices of the common stock as reported by the New York Stock Exchange and the Nasdaq National Market, as applicable.
FISCAL YEAR ENDED JANUARY 31, 1999 HIGH LOW ---- --- FIRST QUARTER $19 3/8 $16 13/16 SECOND QUARTER 23 1/2 15 THIRD QUARTER 22 9/16 14 1/16 FOURTH QUARTER 25 5/8 15 5/8
26
FISCAL YEAR ENDED JANUARY 31, 1998 HIGH LOW ---- --- FIRST QUARTER $17 1/2 $ 8 SECOND QUARTER 14 7/8 9 3/4 THIRD QUARTER 17 7/16 13 3/4 FOURTH QUARTER 17 3/16 13 3/4
As of October 1, 1999, there were 197 holders of record of the Common Stock. Management of the Company believes that there are in excess of 3,000 beneficial holders of its Common Stock. Maxim has never declared or paid any dividends on its common stock. Maxim does not intend to declare or pay any cash dividends for the foreseeable future, and intends to retain earnings, if any, for the future operation and expansion of Maxim's business. Future cash dividends, if any, will be at the discretion of Maxim's board of directors and will depend upon, among other things, Maxim's future earnings, operations, capital requirements and surplus, availability of cash, general financial condition, contractual restrictions and such other factors as the board of directors may deem relevant. Currently, Maxim is restricted in its ability to declare or pay cash dividends under the terms of its senior credit facility and senior subordinated notes. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth certain selected consolidated financial and operating data of Maxim for the periods indicated which have been derived from the Consolidated Financial Statements of Maxim. These selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included herein. Financial data give retroactive effect to the merger of a wholly-owned subsidiary of Maxim and GCO on September 28, 1994 and the merger of a wholly-owned subsidiary of Maxim and Image on August 30, 1996, which transactions were accounted for as poolings-of-interests. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 27
TEN MONTHS ENDED FISCAL YEAR FISCAL YEAR ENDED JANUARY 31, JANUARY 31, ENDED MARCH 31, ------------------------------------- ----------- --------------- 1999 1998 1997 1996(1) 1995 (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues: Sales of floor covering products $ 608,916 $ 303,560 $ 250,968 $ 186,568 $ 174,935 Fees from franchise services 24,960 29,860 26,336 13,432 13,876 Fiber and PET sales 26,716 26,059 28,853 24,072 12,886 Other 3,834 5,648 3,564 3,479 1,644 --------- --------- --------- --------- --------- Total revenues 664,426 365,127 309,721 227,551 203,341 Cost of sales 457,339 249,381 222,290 161,723 139,521 --------- --------- --------- --------- --------- Gross profit 207,087 115,746 87,431 65,828 63,820 Selling, general and administrative expenses 220,748 83,955 72,366 59,197 46,870 Nonrecurring charges 23,713(2) -- -- 6,569(2) -- Merger-related costs -- -- 4,900(4) -- 500(3) Other income (expense): Interest income 1,754 1,233 613 415 397 Interest expense (15,097) (6,948) (7,006) (4,695) (1,839) Gain on sale of Image 24,863 -- -- -- -- Other, net 1,023 394 302 78 421 --------- --------- --------- --------- --------- (Loss) income before income taxes and extraordinary charge (24,831) 26,470 4,074 (4,140) 15,429 Benefit (provision) for income taxes 5,656 (10,314) (1,929) (105) (5,787) --------- --------- --------- --------- --------- (Loss) income before extraordinary charge (19,175) 16,156 2,145 (4,245) 9,642 Extraordinary charge, net of tax benefit (377) (785) -- -- -- --------- --------- --------- --------- --------- Net (loss) income $ (19,552) $ 15,371 $ 2,145 $ (4,245) $ 9,642 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (Loss) earnings per share: Basic $ (1.10) $ 0.95 $ 0.16 $ (0.32) $ 0.76 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted $ (1.10) $ 0.92 $ 0.15 $ (0.32) $ 0.72 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA: Cash and cash equivalents $ 89,901 $ 28,880 $ 6,439 $ 4,207 $ 2,365 Receivables, net 56,012 59,190 45,716 34,660 29,882 Inventories 58,744 54,693 42,148 49,170 38,137 Property, plant and equipment, net 71,766 137,207 101,403 93,879 68,832 Total assets 388,768 321,494 219,673 202,085 162,723 Total debt and capital lease obligations 124,447 131,663 96,289 94,185 57,459 Stockholders' equity 160,867 133,775 76,154 72,150 71,424 OTHER FINANCIAL DATA: Image revenues (5) $ 197,796 $ 178,011 $ 162,681 $ 128,260 $ 127,250 EBITDA, as adjusted (6) 5,548 43,741 25,583 14,639 22,175 Depreciation and amortization 19,209 11,950 10,518 8,008 5,225 Capital expenditures 62,564 47,673 17,444 15,580 25,941 Gross margin 31.2% 31.7% 28.2% 28.9% 31.4% EBITDA margin, as adjusted 0.8% 12.0% 8.3% 6.4% 10.9%
28 (1) On January 31, 1996, Maxim changed its fiscal year end from March 31 to January 31. (2) Certain of Maxim's acquired stores had not performed as anticipated at the time of purchase. The results from these operations led management to assess the realizability of the goodwill and store assets recorded in connection with these acquisitions. The result of this assessment indicated a permanent impairment of goodwill necessitating a write off totaling $6.6 million in fiscal 1996 and $4.2 million in fiscal 1999. Fiscal 1999 nonrecurring charges also include a write off of vendor receivables of $2.4 million, claims reserves of $9.5 million, write down of obsolete equipment of $492,000, and store closure and carrying costs of $7.1 million. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Year Ended January 31, 1999 Compared to Year Ended January 31, 1998-Nonrecurring Charges" and Note 10 of Notes to Maxim's Consolidated Financial Statements. (3) Represents a charge of $500,000 related to the merger with GCO, which was accounted for as a pooling-of-interests. (4) Represents a charge of $4.9 million related to the mergers with Image and Bailey & Roberts Flooring, Inc. which were accounted for as poolings-of-interests. (5) Includes revenues generated from manufactured carpet, fiber and PET sales. (6) EBITDA, as adjusted, is defined as earnings before interest; taxes; depreciation; amortization; other, net; gain on sale of Image and nonrecurring charges. While EBITDA should not be construed as a substitute for operating income or as a better measure of liquidity than cash flows from operating activities, which are determined in accordance with generally accepted accounting principles, it is a measure commonly used in Maxim's industry and is included herein because management believes it is useful and provides additional information with respect to the ability of Maxim to meet future debt service, capital expenditures and working capital requirements. EBITDA, as adjusted, reported above excludes nonrecurring charges of $500,000, $6.6 million, $4.9 million and $23.7 million for fiscal 1995, 1996, 1997 and 1999, respectively, and extraordinary charges of $785,000 and $377,000 in fiscal 1998 and 1999, respectively. 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF MAXIM, INCLUDING THE NOTES THERETO CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K. GENERAL From fiscal 1991 through fiscal 1994, Maxim's operations consisted of selling floor covering products, securing franchisees and brokering the purchase of floor covering products, principally carpet, from major suppliers on behalf of its franchisees. During this period, Maxim derived the majority of its revenues and operating profits from sales of floor covering products, franchise fees and royalties, as well as fees from the provision of various services to the franchisees. In May 1994, Maxim commenced a strategy of acquiring independent floor covering retailers, with the goal of building a network of Company-owned stores in addition to its franchise network. This acquisition program included selected CarpetMAX franchises, other independent dealers and GCO, Inc. (accounted for as a pooling-of-interests). In April 1995, Maxim commenced opening Company-owned stores to expand its market share. Accordingly, Maxim's results of operations since that date reflect the costs and expenses associated with the new store openings. During the year ended January 31, 1999, Maxim acquired the retail store assets of Shaw 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 in fiscal 1999. 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 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 30 of the retail operations, Maxim sold its carpet manufacturing operations of Image in January 1999 to Mohawk Industries, Inc., 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 a dominant pure flooring retailer. As of October 1, 1999, Maxim's retail network consisted of 323 Company-owned stores and 1,035 franchise centers/locations. During the year ended January 31, 1999, Maxim operated three reportable segments: (i) retail; (ii) manufacturing; and (iii) franchise services. The retail segment is a highly integrated chain of stores and support centers. The manufacturing segment includes the operations of Image. With the sale of substantially all the assets of Image in January 1999, Maxim no longer engages in manufacturing operations. The franchise services segment includes franchise fees, general corporate charges, interest expense and corporate non-operating items not directly relating to the manufacturing or retail segments. See Note 18 to Maxim's Consolidated Financial Statements for certain financial information relating to these three segments. RESULTS OF OPERATIONS YEAR ENDED JANUARY 31, 1999 COMPARED TO YEAR ENDED JANUARY 31, 1998 TOTAL REVENUES. Total revenues increased 82.0% to $664.4 million for the year ended January 31, 1999 ("fiscal 1999") from $365.1 million for the year ended January 31, 1998 ("fiscal 1998"). The components of total revenues, exclusive of the effect of intersegment eliminations, are discussed below. Intersegment eliminations, which totaled $43.9 million in fiscal 1999 and $6.7 million in fiscal 1998, include sales of floor covering products by Image to Maxim's retail stores and certain intercompany allocations. 31 RETAIL REVENUE. Retail revenue primarily consists of sales of floor covering products by Maxim's retail stores. Retail revenues increased 192.2% to $439.1 million for fiscal 1999 from $150.3 million for fiscal 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. MANUFACTURING REVENUE. Manufacturing revenue includes the sale of manufactured carpet and polyethylene tereptalate ("PET"), fiber and flake. Manufacturing revenues increased 11.1% to $197.8 million for fiscal 1999 from $178.0 million for fiscal 1998. Sales of manufactured carpet increased 12.6% to $171.1 million for fiscal 1999 from $151.9 million for fiscal 1998. Unit sales of manufactured carpet increased 6.9% to 29.3 million square yards for fiscal 1999 from 27.4 million square yards in fiscal 1998. Sale of PET, fiber and flake increased 2.3% to $26.7 million for fiscal 1999 from $26.1 million for fiscal 1998. Unit sales decreased 7.8% to 59.0 million pounds for fiscal 1999 from 64.0 million pounds for fiscal 1998. The average selling price per pound of PET, fiber and flake for fiscal 1999 increased by 11.0% from fiscal 1998. 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 such as advertising, which are offered to franchisees. Franchise services revenue increased 64.1% to $71.4 million for fiscal 1999 from $43.5 million for fiscal 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. GROSS PROFIT. Gross profit increased 78.9% to $207.1 million for fiscal 1999 from $115.7 million for fiscal 1998. As a percentage of total revenue, gross profit was 31.2% for fiscal 1999 compared to 31.7% for fiscal 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 162.9% to $220.7 million for fiscal 1999 from $84.0 million for fiscal 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 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 33.2% for fiscal 1999 from 23.0% for fiscal 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 selling, general and administrative expenses 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 will comprise a substantial portion of Maxim's operations in future periods. Also contributing to the increase in selling, general and administrative expenses in fiscal 1999 were increases in advertising, bad debt and compensation expenses. OPERATING INCOME/LOSS. Operating income/loss decreased to a loss of $37.4 million for fiscal 1999 from operating income of $31.8 million for fiscal 1998. The components of operating income/loss, exclusive of the effect of intersegment eliminations, are discussed below. Intersegment eliminations totaled $7.3 million in fiscal 1999 and a benefit of $1.0 million in fiscal 1998. RETAIL OPERATING INCOME/LOSS. Retail operating income/loss decreased to a loss of $18.9 million for fiscal 1999 from income of $184,000 for fiscal 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 remodeling and rebranding into the Maxim Brand. MANUFACTURING OPERATING INCOME/LOSS. Manufacturing operating income decreased 39.0% to $14.2 million for fiscal 1999 from $23.2 million for fiscal 1998. This decrease was due to cost of sales increasing during fiscal 1999. During fiscal 1998, the Company experienced unusually low raw material costs related to bottle costs, while in fiscal 1999 these bottle costs returned to historical rates. FRANCHISE SERVICES OPERATING INCOME/LOSS. Franchise services operating income/loss decreased to a loss of $25.3 million for fiscal 1999 from operating income of $7.3 million for fiscal 1998. This loss is due to a $23.7 million nonrecurring charge discussed below, as well as increased expenses relating to, among other things, advertising, bad debt and compensation. INTEREST EXPENSE. Interest expense increased 117.3% to $15.1 million for fiscal 1999 from $6.9 million for fiscal 1998 due principally to a higher debt balances and a higher interest rate during fiscal 1999. See "Liquidity and Capital Resources." NONRECURRING CHARGES. During the second quarter of fiscal 1999, Maxim 32 reevaluated its retail business strategy and determined to expand its focus on its retail operations. As a result of this revised business strategy, Maxim amended the franchise agreements 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 recorded a $28.5 million charge for these nonrecurring items during the three-month period ended July 31, 1998. The initial charge was subsequently reduced by $4.8 million, as revised estimates for claim reserves and store closure costs were less than initially expected, offset in part by a ten store net increase in the number of stores to be closed from the initial estimate of fifteen. The $23.7 million pretax nonrecurring charge related to the following items: Write off of vendor receivables $ 2.4 million Claims reserves 9.5 million Write-down of equipment 0.5 million Store closure and carrying costs 7.1 million Write-down of goodwill 4.2 million -------------- Total nonrecurring charges $23.7 million -------------- --------------
During fiscal 1999, Maxim amended its franchise agreement with the majority of its CarpetMAX franchisees, whereby Maxim established certain requirements for more uniformity in the appearance and merchandising of the franchised stores. As part of the amended franchise agreement, Maxim reduced the number of floor covering vendors available to CarpetMAX franchisees. Maxim wrote off certain vendor receivables and established a reserve to settle claims that may arise from the franchise network. In addition, Maxim has written down to fair value certain assets made obsolete by the amended franchise agreement. Maxim also accrued for the costs of closing certain Company-owned retail stores, most of which were closed as of January 31, 1999. In connection with the reevaluation of Maxim's retail strategy described above, Maxim analyzed the performance of its Company-owned retail stores. This analysis indicated that significant strategic and operational changes would be necessary in some stores, including changes in the customer mix, location, store design, and merchandising. These factors caused management to assess the realizability of the goodwill recorded. The determination of goodwill impairment was made by comparing the unamortized goodwill balance at July 31, 1998, to the estimate of the related market's undiscounted future cash flows. The assumptions used reflected earnings, market and industry conditions, as well as current operating plans. The assessment indicated a permanent impairment of goodwill for certain markets. As a consequence, such goodwill was written down to fair market value, which resulted in a write-off of goodwill totaling $4.2 million during fiscal 1999. 33 GAIN ON SALE OF IMAGE. Maxim recorded a gain on sale of Image of $24.9 million as a result of the sale of its Image subsidiary in January 1999. With the sale of substantially all the assets of Image, Maxim no longer engages in manufacturing operations. INCOME TAX EXPENSE (BENEFIT). Maxim recorded an income tax benefit of $5.7 million for fiscal 1999 compared to a $10.3 million expense for fiscal 1998. The decrease in income tax expense is due to Maxim recording a loss in fiscal 1999 as compared to income in fiscal 1998. The fiscal 1999 effective tax benefit of 22.8% was due to higher non-deductible costs and valuation allowances related to state net operating losses. EXTRAORDINARY CHARGES. The extraordinary charges recorded in fiscal 1999 and 1998 resulted from the write-off of unamortized financing fees associated with Maxim's former revolving credit facilities. The charges amounted to $377,000, net of an income tax benefit of $236,000 for fiscal 1999, and $785,000, net of an income tax benefit of $546,000, for fiscal 1998. YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED JANUARY 31, 1997 TOTAL REVENUES. Total revenues increased 17.9% to $365.1 million for fiscal 1998 from $309.7 million for fiscal year 1997. The components of total revenues, exclusive of the effect of intersegment eliminations, are discussed below. Intersegment eliminations, which totaled $6.7 million in fiscal 1998 and $3.7 million in fiscal 1997, include sales of floorcovering products by Image to Maxim's retail stores and certain intercompany allocations. RETAIL REVENUE. Retail revenue primarily consists of sales of floor covering products by Maxim's retail stores. Retail revenues increased 25.1% to $150.3 million for fiscal 1998 from $120.1 million for fiscal 1997. The growth in retail sales of floor covering products was primarily due to the impact of the acquisition of floor covering retailers and, to a lesser extent, to increased same-store sales. The results of these acquired retailers are not fully reflected in the prior year periods, as such acquisitions were made at various times during the year. MANUFACTURING REVENUE. Manufacturing revenue includes the sale of manufactured carpet and the sale of PET, fiber and flake. Manufacturing revenues increased 9.4% to $178.0 million for fiscal 1998 from $162.7 million for fiscal 1997. Sales of manufactured carpet increased 13.5% to $151.9 million for fiscal 1998 from $133.8 million for fiscal 1997. Unit sales of manufactured carpet increased 22.3% to 27.4 million square yards for fiscal 1998 from 22.4 million square yards in fiscal 1997. Sale of PET, fiber and flake decreased 9.7% to $26.1 million for fiscal 1998 from $28.9 million for fiscal 1997. Unit sales increased 13.1% to 64.0 million pounds for fiscal 1998 from 56.6 million pounds for fiscal 1997. The unit sales increase was the net result of an increase in PET sales, partially offset by a decline in fiber sales, as additional pounds of fiber were allocated to carpet manufacturing. The average selling price per pound of PET, fiber and flake declined by 20.0% compared to the prior year period, resulting in lower revenue despite higher shipments during the period. FRANCHISE SERVICES REVENUE. Franchise services revenue are 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 such as advertising, which are offered to franchisees. Franchise services revenue increased 42.0% to $43.5 million for fiscal 1998 from $30.6 million for fiscal 1997. This increase was attributable to increases in brokering activity generated from new CarpetMax and GCO franchisees, growth in demand for franchise services from existing CarpetMax and GCO franchisees, greater utilization of advertising and other services offered to franchisees and an expansion of advertising services offered by Maxim. 34 GROSS PROFIT. Gross profit increased 32.4% to $115.7 million for fiscal 1998 from $87.4 million for fiscal 1997. As a percentage of total revenue, gross profit was 31.7% for fiscal 1998 compared to 28.2% for fiscal 1997. Contributing to the increase in gross profit as a percentage of total revenue was the continuing change in the retail business mix of Maxim to a revenue base consisting principally of the net sales of floor covering products and a lower cost of raw materials at Image. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 16.0% to $84.0 million for fiscal 1998 from $72.4 million for fiscal 1997. Increases in operating expenses on an absolute basis reflect an overall growth in the size of Maxim's operations required to serve the growing retail base, as well as increased selling costs at Image related to the addition of sales people to service newly created territories. As a percentage of total revenue, selling, general and administrative expenses decreased to 23.0% for fiscal 1998 from 23.4% for fiscal 1997 as a result of spreading fixed costs over a larger revenue base. OPERATING INCOME/LOSS. Operating income/loss increased 212.7% to $31.8 million for fiscal 1998 from $10.2 million for fiscal 1997. The components of operating income/loss, exclusive of the effect of intersegment eliminations, are discussed below. Intersegment eliminations were a benefit of $1.0 million in fiscal 1998 and a $50,000 loss in fiscal 1997. RETAIL OPERATING INCOME/LOSS. Retail operating income increased to $184,000 for fiscal 1998 from a loss of $396,000 for fiscal 1997. This increase was primarily due to the impact of the acquisition of floor covering retailers. MANUFACTURING OPERATING INCOME/LOSS. Manufacturing operating income increased 167.2% to $23.2 million for fiscal 1998 from $8.7 million for fiscal 1997. This increase was due to cost of sales decreasing during fiscal 1998. During fiscal 1998, the Company experienced unusually low raw material costs related to bottle costs. FRANCHISE SERVICES OPERATING INCOME/LOSS. Franchise services operating income increased 282.9% to $7.3 million for fiscal 1998 from $1.9 million for fiscal 1997. This increase is related to the revenue growth of franchise services. INTEREST EXPENSE. Interest expense decreased to $6.9 million for fiscal 1998 from $7.0 million for fiscal 1997 due principally to a reduction in debt of approximately $47.9 million with the net proceeds from a public offering in February 1997. In October 1997, Maxim issued $100 million of 9-1/4% senior subordinated notes, which increased interest expense in the last quarter of fiscal 1998. INCOME TAX EXPENSE. Maxim recorded income tax expense of $10.3 million for fiscal 1998 compared to $1.9 million for fiscal 1997. The increase in tax expense is due to higher net income for fiscal 1998, as compared to fiscal 1997. The effective tax rate for fiscal 1998 was 39.0%. EXTRAORDINARY CHARGE. An extraordinary charge was recorded in fiscal 1998 for the write-off of unamortized financing fees associated with Maxim's credit facility, which was replaced during fiscal 1998. The resultant one-time charge amounted to $785,000, net of an income tax benefit of approximately 35 $546,000. SEASONALITY Historically, Maxim's retail floor covering sales are subject to some seasonal fluctuation typical to this industry, with higher sales occurring in the summer and fall months during Maxim's second and third quarters, and lower sales occurring 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 as a consequence of a combination of ongoing construction and fall and pre-Christmas home remodeling. See Note 20 of Notes to Consolidated Financial Statements included elsewhere herein for summary quarterly data. 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 from 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 October 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." SALE OF IMAGE. On January 29, 1999, Maxim sold substantially all the assets of its Image subsidiary to Aladdin Manufacturing Corporation, a wholly owned subsidiary of Mohawk Industries, Inc. This transaction was valued at approximately $210.7 million, including the assumption of $30.0 million in related debt and $18.1 million in short-term liabilities. Proceeds from the sale were used to retire bank indebtedness incurred as a result of the acquisition of the Shaw retail network. 36 Under the terms of the indenture governing Maxim's senior subordinated notes, Maxim is required to invest the proceeds from the sale of Image to repay senior debt and in capital expenditures, properties, inventories and other assets that will be used in Maxim's business. Approximately $84.5 million of the net proceeds from the sale of Image was applied to repay Maxim's senior credit facility. Maxim intends to apply the remaining net proceeds in a manner consistent with the requirements of the indenture. To the extent that proceeds are not so invested within 365 days of the sale of Image (and exceed $10.0 million), Maxim is required to use such excess proceeds to make an offer to purchase outstanding notes at a price equal to 100% of the principal amount plus accrued interest. CREDIT FACILITY. On May 18, 1999, Maxim entered into an amended and restated credit facility, which provides for aggregate commitments of $75 million. The credit facility consists of a revolving facility that matures three years from the closing of the credit facility. Borrowings under the amended 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 amended credit facility, Maxim has established a cash collateral account with the lenders. As of October 1, 1999 the cash collateral account balance was $41.9 million. As of October 15, 1999, the Company had $10.3 million available under the revolver. Amounts outstanding under the amended credit facility bear interest at various variable rates. The amended 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 amended credit facility. Maxim and its senior 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 lenders to amend or replace its current credit 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 net 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 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 37 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 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 January 31, 1999 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. The agreement in principle provides for Maxim to commence, on or before October 31, 1999, 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 will 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 1, 2001, make 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 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 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 the Noteholders, delivery to Noteholders of definitive solicitation materials, 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 million synthetic lease facility with a lending group with amounts outstanding of approximately $5.0 million as of October 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, 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 waived the noncompliance and forfeited their right to accelerate payment of amounts outstanding under the facility because of such noncompliance. OTHER DEBT. As of October 1, 1999, Maxim also had approximately $12.1 million of debt outstanding under various term loans at interest rates averaging 8.75%. 38 GOING CONCERN. The Consolidated Financial Statements of Maxim 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 January 31, 1999, Maxim was in default of the restricted payment covenant contained in the Indenture pursuant to which the Senior Notes were issued. See "--Senior Subordinated Notes." As of October 15, 1999, Maxim'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. This uncertainty has led Maxim's independent public accountants to include a paragraph in their report on Maxim's Consolidated Financial Statements for the year ended January 31, 1999, that questions Maxim's ability to continue as a going concern. See Note 1 to Maxim's Consolidated Financial Statements included elsewhere herein. Maxim has reached an agreement in principle with the holders of the Senior Notes to obtain the requisite waivers of the default. See "--Senior Subordinated Notes." Maxim is also 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 commenced an informal inquiry in connection with the matters relating to the restatement. See "Item 1. Business--Risk Factors" and "Item 3. Legal Proceedings." CASH FLOWS. During fiscal 1999, operating activities used $6.7 million compared to $3.2 million used in fiscal 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 fiscal 1998, operating activities used $3.2 million compared to $17.8 million provided in fiscal 1997. The decrease in cash provided by operating activities resulted primarily from an increase in accounts receivable and inventories. The increase in accounts receivables and inventories was mainly due to higher sales of floor covering products to franchisees and other carpet retailers. During fiscal 1999, investing activities provided $83.3 million compared to using $49.0 million for fiscal 1998. The change is primarily due to the sale of Image offset by the purchase of CarpetsPlus and the retail store assets of Shaw. During fiscal 1998, investing activities used $49.0 million compared to $18.7 million for fiscal 1997. The increase is primarily due to an increase in capital expenditures relating to manufacturing operations, the purchase of carpet retailers, and the purchase of real estate for the expansion of retail stores. During fiscal 1999, financing activities used $15.6 million compared to $74.6 million provided in fiscal 1998. This decrease is primarily due to proceeds received from the issuance of common stock in a public offering and the issuance of senior subordinated notes in fiscal 1998. No such financing activities occurred in fiscal 1999. During fiscal 1998 financing activities provided $74.6 million compared to $3.1 million provided in fiscal 1997. This increase is primarily due to proceeds received from the issuance of common stock in a public offering and the issuance of senior subordinated notes, partially offset by Maxim's repurchase of common stock and repayment of amounts outstanding under its credit facilities. 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 October 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. 39 RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires capitalization of certain costs of internal-use software. Maxim adopted this statement in the first quarter of fiscal 2000 and has determined that it will have no material impact on the financial statements. In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities," which is effective for fiscal years beginning after December 15, 1998. SOP 98-5 requires entities to expense certain start-up costs and organization costs as they are incurred. Maxim does not expect SOP 98-5 to have a material impact on Maxim's financial statements. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivatives Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 2000. The statement establishes accounting and reporting standards for derivative instruments and transactions involving hedge accounting. Maxim does not anticipate that this statement will have a material impact on its financial statements. 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. 40 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 $189,000 had been expensed as of January 31, 1999, and approximately $1.6 million remains to be spent as of October 1, 1999. All costs associated with analyzing the Year 2000 issue or making conversions to existing software are being expensed as incurred. The costs to Maxim of Year 2000 compliance and the date on which Maxim believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. INTEREST RATE SENSITIVITY. Maxim has limited exposure to market volatility in interest rates. As of January 31, 1999, exposure from interest rates was not material to Maxim's financial position, results of operations, or cash flows, as $99.4 million of Maxim's $116.3 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 has 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 January 31, 1999, a near-term 100 basis point change in interest rates would not materially affect 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 January 31, 1999, there was no exposure to foreign currency exchange rate volatility. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following financial statements are filed with this report: Report of Independent Public Accountants Consolidated Balance Sheets - January 31, 1999 and 1998 Consolidated Statements of Operations - Years ended January 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity - Years ended January 31, 1999, 1998 and 1997 41 Consolidated Statements of Cash Flows - Years ended January 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers and directors of Maxim are as follows:
NAME AGE POSITION WITH MAXIM Ronald H. McSwain................ 57 Chairman of the Board A.J. Nassar...................... 43 President, Chief Executive Officer and Director Thomas P. Leahey................. 38 Executive Vice President - Finance, Treasurer and Director Leonard H. Thill................. 45 Chief Financial Officer and Secretary Karen A. McClelland.............. 40 Executive Vice President - Customer Service Paul D. Bumblauskas.............. 42 Executive Vice President - Operations Paul R. Renn..................... 44 Executive Vice President - Sales and Marketing Mack Hale........................ 59 Executive Vice President - Merchandising Sandra Fowler.................... 37 Executive Vice President - Administration Michael L. DeGrace............... 54 President - Franchise Divisions Michael Cherico.................. 41 President - GCO Carpet Outlet Division Ronald E. Dunn................... 44 President - CarpetsPlus Division Joseph J. Jillson ............... 56 Director Richard A. Kaplan ............... 54 Director J. Michael Nixon ................ 54 Director Larry T. Solari ................. 57 Director Herb Wolk ....................... 67 Director
The executive officers of Maxim are appointed by the Board of Directors and hold office at the pleasure of the Board. RONALD H. MCSWAIN has served as Chairman of the Board of Maxim since June 1999. Since 1968, Mr. McSwain has served as the President and owner of McSwain's Carpets, a retail floorcovering business. Mr. McSwain serves as a director of Johnson Investment Mutual Fund Trust, an investment company. A.J. NASSAR has served as President, Chief Executive Officer and a Director of Maxim since December 1990. From 1986 to 1990, Mr. Nassar served as Vice President and Chief Operating Officer of Kenny Carpet and Linoleum, Inc., a multistore retail carpet chain in western New York. He was previously employed in the carpet manufacturing industry by Trend Carpet Mills and Queen Carpet Mills, where he was responsible for sales of floor covering products to floor covering retailers. THOMAS P. LEAHEY has served as Executive Vice President - Finance of Maxim since August 1993, as Treasurer since July 1994 and as a director since November 1998. Mr. Leahey was employed by the Wachovia Bank of Georgia, N.A. from September 1991 to August 1993 as a Vice President in the Corporate Banking Division. Mr. Leahey's banking career began in January 1984 and included service with Barnett Bank of Central Florida, N.A. and, from March 1987 to July 1991, with Fleet/Norstar Financial Group. 42 LEONARD H. THILL has served as Chief Financial Officer and Secretary of Maxim since September 1999. Mr. Thill served in various capacities with the United States Securities and Exchange Commission from 1987 to September 1999, including most recently as Assistant Chief Accountant with the Commission's Division of Enforcement. KAREN A. MCCLELLAND has served as Executive Vice President - Customer Service of Maxim since June 1999. Ms. McClelland served as Vice President - Retail of Maxim from April 1999 to June 1999. Prior to joining Maxim, Ms. McClelland served as President of McClelland Associates, Inc., a consulting firm, from 1995 to March 1999. Ms. McClelland served as Vice President of Operations/Technology of Sound Floor Coverings, Inc., a floor covering retailer, from 1993 to 1994, and was a Senior Manager for the accounting firm of Price Waterhouse from 1988 to 1993. PAUL D. BUMBLAUSKAS has served in various capacities with Maxim since June 1998, including most recently as Executive Vice President - Operations. Mr. Bumblauskas served as Regional Vice President of Shaw Industries, Inc., a floor covering manufacturer, from December 1995 to June 1998, as Regional Vice President of Carpetland USA, Inc., a floor covering retailer, from July 1994 to December 1995, and was a partner with SV Associates, an accounting firm, from April 1992 to July 1994. PAUL R. RENN has served in various capacities with Maxim since October 1997, including most recently as Executive Vice President - Sales and Marketing. Mr. Renn served as Sales Manager-Southwest Region of Abbey Carpets, a floor covering cooperative, from April 1995 to October 1995, and as General Manager-Texas of Carpet Exchange, a floor covering retailer, from September 1989 to March 1995. MACK HALE has served in various capacities with Maxim since May 1993, including Executive Vice President - Merchandising since April 1998. From January 1992 to May 1993, Mr. Hale served as Executive Vice President of Unituft, Inc., a floor covering marketing support company. Mr. Hale served as Vice President of Sales and Director of Marketing of Mohawk Industries, Inc., a major carpet manufacturer, from 1983 to 1991. At Mohawk, Mr. Hale was responsible for all marketing and promotional functions. Prior to his employment at Mohawk, Mr. Hale served as Vice President, Sales of Horizon Industries, Inc., a major carpet manufacturer. SANDRA FOWLER has served as Executive Vice President - Administration of Maxim since September 1993. From 1982 to September 1993, Ms. Fowler served in various capacities with Shaw, the nation's largest carpet manufacturer, including Manager of Corporate Accounts, where she acted as the liaison between that company and its corporate customers in all areas, ranging from sales to administration. MICHAEL L. DEGRACE has served as President - Franchise Divisions of Maxim since February 1999. From 1997 to January 1999, Mr. DeGrace served as Vice President - Sales and Marketing of Image Industries, Inc., which was a wholly-owned subsidiary of Maxim from August 1996 to January 1999. Mr. DeGrace served as Vice President of Sales and Marketing of Beulieu of America, Inc., a carpet manufacturer, from 1995 to 1996, and served in various capacities, including most recently as Regional Vice President, of Shaw Industries, Inc., a carpet manufacturer, from 1979 to 1995. MICHAEL CHERICO has served in various capacities with Maxim since 1993, including most recently as President of its GCO Carpet Outlet Division. RONALD E. DUNN has served as President of Maxim's CarpetsPlus Division since September 1998. Mr. Dunn served as Chairman of the Board and Chief Executive Officer of CarpetsPlus of America, LLC, a national resource company specializing in the floor covering industry, from 1997 until September 1998. Mr. Dunn served as Vice President of Sales of Mohawk Industries, Inc., a floor covering manufacturer, from 1990 to 1996. JOSEPH J. JILLSON has served as a director of Maxim since November 1998. Mr. Jillson has served as an executive officer and co-owner of Q.I. Corporation, a building materials contractor, since 1967. RICHARD A. KAPLAN has served as Chairman Emeritus of Maxim since February 1995 and served as Chairman of the Board of Maxim from 1989 to February 1994. Mr. Kaplan founded Maxim in 1989. Mr. Kaplan has also served as President and Chief Executive Officer of Pictometry International, LLC, a technology company, since August 1999. Mr. Kaplan served as Chairman of the Board of Worksmart International, Inc., a personnel consulting company, from 1995 to 1998, and as Chairman of the Board of Richland Industries Corp., a retail floor covering chain based in Rochester, New York, from 1972 to 1995. J. MICHAEL NIXON has served as a Director of Maxim since February 1996. Mr. Nixon has served as the President and co-owner of Q.I. Corporation, a building materials contractor, since 1967. LARRY T. SOLARI has served as a director of Maxim since April 1999. Mr. Solari has served as Chairman of the Board and Chief Executive Officer of BSI Holdings, Inc., a builder services company, since 1998. Mr. Solari served as Chairman of the Board and Chief Executive Officer of Sequential Products, Inc., a manufacturer in the building materials industry, from 1996 to 1997, as President of the Building Materials Group of Domtar, Inc. from 1994 to 1996, and as President of the Construction Products Group of The Owens - Corning Company from 1989 to 1994. Mr. Solari is a director of Beazer Homes, Inc., a single family homebuilder, Therma - Tru, Inc. and Pacific Coast Building Products, Inc. 43 HERB WOLK has served as a director of Maxim since 1991. Mr. Wolk is the owner and President of Cadillac Carpet Distributors and has served in various capacities with that company since 1976. There are no family relationships between any director or executive officer and any other director or executive officer of Maxim. BOARD OF DIRECTORS The Board of Directors of Maxim currently consists of eight persons. Maxim's Certificate of Incorporation provides that the Board of Directors shall consist of not less than three nor more than 15 members, the precise number to be determined from time to time by the Board of Directors. Maxim's Board of Directors has four standing committees -- the Audit Committee, the Compensation Committee, the Stock Option Committee and the Directors' Nominating Committee. The Audit Committee presently consists of Richard A. Kaplan, Joseph J. Jillson and J. Michael Nixon. The Audit Committee has been assigned the principal functions of: (i) recommending the independent auditors; (ii) reviewing and approving the annual report of the independent auditors; (iii) approving the annual financial statements; and (iv) reviewing and approving summary reports of the auditor's findings and recommendations. The Compensation Committee presently consists of Richard A. Kaplan, J. Michael Nixon and Herb Wolk. The Compensation Committee has been assigned the functions of approving and monitoring the remuneration arrangements for senior management. The Stock Option Committee presently consists of Richard A. Kaplan and Herb Wolk. The Stock Option Committee has been assigned the functions of administering Maxim's 1993 Stock Option Plan and granting options thereunder. The Directors' Nominating Committee presently consists of Richard A. Kaplan, A.J. Nassar and Herb Wolk. The Directors' Nominating Committee has been assigned the functions of making recommendations to the full Board for the selection of director nominees. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires Maxim's directors, executive officers and persons who own more than 10% of the outstanding Common Stock of Maxim, to file with the Securities and Exchange Commission reports of changes in ownership of the Common Stock of Maxim held by such persons. Officers, directors and greater than 10% shareholders are also required to furnish Maxim with copies of all forms they file under this regulation. To Maxim's knowledge, based solely on a review of the copies of such reports furnished to Maxim and representations that no other reports were required, during the fiscal year ended January 31, 1999 all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% shareholders were complied with, except for Richard A. Kaplan, a director of Maxim, who failed to file on a timely basis one report relating to one transaction and A. J. Nassar, the President and Chief Executive Officer of Maxim, who failed to file on a timely basis one report relating to one transaction. Although it is not Maxim's obligation to make filings pursuant to Section 16 of the Securities Exchange Act of 1934, Maxim has adopted a policy requiring all Section 16 reporting persons to report monthly to the Director of Financial Reporting of Maxim as to whether any transactions in Maxim's Common Stock occurred during the previous month. 44 ITEM 11. EXECUTIVE COMPENSATION. The following table provides certain summary information for the fiscal years ended January 31, 1999, 1998 and 1997 concerning compensation paid or accrued by Maxim to or on behalf of Maxim's Chief Executive Officer and each of the other five most highly compensated executive officers of Maxim during the year ended January 31, 1999 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE LONG-TERM ANNUAL COMPENSATION COMPENSATION --------------------------------------- ------------ OTHER NUMBER OF NAME AND ANNUAL OPTIONS OTHER PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDED COMPENSATION ------------------ ----- --------- ---------- ------------ --------- ------------ A.J. Nassar..................... 1999 $600,000 $1,920,012 $27,591(2) 250,000 $ -- President and Chief 1998 350,012 265,000 10,750(2) 275,000 -- Executive Officer 1997 229,479 -- 10,670(2) 200,000 -- David E. Cicchinelli............ 1999(3) 177,884 152,707 -- 450,000 -- Chief Operating Officer Thomas P. Leahey................ 1999 108,839 37,000 1,633 50,000 -- Executive Vice President, 1998 96,147 30,000 1,436 25,000 -- Finance 1997 75,762 6,195 1,125 -- -- Mack Hale....................... 1999(4) 140,768 10,000 1,962 25,000 Executive Vice President, Merchandising Gary F. Brugliera............... 1999(5) 119,231 -- -- 75,000 -- Executive Vice President and Chief Financial Officer H. Stanley Padgett.............. 1999(6) 297,180 -- -- -- 2,180 Senior Executive 1998 295,000 -- -- 25,000 10,926 Vice President 1997(7) 170,200 -- -- -- --
- ------------------- (1) Except as otherwise indicated, represents Maxim's matching contribution under its 401(k) plan. (2) Includes auto allowance and other perquisites, in addition to Maxim's matching contribution under its 401(k) plan. (3) Mr. Cicchinelli joined Maxim in May 1998 and became its Chief Operating Officer in July 1998. Mr. Cicchinelli resigned effective April 12, 1999. (4) Mr. Hale became an executive officer of Maxim in April 1998. (5) Mr. Brugliera joined Maxim in June 1998 and resigned effective September 21, 1999. (6) Mr. Padgett resigned effective January 29, 1999. (7) Amounts indicated include compensation paid to Mr. Padgett by (i) Maxim and Image subsequent to the acquisition of Image by Maxim on August 30, 1996 and (ii) Image for the period from June 30, 1996 to August 30, 1996. EMPLOYMENT AGREEMENTS A.J. NASSAR. On June 4, 1997, Maxim entered into an Employment Agreement with A.J. Nassar, pursuant to which Mr. Nassar serves as Chief Executive Officer of Maxim. The Employment Agreement, which was amended on January 1, 1998, is for a term of three years, expiring on June 4, 2000, and provides for an annual base salary of $600,000 plus an annual bonus of $200,000 for each fiscal year in which Maxim attains certain earnings targets established by the Board of Directors. The Employment Agreement will automatically renew unless it is earlier terminated or either Maxim or Mr. Nassar elects not to renew the Employment Agreement. The 45 Employment Agreement provides for certain severance payments to be paid to Mr. Nassar in the event of a change in control of Maxim. In the event of a change in control, Mr. Nassar will be entitled, during the term of his Employment Agreement, to terminate his employment with Maxim and, subject to certain adjustments, to receive a lump sum cash payment equal to two years' salary, as well as 12 months' provision of employee benefits and a pro rata portion of his annual bonus. In the event Mr. Nassar is terminated by Maxim without cause, he will receive during the balance of his term of employment (not to exceed 24 months), the annual base salary which would otherwise be payable to Mr. Nassar had he remained in the employ of Maxim. In addition, all unvested stock options will become immediately exercisable and Mr. Nassar will receive 12 months' provision of employee benefits and a pro rata portion of his annual bonus. The Employment Agreement contains non-compete and non-solicitation provisions, effective through the actual date of termination of the Employment Agreement and for a period of two years thereafter. LEONARD H. THILL. On September 27, 1999, Maxim entered into an Employment Agreement with Leonard H. Thill, pursuant to which Mr. Thill serves as Chief Financial Officer of Maxim. The Employment Agreement is for a term of three years, expiring on September 27, 2002, and provides for an annual base salary of $225,000 plus an annual bonus of up to 50% of his base salary if Maxim attains certain operating and financial goals established by Maxim's executive management team and the Compensation Committee of its Board of Directors. The Employment Agreement will automatically renew unless it is earlier terminated or either Maxim or Mr. Thill elects not to renew the Employment Agreement. In the event Mr. Thill is terminated by Maxim without cause, he will receive, for a period of 12 months thereafter, the annual base salary which would otherwise be payable to Mr. Thill had he remained in the employ of Maxim. In addition, all unvested stock options will become immediately exercisable. The Employment Agreement contains non-solicitation provisions, effective through the actual date of termination of the Employment Agreement and for a period of three years thereafter. H. STANLEY PADGETT. On August 30, 1996 and again on July 30, 1997, H. Stanley Padgett entered into amendments to his employment agreement with Image. Under the amended agreement, Mr. Padgett served as a Senior Executive Vice President of Maxim and as the President and Chief Executive Officer of Image. Mr. Padgett's employment agreement was assigned to Aladdin Carpets on January 29, 1999, in connection with the sale of Image. At the same time, Mr. Padgett resigned all positions with Maxim and Image. COMPENSATION OF DIRECTORS Directors of Maxim who are compensated as officers of Maxim serve without compensation for their services as directors. All directors of Maxim are reimbursed by Maxim for all out-of-pocket expenses reasonably incurred by them in the discharge of their duties as directors, including out-of-pocket expenses incurred in attending meetings of the Board of Directors and of any committees of the Board of Directors. Certain of Maxim's outside directors have also been granted options to purchase shares of Maxim common stock. In addition, from time to time, certain of Maxim's outside directors assist in conducting workshops and orientation sessions for Maxim's franchisees, for which they customarily have been paid consulting fees of $10,000 annually. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The following persons served as members of the Compensation Committee of the Board of Directors during the year ended January 31, 1999: Richard A. Kaplan, J. Michael Nixon, M.B. Seretean and Herb Wolk. None of the members of the Compensation Committee has been an officer or employee of Maxim or any of its subsidiaries. Except as set forth herein under "Item 13. Certain Relationships and Related Transactions," there were no material transactions between Maxim and any of the members of the Compensation Committee during the fiscal year ended January 31, 1999. STOCK OPTION PLAN Maxim offers a 1993 Stock Option Plan (the "1993 Plan") for employees who contribute significantly to the management or operation of the business of Maxim or its subsidiaries as determined by Maxim's Board of Directors or the committee administering the 1993 Plan. The 1993 Plan provides for the grant of options to purchase up to 5,000,000 shares of Common Stock at the discretion of the Board of Directors of Maxim or a committee designated by the Board of Directors to administer the 1993 Plan. The option exercise price must be at least 46 100% (110% in the case incentive stock options granted to a holder of 10% or more of the Common Stock) of the fair market value of the Common Stock on the date the option is granted and the options are exercisable by the holder thereof in full at any time prior to their expiration in accordance with the terms of the 1993 Plan. Stock options granted pursuant to the 1993 Plan will expire on or before (1) the date which is the tenth anniversary of the date the option is granted, or (2) the date which is the fifth anniversary of the date an incentive stock option is granted in the event that the option is granted to a key employee who owns more than 10% of the total combined voting power of all classes of stock of Maxim or any subsidiary of Maxim. The following table provides certain information concerning individual grants of stock options under the 1993 Plan made during the fiscal year ended January 31, 1999 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS ----------------------------------------------------------------- POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED OPTIONS ANNUAL RATES OF STOCK GRANTED TO EXERCISE OR PRICE APPRECIATION FOR OPTIONS EMPLOYEES IN BASE PRICE OPTION TERM (1) GRANTED FISCAL ($ PER EXPIRATION ------------------------ NAME (#) YEAR SHARE) DATE 5% 10% ---- ------- ------------ ---------- ---------- ---------- --------- A.J. Nassar................... 250,000(2) 20.1 $14.25 10/14/06 $1,700,925 $4,074,025 David E. Cicchinelli.......... 250,000(3) 20.1 15.13 6/6/08 2,378,793 6,028,325 200,000(2) 16.7 14.25 10/14/06 1,360,740 3,259,220 Thomas P. Leahey.............. 50,000(2) 4.2 14.25 10/14/06 340,185 814,805 Mack Hale..................... 25,000(4) 2.1 14.25 10/14/06 170,093 407,403 Gary F. Brugliera............. 50,000(5) 4.2 15.75 6/22/08 495,254 1,255,072 25,000(4) 2.1 14.25 10/14/06 170,093 407,403 H. Stanley Padgett............ -- -- -- -- -- --
- ------------------ (1) The dollar amounts under these columns represent the potential realizable value of each grant of option assuming that the market price of the Company's common stock appreciates in value from the date of grant at the 5% and 10% annual rates prescribed by the SEC and therefore are not intended to forecast possible future appreciation, if any, of the price of Maxim's common stock. (2) Options vest on July 31, 2006; provided, however, that options vest on April 30, 2000 if the closing price of Maxim's common stock is greater than $25.00 per share for any period of ten consecutive trading days prior to April 30, 2000. (3) Options vest in increments of 20% per year beginning on June 16, 1999 and on each June 16 thereafter until fully vested. These options terminated upon the resignation of Mr. Cicchinelli in April 1999. (4) Options vest on July 31, 2006; provided, however, that options vest in increments of 25% per year beginning on April 30, 2000 and on each April 30 thereafter until fully vested if the closing price of Maxim's common stock is greater than $25.00 per share for any period of ten consecutive trading days prior to April 30, 2000. (5) Options vest in increments of 20% per year beginning on June 22, 1999 and on each June 22 thereafter until fully vested. 47 The following table provides certain information concerning options exercised during fiscal 1999 and the value of unexercised options held by the Named Executive Officers as of January 31, 1999.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS FISCAL YEAR END AT FISCAL YEAR-END (1) ----------------------- ---------------------- ACQUIRED ON VALUE EXER- UNEXER- EXER- UNEXER- NAME EXERCISE (#) REALIZED ($) CISABLE CISABLE CISABLE CISABLE - ---- ------------ ------------ ------- ------- ------- ------- A.J. Nassar................... -- $ -- 715,480 259,520 $7,907,311 $2,199,184 David E. Cicchinelli.......... -- -- 15,000 450,000 129,375 3,548,750 Thomas P. Leahey.............. 12,500 210,156 46,500 71,000 777,188 688,875 Mack Hale..................... 10,000 172,500 36,380 35,517 601,034 290,629 Gary F. Brugliera............. -- -- -- 75,000 -- 553,125 H. Stanley Padgett............ -- -- 171,320 -- 3,438,435 --
- --------------------------- (1) Dollar values were calculated by determining the difference between the closing price of $22.625 per share of common stock on January 29, 1999, and the exercise price of the options. EMPLOYEE RETIREMENT SAVINGS PLAN Maxim has established a savings and profit-sharing plan that qualifies as a tax-deferred savings plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan") for its salaried employees who are at least 21 years old and who have completed one year of service with Maxim. Under the 401(k) Plan, eligible employees may contribute up to 20% of their gross salary to the 401(k) Plan or $10,000, whichever is less. Each participating employee is fully vested in contributions made by such employee. Maxim presently matches 25% of the amount contributed by an employee up to 6% of the employee's salary, but Maxim's policy regarding matching contributions may be changed annually in the discretion of the Board of Directors. All amounts contributed under the 401(k) Plan are invested in one or more investment accounts administered by an independent plan administrator. 48 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information regarding the beneficial ownership of the Common Stock as of October 1, 1999, with respect to (i) each person known by Maxim to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each of Maxim's directors, (iii) each of the Named Executive Officers (as defined herein), and (iv) all directors and executive officers as a group. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares beneficially owned.
NAME OF NUMBER OF SHARES PERCENTAGE OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) TOTAL - ---------------- --------------------- -------------- Joseph J. Jillson......................................... 130,000(2) * Richard A. Kaplan......................................... 110,956 * Thomas P. Leahey.......................................... 52,500(3) * Ronald H. McSwain......................................... 76,900(4) * A.J. Nassar............................................... 949,628(5) 4.8 J. Michael Nixon.......................................... 140,000 * Larry T. Solari........................................... 40,000(2) * Herb Wolk................................................. 200,000 1.0 Mack Hale................................................. 39,758(3) * Gary F. Brugliera ........................................ 10,500(6) * David E. Cicchinelli...................................... 15,000(3) * H. Stanley Padgett........................................ 138,179(7) * FMR Corp.................................................. 1,324,600(8) 7.0 Julian D. Saul............................................ 1,826,984(9) 9.6 Linda Saul Schejola....................................... 1,260,000(10) 6.6 All directors and executive officers as a group (17 persons)........................ 1,882,522(11) 9.4
- -------------------- *Less than one percent of outstanding shares. (1) "Beneficial Ownership" includes shares for which an individual, directly or indirectly, has or shares voting or investment power or both and also includes options which are exercisable within sixty days of the date hereof. Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934. The percentages are based upon 19,038,347 shares outstanding as of October 1, 1999, except for certain parties who hold options to purchase shares which are exercisable within the next 60 days. The percentages for those parties who hold presently exercisable options are based upon the sum of 19,038,347 shares plus the number of shares subject to options held by them which are exercisable within the next 60 days, as indicated in the following notes. (2) Includes 20,000 shares of Common Stock subject to stock options exercisable within the next 60 days. (3) Represents shares of Common Stock subject to stock options exercisable within the next 60 days. (4) Includes 6,000 shares of Common Stock owned by a foundation with respect to which Mr. McSwain serves as trustee. (5) Includes 725,000 shares of Common Stock subject to stock options exercisable within the next 60 days. (6) Includes 10,000 shares of Common Stock subject to stock options exercisable within the next 60 days. (7) Includes 125,002 shares of Common Stock subject to stock options exercisable within the next 60 days. (8) According to an amended Schedule 13G dated June 9, 1999 filed with the Commission by FMR Corp. ("FMR"), 49 Edward C. Johnson III and Abigail P. Johnson. Mr. Johnson is the Chairman of FMR and the owner of 12% of the aggregate outstanding voting stock of FMR and Ms. Johnson is a director of FMR and the owner of 24.5% of the aggregate outstanding voting stock of FMR and each may be deemed to be members of a controlling group with respect to FMR. The Schedule 13G states that (i) Fidelity Management & Research Company, a registered investment adviser and a wholly-owned subsidiary of FMR ("Fidelity"), is the beneficial owner of 1,253,700 shares of Common Stock as a result of acting as investment advisor to various registered investment companies (the "Funds"), (ii) Mr. Johnson, FMR (through its control of Fidelity) and the Funds each has sole power to dispose of the 1,253,700 shares owned by the Funds, and (iii) the power to vote all of the 1,253,700 shares resides with the Board of Trustees of the Funds. The Schedule 13G further states that (i) Fidelity Management Trust Company ("Fidelity Management"), a wholly-owned subsidiary of FMR and a bank as defined in Section 3(a)(6) of the Exchange Act, is the beneficial owner of 70,900 shares of Common Stock as a result of it serving as investment manager of the institutional account(s) and (ii) each of Mr. Johnson and FMR (through its control of Fidelity Management) has sole voting and dispositive power over 70,900 shares of Common Stock owned by such institutional account(s). Maxim makes no representation as to the accuracy or completeness of the information reported. The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109. (9) According to a Schedule 13G dated October 12, 1998 filed with the Commission by Mr. Saul, his beneficial ownership (i) includes 18,947 shares owned individually by Mr. Saul and 1,808,037 shares owned by a trust of which Mr. Saul is the sole trustee, (ii) excludes 63,016 shares owned by Mr. Saul's spouse, with respect to which he disclaims beneficial ownership. Maxim makes no representation as to the accuracy or completeness of the information reported. Mr. Saul's address is 702 Mt. Sinai Road, Dalton, Georgia 30720. (10) According to a Schedule 13G dated October 12, 1998 filed with the Commission by Ms. Schejola, her beneficial ownership includes 12,631 shares owned individually by Ms. Schejola and 1,247,369 shares owned by a trust of which Ms. Schejola is the sole trustee. Maxim makes no representation as to the accuracy or completeness of the information reported. Ms. Schejola's address is Via Bottazzi, 2, 15057 Tortona (AI), Italy. (11) Includes an aggregate of 929,038 shares of Common Stock subject to stock and call options exercisable within the next 60 days. 50 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. As of October 1, 1999, a total of $935,000 was owed to Maxim by A.J. Nassar, Maxim's President and Chief Executive Officer. During fiscal 1999, loans totaling $850,326 were made to Mr. Nassar by Maxim. These loans accrued interest at an annual rate of 9 1/4% and were repaid by Mr. Nassar during fiscal 1999. The largest aggregate amount of indebtedness outstanding from Mr. Nassar to Maxim since the beginning of fiscal 1999 was $1.5 million. All amounts currently owed by Mr. Nassar bear interest at an annual rate of 8%. Mr. Nassar has agreed to repay all outstanding obligations to Maxim in annual installments of $200,000 per year (plus accrued interest) on each March 1 until maturity. In connection therewith, the Board of Directors of Maxim has approved the payment to Mr. Nassar of an annual bonus in an amount sufficient to allow Mr. Nassar to pay the annual installments on this loan. All borrowings were made by Mr. Nassar to fund certain of his personal expenses. No additional loans will be made by Maxim to Mr. Nassar. In January 1998, Maxim loaned $100,000 to Herb Biggers, who at the time was serving as Maxim's Chief Operating Officer. This loan accrued interest at an annual rate of 8.5%, payable monthly, with principal due on demand. This loan was made to Mr. Biggers to fund certain of his personal expenses. The maximum aggregate amount of indebtedness outstanding from Mr. Biggers to Maxim since the beginning of fiscal 1999 was $102,000. Upon the termination of Mr. Biggers' employment in June 1998, Maxim repurchased certain stock options, previously granted to Mr. Biggers for $453,000, which represents the aggregate spread between the fair market value of Maxim's common stock on that date and the exercise price of these stock options. In July 1998, Mr. Biggers used a portion of the proceeds from this transaction to repay his debt to Maxim. In May 1998, Maxim loaned $100,000 to Sandra Fowler, the Executive Vice President - Administration of Maxim. This loan accrued interest at an annual rate of 8.5%, payable monthly, with principal due on demand. This loan was made to Ms. Fowler to fund certain of her personal expenses. This loan was repaid by Ms. Fowler in December 1998. In September 1998, Maxim loaned $100,000 to David E. Cicchinelli, who at the time was serving as Maxim's Chief Operating Officer and a director. This loan bears interest at an annual rate of 8.5%, payable monthly, with principal due on demand. The loan was made to Mr. Cicchinelli to fund certain of his personal expenses. As of October 1, 1999, $109,000, including accrued interest, remained outstanding on this loan. Herb Wolk and Ronald H. McSwain, directors of Maxim, each own a floor covering retailer which is a franchisee of Maxim. During fiscal 1999, Mr. Wolk's floor covering company paid less than $1,000 to Maxim for miscellaneous items and received $128,000 in rebates and other consideration from Maxim. During fiscal 1999, Mr. McSwain's floor covering company paid $11,000 to Maxim for various services and received $567,000 in rebates and other consideration from Maxim. Julian D. Saul, who owns 9.6% of the outstanding shares of Maxim common stock, serves as President and a director of Shaw Industries, Inc., one of Maxim's suppliers of floor covering products. During fiscal 1999, Maxim purchased approximately $84 million of floor covering products from Shaw and received approximately $12 million of rebates and other vendor support payments from Shaw. In addition, in connection with the acquisition of the retail store assets of Shaw in August 1998, Maxim issued to Shaw a promissory note in the principal amount of $18 million. This note is due November 1999 and bears interest at a rate equal to the rate paid by Maxim on its senior credit facility. Approximately $12 million remained outstanding on this note as of October 1, 1999. The ability of Maxim to enter into future transactions with affiliates is limited by the terms of its Senior Notes and Senior Credit Facility. 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. 1. FINANCIAL STATEMENTS. The following financial statements and accountants' reports have been filed as Item 8 in Part II of this Form 10-K: Report of Independent Public Accountants Consolidated Balance Sheets - January 31, 1999 and 1998 Consolidated Statements of Operations - Years ended January 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity - Years ended January 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows - Years ended January 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES. The following financial statement schedule of The Maxim Group, Inc. for the years ended January 31, 1999, 1998 and 1997 is included pursuant to Item 8 in Part II of this Form 10-K: Report of Independent Public Accountants on Schedule . . . . . . .. S-1 Schedule II Valuation and Qualifying Accounts . . . . . . . . S-2 52 Schedules not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the consolidated financial statements or notes thereto. 3. EXHIBITS. The following exhibits are filed with or incorporated by reference into this Form 10-K. The exhibits which are denominated by an asterisk (*) were previously filed as a part of, and are hereby incorporated by reference from either (i) a Registration Statement on Form SB-2 for the Registrant, Registration No. 33-66926 (referred to as "SB-2"), (ii) Amendment No. 2 to the Registrant's Registration Statement on Form SB-2 (referred to as "SB-2 Amendment No. 2)", (iii) the Registrant's Annual Report on Form 10-KSB for the year ended March 31, 1995 (referred to as "1995 10-K"), (iv) the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 (referred to as "1995 10-Q"), (v) a Registration Statement on Form S-3 for the Registrant, Registration No. 333-20105 (referred to as "S-3"), (vi) the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 1997 (referred to as "4-30-97 10-Q"), (vii) a Registration Statement on Form S-4 for the Registrant, Registration No. 333-39819 (referred to as "S-4"), (viii) a Registration Statement on Form S-4 for the Registrant, Registration No. 333-8713 (referred to as "1996 S-4"), (ix) a Registration Statement on Form S-8 for the Registrant, Registration No. 333-47299 (referred to as "S-8"), (x) the Registrant's Annual Report on Form 10-K for the year ended January 31, 1997 (referred to as "1997 10-K"), (xi) the Registrant's Annual Report on Form 10-K for the year ended January 31, 1998 (referred to as "1998 10-K"), (xii) the Registrant's Current Report on Form 8-K dated June 23, 1998 (referred to as "6/23/98 8-K"), (xiii) the Registrant's Current Report on Form 8-K dated August 9, 1998 (referred to as "8/9/98 8-K"), and (xiv) the Registrant's Current Report on Form 8-K dated January 29, 1999 (referred to as "1/29/99 8-K"). Except as otherwise indicated, the exhibit number corresponds to the exhibit number in the referenced document.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- *3.1 - Certificate of Incorporation of the Company (SB-2) *3.1.1 - Certificate of Amendment dated August 29, 1996 (1997 10-K) 3.1.2 - Certificate of Amendment dated December 17, 1998 *3.2 - By-Laws of the Company (SB-2) *3.2.1 - Amendment No. 1 to By-Laws effective August 29, 1996 (1997 10-K)
53 *4.1 - Specimen Certificate of Common Stock (SB-2 Amendment No. 2) *4.2 - Indenture dated as of October 16, 1997 between The Maxim Group, Inc. and its subsidiaries as Guarantors and State Street Bank and Trust Company, as Trustee (S-4) *4.5 - Form of The Maxim Group, Inc. 9 1/4% Senior Subordinated Notes due 2007, Series B (contained in the Indenture filed as Exhibit 4.2) *10.1 - 1993 Incentive Stock Option Plan (SB-2) *10.1.1 - Amendment No. 1 to 1993 Incentive Stock Option Plan (1995 10-K) *10.1.2 - Amendment No. 2 to 1993 Stock Option Plan (1996 S-4) *10.1.3 - Amendment No. 3 to 1993 Stock Option Plan (S-8) 10.1.4 - Amendment No. 4 to 1993 Stock Option Plan 10.1.5 - Amendment No. 5 to 1993 Stock Option Plan 10.3 - Form of CarpetMAX Franchise Membership Agreement *10.10 - Employment Agreement dated July 30, 1993 by and between Image Industries, Inc. and H. Stanley Padgett (S-3, Exhibit 10.4) *10.11 - Extension of Employment Agreement dated July 30, 1996 by and between Image Industries, Inc. and H. Stanley Padgett (S-3, Exhibit 10.5) *10.12 - Amended Employment Agreement dated August 30, 1996 by and between the Registrant, Image Industries, Inc. and H. Stanley Padgett (S-3, Exhibit 10.6) *10.12.1 - Second Amendment to Employment Agreement dated July 31, 1997 by and among Image Industries, Inc., H. Stanley Padgett and The Maxim Group, Inc. (1998 10-K) *10.13 - Employment Agreement dated June 4, 1997 between the Company and A.J. Nassar (4-30-97 10-Q) *10.13.1 - Amendment No. 1 dated September 25, 1997 to Employment Agreement dated June 4, 1997 by and between A.J. Nassar and The Maxim Group, Inc. (S-4)
54 *10.13.2 - Amendment No. 2 dated January 1, 1998 to Employment Agreement dated June 4, 1997, as amended, by and between A.J. Nassar and The Maxim Group, Inc. (1998 10-K) 10.23 - Amended and Restated Credit Agreement among the Company, as Borrower, the Domestic Subsidiaries of the Company, as Guarantors, the Lenders identified therein, and NationsBank, N.A., as Administrative Agent, dated as of May 18, 1999, in the aggregate principal amount of $75.0 million. 10.23.1 - First Amendment to Credit Agreement and Forbearance, dated July 23, 1999, among the Company, as Borrower, the Domestic Subsidiaries of the Company, as Guarantors, Bank of America, N.A. (formerly NationsBank, N.A.), as Administrative Agent, and the Lenders party thereto. 10.23.2 - Second Amendment to Credit Agreement, Forbearance and Waiver, dated September 7, 1999, among the Company, as Borrower, the Domestic Subsidiaries of the Company, as Guarantors, Bank of America, N.A. (formerly NationsBank, N.A.), as Administrative Agent, and the Lenders party thereto. 10.23.3 - Third Amendment to Credit Agreement and Forbearance, dated October 11, 1999, among the Company, as Borrower, the Domestic Subsidiaries of the Company, as Guarantors, Bank of America, N.A. (formerly NationsBank, N.A.), as Administrative Agent, and the Lenders party thereto. *10.24 - Agreement and Plan of Merger, dated as of June 23, 1998, between The Maxim Group, Inc., CMAX Acquisition, Inc., Shaw Industries, Inc. and Shaw Carpet Showplace, Inc. (6/23/98 8-K, exhibit 2.1) *10.24.1 - Amendment, dated August 9, 1998, to Agreement and Plan of Merger, dated as of June 23, 1998, between The Maxim Group, Inc., CMAX Acquisition, Inc., Shaw Industries, Inc. and Shaw Carpet Showplace, Inc. (8/9/98 8-K, exhibit 2.1.1) *10.25 - Asset Purchase Agreement, dated as of November 12, 1998, as amended and restated on January 29, 1999, by and among The Maxim Group, Inc., Image Industries, Inc. and Aladdin Manufacturing Corporation (1/29/99 8-K, exhibit 2.1) 10.26 - Employment Agreement, dated September 27, 1999, by and between the Company and Leonard H. Thill. 21.1 - Subsidiaries of the Registrant 23.1 - Consent of Arthur Andersen LLP 27.1 - Financial Data Schedule
REPORTS ON FORM 8-K. The following reports on Form 8-K were filed during the quarter ended January 31, 1999: (i) Current Report on Form 8-K dated November 12, 1998 (reporting execution of definitive agreement to sell Image Industries, Inc.), and (ii) Current Report on Form 8-K dated January 29, 1999 (reporting sale of Image Industries, Inc.). 55 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Maxim Group, Inc.: We have audited the accompanying consolidated balance sheets of THE MAXIM GROUP, INC. (a Delaware corporation) and subsidiaries as of January 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Maxim Group, Inc. and subsidiaries as of January 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1999 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is not in compliance with a certain restricted payment covenant contained in the indenture which references the Company's $100 million Senior Subordinated Notes due October 2007 (the "Senior Notes") 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. The Company's available borrowings under its Senior Credit Facility plus cash on hand are not sufficient to repay the Senior Notes if declared due and payable. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia October 11, 1999 F-1 THE MAXIM GROUP, INC. CONSOLIDATED BALANCE SHEETS
JANUARY 31, ---------------------- (In thousands, except share data) 1999 1998 --------- --------- ASSETS Cash and cash equivalents, including restricted cash of $22,786 at 1998 $ 89,901 $ 28,880 Current portion of franchise license fees receivable, net of allowance of $565 and $528 in 1999 and 1998, respectively 2,013 3,107 Receivables, net of allowance for doubtful accounts of $5,049 and $2,178 in 1999 and 1998, respectively 56,012 59,190 Inventories 58,744 54,693 Refundable income taxes -- 2,558 Deferred income taxes 7,361 5,714 Prepaid expenses 6,316 3,406 --------- --------- Total current assets 220,347 157,548 Property, plant and equipment, net 71,766 137,207 Franchise license fees receivable, less current portion, net of allowance of $570 and $210 in 1999 and 1998, respectively 2,337 2,718 Notes receivable from franchisees, less current portion, net of allowance of $1,200 in 1999 8,228 3,506 Deferred income taxes 1,065 -- Intangible assets, net of accumulated amortization of $2,666 and $1,626 in 1999 and 1998, respectively 71,341 13,640 Other assets 13,684 6,875 --------- --------- Total assets $ 388,768 $ 321,494 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current portion of long-term debt $ 16,952 $ 384 Senior subordinated notes 99,387 -- Current portion of capital lease obligations 6,635 501 Accounts payable 26,706 23,376 Rebates payable to franchisees 749 3,975 Deposits 14,769 2,897 Deferred revenue 2,254 1,750 Income taxes payable 2,633 -- Other accrued liabilities 55,827 14,333 --------- --------- Total current liabilities 225,912 47,216 --------- --------- Long-term debt, less current portion 4 129,349 --------- --------- Capital lease obligations, less current portion 1,469 1,429 --------- --------- Deferred income taxes -- 9,725 --------- --------- Other long-term liabilities 516 -- --------- --------- Commitments and Contingencies (Note 16) Stockholders' equity: Preferred stock - $.001 par value; 1,000,000 shares authorized; no shares issued -- -- Common stock - $.001 par value; 75,000,000 shares authorized; shares issued: 21,315,664 in 1999 and 17,352,521 in 1998 21 17 Additional paid-in capital 185,828 119,264 Retained earnings 9,836 29,388 Treasury stock - shares at cost: 2,365,900 in 1999 and 1,221,000 in 1998 (34,818) (14,894) --------- --------- Total stockholders' equity 160,867 133,775 --------- --------- Total liabilities and stockholders' equity $ 388,768 $ 321,494 --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-2 THE MAXIM GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED JANUARY 31, ----------------------------------- (In thousands, except per share data) 1999 1998 1997 --------- --------- --------- Revenues: Sales of floor covering products $ 608,916 $ 303,560 $ 250,968 Fees from franchise services 24,960 29,860 26,336 Fiber and PET sales 26,716 26,059 28,853 Other 3,834 5,648 3,564 --------- --------- --------- Total revenues 664,426 365,127 309,721 Cost of sales 457,339 249,381 222,290 --------- --------- --------- Gross profit 207,087 115,746 87,431 Selling, general and administrative expenses 220,748 83,955 72,366 Nonrecurring charges 23,713 -- -- Merger-related costs -- -- 4,900 --------- --------- --------- Operating (loss) income (37,374) 31,791 10,165 Other income (expense): Interest income 1,754 1,233 613 Interest expense (15,097) (6,948) (7,006) Gain on sale of Image 24,863 -- -- Other, net 1,023 394 302 --------- --------- --------- (Loss) income before income taxes and extraordinary charge (24,831) 26,470 4,074 Benefit (provision) for income taxes 5,656 (10,314) (1,929) --------- --------- --------- (Loss) income before extraordinary charge (19,175) 16,156 2,145 Extraordinary charge on early retirement of debt, net of tax benefit (377) (785) -- --------- --------- --------- Net (loss) income $ (19,552) $ 15,371 $ 2,145 --------- --------- --------- --------- --------- --------- Basic (loss) earnings per share before extraordinary charge $ (1.08) $ 1.00 $ 0.16 Extraordinary charge per share (0.02) (0.05) -- --------- --------- --------- Basic (loss) earnings per share $ (1.10) $ 0.95 $ 0.16 --------- --------- --------- --------- --------- --------- Diluted (loss) earnings per share before extraordinary charge $ (1.08) $ 0.96 $ 0.15 Extraordinary charge per share (0.02) (0.04) -- --------- --------- --------- Diluted (loss) earnings per share $ (1.10) $ 0.92 $ 0.15 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-3 THE MAXIM GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional -------------------------- Paid-In Retained Treasury (In thousands, except share data) Shares Amount Capital Earnings Stock Total ----------- ----------- ----------- ----------- ----------- ----------- Balance, January 31, 1996 12,397,280 $ 12 $ 60,392 $ 11,746 $ -- $ 72,150 Purchase and retirement of treasury stock (28,000) -- (336) -- -- (336) Issuance of common stock 93,333 -- 1,278 -- -- 1,278 Common stock issued upon exercise of stock options 95,576 -- 719 -- -- 719 Pooling of Bailey & Roberts Flooring, Inc. 242,288 1 71 126 -- 198 Net income -- -- -- 2,145 -- 2,145 ----------- ----------- ----------- ----------- ----------- ----------- Balance, January 31, 1997 12,800,477 13 62,124 14,017 -- 76,154 Purchase of 1,221,000 shares of treasury stock -- -- -- -- (14,894) (14,894) Issuance of common stock 3,372,365 3 50,240 -- -- 50,243 Common stock issued upon exercise of stock options 1,179,679 1 6,900 -- -- 6,901 Net income -- -- -- 15,371 -- 15,371 ----------- ----------- ----------- ----------- ----------- ----------- Balance, January 31, 1998 17,352,521 17 119,264 29,388 (14,894) 133,775 Purchase of 1,144,900 shares of treasury stock -- -- -- -- (19,924) (19,924) Issuance of common stock 3,474,698 4 61,395 -- -- 61,399 Common stock issued upon exercise of stock options 488,445 -- 5,169 -- -- 5,169 Net loss -- -- -- (19,552) -- (19,552) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, JANUARY 31, 1999 21,315,664 $ 21 $ 185,828 $ 9,836 $ (34,818) $ 160,867 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-4 THE MAXIM GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED JANUARY 31, ----------------------------------- (In thousands) 1999 1998 1997 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (19,552) $ 15,371 $ 2,145 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Nonrecurring charges 7,540 -- -- Depreciation and amortization 19,209 11,950 10,518 Deferred income taxes (12,437) 3,353 335 Gain on sale of Image (24,863) -- -- (Gain) loss on sale of assets (809) 469 367 Changes in operating assets and liabilities, net of effects of acquisitions and disposition: Receivables (3,420) (18,651) (10,254) Inventories (10,843) (12,410) 7,544 Refundable income taxes 2,558 (1,247) 866 Prepaid expenses and other assets (4,534) (5,575) (1,865) Accounts payable and other liabilities 40,480 3,518 8,164 --------- --------- --------- Net cash (used in) provided by operating activities (6,671) (3,222) 17,820 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets, net of cash sold and selling expenses 172,097 52 47 Capital expenditures (62,564) (47,673) (17,444) Acquisitions, net of cash acquired (26,267) (1,339) (1,284) --------- --------- --------- Net cash provided by (used in) investing activities 83,266 (48,960) (18,681) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net -- 47,243 606 Proceeds from exercise of stock options 5,169 6,901 719 Purchase of treasury stock (19,924) (14,894) (336) Long-term debt proceeds 93,900 162,580 89,806 Long-term debt repayments (94,098) (126,478) (87,241) Principal payments on capital lease obligations (621) (729) (461) --------- --------- --------- Net cash (used in) provided by financing activities (15,574) 74,623 3,093 --------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 61,021 22,441 2,232 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 28,880 6,439 4,207 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 89,901 $ 28,880 $ 6,439 --------- --------- --------- --------- --------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 14,009 $ 4,956 $ 7,123 Income taxes 693 6,672 293 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Common stock issued in connection with acquisitions $ 61,399 $ 3,000 $ 672 Note payable issued in connection with acquisition 11,496 -- -- Assets acquired pursuant to capital lease obligations 5,983 -- -- Assets acquired pursuant to debt obligations 4,877
The accompanying notes are an integral part of these consolidated financial statements. F-5 THE MAXIM GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. 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 (See Note 3). Image is 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. BASIS OF PRESENTATION The consolidated financial statements include the accounts of The Maxim Group, Inc. and all wholly owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The financial statements give retroactive effect to the merger of the Company and Image on August 30, 1996, which was accounted for as a pooling-of-interests, as described in Note 3. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed below, the Company is not in compliance with a certain restricted payment covenant contained in the indenture which references the Company's $100 million Senior Subordinated Notes due October 2007 (the "Senior Notes") 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. The Company's available borrowings under its Senior Credit Facility, as amended May 18, 1999, plus cash on hand are not sufficient to repay the Senior Notes if declared due and payable. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are discussed below. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash balances include short-term interest-bearing deposits with original maturities of three months or less. Short-term investments are stated at cost, which approximates fair value. F-6 Restricted cash of $22,786,000 at January 31, 1998 consists of proceeds received from the sale of revenue bonds to finance the expansion of fiber extrusion capabilities at an Image manufacturing plant. ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION Revenue from retail and commercial sales is recognized upon completion of the floor covering installation or at the time of delivery for floor coverings not installed by the Company or its authorized installers. Sales from the manufacturing operations are recognized at the time products are shipped. The Company recognizes franchise license fees as income on the date the related franchise agreement is signed; at which time, the Company has performed substantially all of its obligations under the franchise agreement. The Company finances a portion of its franchise sales over terms of four to fifteen years, generally at a 10 percent interest rate. An allowance for doubtful accounts is provided based on the Company's collection experience and periodic reviews of the accounts. The Company recognizes vendor merchandising support as either revenue or a reduction of product costs over the periods in which the agreements' criteria are met. FEES FROM FRANCHISE SERVICES The Company negotiates volume rebates with various floor covering manufacturers on behalf of its franchisees. In exchange for this service, the Company earns a portion of the rebates as the shipments are made to its franchisees. The Company receives these rebates from the manufacturers throughout the year. The franchisees who meet certain criteria typically receive their portion of the rebates semiannually. Accordingly, the Company has recorded revenue or a reduction of cost of sales, receivables from manufacturers, and rebates payable to franchisees related to these rebates. During 1999, certain franchisees did not meet the criteria to receive their portion of the rebate payable. Accordingly, the Company reduced rebates payable by approximately $3.8 million as of January 31, 1999. The Company develops and offers its franchisees marketing and promotional programs, including television, radio and print advertising, and direct mail campaigns and sales literature. Advertising production fees, excluding direct mail, are considered earned once the advertisement is produced, and the related media commission fees, if applicable, are considered earned once the commercial is aired. Direct mail commissions are earned on the date of the franchisee's promotion or sale. ADVERTISING AND PROMOTION All costs associated with advertising and promoting products are expensed as incurred. INVENTORIES Inventories for retail operations, consisting of goods held for resale, are recorded at the lower of cost or market. Cost is determined on a specific identification basis for retail sales, which approximates the first-in, first-out method. Inventories for manufacturing operations are valued at the lower of cost (first-in, first-out) or market. Costs include raw materials, direct labor and manufacturing overhead. Market is based on current replacement cost F-7 for raw materials and supplies and net realizable value for finished goods. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment are stated at cost, which includes interest on funds borrowed to finance construction. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the net difference, less any amount realized, is reflected in the consolidated statements of operations. The Company's buildings, furniture, fixtures, and equipment are depreciated using the straight-line method over the estimated useful lives of the assets for book purposes, with accelerated methods used for tax purposes. Improvements to leased property are amortized using the straight-line method over the life of the lease, or the useful life of the improvement, whichever is shorter. The Company's property, plant and equipment are depreciated using the following estimated useful lives: Buildings 10 to 40 years Leasehold improvements 3 to 20 years Machinery and equipment 3 to 10 years Furniture and fixtures 5 to 7 years Transportation equipment 5 years
INTANGIBLE ASSETS Intangible assets consist primarily of goodwill. Goodwill arises in connection with business combinations accounted for as purchases. Goodwill is amortized on a straight-line basis over 15 to 20 years. Amortization of $1,935,000, $652,000, and $564,000 was charged to expense in 1999, 1998, and 1997, respectively. REALIZATION OF LONG-LIVED ASSETS The Company periodically evaluates the carrying value of its long-lived assets, including goodwill, in relation to their operating performance and future undiscounted cash flows of the underlying businesses. The Company adjusts the carrying amount of the assets or goodwill if the unamortized balance exceeds the estimate of future cash flows. See Note 10 for discussion of charges recorded based on management's assessment of the realization of certain intangible and fixed assets. DEFERRED LOAN COSTS Deferred loan costs, which are included in other assets, represent fees and expenses incurred to obtain long-term debt. The costs are amortized to expense over the life of the related financing agreement. F-8 SELF-INSURANCE The Company is self-insured for health care and workers' compensation up to predetermined amounts above which third-party insurance applies. Losses are accrued based on the Company's estimates of the aggregate liability for claims incurred using certain actuarial assumptions used in the insurance industry and based on Company experience. EARNINGS PER SHARE Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per common share is computed based on the weighted average number of common shares outstanding, adjusted for potentially dilutive issuances of common stock pursuant to the exercise of outstanding stock options. Income (loss) available to common stockholders, the numerator in the basic and diluted earnings per share computations, was $(19,552,000), $15,371,000 and $2,145,000 for the years ended January 31, 1999, 1998 and 1997, respectively. The following table reconciles the denominator for the basic and diluted earnings (loss) per share computations. - --------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 31, ----------------------------- (In thousands) 1999 1998 1997 ------ ------ ------ Weighted average common shares outstanding 17,833 16,158 13,468 Plus shares issued upon assumed conversion of outstanding stock options -- 608 469 ------ ------ ------ Weighted average common shares outstanding and potentially dilutive common shares in diluted earnings (loss) per common share 17,833 16,766 13,937 ------ ------ ------ ------ ------ ------
- -------------------------------------------------------------------------------- The fiscal year 1999 weighted average common shares outstanding and potentially dilutive common shares outstanding do not reflect the assumed conversion of outstanding stock options due to the antidilutive effect of the assumed conversions for the period. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying amounts of cash, accounts receivable, and accounts payable approximate their fair values because of their short-term maturity. The carrying amounts of the Company's credit facility and Summerville loan approximate their fair values, because interest rates on the debt are periodically adjusted and approximate current market rates. The estimated fair value for the Company's senior subordinated notes was based on quoted market prices or current rates for similar instruments with the same maturities. The estimated fair value of the Company's senior subordinated notes at January 31, 1999 and 1998 was approximately F-9 $99,850,000 and $101,250,000, compared with a carrying value of $99,387,000 and $99,316,000, respectively. The Company does not use derivatives for trading purposes. As of January 31, 1999 and 1998, the Company had derivative financial instruments outstanding for an aggregate notional amount of less than $2,500,000 related to certain borrowings. STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure option of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires that companies who do not choose to account for stock-based compensation as prescribed by the statement shall disclose the pro forma effects on earnings and earnings per share as if SFAS No. 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS No. 123. Pro forma net income (loss) and earnings (loss) per share impacts are presented in Note 14 as if the fair value method had been applied. RECLASSIFICATIONS Certain prior year financial statement balances have been reclassified to conform to the current year presentation. GOING CONCERN The 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 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 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 January 31, 1999 (See Note 11). As of October 11, 1999, the Company's available borrowings under its Senior Credit Facility plus cash on hand are not sufficient to repay the Senior Notes if 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 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 must 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. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1 ("SOP 98-1"),"Accounting for Costs of Computer Software Developed or Obtained for Internal Use", which is effective for fiscal years beginning after December 15, 1998. SOP 98-1 requires capitalization of certain costs of internal-use software. The Company does not expect this statement to have a material impact on the financial statements. In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities," which is effective for fiscal years beginning after December 15, 1998. SOP 98-5 requires entities to expense certain start-up costs and organization costs as they are F-10 incurred. The Company does not expect this statement to have a material impact on the financial statements. NOTE 3. ACQUISITIONS AND DISPOSITION. 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"). Under the terms of the merger agreement, the Company issued to Shaw 3,150,000 shares of common stock of the Company valued at approximately $55,188,000 for financial statement purposes. The Company also signed a one-year note in the principal amount of $18,000,000 (adjusted to $11,496,000 after giving effect to purchase price adjustments), paid Shaw $25,000,000 in cash and assumed certain liabilities. The acquisition has been recorded using the purchase method of accounting. The purchase price has been allocated to the assets acquired and liabilities assumed based upon estimates of the fair values at the date of acquisition. As a result of this acquisition, the Company recorded goodwill of approximately $51,000,000, which is being amortized over 20 years. The purchase price as of January 31, 1999 may be subject to further adjustment, and any adjustments to the purchase price will be reflected as an increase or decrease in intangible assets. Effective September 25, 1998, the Company acquired CarpetsPlus of America, LLC, a floor covering-buying group. The acquisition has been recorded using the purchase method of accounting at a price of approximately $8,485,000, consisting of a cash payment of $2,275,000 and the issuance of 324,698 shares of the Company's common stock valued at approximately $6,210,000. In addition, as of January 31, 1999, 36,078 of the Company's common shares were placed in escrow pending the outcome of certain contingencies. In addition to the consideration received at closing, the shareholders of CarpetsPlus of America, LLC may receive shares of common stock of the Company having a value of up to $2,300,000 based on the profitability of the acquired company during the two-year period ending January 31, 2001. As a result of this acquisition, the Company recorded goodwill of approximately $8,400,000, which is being amortized over 20 years. On August 30, 1996, the Company acquired all of the common stock of Image in exchange for 5,266,285 shares of the Company's common stock. The acquisition of Image was accounted for under the pooling-of-interests method of accounting, and accordingly, the Company's historical financial statements were restated to include the accounts and results of operations of Image. The Company incurred approximately $4,700,000 in one-time costs related to the merger (primarily legal, accounting, investment advisory fees, and merger-related restructuring charges). In addition, the Company F-11 incurred an additional $200,000 in merger-related costs related to the merger with Bailey & Roberts Flooring, Inc. in November 1996. These merger-related amounts, totaling $4,900,000 have been presented separately in the accompanying statements of operations for the year ended January 31, 1997. The Bailey & Roberts Flooring, Inc. acquisition, in which the Company issued 242,288 shares, was accounted for as a pooling-of-interests. The consolidated financial statements of the Company were not restated for the Bailey & Roberts Flooring, Inc. merger for the periods prior to February 1, 1996, as the effect of the restatement would not have been material to such periods. On January 29, 1999, the Company sold substantially all of the assets of its Image subsidiary to Mohawk Industries, Inc. ("Mohawk") for total consideration of $210,666,000, which included the assumption of $48,136,000 in related debt and short-term liabilities. Proceeds were used to retire debt and to fund the Company's working capital requirements. Under the terms of the Indenture (See Note 11), the Company is required to invest the proceeds from certain asset sales, including the sale of Image, to repay senior debt and in capital expenditures, properties, inventories and other assets that will be used in the Company's business. To the extent that such proceeds are not so invested within 365 days of the asset sale (and exceed $10,000,000), the Company will be required to use such excess proceeds to make an offer to purchase outstanding notes at a price equal to 100% of the principal amount plus accrued interest. NOTE 4. PRO FORMA FOR ACQUISITIONS AND DISPOSITION. 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 (see Note 3) had occurred on February 1, 1997. The pro 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.
FISCAL YEAR ENDED JANUARY 31, ----------------------------- (In thousands, except per share data) 1999 1998 ----------- ----------- (Unaudited) (Unaudited) Net revenue $ 753,160 $ 705,192 Net loss (43,215) (3,795) Basic loss per share $ (2.23) $ (0.20) Diluted loss per share (2.23) (0.20)
NOTE 5. RECEIVABLES. Receivables consist of the following:
JANUARY 31, -------------------- (In thousands) 1999 1998 -------- -------- Trade accounts receivable $ 50,736 $ 58,349 Receivable from asset sale 5,020 -- Receivables from officers, directors and employees 1,900 1,593 Notes due from franchisees 3,405 1,426 -------- -------- Total receivables 61,061 61,368 Less reserves (5,049) (2,178) -------- -------- Receivables, net $ 56,012 $ 59,190 -------- -------- -------- --------
F-12 NOTE 6. INVENTORIES. Inventories consist of the following:
JANUARY 31, ----------------- (In thousands) 1999 1998 ------- ------- Raw materials $ 309 $14,809 Work in process -- 3,363 Finished goods 58,435 36,521 ------- ------- Total $58,744 $54,693 ------- ------- ------- -------
On a segment basis, the Company's inventories consist of the following:
JANUARY 31, -------------------- (In thousands) 1999 1998 ------- ------- Retail $56,927 $18,055 Image 1,817 36,638 ------- ------- Total $58,744 $54,693 ------- ------- ------- -------
NOTE 7. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment consist of the following:
JANUARY 31, --------------------------- (In thousands) 1999 1998 --------- --------- Land and improvements $ 5,065 $ 5,289 Buildings and leasehold improvements 36,555 46,377 Machinery and equipment 6,656 95,128 Furniture and fixtures 12,166 4,869 Transportation equipment 2,765 3,313 Construction in progress and other 20,297 30,270 --------- --------- Property, plant and equipment, at cost 83,504 185,246 Less accumulated depreciation and amortization (11,738) (48,039) --------- --------- Property, plant and equipment, net $ 71,766 $ 137,207 --------- --------- --------- ---------
F-13 NOTE 8. OTHER ACCRUED LIABILITIES. Other accrued liabilities consist of the following:
JANUARY 31, -------------------- (In thousands) 1999 1998 ------- ------- Salaries, wages, benefits and related taxes $16,001 $ 5,715 Accrued interest 3,199 2,931 Accrued installer fees 2,001 -- Nonrecurring charge reserve 6,017 -- Accrued closed acquired location leases 6,350 -- Accrued advertising 3,644 155 Taxes, other than income 1,689 611 Other 16,926 4,921 ------- ------- Other accrued liabilities $55,827 $14,333 ------- ------- ------- -------
NOTE 9. NOTES RECEIVABLE FROM FRANCHISEES. The Company has made loans to certain franchisees totaling $12,833,000 and $4,932,000 at January 31, 1999 and 1998, respectively. The loans due from franchisees are payable in monthly installments and/or are due on demand. The current portion of these notes is included in receivables and totals $3,405,000 and $1,426,000 at January 31, 1999 and 1998, respectively. Interest is payable monthly at rates ranging from prime (7 3/4% at January 31, 1999) to 16 1/2% on the outstanding balance. The loans are secured by the franchisees' accounts receivable, inventory, equipment, company common stock, personal guarantees and/or personal property. NOTE 10. 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 January 31, 1999, $17,696,000 of the nonrecurring charges was incurred, with $6,017,000 remaining in the reserve, which is included in accrued liabilities in the accompanying balance sheet. On June 1, 1998, the Company amended its franchise agreement with the majority of its CarpetMAX franchisees, whereby the Company established certain requirements for more uniformity in the appearance and merchandising of the franchised stores. As part of the amended franchise agreement, the number of floor covering vendors available to franchisees through the Company, to buy and earn rebates from, was reduced. The Company wrote-off certain vendor receivables and has also established a reserve to settle claims of franchisees arising from the F-14 changes to the franchise agreement. In addition, the Company has written down to fair value certain assets made obsolete by the amended franchise agreement. The Company also originally accrued for the costs of closing 15 Company-owned retail stores, most of which were closed as of January 31, 1999. The number of store locations to be closed was revised and the Company determined that three of the originally identified stores were to remain open and 13 additional stores were to be closed, bringing the total number of stores to be closed to 25. In connection with the reevaluation of the Company's retail strategy described above, the Company analyzed the performance of its Company-owned retail stores. This analysis indicated that significant strategic and operational changes would be necessary in some stores, including changes in the customer mix, location, store design, and merchandising. These factors also caused management to assess the realization of the goodwill recorded for these stores. The determination of goodwill impairment was made by comparing the unamortized goodwill balance at July 31, 1998 to the estimate of the related undiscounted future cash flows. The assumptions used reflected earnings, and market and industry conditions, as well as current operating plans. The assessment indicated a permanent impairment of goodwill for certain markets. As a consequence, such goodwill was written down to fair market value, which resulted in a write-off totaling $4,200,000. The major components of the nonrecurring charge balance, the remainder of which is included in other accrued liabilities on the balance sheet at January 31, 1999, are as follows:
FISCAL YEAR ENDED JANUARY 31, 1999 ------------------------------------------------------ INITIAL REVISION AMOUNT REMAINING (In thousands) CHARGE TO CHARGE INCURRED BALANCE -------- -------- -------- -------- Write-off of vendor receivables $ 2,439 $ -- $ (2,439) $ -- Claim reserves 10,700 (1,214) (6,291) 3,195 Write-down of equipment 492 -- (492) -- Store closure and carrying costs Original locations 10,700 (7,071) (2,698) 931 Additional locations -- 3,467 (1,576) 1,891 Write-down of goodwill 4,200 -- (4,200) -- -------- -------- -------- -------- $ 28,531 $ (4,818) $(17,696) $ 6,017 -------- -------- -------- -------- -------- -------- -------- --------
F-15 NOTE 11. DEBT. Debt at January 31, 1999 and 1998 is summarized as follows:
JANUARY 31, ------------------------- (In thousands) 1999 1998 --------- --------- 9 1/4 % Senior subordinated notes, net of discount $ 99,387 $ 99,316 Summerville loan -- 30,000 Shaw note 11,496 -- Synthetic lease facility 4,877 -- Other debt with interest rate of 7.5% 583 417 --------- --------- 116,343 129,733 Less senior subordinated notes classified as current (99,387) -- Less synthetic lease facility classified as current (4,877) -- Less current portion (12,075) (384) --------- --------- Long-term debt, less current amounts $ 4 $ 129,349 --------- --------- --------- ---------
The contractual maturities of long-term debt subsequent to January 31, 1999 are $12,075,000 for the fiscal year ending January 31, 2000, with $3,000, $1,000, $4,877,000 and $99,387,000 to mature in the fiscal years ending January 31, 2001, 2002, 2004 and 2008, respectively. SENIOR SUBORDINATED NOTES On October 16, 1997, the Company completed the sale of $100,000,000 of 9 1/4% senior subordinated notes ("Senior Notes"), due 2007, to institutional buyers in a private offering under Rule 144A promulgated under the Securities Act of 1933. The net proceeds to the Company from the offering of the Senior Notes were approximately $96,000,000, net of an issue discount and fees and related costs. Each of the Company's operating subsidiaries has fully and unconditionally guaranteed the Senior Notes on a joint and several basis. The guarantor subsidiaries comprise all of the direct and indirect operating subsidiaries of the Company. The Company has not presented separate financial statements and other disclosures concerning the guarantor subsidiaries because management has determined that such information is not material to investors. There are no significant restrictions on the ability of the guarantor subsidiaries to make distributions to the Company. F-16 As of January 31, 1999, the Company was not in compliance with a certain restricted payment covenant contained in the indenture (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 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 January 31, 1999. As of October 11, 1999, the Company's available borrowings under its Senior Credit Facility plus cash on hand are not sufficient to repay the Senior Notes if 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 the Company 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 the Company, repayment of the Senior Notes may be accelerated, as discussed above. Under the terms of the Indenture, the Company is required to invest the proceeds from certain sales, including the sale of Image, to repay senior debt and in capital expenditures, properties, inventories and other assets that will be used in the Company's business. To the extent that such proceeds are not so invested within 365 days of the asset sale (and exceed $10,000,000), the Company will be required to use such excess proceeds to make an offer to purchase outstanding notes at a price equal to 100% of the principal amount plus accrued interest. SENIOR CREDIT FACILITY On November 25, 1998, the Company entered into a Credit Facility which, as amended through January 31, 1999 (the "Credit Facility"), provided for aggregate commitments of $25,000,000. The Credit Facility consisted of a revolving facility that matures three years from the closing of the Credit Facility. There were no borrowings outstanding under the Credit Facility as of January 31, 1999 and the Company had availability of $20,123,000 as of January 31, 1999. The Credit Facility was further amended and restated as of May 18, 1999 (the "Amended Credit Facility"), with aggregate commitments thereunder increased to $75,000,000 (See Note 19). As of January 31, 1999, borrowings under the Credit Facility were secured by accounts receivable, inventories, certain real and personal property, and certain intangible assets of the Company and its subsidiaries, as well as the capital stock of all of the subsidiaries. Amounts outstanding under the amended 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 0.75% to 1.75% for loans that bear interest at the adjusted LIBOR rate. The Company is required to pay the lenders under the Credit Facility, on a quarterly basis, a commitment fee ranging from 0.20% to 0.375% of the unused portion of the Credit Facility. The Company is required to pay administration fees quarterly. The 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 Credit Facility contains cross default provisions related to the Company's other indebtedness. The Credit Facility requires the Company to meet certain financial ratios and covenants, including debt to equity, minimum tangible net worth, interest coverage, and asset coverage. F-17 Extraordinary charges were recorded in fiscal 1999 and 1998 for the write-off of unamortized financing fees associated with prior credit facilities. The resulting one-time charges amounted to $377,000 and $785,000, net of income tax benefits of $236,000 and $546,000, respectively. SHAW NOTE The Company entered into a promissory note related to the acquisition of the Shaw retail assets (See Note 3). The note is unsecured and is subordinate to bank indebtedness. The interest on the promissory note is at a rate equal to borrowings under the Credit Facility. The principal amount as of January 31, 1999 of $11,496,000 is due in November 1999. SUMMERVILLE BONDS The Development Authority of the City of Summerville, Georgia issued exempt facility revenue bonds in an aggregate principal amount of $30,000,000 and subsequently loaned (the "Summerville Loan") the proceeds to Image to finance the expansion of their fiber extrusion capabilities. The Summerville Loan matures on September 1, 2017 and the interest rate is determined weekly from remarketing of the bonds in the secondary market. For the fiscal year ended January 31, 1999 and 1998, the weighted average annual interest rate on the Summerville Loan was 3.5% and 3.7%, respectively. The Summerville Loan was assumed by Mohawk on January 29, 1999, in connection with the sale of substantially all of the assets of Image (See Note 3). SYNTHETIC LEASE FACILITY The Company has established a $10,000,000 synthetic lease facility with a lending group. Amounts outstanding under the facility were approximately $4,877,000 as of January 31, 1999. Under the synthetic lease facility, which is scheduled to mature no later than November 2003, the Company has the ability to direct the lender group to make loans to the co-owner-trustee under the facility, for acquisition, development or expansion of the Company's flooring center locations. These locations are then leased back by the co-owner-trustee to the Company or a designated designated subsidiary of the Company. The Company has guaranteed repayment of the amounts outstanding under the facility and the lenders have a security interest in the related locations. Availability under the Company's Amended Credit Facility is reduced by amounts outstanding under this synthetic lease facility. The facility contains various covenants. As of January 31, 1999, the Company was not in compliance with certain of these covenants. The lenders have the right to accelerate payment of the amounts outstanding under the facility because of such non-compliance. Accordingly, the amounts outstanding are classified as current in the accompany January 31, 1999 consolidated balance sheet. NOTE 12. INCOME TAXES. Income tax expense (benefit) consists of the following:
(In thousands) CURRENT DEFERRED TOTAL -------- -------- -------- Fiscal year ended January 31, 1999: U.S. Federal $ 5,880 $(12,384) $ (6,504) State and local 1,729 (3,000) (1,271) Valuation allowance -- 2,119 2,119 -------- -------- -------- Provision (benefit) for income taxes $ 7,609 $(13,265) $ (5,656) -------- -------- -------- -------- -------- -------- Fiscal year ended January 31, 1998: U. S. Federal $ 4,806 $ 4,402 $ 9,208 State and local 636 470 1,106 -------- -------- -------- Provision for income taxes $ 5,442 $ 4,872 $ 10,314 -------- -------- -------- -------- -------- -------- Fiscal year ended January 31, 1997: U.S. Federal $ 953 $ 824 $ 1,777 State and local 146 6 152 -------- -------- -------- Provision for income taxes $ 1,099 $ 830 $ 1,929 -------- -------- -------- -------- -------- --------
F-18 Income tax (benefit) expense differed from the expected amounts (computed by applying the United States federal income tax rate of 34% in both 1999 and 1997 and 35% in 1998 to pretax (loss) earnings) as a result of the following:
FISCAL YEAR ENDED JANUARY 31, ---------------------------------- (In thousands) 1999 1998 1997 ------- ------- ------- Computed "expected" income tax (benefit) expense $(8,443) $ 9,265 $ 1,385 Increase (reduction) in income taxes resulting from: Nondeductible goodwill 1,119 139 -- Nondeductible merger costs -- -- 430 Nondeductible compensation 517 -- -- Nondeductible expenses 691 79 243 State and local income taxes, net of federal income tax benefit (868) 719 100 Valuation allowance 2,119 -- -- Other, net (791) 112 (229) ------- ------- ------- (Benefit) provision for income taxes $(5,656) $10,314 $ 1,929 ------- ------- ------- ------- ------- -------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) are presented below:
JANUARY 31, ----------------------- (In thousands) 1999 1998 -------- -------- Deferred tax assets: Deductible goodwill $ 591 $ 1,035 Accounts receivable, principally due to allowance for doubtful accounts 1,693 1,094 Inventories, principally due to additional costs inventoried for tax purposes 897 1,448 Accrued expenses 4,999 1,865 Stock based compensation 662 116 Net operating loss and credit carryforwards 2,319 1,307 Other 317 762 -------- -------- 11,478 7,627 Valuation allowance (2,119) -- -------- -------- Total deferred tax assets 9,359 7,627 -------- -------- Deferred tax liabilities: Property, plant and equipment (448) (11,162) Deferred gain on sale of Image (170) -- Other (315) (476) -------- -------- Total deferred tax liabilities (933) (11,638) -------- -------- Net deferred tax asset (liability) $ 8,426 $ (4,011) -------- -------- -------- --------
The Company has generated net operating loss carryforwards ("NOLs") in various states which will be utilized to offset taxable income generated in future years, subject to the applicable limitations and the NOLs' expiration occurring between 2002 and 2019. A valuation allowance for certain of the state NOLs has been provided in the accompanying consolidated financial statements as of January 31, 1999 as it is more likely than not that some of the NOLs will not be realized. F-19 NOTE 13. RELATED-PARTY TRANSACTIONS. In August 1997, the Company invested $1,000,000 in North Atlantic Acquisition Corp. ("North Atlantic"), a blind pool investment vehicle. A.J. Nassar, the President and Chief Executive Officer of the Company, is a shareholder and former director of North Atlantic. At the time of the Company's investment in North Atlantic, Mr. Nassar owned 14.1% of the outstanding Class A common stock of North Atlantic. As a result of North Atlantic's initial public offering and subsequent merger, Mr. Nassar's percentage of ownership was reduced to less than one percent of the outstanding shares of Class A common stock. The Company's investment in North Atlantic has been included in other assets in the accompanying balance sheets. As of January 31, 1999 and 1998, the Company had loans outstanding to officers, directors and employees for $1,900,000 and $1,593,000, respectively. The notes receivable have an annual interest rate of approximately 8.0% - 9.25% and are to be repaid in annual installments plus accrued interest over the next four years or are due on demand. The officer, director and employee receivables have been included in receivables in the accompanying balance sheet. Ronald H. McSwain and Herb Wolk, directors of the Company, each own a floor covering retailer, which is a franchisee of the Company. During fiscal 1999, Mr. McSwain's floor covering company paid $11,000 to the Company for various services and received $567,000 in rebates and other consideration from the Company. During fiscal 1999, Mr. Wolk's floor covering company paid less than $1,000 to the Company for miscellaneous items and received $128,000 in rebates and other consideration from the Company. Julian D. Saul, who owns 9.6% of the outstanding shares of the Company's common stock, serves as President and a director of Shaw Industries, Inc., one of the Company's suppliers of floor covering products. During fiscal 1999, the Company purchased approximately $84,000,000 of floor covering products from Shaw and received approximately $12,000,000 of rebates and other vendor support payments from Shaw. In addition, in connection with the acquisition of the retail store assets of Shaw in August 1998, the Company issued to Shaw a promissory note in the principal amount of $18,000,000 (adjusted to $11,496,000 after giving effect to purchase price adjustments). This note is due November 1999 and bears interest at a rate equal to the rate paid by the Company on its Senior Credit Facility. NOTE 14. STOCKHOLDERS' EQUITY. On February 18, 1997, the Company sold 3,175,773 shares of its common stock to the public. The Company received approximately $47,900,000 of proceeds from the offering, and such proceeds were utilized to reduce amounts outstanding under the Company's credit facility. During the fiscal year ended January 31, 1999, the Company issued 3,510,776 shares of its common stock, of which 36,078 are in escrow as of January 31, 1999, for the purchase of CarpetsPlus and the retail store assets of Shaw (See Note 3). In March 1997, the board of directors of the Company authorized a stock repurchase program pursuant to which the Company has periodically repurchased shares of its common stock in the open market. As of January 31, 1999, the Company had repurchased an aggregate of 2,365,900 shares for $34,818,000. The ability of the Company to repurchase its common stock is limited by certain restrictions contained in the Indenture relating to the Company's Senior Notes (See Note 11). The Company adopted a stock option plan in fiscal 1994, which, as amended, provides for the granting of incentive and nonqualified stock options for up to 5,000,000 shares of common stock to key employees and directors at an exercise price of at least 100% of fair market value at the date of grant. Information relating to stock options granted under the Company's stock option plan is summarized as of and for the fiscal years ended January 31, 1999, 1998, and 1997 as follows: F-20
Fiscal Year Ended January 31, ----------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Options outstanding at beginning of fiscal year 2,333,555 1,455,508 821,308 Options granted 1,409,000 1,309,527 771,000 Options canceled (135,476) (282,562) (41,224) Options exercised (363,035) (148,918) (95,576) ------------- ------------- ------------- Options outstanding at end of fiscal year 3,244,044 2,333,555 1,455,508 ------------- ------------- ------------- ------------- ------------- ------------- Option prices per share (excluding replacement stock options): Options granted $14.25-$17.50 $10.00-$16.00 $ 9.75-$15.50 Options canceled $10.25-$14.50 $10.25-$15.50 $ 5.25-$13.50 Options exercised $ 5.25-$15.50 $ 5.25-$14.50 $ 5.25-$11.75 Options outstanding at end of fiscal year $ 5.25-$17.50 $ 5.25-$16.00 $ 5.25-$15.50 Weighted average option prices per share: Options granted $ 14.55 $ 12.97 $ 11.91 Options canceled $ 11.88 $ 13.05 $ 11.81 Options exercised $ 11.47 $ 9.26 $ 7.21 Options outstanding at end of fiscal year $ 13.01 $ 10.56 $ 10.24
Subsequent to January 31, 1999, the Company granted options to purchase a total of 662,000 shares of common stock to certain employees, officers and directors. The options granted have exercise prices ranging from $6.13 to $19.25 per share and generally become exercisable over various terms ranging from immediate vesting to 20% per year. The majority of the employee options become exercisable in increments ranging from 20% to 33 1/3% per year; however certain options have various other vesting provisions. At January 31, 1999, the outstanding options had a weighted average remaining contractual life of approximately 7.8 years and there were 1,406,613 options currently exercisable with option prices ranging from $5.25 to $16.00 with a weighted average exercise price of $11.62. Effective August 10, 1993, Image adopted a Plan and Agreement of Conversion (the "Conversion"), in which all previously outstanding vested and unvested stock options and unvested stock appreciation units were canceled and a like number of fully vested replacement stock options were issued. These options have an exercise price of $.01 per share and expire March 30, 2006. At January 31, 1999, 195,634 replacement stock options were outstanding, which are not included in the stock option information presented in the above table. F-21 In connection with the August 1996 merger between the Company and Image, all outstanding options under the Conversion and the Stock Option Plan were converted into like options to purchase shares of common stock of the Company. SFAS No. 123 defines a fair value-based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by APB Opinion No. 25. Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net earnings and earnings per share as if the fair value-based method of accounting defined in the statement had been applied. The Company has elected to account for its stock-based compensation plan under APB Opinion No. 25; however, the Company has computed for pro forma disclosure purposes the value of all options granted since April 1, 1995 using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions for such grants with respect to fiscal 1999, 1998, and 1997:
FISCAL YEAR ENDED JANUARY 31, -------------------------------------- 1999 1998 1997 --------- ----------- ---------- Risk-free interest rate 4.50% 5.95%-6.75% 5.5%-6.8% Expected dividend yield -- -- -- Expected life 5.0 years 7.5 years 7.5 years Expected volatility 43% 49% 50%
The weighted average fair value per share of awards granted in fiscal 1999, 1998, and 1997 was $6.41, $6.93, and $7.59, respectively. The total value of the options granted during the years ended January 31, 1999, 1998, and 1997 was computed as approximately $9,045,000, $7,014,000, and $4,779,000, respectively, which would be amortized over the vesting period of the options. If the Company had accounted for the stock option plans in accordance with SFAS No. 123, the Company's reported pro forma net (loss) income and pro forma net (loss) earnings per share for the years ended January 31, 1999, 1998, and 1997 would have decreased to the following pro forma amounts:
FISCAL YEAR ENDED JANUARY 31, ------------------------------------------- (In thousands, except per share data) 1999 1998 1997 ---------- ---------- ---------- Pro forma net (loss) income: As reported in the financial statements $ (19,552) $ 15,371 $ 2,145 Pro forma in accordance with SFAS No. 123 (21,761) 14,096 1,560 Pro forma diluted (loss) earnings per common share: As reported in the financial statements $ (1.10) $ 0.92 $ 0.15 Pro forma in accordance with SFAS No. 123 (1.22) 0.84 0.11
F-22 NOTE 15. EMPLOYEE BENEFIT PLAN. The Company has a 401(k) retirement savings plan, which is open to all employees who have completed one year of service. The Company's matching contribution is twenty-five percent of the contributions made by the employee limited to 6% of the employee's salary. The Company's matching contribution vests to the employees over a six-year period. The expense incurred for the plan was $458,000, $171,000 and $169,000 for the years ended January 31, 1999, 1998 and 1997, respectively. NOTE 16. COMMITMENTS AND CONTINGENCIES. LEASES The Company is a party to noncancelable lease agreements involving property and equipment, which extend for varying periods up to 20 years. Certain of these leases have options to renew at varying terms. Rental expense for operating leases amounted to $21,906,000, $6,431,000, and $5,225,000 for the years ended January 31, 1999, 1998, and 1997, respectively. Included in property, plant and equipment are the following assets held under capital leases:
RELATED (In thousands) PARTY OTHER TOTAL ------- ------- ------- JANUARY 31, 1999: Buildings and leasehold improvements $ 2,318 $ 5,801 $ 8,119 Machinery and equipment 4 1,460 1,464 ------- ------- ------- Assets under capital leases 2,322 7,261 9,583 Less accumulated amortization (1,329) (163) (1,492) ------- ------- ------- Assets under capital leases, net $ 993 $ 7,098 $ 8,091 ------- ------- ------- ------- ------- ------- January 31, 1998: Buildings and leasehold improvements $ 2,389 $ 1,080 $ 3,469 Machinery and equipment -- 469 469 ------- ------- ------- Assets under capital leases 2,389 1,549 3,938 Less accumulated amortization (1,157) (489) (1,646) ------- ------- ------- Assets under capital leases, net $ 1,232 $ 1,060 $ 2,292 ------- ------- ------- ------- ------- -------
F-23 The Company is in default of certain of its capital lease obligations. The obligations under such leases are classified as current liabilities in the accompanying financial statements. Minimum future lease obligations on long-term noncancelable leases in effect at January 31, 1999 are summarized as follows:
CAPITAL LEASES -------------------------------------- RELATED OPERATING (In thousands) PARTY OTHER TOTAL LEASES -------- -------- -------- -------- 2000 $ 342 $ 1,066 $ 1,408 $ 33,606 2001 232 1,083 1,315 31,149 2002 197 904 1,101 27,808 2003 177 777 954 19,234 2004 46 1,607 1,653 16,282 2005 and thereafter -- 5,766 5,766 60,572 -------- -------- -------- -------- Total minimum lease payments 994 11,203 12,197 $188,651 -------- -------- Less amounts representing interest (128) (3,965) (4,093) Less current portion (325) (908) (1,233) -------- -------- -------- $ 541 $ 6,330 $ 6,871 -------- -------- -------- -------- -------- --------
The Company sold certain land and buildings for $21,471,000 in January 1999. The assets were leased back from the purchasers over a period of 15 years and substantially all are being accounted for as operating leases. The leases require the Company to pay customary operating and repair expenses and to observe certain customary operating restrictions. The leases contain renewal options at lease termination. GUARANTEE In connection with the Company's consumer credit program, it guarantees the obligations of its franchisees related to charge backs for customer disputes in the event that the franchisee is unable to correct the defect and is insolvent, has terminated its business or is in bankruptcy. LEGAL PROCEEDINGS Since the May 18, 1999 announcement that the Company 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 the Company and certain of its current and former executive officers and directors. Each of these actions was filed in the U. S. District Court for the Northern District of Georgia. The plaintiffs in these actions purport to represent a class of all persons who purchased or otherwise acquired the common stock of the Company between August 31, 1998 and May 19, 1999. The Complaints allege that the Company and certain of its current and former officers and directors violated the federal securities laws by, among other things, issuing materially false and misleading statements regarding the Company's financial results for fiscal 1999 and for certain quarters therein, which had the effect of artificially inflating the market price of the Company's common stock. The Complaints allege that by virtue of this conduct the defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC Rule 10b-5 thereunder. The Complaints also allege that the individual defendants were controlling persons within the meaning of Section 20 of the 1934 Act and are therefore liable to the plaintiffs on that basis as well. The Complaints seek compensatory and punitive damages along with pre-judgment interest, reasonable attorneys fees, expert witness fees and other costs. On August 16, 1999, the defendants moved to dismiss all the complaints on the grounds that they do not plead sufficient facts to set forth a fraud claim. The proposed lead plaintiff, Rudman Partners, LP, has opposed the motion and sought leave to file a consolidated, amended complaint. The Company and its named officers and directors intend to vigorously defend these claims. These actions have only recently been filed, however, and it is not possible at this time to determine the outcome of these lawsuits or the effect of their resolution on the Company's financial position or operating results. Management believes that the Company's defenses have merit; however, there can be no assurance that the Company will be successful in its defense or that these lawsuits will not have a material adverse effect on the Company's results of operations for some period or on the Company's financial position. The Company has made a claim under its directors and officers liability insurance policy with respect to the litigation described above. There can be no assurance, however, that this policy will be sufficient to cover all liability in the event of an adverse outcome in those lawsuits. Since the May 18, 1999 announcement that the Company would be restating financial results for fiscal 1999 and certain of the quarters therein, the Securities and Exchange Commission ("SEC") commenced an informal inquiry in connection with the matters relating to the restatement. The SEC may convert the informal inquiry into a formal investigation of the matters relating to the restatement. The staff of the SEC has advised Maxim that its inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred. Except as discussed above, management is not aware of any asserted or pending litigation or claims whose ultimate disposition will have a material adverse effect on the Company's consolidated financial position or results of operations. F-24 NOTE 17. EXPORT SALES In fiscal years 1999, 1998 and 1997, export sales accounted for approximately 3%, 5% and 6%, respectively, of the Company's revenues. Export sales were related to Image and made principally to customers in the Middle East, Europe and Canada. NOTE 18. 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 operations 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. 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 occur as carpet is transferred from Image to the Company's retail segment and as 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. F-25 INDUSTRY SEGMENTS
FRANCHISE INTERSEGMENT (In thousands) MANUFACTURING RETAIL SERVICES ELIMINATIONS TOTAL ------------- --------- ---------- ------------ --------- YEAR ENDED JANUARY 31, 1999: Revenues $ 197,796 $ 439,137 $ 71,408 (43,915) $ 664,426 Nonrecurring charges -- -- 23,713 -- 23,713 Operating income (loss) 14,171 (18,879) (25,330) (7,336) (37,374) Interest expense 5,945 3,964 14,411 (9,223) 15,097 Income tax benefit (provision) (12,070) 3,580 14,146 -- 5,656 Extraordinary charge -- -- 377 -- 377 Net (loss) income 21,677 (19,458) (21,771) -- (19,552) Depreciation and amortization 10,054 5,564 3,591 -- 19,209 Capital expenditures 29,043 15,375 18,146 -- 62,564 Total assets 7,765 205,486 175,517 -- 388,768 --------- --------- ---------- --------- --------- Year Ended January 31, 1998: Revenues $ 178,011 $ 150,290 $ 43,505 (6,679) $ 365,127 Operating income (loss) 23,236 184 7,336 1,035 31,791 Interest expense 4,851 2,523 6,288 (6,714) 6,948 Income tax benefit (provision) (6,933) 540 (3,921) -- (10,314) Extraordinary charge -- -- 785 -- 785 Net (loss) income 11,509 (1,354) 5,216 -- 15,371 Depreciation and amortization 8,820 2,237 893 -- 11,950 Capital expenditures 20,002 21,322 6,349 -- 47,673 Total assets 185,183 67,483 68,828 -- 321,494 --------- --------- ---------- --------- --------- Year Ended January 31, 1997: Revenues $ 162,681 $ 120,089 $ 30,635 (3,684) $ 309,721 Operating income (loss) 8,695 (396) 1,916 (50) 10,165 Interest expense 4,140 1,188 4,246 (2,568) 7,006 Income benefit (provision) (1,494) 306 (741) -- (1,929) Net (loss) income 2,878 (743) 10 -- 2,145 Depreciation and amortization 7,907 1,767 844 -- 10,518 Capital expenditures 15,425 1,106 913 -- 17,444 --------- --------- ---------- --------- ---------
GEOGRAPHIC AREAS
Fiscal Year Ended January 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- (In thousands) Revenues: Domestic $644,133 $345,132 $291,985 Foreign 20,293 19,995 17,736 -------- -------- -------- Total $664,426 $365,127 $309,721 -------- -------- -------- -------- -------- --------
F-26 NOTE 19. SUBSEQUENT EVENTS. SENIOR NOTES 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 $75,000,000 (the "Amended Credit Facility"). The Amended Credit Facility consists of a revolving facility that matures three years from the closing of the Amended Credit Facility. Borrowings under the Amended 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 Amended Credit Facility, the Company has established a cash collateral account with the lenders. As of October 11, 1999 the cash collateral account balance was $41.9 million. As of October 11, 1999, the Company had $6,275,000 available under the revolver. Amounts outstanding under the Amended Credit Facility bear interest at various variable rates. The Amended 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 Amended Credit Facility. The Company and its senior 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 lenders to amend or replace the Amended Credit Facility. The negotiations involve enhanced credit availability, a new maturity date and improved advance ratios on existing collateral. Amounts outstanding under the Amended 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 Amended Credit Facility, on a quarterly basis, a commitment fee ranging from 0.25% to 0.50% of the unused portion of the Amended Credit Facility. The Company is required to pay administration fees quarterly. The Amended 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 Amended Credit Facility contains cross default provisions related to the Company's other indebtedness. The Amended 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. 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 Amended Credit Facility. The Company and its senior lenders have entered into a forebearance agreement with respect to such events of default, which extends to November 15, 1999. ACQUISITIONS Subsequent to the fiscal year ended January 31, 1999, the Company acquired 15 retail locations for an aggregate amount of approximately $20,700,000. The related purchase agreements also provide for additional consideration to be paid based on certain locations' future financial performance. NOTE 20. QUARTERLY FINANCIAL DATA (UNAUDITED).
FIRST SECOND THIRD FOURTH (In thousands, except per share data) QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- YEAR ENDED JANUARY 31, 1999: Net revenues $ 96,632(1) $ 95,581 (1) $ 249,572 (1) $ 222,641 Gross profit 27,068(1) 22,760 (1) 85,973 (1) 71,286 Income (loss) before extraordinary charge 1,318(1) (21,600)(1) 2,631 (1) (1,524) Extraordinary charge, net of taxes -- -- 377 -- Net income (loss) 1,318(1) (21,600)(1) 2,254 (1) (1,524) Basic earnings (loss) per common share before extraordinary charge 0.08(1) (1.32)(1) 0.14 (1) (0.08) Extraordinary charge -- -- (0.02) -- Basic earnings (loss) per common share 0.08(1) (1.32)(1) 0.12 (1) (0.08) Diluted earnings (loss) per common share before extraordinary charge 0.08(1) (1.32)(1) 0.13 (1) (0.08) Extraordinary charge -- -- (0.02) -- Diluted earnings (loss) per common share 0.08(1) (1.32)(1) 0.11 (1) (0.08)
F-27
FIRST SECOND THIRD FOURTH (In thousands, except per share data) QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- Year ended January 31, 1998: Net revenues $ 86,225 $ 92,243 $ 98,328 $ 88,331 Gross profit 27,070 29,172 31,476 28,028 Income before extraordinary charge 3,251 4,585 5,182 3,138 Extraordinary charge, net of taxes -- -- (785) -- Net income 3,251 4,585 4,397 3,138 Basic earnings per common share before extraordinary charge 0.20 0.28 0.32 0.20 Extraordinary charge, net of taxes -- -- (0.05) -- Basic earnings per common share 0.20 0.28 0.27 0.20 Diluted earnings per common share before extraordinary charge 0.20 0.28 0.31 0.19 Extraordinary charge, net of taxes -- -- (0.05) -- Diluted earnings per common share 0.20 0.28 0.26 0.19
- ---------------- (1) Amounts as restated in the Company's Quarterly Reports on Form 10-Q/A for the quarters ended April 30, 1998, July 31, 1998 and October 31, 1998, as filed with the Securities and Exchange Commission. In connection with its year-end audit process, the Company recorded certain adjustments that it deemed necessary to more accurately state the previously filed fiscal 1999 interim financial statements. These adjustments included changes in recognition and/or timing of certain vendor support funds, certain expense accruals, and asset write-downs. F-28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Maxim Group, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of THE MAXIM GROUP, INC. AND SUBSIDIARIES as of January 31, 1999 and 1998 and for each of the three years in the period ended January 31, 1999 included in the Company's annual report on Form 10-K for the period ended January 31, 1999, and have issued our report thereon dated October 11, 1999. Our report on the consolidated financial statements includes an explanatory paragraph with respect to the preparation of the financial statements assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is not in compliance with a certain restricted payment covenant contained in the indenture which references the Company's $100 million Senior Subordinated Notes due October 2007 (the "Senior Notes") 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. The Company's available borrowings under its Senior Credit Facility plus cash on hand are not sufficient to repay the Senior Notes if declared due and payable. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia October 11, 1999 S-1 SCHEDULE II THE MAXIM GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
Balance at Charge to Charge to Beginning of Costs and Other Balance at (In thousands) Year Expense Accounts (b) Deductions End of Year YEAR ENDED JANUARY 31, 1999: Allowance for doubtful accounts (a) $2,916 $6,801 $1,009 $(3,342) $7,384 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- YEAR ENDED JANUARY 31, 1998: Allowance for doubtful accounts (a) $2,269 $2,105 $ 125 $(1,583) $2,916 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- YEAR ENDED JANUARY 31, 1997: Allowance for doubtful accounts (a) $2,373 $1,192 $ 223 $(1,519) $2,269 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
(a) The Company's other valuation and qualifying accounts are not significant and are omitted in accordance with Rule 4.02 or are presented in the notes to the Company's Consolidated Financial Statements. (b) These amounts include reserves of acquired operations. S-2 SIGNATURES In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, in the City of Kennesaw, State of Georgia on October 18, 1999. THE MAXIM GROUP, INC. By: /s/ A. J. Nassar ---------------- A. J. Nassar President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Ronald H. McSwain Chairman of the Board October 18, 1999 - --------------------- Ronald H. McSwain /s/ A. J. Nassar President, Chief Executive October 18, 1999 - --------------------- Officer and Director A. J. Nassar (Principal Executive officer) * Chief Financial Officer and October __, 1999 - --------------------- Secretary (Principal Financial Leonard H. Thill Officer) /s/ Thomas P. Leahey Executive Vice President - Finance, October 18, 1999 - --------------------- Treasurer and Director Thomas P. Leahey /s/ Stephen P. Coburn Senior Vice President and October 18, 1999 - --------------------- Corporate Controller Stephen P. Coburn (Principal Accounting Officer)
* Mr. Thill was recently appointed Chief Financial Officer of the Registrant and, due to his lack of familiarity with the Registrant, Mr. Thill has not signed this Annual Report on Form 10-K. /s/ Joseph J. Jillson Director October 14, 1999 - --------------------- Joseph J. Jillson /s/ Richard A. Kaplan Director October 14, 1999 - --------------------- Richard A. Kaplan /s/ J. Michael Nixon Director October 14, 1999 - --------------------------- J. Michael Nixon /s/ Larry T. Solari Director October 14, 1999 - ------------------- Larry T. Solari Director October , 1999 - ------------- Herb Wolk
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 3.1.2 Certificate of Amendment dated December 17, 1998 10.1.4 Amendment No. 4 to 1993 Stock Option Plan 10.1.5 Amendment No. 5 to 1993 Stock Option Plan 10.3 Form of CarpetMAX Franchise Membership Agreement. 10.23 Amended and Restated Credit Agreement, by and among the Company, as Borrower, the Domestic Subsidiaries of the Company, as Guarantors, the Lenders identified therein, and NationsBank, N.A., as Administrative Agent, dated as of May 18, 1999, in the aggregate principal amount of $ 75.0 million. 10.23.1 First Amendment to Credit Agreement and Forbearance, dated July 23, 1999, among the Company, as Borrow, the Domestic Subsidiaries of the Company, as Guarantors, Bank of America, N.A. (formerly NationsBank, N.A.), as Administrative Agent, and the Lenders party thereto. 10.23.2 Second Amendment to Credit Agreement, Forbearance and Waiver, dated September 7, 1999, among the Company, as Borrower, the Domestic Subsidiaries of the Company, as Guarantors, Bank of America, N.A. (formerly NationsBank, N.A.), as Administrative Agent, and the Lenders party thereto. 10.23.3 Third Amendment to Credit Agreement and Forbearance, dated October 11, 1999, among the Company, as Borrower, the Domestic Subsidiaries of the Company, as Guarantors, Bank of America, N.A. (formerly NationsBank, N.A.), as Administrative Agent, and the Lenders party thereto. 10.26 Employment Agreement, dated September 27, 1999, by and between the Company and Leonard H. Thill. 21.1 Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule
EX-3.1-2 2 EXHIBIT 3.1.2 Exhibit 3.1.2 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF THE MAXIM GROUP, INC. The Maxim Group, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST, that at a meeting of the Board of Directors of the Corporation, resolutions were duly adopted which proposed an amendment to the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and directing that said amendment be considered at a special meeting of the stockholders of the Corporation. SECOND, that thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of said amendment. THIRD, that said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH, that the capital of the Corporation shall not be reduced under or by reason of said amendments. FIFTH, that in accordance therewith, the Certificate of Incorporation of the Corporation is hereby amended as follows: Article IV of the Certificate of Incorporation of the Corporation shall be amended by deleting the first two paragraphs thereof in their entirety and replacing them as follows: "The Corporation shall have authority to issue 76,000,000 shares of capital stock, which shall be divided into classes and shall have the following designations, preferences, limitations and relative rights: A. COMMON STOCK. One class shall consist of 75,000,000 shares of common stock having a par value of $.001 per share, designated "Common Stock." Subject to the rights of the holders of Preferred Stock, the holders of Common Stock shall be entitled to elect all of the members of the Board of Directors of the Corporation, and such holders shall be entitled to vote as a class on all matters required or permitted to be submitted to the shareholders of the Corporation." IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its duly authorized officers this 17th day of December, 1998. THE MAXIM GROUP, INC. By: /s/ A. J. Nassar -------------------------- A. J. Nassar, President EX-10.1-4 3 EXHIBIT 10.1.4 Exhibit 10.1.4 AMENDMENT NO. 4 1993 STOCK OPTION PLAN THE MAXIM GROUP, INC. WHEREAS, the Board of Directors of The Maxim Group, Inc. (the "Company") has previously adopted, and the shareholders of the Company have approved, the 1993 Stock Option Plan, as amended (the "Plan") pursuant to which options to purchase stock of the Company may be issued to eligible directors, officers and key employees of the Company; and WHEREAS, the Board of Directors of the Company deems it desirable to amend the Plan so as to increase the number of shares available for issuance pursuant to the exercise of options granted under the Plan; NOW, THEREFORE, the Plan is amended upon the terms, and subject to the conditions, set forth herein: ARTICLE I AMENDMENT TO PLAN 1.1 Section 4 of the Plan shall be amended by deleting the second sentence thereof in its entirety and substituting the following sentence therefor: "The maximum number of shares which shall be reserved and made available for sale under the Plan shall be 4,000,000." ARTICLE II EFFECTIVE DATE OF AMENDMENT 2.1 The amendment effected hereby shall be effective for options granted under the Plan on or after the date this amendment is approved by the Board of Directors of the Company, but subject to approval of a majority of the shares of Common Stock of the Company entitled to vote thereon represented in person and by proxy at a meeting of shareholders. In the event shareholder approval of adoption of this amendment is not obtained within twelve months of the date this amendment is approved by the Board of Directors of the Company, then any option granted in the intervening period shall be void. EX-10.1-5 4 EXHIBIT 10.1.5 Exhibit 10.1.5 AMENDMENT NO. 5 1993 STOCK OPTION PLAN THE MAXIM GROUP, INC. WHEREAS, the Board of Directors of The Maxim Group, Inc. (the "Company") has previously adopted, and the shareholders of the Company have approved, the 1993 Stock Option Plan, as amended (the "Plan") pursuant to which options to purchase stock of the Company may be issued to eligible directors, officers and key employees of the Company; and WHEREAS, the Board of Directors of the Company deems it desirable to amend the Plan so as to increase the number of shares available for issuance pursuant to the exercise of options granted under the Plan and to conform the plan administration provisions of the Plan to the requirements of SEC Rule 16b-3; NOW, THEREFORE, the Plan is amended upon the terms, and subject to the conditions, set forth herein: ARTICLE I AMENDMENTS TO PLAN 1.1 Section 4 of the Plan shall be amended by deleting the second sentence thereof in its entirety and substituting the following sentence therefor: "The maximum number of shares which shall be reserved and made available for sale under the Plan shall be 5,000,000." 1.2 Section 5 of the Plan shall be amended by deleting the first paragraph thereof in its entirety and substituting the following therefor: "The Plan shall be administered by the Board of Directors of the Company or the Committee. The Committee shall be comprised of not less the two (2) Non-Employee Directors. "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3) as promulgated by the Commission under the Securities Exchange Act of 1934, as amended, or any successor definition adopted by the Commission." ARTICLE II EFFECTIVE DATE OF AMENDMENT 2.1 The amendment effected hereby shall be effective for options granted under the Plan on or after the date this amendment is approved by the Board of Directors of the Company, but, with respect to the amendment set forth in Section 1.1 hereof, subject to approval of a majority of the shares of Common Stock of the Company entitled to vote thereon represented in person and by proxy at a meeting of shareholders. In the event shareholder approval of adoption of Section 1.1 of this amendment is not obtained within twelve months of the date this amendment is approved by the Board of Directors of the Company, then any option granted in the intervening period shall be void. EX-10.3 5 EXHIBIT 10.3 Exhibit 10.3 CARPETMAX -REGISTERED TRADEMARK- FRANCHISE AGREEMENT BETWEEN CARPETMAX, L.P. AND ------------------------------- TABLE OF CONTENTS
PAGE NO. 1. GRANT OF FRANCHISE................................................................................1 2. FRANCHISE FEE.....................................................................................3 3. TERM..............................................................................................3 4. PROPRIETARY MARKS.................................................................................3 5. OBLIGATIONS OF THE COMPANY........................................................................4 6. DEALER'S OPERATIONAL COVENANTS....................................................................5 7. ADVERTISING AND MARKETING.........................................................................9 8. CONFIDENTIAL INFORMATION..........................................................................9 9. DISCLAIMER OF WARRANTY AND LIMITATIONS ON LIABILITY..............................................10 10. RESTRICTIVE COVENANT.............................................................................10 11. RIGHT TO ACCESS, INSPECTION AND FINANCIALS.......................................................10 12. INDEMNIFICATION AND INSURANCE....................................................................11 13. TERMINATION......................................................................................11 14. RIGHTS AND DUTIES OF PARTIES UPON TERMINATION....................................................14 15. TRANSFERABILITY OF INTEREST......................................................................15 16. GOVERNING LAW....................................................................................17 17. INDEPENDENT CONTRACTOR...........................................................................17 18. WAIVERS..........................................................................................17 19. INJUNCTIVE RELIEF................................................................................18 20. RIGHT TO OFFSET..................................................................................18 21. NOTICES..........................................................................................18 22. ATTORNEYS' FEES AND LATE CHARGES.................................................................18 23. SEVERABILITY AND CONSTRUCTION....................................................................18
-i- 24. ARBITRATION......................................................................................19 25. LIMITATION ON CERTAIN LIABILITY..................................................................20 26. ENTIRE AGREEMENT.................................................................................20 27. MISCELLANEOUS PROVISIONS.........................................................................20
Schedule "A" - Dealer's Exclusive Area and Miscellaneous Information Schedule "B" - Merchandise Introductory Package Schedule "C" - State-Specific Amendments Schedule "D" - Guaranty by The Maxim Group, Inc. -ii- CARPETMAX -REGISTERED TRADEMARK- FRANCHISE AGREEMENT THIS AGREEMENT, made this ______ day of __________________, 19__, between Carpetmax, L.P., a Georgia limited partnership with its principal place of business at 210 TownPark Drive, Kennesaw, Georgia 30144 (the "Company"), and ___________________ ____________________________________ (the "Dealer") a (check one) ____ individual ____ partnership or ____ corporation organized under the laws of the State of ___________________ with its principal place of business set forth on Schedule "A" hereto. WITNESSETH: WHEREAS, through the expenditure of considerable time, effort and money, the Company and its general partner, The Maxim Group, Inc. ("Maxim"), have developed a special expertise for the operation of a retail floor covering business which include certain unique and proprietary products, goods and services and business methodologies, operational procedures, business techniques, advertising, sales and promotional techniques, personnel training, purchasing practices, merchandising programs, access to favorable pricing from suppliers and distributors of floor covering products, and other matters relating to the efficient operation of such businesses (hereinafter collectively referred to as the "System") which will be marketed to the public under the name CarpetMAX -REGISTERED TRADEMARK- and such other trademarks, service marks, trade names, logotypes, trade symbols, emblems, signs, slogans, and insignias as may from time to time be created and licensed by the Company for use in connection with the franchise granted hereunder (collectively, the "Proprietary Marks"). The Company has expended substantial sums of time, effort and money in developing and improving the System and in advertising and promoting the Proprietary Marks. By these efforts, the Company has established valuable goodwill in connection with the System and Proprietary Marks; WHEREAS, the Dealer currently operates one or more retail floor covering businesses and after investigating the System and the Company's franchise network has determined that there are significant advantages to becoming a franchisee of the Company; WHEREAS, the Dealer desires to receive a license from the Company by which it will have the right to utilize the System and the Proprietary Marks pursuant to the terms hereof. By entering into this Agreement, the Dealer recognizes the actual and potential value of adding the System and the Proprietary Marks to the Dealer's existing business. Dealer acknowledges that it is essential to the maintenance of the high standards which the public has come to expect of authorized franchisees of the Company, and to the preservation of the integrity and goodwill of the System and the Proprietary Marks, that each franchisee adhere to certain uniform procedures and policies as further described below; and WHEREAS, the Company is willing, upon the terms and conditions described in this Agreement, to license the Dealer to operate a business which will utilize the System and the Proprietary Marks. NOW, THEREFORE, intending to be legally bound, in consideration of the mutual covenants and promises contained herein, the parties hereto agree as follows: 1. GRANT OF FRANCHISE a. Subject to the terms and conditions of this Agreement, the Company hereby grants to the Dealer and the Dealer hereby accepts, the franchise and license to operate one or more CarpetMAX -REGISTERED TRADEMARK- stores (hereinafter any and all stores operating under the System will be referred to as the "Store") using the Proprietary Marks in conformity with the System within the geographic area described on Schedule "A" (the "Exclusive Area"). b. During the term of this Agreement and so long as the Dealer is not in default hereof, the Company shall not license others to operate, anywhere within the Exclusive Area, a CarpetMAX -REGISTERED TRADEMARK- franchise or a retail flooring business utilizing the Proprietary Marks. However, since the Dealer's license hereunder is limited to using the System and Proprietary Marks in the Exclusive Area, the Company and its affiliates may own, operate, license, franchise or in any manner authorize the operation of CarpetMAX - -REGISTERED TRADEMARK- businesses at any location outside the Exclusive Area, even in areas immediately adjacent to the Exclusive Area. Additionally, the Company and its affiliates have the right, within or outside the Exclusive Area, to develop, produce, market and sell, under one or more brands and trade names (other than the CarpetMAX -REGISTERED TRADEMARK- brand or trade name) products and services of the type sold or promoted by CarpetMAX - -REGISTERED TRADEMARK- stores and to do so through similar or dissimilar channels of distribution, pursuant to terms and conditions the Company and its affiliates deem appropriate and the Company and its affiliates have the right to provide the products and services they provide to CarpetMAX - -REGISTERED TRADEMARK- franchisees under the System to other retail floor covering businesses within and outside the Exclusive Area on whatever terms and conditions they deem appropriate. Furthermore, the Company and its affiliates have the right to operate or grant franchises to operate floor covering outlets within the Exclusive Area under brands, trade names and marks other than the Proprietary Marks. Nothing in this Agreement shall be deemed to restrict the Company, Maxim or any of its or their affiliates (i) from acquiring an existing retail floor covering store or group of stores (whether owned or licensed) and operating such stores in the manner they were operated at the time of such acquisition, including any such stores located in the Exclusive Area or (ii) from being acquired by any party regardless of other lines of business owned by such other party, including retail floor covering stores operating in the Exclusive Area. c. Dealer acknowledges that an affiliate of Company, GCO, Inc. ("GCO"), operates and franchises others to operate discount, outlet and warehouse type floor covering stores under the name "GCO Carpet Outlet". Nothing herein shall preclude GCO or any other affiliate of the Company from operating or licensing others to operate a retail floor covering outlet within the Exclusive Area using the "GCO Carpet Outlet" name or the GCO Carpet Outlet franchise system. In connection with the foregoing, Dealer agrees that it is precluded from using the Proprietary Marks or the System with a discount, outlet or warehouse type floor covering store or to advertise or position its Store as a discount, outlet or warehouse type floor covering business. To the extent that Dealer has an existing retail floor covering outlet which it currently positions as a discount, outlet or warehouse type business, Dealer understands and agrees that such outlet shall not be franchised hereunder and shall not become part of the CarpetMAX -REGISTERED TRADEMARK- franchise system. d. Dealer acknowledges that an affiliate of Company, CarpetsPlus of America, Inc. ("CarpetsPlus"), operates a national resource network specializing in the retail flooring industry. CarpetsPlus, offers franchises to operators of retail floor covering stores which permit franchisees to purchase products and other services from CarpetsPlus and its variety of designated suppliers and distributors. Dealer acknowledges that CarpetsPlus franchisees will operate full service retail floor covering stores within the Exclusive Area and that nothing in this Agreement precludes CarpetsPlus from selling franchises within the Exclusive Area. The Dealer shall have no right to use any trademarks, service marks or logotypes associated with the CarpetsPlus franchise network. e. Except for the rights expressly granted to Dealer under this Agreement, the license granted under this Agreement is non-exclusive, and the Company and its affiliates, including Maxim, GCO and CarpetsPlus, reserve for themselves all rights with respect to the System, the Proprietary Marks and business of the Company. f. Dealer may sell CarpetMAX -REGISTERED TRADEMARK- private-labeled products only from a Store which is an authorized CarpetMAX -REGISTERED TRADEMARK- franchised location within the Exclusive Area. It may, however, install such products outside of the Exclusive Area, provided, however, that such products are sold to and installed on behalf of the ultimate consumer of these products and are not sold for resale or redistribution. Company shall have the right to terminate this Agreement immediately in the event Dealer sells CarpetMAX -REGISTERED TRADEMARK- private-labeled products to any supplier, distributor, broker or other similar entity of floor covering products either within or outside its Exclusive Area. -2- g. Upon execution of this Agreement and payment of the Franchise Fee as specified below, Dealer will receive the merchandise introductory package shown on Schedule "B" for one Store within the Exclusive Area (the "Merchandise Package"). Merchandise Packages for other authorized Stores operated by the Dealer within the Exclusive Area are available from the Company in accordance with its standard policies and published prices. 2. FRANCHISE FEE a. In consideration for its right to use the System and Proprietary Marks and other assistance and services Dealer will receive in connection with the CarpetMAX -REGISTERED TRADEMARK- franchise, Dealer agrees to pay to the Company a franchise fee of $35,000 (the "Franchise Fee"). The Dealer has elected to pay the Franchise Fee as follows (check appropriate box): / / $33,250 upon execution of this Agreement in full payment of its Franchise Fee; OR / / $3,000 upon execution of this Agreement and the balance paid as follows: (i) $2,000 on or before 90 days after this Agreement becomes effective, (ii) $2,000 on or before 180 days after this Agreement becomes effective and (iii) the balance of $28,000 due and payable in four consecutive annual payments of $7,000 plus interest on the unpaid balance at the rate of 10% per annum, which payments shall be due and payable on the first four anniversary dates of this Agreement. Upon request, the Company will supply the Dealer with an amortization schedule for this installment payment option. b. The Franchise Fee is deemed fully earned upon the execution of this Agreement and is nonrefundable, either in whole or in part, except as may otherwise be provided in Section 12.b.(iii) of this Agreement. 3. TERM This Agreement shall take effect as of the date first written above (the "Effective Date") and shall continue in full force and effect for an indefinite period, unless and until terminated by one of the parties as provided in this Agreement. 4. PROPRIETARY MARKS a. Dealer acknowledges that the Company has by this Agreement licensed Dealer to use the Proprietary Marks, and that the Company is the exclusive owner of the Proprietary Marks and entitled to all goodwill associated with the Dealer's use of the Proprietary Marks. Dealer agrees not to contest the validity of the Proprietary Marks during or after the term of this Agreement. Apart from the right of Dealer to use the Proprietary Marks pursuant to this Agreement, Dealer shall acquire no right, title or interest of any kind or nature whatsoever in or to the Proprietary Marks or the associated goodwill. Dealer shall use the Proprietary Marks only in connection with the System. Dealer agrees to use the Proprietary Marks solely in compliance with this Agreement and the rules established from time to time by the Company, such compliance being essential to maintain the value of the Proprietary Marks. Dealer agrees not to manufacture, market or sell products or perform services under the Proprietary Marks which are not floor covering products or services otherwise approved by Company or use the Proprietary Marks in any way not explicitly authorized by this Agreement or otherwise in writing by Company. Dealer acknowledges the substantial goodwill value of the Proprietary Marks and Dealer will not use the Proprietary Marks in any manner to impair the goodwill of the Proprietary Marks nor take any action which will harm or jeopardize the Proprietary Marks, or Company's ownership thereof, in any way. -3- b. Dealer shall display the Proprietary Marks only in such form and manner as is specifically approved by the Company and, upon request by Company, affix any legends, markings and notices of trademark registration or franchisor-franchisee relationships specified by the Company or any other notice of Company's ownership. Dealer hereby agrees not to use any Proprietary Mark as any part of its corporate or legal business name except any fictitious name registration permitted hereunder. Company shall have the right to approve all stationery, promotional items, displays and other materials using the Proprietary Marks prepared by Dealer. Dealer agrees to follow Company's instructions regarding proper usage of the Proprietary Marks in all respects. c. Dealer shall immediately notify Company in writing of any apparent infringement of, or challenge to, the Company's, or Dealer's use of any of the Proprietary Marks, or claim by any entity of any rights in any Proprietary Mark or similar trade name or trademark of which the Dealer becomes aware. At its own expense, Company shall defend Dealer against such challenge, and shall take action against uses by others that, in the opinion of counsel to the Company, constitute infringement of the Proprietary Marks. Dealer agrees to execute any and all documents and give any assistance and do any acts that counsel to Company deems are necessary or advisable in order to protect the interests of the Company, provided, that the Company shall reimburse the Dealer for the reasonable out-of-pocket expenses incurred by it in furnishing such assistance. With respect to any litigation or proceeding undertaken by the Company pursuant to this Section 4, the Company will not be bound to defend the Dealer unless the Dealer's use of the Proprietary Marks has been pursuant to and in compliance with this Agreement or instructions provided to it by the Company. Decisions regarding action involving the protection and defense of the Proprietary Marks, and the settlement of any litigation involving same, shall be solely in the discretion of Company and Dealer shall take no action in this regard without the express written permission of Company. d. Company shall have the right at any time, upon notice, to make additions to, deletions from, and changes in the Proprietary Marks at its complete discretion, and Dealer shall adopt and use any and all such additions, deletions and changes pursuant to Company's instructions. Dealer shall use the Proprietary Marks that are appropriate for the nature of the Dealer's business as determined by the Company. Company shall not be liable to Dealer for any alleged injury to goodwill, loss of future sales or consequential or special damages in the event the Dealer is required to discontinue use of the Proprietary Marks. e. Dealer agrees to join with the Company in any application to enter Dealer as a registered or permitted user or the like of the Proprietary Marks with an appropriate governmental agency or entity. Upon termination of this Agreement for any reason whatsoever, Company may immediately apply to cancel Dealer's status as a registered or permitted user and Dealer shall consent in writing for the cancellation and shall join in any cancellation petition. The expense of any of the foregoing recording activities shall be borne by Company. 5. OBLIGATIONS OF THE COMPANY During the term hereof, Company and its affiliates agree to provide Dealer with the following assistance, services or payments: a. continual and ongoing training of Dealer's employees in different aspects of the operation of a retail floor covering outlet including, without limitation, providing such employees with the Company's then-current training programs regarding sales training, sales management training, new employee training, train the trainer training, human resource training, all installation accreditation programs established by the Company and sales success system (S3) training. All training programs will be offered at no charge and will be conducted at one of the Company's designated training facilities. Company agrees to offer these programs as often as is necessary to meet the reasonable requests of Dealer, however, the Company reserves the right to establish reasonable rules regarding scheduling and attendance at these programs. Dealer shall be responsible for all travel and living expenses incurred in attending these training programs, as well as the wages or salaries of the persons receiving the training and the costs associated with the various program -4- materials such as books, tapes and written brochures and any shipping and handling charges if these materials are delivered to the Dealer; b. continual and ongoing access to and use of Maxim Marketing or its successor, for advertising and promotional services so that the Dealer will receive at no charge (i) all advertising and promotional programs and materials produced or created by Maxim Marketing for the System for radio, television or print media including ad slicks, circulars, direct mail pieces and broad sheets, (ii) unlimited use of the CarpetMAX -REGISTERED TRADEMARK- jingle and (iii) grand opening kits. Dealer remains obligated to pay for the costs associated with these programs and materials (and any customizing), the cost of purchasing media, film, paper, and plates and other hard costs and any shipping and handling charges associated with delivering these items to the Dealer. Point of purchase materials will be available to the Dealer at the Company's cost plus shipping and handling charges; c. unlimited access to the Company's satellite network. Dealer will be required to obtain the necessary equipment to access the network, which equipment will be available only from suppliers designated by the Company which may include only the Company or an affiliate of the Company. When purchasing the equipment from the Company or its affiliate, Dealer will be required to sign the then-current form of Satellite Equipment Purchase Agreement. Dealer shall also be responsible for (i) bearing all charges associated with equipment "hook-up" and installation using only installers designated by the Company and (ii) all ongoing equipment maintenance expenses. As long as Dealer complies fully and completely with the terms of this Agreement, the Company will waive all monthly programming charges associated with the network, otherwise Dealer agrees to pay continually such then-current monthly programming charges. d. ongoing assistance and advice by the Company's support staff to the Dealer regarding store planning concepts and designs including production of floor plans tailored to the Dealer's Store. Dealer shall be responsible for any shipping and handling charges associated with the Company delivering plans or materials to Dealer and excessive changes or modifications requested by the Dealer may result in the Company charging Dealer for the charges or modifications at its then-current hourly rate; e. at no charge, the Dealer's Store will be listed on the Company's World Wide Web Site. At Dealer's request, Company will provide assistance to the Dealer in establishing its own World Wide Web Site, which assistance will be charged at the Company's then-current hourly rate; f. assistance to Dealer in financing its purchase of required CarpetMAX -REGISTERED TRADEMARK- signage at rates competitive with third party financing otherwise available to the Dealer; and g. rebates from the Company's designated carpet suppliers equal to 2% of the Dealer's total purchases of selected carpet products from such designated suppliers. Dealer acknowledges that not all product purchases from designated suppliers will generate rebates. Company will provide Dealer with a list of designated suppliers on a regular basis. Such cash rebates, if any, will be paid to Company or its affiliate on behalf of Dealer and distributed to Dealer on an annual basis. 6. DEALER'S OPERATIONAL COVENANTS Dealer acknowledges and agrees that its operation of the Store is important to the Company in order to develop and maintain high and uniform standards of quality, service, facilities and techniques, to the increase the demand for the System and the products offered thereunder, and to protect the reputation and goodwill of the Company and its franchisees. Accordingly, Dealer specifically covenants and agrees: a. Dealer agrees to use its best efforts to promote the products and services offered under or through the CarpetMAX -REGISTERED TRADEMARK- System at each Store identified on Schedule "A". Subject to compliance with Sections 6c. and d. below, this Agreement does not preclude Dealer from offering for sale at each Store any type of products or services it desires. -5- b. Dealer acknowledges and agrees that if it purchases private-labeled products from Company and it elects to give or use the CarpetMAX -REGISTERED TRADEMARK- warranty associated with such products, then, as between the parties to this Agreement, Dealer is the party primarily responsible for honoring such warranty to the extent Dealer is capable of doing so and the warranty would reasonably be assumed to require Dealer to do so. Dealer agrees to indemnify, defend and hold harmless the Company, its officers, directors, shareholders, and affiliated entities from any and all liability arising out of Dealer's failure to fulfill the foregoing or to honor its responsibilities under the CarpetMAX -REGISTERED TRADEMARK- warranty. Company agrees to cause all manufacturers of its private-labeled products to warrant such products to Dealer in accordance with their normal and customary warranty practices. c. Dealer recognizes that it is essential to the proper marketing of all CarpetMAX -REGISTERED TRADEMARK- franchisees and the preservation and promotion of their reputation and acceptance by the public at large, that uniform standards of quality be maintained. Accordingly, as part of the consideration for this Agreement, Dealer agrees that it will at all times offer and dispense such products and services as shall meet the reasonable specifications and standards designated from time to time in writing by the Company. Additionally, since all CarpetMAX -REGISTERED TRADEMARK- franchisees of the Company are required to execute a franchise agreement in a form substantially similar to this Agreement, Dealer understands the importance of complying with the terms of this Agreement and certain specifications and standards mandated by the Company and, where appropriate, Dealer will operate its Store in accordance with the System as it may change from time to time. d. Throughout the term of this Agreement, Dealer shall purchase no less than 90% of its total purchases of floor covering products intended for sale through its Store from manufacturers, suppliers or distributors designated by the Company and sanctioned by the CarpetMAX -REGISTERED TRADEMARK- Advisory Council (the "CAC"). Company and the CAC reserve the right to designate, from time to time, a supplier for products or materials to be sold through the Store and to require the Dealer to use such designated supplier. Consistent with the foregoing and unless otherwise agreed to by the Company, throughout the term of this Agreement, Dealer agrees to offer CarpetMAX -REGISTERED TRADEMARK- Center Stage line of floor covering and related products at the Store. Dealer acknowledges that in consideration of this Agreement and the services provided by the Company hereunder, the Company or its affiliates may receive rebates or commissions from the Company's designated suppliers or distributors based upon Dealer's purchases or, in the event the Company has negotiated a price discount for its franchisees with selected suppliers or distributors, the full dollar amount of the discount eligible to be received by the franchisees may not be passed on to Dealer and will instead be paid to the Company or its affiliates. Dealer's failure to comply with the purchase obligations of this Section 4d. above shall constitute a default of this Agreement thereby entitling the Company to terminate this Agreement and the CarpetMAX -REGISTERED TRADEMARK- franchise granted hereunder. The prices charged to Dealer for products and services obtained through designated suppliers or distributors may contain rebates other than those paid to the Company or its affiliates as described above which the Company is collecting on behalf of the Dealer. Company shall hold these funds for Dealer and, on an annual basis, shall remit to Dealer the amount of rebates allocable to its respective purchases from designated suppliers or distributors. All sums which the Company shall receive on Dealer's behalf are acknowledged to be Dealer's funds and are being held by the Company for the administrative convenience of Dealer and the Company. Notwithstanding the foregoing, to assure payment to the Company of monies due to it from the Dealer, Dealer hereby irrevocably grants the Company the continuing right to use all such rebates described herein to offset any and all monies due to Company or any affiliate by Dealer including, without limitation, monies Company has paid to unaffiliated third parties due to Company's guarantee of Dealer's obligation to such third parties. Company will maintain records of Dealer's purchases, however, to help verify that Dealer is paid the proper rebate amount due to it, Dealer shall provide written documentation to the Company, within 60 days after the end of each month, specifying the amount of its purchases from designated suppliers or distributors during the preceding month. For example, purchases during October shall be reported to Company by the end of December. e. Company may from time to time offer guidance to Dealer regarding its retail prices for products and services offered by CarpetMAX -REGISTERED TRADEMARK- franchisees. Dealer shall not be obligated to accept any such -6- guidance, and shall have the sole right to determine the prices charged for products and services at its Store. No such guidance shall be deemed or construed to impose upon the Dealer any obligation to charge any fixed minimum price for any product or service offered by Dealer. f. Dealer will respond in a timely manner to all surveys regarding the operation of its Store conducted by the Company or any affiliate. g. Dealer will meet the minimum standards of business ethics which are adopted by the local chapter of the Better Business Bureau (or a similar organization acceptable to the Company) operating within the Exclusive Area. In addition, Dealer will notify the Company promptly of any complaint or claim filed against Dealer with the Better Business Bureau or such other organization, and will act diligently to resolve the claim or complaint to the Company's satisfaction in a timely manner, but in no event later than 30 days after the complaint or claim is filed. h. On an annual basis, Dealer will submit to the Company exterior and interior color photographs of its Store sufficient for the Company to view all areas of the Store including, without limitation, merchandising displays, the Store's floor plan and layout, all signage and training facilities and offices. i. Dealer agrees to send at least one management level employee to all CarpetMAX -REGISTERED TRADEMARK- regional meetings and all CarpetMAX - -REGISTERED TRADEMARK- conventions, annual or otherwise. Company agrees not to charge a registration fee for these meetings or conventions, although Dealer is responsible for its transportation and living expenses (including reimbursement of room reservation charges incurred by Company) incurred in attending these meetings and conventions. j. At each Store, Dealer must enroll and participate in either the "Wall-To-Wall" consumer credit program or the successor program thereto, or an alternative consumer credit program approved by the Company. Dealer agrees to use its best efforts to ensure its customers are aware of the availability of these programs prior to or at the time of the purchase of floor covering items. k. Dealer understands and acknowledges that to help the quality, standards and uniformity of the CarpetMAX -REGISTERED TRADEMARK- System and the reputation and goodwill associated with the CarpetMAX -REGISTERED TRADEMARK- name and the Proprietary Marks, Dealer covenants and agrees to deal fairly and honestly with all customers and to render prompt, courteous and willing service. Dealer covenants and agrees to comply fully with all applicable federal, state and local laws, statutes, ordinances and regulations governing the operation of its business including, but not limited to, those regulations promulgated by the Equal Employment Opportunity Commission and the Occupational Safety and Health Administration. Dealer will conduct itself and operate its Store in a manner so as to promote a good public image in the business community. Consistent with the foregoing, Dealer shall properly respond to customer inquiries or complaints and shall take such other steps as may be required to provide positive customer relations. Dealer shall use its best efforts to promote the reputation of the System and the Proprietary Marks by fostering the positive growth and development of the community surrounding its Store through contributions (financial or otherwise) to local charities and conducting other public relations functions which will reflect positively on the Dealer, the Store and the CarpetMAX - -REGISTERED TRADEMARK- brand. l. Dealer will promptly pay when due all taxes and other obligations owed to third parties including, without limitation, all federal, state and local taxes, and any and all accounts payable and other indebtedness of every kind, incurred by Dealer in the operation of its Store including debts to the Company and its affiliates and undisputed debts to its distributors and suppliers. m. Dealer shall at all times actively promote the sale of products from the Store and will use its primary and best efforts to cultivate, develop and expand the market for CarpetMAX -REGISTERED TRADEMARK- branded products at the Store. -7- n. Dealer's sales management and sales staff employees must successfully complete a minimum level of mandatory on-going training programs offered by the Company at one of the Company's designated training facilities. This training will be offered without charge. Company will advise the Dealer in writing of the types of training offered, the schedules for training and the job description of those persons required to attend each program. Dealer shall be responsible for purchasing all training materials and manuals and for any travel, room and board expenses and other expenses incurred in connection with attendance at the training programs, as well as wages or salaries of its employees attending the training. o. All Dealer's floor covering installers must successfully complete, achieve and maintain the level of "accredited floor covering installer" as defined by the Company's then-current floor covering accreditation standards. Dealer agrees that only accredited installers shall install products purchased at the Store and, at all times during performance of floor covering installation and related services, all accredited installers must wear identification issued by the Company to designate such accreditation. p. Each CarpetMAX -REGISTERED TRADEMARK- Store operated by Dealer must participate in the Company's satellite network, which permits the Company to broadcast information about sales training, store merchandising, roll and remnant specials, area rug runs and other topics which the Company believes to be of interest to the franchises. Unless otherwise agreed to by the Company, Dealer will be required to purchase the necessary equipment from the Company or its affiliates and to install the equipment using only installers approved by the Company. Dealer will be responsible for all hook-up charges and other installation expenses necessary to install the equipment at a Store. As long as Dealer complies fully and completely with the terms of this Agreement, the Company will waive the monthly programming charges normally associated with its satellite network. q. Dealer will require all employees to wear the standard then-current CarpetMAX -REGISTERED TRADEMARK- attire established and approved by the Company. Company will sell the attire to the Dealer at its cost. All employees will present a clean and neat appearance and will practice good personal hygiene and grooming. r. Dealer must display prominently at least one CarpetMAX - -REGISTERED TRADEMARK- Flooring Center stand-alone logo sign inside and outside its Store, in a manner prescribed or approved in writing by the Company. The signs must be purchased from a designated signage supplier or another supplier approved in writing in advance by the Company. Additionally, the Dealer will only display signs bearing the Proprietary Marks which comply with guidelines established by the Company and which have been approved by the Company in writing. s. Dealer agrees that at least one owner or general manager of the Dealer will attend the initial CarpetMAX -REGISTERED TRADEMARK- orientation training program conducted by the Company for CarpetMAX -REGISTERED TRADEMARK- dealers at such time and place as the Company shall decide and shall be communicated to Dealer. Dealer shall be responsible for purchasing all training materials and for any travel, room and board and other expenses incurred by its attendees in connection with such training. t. Dealer agrees to ensure that each Store obtains and maintains adequate computer and related equipment necessary and appropriate for Dealer's employees and agents at each Store to access at all times the Company's on-line extranet communication system. In connection with its use of the extranet communication system, Dealer agrees to pay the Company a monthly administration and license fee for each computer user. Dealer agrees to pay such license fees on a yearly basis in advance. Finally, in connection with its use of the extranet communication system, Dealer shall be responsible for ensuring each computer has access to the internet through an acceptable internet service provider and for paying all fees associated with such internet access. u. Dealer may at its expense create its own web site for its Store or Stores. If the web site will contain any Proprietary Marks or reference The Maxim Group, Inc. or any affiliate, Dealer must submit all web site plans and information to the Company for its consent prior to creation and use. All web sites -8- created and utilized by Dealer must conform to the Company's standards. Company shall consent to or reject such plans and materials within 20 days of receipt. Upon written approval from Company, Dealer must supply Company with its web site address and domain names. Dealer acknowledges that the Company has the sole right and interest in and to all domain names and web sites associated with the Proprietary Marks or the CarpetMAX -REGISTERED TRADEMARK- franchise licensed hereunder. 7. ADVERTISING AND MARKETING Dealer acknowledges and agrees that it is important for the System in general, and the other franchisees of the System in particular, that advertising and marketing programs used by franchisees of the System attempt to maximize general public recognition and acceptance of CarpetMAX - -REGISTERED TRADEMARK- branded products and the retail outlets offering CarpetMAX -REGISTERED TRADEMARK- branded products. Accordingly, Dealer agrees that the Company and its CAC shall oversee all advertising and promotional programs undertaken by Dealer and other franchisees with the sole discretion to approve or disapprove the creative concepts, materials and media used in such programs, and the placement and allocation thereof. Dealer agrees not to offer any advertising or promotional programs which do not conform to the specifications, regulations and code of ethics outlined and provided by the Company and the CAC. Furthermore, in order to show uniformity and standardization among all franchisees of the System, Dealer shall obtain the Company's prior written approval of all written advertising or other marketing and promotional programs not previously approved by the Company regarding the Store including, without limitation, "yellow pages" advertising, newspaper ads, flyers, brochures, coupons, direct mail pieces, public relations activities, telemarketing programs and campaigns, specialty and novelty items and radio and television advertising. Any proposed written advertising or description of a marketing or promotional program not previously approved by the Company shall be submitted to the Company at least 20 days prior to publication, broadcast or use. Dealer acknowledges that advertising and promoting the Store in accordance with the Company's standards and specifications for advertising is an essential aspect of the Proprietary Marks and the CarpetMAX -REGISTERED TRADEMARK- brand and Dealer agrees to comply with all advertising standards and specifications. Dealer shall be solely responsible for compliance with all laws applicable to advertising in Dealer's Exclusive Area and, in particular, Dealer agrees to take adequate measures to ascertain all legal requirements with respect to Dealer advertising and to comply fully with all such requirements. In no event shall Dealer be required by the Company to engage in any advertising activities which would violate applicable law in Dealer's jurisdiction. 8. CONFIDENTIAL INFORMATION Dealer shall hold in trust and confidence for the benefit of the Company and its affiliates, and shall not communicate, divulge, transmit, disclose or use for the benefit of any other person, partnership, association, or corporation any information, knowledge, written materials, manuals, price lists, trade secrets, techniques, systems, plans, processes or know-how concerning the Company and its affiliates, the System or the franchise licensed hereunder (collectively, "Confidential Information"), which may be communicated to Dealer, or of which Dealer may be apprised, by virtue of Dealer's operation of a CarpetMAX -REGISTERED TRADEMARK- franchise under the terms of this Agreement. Dealer acknowledges that the Confidential Information is not, by definition, generally known in the trade and is beyond the present skills and experience of Dealer and that for Dealer to develop such information on its own would be expensive, time-consuming and difficult. Dealer further acknowledges that the Confidential Information provides a competitive advantage and will be valuable to Dealer in the development of its business, and that gaining access to such information is therefore a primary reason why Dealer is entering into this Agreement. In connection with the foregoing, Dealer will not make unauthorized copies of any portion of the Confidential Information and will adopt and implement reasonable procedures from time to time to prevent unauthorized use or disclosure of the Confidential Information. Dealer shall divulge such Confidential Information only to such of its employees as must have access to it in order to operate the Store licensed hereunder and to comply with this Agreement and who have agreed in writing to comply with the provisions of this Section 8, which writing must be in a form acceptable to Company. Company reserves the right to require Dealer to cause its officers, directors, partners, shareholders and general manager to sign the CarpetMAX -REGISTERED TRADEMARK- Nondisclosure Agreement containing these -9- restrictions. Dealer hereby acknowledges that the Company and its affiliates have sole ownership rights in the Confidential Information and that all such Confidential Information is of significant value to the Company and its affiliates. Finally, the Dealer acknowledges and agrees that the use of the Confidential Information in any other business other than its CarpetMAX - -REGISTERED TRADEMARK- franchise would constitute an unfair method of competition and the protection and maintenance of the Confidential Information is essential to the Company and its affiliates and that unauthorized use or disclosure of the Confidential Information will result in irreparable harm to the Company and its affiliates. The obligations of confidentiality under this provision shall be effective as of the date first written above and shall continue in full force and effect during the term of the Dealer Agreement and for 5 years thereafter; provided, however, that as to any item of Confidential Information that constitutes a trade secret under applicable law, the obligations of confidentiality contained herein shall continue for so long as allowed under applicable law. 9. DISCLAIMER OF WARRANTY AND LIMITATIONS ON LIABILITY COMPANY AND ITS AFFILIATES SHALL NOT BE LIABLE FOR FAILURE OR DELAY IN FILLING THE DEALER'S ORDERS EITHER BY THE COMPANY OR BY ANY DESIGNATED SUPPLIER OR DISTRIBUTOR. COMPANY MAKES ARRANGEMENTS FOR THE SALE OF PRODUCTS ON AN "AS IS" BASIS AND IN THEIR PRESENT CONDITION, AND COMPANY MAKES NO WARRANTIES, EXPRESS AND/OR IMPLIED BY LAW OR OTHERWISE, REGARDING THE CONDITION, WORKMANSHIP, MERCHANTABILITY AND FITNESS OF THE PRODUCTS FOR ANY PARTICULAR USE AND PURPOSE. THE SOLE AND EXCLUSIVE REMEDY IF THE DEALER IS DISSATISFIED WITH THE PRODUCTS IS FOR THE DEALER TO RETURN THE PRODUCTS TO THE MANUFACTURER, SUPPLIER OR DISTRIBUTOR. UNDER NO CIRCUMSTANCES SHALL THE COMPANY AND/OR ITS OFFICERS, DIRECTORS AND SHAREHOLDERS, AND AFFILIATED ENTITIES, BE RESPONSIBLE AND/OR LIABLE FOR ANY DAMAGES, EXPENSES, INTEREST, DEBTS, DUES, TAXES, FINES, INJURIES, LIABILITIES, ASSESSMENTS, COSTS, EVENTS, CLAIMS, ACTIONS, LAWSUITS, ATTORNEYS' FEES AND ENGINEERING FEES ARISING DIRECTLY AND/OR INDIRECTLY FROM THE PRODUCTS AND/OR THE USE OF THE PRODUCTS BY THE DEALER OR ANY THIRD PARTY. THE DEALER AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS THE COMPANY FROM ANY AND ALL LIABILITY ARISING OUT OF THE SALE OF ANY PRODUCTS OR SERVICES SOLD BY DEALER. 10. RESTRICTIVE COVENANT DEALER ACKNOWLEDGES THAT, IN ADDITION TO THE RIGHT TO USE THE PROPRIETARY MARKS HEREUNDER, THE COMPANY IS ALSO LICENSING COMMERCIALLY VALUABLE INFORMATION WHICH COMPRISES AND IS PART OF THE SYSTEM INCLUDING, WITHOUT LIMITATION, MARKETING AND ADVERTISING INFORMATION AND TECHNIQUES AND ACCESS TO FLOOR COVERING PRODUCTS AND METHODS OF OPERATING A RETAIL FLOOR COVERING BUSINESS, AND THAT THE VALUE OF THIS INFORMATION DERIVES NOT ONLY FROM THE TIME, EFFORT AND MONEY WHICH WENT INTO ITS CREATION, BUT FROM THE USAGE BY ALL FRANCHISEES USING THE SYSTEM. ACCORDINGLY, DURING THE TERM OF AGREEMENT, DEALER AGREES THAT NEITHER IT NOR ANY OF ITS OFFICERS, DIRECTORS, SHAREHOLDERS OR PARTNERS, NOR ANY AFFILIATED ENTITIES, SHALL JOIN, PARTICIPATE IN, BE A MEMBER OF, BE AFFILIATED WITH, BE A LICENSEE OF, OR OTHERWISE PURCHASE PRODUCTS OR SERVICES, DIRECTLY OR INDIRECTLY, FROM ANY FLOOR COVERING PURCHASING GROUP, FRANCHISE SYSTEM OR LICENSE PROGRAM WHICH INVOLVES FLOOR COVERING PRODUCTS AND RELATED SERVICES INCLUDING, WITHOUT LIMITATION, CARPET ONE, ABBEY CARPET OR ANY AND OTHER SUCH SIMILAR GROUPS. 11. RIGHT TO ACCESS, INSPECTION AND FINANCIALS a. Within 120 days from the close of the Dealer's fiscal year end, Dealer shall provide the Company with the Dealer's financial statements including balance sheet and income statement which must include a statement as to the Dealer's sales volume of floor covering products and its gross profit margin from the sale of these products. Company may compile and distribute these numbers, on an anonymous -10- basis, to permit CarpetMAX -REGISTERED TRADEMARK- franchisees to compare the results of their operations with the operations of other franchisees. Dealer hereby consents to the distribution of such financial information and results. b. Dealer acknowledges and agrees that the Company shall have the right to examine the Store and the Dealer's books, records and documents including, without limitation, the products offered for sale at the Store, to ensure the Dealer is complying with the terms of this Agreement. Company agrees to conduct such inspections, if at all, during regular business hours, but Company is not required to provide prior notice to Dealer. 12. INDEMNIFICATION AND INSURANCE a. Dealer agrees to indemnify and hold Company harmless from and against any expense, liability or damage (including attorneys' fees) Company may incur as a result of claims, demands, costs or judgments, of any kind or nature, by anyone whomsoever, arising out of, or otherwise connected with, the ownership, maintenance or operation of the Store by the Dealer, except to the extent any such expense, liability or damage (including attorneys' fees) results from the negligence or other act or omission of Company. b. Dealer agrees to maintain, at Dealer's expense, insurance during the term hereof as follows: (i) Dealer shall maintain Commercial General Liability Insurance coverage on the Store and for the operation of the franchise, including but not limited to, coverage against all types of public liability, including products liability, premises liability, completed operations liability, against claims for personal injury, bodily injury, death or property damage suffered by others upon, in or about the Store or as a result of the use of products sold by, or services rendered by, the Dealer, with a minimum coverage of $1,000,000 per accident or occurrence affecting one or more persons or property damage and $1,000,000 aggregate. (ii) Dealer shall maintain motor vehicle liability insurance for any claims arising out of the Store or occurring as a result of the maintenance or operation by the Dealer, its employees or persons doing business for the Dealer of any automobiles, trucks or other vehicles or airplanes or other facilities with a minimum coverage of $1,000,000 for each accident or occurrence affecting one or more persons or property damage. (iii) Worker's compensation, unemployment compensation, disability insurance, social security and other mandatory insurance coverages shall be maintained in such amounts as may now or later be required by any applicable law. All insurance policies shall be issued by an insurance carrier rated "A" or better by Alfred M. Best and Company, Inc. All policies described in (i) and (ii) above shall insure Dealer and name Company as an additional insured, and shall stipulate that Franchisor shall receive at least 30 days written notice of cancellation or modification. Dealer's obligation to obtain and maintain the insurance policies described above shall not be limited in any way by reason of any insurance which may be maintained by Company, nor shall Dealer's performance of this obligation relieve it of lia bility under the indemnity provision set forth in subsection (a). 13. TERMINATION a. If the Dealer is in compliance with this Agreement and the Company materially breaches this Agreement, the Dealer shall have the right to terminate this Agreement if the Dealer gives written notice of such breach to the Company and the Company does not: (a) correct such material breach within 90 days after receipt of such notice; or (b) if such material breach cannot reasonably be cured within 90 days after receipt of such notice, undertake within 10 days after receipt of such notice reasonable efforts to cure such -11- breach and continue such reasonable efforts so as to complete such cure as soon as is practicable. To terminate this Agreement under this Section 13a., Dealer must give a separate written notice of termination, which will be effective 10 days after the Company's receipt of such notice to the Company. Any termination of this Agreement by the Dealer other than as provided in this Section 13a. shall be deemed a termination by the Dealer without cause. Any termination of this Agreement shall not relieve Dealer of any monetary or other obligation due and owing to the Company including, without limitation, the obligation to pay the entire amount of the Franchise Fee even if such payments would be due subsequent to the effective date of termination. b. Dealer acknowledges and agrees that each of Dealer's obligations described in this Agreement is a material and essential obligation of Dealer and that non-performance of such obligations will adversely and substantially affect the Company, the System and the other franchisees of the System. Accordingly, Dealer agrees that the exercise by Company of the rights and remedies set forth herein is appropriate and reasonable. (i) Company shall have the right, at its option, to terminate this Agreement and all rights granted to Dealer hereunder, without affording Dealer any opportunity to cure any default (subject to any state laws to the contrary, if applicable) effective upon receipt of notice by Dealer, upon the occurrence of any of the following events: A. If Dealer misuses the System or Proprietary Marks, or any other names, marks, systems, insignia, symbols or rights provided by Company to Dealer, or otherwise materially impairs the goodwill associated with the System and the Proprietary Marks or Company's rights therein and fails to correct the misuse or impairment within 5 days notification from Company. B. If Dealer fails to pay any amounts due Company or any affiliate or any of the Company's designated suppliers or distributors within 10 days. C. If Franchisee fails to submit to Franchisor any financial or other information required under this Agreement and fails to correct the failure within 10 days after notification from Company. D. If Franchisee denies Franchisor the right to inspect the Store as permitted hereunder. E. If Dealer attempts any assignment other than in accordance with Section 15 hereof. F. If Franchisee defaults under any lease or sublease of the Store or loses the right to possession thereof for any reason whatsoever. G. If a threat or danger to public health or safety results from the operation of the Store. H. If Dealer fails to obtain Company's written approval or consent prior to taking any action when such consent or approval is expressly required by this Agreement. I. If Dealer abandons the Store or the Store ceases regular operations for a period of 5 consecutive days or any shorter period that indicates an intent by Dealer to discontinue operation of the Store, except for a period of not more than 180 days as a result of fire, storm, flood, condemnation or other similar event occurring out of the ordinary course of business and beyond the control of Dealer. -12- J. If Dealer permits a material violation of any law, ordinance, rule or regulation of a governmental agency in connection with the operation of the Store, and permits the same to go uncorrected after notification, unless there is a bona fide dispute as to the violation or legality of such law, ordinance, rule or regulation, and Dealer promptly resorts to courts or forums of appropriate jurisdiction to contest such violation or illegality. K. If Dealer fails to cooperate with the implementation of any advertising or promotional programs or activities as required by Company pursuant to Sections 6 and 7 or if Dealer takes any unauthorized actions with respect to advertising and promotional activities in violation of this Agreement and fails to correct the failure or cure the unauthorized action within 10 days upon notification from Company. L. If Dealer has received three notices of default from Company within a 12-month period, regardless of whether the defaults were cured by Dealer. M. If Dealer or any executive officer or person owning more than 10% of any class of voting securities of Dealer or any general partner of Dealer is convicted of a felony, a crime involving fraud or moral turpitude punishable by a term of imprisonment in excess of one year, or any crime or offense reasonably likely, in the sole opinion of Company, to materially and unfavorably affect the Proprietary Marks, the System and the associated goodwill and reputation thereof. N. If Dealer, or any person controlling, controlled by, or under common control with Dealer, or any general partner of Dealer, shall become insolvent by reason of inability to pay debts as they mature; or is adjudicated a bankrupt, files or has filed against it a petition in bankruptcy, reorganization or similar proceeding under federal bankruptcy laws; or if a receiver, permanent or temporary, of the business, assets or property of Dealer or any such person or any part thereof, is appointed by a court of competent authority, or if Dealer or any such person requests the appointment of a receiver or makes a general assignment for the benefit of creditors; or if a final judgment against Dealer or any such person in the amount of $10,000 or more remains unsatisfied of record for 30 days or longer; or if the bank accounts, property or receivables of Dealer or any such person are attached and such attachment proceedings are not dismissed within a 30 day period; or if execution is levied against the business or property of Dealer or any such person, or if suit to foreclose any lien or mortgage against the Store or the equipment thereof is instituted and not dismissed within 30 days. O. If Dealer commits fraud in connection with the purchase or operation of Store or otherwise engages in conduct that, in the sole judgment of Company, materially impairs the goodwill associated with the Proprietary Marks or the System. P. If Dealer makes, or has made, any material misrepresentation to Company in connection with this Agreement or in conducting the Store. Q. The Dealer or any person controlling, controlled by, or under common control with Dealer, or any general partner of Dealer, is convicted or pleads no contest to a felony, or to another offense or crime that may adversely affect the reputation of the Dealer, the Company or the Store or the goodwill associated with the Proprietary Marks, or engages in activities or conduct related to the Store or otherwise which adversely affects the reputation of the Company, its franchisees, CarpetMAX - -REGISTERED TRADEMARK- stores or the goodwill associated with the Proprietary Marks. R. If Dealer fails to comply with the prohibitions set forth in Section 1f. (ii) Subject to Sections 13(b)(i), 13(b)(iii), and 13(b)(iv), the Company shall have the right to terminate this Agreement (subject to any state laws to the contrary, if applicable), effective upon 30 days' written notice to Dealer, if Dealer breaches any other provision of this Agreement, and fails to cure the -13- default during such 30 day period. In that event, this Agreement will terminate without further notice to Dealer, effective upon expiration of 30 day period. Notwithstanding the foregoing, if the breach is curable, but is of a nature which cannot be reasonable cured within such 30 day period, and Dealer has commenced and is continuing to make good faith efforts to cure the breach during such 30 day period, Dealer shall be given an additional reasonable period of time to cure the default, and this Agreement shall not terminate. (iii) If the Company believes that the Dealer is not purchasing to fulfill its obligations under Section 6d., the Dealer, after 20 days' written notice and demand from the Company, shall submit to the Company a written statement setting forth all of the Dealer's purchases of products from designated suppliers or distributors, which statement shall be certified by an officer of the Dealer. Failure to supply this statement shall permit the Company, at its option, to terminate immediately this Agreement. If the statement reveals that the Dealer is not purchasing at the required levels, the Dealer shall have 90 days after written notice and demand from the Company to bring its purchases to the required levels and to demonstrate such compliance to the satisfaction of the Company (which satisfaction shall not be unreasonably withheld), failing which the Company may immediately terminate this Agreement. (iv) Company may terminate this Agreement within 60 days of the Effective Date in the event the Company discovers Dealer has misrepresented its financial condition or credit history to the Company during the evaluation process conducted by the Company prior to the execution of this Agreement or that Dealer's business practices, financial condition or reputation in the floor covering industry will reflect adversely upon the Company or the System if Dealer were to remain part of the group of CarpetMAX - -REGISTERED TRADEMARK- franchisees. In the event the Company terminates this Agreement pursuant to the foregoing, the Dealer shall receive a full refund of the Franchise Fee actually paid hereunder; provided, however, the Dealer fully and completely fulfills its obligation as set forth in Section 14 of this Agreement. c. Immediately after the execution of this Agreement, Dealer will receive the Company's current price list for the various products and services available to the Dealer as a franchisee of the System. Dealer shall have 3 business days from its receipt of the price list to both review it and notify the Company in writing of the Dealer's approval or disapproval of the terms thereof. If Dealer notifies the Company in writing that the terms of the price list are unacceptable, then this Agreement and the rights and obligations of the parties hereunder shall cease and be deemed to be immediately canceled. Under such circumstances, any Franchise Fee that may have been previously paid to the Company by Dealer in connection with this Agreement shall be promptly remitted to the Dealer. If Dealer expressly notifies the Company that it approves the price list within the applicable 3 business day period or, in the event that the Company receives no notice from Dealer during such review period, then this Agreement shall be deemed to have been fully executed as of the date first above written. Dealer acknowledges that all information contained in the price list is Confidential Information of the Company and shall be kept confidential pursuant to the terms of Section 8 hereof. The price list may not be copied or reproduced in any manner or for any reason without the Company's prior written consent. If Dealer elects to cancel this Agreement, it shall immediately return the price list to the Company and comply with the requirements set forth in Section 14 hereof. d. THE PARTIES ACKNOWLEDGE THAT IN THE EVENT THAT THE TERMS OF THIS AGREEMENT REGARDING TERMINATION OR EXPIRATION ARE INCONSISTENT WITH APPLICABLE STATE OR FEDERAL LAW, SUCH LAW SHALL GOVERN DEALER'S RIGHTS REGARDING TERMINATION OR EXPIRATION OF THIS AGREEMENT. 14. RIGHTS AND DUTIES OF PARTIES UPON TERMINATION Upon termination of this Agreement for any reason, Dealer shall immediately cease to be authorized to operate the CarpetMAX -REGISTERED TRADEMARK- franchise granted hereunder and Dealer shall: (i) Pay to the Company and its affiliates within 15 days after the effective date of termination, any and all amounts due by the Dealer to the Company and its affiliates which are then unpaid. -14- (ii) Immediately cease to identify the Store as being, or having been, associated with the Company and cease immediately using any Proprietary Mark or any colorable imitation of any Proprietary Mark in any manner or for any purpose, or use for any purpose, any trade name, trademark, service mark or other commercial symbol that suggests or indicates an affiliation with the Company. Additionally, Dealer shall deliver to the Company or remove the Proprietary Marks from all signs, advertising materials, invoices, forms or other materials containing any Proprietary Marks or otherwise relating to the Store, which removal or destruction shall occur within 30 days after termination hereof and notify the telephone company and all telephone directory publishers of the termination of the Dealer's right to use the Proprietary Marks. Dealer acknowledges that, as between Dealer and Company, Company has the sole right to and interest in all directory listings associated with any Proprietary Marks. (iii) Immediately cease to use the Confidential Information for any purpose and return immediately to the Company all copies of confidential materials previously provided to the Dealer including all manuals, training manuals, price lists and other written materials relating to the System or the operation of a retail floor covering business as licensed hereunder. (iv) Promptly undertake the final accounting to assist Company in the determination of any fees and other indebtedness due to either party. (v) Cease immediately to use any advertising materials provided by the Company as well as any imitations or derivations of any such materials. (vi) Promptly take such action as may be required to cancel all fictitious or assumed names or equivalent registrations relating to its use of any Proprietary Marks which are under the exclusive control of the Company or, at the option of the Company, assign the same to the Company. (vii) Cease to use any domain names or web sites associated with the Proprietary Marks. Dealer acknowledges that the Company shall have the right to direct InterNIC and other web search engines of the termination or expiration of Dealer's right to use all domain names, web sites or other search engines for the Store or Stores and to authorize InterNIC and all other search engines to transfer to the Company or its assignee all domain names, web sites and search engines associated with the Proprietary Marks or the CarpetMAX -REGISTERED TRADEMARK- franchise licensed hereunder. If Dealer fails to cease operation of the System and to effectuate the other terms of this Agreement which arise as a result of the termination of this Agreement, Dealer agrees that the Company shall be entitled to seek equitable relief by way of temporary and permanent injunctions and such other and further relief as a court may deem just and proper. Resort to such injunctive relief shall not be construed as a waiver of any other right or remedy the Company may have under this Agreement. All obligations of Dealer which expressly or by their nature survive the termination of this Agreement shall continue in full force and effect until such obligations are fulfilled in full or by their nature expire. 15. TRANSFERABILITY OF INTEREST a. This Agreement is personal to Dealer and, except as stated below, Company shall not allow or permit any transfer, assignment, subfranchise or conveyance of this Agreement or any interest hereunder. For purposes of this Section 15, the term "transfer" includes Dealer's voluntary, involuntary, direct or indirect transfer, assignment, sale, gift or other disposition of any interest in this Agreement, the Dealer entity, the Store governed by this Agreement or a substantial portion of the assets of the Store. Dealer shall not engage in a transfer unless Dealer obtains Company's written consent, which consent shall not be arbitrarily withheld, conditioned or delayed. Dealer acknowledges that Company's right to approve or disapprove a proposed transfer applies to the following: (1) if Dealer is a corporation, partnership, other business -15- association, (i) to the addition or deletion of a shareholder, partner or member or the transfer of ownership interest among existing shareholders, partners or members, and (ii) to any proposed transfer of 25% or more of the interest (whether stock, partnership interest or membership interest) to a third party; and (2) if Dealer is an individual, to the transfer from such individual or individuals to a corporation or entity controlled by them. Notwithstanding the foregoing, transfers upon the existing shareholders, partners, members or other existing holders of ownership interest in the Dealer, transfers to the spouse or adult children of an existing shareholder, partner, member or other existing holder of ownership interests in Dealer, or transfers to trust, family limited partnerships or similar entities created primarily for estate planning purposes for the benefit of an existing shareholder, partner, member or other existing holder of an ownership interest in Dealer or the heirs of such party shall require notice to Company but shall not require the consent of the Company, provided, however, that if the effect of any of the transfers listed in this sentence serve either individually or cumulatively with all such transfers that preceded it, to effect a change in voting control of the Dealer or power to appoint officers or directors of Dealer or to direct day-to-day operations of the Dealer, such transfer shall require consent of the Company as described herein. Subject to the satisfaction of the conditions set forth below in this Section 15, this Agreement and all rights hereunder may be assigned or transferred by the Dealer and, if so assigned or transferred, shall be binding upon and inure to the benefit of the Dealer's successors and assigns. b. No transfer of this Agreement shall be permitted unless each of the following conditions is satisfied: (i) The transferee shall enter into a written agreement with the Dealer and the Company, in a form satisfactory to the Company, wherein the transferee assumes all of the Dealer's obligations hereunder or, at the Company's option, the proposed transferee shall sign the then-current form of CarpetMAX -REGISTERED TRADEMARK- franchise agreement; (ii) Dealer is current on all of its obligations (financial or otherwise) to the Company; and all designated suppliers, distributors and vendors; (iii) The transferee shall be of good moral character and reputation, shall have satisfactory business acumen, operational ability, and management skills, and shall have sufficient financial resources (as determined by the Company) to operate the Store(s) and the franchise license herein and have a good credit rating and competent business qualifications reasonably acceptable to the Company. Dealer shall provide the Company with such information as the Company may require to make such determination concerning any proposed transferee; and (iv) Dealer executes a general release in a form prescribed by the Company, releasing the Company and any affiliates, their respective officers, directors, agents and employees from any and all claims which the Dealer may have against them. c. Dealer must give the Company at least 45 days' written notice prior to any transfer of this Agreement by Dealer. The purpose of this provision is to enable the Company, among other reasons, to comply with applicable state or federal franchise disclosure laws. In addition, Dealer must, within 15 days of its receipt of an offer to assume Dealer's franchise or Dealer's offer to sell the franchise, give the Company written notice thereof. The purpose of this provision is to enable the Company to comply with any applicable state or federal franchise disclosure laws or rules. d. This Agreement may be unilaterally assigned and transferred by Company and will inure to the benefit of Company's successors and assigns. Company will provide Dealer with written notice of any such assignment or transfer and the assignee will be required to fully perform Company's obligations under this Agreement. -16- e. Any transfer in violation of this Section 15 shall be deemed null and void and of no force or effect. 16. GOVERNING LAW All matters relating to arbitration shall be governed by the Federal Arbitration Act (9 U.S.C. ss. 1 eT Seq.). Except to the extent governed by the Federal Arbitration Act as required hereby, the United States Trademark Act of 1946, as amended, or other federal law, this Agreement, the franchise and the relationship between the parties will be governed by and construed and enforced in accordance with the laws of the State of Georgia, which laws shall prevail in the event of any conflict of law; provided, however, that the application of such law shall not abrogate or reduce any rights of Dealer provided for under the existing laws of any other jurisdiction which by their express terms, apply and supersede Georgia law. Dealer hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Agreement or the relationship established hereunder and not subject to arbitration under Section 24 hereof shall be brought in the courts of the State of Georgia sitting in Cobb County, or of the United States of America for the Northern District of Georgia, as the Company may elect. The parties agree that this Agreement was entered into in the State of Georgia and that substantial performance of all obligations hereunder was rendered in Georgia and that there is a regular stream of business activity between Dealer and the Company from and into the State of Georgia. Accordingly, the Dealer hereby irrevocably accepts and submits it generally and unconditionally, for itself and with respect to its property, to the jurisdiction of any such court in any such action or proceeding and hereby waives, to the extent permitted by applicable law, defenses based on jurisdiction, venue or FORUM NON CONVENIENS. 17. INDEPENDENT CONTRACTOR a. This Agreement does not form a fiduciary relationship or constitute the Dealer as agent, legal representative, joint venturer, partner, employee, or servant of the Company for any purpose whatsoever; and it is understood between the parties hereto that the Dealer shall be an independent contractor and is in no way authorized to make any contract, agreement, warranty or representation on behalf of the Company, or to create any obligation, express or implied, on behalf of the Company. The Company will have no liability for any sales, service, use, excise, income, property or other taxes levied against the Dealer or its assets or on the Company in connection with the business conducted by Dealer or any payments the Dealer makes to the Company pursuant to this Agreement or any related agreement. Neither party may represent to anyone else that their relationship is other than that which is described herein, and neither party shall be obligated by, or have any liability under any agreements or representations made by the other that are not expressly authorized hereunder, nor shall the Company be obligated for any damages to any person or property directly or indirectly arising out of the operation of the Dealer's Store. b. If requested by the Company, the Dealer shall prominently display in its place of business, a certificate from the Company stating that the CarpetMAX -REGISTERED TRADEMARK- Store is operated by Dealer under the licenses granted herein, and not as an agent of the Company. 18. WAIVERS Waiver by the Company of any particular default by Dealer shall not effect or impair the Company's right with respect to enforcement of any subsequent default of the same or of a different nature; nor shall subsequent acceptance by the Company of a partial cure after any breach by Dealer of any terms, covenants or conditions of this Agreement constitute a waiver by the Company. The Company will not be deemed to have waived its right to demand exact compliance with any of the terms of this Agreement at a later time upon notice to Dealer. All remedies, either under this Agreement, at law, in equity, or otherwise afforded to either party, shall be cumulative and not alternative and may be exercised simultaneously or sequentially in any order. -17- 19. INJUNCTIVE RELIEF Notwithstanding anything to the contrary contained in Section 24, the Company will have the right in a proper case to obtain temporary restraining orders and temporary and preliminary injunctive relief from a court of competent jurisdiction in order to enforce the provisions of this Agreement relating to the Proprietary Marks, the obligations of Dealer upon termination of this Agreement, the protection of the Company's Confidential Information or to prohibit any act or omission by Dealer that constitutes a violation of any applicable law or regulation. 20. RIGHT TO OFFSET Notwithstanding anything to the contrary in Section 24, Dealer acknowledges and agrees that to assure payment to the Company of monies due to it from Dealer for, among other items, purchase of floor covering products, Dealer hereby irrevocably grants the Company the continuing right to use any and all rebates earned by Dealer from the Company's designated suppliers or distributors which the Company may be collecting on behalf of Dealer to offset monies due to the Company or any affiliated entity. 21. NOTICES Any notice required or permitted under this Agreement shall be in writing and shall be actually delivered or sent by certified mail, return receipt requested, postage prepaid, by hand delivery or pickup or by commercial courier service for overnight delivery or by any other means which shall provide evidence of the date received. Notices to the Dealer shall be addressed to the address listed in Schedule A of this Agreement or to the Dealer at its most current principal business address of which the Company has been notified. Notices to the Company shall be addressed to it at the address listed in the introductory paragraph of this Agreement, or to its most current principal business address, Attention: President. The addresses herein given for notices may be changed at any time by either party by written notice given to the other party as herein provided. All notices shall be deemed given 3 business days after deposit in the United States Mail as set forth above, or on the next business day after delivery to the commercial courier service for overnight delivery, or upon receipt after actual delivery. 22. ATTORNEYS' FEES AND LATE CHARGES In the event it is necessary for either party hereunder to commence any legal proceeding against the other party related to this Agreement or the franchise relationship between the parties including, but not limited to, arbitration proceedings, the losing party in such proceeding shall pay all of the prevailing party's costs and expenses, including reasonable attorneys' fees, relating to such legal proceeding. The prevailing party shall be determined by the arbitrator(s). In the event that any arbitration proceeding is commenced pursuant to this Agreement or the franchise relationship between the parties, the parties agree to share equally the fees and costs of the American Arbitration Association and its arbitrators. If the Dealer does not pay the Company the monies due and owing to the Company within 30 days of the date when due, then such unpaid balance shall accrue interest at the rate of 1.5% per month until fully paid. 23. SEVERABILITY AND CONSTRUCTION If any provision of this Agreement is determined to be invalid or unenforceable for any reason whatsoever, such provision shall be severed from the other provisions of this Agreement, which other provisions shall remain in full force and effect. The language of this Agreement shall be construed simply according to its fair meaning and not strictly for or against either party. -18- 24. ARBITRATION Other than as set forth in Sections 14 and 19 of this Agreement and as provided by the last sentence of this Section 24, unless otherwise prohibited by applicable state law, any and all controversies, claims, disputes, suits, actions, proceedings or otherwise between or involving the Company and Dealer and their respective shareholders, owners, corporate affiliates, officers, directors, employees, agents or guarantors, whether arising out of or relating in any way to this Agreement or any other document ancillary to this Agreement, the franchise relationship created hereunder, any alleged breach of any duty or otherwise (including, without limitation, the underlying legality of the offer and/or sale of the CarpetMAX - -REGISTERED TRADEMARK- franchise, any action for rescission or any claim of fraud) and on whatever theory and/or facts based, will be submitted to and settled by arbitration in accordance with the Federal Arbitration Act under the Commercial Arbitration Rules of the American Arbitration Association or any successor association. All matters within the scope of the Federal Arbitration Act (9 U.S.C. Section 1 ET SEQ.) shall be governed by it and not any state arbitration law. In connection with such arbitration, the parties will execute an appropriate confidentiality agreement. The Company and Dealer agree that arbitration shall be conducted on an individual basis and not on a class-wide basis. Arbitration under this Section 24 shall be submitted to the office of the American Arbitration Association in (or nearest to) Atlanta, Georgia on demand of either party. Such arbitration proceeding shall be conducted in Atlanta, Georgia. The parties hereto agree that in any matter submitted to arbitration, the relevant Rules of Civil Procedures that pertain to pre-trial discovery shall be applicable. The arbitration panel shall have the power to order discovery on the basis of what is likely to produce material and relevant information in the proceeding, and to assess costs and expenses of the arbitration according to the relative merits of the parties' position in the case. The arbitration panel may issue temporary restraining orders, preliminary injunctions, injunctions and other equitable or interim relief to the extent reasonably necessary pending resolution of the arbitration. The procedure for selection of the arbitrator shall be prescribed by the American Arbitration Association or its successor, provided, however, that if said Association does not provide such a procedure, then the Company and Dealer shall each select one arbitrator and the two arbitrators selected shall select a third, and in the event of death, disability or resignation of an arbitrator, his/her successor shall be chosen in the same manner as the arbitrator so selected. The parties agree to proceed with the arbitration in good faith and with due diligence; provided, however, that in no event shall any demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter would be barred by the applicable statute of limitations. The arbitration panel shall enter judgment by default in the event either party shall fail or refuse to appear or participate in any properly noticed arbitration proceeding. Any award or determination in arbitration shall be final and binding and conclusive upon the parties, and judgment upon any award so rendered may be entered in any court having jurisdiction. Company and Dealer hereby waive to the fullest extent permitted by law, any right to or claim for any punitive or exemplary damages against the other and agree that in the event of a dispute between them each shall be limited to the recovery of any actual damages sustained by it. This arbitration provision shall be deemed to be self-executing and shall remain in full force and effect after execution or termination of this Agreement. The provisions of this paragraph are intended to benefit and bind certain third-party non-signatories and this arbitration provision shall be deemed to be self-executing and shall remain in full force and effect after expiration or termination of this Agreement. In the event that any party fails to appear at any properly-noticed arbitration proceeding, an award may be entered against such party by default or otherwise notwithstanding that failure to appear. An arbitration proceeding between the parties shall not be consolidated with any other arbitration proceeding involving the Company or any other person. Any of the foregoing to the contrary notwithstanding, this arbitration provision shall not be applicable to any claim or controversy which involves solely the payment of a sum of money, such as a claim for money due and owing. In the event a dispute or claim arises hereunder involving both matters subject to arbitration under this Section 24 as well as matters not subject to arbitration under Section 19, or portions of such claim which are subject to arbitration shall be severed from the non-arbitrable claims and shall be subject to arbitration hereunder, unless both parties agree to consolidation in a single action in either forum. -19- 25. LIMITATION ON CERTAIN LIABILITY Under no circumstances shall any general partner or any officer or director of any general partner or any employee, agent, representative or affiliate of the Company incur any personal liability as a result of the Company's actions or inactions in connection with this Agreement. Dealer shall look only to the assets of the Company in its efforts to recover any damages to which it may be entitled under this Agreement. 26. ENTIRE AGREEMENT This Agreement, including Schedules, represents the entire understanding of the parties and supersedes any prior agreements, whether written or oral, between the parties with respect to the subject matter hereof. Both parties acknowledge and agree that there are no representations, promises, warranties, covenants, or understandings other than those set forth herein. The Dealer should not sign this Agreement if it is relying on any representations or promises not incorporated into this Agreement. This Agreement is binding upon the parties hereto and their respective executors, administrators, heirs, assigns, and successors in interest. Except as otherwise expressly provided herein, this Agreement may be amended only by a written document signed by both parties hereto. This limitation on modification is not subject to oral rescission, modification or waiver. Dealer acknowledges and agrees that no representations have been made to its by Company regarding projected sales volumes, market potential, revenues, costs, profits or assistance other than as stated in this Agreement or in any franchise offering circular provided by the Company. 27. MISCELLANEOUS PROVISIONS a. Dealer acknowledges that Company shall have the right to delegate the performance of any portion or all of its obligations and duties hereunder to affiliates including subsidiaries or affiliated entities. b. Dealer acknowledges that it had a copy of the Company's Uniform Franchise Offering Circular in its possession for not less than 10 full business days, and this Agreement in its possess for not less than 5 full business days, during which time Dealer shall have had ample time and opportunity to review such documents with its own legal counsel and other advisors of its own choosing, if any, and to consult with them about the potential benefits and risks of entering into this Agreement. c. Dealer acknowledges that Company may from time to time approve exception or changes from the uniform standards of the System which Company, in its sole absolute discretion, believes necessary or desirable under particular circumstances. Dealer understands that it has no right to object to or automatically obtain such variances, and that any exception or change must be approved in advance by Company in writing. Dealer also understand that other existing and/or future franchisees may operate under different forms of agreements, and consequentially the rights and obligations of such franchisees may differ materially from Dealer's. d. Dealer acknowledges that it has conducted an independent investigation of the business contemplated by this Agreement and recognizes that it involves business risks, and that making a success of a venture is largely dependent upon dealer's own business abilities. Dealer acknowledges that no assurance or warranty, express or implied, has been given to Dealer as to the potential success of business contemplated by this Agreement or the profits likely to be achieved. Finally, Dealer acknowledges and agrees that no statement, representation or other act, event or communication, except as set forth in this Agreement, and in any franchise offering circular provided to Dealer is binding on the Company in connection with the subject matter of this Agreement. e. Dealer acknowledges that Company is an affiliate of Maxim, Maxim Retail Stores, Inc., Maxim Retail Group, Inc., GCO, Inc. and subsidiaries and affiliates thereof. These companies and subsidiaries and affiliates own, operate, develop, license and franchise retail floor covering stores operating under the names "Baker Brothers", "Carpetland USA", "CarpetSmart", "House of Carpets", "New York -20- Carpet World", "Reedy", "Walters", "Carpet Factory Outlet", "Clydes", "Carpet Exchange", "Carpet Center", "GCO Carpet Outlet", and will continue to develop and acquire other flooring retail concepts. Further, Dealer acknowledges and agrees that these companies and subsidiaries and Maxim and its affiliates will have the absolute right to own, operate, develop, license and franchise the foregoing concepts, and any other floor covering concepts or businesses at any location in the world, including locations that may be in the Exclusive Area, and locations that may be near or adjacent to the Exclusive Area even if the location competes for customers with Dealer. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have duly executed, and delivered this Agreement as of the day and year first written above. DEALER: CARPETMAX, L.P. By: By: THE MAXIM GROUP, INC., ------------------------------- General Partner Title: ------------------------------- By: ----------------------- [CORPORATE SEAL] A.J. Nassar Title: President [CORPORATE SEAL] -21- SCHEDULE "A" DEALER'S EXCLUSIVE AREA Description of Exclusive Area: Dealer's Principal Business Address and Telephone Number: Addresses of Store(s) Authorized to be CarpetMAX -REGISTERED TRADEMARK- Stores: Name and Address of Each Owner of Dealer: - ------------------------------------ ------------------------------------- - ------------------------------------ ------------------------------------- - ------------------------------------ ------------------------------------- - ------------------------------------ ------------------------------------- - ------------------------------------ ------------------------------------- - ------------------------------------ ------------------------------------- - ------------------------------------ ------------------------------------- - ------------------------------------ ------------------------------------- - ------------------------------------ ------------------------------------- Page 1 of 1 SCHEDULE "B" MERCHANDISE INTRODUCTORY PACKAGE ORDER FORM* CARPETMAX CENTER STAGE COLLECTION 1 Set CARPETMAX Center Stage Collection. This collection is 62 products (shown on 42 racks) from six of our aligned manufacturers. CARPETMAX has worked with the mills to bring you the best valued and the best selling products in the industry. See the attached list for products and price points. CARPETMAX DISPLAY SYSTEMS (Check items desired) 3 racks CARPETMAX 4500 2-Tier Berber System, 6000 High Performance - ------- Display & 7000 Premier Pattern Display (Sutton) 1 rack CARPETMAX Contract Commercial Rack (Mohawk) - ------- 1 rack CARPETMAX Commercial Business Systems (Shaw Industries) - ------- 1 set CARPETMAX /Bruce Four Star Wood Program - ------- 1 set CARPETMAX Master Builder Program (14 Qualities on 12 Deck Boards) - ------- 1 set CARPETMAX/Image Fabulous Value Package (Bi-Monthly Special - ------- Program) 1 set CARPETMAX/Ceramic Center Stage products on 2 "Step Up" racks - ------- # of racks CMAX Basket racks (May order up to 30 racks - indicate # of - ------- racks desired) 1 set CARPETMAX Conversion Kit (Signage & Graphics) - ------- (After you pay invoice for these samples, send a copy to CARPETMAX for reimbursement, attention of Terri Brost) POINT OF PURCHASE MATERIALS CARPETMAX Warranty Brochures (2500 personalized brochures) please call - ------- us to place order Advantage Folders and Installation Brochures - ------- 1 Day Orientation for up to Three People (Transportation and Lodging - ------- Not included) Date: Dealer #: ------------------------- ---------------------- Store Name: Contact: ------------------- ----------------------- Shipping Address: Signature: ------------- --------------------- CARPETMAX Signature: ---------------- Phone: Fax: ----------------------- ------------------- *SUBJECT TO SEASONAL CHANGE UPDATED 12/01/98 Page 2 of 1 SCHEDULE "C" STATE-SPECIFIC AMENDMENTS FOR RESIDENTS OF THE STATE OF HAWAII Section 14 of the Franchise Agreement, under the heading "Rights and Duties of Parties Upon Termination", shall be supplemented by the addition of the following Section 14(viii): Pursuant to Section 482E-6(3) of the Hawaii Revised Statutes, for so long as such statute remains in effect and so provides, upon termination or refusal to renew the franchise, the Dealer shall be compensated for the fair market value, at the time of termination or expiration of the franchise, of Dealer's inventory, supplies, equipment and furnishings purchased from the Company or a supplier designated by the Company, exclusive of personalized materials which have no value to the Company. If the Company refuses to renew a franchise for the purpose of converting the franchised business to one owned by the Company, the Company, in addition to the remedies provided in this paragraph, shall compensate the Dealer for the loss of goodwill. The Company may deduct from such compensation reasonable costs incurred in removing, transporting and disposing of Dealer's inventory, supplies, equipment and furnishings pursuant to this paragraph, and may offset from such compensation any moneys due to the Company. FOR RESIDENTS OF THE STATE OF ILLINOIS Notwithstanding Section 13 of the Franchise Agreement, the conditions under which the Franchise Agreement can be terminated and the parties' rights upon non-renewal may be affected by Illinois law, 815 ILCS 705/19 and 705/20. Nothing in the Franchise Agreement shall limit or prevent the enforcement of any cause of action otherwise enforceable in Illinois or arising under the Illinois Franchise Disclosure Act of 1987, as amended. Accordingly, any provision in the Franchise Agreement which designates jurisdiction or venue in a forum outside of Illinois is void with respect to any cause of action which is otherwise enforceable in Illinois, except as this may be restricted by the Franchise Agreement's arbitration provision. Any condition, stipulation or provision of the Franchise Agreement purporting to bind the Dealer to a waiver of compliance with the Illinois Franchise Disclosure Act of 1987, as amended, is void. Section 16 of the Franchise Agreement is hereby modified by changing "State of Georgia" in the second sentence thereof to "State of Illinois" and deleting the last sentence thereof in its entirety. FOR RESIDENTS OF THE STATE OF INDIANA Section 13 of the Franchise Agreement is hereby modified by adding a new subsection e. as follows: e. The conditions under which this Agreement can be terminated may be affected by Indiana law [IC Stat. Sec. 23-2-2.5 and 23-2-2.7] which provides Franchisee with certain termination rights. Notwithstanding the terms of Section 15 of the Franchise Agreement, nothing shall require the Dealer to agree to any general release provisions or agree to any separate release agreements [IC Stat. Sec. 23-2-2.7-1(5)]. Page 1 of 6 If any of the provisions in the Franchise Offering Circular or Franchise Agreement are inconsistent with the laws of the State of Indiana, including but not limited to Indiana Code 23-2-2.7-1(5) & (10), then these provisions shall govern instead of the terms of the Franchise Offering Circular or Franchise Agreement. More particularly, notwithstanding anything to the contrary in Section 16 of the Franchise Agreement, the Franchise Agreement shall be governed by the laws of the State of Indiana. Additionally, the second sentence of Section 16 of the Franchise Agreement is hereby deleted in its entirety. Section 16 of the Franchise Agreement is hereby modified by adding the following text as the last sentence thereof: This provision shall not in any way abrogate or reduce any rights of Franchisee as provided for under Indiana law including, but not limited to, the right to submit matters to the jurisdiction of the courts of Indiana. With respect to Section 24 of the Franchise Agreement, the Company agrees to select as the place for arbitration a location within the State of Indiana if the Dealer so requests and the laws of the State of Indiana shall apply to the arbitration proceedings. Additionally, the third and eleventh sentences of Section 23 of the Franchise Agreement are hereby deleted in their entirety. Section 25 of the Franchise Agreement is hereby deleted in its entirety. FOR RESIDENTS OF THE STATE OF MARYLAND Any general release required by the terms and conditions of the Franchise Agreement as a condition of renewal, assignment or transfer shall not apply to any liability under the Maryland Franchise Registration and Disclosure Law. Notwithstanding anything to the contrary in Sections 16 or 24 of the Franchise Agreement, the Maryland Franchise Registration and Disclosure Law prohibits the Franchisor from precluding the Franchisee from initiating litigation against the Franchisor in Maryland. Accordingly, to the extent the Sections 16 or 24 are inconsistent with the Maryland Franchise Registration and Disclosure Law, such terms and conditions shall be of no force or effect. FOR RESIDENTS OF THE STATE OF MINNESOTA Section 13 of the Franchise Agreement is hereby modified by adding a new subsection e. as follows: e. The conditions under which this Agreement can be terminated or not renewed may be affected by Minnesota law which provides Franchisee with certain termination and non-renewal rights. Minnesota Statute Section 80C.14, subdivisions 3, 4 and 5 require, except in certain specified cases, that the Dealer be given 90 days notice of termination (with 60 days to cure) and 180 days notice for non-renewal of the Franchise Agreement. Section 16 of the Franchise Agreement is hereby modified by adding the following text as the last sentence thereof: Pursuant to Minnesota Statute Section 80C.21, this provision shall not in any way abrogate or reduce any rights of the Dealer as provided for in Minnesota Statute Chapter 80C. Page 2 of 6 including, but not limited to, the right to submit matters to the jurisdiction of the courts of Minnesota. The Company agrees to indemnify Dealer from and against any losses, liabilities and damages for which Dealer is held liable by a court of competent jurisdiction in any proceeding arising out of Dealer's use of the mark CarpetMAX -REGISTERED TRADEMARK- and all other trademarks, service marks and associated marks and symbols utilized by Dealer pursuant to this Agreement, provided such use is in accordance with and pursuant to the provisions of this Agreement and instructions from the Company. The foregoing indemnification is conditioned upon the following: Dealer must (i) provide written notice to the Company of any claims subject to indemnification hereunder within 20 days of Dealer's receipt of any written information pertaining to such claims, (ii) tender the defense of the claims to the Company if the Company so desires, and (iii) permit the Company to have sole control of the defense and settlement of any such claim. Nothing in the Franchise Agreement is intended to abrogate or reduce any rights of the Franchisee as provided in for Minnesota Statutes, Chapter 80C. In any arbitration involving a franchise located in Minnesota, the arbitration site shall be either in Minnesota or a place mutually agreed upon at the time of the arbitration, as determined by the arbitrator(s). FOR RESIDENTS OF THE STATE OF NEW YORK Notwithstanding any provision of the Franchise Agreement, all rights enjoyed by the Dealer and any causes of action arising in its favor from the provisions of Article 33 of the General Business Law of the State of New York and the regulations issued thereunder shall remain in force, it being the intent of this proviso that the non-waiver provisions of the General Business Law of the State of New York Sections 687.4 and 687.5 be satisfied. With respect to the Dealer's indemnification requirements under the Franchise Agreement, the Dealer shall not be required to indemnify for any claims arising out of a breach of the Franchise Agreement or other civil wrong of the Company. Notwithstanding any provision of the Franchise Agreement to the contrary, the Company will not transfer and assign its rights and obligations under the Franchise Agreement unless the transferee will be able to perform the Company's obligations under the Franchise Agreement, in Company's good faith judgment, so long as it remains subject to Article 33 of the General Business Law of the State of New York. Notwithstanding Section 16 of the Franchise Agreement, the choice of law and venue provisions should not be construed as a waiver of any right conferred upon the Dealer by the provisions of Article 33 of the General Business Law of the State of New York. FOR RESIDENTS OF THE STATE OF NORTH DAKOTA Section 16 of the Franchise Agreement is hereby modified by deleting the current text in its entirety and replacing it with the following: "This Agreement shall be governed by and construed in accordance with the laws of the State of North Dakota." With respect to Section 24 of the Franchise Agreement, the Company agrees to select as the place for arbitration a location within the State of North Dakota in close proximity to the Dealer's business. Page 3 of 6 Additionally, nothing in Section 24 shall bar the right of either party to obtain injunctive relief from any court of competent jurisdiction against threatened conduct that will cause loss or damages under the usual equity rules, including the applicable rules for obtaining preliminary injunctions. Finally, the fourth to last sentence of Section 24 is hereby deleted in its entirety. FOR RESIDENTS OF THE STATE OF SOUTH DAKOTA Notwithstanding anything to the contrary in the Franchise Agreement, the Company will not terminate the Franchise Agreement for a breach of the Franchise Agreement, for failure of the Dealer to meet performance and quality standards unless the Franchisee receives 30 days written notice and an opportunity to cure such defaults. Section 16 of the Franchise Agreement is amended in its entirety to read as follows: The law regarding franchise registration, employment, covenants not to compete, and other matters of local concern will be governed by the laws of the State of South Dakota; but as to contractual and all other matters, this agreement and all provisions of this instrument will be and remain subject to the applications, construction, enforcement and interpretation under the governing law of Georgia. Any provision in the Franchise Agreement restricting jurisdiction or venue to a forum outside of South Dakota or requiring the application of the laws of another state is void with respect to a claim otherwise enforceable under the South Dakota Franchise Law. Section 24 of the Franchise Agreement is amended to delete any references to the site of arbitration being in Georgia. The parties agree that such arbitration shall be conducted in a mutually agreed upon site in accordance with Section 11 of the Commercial Arbitration Rules of the American Arbitration Association. Furthermore, nothing in Section 24 shall be deemed to bar the right of either party to obtain injunctive relief from any court of competent jurisdiction against threatened conduct that will cause loss or damages under the usual equity rules, including the applicable rules for obtaining preliminary injunctions. Finally, the fourth to last sentence of Section 24 is hereby deleted in its entirety. Pursuant to S.D.C.L. 37-5A-86, any acknowledgment provision, disclaimer, or integration clause or a provision having a similar effect in the Franchise Agreement does not negate or act to remove from judicial review any statement, misrepresentation or action that would violate the South Dakota Franchise Law (S.D.C.L. 37-5A), or any administrative regulations promulgated thereunder. FOR RESIDENTS OF THE STATE OF WASHINGTON Notwithstanding any other provision of the Franchise Agreement to the contrary, the Company shall not terminate the Franchise Agreement prior to expiration of its initial Term or any renewal Term except for good cause. Good cause shall include, without limitation, the failure of the Dealer to comply with lawful material provisions of the Franchise Agreement or any other agreement between the Company and the Dealer, and to cure such default after being given written notice thereof and a reasonable opportunity, which in no event need be more than thirty days, to cure such default, or if such default cannot reasonably be cured within thirty days, the failure of the Dealer to initiate within thirty days substantial and continuing action to cure such default. After 3 willful and material breaches of the same term of the Franchise Agreement occurring within a 12 month period, for which the Dealer has been given notice and an opportunity to cure as provided in this subsection, the Company may terminate the Franchise Agreement upon any subsequent Page 4 of 6 willful and material breach of the same term within the 12 month period without providing notice or opportunity to cure. The Company may terminate the Franchise Agreement without giving prior notice or opportunity to cure a default if the Dealer (i) is adjudicated a bankrupt or insolvent; (ii) makes an assignment for the benefit of creditors or similar disposition of the assets of the franchised business; (iii) voluntarily abandons the franchised business; or (iv) is convicted of or pleads guilty or no contest to a charge of violating any law relating to the franchised business. Upon termination for good cause, the Company shall purchase from the Dealer at fair market value at the time of termination, the Dealer's inventory and supplies, exclusive of (i) personalized materials which have no value to the Company; (ii) inventory and supplies not reasonably required in the conduct of the franchised business; and (iii), if the Dealer is to retain control of the premises of the franchised business, any inventory and supplies not purchased from the Company or upon the Company's express requirement: PROVIDED, that the Company may offset against amounts owed to the Dealer under this paragraph any amounts owed by the Dealer to the Company or its affiliates. In any arbitration involving a franchise purchased in Washington, the arbitration site shall be either in the State of Washington, or in a place mutually agreed upon at the time of the arbitration, or as determined by the arbitrator. If any provision of the Franchise Agreement is inconsistent with the relationship provisions of RCW 19.100.180 or other requirements of the Washington Franchise Investment Protection Act (the "Act"), the provisions of the Act will prevail. A release or waiver of rights executed the Dealer shall not include rights under the Act except when executed pursuant to a negotiated settlement after the Franchise Agreement is in effect and where the parties are represented by independent counsel. Provisions which unreasonably restrict or limit the statute of limitations period for claims under the Act, or rights or remedies under the Act, such as a right to trial by jury, may not be enforceable. FOR RESIDENTS OF THE STATE OF WISCONSIN Section 13 of the Franchise Agreement is hereby modified by adding a new subsection e. as follows: e. The conditions under which this Agreement can be terminated or not renewed may be affected by Wisconsin law, Chapter 135, Wisc. Stats., the Wisconsin Fair Dealership Law. Section 13 of the Franchise Agreement is hereby modified by adding the following: "The Wisconsin Fair Dealership Law supersedes any provision of this Agreement which is inconsistent with that law." FOR RESIDENTS OF ALL STATES LISTED IN THIS ADDENDUM Notwithstanding Section 26 of the Franchise Agreement to the contrary, this Addendum shall not be merged with or into, or superseded by, the Franchise Agreement. In the event of any conflict between the Franchise Agreement and this Addendum, this Addendum shall be controlling. Except as otherwise expressly set forth herein, no other amendments or modifications of the Franchise Agreement are intended or made by the parties. Applicable State: ____________________________ Page 5 of 6 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Addendum on the day and year first above written. DEALER: CARPETMAX, L.P. -------------------------- By: By: THE MAXIM GROUP, INC., ------------------------------ General Partner Title: --------------------------- By: --------------------------- [CORPORATE SEAL] A.J. Nassar Title: President (SEAL) [CORPORATE SEAL] - --------------------------- Page 6 of 6 SCHEDULE "D" GUARANTY BY THE MAXIM GROUP, INC. GUARANTY THIS GUARANTY (the "Guaranty") is executed as of _________________, 199___ by THE MAXIM GROUP, INC. (the "Guarantor") in favor of _____________________ ("Dealer"). WHEREAS, Carpetmax, L.P., a Georgia limited partnership ("Company") that is an affiliate of Guarantor, is the franchisor under that certain CarpetMAX Franchise Agreement, dated as of _________________, 199___, between Company and Dealer (the "Franchise Agreement"); and WHEREAS, in order to provide assurance to Dealer that the Company will fulfill its obligations to Dealer under the Franchise Agreement, Guarantor is willing to execute this Guaranty; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Guarantor, the Guarantor agrees as follows: 1. GUARANTY. Guarantor hereby guarantees to Dealer the full and prompt performance of Company's obligations to Dealer arising under the Franchise Agreement. Guarantor agrees that if Company does not perform the obligations required to be performed thereunder, then upon written notice from Dealer, Guarantor will perform or cause to be performed such unperformed obligations as required by the Franchise Agreement. 2. NO WAIVER BY DEALER. No delay or failure of Dealer in the exercise of any right, power or remedy shall operate as a waiver thereof, and no single or partial exercise by Dealer of any right, power or remedy shall preclude any further exercise thereof or the exercise of any other right, any power or remedy. 3. PLACE OF EXECUTION; GOVERNING LAW. Guarantor acknowledges that this Guaranty was delivered in Georgia, and shall be governed and construed in accordance with Georgia law (excluding the laws of conflicts). 4. MODIFICATIONS. This Guaranty may not be changed orally, and no obligation of Guarantor can be released or waived by Dealer or any officer or agent of Dealer, except by a writing signed by a duly authorized officer of Dealer. 5. NOTICES. Any and all notices, elections or demands permitted or required to be made under this Guaranty shall be in writing, signed by the party giving such notice, election or demand, and shall be mailed by registered or certified United States mail, postage prepaid, or otherwise delivered to the other party at the address set forth below, or at such other address within the continental United States of America as the addressee may hereafter designate in writing. The effective date of such notice, election or demand shall be the date of delivery. For the purposes of this Guaranty: (a) The address of Dealer is: ------------------------- ------------------------- (b) The address of Guarantor is: The Maxim Group, Inc. 210 TownPark Drive Kennesaw, Georgia 30144 6. SUCCESSORS AND ASSIGNS. The provisions of this Guaranty shall bind Guarantor and its successors and shall benefit Dealer and its successors and assigns. IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date first written above. THE MAXIM GROUP, INC. By: ------------------------------ Name: A.J. Nassar Title: President 2 EX-10.23 6 EX-10-23 EXHIBIT 10.23 AMENDED AND RESTATED CREDIT AGREEMENT among THE MAXIM GROUP, INC. as Borrower, AND THE DOMESTIC SUBSIDIARIES OF THE BORROWER as Guarantors, AND THE LENDERS IDENTIFIED HEREIN, AND NATIONSBANK, N.A., as Administrative Agent DATED AS OF MAY 18, 1999 Arranged by: BANC OF AMERICA SECURITIES LLC, as Sole Lead Arranger and Sole Book Manager TABLE OF CONTENTS ----------------- SECTION 1 DEFINITIONS AND ACCOUNTING TERMS.......................................................................1 1.1 DEFINITIONS..........................................................................................1 1.2 COMPUTATION OF TIME PERIODS AND OTHER DEFINITIONAL PROVISIONS.......................................26 1.3 ACCOUNTING TERMS....................................................................................26 SECTION 2 CREDIT FACILITIES.....................................................................................26 2.1 REVOLVING LOANS.....................................................................................26 2.2 LETTER OF CREDIT SUBFACILITY........................................................................29 2.3 INDEMNIFICATION OF ISSUING LENDER...................................................................33 2.4 CONTINUATIONS AND CONVERSIONS.......................................................................34 2.5 MINIMUM AMOUNTS.....................................................................................35 SECTION 3 GENERAL PROVISIONS APPLICABLE TO LOANS AND LETTERS OF CREDIT..........................................35 3.1 INTEREST. .........................................................................................35 3.2 PLACE AND MANNER OF PAYMENTS........................................................................36 3.3 PREPAYMENTS.........................................................................................36 3.4 FEES. .........................................................................................37 3.5 PAYMENT IN FULL AT MATURITY.........................................................................39 3.6 COMPUTATIONS OF INTEREST AND FEES...................................................................39 3.7 PRO RATA TREATMENT..................................................................................40 3.8 SHARING OF PAYMENTS.................................................................................41 3.9 CAPITAL ADEQUACY....................................................................................41 3.10 INABILITY TO DETERMINE INTEREST RATE...............................................................42 3.11 ILLEGALITY.........................................................................................42 3.12 REQUIREMENTS OF LAW................................................................................43 3.13 TAXES. .........................................................................................44 3.14 COMPENSATION.......................................................................................46 3.15 EVIDENCE OF DEBT...................................................................................46 3.16 REPLACEMENT OF LENDERS.............................................................................47 SECTION 4 GUARANTY..............................................................................................47 4.1 GUARANTY OF PAYMENT.................................................................................47 4.2 OBLIGATIONS UNCONDITIONAL...........................................................................48 4.3 MODIFICATIONS.......................................................................................49 4.4 WAIVER OF RIGHTS....................................................................................49 4.5 REINSTATEMENT.......................................................................................49 4.6 REMEDIES............................................................................................50 4.7 LIMITATION OF GUARANTY..............................................................................50 4.8 RIGHTS OF CONTRIBUTION..............................................................................50
SECTION 5 CONDITIONS PRECEDENT..................................................................................50 5.1 CLOSING CONDITIONS..................................................................................50 5.2 CONDITIONS TO ALL EXTENSIONS OF CREDIT..............................................................54 SECTION 6 REPRESENTATIONS AND WARRANTIES........................................................................55 6.1 FINANCIAL CONDITION.................................................................................55 6.2 NO MATERIAL CHANGE..................................................................................56 6.3 ORGANIZATION AND GOOD STANDING......................................................................56 6.4 DUE AUTHORIZATION...................................................................................56 6.5 NO CONFLICTS........................................................................................56 6.6 CONSENTS............................................................................................57 6.7 ENFORCEABLE OBLIGATIONS.............................................................................57 6.8 NO DEFAULT..........................................................................................57 6.9 OWNERSHIP...........................................................................................57 6.10 INDEBTEDNESS.......................................................................................58 6.11 LITIGATION.........................................................................................58 6.12 TAXES. .........................................................................................58 6.13 COMPLIANCE WITH LAW................................................................................58 6.14 ERISA..............................................................................................58 6.15 SUBSIDIARIES.......................................................................................59 6.16 USE OF PROCEEDS....................................................................................60 6.17 GOVERNMENT REGULATION..............................................................................60 6.18 ENVIRONMENTAL MATTERS..............................................................................61 6.19 INTELLECTUAL PROPERTY..............................................................................62 6.20 SOLVENCY...........................................................................................63 6.21 INVESTMENTS........................................................................................63 6.22 LOCATION OF COLLATERAL.............................................................................63 6.23 DISCLOSURE.........................................................................................63 6.24 LICENSES, ETC......................................................................................63 6.25 COLLATERAL DOCUMENTS...............................................................................63 6.26 BURDENSOME RESTRICTIONS............................................................................63 SECTION 7 AFFIRMATIVE COVENANTS.................................................................................64 7.1 INFORMATION COVENANTS...............................................................................64 7.2 FINANCIAL COVENANTS.................................................................................68 7.3 PRESERVATION OF EXISTENCE AND FRANCHISES............................................................71 7.4 BOOKS AND RECORDS...................................................................................71 7.5 COMPLIANCE WITH LAW.................................................................................71 7.6 PAYMENT OF TAXES AND OTHER INDEBTEDNESS.............................................................71 7.7 INSURANCE...........................................................................................72 7.8 MAINTENANCE OF PROPERTY.............................................................................73 7.9 PERFORMANCE OF OBLIGATIONS..........................................................................73 7.10 COLLATERAL.........................................................................................73 7.11 USE OF PROCEEDS....................................................................................73 7.12 AUDITS/INSPECTIONS.................................................................................73 7.13 ADDITIONAL CREDIT PARTIES..........................................................................74
ii 7.14 YEAR 2000 COMPLIANCE...............................................................................74 7.15 POST-CLOSING REQUIREMENTS..........................................................................75 SECTION 8 NEGATIVE COVENANTS....................................................................................77 8.1 INDEBTEDNESS........................................................................................77 8.2 LIENS. .........................................................................................78 8.3 NATURE OF BUSINESS..................................................................................78 8.4 CONSOLIDATION AND MERGER............................................................................78 8.5 SALE OR LEASE OF ASSETS.............................................................................79 8.6 SALE LEASEBACKS.....................................................................................79 8.7 ADVANCES, INVESTMENTS AND LOANS.....................................................................79 8.8 RESTRICTED PAYMENTS.................................................................................80 8.9 TRANSACTIONS WITH AFFILIATES........................................................................80 8.10 FISCAL YEAR; ORGANIZATIONAL DOCUMENTS..............................................................80 8.11 NO LIMITATIONS.....................................................................................80 8.12 NO OTHER NEGATIVE PLEDGES..........................................................................81 8.13 LIMITATION ON FOREIGN OPERATIONS...................................................................81 8.14 CAPITAL EXPENDITURES...............................................................................81 8.15 PREPAYMENTS OF INDEBTEDNESS........................................................................81 8.16 SUBORDINATED DEBT..................................................................................81 8.17 LIMITATION ON STORE OPENINGS.......................................................................82 8.18 LIMITATION ON FEES AND EXPENSES....................................................................82 SECTION 9 EVENTS OF DEFAULT.....................................................................................83 9.1 EVENTS OF DEFAULT...................................................................................83 9.2 ACCELERATION; REMEDIES..............................................................................86 9.3 ALLOCATION OF PAYMENTS AFTER EVENT OF DEFAULT.......................................................87 SECTION 10 AGENCY PROVISIONS....................................................................................88 10.1 APPOINTMENT........................................................................................88 10.2 DELEGATION OF DUTIES...............................................................................88 10.3 EXCULPATORY PROVISIONS.............................................................................89 10.4 RELIANCE ON COMMUNICATIONS.........................................................................89 10.5 NOTICE OF DEFAULT..................................................................................90 10.6 NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER LENDERS.............................................90 10.7 INDEMNIFICATION....................................................................................91 10.8 ADMINISTRATIVE AGENT IN ITS INDIVIDUAL CAPACITY....................................................91 10.9 SUCCESSOR ADMINISTRATIVE AGENT.....................................................................91 SECTION 11 MISCELLANEOUS........................................................................................92 11.1 NOTICES............................................................................................92 11.2 RIGHT OF SET-OFF...................................................................................92 11.3 BENEFIT OF AGREEMENT...............................................................................92 11.4 NO WAIVER; REMEDIES CUMULATIVE.....................................................................95 11.5 PAYMENT OF EXPENSES; INDEMNIFICATION...............................................................96 11.6 AMENDMENTS, WAIVERS AND CONSENTS...................................................................96
iii 11.7 COUNTERPARTS/TELECOPY..............................................................................98 11.8 HEADINGS...........................................................................................98 11.9 DEFAULTING LENDER..................................................................................98 11.10 SURVIVAL OF INDEMNIFICATION AND REPRESENTATIONS AND WARRANTIES....................................98 11.11 GOVERNING LAW; JURISDICTION.......................................................................98 11.12 WAIVER OF JURY TRIAL..............................................................................99 11.13 TIME..............................................................................................99 11.14 SEVERABILITY......................................................................................99 11.15 FURTHER ASSURANCES................................................................................99 11.16 CONFIDENTIALITY...................................................................................99 11.17 ENTIRETY.........................................................................................100 11.18 BINDING EFFECT; CONTINUING AGREEMENT.............................................................100
SCHEDULES Schedule 1.1(a) Commitment Percentages Schedule 1.1(b) Indenture Default Schedule 1.1(c) Permitted Liens Schedule 2.2(c) Existing Letters of Credit Schedule 6.10 Indebtedness Schedule 6.15 Subsidiaries Schedule 6.19 Intellectual Property Schedule 6.22(a) Real Property Locations Schedule 6.22(b) Personal Property Locations Schedule 6.22(c) Chief Executive Offices Schedule 7.7 Insurance Schedule 11.1 Notices EXHIBITS Exhibit 2.1(b) Form of Notice of Borrowing Exhibit 2.1(f) Form of Revolving Note Exhibit 2.4 Form of Notice of Continuation/Conversion Exhibit 7.1(c) Form of Officer's Certificate Exhibit 7.1(d) Form of Borrowing Base Certificate Exhibit 7.13 Form of Joinder Agreement Exhibit 11.3(b) Form of Assignment Agreement iv AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT (this "CREDIT AGREEMENT"), is entered into as of May 18, 1999 among THE MAXIM GROUP, INC., a Delaware corporation (the "BORROWER"), each of the Domestic Subsidiaries of the Borrower (individually a "GUARANTOR" and collectively the "GUARANTORS"), the Lenders (as defined herein) and NATIONSBANK, N.A., as Administrative Agent for the Lenders (in such capacity, the "ADMINISTRATIVE AGENT") RECITALS WHEREAS, the Borrower and the Guarantors entered into that certain Credit Agreement dated as of November 25, 1998 (as amended or modified from time to time, the "PRIOR CREDIT AGREEMENT"); and WHEREAS, the Borrower and the Guarantors have requested that the Lenders provide an amended and restated credit facility comprised of a $75,000,000 revolving credit facility; and WHEREAS, the Lenders have agreed to make the requested amended and restated credit facility available to the Borrower on the terms and conditions hereinafter set forth. NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1 DEFINITIONS AND ACCOUNTING TERMS 1.1 DEFINITIONS. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms herein shall include in the singular number the plural and in the plural the singular: "ACCELERATION EVENT" means the acceleration of the Subordinated Debt prior to its stated maturity. "ACCELERATION EVENT FEE" has the meaning set forth in Section 3.4(g). "ADDITIONAL CREDIT PARTY" means each Person that becomes a Guarantor after the Closing Date, as provided in Section 7.13. "ADJUSTED BASE RATE" means the Base Rate plus the Applicable Percentage. "ADJUSTED EURODOLLAR RATE" means the Eurodollar Rate plus the Applicable Percentage. "ADJUSTED SENIOR DEBT RATIO" means, with respect to the Credit Parties on a consolidated basis for the twelve month period ending on the last day of any fiscal quarter of the Borrower, the ratio of (a) Total Senior Debt plus Adjusted Rent Expense to (b) EBITDAR. "ADJUSTED RENT EXPENSE" means the product of Rent Expense multiplied by eight (8). "ADMINISTRATIVE AGENT" shall have the meaning assigned to such term in the heading hereof (or any successor thereto) or any successor agent appointed pursuant to Section 10.9. "AFFILIATE" means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (a) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (b) to direct or cause direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "AGENCY SERVICES ADDRESS" means NationsBank, N.A., NC1-001-15-04, 101 North Tryon Street, Charlotte, North Carolina 28255, Attn: Agency Services, or such other address as may be identified by written notice from the Administrative Agent to the Borrower. "APPLICABLE PERCENTAGE" means the appropriate applicable percentages corresponding to the Fixed Charge Coverage Ratio in effect as of the most recent Calculation Date as shown below: 2
Applicable Applicable Fixed Charge Applicable Applicable Percentage for Percentage for Applicable Pricing Coverage Percentage for Percentage for Standby Letter Trade Letter of Percentage for Level Ratio Eurodollar Loans Base Rate Loans of Credit Fees Credit Fees Commitment Fees - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------ - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------ equal to or greater than I 2.00 to 1.0 1.00% 0.0% 1.00% 0.625% 0.250% - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------ - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------ equal to or greater than II 1.75 to 1.0 1.25% 0.0% 1.25% 0.625% 0.250% but less than 2.00 to 1.0 - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------ - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------ equal to or greater than III 1.50 to 1.0 1.50% 0.0% 1.50% 0.625% 0.300% but less than 1.75 to 1.0 - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------ - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------ equal to or greater than IV 1.30 to 1.0 1.75% 0.25% 1.75% 0.625% 0.375% but less than 1.50 to 1.0 - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------ - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------ less than V 1.30 to 1.0 2.00% 0.50% 2.00% 0.625% 0.500% - ------------- ---------------- ----------------- ---------------- ----------------- ----------------- ------------------
The Applicable Percentage for Loans, the Standby Letter of Credit Fees, the Trade Letter of Credit Fees and the Commitment Fees shall, in each case, be determined and adjusted quarterly on the date (each a "CALCULATION DATE") five Business Days after the date by which the Borrower is required to provide the officer's certificate in accordance with the provisions of Section 7.1(c); PROVIDED THAT the initial Applicable Percentage for Loans, the Standby Letter of Credit Fees, the Trade Letter of Credit Fees and the Commitment Fees shall be based on Pricing Level V (as shown above) and shall remain at Pricing Level V until the first Calculation Date subsequent to the fiscal quarter of the Borrower ending July 31, 1999, and, thereafter, the Applicable Percentage shall be determined by the Fixed Charge Coverage Ratio calculated as of the most recent Calculation Date; and PROVIDED FURTHER THAT if the Borrower fails to provide the officer's certificate required by Section 7.1(c) on or before the most recent Calculation Date, the Applicable Percentage for Loans, the Standby Letter of Credit Fees, the Trade Letter of Credit Fees and the Commitment Fees from such Calculation Date shall be based on Pricing Level V until such time that an appropriate officer's certificate is provided whereupon the Applicable Percentage shall be determined by the then current Fixed Charge Coverage Ratio. Each Applicable Percentage shall be effective from one Calculation Date until the next Calculation Date. Any adjustment in the Applicable Percentage shall be applicable to all existing Loans and Letters of Credit as well as any new Loans made or Letters of Credit issued. The Borrower shall promptly deliver to the Administrative Agent, at the address set forth on SCHEDULE 11.1 and at the Agency Services Address, at the time the officer's certificate is required to be delivered by Section 7.1(c), information regarding any change in the Fixed Charge Coverage Ratio that would change the existing Applicable Percentage pursuant to the preceding paragraph. Upon the occurrence of a Repurchase Event, the Applicable Percentages for Loans and the Standby Letter of Credit Fees at each Pricing Level will be permanently increased 3 by 0.50%. Upon the occurrence of an Acceleration Event, the Applicable Percentages for Loans and the Standby Letter of Credit Fees at each Pricing Level will be permanently increased by 1.00%. "ASSET DISPOSITION" means the disposition of any or all of the assets of a Credit Party or any of its Subsidiaries whether by sale, lease, transfer or otherwise, other than (a) transfers of assets permitted by Section 8.5 and (b) losses of assets or destroyed assets permitted by clauses (a) and (b) of Section 7.7. "ASSIGNMENT OF CASH COLLATERAL ACCOUNT" means that certain Assignment of Cash Collateral Account, dated as of the Closing Date, executed by the Credit Parties in favor of the Administrative Agent, as amended, modified, extended, renewed or replaced from time to time. "BANKRUPTCY CODE" means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time. "BASE RATE" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the greater of (a) the Federal Funds Rate in effect on such day PLUS 1/2 of 1% or (b) the Prime Rate in effect on such day. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable after due inquiry to ascertain the Federal Funds Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall be determined without regard to clause (a) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Rate, respectively. "BASE RATE LOAN" means any Loan bearing interest at a rate determined by reference to the Base Rate. "BASL" means Banc of America Securities LLC f/k/a NationsBanc Montgomery Securities LLC. "BORROWER" means The Maxim Group, Inc., a Delaware corporation, together with any successors and permitted assigns. "BORROWING BASE ASSETS" means, as of any date of determination, the sum of (a) 80% of Eligible Receivable plus (b) 40% of Eligible Warehouse Inventory plus (c) 25% of Eligible Inventory plus (d) (i) prior to satisfaction of the requirements set forth in Section 7.15(e), 50% of the net book value of the Executive Buildings (such value not to exceed $5 million) and (ii) upon satisfaction of the requirements set forth in Section 7.15(e), 75% of the orderly liquidation value of the Executive Buildings (such value not to exceed $7 million). 4 "BORROWING BASE CERTIFICATE" means a certificate, substantially in the form of Exhibit 7.1(d), describing the Borrowing Base Assets as of a particular date. "BUSINESS DAY" means any day other than a Saturday, a Sunday, a legal holiday or a day on which banking institutions are authorized or required by law or other governmental action to close in Charlotte, North Carolina; provided that in the case of Eurodollar Loans, such day is also a day on which dealings between banks are carried on in U.S. dollar deposits in the London interbank market. "CALCULATION DATE" has the meaning set forth in the definition of Applicable Percentage. "CAPITAL EXPENDITURES" means all expenditures of the Credit Parties and their Subsidiaries which, in accordance with GAAP, would be classified as capital expenditures, including, without limitation, Capital Leases. "CAPITAL LEASE" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person and the amount of such obligation shall be the capitalized amount thereof determined in accordance with GAAP. "CAPITAL LEASE PAYMENTS" means, for any period, with respect to the Credit Parties on a consolidated basis, all payments made by the Credit Parties under Capital Leases, as determined in accordance with GAAP. "CAPITALIZATION" means, as of any date of determination, with respect to the Credit Parties on a consolidated basis, the sum of (a) Funded Debt of the Credit Parties and (b) Net Worth. "CASH COLLATERAL ACCOUNT" means the deposit account(s) referenced in the Assignment of Cash Collateral Account. "CASH EQUIVALENTS" means (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (b) U.S. dollar denominated time and demand deposits and certificates of deposit of (i) any Lender, (ii) any domestic commercial bank having capital and surplus in excess of $500,000,000 or (iii) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank being an "APPROVED BANK"), in each case with maturities of not more than 270 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any variable rate notes issued by, or 5 guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or better by Moody's and maturing within six months of the date of acquisition, (d) repurchase agreements with a bank or trust company (including any of the Lenders) or recognized securities dealer having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the United States of America in which the Borrower shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations and (e) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Company Act of 1940, as amended, which are administered by reputable financial institutions having capital of at least $500,000,000 and the portfolios of which are limited to Investments of the character described in the foregoing subdivisions (a) through (d). "CHANGE OF CONTROL" means either of the following: (a) any "person" or "group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act), has become, directly or indirectly, the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), by way of merger, consolidation or otherwise, of 25% or more of the Voting Stock of the Borrower on a fully-diluted basis, after giving effect to the conversion and exercise of all outstanding warrants, options and other securities of the Borrower (whether or not such securities are then currently convertible or exercisable); or (b) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted the board of directors of the Borrower cease for any reason to constitute a majority of the directors of the Borrower then in office unless such new directors were elected by the directors of the Borrower who constituted the board of directors of the Borrower at the beginning of such period. "CLOSING DATE" means the date hereof. "CODE" means the Internal Revenue Code of 1986 and the rules and regulations promulgated thereunder, as amended, modified, succeeded or replaced from time to time. "COLLATERAL" means all assets of the Credit Parties in which, pursuant to the Collateral Documents, a Lien has been granted in favor of the Administrative Agent, for the benefit of the Lenders. "COLLATERAL DOCUMENTS" means the Security Agreements, the Pledge Agreements, the Assignment of Cash Collateral Account, any deed to secure debt and security agreement executed by the Borrower in favor of the Administrative Agent pursuant to Section 7.15(e) and such other documents executed and delivered in connection with the attachment and perfection of the Administrative Agent's security interests in the assets of the Credit Parties, including without limitation, the UCC financing statements. 6 "COMMITMENT FEES" means the fees payable to the Lenders pursuant to Section 3.4(a). "COMMITMENTS" means (i) with respect to each Lender, the Revolving Loan Commitment and (ii) with respect to the Issuing Lender, the LOC Commitment. "CREDIT DOCUMENTS" means this Credit Agreement, the Notes, any Joinder Agreement, the Collateral Documents, the LOC Documents, the Syndication Side Letter and all other related agreements and documents issued or delivered hereunder or thereunder or pursuant hereto or thereto. "CREDIT PARTIES" means the Borrower and the Guarantors and "CREDIT PARTY" means any one of them. "CREDIT PARTY OBLIGATIONS" means, without duplication, (a) all of the obligations of the Credit Parties to the Lenders (including the Issuing Lender) and the Administrative Agent, whenever arising, under this Credit Agreement, the Notes, the Collateral Documents or any of the other Credit Documents to which any Credit Party is a party and (b) all liabilities and obligations owing from such Credit Party to any Lender, or any Affiliate of a Lender, arising under Hedging Agreements. "DEBT ISSUANCE" means the issuance of any Indebtedness for borrowed money by a Credit Party or any of its Subsidiaries, other than Indebtedness permitted by Section 8.1. "DEFAULT" means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "DEFAULTING LENDER" means, at any time, any Lender that, (a) has failed to make a Loan or purchase a Participation Interest required pursuant to the terms of this Credit Agreement (but only for so long as such Loan is not made or such Participation Interest is not purchased), (b) has failed to pay to the Administrative Agent or any Lender an amount owed by such Lender pursuant to the terms of this Credit Agreement (but only for so long as such amount has not been repaid) or (c) has been deemed insolvent or has become subject to a bankruptcy or insolvency proceeding or to a receiver, trustee or similar official. "DOLLARS" and "$" means dollars in lawful currency of the United States of America. "DOMESTIC SUBSIDIARY" means each direct and indirect Subsidiary of the Borrower that is domiciled, incorporated or organized under the laws of any state of the United States or the District of Columbia whether existing as of the date hereof or hereafter created or acquired. As of the Closing Date, the Domestic Subsidiaries are as set forth on SCHEDULE 6.15. "EBITDA" means, for any period, with respect to the Credit Parties on a consolidated basis, without duplication, the sum of (a) Net Income for such period 7 (excluding the effect of any extraordinary or other non-recurring gains (including any gain from the sale of property) or non-cash losses plus (b) an amount which, in the determination of Net Income for such period has been deducted for (i) Interest Expense for such period, (ii) total Federal, state, foreign or other income or franchise taxes for such period and (iii) all depreciation and amortization for such period, all as determined in accordance with GAAP. "EBITDAR" means, for any period, with respect to the Credit Parties on a consolidated basis, without duplication, the sum of (a) Net Income for such period (excluding the effect of any extraordinary or other non-recurring gains (including any gain from the sale of property) or non-cash losses plus (b) an amount which, in the determination of Net Income for such period has been deducted for (i) Interest Expense for such period, (ii) total Federal, state, foreign or other income or franchise taxes for such period, (iii) all depreciation and amortization for such period, and (iv) Rent Expense for such period, all as determined in accordance with GAAP. "EFFECTIVE DATE" means the date on which the conditions set forth in Section 5.1 shall have been fulfilled (or waived in the sole discretion of the Lenders) and on which the initial Loans shall have been made and/or the initial Letters of Credit shall have been issued. "ELIGIBLE ASSIGNEE" means (a) any Lender; (b) an Affiliate of a Lender; and (c) any other Person approved by the Administrative Agent and the Borrower (such approval not to be unreasonably withheld or delayed); PROVIDED THAT (i) the Borrower's consent is not required during the existence and continuation of an Event of Default, (ii) approval by the Borrower shall be deemed given if no objection is received by the assigning Lender and the Administrative Agent from the Borrower within two Business Days after notice of such proposed assignment has been received by the Borrower; and (iii) neither the Borrower nor an Affiliate of the Borrower shall qualify as an Eligible Assignee. "ELIGIBLE INVENTORY" means, as of any date of determination and without duplication, the lower of (a) the aggregate book value (based on a FIFO or a moving average cost valuation, consistently applied) or (b) fair market value of all raw materials and finished goods inventory, other than Eligible Warehouse Inventory, owned by any Credit Party and in which NationsBank, in its capacity as agent for the benefit of the Lenders and the TROL Lenders, has a first priority security interest, in either case, less appropriate reserves determined in accordance with GAAP, but excluding in any event (i) inventory subject to any Lien other than liens in favor of NationsBank, in its capacity as agent for the benefit of the Lenders and the TROL Lenders, (ii) inventory which is not in good condition or fails to meet standards for sale or use imposed by governmental agencies, departments or divisions having regulatory authority over such goods, (iii) inventory which is discontinued or not useable or saleable at prices approximating their cost in the ordinary course of the applicable Credit Party's business (including without duplication the amount of any reserves for obsolescence, unsalability or decline in value), (iv) inventory located outside of the 8 United States, (v) inventory located at a location not owned or leased by the applicable Credit Party unless the Administrative Agent has received a waiver and estoppel agreement, reasonably satisfactory to the Administrative Agent, from the owner/operator of such location, and, if deemed appropriate by the Administrative Agent, a UCC financing statement has been filed with respect to such location, (vi) inventory located at a location leased by the applicable Credit Party at which such Credit Party maintains in excess of $400,000 of inventory and with respect to which the Administrative Agent shall not have received a landlord's waiver and estoppel agreement in a form reasonably satisfactory to the Administrative Agent and (vii) inventory which is leased or on consignment. "ELIGIBLE RECEIVABLES" means, at any time, the aggregate book value of all accounts receivable, receivables, and obligations for payment created or arising from the sale of inventory or the rendering of services in the ordinary course of business (collectively, the "RECEIVABLES") owned by or owing to the Credit Parties, net of allowances and reserves for doubtful or uncollectible accounts and sales adjustments consistent with the Borrower's internal policies and in any event in accordance with GAAP but excluding in any event (i) Receivables subject to any Lien, other than Liens securing Credit Party Obligations and Liens in favor of NationsBank, in its capacity as agent for the benefit of the TROL Lenders, (ii) Receivables which are more than 90 days past due (net of reserves for bad debts in connection with any such Receivables) and (iii) Receivables owing by an account debtor located outside of the United States (unless payment for the goods shipped is secured by an irrevocable letter of credit in a form and from an institution acceptable to the Administrative Agent). It is specifically understood and agreed that the accounts receivable and receivables purchased or established by GE Capital under the GE Capital Program and accounts receivable and receivables purchased or established by Monogram under the Monogram Program are not owned or owing to the Credit Parties, and therefore will not be included in the definition of Eligible Receivables. "ELIGIBLE WAREHOUSE INVENTORY" means, as of any date of determination and without duplication, the lower of (a) the aggregate book value (based on a FIFO or a moving average cost valuation, consistently applied) or (b) fair market value of all raw materials and finished goods inventory owned by any Credit Party, located at a location designated as a warehouse location on SCHEDULE 6.22(a) and in which NationsBank, in its capacity as agent for the benefit of the Lenders and the TROL Lenders, has a first priority security interest, in either case, less appropriate reserves determined in accordance with GAAP, but excluding in any event (i) inventory subject to any Lien other than liens in favor of NationsBank, in its capacity as agent for the benefit of the Lenders and the TROL Lenders, (ii) inventory which is not in good condition or fails to meet standards for sale or use imposed by governmental agencies, departments or divisions having regulatory authority over such goods, (iii) inventory which is discontinued or not useable or saleable at prices approximating their cost in the ordinary course of the applicable Credit Party's business (including without duplication the amount of any reserves for obsolescence, unsalability or decline in value), (iv) inventory located outside of the United States, (v) inventory located at a location not owned or leased by the applicable Credit Party unless the Administrative Agent has received a waiver and estoppel agreement, reasonably satisfactory to the Administrative 9 Agent, from the owner/operator of such location, and, if deemed appropriate by the Administrative Agent, a UCC financing statement has been filed with respect to such location, (vi) inventory located at a location leased by the applicable Credit Party at which such Credit Party maintains in excess of $400,000 of inventory and with respect to which the Administrative Agent shall not have received a landlord's waiver and estoppel agreement in a form reasonably satisfactory to the Administrative Agent and (vii) inventory which is leased or on consignment. "ENVIRONMENTAL CLAIM" means any investigation, written notice, violation, written demand, written allegation, action, suit, injunction, judgment, order, consent decree, penalty, fine, lien, proceeding, or written claim whether administrative, judicial, or private in nature arising (a) pursuant to, or in connection with, an actual or alleged violation of, any Environmental Law, (b) in connection with any Hazardous Material, (c) from any assessment, abatement, removal, remedial, corrective, or other response action in connection with an Environmental Law or other order of a Governmental Authority or (d) from any actual or alleged damage, injury, threat, or harm to health, safety, natural resources, or the environment. "ENVIRONMENTAL LAWS" means any current or future legal requirement of any Governmental Authority pertaining to (a) the protection of health, safety, and the indoor or outdoor environment, (b) the conservation, management, or use of natural resources and wildlife, (c) the protection or use of surface water and groundwater or (d) the management, manufacture, possession, presence, use, generation, transportation, treatment, storage, disposal, release, threatened release, abatement, removal, remediation or handling of, or exposure to, any hazardous or toxic substance or material or (e) pollution (including any release to land surface water and groundwater) and includes, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 USC 9601 ET SEQ., Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 USC 6901 ET SEQ., Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 USC 1251 ET SEQ., Clean Air Act of 1966, as amended, 42 USC 7401 ET SEQ., Toxic Substances Control Act of 1976, 15 USC 2601 ET SEQ., Hazardous Materials Transportation Act, 49 USC App. 1801 ET SEQ., Occupational Safety and Health Act of 1970, as amended, 29 USC 651 ET SEQ., Oil Pollution Act of 1990, 33 USC 2701 ET SEQ., Emergency Planning and Community Right-to-Know Act of 1986, 42 USC 11001 ET SEQ., National Environmental Policy Act of 1969, 42 USC 4321 ET SEQ., Safe Drinking Water Act of 1974, as amended, 42 USC 300(f) ET SEQ., any analogous implementing or successor law, and any amendment, rule, regulation, order, or directive issued thereunder. "EQUITY ISSUANCE" means any issuance by a Credit Party to any Person of (a) shares of its capital stock or other equity interests, (b) any shares of its capital stock or other equity interests pursuant to the exercise of options or warrants or (c) any shares of its capital stock or other equity interests pursuant to the conversion of any debt securities to equity. 10 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "ERISA AFFILIATE" means an entity, whether or not incorporated, which is under common control with any Credit Party or any of its Subsidiaries within the meaning of Section 4001(a)(14) of ERISA, or is a member of a group which includes any Credit Party or any of its Subsidiaries and which is treated as a single employer under Sections 414(b), (c), (m), or (o) of the Code. "EURODOLLAR LOAN" means a Loan bearing interest based at a rate determined by reference to the Eurodollar Rate. "EURODOLLAR RATE" means, for the Interest Period for each Eurodollar Loan comprising part of the same borrowing (including conversions, extensions and renewals), a per annum interest rate determined pursuant to the following formula: Eurodollar Rate = London Interbank Offered Rate --------------------------------- 1 - Eurodollar Reserve Percentage "EURODOLLAR RESERVE PERCENTAGE" means for any day, that percentage (expressed as a decimal) which is in effect from time to time under Regulation D of the Board of Governors of the Federal Reserve System (or any successor), as such regulation may be amended from time to time or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of Eurodollar Loans is determined), whether or not a Lender has any Eurocurrency liabilities subject to such reserve requirement at that time. Eurodollar Loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to a Lender. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. "EVENT OF DEFAULT" means any of the events or circumstances specified in Section 9.1. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as amended, modified, succeeded or replaced from time to time. 11 "EXECUTIVE BUILDINGS" means (a) the Borrower's current executive office building located at 210 TownPark Drive, Cobb County, Kennesaw, Georgia and (b) the Borrower's former executive office building located in Cobb County, Georgia. "EXECUTIVE OFFICER" means any chief executive officer, chief operating officer, executive vice president of finance, chief financial officer, president, vice president or treasurer of the Borrower. "EXISTING LETTERS OF CREDIT" means the letters of credit described on SCHEDULE 2.2(c). "EXTENSION OF CREDIT" means, as to any Lender, the making of a Loan by such Lender (or a participation therein by a Lender) or the issuance of, or participation in, a Letter of Credit by such Lender. "FEDERAL FUNDS RATE" means for any day the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day and (b) if no such rate is so published on such next preceding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Administrative Agent on such day on such transactions as determined by the Administrative Agent. "FEE LETTER" means that certain letter agreement among the Borrower, BASL and the Administrative Agent dated as of May 18, 1999. "FIRST TIER FOREIGN SUBSIDIARY" means each Foreign Subsidiary which is owned directly by a Credit Party. "FIXED CHARGE COVERAGE RATIO" means, with respect to the Credit Parties on a consolidated basis for the twelve month period ending on the last day of any fiscal quarter of the Credit Parties, the ratio of (a) EBITDAR to (b) Fixed Charges. "FIXED CHARGES" means, for any period, the sum of (a) Rent Expense plus (b) Interest Expense plus (c) Scheduled Funded Debt Payments plus (d) Capital Lease Payments. "FOREIGN SUBSIDIARY" means any Subsidiary of the Borrower or any other Credit Party that is not a Domestic Subsidiary. "FUNDED DEBT" means, with respect to any Person without duplication, the sum of (a) all Indebtedness of such Person for borrowed money, (b) all purchase money 12 Indebtedness of such Person, (c) the principal portion of all obligations of such Person under Capital Leases, (d) all obligations, contingent or otherwise, relative to the face amount of all letters of credit (other than letters of credit supporting inventory purchases in the ordinary course of business), whether or not drawn, and banker's acceptances issued for the account of such Person (it being understood that, to the extent an undrawn letter of credit supports another obligation consisting of Indebtedness, in calculating aggregated Indebtedness only such other obligation shall be included), (e) all Guaranty Obligations of such Person with respect to Funded Debt of another Person, (f) all Funded Debt of another entity secured by a Lien on any property of such Person whether or not such Funded Debt has been assumed by such Person, (g) all Funded Debt of any partnership or unincorporated joint venture to the extent such Person is legally obligated or has a reasonable expectation of being liable with respect thereto, net of any assets of such partnership or joint venture and (h) the principal portion of all obligations of such Person under Synthetic Leases (including without limitation the principal portion of obligations due under the Participation Agreement and the Operative Agreements (as defined in the Participation Agreement)). "GAAP" means generally accepted accounting principles in the United States applied on a consistent basis and subject to Section 1.3. "GE CAPITAL" means General Electric Capital Corporation, a New York corporation. "GE CAPITAL DEALER AGREEMENT" means any Shaw Business Revolving Credit Card Program Business Revolving Charge Dealer Agreement by and among Maxim Retail, C&S Textiles, Inc., the Borrower and GE Capital and any other credit card program revolving charge dealer agreement entered into by and among Maxim Retail, C&S Textiles, Borrower and GE Capital. "GE CAPITAL PROGRAM" means any program established by GE Capital under which GE Capital extends credit to certain customers of Maxim Retail and C&S Textiles, Inc. for the purchase of goods, services and other products from Maxim Retail and C&S Textiles, Inc. "GOVERNMENTAL AUTHORITY" means any Federal, state, local, provincial or foreign court or governmental agency, authority, instrumentality or regulatory body. "GUARANTOR" means each of the Domestic Subsidiaries of the Borrower (other than Maxim Industries) and each Additional Credit Party which has executed a Joinder Agreement or otherwise become a Guarantor hereunder, together with their successors and assigns. "GUARANTY OBLIGATIONS" means, with respect to any Person, without duplication, any obligations (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (a) to purchase any such Indebtedness or other obligation or any 13 property constituting security therefor, (b) to advance or provide funds or other support for the payment or purchase of such Indebtedness or obligation or to maintain working capital, solvency or other balance sheet condition of such other Person (including, without limitation, maintenance agreements, comfort letters, take or pay arrangements, put agreements or similar agreements or arrangements) for the benefit of the holder of Indebtedness of such other Person, (c) to lease or purchase property, securities or services primarily for the purpose of assuring the owner of such Indebtedness or (d) to otherwise assure or hold harmless the owner of such Indebtedness or obligation against loss in respect thereof. The amount of any Guaranty Obligation hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Obligation is made. "HAZARDOUS MATERIALS" means any substance, material or waste defined in or regulated under any Environmental Laws. "HEDGING AGREEMENTS" means any interest rate protection agreements, foreign currency exchange agreements, or other interest or exchange rate hedging agreements, in each case, entered into or purchased by a Credit Party by or from any Lender or any Affiliate of any Lender. "INDEBTEDNESS" of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, or upon which interest payments are customarily made (c) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person to the extent of the value of such property (other than customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business), (d) all obligations, other than intercompany items, of such Person issued or assumed as the deferred purchase price of property or services purchased by such Person which would appear as liabilities on a balance sheet of such Person, (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (f) all Guaranty Obligations of such Person, (g) the principal portion of all obligations of such Person under (i) Capital Leases and (ii) Synthetic Leases, (h) all net obligations of such Person in respect of hedging agreements, foreign currency exchange obligations, and commodity futures agreements, (i) the maximum amount of all performance and standby letters of credit issued or bankers' acceptances facilities created for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed), (j) all preferred stock issued by such Person and required by the terms thereof to be redeemed, or for which mandatory sinking fund payments are due by a fixed date, (k) the aggregate amount of uncollected accounts receivable of such Person subject at such time to a sale of receivables (or similar transaction) regardless of whether such transaction is effected without recourse to such Person or in a manner that would not be reflected on the 14 balance sheet of such Person in accordance with GAAP, and (l) all obligations of such Person to repurchase any securities which repurchase obligation is related to the issuance thereof, including, without limitation, obligations commonly known as residual equity appreciation potential shares. The Indebtedness of any Person shall include the Indebtedness of any partnership or unincorporated joint venture in which such Person is legally obligated. The Indebtedness of any Person shall not include any obligations of such Person under Operating Leases which are not Capital Leases or Synthetic Leases. "INDENTURE" means that certain Indenture dated as of October 16, 1997 among the Borrower, as issuer, the Borrower and certain Subsidiaries of the Borrower, as guarantors and State Street Bank and Trust Company, as trustee, as the same may be modified, supplemented or amended from time to time. "INDENTURE DEFAULT" means the existing default by the Credit Parties in the performance or observance of Section 1009 of the Indenture described in SCHEDULE 1.1(b), which default has been disclosed to the Lenders prior to the Closing Date. "INTEREST EXPENSE" means, for any period, with respect to the Credit Parties on a consolidated basis, all interest expense, including the interest component under Capital Leases, as determined in accordance with GAAP. "INTEREST PAYMENT DATE" means (a) as to Base Rate Loans, the last day of each calendar month and the Maturity Date and (b) as to Eurodollar Loans, the last day of each applicable Interest Period and the Maturity Date, and in addition where the applicable Interest Period for a Eurodollar Loan is greater than three months, then also the date three months from the beginning of the Interest Period and each three months thereafter. "INTEREST PERIOD" means, as to Eurodollar Loans, a period of one, two, three or six months' duration, as the Borrower may elect, commencing, in each case, on the date of the borrowing (including continuations and conversions thereof); provided, however, (a) if any Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day (except that where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (b) no Interest Period shall extend beyond the Maturity Date and (c) where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last Business Day of such calendar month. "INVESTMENT" means (a) the acquisition (whether for cash, property, services, assumption of Indebtedness, securities or otherwise) of assets, shares of capital stock, bonds, notes, debentures, partnership, joint ventures or other ownership interests or other securities of any Person or (b) any deposit with, or advance, loan or other extension of credit to, any Person (other than deposits made in connection with the purchase of equipment or other assets in the ordinary course of business) or (c) any other capital contribution to or investment in any Person, including, without limitation, any Guaranty Obligation (including 15 any support for a Letter of Credit issued on behalf of such Person) incurred for the benefit of such Person. "ISP98" has the meaning set forth in Section 2.2(g). "ISSUING LENDER" means NationsBank, N.A. or any successor Administrative Agent. "ISSUING LENDER FEES" has the meaning set forth in Section 3.4(d). "JOINDER AGREEMENT" means a Joinder Agreement substantially in the form of EXHIBIT 7.13. "LENDER" means any of the Persons identified as a "Lender" on the signature pages hereto, and any Eligible Assignee which may become a Lender by way of assignment in accordance with the terms hereof, together with their successors and permitted assigns. "LETTER OF CREDIT" means any standby or trade Letter of Credit issued for the account of a Credit Party by the Issuing Lender pursuant to Section 2.2 hereof or any Existing Letter of Credit, as such letter of credit may be amended, modified, extended, renewed or replaced. "LIEN" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind, including, without limitation, any agreement to give any of the foregoing, any conditional sale or other title retention agreement, and any lease in the nature thereof. "LOAN" or "LOANS" means the Revolving Loans (or a portion of any Revolving Loan), individually or collectively, as appropriate. "LOC COMMITTED AMOUNT" means FIVE MILLION DOLLARS ($5,000,000). "LOC COMMITMENT" means the commitment of the Issuing Lender to issue Letters of Credit for the account of a Credit Party in an aggregate face amount any time outstanding (together with the amounts of any unreimbursed drawings thereon) of up to the LOC Committed Amount. "LOC DOCUMENTS" means, with respect to any Letter of Credit, such Letter of Credit, any amendments thereto, any documents delivered in connection therewith, any application therefor, and any agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (a) the rights and obligations of the parties concerned or at risk or (b) any collateral security for such obligations. "LOC OBLIGATIONS" means, at any time, the sum of (a) the maximum amount which is, or at any time thereafter may become, available to be drawn under Letters of Credit 16 (including the Existing Letters of Credit) then outstanding, assuming compliance with all requirements for drawings referred to in such Letters of Credit PLUS (b) the aggregate amount of all drawings under Letters of Credit honored by the Issuing Lender but not theretofore reimbursed. "LOC PARTICIPANTS" means the Lenders. "LONDON INTERBANK OFFERED RATE" means, with respect to any Eurodollar Loan for the Interest Period applicable thereto, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Telerate Page 3750, the applicable rate shall be the arithmetic mean of all such rates. If, for any reason, such rate is not available, the term "LONDON INTERBANK OFFERED RATE" shall mean, with respect to any Eurodollar Loan for the Interest Period applicable thereto, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "MANDATORY BORROWING" has the meaning set forth in Section 2.2(e). "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the operations, financial condition, business or prospects of the Credit Parties and their Subsidiaries taken as a whole, (b) the ability of a Credit Party to perform its obligations under this Credit Agreement or any of the other Credit Documents, or (c) the validity or enforceability of this Credit Agreement, any of the other Credit Documents, or the rights and remedies of the Lenders hereunder or thereunder taken as a whole. "MATURITY DATE" means May 18, 2002. "MAXIM RETAIL" means Maxim Retail Stores, Inc., a Georgia corporation. "MAXIM INDUSTRIES" means Maxim Industries, Inc., a Delaware corporation. "MONOGRAM" means Monogram Credit Card Bank of Georgia. "MONOGRAM PROGRAM" means any program established by Monogram under which Monogram may extend credit to certain customers of Maxim Retail and C&S Textiles, Inc. for the purchase of goods, services and other products from Maxim Retail and C&S Textiles, Inc. 17 "MOODY'S" means Moody's Investors Service, Inc., or any successor or assignee of the business of such company in the business of rating securities. "MULTIEMPLOYER PLAN" means a Plan covered by Title IV of ERISA which is a multiemployer plan as defined in Section 3(37) or 4001(a)(3) of ERISA. "MULTIPLE EMPLOYER PLAN" means a Plan covered by Title IV of ERISA, other than a Multiemployer Plan, which any Credit Party or any of its Subsidiaries or any ERISA Affiliate and at least one employer other than a Credit Party or any of its Subsidiaries or any ERISA Affiliate are contributing sponsors. "NATIONSBANK" means NationsBank, N.A. or any successor thereto. "NET CASH PROCEEDS" means the aggregate cash proceeds received from an Asset Disposition, an Equity Issuance or a Debt Issuance net of (a) reasonable transaction costs payable to third parties, and (b) taxes paid or a good faith estimate of the taxes payable with respect to such proceeds. "NET INCOME" means, for any period, the net income after taxes for such period of the Credit Parties on a consolidated basis, as determined in accordance with GAAP. "NET WORTH" means, as of any date, shareholders' equity or net worth of the Credit Parties on a consolidated basis, as determined in accordance with GAAP. "NEW SUBSIDIARIES" means Colorado Carpet & Rugs, Inc., a Colorado corporation, Manasota Carpet, Inc., a Florida corporation and Wadsworth & Owens Decorating Center, Inc., a Florida corporation. "NON-EXCLUDED TAXES" has the meaning set forth in Section 3.13. "NOTE" or "NOTES" means the Revolving Notes, individually or collectively, as appropriate. "NOTICE OF BORROWING" means a request by the Borrower for a Revolving Loan, in the form of EXHIBIT 2.1(b). "NOTICE OF CONTINUATION/CONVERSION" means a request by the Borrower to continue an existing Eurodollar Loan to a new Interest Period or to convert a Eurodollar Loan to a Base Rate Loan or a Base Rate Loan to a Eurodollar Loan, in the form of EXHIBIT 2.4. "OPERATING LEASE" means, as applied to any Person, any lease (including, without limitation, leases which may be terminated by the lessee at any time) of any Property (whether real, personal or mixed) which is not a Capital Lease other than any such lease in which that Person is the lessor. 18 "PARTICIPATION AGREEMENT" means that certain Participation Agreement dated as of November 25, 1998 among the Borrower, as construction agent and lessee, the guarantors party thereto, First Security Bank, National Association, as co-owner trustee, Val T. Orton, as co-owner trustee, the lenders identified therein, as holders, the lenders identified therein, as lenders and NationsBank, as agent, as amended or modified from time to time. "PARTICIPATION INTEREST" means the Extension of Credit by a Lender by way of a purchase of a participation in Letters of Credit or LOC Obligations as provided in Section 2.2 or in any Loans as provided in Section 2.3 or Section 3.8. "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereto. "PERMITTED ACQUISITION" means the acquisition by a Credit Party of all or a majority of the capital stock of another Person or all or substantially all of the business or a line of business of another Person, provided that each of the following conditions are satisfied: (a) prior to such acquisition, the Borrower shall deliver to the Administrative Agent and Lenders evidence reasonably satisfactory to the Administrative Agent and Required Lenders demonstrating that after giving effect to such acquisition, including without limitation, any Indebtedness incurred or assumed by such Credit Party as a result of such acquisition, on a pro forma basis, as if such acquisition had occurred on the first day of the twelve month period ending on the last day of the Borrower's most recently completed fiscal quarter, the Credit Parties would have been in compliance with all the financial covenants set forth in Section 7.2, (b) simultaneously with any such acquisition, the Borrower shall have taken all action required under applicable law, or reasonably requested by the Administrative Agent, to grant to the Administrative Agent, for the benefit of the Lenders, a valid and perfected first-priority security interest in all the assets acquired pursuant to such acquisition, (c) the acquisition is consummated pursuant to a negotiated acquisition agreement and involves the purchase of a company, business or property in the same line of business as the Borrower or any Subsidiary of the Borrower, (d) the total cash and non-cash consideration (including, without limitation, Indebtedness assumed in connection with any single acquisition) paid in the aggregate for all such acquisitions in any fiscal year of the Borrower does not exceed $10,000,000, (e) after giving effect to the acquisition, the representations and warranties set forth in Section 6 hereof shall be true and correct in all material respects on and as of the date of such acquisition with the same effect as though made on and as of such date, (f) no Default or Event of Default exists and is continuing or would result from such acquisition and (g) with respect each such acquisition other than an acquisition consummated prior to the Closing Date or for which the Borrower has executed a letter of intent prior to the Closing Date, no Event of Default (as defined in the Indenture) (including, without limitation, the Indenture Default) exists and is continuing or would result from such acquisition. "PERMITTED INVESTMENTS" means Investments which are (a) cash or Cash Equivalents, (b) accounts receivable created, acquired or made in the ordinary course of business and payable or dischargeable in accordance with customary trade terms, (c) inventory, raw 19 materials, furniture, fixtures, equipment and general intangibles acquired in the ordinary course of business, (d) subject to the terms of Section 8.14 and Section 8.17, leasehold improvements acquired in the ordinary course of business, (e) Investments by a Credit Party in any Credit Party, (f) loans to directors, officers or employees of any Credit Party in the ordinary course of business for reasonable business expenses, not to exceed, in the aggregate, $1,250,000 at any one time, (g) Permitted Acquisitions, (h) the purchase, redemption, acquisition or retirement by the Borrower of any shares of its capital stock of any class or any warrants or options to purchase any such shares (each a "STOCK REPURCHASE") in an amount not to exceed, in the aggregate, the sum of (i) $15,000,000 plus (ii) 50% of Net Income earned subsequent to January 31, 1999; provided that (A) no Default or Event of Default, or Event of Default (as defined in the Indenture) (including, without limitation, the Indenture Default) shall exist immediately prior to or after giving effect to such Stock Repurchase, (B) unless otherwise permitted pursuant to the terms of Section 8.16, the sum of the aggregate amount of all Stock Repurchases plus the aggregate amount of all Subordinated Debt Prepayments (including, without limitation, the purchase of 4,000,000 Series B Securities for the aggregate purchase price of $4,128,000 on March 9, 1999 and March 16, 1999) shall not exceed $15,000,000, and (C) no such Stock Repurchase shall be permitted pursuant to this definition until the Borrower has demonstrated to the Lenders that it is in compliance with Section 7.2(e) for the period ending July 31, 1999 or any period subsequent thereto, (i) loans to franchisees so long as (after giving effect to such proposed loan) (i) the amount of any single such loan by the Borrower or any Subsidiary does not exceed $4,000,000 and (ii) the aggregate amount of such loans to franchisees by the Borrower and its Subsidiaries does not exceed $12,000,000 in the aggregate during the term of this Credit Agreement, (j) the repurchases of Subordinated Debt permitted by Section 8.16, and (k) other Investments (in addition to those set forth above) not to exceed, in the aggregate, $500,000 at any one time. "PERMITTED LIENS" means (a) Liens securing Credit Party Obligations, (b) Liens securing Indebtedness permitted by Section 8.1(i), (c) Liens for taxes not yet due or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property subject to any such Lien is not yet subject to foreclosure, sale, collection, levy or loss on account thereof), (d) Liens in respect of property imposed by law arising in the ordinary course of business such as materialmen's, mechanics', warehousemen's, carrier's, landlords' and other nonconsensual statutory Liens which are not yet due and payable or which are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof), (e) pledges or deposits made in the ordinary course of business to secure payment of worker's compensation insurance, unemployment insurance, pensions or social security programs, (f) Liens arising from good faith deposits in connection with or to secure performance of tenders, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (other than obligations in respect of the payment of borrowed money), (g) Liens arising from good faith deposits in connection with or to secure performance of statutory obligations and 20 surety and appeal bonds, (h) easements, rights-of-way, restrictions (including zoning restrictions), matters of plat, minor defects or irregularities in title and other similar charges or encumbrances not, in any material respect, impairing the use of the encumbered property for its intended purposes, (i) judgment Liens that would not constitute an Event of Default, (j) Liens in connection with Indebtedness permitted by Section 8.1(e), (k) Liens arising by virtue of any statutory or common law provision relating to banker's liens, rights of setoff or similar rights as to deposit accounts or other funds maintained with a creditor depository institution and (l) Liens existing on the date hereof and identified on SCHEDULE 1.1(c); PROVIDED THAT no such Lien shall extend to any property other than the property subject thereto on the Closing Date. "PERSON" means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise (whether or not incorporated), or any Governmental Authority. "PLAN" means any employee benefit plan (as defined in Section 3(3) of ERISA) which is covered by ERISA and with respect to which any Credit Party or any of its Subsidiaries or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" within the meaning of Section 3(5) of ERISA. "PLEDGE AGREEMENTS" means any pledge agreement executed and delivered by a Credit Party in favor of NationsBank, in its capacity as agent, for the benefit of the Lenders and the TROL Lenders, to secure its obligations under the Credit Documents, the Participation Agreement and Operative Agreements (as defined in the Participation Agreement) as amended, modified, extended, renewed or replaced from time to time. "PRIME RATE" means the per annum rate of interest established from time to time by the Administrative Agent at its principal office in Charlotte, North Carolina (or such other principal office of the Administrative Agent as communicated in writing to the Borrower and the Lenders) as its Prime Rate. Any change in the interest rate resulting from a change in the Prime Rate shall become effective as of 12:01 a.m. of the Business Day on which each change in the Prime Rate is announced by the Administrative Agent. The Prime Rate is a reference rate used by the Administrative Agent in determining interest rates on certain loans and is not intended to be the lowest rate of interest charged on any extension of credit to any debtor. "PRIOR CREDIT AGREEMENT" means that certain Credit Agreement, dated as of November 25, 1998, by and among the Borrower and certain of its subsidiaries, as borrowers, the lenders referred to therein, NationsBank, N.A., as administrative agent, SunTrust Bank, Atlanta, as documentation agent and Fleet National Bank, as co-agent, as amended or modified from time to time. "REAL PROPERTIES" means the real properties that the Credit Parties may own or lease (as lessee or sublessee) from third parties from time to time. 21 "REGULATION D, U, OR X" means Regulation D, U or X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "RENT EXPENSE" means, for any period, with respect to the Credit Parties on a consolidated basis, all rent payable under an Operating Lease (whether a lease of real property, personal property or mixed), as determined in accordance with GAAP. "REPORTABLE EVENT" means a "reportable event" as defined in Section 4043 of ERISA with respect to which the notice requirements to the PBGC have not been waived. "REPURCHASE EVENT" means the aggregate repurchase of Securities by the Credit Parties in an aggregate principal amount of more than $15 million (including, without limitation, the purchase of 4,000,000 Series B Securities for the aggregate purchase price of $4,128,000 on March 9, 1999 and March 16, 1999). "REPURCHASE EVENT FEE" has the meaning set forth in Section 3.4(f). "REQUIRED LENDERS" means Lenders whose aggregate Credit Exposure (as hereinafter defined) constitutes more than 50% of the Credit Exposure of all Lenders at such time; PROVIDED, HOWEVER, that if any Lender shall be a Defaulting Lender at such time then there shall be excluded from the determination of Required Lenders the aggregate principal amount of Credit Exposure of such Lender at such time. For purposes of the preceding sentence, the term "Credit Exposure" as applied to each Lender shall mean (a) at any time prior to the termination of the Commitments, the sum of the Revolving Loan Commitment Percentage of such Lender multiplied by the Revolving Committed Amount and (b) at any time after the termination of the Commitments, the sum of (i) the principal balance of the outstanding Loans of such Lender plus (ii) such Lender's Participation Interests in the face amount of the outstanding Letters of Credit. "REQUIREMENT OF LAW" means, as to any Person, the articles or certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or final, non-appealable determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or to which any of its material property is subject. "REVOLVING COMMITTED AMOUNT" means SEVENTY-FIVE MILLION DOLLARS ($75,000,000) or such lesser amount as the Revolving Committed Amount may be reduced pursuant to Section 2.1(d) or 3.3(c). "REVOLVING LOAN COMMITMENT" means, with respect to each Lender, the commitment of such Lender to make its portion of the Revolving Loans in a principal amount equal to such Lender's Revolving Loan Commitment Percentage of the Revolving Committed Amount. 22 "REVOLVING LOAN COMMITMENT PERCENTAGE" means, for each Lender, the percentage identified as its Revolving Loan Commitment Percentage on SCHEDULE 1.1(a), as such percentage may be modified in connection with any assignment made in accordance with the provisions of Section 11.3. "REVOLVING LOAN UNUSED COMMITMENT" means, for any period, the amount by which (a) the then applicable aggregate Revolving Committed Amount exceeds (b) the daily average sum for such period of the outstanding aggregate principal amount of all Revolving Loans plus the aggregate amount of LOC Obligations outstanding. "REVOLVING LOANS" means the Revolving Loans made to the Borrower pursuant to Section 2.1. "REVOLVING NOTE" or "REVOLVING NOTES" means the promissory notes of the Borrower in favor of each of the Lenders evidencing the Revolving Loans provided pursuant to Section 2.1, individually or collectively, as appropriate, as such promissory notes may be amended, modified, supplemented, extended, renewed or replaced from time to time and as evidenced in the form of EXHIBIT 2.1(f). "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or any successor or assignee of the business of such division in the business of rating securities. "SCHEDULED FUNDED DEBT PAYMENTS" means, as of the date of determination, for the Credit Parties on a consolidated basis, the sum of all scheduled payments of principal on Funded Debt for any period ending on the date of determination (including the principal component of payments due on leases that are required to be capitalized in accordance with GAAP during such period ending on the date of determination); it being understood that Scheduled Funded Debt Payments shall not include voluntary prepayments or the mandatory prepayments required pursuant to Section 3.3. "SECURITIES" means the collective reference to the Series A Securities and the Series B Securities and "SECURITY" means any one of them. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SECURITY AGREEMENTS" means any security agreement executed and delivered by a Credit Party in favor of NationsBank, in its capacity as agent for the benefit of the Lenders and the TROL Lenders to secure its obligations under the Credit Documents, the Participation Agreement and the Operative Agreements (as defined in the Participation Agreement) as such may be amended, modified, extended, renewed, restated or replaced from time to time. 23 "SERIES A SECURITIES" means the 9 1/4% Senior Subordinated Notes due 2007, Series A, issued pursuant to the terms of the Indenture. "SERIES B SECURITIES" means the 9 1/4% Senior Subordinated Notes due 2007, Series B, issued pursuant to the terms of the Indenture. "SHAW PROMISSORY NOTE" means that certain Subordinated Promissory Note dated August 9, 1998 issued by the Borrower in favor of Shaw Industries, Inc. in the amount of $11,927,000. "SINGLE EMPLOYER PLAN" means any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "SOLVENT" means, with respect to any Person as of a particular date, that on such date (a) such Person is able to pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (b) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature in their ordinary course, (c) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person's assets would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged or is to engage, (d) the fair value of the assets of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person and (e) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "STOCK REPURCHASE" has the meaning set forth in the definition of Permitted Investments. "SUBORDINATED DEBT" means the Indebtedness evidenced by the Indenture or by the guarantees thereof in an aggregate amount not to exceed $100,000,000. "SUBORDINATED DEBT PREPAYMENT" has the meaning set forth in Section 8.16. "SUBSIDIARY" means, as to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries, and (b) any partnership, association, joint venture or other entity in 24 which such person directly or indirectly through Subsidiaries has more than a 50% equity interest at any time. "SYNDICATION SIDE LETTER" has the meaning set forth in Section 5.1. "SYNTHETIC LEASE" means any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where such transaction is considered borrowed money indebtedness for tax purposes, but is classified as an Operating Lease. "SYNTHETIC LEASE OBLIGATIONS" means any and all obligations of the Borrower, non-existing or hereafter arising under the Participation Agreement and/or any other Operative Agreement (as defined in the Participation Agreement). "TERMINATION EVENT" means (a) with respect to any Single Employer Plan, the occurrence of a Reportable Event or the substantial cessation of operations (within the meaning of Section 4062(e) of ERISA); (b) the withdrawal of any Credit Party or any of its Subsidiaries or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan; (c) the distribution of a notice of intent to terminate or the actual termination of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA; (d) the institution of proceedings to terminate or the actual termination of a Plan by the PBGC under Section 4042 of ERISA; (e) any event or condition which might reasonably constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; or (f) the complete or partial withdrawal of any Credit Party or any of its Subsidiaries or any ERISA Affiliate from a Multiemployer Plan. "TOTAL ASSETS" means all items which in accordance with GAAP would be classified as assets of the Borrower and its Subsidiaries on a consolidated basis. "TOTAL DEBT TO CAPITALIZATION RATIO" means, as of any date of determination, the ratio of (a) Funded Debt to (b) Capitalization. "TOTAL SENIOR DEBT" means, as of any date of determination, all Funded Debt of the Credit Parties other than Subordinated Debt. "TRADE LETTER OF CREDIT FEES" has the meaning set forth in Section 3.4(c). "TROL LENDERS" means the lenders, holders and other Financing Parties (as defined in the Participation Agreement) from time to time party to the Participation Agreement. "UCP" has the meaning set forth in Section 2.2(g). 25 "VOTING STOCK" of a corporation means all classes of the capital stock of such corporation then outstanding and normally entitled to vote in the election of directors. "YEAR 2000 COMPLIANT" has the meaning set forth in Section 6.27. "YEAR 2000 PROBLEM" means any risk that any computer hardware, software or other equipment used by a Credit Party or any of its Subsidiaries will not function as effectively and reliably on and after January 1, 2000 as it does prior to January 1, 2000, to the extent such risk would cause or be reasonably expected to cause a Material Adverse Effect. 1.2 COMPUTATION OF TIME PERIODS AND OTHER DEFINITIONAL PROVISIONS. For purposes of computation of periods of time hereunder, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." References in this Agreement to "Articles", "Sections", "Schedules" or "Exhibits" shall be to Articles, Sections, Schedules or Exhibits of or to this Agreement unless otherwise specifically provided. 1.3 ACCOUNTING TERMS. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. All calculations made for the purposes of determining compliance with this Credit Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with the most recent annual or quarterly financial statements delivered pursuant to Section 7.1 (or, prior to the delivery of the first financial statements pursuant to Section 7.1, consistent with the financial statements described in Section 5.1(d); provided, however, if (a) the Borrower shall object to determining such compliance on such basis at the time of delivery of such financial statements due to any change in GAAP or the rules promulgated with respect thereto or (b) the Administrative Agent or the Required Lenders shall so object in writing within 30 days after delivery of such financial statements, then such calculations shall be made on a basis consistent with GAAP as in effect as of the date of the most recent financial statements delivered by the Borrower to the Lenders to which no such objection shall have been made. SECTION 2 CREDIT FACILITIES 2.1 REVOLVING LOANS. (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 26 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 (A) the lesser of (x) the Revolving Committed Amount and (y) the Borrowing Base Assets and (B) until such time as the Indenture Default is cured or an Acceleration Event occurs, $15,000,000; PROVIDED FURTHER, HOWEVER, that if an Acceleration Event occurs, 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 may only exceed $15,000,000 if such excess amount is used to retire the Securities 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. (b) METHOD OF BORROWING FOR REVOLVING LOANS. By no later than 11:00 a.m. (i) on the date of the requested borrowing of Revolving Loans that will be Base Rate Loans or (ii) three Business Days prior to the date of the requested borrowing of Revolving Loans that will be Eurodollar Loans, the Borrower shall telephone the Administrative Agent with the information described below as well as submit a written Notice of Borrowing in the form of EXHIBIT 2.1(b) to the Administrative Agent setting forth (A) the amount requested, (B) whether such Revolving Loans shall accrue interest at the Adjusted Base Rate or the Adjusted Eurodollar Rate, (C) with respect to Revolving Loans that will be Eurodollar Loans, the Interest Period applicable thereto and (D) certification that the Borrower has complied in all respects with Section 5.2. All Revolving Loans made on the Effective Date shall be Base Rate Loans. Thereafter, all or any portion of such Revolving Loans may be converted into Eurodollar Loans in accordance with the terms of Section 2.4. (c) FUNDING OF REVOLVING LOANS. Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly inform the Lenders as to the terms thereof. Each Lender shall make its Revolving Loan Commitment Percentage of the requested Revolving Loans available to the Administrative Agent by 1:00 p.m. on the date specified in the Notice of Borrowing by deposit, in Dollars, of immediately available funds at the offices of the Administrative Agent at its principal office in Charlotte, North Carolina or at such other address as the Administrative Agent may designate in writing. The amount of the requested Revolving Loans will then be made available to the Borrower by the Administrative Agent by crediting the account of the Borrower on the books of such office of the Administrative Agent, to the extent the amount of such Revolving Loans are made available to the Administrative Agent. 27 No Lender shall be responsible for the failure or delay by any other Lender in its obligation to make Revolving Loans hereunder; provided, however, that the failure of any Lender to fulfill its obligations hereunder shall not relieve any other Lender of its obligations hereunder. Unless the Administrative Agent shall have been notified by any Lender prior to the date of any such Revolving Loan that such Lender does not intend to make available to the Administrative Agent its portion of the Revolving Loans to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on the date of such Revolving Loans, and the Administrative Agent in reliance upon such assumption, may (in its sole discretion but without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent, the Administrative Agent shall be able to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent will promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from the Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent at a per annum rate equal to (i) from the Borrower at the applicable rate for such Revolving Loan pursuant to the Notice of Borrowing and (ii) from a Lender at the Federal Funds Rate. (d) REDUCTIONS OF REVOLVING COMMITTED AMOUNT. Upon at least three Business Days' notice, the Borrower shall have the right to permanently reduce, without premium or penalty, all or part of the aggregate unused amount of the Revolving Committed Amount at any time or from time to time; provided that (i) each partial reduction shall be in an aggregate amount at least equal to $1,000,000 and in integral multiples of $500,000 above such amount and (ii) no reduction shall be made which would reduce the Revolving Committed Amount to an amount less than the aggregate amount of outstanding Revolving Loans plus the aggregate amount of outstanding LOC Obligations plus the aggregate amount of outstanding Synthetic Lease Obligations. Any reduction in (or termination of) the Revolving Committed Amount shall be permanent and may not be reinstated. The Administrative Agent shall immediately notify the Lenders of any reduction in the Revolving Committed Amount. (e) INTEREST. Subject to the provisions of Section 3.1, (i) BASE RATE LOANS. During such periods as Revolving Loans shall be comprised in whole or in part of Base Rate Loans, such Base Rate Loans shall bear interest at a per annum rate equal to the Adjusted Base Rate. (ii) EURODOLLAR LOANS. During such periods as Revolving Loans shall be comprised in whole or in part of Eurodollar Loans, such Eurodollar Loans shall bear interest at a per annum rate equal to the Adjusted Eurodollar Rate. 28 (f) REVOLVING NOTES. The Revolving Loans made by each Lender shall be evidenced by a duly executed promissory note of the Borrower to such Lender in an original principal amount equal to such Lender's Revolving Loan Commitment Percentage of the Revolving Committed Amount and in substantially the form of EXHIBIT 2.1(f). 2.2 LETTER OF CREDIT SUBFACILITY. (a) ISSUANCE. Subject to the terms and conditions hereof and of the LOC Documents, if any, and any other terms and conditions which the Issuing Lender may reasonably require and in reliance upon the representations and warranties set forth herein, the Issuing Lender shall from time to time upon request issue (from the Effective Date to the Maturity Date and in a form reasonably acceptable to the Issuing Lender), in Dollars, and the LOC Participants shall participate in, Letters of Credit for the account of a Credit Party; PROVIDED, HOWEVER, that (i) the aggregate amount of LOC Obligations shall not at any time exceed the LOC Committed Amount, (ii) the sum of the aggregate amount of LOC Obligations outstanding plus the Revolving Loans outstanding plus the Synthetic Lease Obligations outstanding shall not exceed the lesser of (A) the Revolving Committed Amount and (B) the Borrowing Base Assets and (iii) with respect to each individual LOC Participant, the LOC Participant's pro rata share of outstanding Revolving Loans plus its pro rata share of outstanding LOC Obligations plus its pro rata share of Synthetic Lease Obligations shall not exceed such LOC Participant's Revolving Loan Commitment Percentage of the Revolving Committed Amount. The Issuing Lender may require the issuance and expiry date of each Letter of Credit to be a Business Day. Each Letter of Credit shall be a standby letter of credit issued to support the obligations (including pension or insurance obligations), contingent or otherwise, of a Credit Party or a commercial trade letter of credit in respect of the purchase of goods and services by a Credit Party in the ordinary course of business. Except as otherwise expressly agreed upon by all the LOC Participants, no Letter of Credit shall have an original expiry date more than one year from the date of issuance, or as extended, shall have an expiry date extending beyond the Maturity Date. Each Letter of Credit shall comply with the related LOC Documents. (b) NOTICE AND REPORTS. The request for the issuance of a Letter of Credit shall be submitted to the Issuing Lender at least three Business Days prior to the requested date of issuance. The Issuing Lender will, at least quarterly and more frequently upon request, provide to the Administrative Agent for dissemination to the Lenders a detailed report specifying the Letters of Credit which are then issued and outstanding and any activity with respect thereto which may have occurred since the date of the prior report, and including therein, among other things, the account party, the beneficiary, the face amount, and the expiry date as well as any payments or expirations which may have occurred. The Issuing Lender will further provide to the Administrative Agent, promptly upon request, copies of the Letters of Credit and the other LOC Documents. Notwithstanding anything to the contrary set forth in this Credit Agreement, with respect to any Letter of Credit issued for the account of a Credit Party other than the Borrower, the Borrower shall be the actual account party for all purposes of this Credit Agreement for such Letter of Credit and the 29 Borrower shall have the reimbursement obligations hereunder with respect to such Letter of Credit. (c) PARTICIPATIONS. (i) Each LOC Participant acknowledges and confirms that it has a Participation Interest in the liability of the Issuing Lender under each Existing Letter of Credit in an amount equal to its Revolving Loan Commitment Percentage of such Existing Letters of Credit. The Borrower's reimbursement obligations in respect of each Existing Letter of Credit, and each LOC Participant's obligations in connection therewith, shall be governed by the terms of this Credit Agreement. (ii) Each LOC Participant, upon issuance of a Letter of Credit, shall be deemed to have purchased without recourse a risk participation from the Issuing Lender in such Letter of Credit and each LOC Document related thereto and the rights and obligations arising thereunder and any collateral relating thereto, in each case in an amount equal to its Revolving Loan Commitment Percentage of the obligations under such Letter of Credit, and shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and be obligated to pay to the Issuing Lender therefor and discharge when due, its Revolving Loan Commitment Percentage of the obligations arising under such Letter of Credit. Without limiting the scope and nature of each LOC Participant's participation in any Letter of Credit, to the extent that the Issuing Lender has not been reimbursed as required hereunder or under any such Letter of Credit, each such LOC Participant shall pay to the Issuing Lender its Revolving Loan Commitment Percentage of such unreimbursed drawing in same day funds on the day of notification by the Issuing Lender of an unreimbursed drawing pursuant to the provisions of subsection (d) or (e) hereof. The obligation of each LOC Participant to so reimburse the Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of a Default, an Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of the Borrower or any other Credit Party to reimburse the Issuing Lender under any Letter of Credit, together with interest as hereinafter provided. (d) REIMBURSEMENT. In the event of any drawing under any Letter of Credit, the Issuing Lender will promptly notify the Borrower. Unless the Borrower shall immediately notify the Issuing Lender of its intent to otherwise reimburse the Issuing Lender, the Borrower shall be deemed to have requested that the Lenders make a Revolving Loan in the amount of the drawing as provided in subsection (e) below on the related Letter of Credit, the proceeds of which will be used to satisfy the related reimbursement obligations. The Borrower shall reimburse the Issuing Lender on the day of drawing under any Letter of Credit with the proceeds of such Revolving Loan obtained hereunder or otherwise in same day funds as provided herein or in the LOC Documents. If the Borrower shall fail to reimburse the Issuing Lender as provided hereinabove, the unreimbursed amount of such drawing shall bear interest at a per annum rate equal to the Base Rate plus the Applicable 30 Percentage for the Base Rate Loans that are Revolving Loans plus two percent (2%). The Borrower's reimbursement obligations hereunder shall be absolute and unconditional under all circumstances irrespective of (but without waiver of) any rights of set-off, counterclaim or defense to payment the applicable account party or the Borrower may claim or have against an Issuing Lender, the Administrative Agent, the Lenders, the beneficiary of the Letter of Credit drawn upon or any other Person, including without limitation, any defense based on any failure of the applicable account party, the Borrower or any other Credit Party to receive consideration or the legality, validity, regularity or unenforceability of the Letter of Credit. The Issuing Lender will promptly notify the LOC Participants of the amount of any unreimbursed drawing and each LOC Participant shall promptly pay to the Issuing Lender, in Dollars and in immediately available funds, the amount of such LOC Participant's Revolving Loan Commitment Percentage of such unreimbursed drawing. Such payment shall be made on the day such notice is received by such Lender from the Issuing Lender if such notice is received at or before 12:00 Noon, otherwise such payment shall be made at or before 12:00 Noon on the Business Day next succeeding the day such notice is received. If such LOC Participant does not pay such amount to the Issuing Lender in full upon such request, such LOC Participant shall, on demand, pay to the Issuing Lender interest on the unpaid amount during the period from the date the LOC Participant received the notice regarding the unreimbursed drawing until such LOC Participant pays such amount to the Issuing Lender in full at a rate per annum equal to, if paid within two Business Days of the date of drawing, the Federal Funds Rate and thereafter at a rate equal to the Base Rate. Each LOC Participant's obligation to make such payment to the Issuing Lender, and the right of the Issuing Lender to receive the same, shall be absolute and unconditional, shall not be affected by any circumstance whatsoever and without regard to the termination of this Credit Agreement or the Commitments hereunder, the existence of a Default or Event of Default or the acceleration of the obligations hereunder and shall be made without any offset, abatement, withholding or reduction whatsoever. Simultaneously with the making of each such payment by a LOC Participant to the Issuing Lender, such LOC Participant shall, automatically and without any further action on the part of the Issuing Lender or such LOC Participant, acquire a participation in an amount equal to such payment (excluding the portion of such payment constituting interest owing to the Issuing Lender) in the related unreimbursed drawing portion of the LOC Obligation and in the interest thereon and in the related LOC Documents, and shall have a claim against the Borrower and the other Credit Parties with respect thereto. (e) REPAYMENT WITH REVOLVING LOANS. On any day on which the Borrower shall have requested, or been deemed to have requested, a Revolving Loan borrowing to reimburse a drawing under a Letter of Credit (as set forth in clause (d) above), the Administrative Agent shall give notice to the applicable Lenders that a Revolving Loan has been requested or deemed requested in connection with a drawing under a Letter of Credit, in which case a Revolving Loan borrowing comprised solely of Base Rate Loans (each such borrowing, a "MANDATORY BORROWING") shall be immediately made from all applicable Lenders (without giving effect to any termination of the Commitments pursuant to Section 9.2) PRO RATA based on each Lender's respective Revolving Loan Commitment Percentage and the proceeds thereof shall be paid directly to the Issuing Lender for application to the 31 respective LOC Obligations. Each such Lender hereby irrevocably agrees to make such Revolving Loans immediately upon any such request or deemed request on account of each such Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and on the same such date NOTWITHSTANDING (i) the amount of Mandatory Borrowing may not comply with the minimum amount for borrowings of Revolving Loans otherwise required hereunder, (ii) whether any conditions specified in Section 5.2 are then satisfied, (iii) whether a Default or Event of Default then exists, (iv) failure of any such request or deemed request for Revolving Loans to be made by the time otherwise required hereunder, (v) the date of such Mandatory Borrowing, or (vi) any reduction in the Revolving Committed Amount or any termination of the Commitments. In the event that any Mandatory Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower or any other Credit Party), then each such Lender hereby agrees that it shall forthwith fund (as of the date the Mandatory Borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) its Participation Interest in the outstanding LOC Obligations; PROVIDED, FURTHER, that in the event any Lender shall fail to fund its Participation Interest on the day the Mandatory Borrowing would otherwise have occurred, then the amount of such Lender's unfunded Participation Interest therein shall bear interest payable to the Issuing Lender upon demand, at the rate equal to, if paid within two Business Days of such date, the Federal Funds Rate, and thereafter at a rate equal to the Base Rate. (f) MODIFICATION AND EXTENSION. The issuance of any supplement, modification, amendment, renewal, or extensions to any Letter of Credit shall, for purposes hereof, be treated in all respects the same as the issuance of a new Letter of Credit hereunder. (g) UNIFORM CUSTOMS AND PRACTICES. The Issuing Lender may have the Letters of Credit be subject to The Uniform Customs and Practice for Documentary Credits (the "UCP") or the International Standby Practices 1998 (the "ISP98"), in either case as published as of the date of issue by the International Chamber of Commerce , in which case the UCP or ISP98, as applicable, may be incorporated therein and deemed in all respects to be a part thereof. (h) RESPONSIBILITY OF ISSUING LENDER. It is expressly understood and agreed as between the Lenders that the obligations of the Issuing Lender hereunder to the LOC Participants are only those expressly set forth in this Credit Agreement and that the Issuing Lender shall be entitled to assume that the conditions precedent set forth in Section 5.2 have been satisfied unless it shall have acquired actual knowledge that any such condition precedent has not been satisfied; provided, however, that nothing set forth in this Section 2.2 shall be deemed to prejudice the right of any LOC Participant to recover from the Issuing Lender any amounts made available by such LOC Participant to the Issuing Lender pursuant to this Section 2.2 in the event that it is determined by a court of competent jurisdiction that the payment with respect to a Letter of Credit constituted gross negligence or willful misconduct on the part of the Issuing Lender. 32 (i) CONFLICT WITH LOC DOCUMENTS. In the event of any conflict between this Credit Agreement and any LOC Document, this Credit Agreement shall govern. 2.3 INDEMNIFICATION OF ISSUING LENDER. (a) In addition to its other obligations under this Credit Agreement, the Borrower hereby agrees to protect, indemnify, pay and save the Issuing Lender harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) that the Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit or (B) the failure of the Issuing Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto Governmental Authority (all such acts or omissions, herein called "GOVERNMENT ACTS"). (b) As between the Borrower and the Issuing Lender, the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. The Issuing Lender shall not be responsible for: (A) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (C) failure of the beneficiary of a Letter of Credit to comply fully with conditions required in order to draw upon a Letter of Credit; (D) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (E) errors in interpretation of technical terms; (F) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (G) any consequences arising from causes beyond the control of the Issuing Lender, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of the Issuing Lender's rights or powers hereunder. (c) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Issuing Lender, under or in connection with any Letter of Credit or the related certificates, if taken or omitted in good faith, shall not put the Issuing Lender under any resulting liability to the Borrower or any other Credit Party. It is the intention of the parties that this Credit Agreement shall be construed and applied to protect and indemnify the Issuing Lender against any and all risks involved in the issuance of the Letters of Credit, all of which risks are hereby assumed by the Borrower, including, without 33 limitation, any and all risks of the acts or omissions, whether rightful or wrongful, of any present or future Government Acts. The Issuing Lender shall not, in any way, be liable for any failure by the Issuing Lender or anyone else to pay any drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of the Issuing Lender. (d) Nothing in this Section 2.3 is intended to limit the reimbursement obligation of the Borrower contained in Section 2.2. The obligations of the Borrower under this Section 2.3 shall survive the termination of this Credit Agreement. No act or omission of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Issuing Lender to enforce any right, power or benefit under this Credit Agreement. (e) Notwithstanding anything to the contrary contained in this Section 2.3, the Borrower shall have no obligation to indemnify the Issuing Lender in respect of any liability incurred by the Issuing Lender arising solely out of the gross negligence or willful misconduct of the Issuing Lender, as determined by a court of competent jurisdiction. (f) To the extent the Borrower does not fulfill any or all of its obligations under this Section 2.3, each LOC Participant agrees to reimburse the Issuing Lender for any losses incurred thereby ratably in accordance with each such LOC Participant's LOC Commitment Percentage. 2.4 CONTINUATIONS AND CONVERSIONS. The Borrower shall have the option, on any Business Day, to continue existing Eurodollar Loans for a subsequent Interest Period, to convert Base Rate Loans into Eurodollar Loans or to convert Eurodollar Loans into Base Rate Loans; provided, however, that (i) each such continuation or conversion must be requested by the Borrower pursuant to a written Notice of Continuation/Conversion, in the form of EXHIBIT 2.4, in compliance with the terms set forth below, (ii) except as provided in Section 3.11, Eurodollar Loans may only be continued or converted into Base Rate Loans on the last day of the Interest Period applicable thereto, (iii) Eurodollar Loans may not be continued nor may Base Rate Loans be converted into Eurodollar Loans during the existence and continuation of a Default or an Event of Default and (iv) any request to continue a Eurodollar Loan that fails to comply with the terms hereof or any failure to request a continuation of a Eurodollar Loan at the end of an Interest Period shall constitute a conversion to a Base Rate Loan on the last day of the applicable Interest Period. Each continuation or conversion must be requested by the Borrower no later than 11:00 a.m. (A) on the date for a requested conversion of a Eurodollar Loan to a Base Rate Loan or (B) three Business Days prior to the date for a requested continuation of a Eurodollar Loan or conversion of a Base Rate Loan to a Eurodollar Loan, in each case pursuant to a written Notice of Continuation/Conversion submitted to the Administrative Agent which shall set forth (x) whether the Borrower wishes to continue or convert such Loans and (y) if the request is to continue a Eurodollar Loan or convert a Base Rate Loan to a Eurodollar Loan, the Interest Period applicable thereto. 34 2.5 MINIMUM AMOUNTS. Each request for a borrowing, conversion or continuation shall be subject to the requirements that (a) each Eurodollar Loan shall be in a minimum amount of $1,000,000 and in integral multiples of $100,000 in excess thereof, (b) each Base Rate Loan shall be in a minimum amount of the lesser of $500,000 (and integral multiples of $100,000 in excess thereof) or the remaining amount available under the Revolving Committed Amount and (c) no more than six (6) Eurodollar Loans shall be outstanding hereunder at any one time. For the purposes of this Section, all Eurodollar Loans with the same Interest Periods that begin and end on the same date shall be considered as one Eurodollar Loan, but Eurodollar Loans with different Interest Periods, even if they begin on the same date, shall be considered as separate Eurodollar Loans. 2.6 MODIFICATION OF BORROWING BASE. Upon receipt of the results from the asset field examination required pursuant to Section 7.15(b), the Required Lenders shall have the right, in their sole reasonable discretion, to modify the percentages set forth in the definition of Borrowing Base Assets and/or to amend or modify the definitions of Eligible Inventory and Eligible Receivables in a manner consistent with the results from such asset field examination. SECTION 3 GENERAL PROVISIONS APPLICABLE TO LOANS AND LETTERS OF CREDIT 3.1 INTEREST. (a) DEFAULT RATE OF INTEREST. Upon the occurrence, and during the continuance, of an Event of Default, the principal of and, to the extent permitted by law, interest on the Loans and any other amounts owing hereunder or under the other Credit Documents (including without limitation fees and expenses) shall bear interest, payable on demand, at a per annum rate equal to 2% plus the rate which would otherwise be applicable (or if no rate is applicable, then the rate for Revolving Loans that are Base Rate Loans plus two percent (2%) per annum). (b) INTEREST PAYMENTS. Interest on Loans shall be due and payable in arrears on each Interest Payment Date. If an Interest Payment Date falls on a date which is not a Business Day, such Interest Payment Date shall be deemed to be the next succeeding Business Day, except that in the case of Eurodollar Loans where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding day. 35 3.2 PLACE AND MANNER OF PAYMENTS. All payments of principal, interest, fees, expenses and other amounts to be made by a Credit Party under this Credit Agreement shall be made without setoff, deduction or counterclaim and received not later than 2:00 p.m. on the date when due, in Dollars and in immediately available funds, by the Administrative Agent at its offices in Charlotte, North Carolina. Payments received after such time shall be deemed to have been received on the next Business Day. The Borrower shall, at the time it makes any payment under this Credit Agreement, specify to the Administrative Agent, the Loans, Letters of Credit, fees or other amounts payable by the Borrower hereunder to which such payment is to be applied (and in the event that it fails to specify, or if such application would be inconsistent with the terms hereof, the Administrative Agent shall, subject to Section 3.7, distribute such payment to the Lenders in such manner as the Administrative Agent may deem appropriate). The Administrative Agent will distribute such payments to the applicable Lenders on the same Business Day if any such payment is received prior to 2:00 p.m.; otherwise the Administrative Agent will distribute such payment to the applicable Lenders on the next succeeding Business Day. Whenever any payment hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (subject to accrual of interest and fees for the period of such extension), except that in the case of Eurodollar Loans, if the extension would cause the payment to be made in the next following calendar month, then such payment shall instead be made on the next preceding Business Day. 3.3 PREPAYMENTS. (a) VOLUNTARY PREPAYMENTS. The Borrower shall have the right to prepay Loans in whole or in part from time to time without premium or penalty; provided, however, that (i) Eurodollar Loans may only be prepaid on three Business Days' prior written notice to the Administrative Agent and (ii) each such partial prepayment of Loans shall be in the minimum principal amount of $1,000,000 and integral multiples of $500,000 in excess thereof. All prepayments under this Section shall be subject to Section 3.14 and be accompanied by interest on the principal amount prepaid through the date of prepayment. (b) MANDATORY PREPAYMENTS. (i) REVOLVING COMMITTED AMOUNT. If at any time the sum of the aggregate amount of Revolving Loans outstanding plus LOC Obligations outstanding plus the Synthetic Lease Obligations outstanding exceeds the lesser of (A) the Revolving Committed Amount and (B) the Borrowing Base Assets, the Borrower shall immediately make a principal payment to the Administrative Agent in the manner and in an amount such that the sum of the aggregate amount of Revolving Loans outstanding plus LOC Obligations outstanding plus the Synthetic Lease Obligations outstanding is less than or equal to the lesser of (A) Revolving Committed Amount and (B) the Borrowing Base Assets (to be applied as set forth in Section 3.3(c) below). 36 (ii) ASSET SALES. Immediately upon receipt by a Credit Party or any of its Subsidiaries of proceeds from any Asset Disposition, the Borrower shall forward an amount equal to 100% of the Net Cash Proceeds of such Asset Disposition to the Lenders as a prepayment of the Loans (to be applied as set forth in Section 3.3(c) below). (iii) ISSUANCES OF EQUITY. Immediately upon receipt by a Credit Party or any of its Subsidiaries of proceeds from any Equity Issuance, the Borrower shall forward 100% of the Net Cash Proceeds of such Equity Issuance to the Lenders as a prepayment of the Loans (to be applied as set forth in Section 3.3(c) below). (iv) ISSUANCE OF DEBT. Immediately upon receipt by a Credit Party or any of its Subsidiaries of proceeds from any Debt Issuance, the Borrower shall forward 100% of the Net Cash Proceeds of such Debt Issuance to the Lenders as a prepayment of the Loans (to be applied as set forth in Section 3.3(c) below). (c) APPLICATION OF PREPAYMENTS. All amounts required to be paid pursuant to Section 3.3(b)(i) shall be applied FIRST to Revolving Loans and SECOND to a cash collateral account in respect of LOC Obligations. All amounts required to be paid pursuant to Sections 3.3(b)(ii), (iii) and (iv) above shall be applied FIRST to the Revolving Loans (with a corresponding permanent reduction in the Revolving Committed Amount) and SECOND, to a cash collateral account in respect of LOC Obligations. Within the parameters of the applications set forth above, prepayments shall be applied first to Base Rate Loans and then to Eurodollar Loans in direct order of Interest Period maturities. All prepayments hereunder shall be subject to Section 3.14 and shall be accompanied by interest on the principal amount prepaid through the date of prepayment. 3.4 FEES. (a) COMMITMENT FEES. In consideration of the Revolving Committed Amount being made available by the Lenders hereunder, the Borrower agrees to pay to the Administrative Agent, for the pro rata benefit of each Lender (based on each Lender's Revolving Loan Commitment Percentage of the Revolving Committed Amount), a per annum fee equal to the Applicable Percentage for Commitment Fees multiplied by the Revolving Loan Unused Commitment (the "COMMITMENT FEES"). The Commitment Fees shall commence to accrue on the Effective Date and shall be due and payable in arrears on the last day of each fiscal quarter of the Borrower (as well as on the Maturity Date and on any date that the Revolving Committed Amount is reduced) for the immediately preceding fiscal quarter (or portion thereof), beginning with the first of such dates to occur after the Closing Date. (b) STANDBY LETTER OF CREDIT FEE. In consideration of the issuance of standby Letters of Credit hereunder, the Borrower agrees to pay to the Issuing Lender for the pro rata benefit of each Lender (based on each Lender's Revolving Loan Commitment Percentage of the Revolving Committed Amount), a per annum fee (the "STANDBY LETTER OF CREDIT FEES") 37 equal to the Applicable Percentage for the Standby Letter of Credit Fees on the average daily maximum amount available to be drawn under each such Letter of Credit from the date of issuance to the date of expiration. The Standby Letter of Credit Fees will be payable in arrears on the last day of each fiscal quarter of the Borrower (as well as on the Maturity Date) for the immediately preceding fiscal quarter (or portion thereof), beginning with the first of such dates to occur after the Closing Date. (c) TRADE LETTER OF CREDIT FEE. In consideration of the issuance of trade Letters of Credit hereunder, the Borrower agrees to pay to the Issuing Lender for the pro rata benefit of each Lender (based on each Lender's Revolving Loan Commitment Percentage of the Revolving Committed Amount) a per annum fee (the "TRADE LETTER OF CREDIT FEES") equal to the Applicable Percentage for the Trade Letter of Credit Fees on the average daily maximum amount available to be drawn under each such Letter of Credit from the date of issuance to the date of expiration. The Trade Letter of Credit Fees will be payable in arrears on the last day of each fiscal quarter of the Borrower (as well as on the Maturity Date) for the immediately preceding fiscal quarter (or portion thereof), beginning with the first of such dates to occur after the Closing Date. (d) ISSUING LENDER FEES. In addition to the Standby Letter of Credit Fees payable pursuant to clause (b) above and the Trade Letter of Credit Fees payable pursuant to clause (c) above, the Borrower shall pay to the Issuing Lender for its own account, without sharing by the other Lenders, (i) the customary charges from time to time to the Issuing Lender for its services in connection with the issuance, amendment, payment, transfer, administration, cancellation and conversion of, and drawings under, Letters of Credit, and (ii) a letter of credit fronting fee of 0.125% of the face amount of each Letter of Credit (collectively, the "ISSUING LENDER FEES"). (e) ADMINISTRATIVE FEES. The Borrower agrees to pay to the Administrative Agent, for its own account, an annual fee in accordance with the terms of the Fee Letter. (f) REPURCHASE EVENT FEE. Upon the occurrence of a Repurchase Event, the Borrower agrees to pay to the Administrative Agent for the pro rata benefit of each Lender (based on each Lender's Revolving Loan Commitment Percentage of the Revolving Committed Amount) a fee equal to 0.75% of the Revolving Committed Amount (the "REPURCHASE EVENT FEE"); provided, however, if (i) the Repurchase Event occurs after July 31, 1999 and (ii) EBITDAR of the Borrower and its Subsidiaries for the twelve month period ending as of the last day of the most recent fiscal quarter of the Borrower prior to such Repurchase Event is at least $67.5 million, then the Repurchase Event Fee shall be equal to 0.375% of the Revolving Committed Amount. (g) ACCELERATION EVENT FEE. Upon the occurrence of an Acceleration Event, the Borrower agrees to pay to the Administrative Agent for the pro rata benefit of each Lender (based on each Lender's Revolving Loan Commitment Percentage of the Revolving Committed Amount) a fee equal to 0.75% of the Revolving Committed Amount (the "ACCELERATION EVENT FEE"); provided, however, if (i) the Acceleration Event occurs after 38 July 31, 1999 and (ii) EBITDAR of the Borrower and its Subsidiaries for the twelve month period ending as of the last day of the most recent fiscal quarter of the Borrower prior to such Acceleration Event is at least $67.5 million, then the Acceleration Event Fee shall only be equal to 0.375% of the Revolving Committed Amount. 3.5 PAYMENT IN FULL AT MATURITY. On the Maturity Date, the entire outstanding principal balance of all Loans and all LOC Obligations, together with accrued but unpaid interest and all other sums owing with respect thereto, shall be due and payable in full, unless accelerated sooner pursuant to Section 9.2. 3.6 COMPUTATIONS OF INTEREST AND FEES. (a) Except for Base Rate Loans, in which case interest shall be computed on the basis of a 365 or 366 day year as the case may be, all computations of interest and fees hereunder shall be made on the basis of the actual number of days elapsed over a year of 360 days. Interest shall accrue from and include the date of borrowing (or continuation or conversion) but exclude the date of payment. (b) It is the intent of the Lenders and the Credit Parties to conform to and contract in strict compliance with applicable usury law from time to time in effect. All agreements between the Lenders and the Credit Parties are hereby limited by the provisions of this paragraph which shall override and control all such agreements, whether now existing or hereafter arising and whether written or oral. In no way, nor in any event or contingency (including but not limited to prepayment or acceleration of the maturity of any obligation), shall the interest taken, reserved, contracted for, charged, or received under this Credit Agreement, under the Notes or otherwise, exceed the maximum nonusurious amount permissible under applicable law. If, from any possible construction of any of the Credit Documents or any other document, interest would otherwise be payable in excess of the maximum nonusurious amount, any such construction shall be subject to the provisions of this paragraph and such documents shall be automatically reduced to the maximum nonusurious amount permitted under applicable law, without the necessity of execution of any amendment or new document. If any Lender shall ever receive anything of value which is characterized as interest on the Loans under applicable law and which would, apart from this provision, be in excess of the maximum lawful amount, an amount equal to the amount which would have been excessive interest shall, without penalty, be applied to the reduction of the principal amount owing on the Loans and not to the payment of interest, or refunded to the Borrower or the other payor thereof if and to the extent such amount which would have been excessive exceeds such unpaid principal amount of the Loans. The right to demand payment of the Loans or any other indebtedness evidenced by any of the Credit Documents does not include the right to accelerate the payment of any interest which has not otherwise accrued on the date of such demand, and the Lenders do not intend to charge or receive any unearned interest in the event of such demand. All interest paid or agreed to be paid to the Lenders with respect to the Loans shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term (including 39 any renewal or extension) of the Loans so that the amount of interest on account of such indebtedness does not exceed the maximum nonusurious amount permitted by applicable law. 3.7 PRO RATA TREATMENT. Except to the extent otherwise provided herein: (a) LOANS. Each Revolving Loan borrowing (including, without limitation, each Mandatory Borrowing), each payment or prepayment of principal of any Loan, each payment of fees (other than the Issuing Lender Fees retained by the Issuing Lender for its own account and the fees retained by the Administrative Agent for its own account), each reduction of the Revolving Committed Amount, and each conversion or continuation of any Loan, shall (except as otherwise provided in Section 3.11) be allocated pro rata among the relevant Lenders in accordance with the respective Revolving Loan Commitment Percentages of such Lenders (or, if the Commitments of such Lenders have expired or been terminated, in accordance with the respective principal amounts of the outstanding Loans and Participation Interests of such Lenders); PROVIDED that, if any Lender shall have failed to pay its applicable pro rata share of any Revolving Loan, then any amount to which such Lender would otherwise be entitled pursuant to this subsection (a) shall instead be payable to the Administrative Agent until the share of such Loan not funded by such Lender has been repaid; PROVIDED FURTHER, that in the event any amount paid to any Lender pursuant to this subsection (a) is rescinded or must otherwise be returned by the Administrative Agent, each Lender shall, upon the request of the Administrative Agent, repay to the Administrative Agent the amount so paid to such Lender, with interest for the period commencing on the date such payment is returned by the Administrative Agent until the date the Administrative Agent receives such repayment at a rate per annum equal to, during the period to but excluding the date two Business Days after such request, the Federal Funds Rate, and thereafter, the Base Rate PLUS two percent (2%) per annum; and (b) LETTERS OF CREDIT. Each payment of unreimbursed drawings in respect of LOC Obligations shall be allocated to each LOC Participant pro rata in accordance with its Revolving Loan Commitment Percentage; PROVIDED that, if any LOC Participant shall have failed to pay its applicable pro rata share of any drawing under any Letter of Credit, then any amount to which such LOC Participant would otherwise be entitled pursuant to this subsection (b) shall instead be payable to the Issuing Lender until the share of such unreimbursed drawing not funded by such Lender has been repaid; PROVIDED FURTHER, that in the event any amount paid to any LOC Participant pursuant to this subsection (b) is rescinded or must otherwise be returned by the Issuing Lender, each LOC Participant shall, upon the request of the Issuing Lender, repay to the Administrative Agent for the account of the Issuing Lender the amount so paid to such LOC Participant, with interest for the period commencing on the date such payment is returned by the Issuing Lender until the date the Issuing Lender receives such repayment at a rate per annum equal to, during the period to but excluding the date two Business Days after such request, the Federal Funds Rate, and thereafter, the Base Rate PLUS two percent (2%) per annum. 40 3.8 SHARING OF PAYMENTS. The Lenders agree among themselves that, except to the extent otherwise provided herein, in the event that any Lender shall obtain payment in respect of any Loan, unreimbursed drawing with respect to any LOC Obligations or any other obligation owing to such Lender under this Credit Agreement through the exercise of a right of setoff, banker's lien or counterclaim, or pursuant to a secured claim under Section 506 of the Bankruptcy Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, in excess of its pro rata share of such payment as provided for in this Credit Agreement, such Lender shall promptly pay in cash or purchase from the other Lenders a participation in such Loans, LOC Obligations, and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all Lenders share such payment in accordance with their respective ratable shares as provided for in this Credit Agreement. The Lenders further agree among themselves that if payment to a Lender obtained by such Lender through the exercise of a right of setoff, banker's lien, counterclaim or other event as aforesaid shall be rescinded or must otherwise be restored, each Lender which shall have shared the benefit of such payment shall, by payment in cash or a repurchase of a participation theretofore sold, return its share of that benefit (together with its share of any accrued interest payable with respect thereto) to each Lender whose payment shall have been rescinded or otherwise restored. The Borrower agrees that any Lender so purchasing such a participation may, to the fullest extent permitted by law, exercise all rights of payment, including setoff, banker's lien or counterclaim, with respect to such participation as fully as if such Lender were a holder of such Loan, LOC Obligation or other obligation in the amount of such participation. Except as otherwise expressly provided in this Credit Agreement, if any Lender or the Administrative Agent shall fail to remit to the Administrative Agent or any other Lender an amount payable by such Lender or such Administrative Agent to the Administrative Agent or such other Lender pursuant to this Credit Agreement on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Administrative Agent or such other Lender at a rate per annum equal to the Federal Funds Rate. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section 3.8 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders under this Section 3.8 to share in the benefits of any recovery on such secured claim. 3.9 CAPITAL ADEQUACY. If, after the date hereof, any Lender has determined that the adoption or the becoming effective of, or any change in, or any change by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof in the interpretation or administration of, any applicable law, rule or regulation regarding capital adequacy, or compliance by such Lender, or its parent corporation, with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's (or parent 41 corporation's) capital or assets as a consequence of its commitments or obligations hereunder to a level below that which such Lender, or its parent corporation, could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's (or parent corporation's) policies with respect to capital adequacy), then, upon notice from such Lender to the Borrower, the Borrower shall be obligated to pay to such Lender such additional amount or amounts as will compensate such Lender on an after-tax basis (after taking into account applicable deductions and credits in respect of the amount indemnified) for such reduction. Each determination by any such Lender of amounts owing under this Section shall, absent manifest error, be conclusive and binding on the parties hereto. This covenant shall survive the termination of this Credit Agreement and the payment of the Loans and all other amounts payable hereunder. 3.10 INABILITY TO DETERMINE INTEREST RATE. If prior to the first day of any Interest Period, the Administrative Agent shall have determined in good faith (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter, and will also give prompt written notice to the Borrower when such conditions no longer exist. If such notice is given (a) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as Base Rate Loans, (b) any Loans that were to have been converted on the first day of such Interest Period to or continued as Eurodollar Loans shall be converted to or continued as Base Rate Loans and (c) any outstanding Eurodollar Loans shall be converted, on the first day of such Interest Period, to Base Rate Loans. Until such notice is withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Base Rate Loans to Eurodollar Loans. 3.11 ILLEGALITY. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof occurring after the Closing Date shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Credit Agreement, (a) such Lender shall promptly give written notice of such circumstances to the Borrower and the Administrative Agent (which notice shall be withdrawn whenever such circumstances no longer exist), (b) the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert a Base Rate Loan to Eurodollar Loans shall forthwith be canceled and, until such time as it shall no longer be unlawful for such Lender to make or maintain Eurodollar Loans, such Lender shall then have a commitment only to make a Base Rate Loan when a Eurodollar Loan is requested and (c) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans on the respective last days or the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 3.14. 42 3.12 REQUIREMENTS OF LAW. If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof applicable to any Lender, or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority, in each case made subsequent to the Closing Date (or, if later, the date on which such Lender becomes a Lender): (a) shall subject such Lender to any tax of any kind whatsoever with respect to any Letter of Credit, any Eurodollar Loans made by it or its obligation to make Eurodollar Loans, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 3.13 (including Non-Excluded Taxes imposed solely by reason of any failure of such Lender to comply with its obligations under Section 3.13(b)) and changes in taxes measured by or imposed upon the overall net income, or franchise tax (imposed in lieu of such net income tax), of such Lender or its applicable lending office, branch, or any affiliate thereof); (b) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (c) shall impose on such Lender any other condition (excluding any tax of any kind whatsoever); and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or issuing or participating in Letters of Credit or to reduce any amount receivable hereunder in respect thereof, then, in any such case, upon notice to the Borrower from such Lender, through the Administrative Agent, in accordance herewith, the Borrower shall be obligated to promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender on an after-tax basis (after taking into account applicable deductions and credits in respect of the amount indemnified) for such increased cost or reduced amount receivable, PROVIDED that, in any such case, the Borrower may elect to convert the Eurodollar Loans made by such Lender hereunder to Base Rate Loans by giving the Administrative Agent at least one Business Day's notice of such election, in which case the Borrower shall promptly pay to such Lender, upon demand, without duplication, such amounts, if any, as may be required pursuant to Section 3.14. If any Lender becomes entitled to claim any additional amounts pursuant to this Section 3.12, it shall provide prompt notice thereof to the Borrower, through the Administrative Agent, certifying (x) that one of the events described in this Section 3.12 has occurred and describing in reasonable detail the nature of such event, (y) as to the increased cost or reduced amount resulting from such event and (z) as to the additional amount demanded by such Lender and a reasonably detailed explanation of the calculation thereof. Such a certificate as to any additional amounts payable pursuant to this Section 3.12 submitted by such Lender, through the Administrative Agent, to the Borrower shall be conclusive and binding on the 43 parties hereto in the absence of manifest error. This covenant shall survive the termination of this Credit Agreement and the payment of the Loans and all other amounts payable hereunder. 3.13 TAXES. (a) Except as provided below in this Section 3.13, all payments made by the Borrower under this Credit Agreement and any Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any court, or governmental body, agency or other official, excluding taxes measured by or imposed upon the net income of any Lender or its applicable lending office, or any branch or affiliate thereof, and all franchise taxes, branch taxes, taxes on doing business or taxes on the capital or net worth of any Lender or its applicable lending office, or any branch or affiliate thereof, in each case imposed in lieu of net income taxes: (i) by the jurisdiction under the laws of which such Lender, applicable lending office, branch or affiliate is organized or is located, or in which its principal executive office is located, or any nation within which such jurisdiction is located or any political subdivision thereof; or (ii) by reason of any connection between the jurisdiction imposing such tax and such Lender, applicable lending office, branch or affiliate other than a connection arising solely from such Lender having executed, delivered or performed its obligations, or received payment under or enforced, this Credit Agreement or any Notes. If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("NON-EXCLUDED TAXES") are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder or under any Notes, (A) the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Credit Agreement and any Notes, PROVIDED, HOWEVER, that the Borrower shall be entitled to deduct and withhold any Non-Excluded Taxes and shall not be required to increase any such amounts payable to any Lender that is not organized under the laws of the United States of America or a state thereof if such Lender fails to comply with the requirements of paragraph (b) of this Section 3.13 whenever any Non-Excluded Taxes are payable by the Borrower, and (B) as promptly as possible after requested the Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and any Lender for any incremental Non-Excluded Taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. The agreements in this subsection shall survive the termination of this Credit Agreement and the payment of the Loans and all other amounts payable hereunder. 44 (b) Each Lender that is not incorporated under the laws of the United States of America or a state thereof shall: (i) (A) on or before the date of any payment by the Borrower under this Credit Agreement or Notes to such Lender, deliver to the Borrower and the Administrative Agent (x) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, certifying that it is entitled to receive payments under this Credit Agreement and any Notes without deduction or withholding of any United States federal income taxes and (y) an Internal Revenue Service Form W-8 or W-9, or successor applicable form, as the case may be, certifying that it is entitled to an exemption from United States backup withholding tax; (B) deliver to the Borrower and the Administrative Agent two further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (C) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Borrower or the Administrative Agent; or (ii) in the case of any such Lender that is not a "bank" within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (A) represent to the Borrower (for the benefit of the Borrower and the Administrative Agent) that it is not a bank within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (B) agree to furnish to the Borrower, on or before the date of any payment by the Borrower, with a copy to the Administrative Agent, two accurate and complete original signed copies of Internal Revenue Service Form W-8, or successor applicable form certifying to such Lender's legal entitlement at the date of such certificate to an exemption from U.S. withholding tax under the provisions of Section 881(c) of the Internal Revenue Code with respect to payments to be made under this Credit Agreement and any Notes (and to deliver to the Borrower and the Administrative Agent two further copies of such form on or before the date it expires or becomes obsolete and after the occurrence of any event requiring a change in the most recently provided form and, if necessary, obtain any extensions of time reasonably requested by the Borrower or the Administrative Agent for filing and completing such forms), and (C) agree, to the extent legally entitled to do so, upon reasonable request by the Borrower, to provide to the Borrower (for the benefit of the Borrower and the Administrative Agent) such other forms as may be reasonably required in order to establish the legal entitlement of such Lender to an exemption from withholding with respect to payments under this Credit Agreement and any Notes. 45 Notwithstanding the above, if any change in treaty, law or regulation has occurred after the date such Person becomes a Lender hereunder which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Administrative Agent, then such Lender shall be exempt from such requirements. Each Person that shall become a Lender or a participant of a Lender pursuant to Section 11.3 shall, upon the effectiveness of the related transfer, be required to provide all of the forms, certifications and statements required pursuant to this subsection (b); PROVIDED that in the case of a participant of a Lender, the obligations of such participant of a Lender pursuant to this subsection (b) shall be determined as if the participant of a Lender were a Lender except that such participant of a Lender shall furnish all such required forms, certifications and statements to the Lender from which the related participation shall have been purchased. 3.14 COMPENSATION. The Borrower promises to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Credit Agreement, (b) default by the Borrower in making any prepayment of a Eurodollar Loan after the Borrower has given a notice thereof in accordance with the provisions of this Credit Agreement and (c) the making of a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Eurodollar Loans provided for herein (excluding, however, the Applicable Percentage included therein, if any) minus (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. The agreements in this Section shall survive the termination of this Credit Agreement and the payment of the Loans and all other amounts payable hereunder. 3.15 EVIDENCE OF DEBT. (a) Each Lender shall maintain an account or accounts evidencing each Loan made by such Lender to the Borrower from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Credit Agreement. Each Lender will make reasonable efforts to maintain the accuracy of its account or accounts and to promptly update its account or accounts from time to time, as necessary. (b) The Administrative Agent shall maintain the Register pursuant to Section 11.3(c), and a subaccount for each Lender, in which Register and subaccounts (taken together) shall be recorded (i) the amount, type and Interest Period of each such Loan hereunder, (ii) the amount of 46 any principal or interest due and payable or to become due and payable to each Lender hereunder, and (iii) the amount of any sum received by the Administrative Agent hereunder from or for the account of the Borrower and each Lender's share thereof, if any. The Administrative Agent will make reasonable efforts to maintain the accuracy of the subaccounts referred to in the preceding sentence and to promptly update such subaccounts from time to time, as necessary. (c) The entries made in the accounts, Register and subaccounts maintained pursuant to subsection (b) of this Section 3.16 (and, if consistent with the entries of the Administrative Agent, subsection (a)) shall be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; PROVIDED, HOWEVER, that the failure of any Lender or the Administrative Agent to maintain such account, such Register, or such subaccount, as applicable, or any error therein, shall not in any manner affect the obligation of the Borrower to repay the Loans made by such Lender in accordance with the terms hereof. 3.16 REPLACEMENT OF LENDERS. In the event any Lender delivers to the Borrower any notice in accordance with Section 3.9, 3.11 or 3.12, then the Borrower shall have the right, if no Default or Event of Default then exists, to replace such Lender (the "REPLACED LENDER") with one or more additional banks or financial institutions (collectively, the "REPLACEMENT LENDER"), PROVIDED, that (a) the Replacement Lender is acceptable to the Administrative Agent, (b) at the time of any replacement pursuant to this Section 3.16, the Replacement Lender shall enter into one or more Assignment and Acceptance agreements pursuant to, and in accordance with the terms of, Section 11.3(b) (and with all processing and recordation fees payable pursuant to said Section 11.3(b) to be paid by the Replacement Lender or, at its option, the Borrower) pursuant to which the Replacement Lender shall acquire all of the rights and obligations of the Replaced Lender hereunder and, in connection therewith, shall pay to the Replaced Lender in respect thereof an amount equal to the sum of (i) the principal of, and all accrued interest on, all outstanding Loans of the Replaced Lender, and (ii) all accrued, but theretofore unpaid, fees owing to the Replaced Lender pursuant to Section 3.4, (c) all other obligations of the Borrower owing to the Replaced Lender (including all other obligations, if any, owing pursuant to Sections 3.9, 3.11 and 3.12) shall be paid in full to such Replaced Lender concurrently with such replacement and (d) the Administrative Agent and the Lenders shall not be obligated to assist the Borrower in identifying any Replacement Lender. SECTION 4 GUARANTY 4.1 GUARANTY OF PAYMENT. Subject to Section 4.7 below, each of the Guarantors hereby, jointly and severally, unconditionally guarantees to each Lender, each Affiliate of Lender that enters into a Hedging Agreement and the Administrative Agent the prompt payment of the Credit Party Obligations in 47 full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise). This Guaranty is a guaranty of payment and not of collection and is a continuing guaranty and shall apply to all Credit Party Obligations whenever arising. 4.2 OBLIGATIONS UNCONDITIONAL. The obligations of the Guarantors hereunder are absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of any of the Credit Documents or the Hedging Agreements, or any other agreement or instrument referred to therein, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor. Each Guarantor agrees that this Guaranty may be enforced by the Lenders without the necessity at any time of resorting to or exhausting any other security or collateral and without the necessity at any time of having recourse to the Notes or any other of the Credit Documents or any collateral, if any, hereafter securing the Credit Party Obligations or otherwise and each Guarantor hereby waives the right to require the Lenders to proceed against the Borrower or any other Person (including a co-guarantor) or to require the Lenders to pursue any other remedy or enforce any other right. Each Guarantor further agrees that it shall have no right of subrogation, indemnity, reimbursement or contribution against the Borrower or any other Guarantor of the Credit Party Obligations for amounts paid under this Guaranty until such time as the Lenders (and any Affiliates of Lenders entering into Hedging Agreements) have been paid in full, all Commitments under the Credit Agreement have been terminated and no Person or Governmental Authority shall have any right to request any return or reimbursement of funds from the Lenders in connection with monies received under the Credit Documents. Each Guarantor further agrees that nothing contained herein shall prevent the Lenders from suing on the Notes or any of the other Credit Documents or any of the Hedging Agreements or foreclosing its security interest in or Lien on any collateral, if any, securing the Credit Party Obligations or from exercising any other rights available to it under this Credit Agreement, the Notes, any other of the Credit Documents, or any other instrument of security, if any, and the exercise of any of the aforesaid rights and the completion of any foreclosure proceedings shall not constitute a discharge of any of any Guarantor's obligations hereunder; it being the purpose and intent of each Guarantor that its obligations hereunder shall be absolute, independent and unconditional under any and all circumstances. Neither any Guarantor's obligations under this Guaranty nor any remedy for the enforcement thereof shall be impaired, modified, changed or released in any manner whatsoever by an impairment, modification, change, release or limitation of the liability of the Borrower or by reason of the bankruptcy or insolvency of the Borrower. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Credit Party Obligations and notice of or proof of reliance of by the Administrative Agent or any Lender upon this Guarantee or acceptance of this Guarantee. The Credit Party Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guarantee. All dealings between the Borrower and any of the Guarantors, on the one hand, and the Administrative Agent and the Lenders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Guarantee. The Guarantors further agree to all rights of set-off as set forth in Section 11.2. 48 4.3 MODIFICATIONS. Each Guarantor agrees that (a) all or any part of the Collateral now or hereafter held for the Credit Party Obligations, if any, may be exchanged, compromised or surrendered from time to time; (b) the Lenders shall not have any obligation to protect, perfect, secure or insure any such security interests, liens or encumbrances now or hereafter held, if any, for the Credit Party Obligations or the properties subject thereto; (c) the time or place of payment of the Credit Party Obligations may be changed or extended, in whole or in part, to a time certain or otherwise, and may be renewed or accelerated, in whole or in part; (d) the Borrower and any other party liable for payment under the Credit Documents may be granted indulgences generally; (e) any of the provisions of the Notes or any of the other Credit Documents may be modified, amended or waived; (f) any party (including any co-guarantor) liable for the payment thereof may be granted indulgences or be released; and (g) any deposit balance for the credit of the Borrower or any other party liable for the payment of the Credit Party Obligations or liable upon any security therefor may be released, in whole or in part, at, before or after the stated, extended or accelerated maturity of the Credit Party Obligations, all without notice to or further assent by such Guarantor, which shall remain bound thereon, notwithstanding any such exchange, compromise, surrender, extension, renewal, acceleration, modification, indulgence or release. 4.4 WAIVER OF RIGHTS. Each Guarantor expressly waives to the fullest extent permitted by applicable law: (a) notice of acceptance of this Guaranty by the Lenders and of all extensions of credit to the Borrower by the Lenders; (b) presentment and demand for payment or performance of any of the Credit Party Obligations; (c) protest and notice of dishonor or of default (except as specifically required in the Credit Agreement) with respect to the Credit Party Obligations or with respect to any security therefor; (d) notice of the Lenders obtaining, amending, substituting for, releasing, waiving or modifying any security interest, lien or encumbrance, if any, hereafter securing the Credit Party Obligations, or the Lenders' subordinating, compromising, discharging or releasing such security interests, liens or encumbrances, if any; (e) all other notices to which such Guarantor might otherwise be entitled; and (f) demand for payment under this Guaranty. 4.5 REINSTATEMENT. The obligations of the Guarantors under this Section 4 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Credit Party Obligations is rescinded or must be otherwise restored by any holder of any of the Credit Party Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Administrative Agent and each Lender on demand for all reasonable costs and expenses (including, without limitation, reasonable fees of counsel) incurred by the Administrative Agent or such Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 49 4.6 REMEDIES. The Guarantors agree that, as between the Guarantors, on the one hand, and the Administrative Agent and the Lenders, on the other hand, the Credit Party Obligations may be declared to be forthwith due and payable as provided in Section 9 (and shall be deemed to have become automatically due and payable in the circumstances provided in Section 9) notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing such Credit Party Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or such Credit Party Obligations being deemed to have become automatically due and payable), such Credit Party Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantors. The Guarantors acknowledge and agree that their obligations hereunder are secured in accordance with the terms of the Security Agreements and the other Collateral Documents and that the Lenders may exercise their remedies thereunder in accordance with the terms thereof. 4.7 LIMITATION OF GUARANTY. Notwithstanding any provision to the contrary contained herein or in any of the other Credit Documents, to the extent the obligations of any Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder shall be limited to the maximum amount that is permissible under applicable law (whether federal or state and including, without limitation, the Bankruptcy Code). 4.8 RIGHTS OF CONTRIBUTION. The Credit Parties agree among themselves that, in connection with payments made hereunder, each Credit Party shall have contribution rights against the other Credit Parties as permitted under applicable law. Such contribution rights shall be subordinate and subject in right of payment to the obligations of the Credit Parties under the Credit Documents and no Credit Party shall exercise such rights of contribution until all Credit Party Obligations have been paid in full and the Commitments terminated. SECTION 5 CONDITIONS PRECEDENT 5.1 CLOSING CONDITIONS. The obligation of the Lenders to enter into this Credit Agreement and make the initial Extension of Credit is subject to satisfaction (or waiver by each of the Lenders) of the following conditions: 50 (a) EXECUTED CREDIT DOCUMENTS. Receipt by the Administrative Agent of duly executed copies of: (i) this Credit Agreement; (ii) the Notes; (iii) the Collateral Documents; and (iv) all other Credit Documents, each in form and substance reasonably acceptable to the Administrative Agent. (b) CORPORATE DOCUMENTS. With respect to each Credit Party that is a corporation, receipt by the Administrative Agent of the following: (i) CHARTER DOCUMENTS. Copies of the articles or certificates of incorporation or other charter documents of each Credit Party certified by a secretary or assistant secretary of such Credit Party to be true and correct as of the Effective Date. (ii) BYLAWS. A copy of the bylaws of each Credit Party certified by a secretary or assistant secretary of such Credit Party to be true and correct as of the Effective Date. (iii) RESOLUTIONS. Copies of resolutions of the Board of Directors of each Credit Party approving and adopting the Credit Documents to which it is a party, the transactions contemplated therein and authorizing execution and delivery thereof, certified by a secretary or assistant secretary of such Credit Party to be true and correct and in force and effect as of the Effective Date. (iv) INCUMBENCY. An incumbency certificate of each Credit Party certified by a secretary or assistant secretary to be true and correct as of the Effective Date. (c) PARTNERSHIP DOCUMENTS. With respect to each Credit Party that is a partnership, receipt by the Administrative Agent of the following: (i) AUTHORIZATION. Authorization of the general partner(s) of such Credit Party, as of the Closing Date, approving and adopting the Credit Documents to be executed by such Credit Party and authorizing the execution and delivery thereof., certified by a secretary or assistant secretary of such general partner to be true and correct as of the Closing Date. (ii) PARTNERSHIP AGREEMENTS. The partnership agreement of such Credit Party, together with all amendments thereto, certified by a secretary or assistant secretary of such general partner to be true and correct as of the Closing Date. (iii) INCUMBENCY. An incumbency certificate of the general partner(s) of such Credit Party, certified by a secretary or assistant secretary of such general partner to be true and correct as of the Closing Date. 51 (d) OPINION OF COUNSEL. Receipt by the Administrative Agent of an opinion or opinions (which shall cover, among other things, authority, legality, validity, binding effect, and enforceability of the Credit Documents and the attachment, perfection, and validity of liens), reasonably satisfactory to the Administrative Agent, addressed to the Administrative Agent and the Lenders and dated as of the Effective Date, from legal counsel to the Credit Parties. (e) FINANCIAL STATEMENTS. Receipt by the Lenders of such financial information regarding the Credit Parties as they may request, including, but not limited to, (i) the consolidated financial statements of the Credit Parties for the fiscal year 1998, including balance sheets, income statements and cash flow statements audited by independent public accountants of recognized national standing and prepared in accordance with GAAP and (ii) interim unaudited quarterly financial statements for the Credit Parties. (f) OPENING BORROWING BASE CERTIFICATE. Receipt by the Administrative Agent of a Borrowing Base Certificate, in the form of EXHIBIT 7.1(D), dated as of the Closing Date. (g) PERSONAL PROPERTY COLLATERAL. The Administrative Agent shall have received, in form and substance reasonably satisfactory to the Administrative Agent: (i) all stock certificates evidencing the stock pledged to the Administrative Agent pursuant to the Pledge Agreements, together with duly executed in blank undated stock powers attached thereto; and (ii) all instruments and chattel paper in the possession of a Credit Party, as required by the Security Agreements, together with allonges or assignments as may be necessary to perfect the Administrative Agent's security interest in such Collateral. (h) MATERIAL ADVERSE EFFECT. No material adverse change shall have occurred since January 31, 1998 in the condition (financial or otherwise), business, management or prospects of the Borrower and its Subsidiaries taken as a whole; it being understood and agreed that the adjustments for the (i) recognition of income with respect to vendor merchandising support payments and (ii) the accrual of employee benefit bonuses for the Borrower's fiscal year 1999, as such adjustments have been described to the Lenders by the Borrower and presented in any draft of the Borrower's 1999 annual financial statements provided to the Lenders, shall not constitute a material adverse change. (i) LITIGATION. There shall not exist any pending or, to the knowledge of any Credit Party, threatened action, suit, investigation or proceeding against a Credit Party or any of their Subsidiaries that would have or would reasonably be expected to have a Material Adverse Effect. 52 (j) OFFICER'S CERTIFICATES. The Administrative Agent shall have received a certificate or certificates executed by an Executive Officer of the Borrower as of the Effective Date stating that (i) except for the Indenture Default under the Indenture, the Borrower and each of its Subsidiaries are in compliance with all existing financial obligations, (ii) no action, suit, investigation or proceeding is pending or, to the knowledge of any Credit Party, threatened in any court or before any arbitrator or governmental instrumentality that purports to effect the Borrower, any of the its Subsidiaries or any transaction contemplated by the Credit Documents, if such action, suit, investigation or proceeding would have or might reasonably be expected to have a Material Adverse Effect, (iii) the financial statements and information delivered to the Administrative Agent on or before the Effective Date were prepared in good faith and in accordance with GAAP and (iv) immediately after giving effect to this Credit Agreement, the other Credit Documents and all the transactions contemplated therein to occur on such date, (A) the Borrower and each of its Subsidiaries is Solvent, (B) no Default or Event of Default exists, (C) all representations and warranties contained herein and in the other Credit Documents are true and correct in all material respects, and (D) the Credit Parties are in compliance with each of the financial covenants set forth in Section 7.2. (k) CONSENTS. Receipt of all governmental, shareholder and third party consents (including the consent, if necessary, of any existing lenders, lessors and/or bondholders of the Borrower to the extent that such indebtedness is to remain in place after the transactions contemplated hereby) and approvals necessary or, in the opinion of the Administrative Agent, desirable in connection with the transactions contemplated hereby and expiration of all applicable waiting periods without any action being taken by any authority that could restrain, prevent or impose any material adverse conditions on the transactions contemplated hereby or that could seek or threaten any of the foregoing, and no law or regulation shall be applicable which in the judgment of the Administrative Agent could have such effect. (l) PRIOR CREDIT AGREEMENT. Receipt by the Administrative Agent of (i) evidence that all obligations outstanding under the Prior Credit Agreement have been paid in full or are now evidenced by the Credit Documents and (ii) an Assignment Agreement between NationsBank and each Lender party to the Prior Credit Agreement, pursuant to which each such Lender will assign its Commitment and its rights and obligations under the Prior Credit Agreement to NationsBank. (m) WAIVER AGREEMENT. Receipt by the Administrative Agent of a waiver agreement between the Credit Parties and the Lenders, pursuant to which the Lenders agree to waive certain Events of Default under the Prior Credit Agreement; it is understood and agreed that the Assignment Agreements referenced in Section 5.1(l) shall be effective prior to giving effect to such waiver letter. (n) TROL AMENDMENT. Receipt by the Administrative Agent of an executed copy of any Amendment to the Participation or any Operative Agreement (as defined in the 53 Participation Agreement) executed in conjunction with the closing of this Credit Agreement. (o) SYNDICATION SIDE LETTER. Receipt by the Administrative Agent of the Syndication Side Letter, dated as of the date hereof, among the Borrower, the Administrative Agent and BASL (the "SYNDICATION SIDE LETTER"). (p) AVAILABILITY. The Administrative Agent shall be satisfied that (i) the amount of committed financing available to the Borrower shall be sufficient to meet the ongoing financing needs of the Borrower and its Subsidiaries and (ii) after giving effect to the initial Loans made on the Effective Date and the Letters of Credit issued on or prior to the Effective Date, there shall be at least $5,000,000 of availability existing under the Revolving Committed Amount. (q) CASH COLLATERAL ACCOUNT. Receipt by the Administrative Agent of evidence of the deposit by the Credit Parties of $35 million in the Cash Collateral Account. (r) FEES AND EXPENSES. Payment by the Credit Parties of the fees and expenses owed by them to the Administrative Agent, as set forth in the Fee Letter. (s) PRIORITY OF LIENS. The Administrative Agent shall have received satisfactory evidence that none of the Collateral is subject to any Liens other than Permitted Liens. (t) YEAR 2000. Receipt by the Administrative Agent of evidence that (a) the Borrower and its Subsidiaries are taking all necessary and appropriate steps to ascertain the extent of, and to quantify and successfully address, business and financial risks facing the Borrower and such Subsidiary as a result of what is commonly referred to as the `Year 2000 problem' (i.e., the inability of certain computer applications to recognize correctly and perform date-sensitive functions involving certain dates prior to and after December 31, 1999), including risks resulting from the failure of key vendors and customers of the Borrower or any Subsidiary to successfully address the Year 2000 problem, and (b) the Borrower and each Subsidiary's material computer applications and those of its key vendors and customers will, on a timely basis, adequately address the Year 2000 problem in all material respects. (u) OTHER. Receipt and satisfactory review by the Administrative Agent of such other documents, instruments, agreements or information as reasonably and timely requested by the Administrative Agent or any Lender, including, but not limited to, information regarding litigation, tax, accounting, labor, insurance, pension liabilities (actual or contingent), real estate leases, material contracts, debt agreements, property ownership and contingent liabilities of the Borrower and its Subsidiaries. 5.2 CONDITIONS TO ALL EXTENSIONS OF CREDIT. 54 In addition to the conditions precedent stated elsewhere herein, the Lenders shall not be obligated to make Loans nor shall an Issuing Lender be required to issue or extend a Letter of Credit unless: (a) NOTICE. The Borrower shall have delivered (i) in the case of any new Revolving Loan, a Notice of Borrowing, duly executed and completed, by the time specified in Section 2.1 and (ii) in the case of any Letter of Credit, the Issuing Lender shall have received an appropriate request for issuance in accordance with the provisions of Section 2.2; (b) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Credit Parties in any Credit Document are true and correct in all material respects at and as if made as of such date except to the extent they expressly relate to an earlier date; (c) NO DEFAULT. No Default or Event of Default shall exist or be continuing either prior to or after giving effect thereto; and (d) AVAILABILITY. Immediately after giving effect to the making of a Loan (and the application of the proceeds thereof) or to the issuance of a Letter of Credit, as the case may be, the sum of the Revolving Loans outstanding plus LOC Obligations outstanding plus the aggregate amount of Synthetic Lease Obligations outstanding shall not exceed the lesser of (i) the Revolving Committed Amount and (ii) the Borrowing Base Assets. (e) SECTION 1008 OF INDENTURE. Immediately after giving effect to the making of a Loan (and the application of the proceeds thereof) or to the issuance of a Letter of Credit, as the case may be, the Borrower and its Subsidiaries shall be in compliance with the terms of Section 1008 of the Indenture. The delivery of each Notice of Borrowing and each request for a Letter of Credit shall constitute a representation and warranty by the Borrower of the correctness of the matters specified in subsections (b), (c), (d) and (e) above. SECTION 6 REPRESENTATIONS AND WARRANTIES The Credit Parties hereby represent to the Administrative Agent and each Lender that: 6.1 FINANCIAL CONDITION. (a) The financial statements delivered to the Lenders prior to the Effective Date and pursuant to Section 7.1(a) and (b): (i) have been prepared in accordance with GAAP and (ii) present fairly the consolidated and consolidating (as applicable) financial condition, 55 results of operations and cash flows of the Credit Parties and their Subsidiaries as of such date and for such periods. (b) Since January 31, 1998, (i) there has been no sale, transfer or other disposition by any Credit Party or any of their Subsidiaries of any material part of the business or property of the Credit Parties, taken as a whole, and (ii) there has been no purchase or other acquisition by any Credit Party or any of their Subsidiaries of any business or property (including any capital stock of any other Person) material in relation to the consolidated financial condition of the Credit Parties, taken as a whole, in each case, which, is not (A) reflected in the most recent financial statements delivered to the Lenders pursuant to Section 7.1 or in the notes thereto or (B) otherwise permitted by the terms of this Credit Agreement and communicated to the Administrative Agent. 6.2 NO MATERIAL CHANGE. Since the Effective Date, there has been no development or event relating to or affecting a Credit Party or any of their Subsidiaries which has had or would be reasonably expected to have a Material Adverse Effect. To the knowledge of any Credit Party, since January 31, 1998, there has been no development or event relating to or affecting a Credit Party or any of its Subsidiaries which has had or would be reasonably expected to have a Material Adverse Effect; it being understood and agreed that the adjustments for the (i) recognition of income with respect to vendor merchandising support payments and (ii) the accrual of employee benefit bonuses for the Borrower's fiscal year 1999, as such adjustments have been described to the Lenders by the Borrower and presented in any draft of the Borrower's 1999 annual financial statements provided to the Lenders, shall not constitute a Material Adverse Effect. 6.3 ORGANIZATION AND GOOD STANDING. Each Credit Party (a) is duly organized, validly existing and in good standing under the laws of the State (or other jurisdiction) of its incorporation or formation, (b) is duly qualified and in good standing and authorized to do business in every jurisdiction unless the failure to be so qualified, in good standing or authorized would have a Material Adverse Effect and (c) has the right, power and authority to own its properties and to carry on its business as now conducted and as proposed to be conducted. 6.4 DUE AUTHORIZATION. Each Credit Party (a) has the right, power and authority to execute, deliver and perform this Credit Agreement and the other Credit Documents to which it is a party and to incur the obligations herein and therein provided for and (b) is duly authorized to, and has been authorized by all necessary corporate and other action, to execute, deliver and perform this Credit Agreement and the other Credit Documents to which it is a party. 6.5 NO CONFLICTS. 56 Neither the execution and delivery of the Credit Documents, nor the consummation of the transactions contemplated therein, nor performance of and compliance with the terms and provisions thereof by such Credit Party will (a) violate or conflict with any provision of the articles or certificate of incorporation, bylaws or other organizational documents of the Borrower or any of its Subsidiaries, (b) violate, contravene or materially conflict with any Requirement of Law or any other law, regulation (including, without limitation, Regulation U or Regulation X), order, writ, judgment, injunction, decree or permit applicable to it, (c) violate, contravene or conflict with contractual provisions of, or cause an event of default under, any indenture, loan agreement, mortgage, deed of trust, contract or other agreement or instrument to which it is a party or by which it may be bound, the violation of which could have or might be reasonably expected to have a Material Adverse Effect, or (d) result in or require the creation of any Lien (other than those contemplated in or created in connection with the Credit Documents) upon or with respect to its properties. 6.6 CONSENTS. Except for consents, approvals and authorizations which have been obtained, no consent, approval, authorization or order of, or filing, registration or qualification with, any court or Governmental Authority or third party in respect of any Credit Party is required in connection with the execution, delivery or performance of this Credit Agreement or any of the other Credit Documents by such Credit Party. 6.7 ENFORCEABLE OBLIGATIONS. This Credit Agreement and the other Credit Documents have been duly executed and delivered and constitute legal, valid and binding obligations of each Credit Party enforceable against such Credit Party in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization or moratorium laws or similar laws relating to or affecting creditors' rights generally or by general equitable principles. 6.8 NO DEFAULT. Except for the Indenture Default, no Credit Party, nor any of their Subsidiaries, is in default in any respect under any contract, lease, loan agreement, indenture, mortgage, security agreement or other agreement or obligation to which it is a party or by which any of its properties is bound which default would have or would be reasonably expected to have a Material Adverse Effect. No Default or Event of Default exists except as previously disclosed in writing to the Lenders. 6.9 OWNERSHIP. Each Credit Party, and each of its Subsidiaries, is the owner of, and has good and marketable title to, or has a valid license to use all of its respective assets and none of such assets is subject to any Lien other than Permitted Liens. 57 6.10 INDEBTEDNESS. The Credit Parties and their Subsidiaries have no Indebtedness except (a) as disclosed in the financial statements referenced in Section 6.1, (b) as set forth on SCHEDULE 6.10 and (c) as otherwise permitted by this Credit Agreement. 6.11 LITIGATION. There are no actions, suits or legal, equitable, arbitration or administrative proceedings, pending or, to the knowledge of any Credit Party, threatened against, any Credit Party or any of its Subsidiaries which could have or might be reasonably expected to have a Material Adverse Effect. 6.12 TAXES. Each Credit Party, and each of its Subsidiaries, has filed, or caused to be filed, all material tax returns (federal, state, local and foreign) required to be filed and paid (a) all material amounts of taxes shown thereon to be due and payable (including interest and penalties) and (b) all material other taxes, fees, assessments and other governmental charges (including documentary stamp taxes and intangibles taxes) that are due and payable, except for such taxes (i) which are not yet delinquent or (ii) that are being contested in good faith and by proper proceedings, and against which adequate reserves are being maintained in accordance with GAAP. To the knowledge of the Credit Parties, there are no material amounts claimed to be due against any of them by any Governmental Authority. 6.13 COMPLIANCE WITH LAW. Each Credit Party, and each of its Subsidiaries, is in compliance with all Requirements of Law and all other laws, rules, regulations, orders and decrees (including without limitation Environmental Laws) applicable to it, or to its properties, unless such failure to comply would not have or would not be reasonably expected to have a Material Adverse Effect. 6.14 ERISA. Except as would not result or be reasonably expected to result in a Material Adverse Effect: (a) During the five-year period prior to the date on which this representation is made or deemed made: (i) no Termination Event has occurred, and, to the knowledge of the Credit Parties, no event or condition has occurred or exists as a result of which any Termination Event could reasonably be expected to occur, with respect to any Plan; (ii) no "accumulated funding deficiency," as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, has occurred with respect to any Plan; (iii) each Plan has been maintained, operated, and funded in compliance with its own terms and in material compliance with the provisions of ERISA, the Code, and any other applicable federal or state laws; and (iv) no lien in favor or the PBGC or a Plan has arisen or is reasonably likely to arise on account of any Plan. 58 (b) The actuarial present value of all "benefit liabilities" under each Single Employer Plan (determined within the meaning of Section 401(a)(2) of the Code, utilizing the actuarial assumptions used to fund such Plans), whether or not vested, did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the current value of the assets of such Plan allocable to such accrued liabilities. (c) Neither the Borrower, nor any of its Subsidiaries nor any ERISA Affiliate has incurred, or, to the knowledge of the Credit Parties, are reasonably expected to incur, any withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither the Borrower, any of its Subsidiaries nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization (within the meaning of Section 4241 of ERISA), is insolvent (within the meaning of Section 4245 of ERISA), or has been terminated (within the meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best knowledge of the Credit Parties, reasonably expected to be in reorganization, insolvent, or terminated. (d) No prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility has occurred with respect to a Plan which has subjected or is reasonably likely to subject the Borrower or any of its Subsidiaries or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which the Borrower or any of its Subsidiaries or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability. (e) The present value (determined using actuarial and other assumptions which are reasonable with respect to the benefits provided and the employees participating) of the liability of the Borrower and its Subsidiaries and each ERISA Affiliate for post-retirement welfare benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA), net of all assets under all such Plans allocable to such benefits, are reflected on the Financial Statements in accordance with FASB 106. (f) Each Plan which is a welfare plan (as defined in Section 3(1) of ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Code apply has been administered in material compliance with such sections. 6.15 SUBSIDIARIES. Set forth on SCHEDULE 6.15 is a complete and accurate list of all Subsidiaries of each Credit Party. Information on SCHEDULE 6.15 includes jurisdiction of incorporation or organization, the number of shares of each class of capital stock or other equity interests outstanding, the number and percentage of outstanding shares of each class owned (directly or indirectly) by such Credit Party; and the number and effect, if exercised, of all outstanding options, warrants, rights of conversion or 59 purchase and all other similar rights with respect thereto. The outstanding capital stock and other equity interests of all such Subsidiaries is validly issued, fully paid and non-assessable and is owned by each such Credit Party, directly or indirectly, free and clear of all Liens (other than those arising under or contemplated in connection with the Credit Documents). Other than as set forth in SCHEDULE 6.15, neither any Credit Party nor any Subsidiary thereof has outstanding any securities convertible into or exchangeable for its capital stock nor does any such Person have outstanding any rights to subscribe for or to purchase or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to its capital stock. SCHEDULE 6.15 may be updated from time to time by the Borrower by giving written notice thereof to the Administrative Agent. As of the Closing Date, none of the Credit Parties owns any shares of capital stock in any Foreign Subsidiaries. 6.16 USE OF PROCEEDS. The proceeds of the Loans hereunder will be used solely for the purposes specified in Section 7.11. No proceeds of the Loans hereunder have been or will be used (a) to acquire, directly or indirectly, any security in any transaction which is subject to Sections 13 or 14 of the Securities Exchange Act of 1934, as amended, (including, without limitation, Sections 13(d) and 14(d) thereof) or to refinance any Indebtedness used to acquire any such securities or (b) for the acquisition of another Person unless the board of directors (or other comparable governing body) or stockholders, as appropriate, of such Person has approved such acquisition. 6.17 GOVERNMENT REGULATION. (a) No part of the Letters of Credit or proceeds of the Loans will be used, directly or indirectly, for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U, or for the purpose of purchasing or carrying or trading in any securities. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in Regulation U. No Indebtedness being reduced or retired out of the proceeds of the Loans was or will be incurred for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U or any "margin security" within the meaning of Regulation T. "Margin stock" within the meaning of Regulation U does not constitute more than 25% of the value of the consolidated assets of the Credit Parties and their Subsidiaries. None of the transactions contemplated by the Credit Documents (including, without limitation, the direct or indirect use of the proceeds of the Loans) will violate or result in a violation of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or regulations issued pursuant thereto, or Regulation T, U or X. (b) No Credit Party, nor any of their Subsidiaries, is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940, each as amended. In addition, no Credit Party, nor any of their Subsidiaries, is (i) an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, and is not controlled 60 by such a company, or (ii) a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. (c) No director, executive officer or principal shareholder of any Credit Party or any of their Subsidiaries is a director, executive officer or principal shareholder of any Lender. For the purposes hereof the terms "director", "executive officer" and "principal shareholder" (when used with reference to any Lender) have the respective meanings assigned thereto in Regulation O issued by the Board of Governors of the Federal Reserve System. 6.18 ENVIRONMENTAL MATTERS. (a) Except as would not cause or reasonably be expected to cause a Material Adverse Effect: (i) Each of the Real Properties and all operations at the Real Properties are in compliance with all applicable Environmental Laws, and there is no violation of any Environmental Law with respect to the Real Properties or the businesses operated by the Credit Parties or any of their Subsidiaries (the "BUSINESSES"), and there are no conditions relating to the Businesses or Real Properties that would reasonably be expected to give rise to liability under any applicable Environmental Laws. (ii) No Credit Party has received any written notice of, or inquiry from any Governmental Authority regarding, any violation, alleged violation, non-compliance, liability or potential liability regarding Hazardous Materials or compliance with Environmental Laws with regard to any of the Real Properties or the Businesses, nor, to the knowledge of a Credit Party or any of its Subsidiaries, is any such notice being threatened. (iii) Hazardous Materials have not been transported or disposed of from the Real Properties, or generated, treated, stored or disposed of at, on or under any of the Real Properties or any other location, in each case by, or on behalf or with the permission of, a Credit Party or any of its Subsidiaries in a manner that would give rise to liability under any applicable Environmental Laws. (iv) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of a Credit Party or any of its Subsidiaries, threatened, under any Environmental Law to which a Credit Party or any of its Subsidiaries is or will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to a Credit Party or any of its Subsidiaries, the Real Properties or the Businesses. 61 (v) There has been no release (including, without limitation, disposal) or threat of release of Hazardous Materials at or from the Real Properties, or arising from or related to the operations of a Credit Party or any of its Subsidiaries in connection with the Real Properties or otherwise in connection with the Businesses where such release constituted a violation of, or would give rise to liability under, any applicable Environmental Laws. (vi) None of the Real Properties contains, or has previously contained, any Hazardous Materials at, on or under the Real Properties in amounts or concentrations that, if released, constitute or constituted a violation of, or could give rise to liability under, Environmental Laws. (vii) No Credit Party, nor any of its Subsidiaries, has assumed any liability of any Person (other than another Credit Party, or one of its Subsidiaries) under any Environmental Law. (b) The Credit Parties have adopted procedures that are designed to (i) ensure that each Credit Party, any of its operations and each of the properties owned or leased by each Credit Party complies with applicable Environmental Laws and (ii) minimize any liabilities or potential liabilities that each Credit Party, any of its operations and each of the properties owned or leased by each Credit Party may have under applicable Environmental Laws. 6.19 INTELLECTUAL PROPERTY. Each Credit Party owns, or has the legal right to use, all patents, trademarks, tradenames, copyrights, technology, know-how and processes (the "INTELLECTUAL PROPERTY") necessary for each of them to conduct its business as currently conducted except for those the failure to own or have such legal right to use would not have or be reasonably expected to have a Material Adverse Effect. Set forth on SCHEDULE 6.19 is a list of all patents, registered and material unregistered trademarks, tradenames and registered copyrights owned by each Credit Party or that any Credit Party has the right to use. Except as provided on SCHEDULE 6.19, none of the Intellectual Property is subject to any licensing or franchise agreement. Furthermore, except as provided on SCHEDULE 6.19, no claim been asserted against any Credit Party or its Subsidiaries in writing and is pending by any Person challenging or questioning the use of any Intellectual Property owned by a Credit Party or that any Credit Party has a right to use or the validity or effectiveness of any such Intellectual Property, nor does any Credit Party have knowledge of any such claim, and to the Credit Parties' knowledge the use of any Intellectual Property by the Credit Parties or any of their Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that in the aggregate, would not have or be reasonably expected to have a Material Adverse Effect. Maxim Industries does not own, or have the legal right to use, any registered copyrights. SCHEDULE 6.19 may be updated from time to time by the Borrower by giving written notice thereof to the Administrative Agent. 62 6.20 SOLVENCY. Each Credit Party is and, after consummation of the transactions contemplated by this Credit Agreement, will be Solvent. 6.21 INVESTMENTS. All Investments of each Credit Party and its Subsidiaries are Permitted Investments. 6.22 LOCATION OF COLLATERAL. Set forth on SCHEDULE 6.22(a) is a list of all Real Properties with street address, county and state where located. Set forth on SCHEDULE 6.22(b) is a list of all locations where any personal property of a Credit Party is located, including county and state where located. Set forth on SCHEDULE 6.22(c) is the chief executive office and principal place of business of each Credit Party. SCHEDULES 6.22(a), 6.22(b) and 6.22(c) may be updated from time to time by the Borrower by giving written notice thereof to the Administrative Agent. 6.23 DISCLOSURE. Neither this Credit Agreement nor any financial statements delivered to the Lenders nor any other document, certificate or statement furnished to the Lenders by or on behalf of any Credit Party in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein, taken as a whole, not misleading. 6.24 LICENSES, ETC. The Credit Parties have obtained and hold in full force and effect, all franchises, licenses, permits, certificates, authorizations, qualifications, accreditations, easements, rights of way and other rights, consents and approvals which are necessary for the operation of their respective businesses as presently conducted, except where the failure to obtain same would not have a Material Adverse Effect. 6.25 COLLATERAL DOCUMENTS. The Collateral Documents create valid security interests in, and Liens on, the Collateral purported to be covered thereby, which security interests and Liens are prior to all other Liens other than Permitted Liens. 6.26 BURDENSOME RESTRICTIONS. No Credit Party, nor any of this Subsidiaries, is a party to any agreement or instrument or subject to any other obligation or any charter or corporate restriction or any provision of any 63 applicable law, rule or regulation which, individually or in the aggregate, would have or be reasonably expected to have a Material Adverse Effect. 6.27 YEAR 2000 COMPLIANCE. Each Credit Party has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers, vendors and customers) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by such Credit Party or any of its Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with the timetable. Based on the foregoing, each Credit Party believes that all computer applications (including those of its suppliers, vendors and customers) that are material to its and any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have Material Adverse Effect. 6.28 LABOR CONTRACTS AND DISPUTES. (i) There is no collective bargaining agreement or other labor contract covering employees of any Credit Party; (ii) no union or other labor organization is seeking to organize, or be recognized as, a collective bargaining unit of employees of any Credit Party; (iii) there is no pending, or to any Credit Party's knowledge, threatened, strike, work stoppage, material unfair lease practice claim or other material labor dispute against or effecting any Credit Party or its employees. SECTION 7 AFFIRMATIVE COVENANTS Each Credit Party hereby covenants and agrees that so long as this Credit Agreement is in effect and until the Loans and LOC Obligations, together with interest and fees and other obligations then due and payable hereunder, have been paid in full and the Commitments and Letters of Credit hereunder shall have terminated: 7.1 INFORMATION COVENANTS. The Credit Parties will furnish, or cause to be furnished, to the Administrative Agent and each of the Lenders: (a) ANNUAL FINANCIAL STATEMENTS. As soon as available, and in any event within 90 days after the close of each fiscal year of the Borrower (or, with respect to fiscal year 64 1999, within 7 days after the Closing Date), a consolidated and consolidating balance sheet and income statement of the Borrower and its Subsidiaries, as of the end of such fiscal year, together with related consolidated and consolidating statements of operations and retained earnings and of cash flows for such fiscal year, setting forth in comparative form consolidated and consolidating figures for the preceding fiscal year, all such consolidated financial information described above to be in reasonable form and detail and audited by independent certified public accountants of recognized national standing reasonably acceptable to the Administrative Agent and whose opinion shall be to the effect that such financial statements have been prepared in accordance with GAAP (except for changes with which such accountants concur) and shall not be limited as to the scope of the audit or qualified in any manner. (b) INTERIM FINANCIAL STATEMENTS. (i) QUARTERLY FINANCIAL STATEMENTS. As soon as available, and in any event within 45 days after the close of each fiscal quarter of the Borrower, a consolidated and consolidating balance sheet and income statement of the Borrower and its Subsidiaries, as of the end of such fiscal quarter, together with related consolidated and consolidating statements of operations and retained earnings and of cash flows for such fiscal quarter in each case setting forth in comparative form consolidated and consolidating figures for the corresponding period of the preceding fiscal year, all such financial information described above to be in reasonable form and detail and reasonably acceptable to the Administrative Agent, and accompanied by a certificate of the chief financial officer of the Borrower to the effect that such quarterly financial statements fairly present in all material respects the financial condition of the Borrower and its Subsidiaries and have been prepared in accordance with GAAP, subject to changes resulting from audit and normal year-end audit adjustments. (ii) MONTHLY FINANCIAL STATEMENTS. As soon as available, and in any event within 30 days after the end of each calendar month, a consolidated balance sheet and income statement of the Borrower and its Subsidiaries, as of the end of such month, in each case setting forth in comparative form consolidated figures for the corresponding period of the preceding fiscal year, all such financial information described above to be in reasonable form and detail and reasonably acceptable to the Administrative Agent, and accompanied by a certificate of the chief financial officer of the Borrower to the effect that such monthly financial statements fairly present in all material respects the financial condition of the Borrower and its Subsidiaries and have been prepared in accordance with GAAP, subject to changes resulting from audit and normal year-end audit adjustments. (c) OFFICER'S CERTIFICATE. At the time of delivery of the financial statements provided for in Sections 7.1(a) and 7.1(b)(i) above, a certificate of an Executive Officer of the Borrower substantially in the form of EXHIBIT 7.1(c), (i) demonstrating compliance with the financial covenants contained in Section 7.2 by calculation thereof as of the end of each 65 such fiscal period, (ii) demonstrating compliance with any other terms of this Credit Agreement as requested by the Administrative Agent and (iii) stating that no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action the Borrower proposes to take with respect thereto. (d) BORROWING BASE CERTIFICATE. As soon as available, and in any event within 30 days after the end of each calendar month, a Borrowing Base Certificate as of the last Business Day of the preceding calendar month, substantially in the form of EXHIBIT 7.1(d) and certified by an Executive Officer of the Borrower to be true and correct as of the date thereof. (e) ANNUAL BUSINESS PLAN AND BUDGETS. Prior to the end of each fiscal year of the Borrower, an annual business plan and budget of the Borrower and its Subsidiaries on a consolidated basis containing, among other things, pro forma financial projections (including without limitation, income statement, balance sheet and statement of cash flows) for the next fiscal year. (f) ACCOUNTANT'S CERTIFICATE. Within the period for delivery of the annual financial statements provided in Section 7.1(a), a certificate of the accountants conducting the annual audit stating that they have reviewed this Credit Agreement and stating further whether, in the course of their audit, they have become aware of any Default or Event of Default and, if any such Default or Event of Default exists, specifying the nature and extent thereof. (g) AUDITOR'S REPORTS. Promptly upon receipt thereof, a copy of any "management letter" submitted by independent accountants to the Borrower or any of its Subsidiaries in connection with any annual, interim or special audit of the books of the Borrower or any of its Subsidiaries. (h) REPORTS. Promptly upon transmission or receipt thereof, (a) copies of any public filings and registrations with, and reports to or from, the Securities and Exchange Commission, or any successor agency, and copies of all financial statements, proxy statements, notices and reports as the Borrower or any of its Subsidiaries shall send to its shareholders generally and (b) upon the written request of the Administrative Agent, all reports and written information to and from the United States Environmental Protection Agency, or any state or local agency responsible for environmental matters, the United States Occupational Health and Safety Administration, or any state or local agency responsible for health and safety matters, or any successor agencies or authorities concerning environmental, health or safety matters. (i) NOTICES. Upon an officer of a Credit Party obtaining knowledge thereof, the Borrower will give written notice to the Administrative Agent promptly (and in any event within two Business Days) of (a) the occurrence of an event or condition consisting of a Default or Event of Default, specifying the nature and existence thereof and what action the 66 Borrower proposes to take with respect thereto, and (b) the occurrence of any of the following with respect to the Borrower or any of its Subsidiaries: (i) the pendency or commencement of any litigation, arbitral or governmental proceeding against a Credit Party or any of its Subsidiaries which if adversely determined would have or would be reasonably expected to have a Material Adverse Effect, (ii) the institution of any proceedings against a Credit Party or any of its Subsidiaries with respect to, or the receipt of written notice by such Person of potential liability or responsibility for violation, or alleged violation of any federal, state or local law, rule or regulation, (including but not limited to, Environmental Laws) the violation of which would have or would be reasonably expected to have a Material Adverse Effect, or (iii) any information that a Credit Party may have a Year 2000 Problem on or after January 1, 2000. (j) ERISA. Upon any of the Credit Parties or any ERISA Affiliate obtaining knowledge thereof, the Borrower will give written notice to the Administrative Agent promptly (and in any event within two Business Days) of: (i) any event or condition, including, but not limited to, any Reportable Event, that constitutes, or might reasonably lead to, a Termination Event; (ii) with respect to any Multiemployer Plan, the receipt of notice as prescribed in ERISA or otherwise of any withdrawal liability assessed against the Credit Parties or any of their ERISA Affiliates, or of a determination that any Multiemployer Plan is in reorganization or insolvent (both within the meaning of Title IV of ERISA); (iii) the failure to make full payment on or before the due date (including extensions) thereof of all amounts which a Credit Party or any of its Subsidiaries or ERISA Affiliates is required to contribute to each Plan pursuant to its terms and as required to meet the minimum funding standard set forth in ERISA and the Code with respect thereto; or (iv) any change in the funding status of any Plan that could have a Material Adverse Effect; together, with a description of any such event or condition or a copy of any such notice and a statement by the principal financial officer of the Borrower briefly setting forth the details regarding such event, condition, or notice, and the action, if any, which has been or is being taken or is proposed to be taken by the Credit Parties with respect thereto. Promptly upon request, a Credit Party shall furnish the Administrative Agent and each of the Lenders with such additional information concerning any Plan as may be reasonably requested, including, but not limited to, copies of each annual report/return (Form 5500 series), as well as all schedules and attachments thereto required to be filed with the Department of Labor and/or the Internal Revenue Service pursuant to ERISA and the Code, respectively, for each "plan year" (within the meaning of Section 3(39) of ERISA). (k) ENVIRONMENTAL. (i) Subsequent to a notice from any Governmental Authority where the subject matter of such notice would reasonably cause concern, or during the existence of an Event of Default, and upon the written request of Administrative Agent, the Credit Parties will furnish or cause to be furnished to the Administrative Agent, at the Credit Parties' expense, a report of an environmental assessment of reasonable scope, form and depth, including, where appropriate, invasive soil or groundwater sampling, by a consultant reasonably acceptable to the Administrative 67 Agent addressing the subject of such notice or, if during the existence of an Event of Default, regarding any release or threat of release of Hazardous Materials on any property owned, leased or operated by a Credit Party and the compliance by the Credit Parties with Environmental Laws. If the Credit Parties fail to deliver such an environmental report within sixty (60) days after receipt of such written request, then the Administrative Agent may arrange for same, and the Credit Parties hereby grant to the Administrative Agent and its representatives access to the Real Properties and a license of a scope reasonably necessary to undertake such an assessment (including, where appropriate, invasive soil or groundwater sampling). The reasonable cost of any assessment arranged for by the Administrative Agent pursuant to this provision will be payable by the Credit Parties on demand and added to the obligations secured by the Collateral Documents. (ii) Each Credit Party will conduct and complete all investigations, studies, sampling, and testing and all remedial, removal, and other actions necessary to address all Hazardous Materials on, from, or affecting any real property owned or leased by a Credit Party to the extent necessary to be in compliance with all Environmental Laws and all other applicable federal, state, and local laws, regulations, rules and policies and with the orders and directives of all Governmental Authorities exercising jurisdiction over such real property to the extent any failure would have or be reasonably expected to have a Material Adverse Effect. (l) OTHER INFORMATION. With reasonable promptness upon any such request, such other information regarding the business, properties or financial condition of the Credit Parties and their Subsidiaries as the Administrative Agent may reasonably request. 7.2 FINANCIAL COVENANTS. (a) FIXED CHARGE COVERAGE RATIO. The Fixed Charge Coverage Ratio, measured as of the last day of each fiscal quarter of the Credit Parties, shall be greater than or equal to:
Fiscal Quarter Ending Fixed Charge Coverage Ratio --------------------- ------------------------------------- 4/30/99 greater than or equal to 1.05 to 1.00 7/31/99 greater than or equal to 1.10 to 1.00 10/31/99 greater than or equal to 1.15 to 1.00 1/31/00 greater than or equal to 1.20 to 1.00 4/30/00 and thereafter greater than or equal to 1.25 to 1.00
The Fixed Charge Coverage Ratio shall be calculated as follows: (i) As of the last day of the fiscal quarter ending April 30, 1999, the Fixed Charge Coverage Ratio shall be based on the ratio of (A) EBITDAR for the 68 one fiscal-quarter period then ended to (B) Fixed Charges for the one fiscal-quarter period then ended; (ii) As of the last day of the fiscal quarter ending July 31, 1999, the Fixed Charge Coverage Ratio shall be based on the ratio of (A) EBITDAR for the two fiscal-quarter period then ended to (B) Fixed Charges for the two fiscal-quarter period then ended; (iii) As of the last day of the fiscal quarter ending October 31, 1999, the Fixed Charge Coverage Ratio shall be based on the ratio of (A) EBITDAR for the three fiscal-quarter period then ended to (B) Fixed Charges for the three fiscal-quarter period then ended; and (iv) As of the last day of the fiscal quarter ending January 31, 2000 and each fiscal quarter thereafter, the Fixed Charge Coverage Ratio shall be based on the ratio of (A) EBITDAR for the four fiscal-quarter period then ended to (B) Fixed Charges for the four fiscal-quarter period then ended. (b) ADJUSTED SENIOR DEBT RATIO. The Adjusted Senior Debt Ratio, measured as of the last day of each fiscal quarter of the Credit Parties, shall be less than or equal to:
Fiscal Quarter Ending Adjusted Senior Debt Ratio --------------------- ---------------------------------- 4/30/99 less than or equal to 6.25 to 1.00 7/31/99 less than or equal to 5.50 to 1.00 10/31/99 less than or equal to 5.00 to 1.00 1/31/00 less than or equal to 4.90 to 1.00 4/30/00 less than or equal to 4.50 to 1.00 7/31/00 and thereafter less than or equal to 4.25 to 1.00
The Adjusted Senior Debt Ratio shall be calculated as follows: (i) As of the last day of the fiscal quarter ending April 30, 1999, the Adjusted Senior Debt Ratio shall be based on the ratio of (A) Total Senior Debt as of the last day of such fiscal quarter PLUS ((Adjusted Rent Expense for the one fiscal-quarter period then ended) MULTIPLIED BY 4) to (B) (EBITDAR for the one fiscal-quarter period then ended) MULTIPLIED BY 4; (ii) As of the last day of the fiscal quarter ending July 31, 1999, the Adjusted Senior Debt Ratio shall be based on the ratio of (A) Total Senior Debt as of the last day of such fiscal quarter PLUS ((Adjusted Rent Expense for the two fiscal-quarter period then ended) MULTIPLIED BY 2) to (B) (EBITDAR for the two fiscal-quarter period then ended) MULTIPLIED BY 2; 69 (iii) As of the last day of the fiscal quarter ending October 31, 1999, the Adjusted Senior Debt Ratio shall be based on the ratio of (A) Total Senior Debt as of the last day of such fiscal quarter PLUS ((Adjusted Rent Expense for the three fiscal-quarter period then ended) MULTIPLIED BY 1.33) to (B) (EBITDAR for the three fiscal-quarter period then ended) MULTIPLIED BY 1.33; and (iv) As of the last day of the fiscal quarter ending January 31, 2000 and each fiscal quarter thereafter, the Adjusted Senior Debt Ratio shall be based on the ratio of (A) Total Senior Debt as of the last day of such fiscal quarter PLUS Adjusted Rent Expense for the four fiscal-quarter period then ended to (B) EBITDAR for the four fiscal-quarter period then ended. (c) TOTAL DEBT TO CAPITALIZATION RATIO. The Total Debt to Capitalization Ratio shall at all times be less than 0.45 to 1.00. (d) NET WORTH. As of the last day of each fiscal quarter of the Credit Parties, the Net Worth shall be greater than or equal to the sum of (i) $165 million PLUS (ii) 50% of the cumulative Net Income (without deduction for losses) earned for each completed fiscal quarter subsequent to the Closing Date to the date of determination PLUS (iii) 100% of the amount of Net Cash Proceeds from any Equity Issuance. (e) MINIMUM EBITDAR. As of the last day of each fiscal quarter of the Credit Parties, EBITDAR shall be greater than or equal to:
Fiscal Quarter Ending Minimum EBITDAR --------------------- --------------- 4/30/99 $13,250,000 7/31/99 $31,000,000 10/31/99 $51,500,000 1/31/00 $67,000,000 4/30/00 and thereafter $67,500,000
EBITDAR shall be calculated as follows: (i) As of the last day of the fiscal quarter ending April 30, 1999, EBITDAR shall be based on EBITDAR for the one fiscal-quarter period then ended; (ii) As of the last day of the fiscal quarter ending July 31, 1999, EBITDAR shall be based on EBITDAR for the two fiscal-quarter period then ended; (iii) As of the last day of the fiscal quarter ending October 31, 1999, EBITDAR shall be based on EBITDAR for the three fiscal-quarter period then ended; and 70 (iv) As of the last day of the fiscal quarter ending January 31, 2000 and each fiscal quarter thereafter, EBITDAR shall be based on EBITDAR for the four fiscal-quarter period then ended. 7.3 PRESERVATION OF EXISTENCE AND FRANCHISES. Each of the Credit Parties will do all things necessary to (a) preserve and keep in full force and effect its existence and (b) take all reasonable action to maintain all rights, franchises and authority necessary or desirable in the normal conduct of its business, except as permitted by Section 8.4. 7.4 BOOKS AND RECORDS. Each of the Credit Parties will, and cause its Subsidiaries to, keep complete and accurate books and records of its transactions in accordance with GAAP (including the establishment and maintenance of appropriate reserves). 7.5 COMPLIANCE WITH LAW. Each of the Credit Parties will, and cause its Subsidiaries to, comply with all material laws, rules, regulations and orders, and all applicable material restrictions imposed by all Governmental Authorities, applicable to it and its property (including, without limitation, Environmental Laws). 7.6 PAYMENT OF TAXES AND OTHER INDEBTEDNESS. Each of the Credit Parties will, and cause its Subsidiaries to, pay, settle or discharge (a) all taxes, assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties, before they shall become delinquent, (b) all lawful claims (including claims for labor, materials and supplies) which, if unpaid, might give rise to a Lien upon any of its properties, and (c) all of its other Indebtedness as it shall become due (to the extent such repayment is not otherwise prohibited by this Credit Agreement); PROVIDED, HOWEVER, that a Credit Party or any of its Subsidiaries shall not be required to pay any such tax, assessment, charge, levy, claim or Indebtedness which is being contested in good faith by appropriate proceedings and as to which adequate reserves therefor have been established in accordance with GAAP, unless the failure to make any such payment (i) would give rise to an immediate right to foreclose or collect on a Lien securing such amounts or (ii) would have or reasonably be expected to have a Material Adverse Effect. 7.7 INSURANCE. Each of the Credit Parties will at all times maintain in full force and effect insurance (including worker's compensation insurance, liability insurance, casualty insurance and business interruption insurance) in such amounts, covering such risks and liabilities and with such deductibles or self-insurance retentions as are in accordance with normal industry practice. All 71 policies shall have the Administrative Agent, on behalf of the Lenders, named as an additional insured and loss payee. In the event there occurs any material loss, damage to or destruction of the Collateral of any Credit Party or any part thereof, such Credit Party shall promptly give written notice thereof to the Administrative Agent generally describing the nature and extent of such damage or destruction. Subsequent to any loss, damage to or destruction of the Collateral of any Credit Party or any part thereof, such Credit Party, whether or not the insurance proceeds, if any, received on account of such damage or destruction shall be sufficient for that purpose, at such Credit Party's cost and expense, will promptly repair or replace the Collateral of such Credit Party so lost, damaged or destroyed; PROVIDED, HOWEVER, that such Credit Party need not repair or replace the Collateral of such Credit Party so lost, damaged or destroyed to the extent the failure to make such repair or replacement (a) is desirable to the proper conduct of the business of such Credit Party in the ordinary course and otherwise is in the best interest of such Credit Party and (b) would not materially impair the rights and benefits of the Administrative Agent or the Lenders under this Credit Agreement or any other Credit Document. In the event a Credit Party shall receive any insurance proceeds, as a result of any loss, damage or destruction of Collateral, in a net amount in excess of $1,000,000, such Credit Party will immediately pay over such proceeds to the Administrative Agent as cash collateral for the Credit Party Obligations. The Administrative Agent agrees to release such insurance proceeds to such Credit Party for replacement or restoration of the portion of the Collateral of such Credit Party lost, damaged or destroyed if (A) within 30 days from the date the Administrative Agent receives such insurance proceeds, the Administrative Agent has received written application for such release from such Credit Party together with evidence reasonably satisfactory to it that the Collateral lost, damaged or destroyed has been or will be replaced or restored to its condition (or by Collateral having a value at least equal to the condition of the asset subject to the loss, damage or destruction) immediately prior to the loss, destruction or other event giving rise to the payment of such insurance proceeds and (B) on the date of such release no Default or Event of Default exists. If the conditions in the preceding sentence are not met, the Administrative Agent may or, upon the request of the Required Lenders, shall at any time after the first Business Day subsequent to the date 30 days after it received such insurance proceeds, apply such insurance proceeds as a mandatory prepayment of the Credit Party Obligations for application in accordance with the terms of Section 3.3(b)(iii). All insurance proceeds shall be subject to the security interest of the Lenders under the Collateral Documents. The present insurance coverage of the Credit Parties and their Subsidiaries is outlined as to carrier, policy number, expiration date, type and amount on SCHEDULE 7.7. SCHEDULE 7.7 shall be amended and updated by the Credit Parties on an at least annual basis or upon the request of the Administrative Agent. 7.8 MAINTENANCE OF PROPERTY. Each of the Credit Parties will, and cause its Subsidiaries to, maintain and preserve its properties and equipment in good repair, working order and condition, normal wear and tear excepted, and will make, or cause to be made, in such properties and equipment from time to time all repairs, renewals, replacements, extensions, additions, betterments and improvements thereto as 72 may be needed or proper, to the extent and in the manner customary for companies in similar businesses. 7.9 PERFORMANCE OF OBLIGATIONS. Each of the Credit Parties will, and cause its Subsidiaries to, perform in all material respects all of its obligations under the terms of all material agreements, indentures, mortgages, security agreements or other debt instruments to which it is a party or by which it is bound. 7.10 COLLATERAL. If, subsequent to the Closing Date, a Credit Party shall (a) acquire any patented, registered or applied for intellectual property or any securities or (b) acquire any other personal property required to be delivered to the Administrative Agent as Collateral hereunder or under any of the Collateral Documents, the Borrower shall immediately notify the Administrative Agent of same. Each Credit Party shall take such action (including, but not limited to, the actions set forth in Sections 5.1(g) and 7.15(d)), as reasonably requested by the Administrative Agent and at its own expense, to ensure that the Administrative Agent has a perfected Lien in all owned personal property of the Credit Parties as set forth in the Security Agreements and the Pledge Agreements (whether now owned or hereafter acquired), subject only to Permitted Liens. Each Credit Party shall adhere to the covenants regarding the location of personal property as set forth in the Security Agreements. 7.11 USE OF PROCEEDS. The Credit Parties will use the proceeds of the Loans solely (a) to refinance the Indebtedness owing under the Prior Credit Agreement, (b) to provide working capital, (c) to repurchase Securities, subject to the terms and conditions of the Credit Documents, (d) to make Permitted Acquisitions and (e) for general corporate purposes. The Credit Parties will use the Letters of Credit solely for the purposes set forth in Section 2.2(a). 7.12 AUDITS/INSPECTIONS. Upon reasonable notice and during normal business hours, each Credit Party will permit representatives appointed by the Administrative Agent or any Lender, including, without limitation, independent accountants, agents, attorneys and appraisers to visit and inspect such Credit Party's property, including its books and records, its accounts receivable and inventory, its facilities and its other business assets, and to make photocopies or photographs thereof and to write down and record any information such representative obtains and shall permit the Administrative Agent or its representatives or any Lender or its representatives to investigate and verify the accuracy of information provided to the Lenders, including, without limitation, the performance of collateral valuation reviews from time to time to assess the composition of the Borrowing Base Assets, and to discuss all such matters with the officers, employees and representatives of the Credit Parties. The Credit Parties agree that the Administrative Agent may conduct such collateral reviews, at the Credit Parties' expense, as it reasonably deems appropriate. 73 7.13 ADDITIONAL CREDIT PARTIES. At the time any Person becomes a Subsidiary of a Credit Party, the Borrower shall so notify the Administrative Agent and promptly thereafter (but in any event within 30 days after the date thereof) shall cause such Person to (a) if it is a Domestic Subsidiary, execute a Joinder Agreement in substantially the same form as EXHIBIT 7.13, (b) cause all of the capital stock of such Person (if it is a Domestic Subsidiary) or 65% of the capital stock of such Person (if it is a First Tier Foreign Subsidiary) to be delivered to the Administrative Agent (together with undated stock powers signed in blank) and pledged to the Administrative Agent pursuant to an appropriate pledge agreement in substantially the form of the Pledge Agreement (or a joinder to the existing Pledge Agreement) and otherwise in a form reasonably acceptable to the Administrative Agent, (c) if such Person is a Domestic Subsidiary, pledge all of its assets to the Administrative Agent pursuant to a security agreement in substantially the form of the Security Agreement (or a joinder to the existing Security Agreement) and otherwise in a form reasonably acceptable to the Administrative Agent, and (d) if such Person is a Domestic Subsidiary and has any Subsidiaries, (A) deliver all of the capital stock of such Domestic Subsidiaries owned by it and 65% of the stock of the First Tier Foreign Subsidiaries owned by it (together with undated stock powers signed in blank) to the Administrative Agent and (B) execute a pledge agreement in substantially the form of the Pledge Agreement (or a joinder to the existing Pledge Agreement) and otherwise in a form acceptable to the Administrative Agent, (e) if such Person is a Domestic Subsidiary and leases any real property, cause to be delivered in a commercially reasonable manner a landlord waiver or estoppel letter with respect thereto in a form acceptable to the Administrative Agent) and (f) deliver such other documentation as the Administrative Agent may reasonably request in connection with the foregoing, including, without limitation, appropriate UCC-1 financing statements, environmental reports, landlord's waivers, certified resolutions and other organizational and authorizing documents of such Person and favorable opinions of counsel to such Person (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to above), all in form, content and scope reasonably satisfactory to the Administrative Agent. 7.14 YEAR 2000 COMPLIANCE. Each Credit Party will promptly notify the Administrative Agent in the event such Credit Party discovers or determines that any computer application that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 Compliant, except to the extent that such failure could reasonably be expected to have a Material Adverse Effect. 7.15 POST-CLOSING REQUIREMENTS. (a) Within 21 days after the Closing Date, the Credit Parties shall deposit $5 million into the Cash Collateral Account, which deposit shall be in addition to the deposit required pursuant to Section 5.1(q). 74 (b) Within 30 days after the Closing Date, the Administrative Agent shall have completed a field examination (whether through internal or third party appraisers or both), at the Borrower's expense, with respect to the Borrower's accounts receivable and inventory, the results of which demonstrate that the margined value of the Borrower's accounts receivable and inventory, together with the value attributed to the Executive Buildings (such value not to exceed $7 million), when added to the amount of cash in the Cash Collateral Account is at least equal to $112.5 million. (c) Within 30 days after the Closing Date, the Borrower shall deliver to the Administrative Agent (i) copies of certificates of good standing, existence or their equivalent with respect to each Credit Party certified as of a recent date by the appropriate Governmental Authorities of the state or other jurisdiction of incorporation or organization and each other jurisdiction in which the failure to so qualify and be in good standing would have a Material Adverse Effect on the business or operations of a Credit Party in such jurisdiction and (ii) copies of the articles or certificates of incorporation or other charter documents of each Credit Party certified to be true and complete as of a recent date by the appropriate Governmental Authority of the state or other jurisdiction of its incorporation or organization. (d) Within 30 days after the Closing Date, the Borrower shall deliver to the Administrative Agent the following: (i) searches of Uniform Commercial Code ("UCC") filings in the jurisdiction of the chief executive office of each New Subsidiary (and each other Credit Party which the Administrative Agent deems appropriate) and each jurisdiction where any Collateral is located or where a filing would need to be made (and has not previously been made) in order to perfect the Administrative Agent's security interest in the Collateral, copies of the financing statements on file in such jurisdictions, evidence that no Liens exist other than Permitted Liens and such payoff letters and UCC termination statements as required by the Administrative Agent in connection with such UCC search results; (ii) duly executed UCC financing statements (or amendments to UCC financing statements) for each appropriate jurisdiction as is necessary, in the Administrative Agent's sole discretion, to perfect the Administrative Agent's security interest in the Collateral; (iii) searches of ownership of the intellectual property of each New Subsidiary (and each other Credit Party which the Administrative Agent deems appropriate) in the appropriate governmental offices as requested by the Administrative Agent and such patent, trademark and copyright filings as requested by the Administrative Agent in connection therewith; 75 (iv) evidence of the transfer of all assets of Maxim Industries (other than immaterial assets not to exceed $1000 in the aggregate) to a Credit Party, such evidence to be in form and substance satisfactory to the Administrative Agent; (v) copies of insurance policies or certificates of insurance of the New Subsidiaries evidencing liability and casualty insurance meeting the requirements set forth in the Credit Documents, including, but not limited to, naming the Administrative Agent as additional insured or loss payee on behalf of the Lenders; (vi) to the extent not previously delivered to the Administrative Agent, evidence of any merger of a Credit Party under the Prior Credit Agreement with and into another Credit Party under the Prior Credit Agreement, in form and substance satisfactory to the Administrative Agent; (vii) with respect to each leased location of a Credit Party (i) on which such Credit Party maintains in excess of $400,000 of inventory and (ii) for which the Administrative Agent in its sole discretion determines that a landlord consent is required, receipt by the Administrative Agent of a landlord consent from the respective landlord in form and substance satisfactory to the Administrative Agent; and (viii) all original executed note receivables owing to a Credit Party, together with duly executed allonges, in form and substance acceptable to the Administrative Agent, attached thereto. (e) Within 30 days after the Closing Date (or such later date as the Administrative Agent may agree), the Borrower shall deliver to the Administrative Agent, with respect to the Real Property on which each of the Executive Buildings is located, (i) a deed to secure debt and security agreement executed by the Borrower in favor of the Administrative Agent, in form and substance satisfactory to the Administrative Agent, (ii) duly executed UCC fixture financing statements for each appropriate jurisdiction as is necessary, in the Administrative Agent's sole discretion, to perfect the Administrative Agent's security interest in the Collateral described therein, (iii) an opinion of counsel to the Borrower in form and substance satisfactory to the Administrative Agent, (iv) a mortgagee title policy, in form and substance satisfactory to the Administrative Agent, together with such title endorsements as the Administrative Agent may require, (v) an appraiser from a qualified appraiser satisfactory to the Administrative Agent, (vi) an environmental site assessment from an environmental consultant satisfactory to the Administrative Agent, (viii) an ALTA survey, in form and substance satisfactory to the Administrative Agent and (ix) such other real estate collateral documentation as the Administrative Agent may require. 76 SECTION 8 NEGATIVE COVENANTS Each Credit Party hereby covenants and agrees that so long as this Credit Agreement is in effect and until the Loans and LOC Obligations, together with interest, fees and other obligations then due and payable hereunder, have been paid in full and the Commitments and Letters of Credit hereunder shall have terminated: 8.1 INDEBTEDNESS. No Credit Party will, nor will it permit any of its Subsidiaries to, contract, create, incur, assume or permit to exist any Indebtedness, except: (a) Indebtedness arising under this Credit Agreement and the other Credit Documents; (b) Indebtedness existing as of the Closing Date as referenced in Section 6.10 (and renewals, refinancings, replacements or extensions thereof on terms and conditions no more favorable, in the aggregate, to such creditor than such existing Indebtedness and in a principal amount not in excess of that outstanding as of the date of such renewal, refinancing, replacement or extension); (c) Indebtedness in respect of current accounts payable and accrued expenses incurred in the ordinary course of business and to the extent not current, accounts payable and accrued expenses that are subject to bona fide dispute; (d) Indebtedness owing by a Credit Party to another Credit Party; (e) purchase money Indebtedness (including obligations in respect of Capital Leases or Synthetic Leases) to finance the purchase of fixed assets (including equipment); PROVIDED that (i) the total of all such Indebtedness (including any such Indebtedness referred to in subsection (b) above) for all such Persons taken together shall not exceed at any one time outstanding the sum of (A) an aggregate principal amount of $7,500,000 PLUS (B) the principal amount of Indebtedness outstanding under the Participation Agreement and Operative Agreements; (ii) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed; and (iii) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing; (f) Indebtedness assumed or seller debt incurred in connection with Permitted Acquisitions permitted by Section 8.7 (so long as such Indebtedness assumed or incurred in connection with a Permitted Acquisition was not assumed or incurred in anticipation of the respective Permitted Acquisition); 77 (g) Indebtedness arising from Hedging Agreements entered into in the ordinary course of business and not for speculative purposes; (h) the Subordinated Debt; (i) Indebtedness up to $10,000,000 under the Participation Agreement and the Operative Agreements (as defined in the Participation Agreement); (j) Indebtedness up to $11,927,000 under the Shaw Promissory Note; and (k) other unsecured Indebtedness up to $2,000,000, in the aggregate, at any one time outstanding. 8.2 LIENS. No Credit Party will, nor will it permit its Subsidiaries to, contract, create, incur, assume or permit to exist any Lien with respect to any of its property or assets of any kind (whether real or personal, tangible or intangible), whether now owned or after acquired, except for Permitted Liens. 8.3 NATURE OF BUSINESS. No Credit Party will, nor will it permit its Subsidiaries to, alter the character of its business from that conducted as of the Effective Date or engage in any business other than the business conducted as of the Effective Date and activities which are substantially similar or related thereto or logical extensions thereof. 8.4 CONSOLIDATION AND MERGER. No Credit Party will, nor will it permit any Subsidiary to, enter into any transaction of merger or consolidation or liquidate, wind up or dissolve itself; provided that any Credit Party may merge or consolidate with or into another Credit Party, if the following conditions are satisfied: (a) the Administrative Agent is given prior written notice of such action; (b) the Person formed by such consolidation or into which a Credit Party is merged shall either (A) be such Credit Party or (B) be a Domestic Subsidiary of such Credit Party and expressly assume in writing all of the obligations of such Credit Party under the Credit Documents; provided that if the transaction is between the Borrower and another Person, the Borrower must be the surviving entity; (c) the Credit Parties execute and deliver such documents, instruments and certificates as the Administrative Agent may request (including, if necessary, to maintain its perfection and priority in the Collateral pledged pursuant to the Collateral Documents); 78 (d) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (e) the Borrower delivers to the Administrative Agent an officer's certificate demonstrating compliance with clause (b) or (c) above, as applicable, and an opinion of counsel stating that such consolidation or merger and any written agreement entered into in connection therewith, comply with this Section 8.4. 8.5 SALE OR LEASE OF ASSETS. No Credit Party will, nor will it permit its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business or assets whether now owned or hereafter acquired, including, without limitation, inventory, receivables, equipment, real property interests (whether owned or leasehold), and securities, other than (a) any inventory sold or otherwise disposed of in the ordinary course of business; (b) the sale, lease, transfer or other disposal by a Credit Party (other than the Borrower) of any or all of its assets to another Credit Party; (c) obsolete, slow-moving, idle or worn-out assets no longer used or useful in its business or the trade in of equipment for equipment in better condition or of better quality; (d) the transfer of assets which constitute a Permitted Investment; (e) the lease or sublease of real property interests in the ordinary course of business; (f) accounts receivable and related rights and interests sold to GE Capital pursuant to the terms of the GE Capital Dealer Agreement; (g) leases related to vans for MaxCare franchises not to exceed $3,500,000, in the aggregate, during the term of this Credit Agreement and (g) other sales of assets not to exceed $2,500,000, in the aggregate, during the term of this Credit Agreement in connection with the closing and liquidation of retail stores. Upon a sale of assets permitted by this Section 8.5, the Administrative Agent shall promptly deliver to the Borrower, upon the Borrower's request and at the Borrower's expense, such documentation as is reasonably necessary to evidence the release of the Administrative Agent's security interest in such assets, including, without limitation, amendments or terminations of UCC financing statements. 8.6 SALE LEASEBACKS. No Credit Party will, nor will it permit its Subsidiaries to, directly or indirectly become or remain liable as lessee or as guarantor or other surety with respect to any lease of any property (whether real or personal or mixed), whether now owned or hereafter acquired, (a) which such Credit Party or its Subsidiary has sold or transferred or is to sell or transfer to any other Person other than another Credit Party or (b) which such Credit Party or its Subsidiary intends to use for substantially the same purpose as any other property which has been sold or is to be sold or transferred by such Credit Party to any Person in connection with such lease. 8.7 ADVANCES, INVESTMENTS AND LOANS. 79 No Credit Party will, nor will it permit its Subsidiaries to, make any Investments except for Permitted Investments. 8.8 RESTRICTED PAYMENTS. No Credit Party will, nor will it permit its Subsidiaries to, directly or indirectly, (a) declare or pay any dividends or make any other distribution upon any shares of its capital stock of any class other than payment of dividends by any Subsidiary of the Borrower to its parent or (b) purchase, redeem or otherwise acquire or retire or make any provisions for redemption, acquisition or retirement of any shares of its capital stock of any class or any warrants or options to purchase any such shares other than the purchase of shares by the Borrower permitted pursuant to clause (h) of the definition of Permitted Investments; 8.9 TRANSACTIONS WITH AFFILIATES. No Credit Party will, nor will it permit its Subsidiaries to, enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any officer, director, shareholder, Subsidiary or Affiliate other than on terms and conditions substantially as favorable as would be obtainable in a comparable arm's-length transaction with a Person other than an officer, director, shareholder, Subsidiary or Affiliate. 8.10 FISCAL YEAR; ORGANIZATIONAL DOCUMENTS. No Credit Party will, nor will it permit its Subsidiaries to, (a) change its fiscal year or (b) in any manner that would reasonably be likely to adversely affect the rights of the Lenders, change its articles or certificate of incorporation or its bylaws. 8.11 NO LIMITATIONS. No Credit Party will, nor will it permit its Subsidiaries to, directly or indirectly, create or otherwise cause, incur, assume, suffer or permit to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Person to (a) pay dividends or make any other distribution on any of such Person's capital stock, (b) pay any Indebtedness owed to any other Credit Party, (c) make loans or advances to any other Credit Party or (d) transfer any of its property to any other Credit Party, except for encumbrances or restrictions existing under or by reason of (i) customary non-assignment or net worth provisions in any lease governing a leasehold interest, (ii) any agreement or other instrument of a Person existing at the time it becomes a Subsidiary of a Credit Party; PROVIDED that such encumbrance or restriction is not applicable to any other Person, or any property of any other Person, other than such Person becoming a Subsidiary of a Credit Party and was not entered into in contemplation of such Person becoming a Subsidiary of a Credit Party, (iii) this Credit Agreement and the other Credit Documents and (iv) the Indenture. 80 8.12 NO OTHER NEGATIVE PLEDGES. No Credit Party will, nor will it permit its Subsidiaries to, enter into, assume or become subject to any agreement prohibiting or otherwise restricting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, or requiring the grant of any security for such obligation if security is given for some other obligation except as set forth in (a) the Credit Documents and (b) the Indenture. 8.13 LIMITATION ON FOREIGN OPERATIONS. The Credit Parties will not, nor will they permit any of their Subsidiaries to, allow the Foreign Subsidiaries to have assets which in the aggregate constitute more than 5% of Total Assets at any time. 8.14 CAPITAL EXPENDITURES. The Credit Parties shall not make Capital Expenditures of more than $30,000,000 in the aggregate in any fiscal year of the Borrower. 8.15 PREPAYMENTS OF INDEBTEDNESS. No Credit Party will, nor will it permit any of its Subsidiaries to, (a) amend or modify (or permit the amendment or modification of) any of the terms of any Indebtedness if such amendment or modification would add or change any terms in a manner adverse to the Lenders, including but not limited to, shortening final maturity or average life to maturity of such Indebtedness or requiring any payment to be made sooner than originally scheduled or increasing the interest rate applicable thereto or change any subordination provision thereof, (b) during the existence of a Default or Event of Default, or if a Default or Event of Default would be caused as a result thereof, make (or give any notice with respect thereto) any voluntary or optional payment or prepayment or redemption or acquisition for value of (including, without limitation, by way of depositing money or securities with the trustee with respect thereto before due for the purpose of paying when due), refund, refinance or exchange of any other Indebtedness. 8.16 SUBORDINATED DEBT. No Credit Party will (a) make or offer to make any principal payments with respect to the Subordinated Debt, (b) redeem or offer to redeem any of the Subordinated Debt, or (c) deposit any funds intended to discharge or defease any or all of the Subordinated Debt; PROVIDED, HOWEVER, (i) the Borrower may repurchase portions of the Subordinated Debt (each a "SUBORDINATED DEBT PREPAYMENT") so long as (A) no Default or Event of Default, or Event of Default (as defined in the Indenture) (including, without limitation, the Indenture Default), shall have occurred and be continuing or would result from such Subordinated Debt Prepayment, (B) with respect to the repurchase of any Securities, the purchase price for any Security shall not exceed 110% of the principal amount of such Security and (C) the repurchase by the Borrower of the Subordinated Debt (including, without limitation, the purchase of 4,000,000 Series B 81 Securities for the aggregate purchase price of $4,128,000 on March 9, 1999 and March 16, 1999), together with the aggregate amount of all Stock Repurchases, shall not exceed $15,000,000 in the aggregate during the term of this Credit Agreement (such amount to include any accrued interest, premiums or penalties associated therewith); provided that the aggregate amount of Subordinated Debt Prepayments (including, without limitation, the purchase of 4,000,000 Series B Securities for the aggregate purchase price of $4,128,000 on March 9, 1999 and March 16, 1999) plus the aggregate amount of Stock Repurchases may exceed $15,000,000 (which shall be considered a Repurchase Event) if (x) Lenders whose aggregate Credit Exposure (as defined in, and subject to the terms of, the definition of Required Lenders) constitutes more than 70% of the Credit Exposure of all Lenders at such time consent to such excess prepayment or repurchase, (y) the Applicable Percentages for Loans and the Standby Letter of Credit Fees are increased in accordance with the terms of the definition of Applicable Percentage and (z) the Repurchase Event Fee is paid to the Administrative Agent, on behalf of the Lenders, and (ii) upon the occurrence of an Acceleration Event, the Borrower may repurchase portions of the Subordinated Debt at a price not to exceed 100% of par so long as (A) no Default or Event of Default, or Event of Default (as defined in the Indenture) other than the Indenture Default, shall have occurred and be continuing or would result from such Subordinated Debt Payment, (B) the Acceleration Event Fee is paid to the Administrative Agent, on behalf of the Lenders, (C) the Borrower shall have delivered to the Administrative Agent a certificate of Executive Officer, in form and substance satisfactory to the Administrative Agent, (x) certifying that no Default or Event of Default, or Event of Default (as defined in the Indenture) other than the Indenture Default, has occurred and is continuing or would result from such Subordinated Debt Payment, (y) demonstrating that after giving effect to such repurchase on a pro forma basis, as if such repurchase had occurred on the first day of the twelve month period ending on the last day of the Borrower's most recently completed fiscal quarter, the Credit Parties would have been in compliance with all the financial covenants set forth in Section 7.2 and (z) certifying that after giving effect to such repurchase, 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 be less than the sum of (1) the lesser of (a) the Revolving Committed Amount and (b) the Borrowing Base Assets MINUS (2) $5 million. The Subordinated Debt may not be amended or modified in any material manner without the prior written consent of the Required Lenders. 8.17 LIMITATION ON STORE OPENINGS. The Credit Parties will not, nor will they permit their Subsidiaries to, open or start up, in the aggregate, more than (a) fifteen (15) new stores in the fiscal year 2000 of the Borrower and (b) twenty-five (25) new stores in any fiscal year of the Borrower thereafter. 8.18 LIMITATION ON FEES AND EXPENSES. The fees and expenses of the Credit Parties in connection with curing or obtaining a waiver of the Indenture Default shall not exceed $5 million in the aggregate. 82 SECTION 9 EVENTS OF DEFAULT 9.1 EVENTS OF DEFAULT. An Event of Default shall exist upon the occurrence, and during the continuance, of any of the following specified events (each an "EVENT OF DEFAULT"): (a) PAYMENT. Any Credit Party shall default in the payment (i) when due of any principal of any of the Loans or any reimbursement obligation arising from drawings under Letters of Credit or (ii) within three Business Days of when due of any interest on the Loans or any fees or other amounts owing hereunder, under any of the other Credit Documents or in connection herewith. (b) REPRESENTATIONS. Any representation, warranty or statement made or deemed to be made by any Credit Party herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was made or deemed to have been made. (c) COVENANTS. Any Credit Party shall: (i) default in the due performance or observance of any term, covenant or agreement contained in Sections 7.2, 7.3, 7.5, 7.11, 7.12, or 8.1 through 8.18 inclusive; (ii) default in the due performance or observance by it of any term, covenant or agreement contained in Sections 7.1 and such default shall continue unremedied for a period of five Business Days; (iii) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in subsections (a), (b) or (c)(i) or (ii) of this Section 9.1) contained in this Credit Agreement and such default shall continue unremedied for a period of at least 30 days after the earlier of a Credit Party becoming aware of such default or notice thereof given by the Administrative Agent. (d) OTHER CREDIT DOCUMENTS. (i) Any Credit Party shall default in the due performance or observance of any term, covenant or agreement in any of the other Credit Documents and such default shall continue unremedied for a period of at least 30 days after the earlier of a Credit Party becoming aware of such default or notice thereof given by the Administrative Agent, or (ii) any Credit Document shall fail to be in full force and effect or any Credit Party shall so assert or any Credit Document shall fail to give the Administrative 83 Agent and/or the Lenders the security interests, liens, rights, powers and privileges purported to be created thereby. (e) GUARANTIES. The guaranty given by the Credit Parties hereunder or by any Additional Credit Party hereafter or any provision thereof shall cease to be in full force and effect, or any guarantor thereunder or any Person acting by or on behalf of such guarantor shall deny or disaffirm such Guarantor's obligations under such guaranty. (f) BANKRUPTCY, ETC. The occurrence of any of the following: (i) a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of any Credit Party or any of its Subsidiaries in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of any Credit Party or any of its Subsidiaries or for any substantial part of its property or ordering the winding up or liquidation of its affairs; or (ii) an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect is commenced against any Credit Party or any of its Subsidiaries and such petition remains unstayed and in effect for a period of 60 consecutive days; or (iii) any Credit Party or any of its Subsidiaries shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of such Person or any substantial part of its property or make any general assignment for the benefit of creditors; or (iv) any Credit Party or any of its Subsidiaries shall admit in writing its inability to pay its debts generally as they become due or any action shall be taken by such Person in furtherance of any of the aforesaid purposes. (g) DEFAULTS UNDER OTHER AGREEMENTS. (i) Except for the Indenture Default, a Credit Party or any of its Subsidiaries shall default in the due performance or observance (beyond the applicable grace period with respect thereto) of any material obligation or condition of any contract or lease to which it is a party; or (ii) With respect to any Indebtedness in excess of $2,000,000 (other than Indebtedness outstanding under this Credit Agreement) of a Credit Party or any of their Subsidiaries (i) such Person shall (A) default in any payment (beyond the applicable grace period with respect thereto, if any) with respect to any such Indebtedness, or (B) except for the Indenture Default, default (after giving effect to any applicable grace period) in the observance or performance relating to such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event or condition shall occur or condition exist, the effect of which default or other event or condition is to cause, or permit, the holder or holders of such Indebtedness (or trustee or agent on behalf of such holders) to cause (determined without regard to whether any notice or lapse of time is required) 84 any such Indebtedness to become due prior to its stated maturity; or (ii) any such Indebtedness shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment prior to the stated maturity thereof; or (iii) any such Indebtedness shall mature and remain unpaid. (h) JUDGMENTS. One or more judgments, orders, or decrees shall be entered against any one or more of the Credit Parties and its Subsidiaries involving a liability of $2,000,000 or more, in the aggregate, (to the extent not paid or covered by insurance provided by a carrier who has acknowledged coverage) and such judgments, orders or decrees (i) are the subject of any enforcement proceeding commenced by any creditor or (ii) shall continue unsatisfied, undischarged and unstayed for a period ending on the first to occur of (A) the last day on which such judgment, order or decree becomes final and unappealable or (B) 60 days. (i) ERISA. The occurrence of any of the following events or conditions: (A) any "accumulated funding deficiency," as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, shall exist with respect to any Plan, or any lien shall arise on the assets of any Credit Party or any ERISA Affiliate in favor of the PBGC or a Plan; (B) a Termination Event shall occur with respect to a Single Employer Plan, which is, in the reasonable opinion of the Administrative Agent, likely to result in the termination of such Plan for purposes of Title IV of ERISA; (C) a Termination Event shall occur with respect to a Multiemployer Plan or Multiple Employer Plan, which is, in the reasonable opinion of the Administrative Agent, likely to result in (i) the termination of such Plan for purposes of Title IV of ERISA, or (ii) any Credit Party or any ERISA Affiliate incurring any liability in connection with a withdrawal from, reorganization of (within the meaning of Section 4241 of ERISA), or insolvency (within the meaning of Section 4245 of ERISA) of such Plan; or (D) any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility shall occur which may subject any Credit Party or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which any Credit Party or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability. (j) OWNERSHIP. There shall occur a Change of Control. (k) SYNTHETIC LEASE. There shall occur an Event of Default (as defined in the Participation Agreement) under the Participation Agreement. (l) SUBORDINATED DEBT. Any holder of the Subordinated Debt alleges in writing (or any Governmental Authority with applicable jurisdiction determines) (i) that the Lenders are not holders of Senior Indebtedness (as defined in the Indenture) or (ii) the subordinated provisions in the Indenture shall, in whole or part, terminate, cease to be effective or cease to be legally valid, binding and enforceable against any holder of the Subordinated Debt. 85 (m) DEFAULT ON SUBORDINATED DEBT. There shall occur (i) (other than the Indenture Default) an Event of Default (as defined in the Indenture) under the Indenture or (ii) a Change of Control (as defined in the Indenture) under the Indenture. (n) SHAW PROMISSORY NOTE. There shall occur a default or event of default under the Shaw Promissory Note. (o) INDENTURE DEFAULT. The failure of the Credit Parties to receive a written waiver of the Indenture Default in form and substance satisfactory to the Administrative Agent on or before February 1, 2000. (p) ACTION BY SUBORDINATED DEBT HOLDERS. The holders of the Subordinated Debt or any Person acting on behalf of the holders of the Subordinated Debt shall take any remedial action (whether affirmative or by omission) with respect to the Indenture Default (other than the waiver thereof), including but not limited to, acceleration of the Subordinated Debt, written demand with respect to the Subordinated Debt or the pursuit of any assets of the Credit Parties in connection therewith. 9.2 ACCELERATION; REMEDIES. Upon the occurrence, and during the continuance, of an Event of Default, and at any time thereafter unless and until such Event of Default has been waived in writing by the Required Lenders (or the Lenders as may be required hereunder), the Administrative Agent shall, upon the request and direction of the Required Lenders, by written notice to the Borrower, take the following actions without prejudice to the rights of the Administrative Agent or any Lender to enforce its claims against the Credit Parties, except as otherwise specifically provided for herein: (a) TERMINATION OF COMMITMENTS. Declare the Commitments terminated whereupon the Commitments shall be immediately terminated. (b) ACCELERATION OF LOANS. Declare the unpaid principal of and any accrued interest in respect of all Loans, any reimbursement obligations arising from drawings under Letters of Credit and any and all other indebtedness or obligations of any and every kind owing by a Credit Party to any of the Lenders hereunder to be due whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Credit Parties. (c) CASH COLLATERAL. Direct the Borrower to pay (and the Borrower agrees that upon receipt of such notice, or upon the occurrence of an Event of Default under Section 9.1(f), it will immediately pay) to the Administrative Agent additional cash, to be held by the Administrative Agent, for the benefit of the Lenders, in a cash collateral account as additional security for the LOC Obligations in respect of subsequent drawings under all then outstanding Letters of Credit in an amount equal to the maximum aggregate amount which may be drawn under all Letters of Credits then outstanding. 86 (d) ENFORCEMENT OF RIGHTS. Enforce any and all rights and interests created and existing under the Credit Documents, including, without limitation, all rights and remedies existing under the Collateral Documents, all rights and remedies against a Guarantor and all rights of set-off. Notwithstanding the foregoing, if an Event of Default specified in Section 9.1(f) shall occur, then the Commitments shall automatically terminate and all Loans, all reimbursement obligations under Letters of Credit, all accrued interest in respect thereof, all accrued and unpaid fees and other indebtedness or obligations owing to the Lenders hereunder shall immediately become due and payable without the giving of any notice or other action by the Administrative Agent or the Lenders, which notice or other action is expressly waived by the Credit Parties. Notwithstanding the fact that enforcement powers reside primarily with the Administrative Agent, each Lender has, to the extent permitted by law, a separate right of payment and shall be considered a separate "creditor" holding a separate "claim" within the meaning of Section 101(5) of the Bankruptcy Code or any other insolvency statute. 9.3 ALLOCATION OF PAYMENTS AFTER EVENT OF DEFAULT. Notwithstanding any other provisions of this Credit Agreement, after the occurrence and during the continuance of an Event of Default, all amounts collected or received by the Administrative Agent or any Lender on account of amounts outstanding under any of the Credit Documents or in respect of the Collateral shall be paid over or delivered as follows: FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation reasonable attorneys' fees) of the Administrative Agent or any of the Lenders in connection with enforcing the rights of the Lenders under the Credit Documents and any protective advances made by the Administrative Agent or any of the Lenders with respect to the Collateral under or pursuant to the terms of the Collateral Documents; SECOND, to payment of any fees owed to the Administrative Agent, the Issuing Lender or any Lender; THIRD, to the payment of all accrued interest payable to the Lenders hereunder and all other obligations which shall have become due and payable under the Credit Documents and not repaid pursuant to clauses "FIRST" and "SECOND" above; FOURTH, to the payment of the outstanding principal amount of the Loans and unreimbursed drawings under Letters of Credit, and to the payment or cash collateralization of the outstanding LOC Obligations, pro rata as set forth below; FIFTH, to any principal amounts outstanding under Hedging Agreements between a Credit Party and a Lender, pro rata, as set forth below; and 87 SIXTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus. In carrying out the foregoing, (a) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; (b) each of the Lenders shall receive an amount equal to its pro rata share (based on the proportion that the then outstanding Loans, LOC Obligations and obligations under Hedging Agreements held by such Lender bears to the aggregate then outstanding Loans, LOC Obligations and obligations under Hedging Agreements) of amounts available to be applied; and (c) to the extent that any amounts available for distribution pursuant to clause "FOURTH" above are attributable to the issued but undrawn amount of outstanding Letters of Credit, such amounts shall be held by the Administrative Agent in a cash collateral account and applied (x) first, to reimburse the Issuing Lender from time to time for any drawings under such Letters of Credit and (y) then, following the expiration of all Letters of Credit, to all other obligations of the types described in clauses "FOURTH," and "FIFTH" above in the manner provided in this Section 9.3. SECTION 10 AGENCY PROVISIONS 10.1 APPOINTMENT. Each Lender hereby designates and appoints NationsBank, N.A. as Administrative Agent of such Lender to act as specified herein and the other Credit Documents, and each such Lender hereby authorizes the Administrative Agent, as the agent for such Lender, to take such action on its behalf under the provisions of this Credit Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated by the terms hereof and of the other Credit Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere herein and in the other Credit Documents, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein and therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Credit Agreement or any of the other Credit Documents, or shall otherwise exist against the Administrative Agent. The provisions of this Section are solely for the benefit of the Administrative Agent and the Lenders and none of the Credit Parties shall have any rights as a third party beneficiary of the provisions hereof. In performing its functions and duties under this Credit Agreement and the other Credit Documents, the Administrative Agent shall act solely as the agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for any Credit Party. 10.2 DELEGATION OF DUTIES. The Administrative Agent may execute any of its duties hereunder or under the other Credit Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel 88 concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 10.3 EXCULPATORY PROVISIONS. Neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection herewith or in connection with any of the other Credit Documents (except for its or such Person's own gross negligence or willful misconduct) or responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any of the Credit Parties contained herein or in any of the other Credit Documents or in any certificate, report, document, financial statement or other written or oral statement referred to or provided for in, or received by the Administrative Agent under or in connection herewith or in connection with the other Credit Documents, or enforceability or sufficiency therefor of any of the other Credit Documents, or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Administrative Agent shall not be responsible to any Lender for the effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Credit Agreement, or any of the other Credit Documents or for any representations, warranties, recitals or statements made herein or therein or made by a Borrower or any Credit Party in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by the Administrative Agent to the Lenders or by or on behalf of the Credit Parties to the Administrative Agent or any Lender or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or the use of the Letters of Credit or of the existence or possible existence of any Default or Event of Default or to inspect the properties, books or records of the Credit Parties. The Administrative Agent is not a trustee for the Lenders and owes no fiduciary duty to the Lenders. 10.4 RELIANCE ON COMMUNICATIONS. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to any of the Credit Parties, independent accountants and other experts selected by the Administrative Agent with reasonable care). The Administrative Agent may deem and treat the Lenders as the owner of its interests hereunder for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent in accordance with Section 11.3(b). The Administrative Agent shall be fully justified in failing or refusing to take any action under this Credit Agreement or under any of the other Credit Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all 89 liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or under any of the other Credit Documents in accordance with a request of the Required Lenders (or to the extent specifically provided in Section 11.6, all the Lenders) and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders (including their successors and assigns). 10.5 NOTICE OF DEFAULT. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or a Credit Party referring to the Credit Document, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders and as is permitted by the Credit Documents. 10.6 NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER LENDERS. Each Lender expressly acknowledges that neither the Administrative Agent, BASL nor any of their officers, directors, employees, agent, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Administrative Agent or any affiliate thereof hereinafter taken, including any review of the affairs of any Credit Party, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent and BASL that it has, independently and without reliance upon the Administrative Agent or BASL or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Credit Parties and made its own decision to make its Loans hereunder and enter into this Credit Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or BASL or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Credit Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Credit Parties. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent and BASL shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, assets, property, financial or other conditions, prospects or creditworthiness of the Credit Parties which may come into the possession of the Administrative Agent, BASL or any of their officers, directors, employees, agents, attorneys-in-fact or affiliates. 10.7 INDEMNIFICATION. 90 The Lenders agree to indemnify the Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitments (or if the Commitments have expired or been terminated, in accordance with the respective principal amounts of outstanding Loans and Participation Interest of the Lenders), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following payment in full of the Credit Party Obligations) be imposed on, incurred by or asserted against the Administrative Agent in its capacity as such in any way relating to or arising out of this Credit Agreement or the other Credit Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; PROVIDED that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of the Administrative Agent. If any indemnity furnished to the Administrative Agent for any purpose shall, in the opinion of the Administrative Agent, be insufficient or become impaired, the Administrative Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section shall survive the payment of the Credit Party Obligations and all other amounts payable hereunder and under the other Credit Documents. 10.8 ADMINISTRATIVE AGENT IN ITS INDIVIDUAL CAPACITY. The Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with a Borrower or any other Credit Party as though the Administrative Agent were not the Administrative Agent hereunder. With respect to the Loans made and Letters of Credit issued and all obligations owing to it, the Administrative Agent shall have the same rights and powers under this Credit Agreement as any Lender and may exercise the same as though they were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 10.9 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may, at any time, resign upon 20 days written notice to the Lenders. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 60 days after the notice of resignation, then the retiring Administrative Agent shall select a successor Administrative Agent, provided such successor is an Eligible Assignee. Upon the acceptance of any appointment as the Administrative Agent hereunder by a successor, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations as the Administrative Agent, as appropriate, under this Credit Agreement and the other Credit Documents and the provisions of this Section 91 10.9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Agent under this Credit Agreement. SECTION 11 MISCELLANEOUS 11.1 NOTICES. Except as otherwise expressly provided herein, all notices and other communications shall have been duly given and shall be effective (a) when delivered, (b) when transmitted via telecopy (or other facsimile device) to the number set out below, (c) the Business Day following the day on which the same has been delivered prepaid to a reputable national overnight air courier service, or (d) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case to the respective parties at the address or telecopy numbers set forth on SCHEDULE 11.1, or at such other address as such party may specify by written notice to the other parties hereto. 11.2 RIGHT OF SET-OFF. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default and the commencement of remedies described in Section 9.2, each Lender is authorized at any time and from time to time, without presentment, demand, protest or other notice of any kind (all of which rights being hereby expressly waived), to set-off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Lender (including, without limitation, branches, agencies or Affiliates of such Lender wherever located) to or for the credit or the account of any Credit Party against obligations and liabilities of such Credit Party to the Lenders hereunder, under the Notes, the other Credit Documents or otherwise, irrespective of whether the Administrative Agent or the Lenders shall have made any demand hereunder and although such obligations, liabilities or claims, or any of them, may be contingent or unmatured, and any such set-off shall be deemed to have been made immediately upon the occurrence of an Event of Default even though such charge is made or entered on the books of such Lender subsequent thereto. The Credit Parties hereby agree that any Person purchasing a participation in the Loans and Commitments hereunder pursuant to Section 11.3(c) or 3.8 may exercise all rights of set-off with respect to its participation interest as fully as if such Person were a Lender hereunder. 11.3 BENEFIT OF AGREEMENT. (a) GENERALLY. This Credit Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; PROVIDED that none of the Credit Parties may assign and transfer any of its interests (except as permitted by Section 8.4 or 8.5) without the prior written consent of the Lenders; and 92 PROVIDED FURTHER that the rights of each Lender to transfer, assign or grant participations in its rights and/or obligations hereunder shall be limited as set forth below in this Section 11.3. (b) ASSIGNMENTS. Each Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Credit Agreement (including, without limitation, all or a portion of its Loans, its Notes, and its Commitments); PROVIDED, HOWEVER, that: (i) each such assignment shall be to an Eligible Assignee; (ii) except in the case of an assignment to another Lender or an assignment of all of a Lender's rights and obligations under this Credit Agreement, any such partial assignment shall be in an amount at least equal to $5,000,000 (or, if less, the remaining amount of the Commitment being assigned by such Lender) or an integral multiple of $1,000,000 in excess thereof; (iii) each such assignment by a Lender shall be of a constant, and not varying, percentage of all of its rights and obligations under this Credit Agreement and the Notes; (iv) unless otherwise agreed to by the Borrower and the Administrative Agent, such Lender proposing to assign a portion of its Commitment shall be required to assign to such Eligible Assignee (A) an identical percentage of its Commitment (as defined in Appendix A to the Participation Agreement) and (B) an identical percentage of its Holder Commitment (as defined in Appendix A to the Participation Agreement); provided that to the extent an Affiliate of any Lender holds any portion of such Commitment or Holder Commitment, such Lender shall cause such Affiliate to assign to such Eligible Assignee (C) an identical percentage of its Commitment (as defined in the Appendix A to the Participation Agreement) and (D) an identical percentage of its Holder Commitment (as defined in Appendix A to the Participation Agreement); (v) the parties to such assignment shall execute and deliver to the Administrative Agent for its acceptance an Assignment Agreement in substantially the form of EXHIBIT 11.3(b), together with a processing fee from the assignor of $3,500. Upon execution, delivery, and acceptance of such Assignment Agreement, the assignee thereunder shall be a party hereto and, to the extent of such assignment, have the obligations, rights, and benefits of a Lender hereunder and the assigning Lender shall, to the extent of such assignment, relinquish its rights and be released from its obligations under this Credit Agreement. Upon the consummation of any assignment pursuant to this Section 11.3(b), the assignor, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, new Notes are issued to the assignor and the 93 assignee. If the assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of taxes in accordance with Section 3.13. By executing and delivering an assignment agreement in accordance with this Section 11.3(b), the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (A) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and the assignee warrants that it is an Eligible Assignee; (B) except as set forth in clause (A) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Credit Agreement, any of the other Credit Documents or any other instrument or document furnished pursuant hereto or thereto, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Credit Agreement, any of the other Credit Documents or any other instrument or document furnished pursuant hereto or thereto or the financial condition of any Credit Party or the performance or observance by any Credit Party of any of its obligations under this Credit Agreement, any of the other Credit Documents or any other instrument or document furnished pursuant hereto or thereto; (C) such assignee represents and warrants that it is legally authorized to enter into such assignment agreement; (D) such assignee confirms that it has received a copy of this Credit Agreement, the other Credit Documents and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such assignment agreement; (E) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Credit Agreement and the other Credit Documents; (F) such assignee appoints and authorizes the Administrative Agent to take such action on its behalf and to exercise such powers under this Credit Agreement or any other Credit Document as are delegated to the Administrative Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto; and (G) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Credit Agreement and the other Credit Documents are required to be performed by it as a Lender. (c) REGISTER. The Administrative Agent shall maintain a copy of each Assignment Agreement delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time (the "REGISTER"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Credit Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. 94 (d) ACCEPTANCE. Upon its receipt of an Assignment Agreement executed by the parties thereto, together with any Note subject to such assignment and payment of the processing fee, the Administrative Agent shall, if such Assignment Agreement has been completed and is in substantially the form of EXHIBIT 11.3(b) hereto, (i) accept such Assignment Agreement, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the parties thereto. (e) PARTICIPATIONS. Each Lender may sell participations to one or more Persons in all or a portion of its rights, obligations or rights and obligations under this Credit Agreement (including all or a portion of its Commitments and its Loans); PROVIDED, HOWEVER, that (i) such Lender's obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participant shall be entitled to the benefit of the yield protection provisions contained in Sections 3.9 through 3.14, inclusive, and the right of set-off contained in Section 11.2, and (iv) the Borrower shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Credit Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to its Loans and its Notes and to approve any amendment, modification, or waiver of any provision of this Credit Agreement (other than amendments, modifications, or waivers decreasing the amount of principal of or the rate at which interest is payable on such Loans or Notes, extending any scheduled principal payment date or date fixed for the payment of interest on such Loans or Notes, extending its Commitments or releasing all or substantially all of the Collateral securing the Credit Party Obligations). - - (f) NONRESTRICTED ASSIGNMENTS. Notwithstanding any other provision set forth in this Credit Agreement, any Lender may at any time assign and pledge all or any portion of its Loans and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations hereunder. (g) INFORMATION. Any Lender may furnish any information concerning the Borrower or any of its Subsidiaries in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 11.16 hereof. 11.4 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Borrower or any Credit Party and the Administrative Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the 95 Administrative Agent or any Lender would otherwise have. No notice to or demand on any Credit Party in any case shall entitle any Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand. 11.5 PAYMENT OF EXPENSES; INDEMNIFICATION. The Credit Parties agree to: (a) pay all reasonable out-of-pocket costs and expenses of (i) the Administrative Agent and BASL in connection with (A) the negotiation, preparation, execution and delivery and administration of this Credit Agreement and the other Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and expenses of Moore & Van Allen, PLLC, special counsel to the Administrative Agent), (B) any amendment, waiver or consent relating hereto and thereto including, but not limited to, any such amendments, waivers or consents resulting from or related to any work-out, renegotiation or restructure relating to the performance by the Credit Parties under this Credit Agreement, and (C) searches of the UCC and the preparation and filing of UCC financing statements in connection with such searches subsequent to the Closing Date (including, without limitation, the reasonable fees and expenses of Moore & Van Allen, PLLC) and (ii) the Administrative Agent and the Lenders in connection with (A) enforcement of the Credit Documents and the documents and instruments referred to therein, including, without limitation, in connection with any such enforcement, the reasonable fees and disbursements of counsel for the Administrative Agent and each of the Lenders, and (B) any bankruptcy or insolvency proceeding of a Credit Party of any of its Subsidiaries and (b) indemnify the Administrative Agent, BASL and each Lender, its officers, directors, employees, representatives and agents from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, any investigation, litigation or other proceeding (whether or not the Administrative Agent, BASL or Lender is a party thereto) related to (i) the entering into and/or performance of any Credit Document or the use of proceeds of any Loans (including other extensions of credit) hereunder or the consummation of any other transactions contemplated in any Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding, (ii) any Environmental Claim, (iii) any claims for Non-Excluded Taxes (but excluding in the case of (i), (ii) and (iii) above, any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of gross negligence or willful misconduct on the part of the Person to be indemnified). 11.6 AMENDMENTS, WAIVERS AND CONSENTS. Neither this Credit Agreement nor any other Credit Document nor any of the terms hereof or thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is in writing and signed by the Required Lenders and the then Credit Parties; PROVIDED that no such amendment, change, waiver, discharge or termination shall without the consent of each Lender affected thereby: (a) extend the final maturity of any Loan or of any reimbursement obligation; or any portion thereof, arising from drawings under Letters of Credit; 96 (b) reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) thereon or fees hereunder; (c) reduce or waive the principal amount of any Loan or of any reimbursement obligation, or any portion thereof, arising from drawings under Letters of Credit; (d) increase or extend the Revolving Committed Amount, the LOC Committed Amount or the Commitment of any Lender (it being understood and agreed that a waiver of any Default or Event of Default or a waiver of any mandatory reduction in the Revolving Committed Amount or the LOC Committed Amount shall not constitute a change in the terms of the Revolving Committed Amount, the LOC Committed Amount or the Commitment of any Lender); (e) release all or substantially all of the Collateral securing the Credit Party Obligations hereunder (provided that the Administrative Agent may, without consent from any other Lender, release any Collateral that is sold or transferred by a Credit Party in conformance with Section 8.5); (f) release the Borrower from its obligations or release all or substantially all of the other Credit Parties from their respective obligations under the Credit Documents; (g) amend, modify or waive any provision of this Section or Section 3.4(a), 3.4(b), 3.4(c), 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13, 3.14, 5.2, 9.1(a), 11.2, 11.3 or 11.5; (h) reduce any percentage specified in, or otherwise modify, the definition of Required Lenders; or (i) consent to the assignment or transfer by the Borrower of any of its rights and obligations under (or in respect of) the Credit Documents. Notwithstanding the above, no provisions of Section 10 may be amended or modified without the consent of the Administrative Agent, and no provisions of Section 2.2, Section 2.3 or Section 2.4 may be amended or modified without the consent of the Issuing Lender. Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, (x) each Lender is entitled to vote as such Lender sees fit on any reorganization plan that affects the Loans or the Letters of Credit, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous consent provisions set forth herein and (y) the Required Lenders may consent to allow a Credit Party to use cash collateral in the context of a bankruptcy or insolvency proceeding. 11.7 COUNTERPARTS/TELECOPY. 97 This Credit Agreement may be executed in any number of counterparts, each of which where so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. Delivery of executed counterparts by telecopy shall be as effective as an original and shall constitute a representation that an original will be delivered. 11.8 HEADINGS. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Credit Agreement. 11.9 DEFAULTING LENDER. Each Lender understands and agrees that if such Lender is a Defaulting Lender then notwithstanding the provisions of Section 11.6 it shall not be entitled to vote on any matter requiring the consent of the Required Lenders or to object to any matter requiring the consent of all the Lenders; provided, however, that all other benefits and obligations under the Credit Documents shall apply to such Defaulting Lender. 11.10 SURVIVAL OF INDEMNIFICATION AND REPRESENTATIONS AND WARRANTIES. All indemnities set forth herein and all representations and warranties made herein shall survive the execution and delivery of this Credit Agreement, the making of the Loans, the issuance of the Letters of Credit and the repayment of the Loans, LOC Obligations and other obligations and the termination of the Commitments hereunder. 11.11 GOVERNING LAW; JURISDICTION. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA. Any legal action or proceeding with respect to this Credit Agreement or any other Credit Document may be brought in the courts of the State of North Carolina or of the United States for the Western District of North Carolina, and, by execution and delivery of this Credit Agreement, each Credit Party hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of such courts. Each Credit Party further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address for notices pursuant to Section 11.1, such service to become effective 10 days after such mailing. Nothing herein shall affect the right of a Lender to serve process in any other manner permitted by law or to commence legal proceedings or to otherwise proceed against a Credit Party in any other jurisdiction. Each Credit Party agrees that a final judgment in any action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner 98 provided by law; provided that nothing in this Section 11.11(a) is intended to impair a Credit Party's right under applicable law to appeal or seek a stay of any judgment. (b) Each Credit Party hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in subsection (a) hereof and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. 11.12 WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY LAW, EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.13 TIME. All references to time herein shall be references to Eastern Standard Time or Eastern Daylight time, as the case may be, unless specified otherwise. 11.14 SEVERABILITY. If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 11.15 FURTHER ASSURANCES. The Credit Parties agree, upon the request of the Administrative Agent, to promptly take such actions, as reasonably requested, as is necessary to carry out the intent of this Credit Agreement and the other Credit Documents, including, but not limited to, such actions as are necessary to ensure that the Lenders have a perfected security interest in the Collateral subject to no Liens other than Permitted Liens. 11.16 CONFIDENTIALITY. Each Lender agrees that it will use its reasonable best efforts to keep confidential and to cause any representative designated under Section 7.12 to keep confidential any non-public information from time to time supplied to it under any Credit Document; PROVIDED, HOWEVER, that nothing herein shall prevent the disclosure of any such information to (a) the extent a Lender in good faith believes such disclosure is required by Requirement of Law, (b) counsel for a Lender or 99 to its accountants, (c) bank examiners or auditors or comparable Persons, (d) any affiliate of a Lender, (e) any other Lender, or any assignee, transferee or participant, or any potential assignee, transferee or participant, of all or any portion of any Lender's rights under this Agreement who is notified of the confidential nature of the information or (f) any other Person in connection with any litigation to which any one or more of the Lenders is a party; and PROVIDED FURTHER that no Lender shall have any obligation under this Section 11.16 to the extent any such information becomes available on a non-confidential basis from a source other than a Credit Party or that any information becomes publicly available other than by a breach of this Section 11.16 by any Lender or representative thereof. 11.17 ENTIRETY. This Credit Agreement together with the other Credit Documents and the Fee Letter represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein. 11.18 BINDING EFFECT; CONTINUING AGREEMENT. (a) This Credit Agreement shall become effective at such time when all of the conditions set forth in Section 5.1 have been satisfied or waived by the Lenders and it shall have been executed by the Borrower, the Guarantors and the Administrative Agent, and the Administrative Agent shall have received copies hereof (telefaxed or otherwise) which, when taken together, bear the signatures of each Lender, and thereafter this Credit Agreement shall be binding upon and inure to the benefit of the Borrower, the Guarantors, the Administrative Agent and each Lender and their respective successors and assigns. Upon this Credit Agreement becoming effective, the Prior Credit Agreement shall be deemed terminated and the lenders party to the Prior Credit Agreement shall no longer have any obligations thereunder. (b) This Credit Agreement shall be a continuing agreement and shall remain in full force and effect until all Loans, LOC Obligations, interest, fees and other Credit Party Obligations have been paid in full and all Commitments and Letters of Credit have been terminated. Upon termination, the Credit Parties shall have no further obligations (other than the indemnification provisions that survive) under the Credit Documents and the Administrative Agent shall, at the request and expense of the Borrower, deliver all Collateral in its possession to the Borrower and release all Liens on Collateral; provided that should any payment, in whole or in part, of the Credit Party Obligations be rescinded or otherwise required to be restored or returned by the Administrative Agent or any Lender, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, then the Credit Documents shall automatically be reinstated and all Liens of the Lenders shall reattach to the Collateral and all amounts required to be restored or returned and all costs and expenses incurred by the Administrative Agent or Lender in connection therewith shall be deemed included as part of the Credit Party Obligations. 100 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 101 AMENDED AND RESTATED CREDIT AGREEMENT Each of the parties hereto has caused a counterpart of this Credit 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: Executive Vice President ------------------------------- 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: Executive Vice President ------------------------------- [SIGNATURES CONTINUE] 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: Vice President of each of the foregoing Guarantors [SIGNATURES CONTINUE] LENDERS: - -------- NATIONSBANK, N.A., individually in its capacity as a Lender, in its capacity as the Administrative Agent, and in its capacity as the Issuing Lender By: /s/ David H. Dinkins ---------------------------------- Name: David H. Dinkins -------------------------------- Title: Vice President ------------------------------- EX-10.23-1 7 EXHIBIT 10.23.1 EXHIBIT 10.23.1 FIRST AMENDMENT TO CREDIT AGREEMENT AND FORBEARANCE THIS FIRST AMENDMENT TO CREDIT AGREEMENT AND FORBEARANCE (this "Agreement") is entered into as of July 23, 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, modified, supplemented, extended or restated from time to time, the "Credit Agreement"); WHEREAS, the following Events of Default exist under the Credit Agreement (collectively, the "Acknowledged Events of Default"): (1) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders the financial statements for fiscal year 1999 which are required by Section 7.1(a) of the Credit Agreement to be delivered to the Administrative Agent and the Lenders within 90 days after the close of such fiscal year; (2) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders the financial statements as of April 30, 1999 which are required by Section 7.1(b)(i) of the Credit Agreement to be delivered to the Administrative Agent and the Lenders within 45 days of the close of the fiscal quarter ending April 30, 1999; (3) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders the financial statements as of the end of May, 1999 which are required by Section 7.1(b)(ii) of the Credit Agreement to be delivered to the Administrative Agent and the Lenders within 30 days of the end of such calendar month; (4) an Executive Officer of the Borrower has failed to deliver to the Administrative Agent and the Lenders the officer's certificates required by Section 7.1(c) of the Credit Agreement which are to be delivered with the financial statements referenced in subclauses (1) and (2) above; (5) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders a certificate of the accountants conducting the annual audit of the financial statements referenced in subclause (1) above which are required by 7.1(f) of the Credit Agreement to be delivered within 90 days after the close of fiscal year 1999; (6) the field examination with respect to the Borrower's accounts receivable and inventory failed to demonstrate that the margined value of the Borrower's accounts receivable and inventory, together with the value attributed to the Executive Buildings and the amount of cash in the Cash Collateral Account totaled at least $112,500,000 as required by Section 7.15(b) of the Credit Agreement; (7) the Borrower has failed to deliver landlord consents satisfactory to the Administrative Agent within 30 days of the Closing Date as required by Section 7.15(d)(vii) of the Credit Agreement; (8) the Borrower has failed to deliver to the Administrative Agent the real estate documentation with respect to the Executive Buildings required by Section 7.15(e) of the Credit Agreement within 30 days of the Closing Date as required by Section 7.15(e) of the Credit Agreement; and (9) each Credit Party changed its fiscal year after the Closing Date in violation of Section 8.10 of the Credit Agreement. WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders waive the Acknowledged Events of Default, and the Administrative Agent and the Lenders have refused that request; WHEREAS, the Borrower has now asked the Administrative Agent and the Lenders to forbear from exercising their rights and remedies arising from the Acknowledged Events of Default until September 24, 1999 (the "Forbearance Termination Date") and to continue to make available to the Borrower the Loans provided under the Credit Agreement; and WHEREAS, the Administrative Agent and the Lenders are, upon and subject to the terms and conditions specified in this Agreement, willing to forbear from exercising their rights and remedies arising from the Acknowledged Events of Default until the Forbearance Termination Date and to continue to make available to the Borrower the Loans. 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. AGREEMENT TO FORBEAR. Subject to the other terms and conditions of this Agreement, the Administrative Agent and the Lenders agree to forbear exercising their rights and remedies arising exclusively as a result of the Acknowledged Events of Default until the Forbearance Termination Date; PROVIDED, HOWEVER, that the Administrative Agent and the Lenders shall be free to exercise any or all of their rights and remedies arising on account of the Acknowledged Events of Default at any time after the occurrence of a Forbearance Default (defined below). 3. FORBEARANCE DEFAULTS. Nothing set forth herein or contemplated hereby is intended to constitute an agreement by the Administrative Agent or the Lenders to forbear the exercise of any of the rights and remedies available to the Administrative Agent and/or the Lenders under the Credit Agreement and the other Credit Documents (all of which rights and remedies are hereby expressly reserved by the Administrative and the Lenders) upon and after the 2 occurrence of a Forbearance Default. For purposes hereof, the term "Forbearance Default" shall mean the existence or occurrence of any or all of the following: (a) any Default or Event of Default under the Credit Agreement or any other Credit Document other than the Acknowledged Events of Default, (b) a breach by the Credit Parties of any term of this Agreement, (c) any Person shall commence any suit or other legal proceeding against any Credit Party or any of its assets to enforce any obligations for Indebtedness of any Credit Party to such Person or (d) the acceleration of the Subordinated Debt prior to its stated maturity. The Administrative Agent and the Lenders shall be free to exercise any or all of their rights and remedies arising on account of any Default or Event of Default under the Credit Agreement or any other Credit Document upon the earlier of (x) the occurrence of a Forbearance Default and (y) the Forbearance Termination Date. This Agreement is a Credit Document. Furthermore, notwithstanding any term to the contrary contained in the Credit Agreement or any other Credit Document, if the Subordinated Debt is accelerated prior to its stated maturity, (i) the Administrative Agent and the Lenders shall be free to exercise any or all of their rights and remedies under the Credit Agreement (including, without limitation, all rights contained in Section 9.2 of the Credit Agreement) or any other Credit Document and (ii) the Lenders shall not be required to make any Loans to the Borrower. 4. NEW DEFINITION. The following definition is hereby added to Section 1.1 of the Credit Agreement and shall read as follows: "SHAW INDEBTEDNESS" means the unsecured indebtedness in the amount of $11,927,000 evidenced by the Shaw Promissory Note. 5. AMENDED DEFINITION. The pricing grid in the definition of "Applicable Percentage" set forth in Section 1.1 of the Credit Agreement is amended and restated in its entirety to read as follows:
- ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- Applicable Applicable Applicable Fixed Charge Percentage for Applicable Percentage for Percentage for Pricing Coverage Eurodollar Loans Percentage for Standby Letter Trade Letter of Level Ratio Base Rate Loans of Credit Fees Credit Fees Commitment Fees - ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- - ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- I GREATER THAN OR EQUAL TO 2.00 to 1.0 1.25% 0.0% 1.25% 0.625% - ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- - ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- II GREATER THAN OR EQUAL TO 1.75 to 1.0 1.625% 0.0% 1.625% 0.625% but LESS THAN 2.00 to 1.0 - ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- - ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- III GREATER THAN OR EQUAL TO 1.50 to 1.0 2.00% 0.25% 2.00% 0.625% but LESS THAN 1.75 to 1.0 - ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- - ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- IV GREATER THAN OR EQUAL TO 1.30 to 1.0 2.25% 0.50% 2.25% 0.625% but LESS THAN 1.50 to 1.0 - ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- - ------------- ------------------------------------- ----------------- ---------------- ----------------- ----------------- V LESS THAN 1.30 to 1.0 2.50% 0.50% 2.50% 0.625% - ------------- ------------------------------------- ----------------- ---------------- ----------------- -----------------
- ------------- ------------------ Applicable Percentage for Pricing Commitment Level Fees - ------------- ------------------ - ------------- ------------------ I 0.250% - ------------- ------------------ - ------------- ------------------ II 0.300% - ------------- ------------------ - ------------- ------------------ III 0.375% - ------------- ------------------ - ------------- ------------------ IV 0.450% - ------------- ------------------ - ------------- ------------------ V 0.500% - ------------- ------------------
3 6. REVOLVING LOAN COMMITMENT. The two provisos in Section 2.1(a) of the Credit Agreement are hereby amended and restated in their entirety to read as follows: 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 (A) the lesser of (x) the Revolving Committed Amount and (y) the Borrowing Base Assets and (B) until such time as the Indenture Default is cured or an Acceleration Event occurs, $22,500,000; PROVIDED, FURTHER, HOWEVER, that if an Acceleration Event occurs, 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 may only exceed $22,500,000 if such excess amount is used to retire the Securities 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. 7. PREPAYMENT OF INDEBTEDNESS. A subsection (c) is hereby added at the end of Section 8.15 of the Credit Agreement and shall read as follows: (c) notwithstanding any term to the contrary contained herein, (i) make or offer to make any payments with respect to the Shaw Indebtedness without the prior written consent of the Administrative Agent, (ii) redeem or offer to redeem any of the Shaw Indebtedness without the prior written consent of the Administrative Agent or (iii) deposit any funds intended to discharge the Shaw Indebtedness without the prior written consent of the Administrative Agent. 8. SHAW INDEBTEDNESS. The following sentence is hereby added to the Credit Agreement after subsection (c) of Section 8.15 of the Credit Agreement and shall read as follows: The Shaw Indebtedness may not be amended or modified in any manner without the prior written consent of the Administrative Agent. 9. 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. 10. CONDITIONS PRECEDENT. The effectiveness of this Agreement is subject to the satisfaction of each of the following conditions: 4 (a) The Administrative Agent shall have received original duly executed 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 Borrower shall have delivered to the Administrative Agent, with respect to the Real Property on which each of the Executive Buildings is located, (i) a deed to secure debt and security agreement executed by the Borrower in favor of the Administrative Agent, in form and substance satisfactory to the Administrative Agent, (ii) duly executed UCC fixture financing statements for each appropriate jurisdiction as is necessary, in the Administrative Agent's sole discretion, to perfect the Administrative Agent's security interest in the Collateral described therein, (iii) an opinion of counsel to the Borrower in form and substance satisfactory to the Administrative Agent, (iv) a mortgagee title policy, in form and substance satisfactory to the Administrative Agent, together with such title endorsements as the Administrative Agent may require, (v) an appraisal from a qualified appraiser satisfactory to the Administrative Agent, (vi) an environmental site assessment from an environmental consultant satisfactory to the Administrative Agent, (viii) an ALTA survey, in form and substance satisfactory to the Administrative Agent and (ix) such other real estate collateral documentation as the Administrative Agent may require. (d) The Administrative Agent shall have received such other documents and information as it deems reasonably necessary. 11. 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 5 (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) other than the Acknowledged Events of Default 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 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] 6 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] 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: EVP Finance 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 --------------------------------------- EX-10.23(2) 8 EXHIBIT 10.23.2 Exhibit 10.23.2 SECOND AMENDMENT TO CREDIT AGREEMENT, FORBEARANCE AND WAIVER THIS SECOND AMENDMENT TO CREDIT AGREEMENT, FORBEARANCE AND WAIVER (this "Agreement") is entered into as of September 7, 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") and as further amended, modified, supplemented, extended or restated from time to time, the "Credit Agreement"); WHEREAS, the following Events of Default exist under the Credit Agreement (collectively, the "Acknowledged Events of Default"): (1) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders the financial statements for fiscal year 1999 which are required by Section 7.1(a) of the Credit Agreement to be delivered to the Administrative Agent and the Lenders within 90 days after the close of such fiscal year; (2) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders the financial statements as of April 30, 1999 which are required by Section 7.1(b)(i) of the Credit Agreement to be delivered to the Administrative Agent and the Lenders within 45 days of the close of the fiscal quarter ending April 30, 1999; (3) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders the financial statements as of the end of May, 1999 which are required by Section 7.1(b)(ii) of the Credit Agreement to be delivered to the Administrative Agent and the Lenders within 30 days of the end of such calendar month; (4) an Executive Officer of the Borrower has failed to deliver to the Administrative Agent and the Lenders the officer's certificates required by Section 7.1(c) of the Credit Agreement which are to be delivered with the financial statements referenced in subclauses (1) and (2) above; (5) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders a certificate of the accountants conducting the annual audit of the financial statements referenced in subclause (1) above which are required by 7.1(f) of the Credit Agreement to be delivered within 90 days after the close of fiscal year 1999; (6) the field examination with respect to the Borrower's accounts receivable and inventory failed to demonstrate that the margined value of the Borrower's accounts receivable and inventory, together with the value attributed to the Executive Buildings and the amount of cash in the Cash Collateral Account totaled at least $112,500,000 as required by Section 7.15(b) of the Credit Agreement; (7) the Borrower has failed to deliver landlord consents satisfactory to the Administrative Agent within 30 days of the Closing Date as required by Section 7.15(d)(vii) of the Credit Agreement; (8) the Borrower has failed to deliver to the Administrative Agent the real estate documentation with respect to the Executive Buildings required by Section 7.15(e) of the Credit Agreement within 30 days of the Closing Date as required by Section 7.15(e) of the Credit Agreement; and (9) each Credit Party changed its fiscal year after the Closing Date in violation of Section 8.10 of the Credit Agreement. WHEREAS, pursuant to the terms of the First Amendment, the Administrative Agent and the Lenders agreed to forbear from exercising their rights and remedies arising from the Acknowledged Events of Default until September 24, 1999 (the "Forbearance Termination Date") and to continue to make available to the Borrower the Loans provided under the Credit Agreement; WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders agree to (i) extend the Forbearance Termination Date until October 15, 1999 (the "New Forbearance Termination Date"), (ii) continue to make available to the Borrower the Loans provided under the Credit Agreement and (iii) waive the Event of Default resulting from the failure of the Borrower to deliver to the Administrative Agent the real estate documentation with respect to the Executive Buildings required by Section 7.15(e) of the Credit Agreement within 30 days of the Closing Date as required by Section 7.15(e) of the Credit Agreement (the "Real Estate Documentation Default"); and WHEREAS, the Administrative Agent and the Lenders are, upon and subject to the terms and conditions specified in this Agreement, willing to (i) forbear from exercising their rights and remedies arising from the Acknowledged Events of Default until the New Forbearance Termination Date, (ii) continue to make available to the Borrower the Loans and (iii) waive the Real Estate Documentation Default. 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. AGREEMENT TO FORBEAR. Subject to the other terms and conditions of this Agreement, the Administrative Agent and the Lenders agree to forbear exercising their rights and remedies arising exclusively as a result of the Acknowledged Events of Default until the New Forbearance Termination Date; PROVIDED, HOWEVER, that the Administrative Agent and the Lenders shall be free to exercise any or all of their rights and remedies arising on account of the 2 Acknowledged Events of Default at any time after the occurrence of a Forbearance Default (defined below). 3. FORBEARANCE DEFAULTS. Nothing set forth herein or contemplated hereby is intended to constitute an agreement by the Administrative Agent or the Lenders to forbear the exercise of any of the rights and remedies available to the Administrative Agent and/or the Lenders under the Credit Agreement and the other Credit Documents (all of which rights and remedies are hereby expressly reserved by the Administrative Agent and the Lenders) upon and after the occurrence of a Forbearance Default. For purposes hereof, the term "Forbearance Default" shall mean the existence or occurrence of any or all of the following: (a) any Default or Event of Default under the Credit Agreement or any other Credit Document other than the Acknowledged Events of Default, (b) a breach by the Credit Parties of any term of this Agreement, (c) any Person shall commence any suit or other legal proceeding against any Credit Party or any of its assets to enforce any obligations for Indebtedness of any Credit Party to such Person or (d) the acceleration of the Subordinated Debt prior to its stated maturity. The Administrative Agent and the Lenders shall be free to exercise any or all of their rights and remedies arising on account of any Default or Event of Default under the Credit Agreement or any other Credit Document upon the earlier of (x) the occurrence of a Forbearance Default and (y) the New Forbearance Termination Date. This Agreement is a Credit Document. Furthermore, notwithstanding any term to the contrary contained in the Credit Agreement or any other Credit Document, if the Subordinated Debt is accelerated prior to its stated maturity, (i) the Administrative Agent and the Lenders shall be free to exercise any or all of their rights and remedies under the Credit Agreement (including, without limitation, all rights contained in Section 9.2 of the Credit Agreement) or any other Credit Document and (ii) the Lenders shall not be required to make any Loans to the Borrower. 4. WAIVER. The Administrative Agent and the Lenders, by their execution below, hereby waive the Real Estate Documentation Default. Except for the waiver contained herein, this Agreement does not modify or effect the obligations of the Credit Parties to comply fully with all terms, conditions and covenants in the Credit Documents. This one-time waiver is limited solely to the Real Estate Documentation Default and shall not be construed to be a (a) waiver of any other Default or Event of Default (including, without limitation, the other Acknowledged Events of Default), (b) modification or amendment to the Credit Agreement, or (c) waiver of any other rights or remedies the Administrative Agent or any Lender may have under the Credit Agreement or any other Credit Documents or under applicable law. 5. REVOLVING LOAN COMMITMENT. The two provisos in Section 2.1(a) of the Credit Agreement are hereby amended and restated in their entirety to read as follows: 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 (A) the lesser of (x) the Revolving Committed Amount and (y) the Borrowing Base Assets and (B) until such time as the Indenture Default is cured or an Acceleration Event occurs, $27,500,000; PROVIDED, FURTHER, HOWEVER, that if an Acceleration Event occurs, the sum of the aggregate amount of Revolving Loans outstanding plus the aggregate amount of LOC Obligations outstanding 3 plus the aggregate amount of Synthetic Lease Obligations outstanding may only exceed $27,500,000 if such excess amount is used to retire the Securities 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. 6. 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. 7. 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 such other documents and information as it deems reasonably necessary. 8. 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 4 (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) other than the Acknowledged Events of Default 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 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] 5 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] 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: EVP Finance 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 EX-10.23-3 9 EXHIBIT 10.23.3 EXHIBIT 10.23.3 THIRD AMENDMENT TO CREDIT AGREEMENT AND FORBEARANCE THIS THIRD AMENDMENT TO CREDIT AGREEMENT AND FORBEARANCE (this "Agreement") is entered into as of October 11, 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") and that certain Second Amendment to Credit Agreement, Forbearance and Waiver dated as of September 7, 1999 (the "Second Amendment") and as further amended, modified, supplemented, extended or restated from time to time, the "Credit Agreement"); WHEREAS, the following Events of Default exist under the Credit Agreement (collectively, the "Acknowledged Events of Default"): (1) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders the financial statements for fiscal year 1999 which are required by Section 7.1(a) of the Credit Agreement to be delivered to the Administrative Agent and the Lenders within 90 days after the close of such fiscal year; (2) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders both the financial statements as of April 30, 1999 and the financial statements as of July 31, 1999 which are required by Section 7.1(b)(i) of the Credit Agreement to be delivered to the Administrative Agent and the Lenders within 45 days of the close of the fiscal quarters ending April 30, 1999 and July 31, 1999; (3) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders the financial statements as of the end of May, 1999, June, 1999 and August, 1999 which are required by Section 7.1(b)(ii) of the Credit Agreement to be delivered to the Administrative Agent and the Lenders within 30 days of the end of such calendar months; (4) an Executive Officer of the Borrower has failed to deliver to the Administrative Agent and the Lenders the officer's certificates required by Section 7.1(c) of the Credit Agreement which are to be delivered with the financial statements referenced in subclauses (1) and (2) above; (5) the Credit Parties have failed to furnish to the Administrative Agent and the Lenders a certificate of the accountants conducting the annual audit of the financial statements referenced in subclause (1) above which are required by 7.1(f) of the Credit Agreement to be delivered within 90 days after the close of fiscal year 1999; (6) the field examination with respect to the Borrower's accounts receivable and inventory failed to demonstrate that the margined value of the Borrower's accounts receivable and inventory, together with the value attributed to the Executive Buildings and the amount of cash in the Cash Collateral Account totaled at least $112,500,000 as required by Section 7.15(b) of the Credit Agreement; (7) the Borrower has failed to deliver landlord consents satisfactory to the Administrative Agent within 30 days of the Closing Date as required by Section 7.15(d)(vii) of the Credit Agreement; and (8) each Credit Party changed its fiscal year after the Closing Date in violation of Section 8.10 of the Credit Agreement. WHEREAS, pursuant to the terms of the First Amendment, the Administrative Agent and the Lenders agreed to forbear from exercising their rights and remedies arising from the Acknowledged Events of Default until September 24, 1999 (the "Forbearance Termination Date") and to continue to make available to the Borrower the Loans provided under the Credit Agreement; WHEREAS, pursuant to the terms of the Second Amendment, the Administrative Agent and the Lenders agreed to forbear from exercising their rights and remedies arising from the Acknowledged Events of Default until October 15, 1999 (the "Extended Forbearance Termination Date"), to waive the Event of Default resulting from the failure of the Borrower to deliver to the Administrative Agent the real estate documentation with respect to the Executive Buildings within 30 days of the Closing Date as required by Section 7.15(e) of the Credit Agreement, and to continue to make available to the Borrower the Loans provided under the Credit Agreement; WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders agree to (i) extend the Extended Forbearance Termination Date until November 15, 1999 (the "New Forbearance Termination Date") and (ii) continue to make available to the Borrower the Loans provided under the Credit Agreement; and WHEREAS, the Administrative Agent and the Lenders are, upon and subject to the terms and conditions specified in this Agreement, willing to (i) forbear from exercising their rights and remedies arising from the Acknowledged Events of Default until the New Forbearance Termination Date and (ii) continue to make available to the Borrower the Loans. 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. AGREEMENT TO FORBEAR. Subject to the other terms and conditions of this Agreement, the Administrative Agent and the Lenders agree to forbear exercising their rights and 2 remedies arising exclusively as a result of the Acknowledged Events of Default until the New Forbearance Termination Date; PROVIDED, HOWEVER, that the Administrative Agent and the Lenders shall be free to exercise any or all of their rights and remedies arising on account of the Acknowledged Events of Default at any time after the occurrence of a Forbearance Default (defined below). 3. FORBEARANCE DEFAULTS. Nothing set forth herein or contemplated hereby is intended to constitute an agreement by the Administrative Agent or the Lenders to forbear the exercise of any of the rights and remedies available to the Administrative Agent and/or the Lenders under the Credit Agreement and the other Credit Documents (all of which rights and remedies are hereby expressly reserved by the Administrative Agent and the Lenders) upon and after the occurrence of a Forbearance Default. For purposes hereof, the term "Forbearance Default" shall mean the existence or occurrence of any or all of the following: (a) any Default or Event of Default under the Credit Agreement or any other Credit Document other than the Acknowledged Events of Default, (b) a breach by the Credit Parties of any term of this Agreement, (c) any Person shall commence any suit or other legal proceeding against any Credit Party or any of its assets to enforce any obligations for Indebtedness of any Credit Party to such Person or (d) the acceleration of the Subordinated Debt prior to its stated maturity. The Administrative Agent and the Lenders shall be free to exercise any or all of their rights and remedies arising on account of any Default or Event of Default under the Credit Agreement or any other Credit Document upon the earlier of (x) the occurrence of a Forbearance Default and (y) the New Forbearance Termination Date. This Agreement is a Credit Document. Furthermore, notwithstanding any term to the contrary contained in the Credit Agreement or any other Credit Document, if the Subordinated Debt is accelerated prior to its stated maturity, (i) the Administrative Agent and the Lenders shall be free to exercise any or all of their rights and remedies under the Credit Agreement (including, without limitation, all rights contained in Section 9.2 of the Credit Agreement) or any other Credit Document and (ii) the Lenders shall not be required to make any Loans to the Borrower. 4. REVOLVING LOAN COMMITMENT. The two provisos in Section 2.1(a) of the Credit Agreement are hereby amended and restated in their entirety to read as follows: 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 (A) the lesser of (x) the Revolving Committed Amount and (y) the Borrowing Base Assets and (B) until such time as the Indenture Default is cured or an Acceleration Event occurs, $32,500,000 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. 5. SALE OR LEASE OF ASSETS. The first paragraph of Section 8.5 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: 3 8.5 SALE OR LEASE OF ASSETS. No Credit Party will, nor will it permit its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business or assets whether now owned or hereafter acquired, including, without limitation, inventory, receivables, equipment, real property interests (whether owned or leasehold), and securities, other than (a) any inventory sold or otherwise disposed of in the ordinary course of business; (b) the sale, lease, transfer or other disposal by a Credit Party (other than the Borrower) of any or all of its assets to another Credit Party; (c) obsolete, slow-moving, idle or worn-out assets no longer used or useful in its business or the trade in of equipment for equipment in better condition or of better quality; (d) the transfer of assets which constitute a Permitted Investment; (e) the lease or sublease of real property interests in the ordinary course of business; (f) accounts receivable and related rights and interests sold to GE Capital pursuant to the terms of the GE Capital Dealer Agreement; (g) leases related to vans for MaxCare franchises not to exceed $3,500,000, in the aggregate, during the term of this Credit Agreement; (h) the sale of that certain real property owned by the Borrower and located at 1911 North Highway 16, Denver, North Carolina; PROVIDED that the proceeds from the sale of such real property (net of reasonable transaction costs payable to third parties and taxes paid or a good faith estimate of the taxes payable with respect to such proceeds) shall be deposited in the Cash Collateral Account and shall be subject to the terms of the Credit Documents relating to the Cash Collateral Account; and (i) other sales of assets not to exceed $2,500,000, in the aggregate, during the term of this Credit Agreement in connection with the closing and liquidation of retail stores. 6. 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. 7. 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 such other documents and information as it deems reasonably necessary. 4 8. 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) other than the Acknowledged Events of Default 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 representation that an executed original shall be delivered. 5 (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] 6 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] 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: VP 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 Presidents --------------------------------------------- EX-10.26 10 EXHIBIT 10.26 EXHIBIT 10.26 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made and entered into as of this 27th day of September, 1999, by and between The Maxim Group, Inc., a Delaware corporation (the "Company"), and Leonard H. Thill (hereinafter "Executive"); WHEREAS, the Company, recognizing the experience and knowledge of Executive in financial accounting matters, desires to retain the valuable services of Executive, it being in the best interests of the Company to arrange a term of employment for Executive; and WHEREAS, Executive desires to devote full time service to the business of the Company, in accordance with the terms and conditions hereinafter set forth. NOW, THEREFORE, for and in consideration of the mutual premises and covenants herein contained, the parties hereto agree as follows: 1. EMPLOYMENT. For the Term of Employment, as hereinafter defined, the Company agrees to employ Executive and Executive agrees to accept such employment and to perform such duties and functions as the Board of Directors of the Company may assign to Executive from time to time, but only administrative and managerial functions commensurate with Executive's past experience and performance level. Unless otherwise agreed to by Executive, he shall perform such duties primarily from the Company's offices in Kennesaw, Georgia. Executive agrees to devote his full time and energy to the business of the Company, and shall perform his duties in a trustworthy and businesslike manner, all for the purpose of advancing the interests of the Company. It is hereby expressly agreed among the parties hereto that primary responsibility for the supervision of Executive shall rest with the Board of Directors of the Company and Chief Executive Officer, which shall review Executive's performance annually, make adjustments to Executive's compensation and award such other bonuses and employee benefits as they shall deem appropriate. 2. TITLE. Executive shall serve as Chief Financial Officer of the Company, as well as such other positions, and with such titles, as the Board of Directors and Executive may mutually agree upon during the Term of Employment (as defined below). 3. TERM OF EMPLOYMENT. The "Term of Employment" referred to in Section 1 hereof and hereinafter shall be three years, commencing on the date of this Agreement. This Agreement shall automatically renew on the third anniversary of the date of this Agreement unless earlier terminated in accordance with Section 6 of the Agreement, or unless either party gives the other written notice at least thirty (30) days prior to such anniversary date that he or it does not desire to renew the Agreement. 4. COMPENSATION. 4.1 BASE SALARY. During the Term of Employment, Executive shall be paid an annual base salary (hereinafter "Base Salary"), which shall be paid in equal installments in accordance with the Company's normal pay practices, but not less frequently than monthly. Executive's initial annual Base Salary shall be $225,000. The Board of Directors of the Company shall review Executive's Base Salary annually and may increase such Base Salary for the subsequent one-year period. 4.2 INCENTIVE BONUS PLAN. During the Term of Employment and in addition to Executive's Base Salary, Executive shall be entitled to receive such additional bonus payments determined as follows: (a) A bonus equal in amount up to 50% of Executive's Base Salary for each fiscal year of the Company in which the Company meets or exceeds certain financial and operating goals as set by the executive management team of the Company and the Compensation Committee of the Board of Directors. (b) Executive shall also be entitled to participate, in the discretion of the Board of Directors, in such other executive incentive bonus plans for any fiscal year or portion thereof as may from time to time be designated by the Board of Directors for executive officers generally. 4.3 STOCK OPTIONS. The Company has granted to Executive stock options to purchase one hundred thousand (100,000) shares of Company common stock, all issued under the Company's stock option plan. The options will vest in equal annual increments over a five-year period ending on the fifth anniversary of the date of this Agreement. All vested options will expire on September 21, 2009. Fifty thousand (50,000) stock options will have an exercise price of $6.13 per share. The remaining fifty thousand (50,000) stock options will have an exercise price of $6.67 per share. 4.4 ADDITIONAL BENEFITS. During the Term of Employment, Executive shall have the right to participate in any and all employee benefit programs established and maintained by the Company from time to time including, without limitation, such medical or dental plans as may be established from time to time by the Company. Executive shall be entitled to participate in any qualified or unqualified stock option, pension, profit sharing or other employee benefit plan adopted by the Company hereinafter and covering executive officers generally. Throughout the Term of Employment, Executive shall also be entitled to reimbursement for reasonable business expenses incurred by him in the performance of his duties hereunder, -2- including certain entertainment expenses, as approved from time to time by the Board of Directors of the Company. 4.5 VACATION. Executive shall be entitled to annual vacation leave in accordance with the Company's vacation policy as set forth in the current Employee Handbook of the Company. Vacation shall be scheduled at reasonable times not in conflict with Executive's duties hereunder. 5. ILLNESS, INCAPACITY OR DEATH DURING EMPLOYMENT. (a) If by reason of illness or incapacity, Executive is unable to perform his services or discharge his duties hereunder for sixty (60) or more consecutive days or ninety (90) days in the aggregate during any twelve (12) month period, then upon ten (10) days' prior notice, the Company may, in its sole discretion, either suspend Executive without pay of any kind, salary or bonus, until Executive is able to perform his services and discharge his duties hereunder or terminate the employment of Executive, and thereupon, Executive shall be paid his Base Salary from the date of termination through the 10-day notice period. (b) In the event of Executive's death, all obligations of the Company under this Agreement shall terminate other than the payment of that portion of the Base Salary and bonus, if any, earned by Executive to the date of death. 6. TERMINATION. 6.1 FOR CAUSE. This Agreement may be terminated by the Company at any time during the Term of Employment for cause (as hereinafter defined) immediately and without further obligation other than for monies already paid to the Employee. For purposes of this Agreement, "for cause" shall mean the occurrence of any of the following: (a) Employee's inattention to or substandard performance of the services required of Employee hereunder; (b) failure of Employee to follow reasonable written instructions or policies of the Company; (c) Employee willfully engaging in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise; (d) conviction of Employee during the Term of Employment of a crime involving breach of trust or moral turpitude; or (e) Employee's commission of any act or activity prohibited under the terms of this Agreement. -3- For purposes of Clause (c) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. In the event that the Company discharges Employee for cause under this Section 6.1, and it is subsequently determined judicially that the termination was without cause (as hereinafter defined), then such discharge shall be deemed a discharge without cause subject to the provisions of Section 6.2 of this Agreement. In the event that the Company discharges Employee for cause under this Section 6.1, such notice of discharge shall be accompanied by a written and specific description of the reason(s) for such discharge. 6.2 WITHOUT CAUSE. The Company may, upon thirty (30) days' written notice to Executive, terminate this Agreement without cause at any time during the Term of Employment. In such event and notwithstanding any provision to the contrary contained in any stock option agreement of Executive, any stock options which have been granted to Executive but which are not yet exercisable as of the date of notice of termination shall be deemed to be presently exercisable as of the date of notice of termination. The Company shall pay to Executive, as liquidated damages in lieu of all other claims, twelve (12) months' Base Salary then in effect at the time of Executive's termination. Payment of such monies shall be made in equal monthly installments. The Company may, in its sole discretion, at any time during the period that payments under this Section 6.2 would otherwise be due, discharge its obligations pursuant to this Section 6.2 by paying to Executive the present value of its obligations hereunder as determined by an enrolled actuary. 6.3 EXECUTIVE'S OBLIGATIONS UPON TERMINATION. Upon the termination of his employment hereunder for whatever reason, Executive shall: (a) Forthwith tender his resignation from any directorship or office he may hold in the Company; and (b) Not at any time represent himself still to be connected or to have any connection with the Company. 6.4 EFFECT OF TERMINATION. The provisions of this Agreement shall survive the termination of this Agreement and the termination of Executive's employment with the Company to the extent required to give full effect to the covenants and agreements contained herein. 7. CONFIDENTIALITY. 7.1 CONFIDENTIAL INFORMATION. Subject to Section 7(b) below, Executive agrees that, both during the term of this Agreement and after the termination of this Agreement, Executive will hold in a fiduciary capacity for the benefit of the Company, and shall not directly or indirectly use or disclose, except as authorized by the Company in connection with the performance of Executive's duties, any Confidential Information, as defined hereinafter, that -4- Executive may have or acquire (whether or not developed or compiled by Executive and whether or not Executive has been authorized to have access to such Confidential Information) during the term of this Agreement. The term "Confidential Information" as used in this Agreement shall mean and include any information, data and know-how relating to the business of the Company that is disclosed to Executive by the Company or known by him as a result of his relationship with the Company and not generally within the public domain (whether constituting a trade secret or not), including without limitation, the following information: (i) financial information, such as the Company's earnings, assets, debts, prices, fee structure, volumes of purchases or sales or other financial data, whether relating to the Company generally, or to particular products, services, geographic areas or time periods; (ii) supply and service information, such as information concerning the goods and services utilized or purchased by the Company, the names or addresses of suppliers, terms of supply or service contracts, or of particular transactions, or related information about potential suppliers, to the extent that such information is not generally known to the public, and to the extent that the combination of suppliers or use of a particular supplier, though generally known or available, yields advantages to the Company the details of which are not generally known; (iii) marketing information, such as details about ongoing or proposed marketing programs or agreements by or on behalf of the Company, marketing forecasts or results of marketing efforts or information about impending transactions; (iv) personnel information, such as employees' personal or medical histories, compensation or other terms of employment, actual or proposed promotions, hiring, resignations, disciplinary actions, terminations or reasons therefor, training methods, performance or other employee information; (v) customer information, such as any compilation of past, existing or prospective customers, customer proposals or agreements between customers and the Company, status of customer accounts or credit, or related information about actual or prospective customers; and (vi) information with respect to any corporate affairs that the Company agreed to treat as confidential. The term "Confidential Information" does not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right of the Company or the client to which such information pertains. -5- 7.2 COVENANT OF CONFIDENTIALITY. The covenant contained in this Section 7 shall survive the termination of Executive's employment with the Company for any reason for a period of five (5) years; provided, however, that with respect to those items of Confidential Information which constitute trade secrets under applicable law, Executive's obligations of confidentiality and non-disclosure as set forth in this Section 7 shall continue to survive after said five (5) year period to the greatest extent permitted by applicable law. These rights of the Company are in addition to those rights the Company has under the common law or applicable statutes for the protection of trade secrets. 8. NON-COMPETITION. 8.1 TERRITORY. Executive acknowledges that he will perform services hereunder which directly affect the Company's business presently conducted within the territory comprised of the 48 contiguous states of the United States (the "Territory"). Accordingly, the parties hereto deem it necessary to enter into the protective agreement set forth below, the terms and conditions of which have been negotiated by and between the parties hereto. 8.2 NON-SOLICITATION. Executive agrees (a) that he will not take any customer or franchise lists of the Company after leaving his employ and (b) that he will, for so long as he is employed hereunder and for a period of two (2) years following termination of his employment for any reason, refrain from soliciting or attempting to solicit directly or indirectly or by assisting others, any business from any of the Company's customers or franchisees, including actively sought prospective customers or franchisees, with whom Executive had material contact during his employment for purposes of providing products or services that are similar to or competitive with those provided by the Company, namely floor covering products and support services of the type offered or provided by the Company. 8.3 NON-SOLICITATION OF EMPLOYEES. Executive agrees that he will, for so long as he is employed hereunder and for a period of three (3) years after termination of his employment, refrain from recruiting or hiring, or attempting to recruit or hire, directly or by assisting others, any employee of the Company who is employed by the Company or any successor or affiliate of the Company if the Company or its successor or affiliate is then engaged in the business of the sale of franchises to retail floor covering dealers, and the sale and distribution of floor covering products and support services of the type offered or provided by the Company. 8.4 ACKNOWLEDGEMENTS. The covenants of Executive set forth in this Section 8 are separate and independent covenants for which valuable consideration has been paid, the receipt, adequacy and sufficiency of which are acknowledged by Executive, and have also been made by Executive to induce the Company to enter into this Agreement. The aforesaid covenants may be availed of or relied upon by the Company in any court of competent jurisdiction, and shall form the basis of injunctive relief and damages (but not including expenses of litigation) suffered by the Company arising out of any breach of the aforesaid covenants by Executive. The covenants of Executive set forth in this Section 8 are cumulative to all other covenants of Executive in -6- favor of the Company contained in this Agreement and shall survive the termination of this Agreement for the purposes intended. Should any covenant, term or condition contained in this Section 8 become or be declared invalid or unenforceable by a court of competent jurisdiction, then the parties request that such court judicially modify such unenforceable provision consistent with the intent of Section 8 so that it shall be enforceable as modified, and in any event the invalidity of any provision of Section 8 shall not affect the validity of any other provision in Section 8 or elsewhere in this Agreement. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties hereto regarding employment of Executive, and supersedes and replaces any prior agreements relating thereto. 10. ASSIGNMENT. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive hereunder are of a personal nature and shall not be assignable or delegable in whole or in part by Executive. No assignment by the Company of its rights hereunder shall relieve the Company of any liability to Executive hereunder. 11. SEVERABILITY. Each section and subsection of this Agreement constitutes a separate and distinct understanding, covenant and provision hereof. In the event that any provision of this Agreement shall finally be determined to be unlawful, such provision shall be deemed to be severed from this Agreement, but every other provision of this Agreement shall remain in full force and effect. 12. GOVERNING LAW. This Agreement shall in all respects be interpreted, construed and governed by and in accordance with the laws of the State of Georgia. 13. RIGHTS OF THIRD PARTIES. Nothing herein, expressed or implied, is intended to or shall be construed to confer upon or give to any person, firm or other entity, other than the parties hereto and their permitted assigns, any rights or remedies under or by reason of this Agreement. 14. AMENDMENT. This Agreement may not be amended orally but only by an instrument in writing duly executed by the parties hereto. 15. NOTICES. Any notice or other document or communication permitted or required to be given to Executive pursuant to the terms hereof shall be deemed given if personally delivered to Executive or sent to him, postage prepaid, by registered or certified mail, at 2510 Thorngate Drive, Acworth, Georgia 30101, or any such other address as Executive shall have notified the Company in writing. Any notice or other document or other communication permitted or required to be given to the Company pursuant to the terms hereof shall be deemed given if personally delivered or sent to the Company, postage prepaid, by registered or certified -7- mail, at 210 TownPark Drive, Kennesaw, Georgia 30144, or at such other address as the Company shall have notified Executive in writing. 16. WAIVER. The waiver by either party hereto of a breach of any provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision of this Agreement by the breaching party. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. THE MAXIM GROUP, INC. Attest: /s/ THOMAS P. LEAHEY By: /s/ A. J. NASSAR -------------------------- ------------------------------ Executive Vice President - Title: PRESIDENT AND CHIEF EXECUTIVE Finance OFFICER "EXECUTIVE" /s/ LEONARD H. THILL ------------------------------(L.S.) Leonard H. Thill -8- EX-21.1 11 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Advance Floor Decorators, Inc., a Michigan corporation Bailey & Roberts CarpetMax of Tennessee, Inc., a Tennessee corporation CarpetMAX, L.P., a Georgia limited partnership C&S Textiles, Inc., an Idaho corporation CarpetMAX Retail Stores, Inc., a Delaware corporation CarpetMAX of Utah, Inc., a Utah corporation CarpetsPlus of America, Inc., a Georgia corporation Colorado Carpet & Rugs, Inc., a Colorado corporation Everythingdecor, Inc., a Georgia corporation Floor Service Distributors, Inc., a Georgia corporation 4 Floors, Inc., an Ohio corporation GCO Carpet Outlet, Inc., an Alabama corporation GCO, Inc., a Nevada corporation Investor Management, Inc., an Alabama corporation Karen's, Inc., a Michigan corporation Manasota Carpet, Inc. a Florida corporation Maxim Equipment Leasing Company, Inc., a Georgia corporation Maxim Industries, Inc., a Delaware corporation Maxim Retail Group, Inc., a Georgia corporation Maxim Retail Stores, Inc., a Georgia corporation Tri-R of Orlando, Inc., a Georgia corporation Wadsworth & Owens Decorating Center, Inc., a Florida corporation EX-23.1 12 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-80984, 33-81002, 333-19691, 333-19693, 333-47299 and 333-59423). /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia October 11, 1999 EX-27.1 13 EXHIBIT 27.1
5 0000910468 THE MAXIM GROUP, INC. 1,000 YEAR JAN-31-1999 FEB-01-1998 JAN-31-1999 89,901 0 75,974 7,384 58,744 220,347 83,504 11,738 388,768 225,912 116,343 0 0 21 160,846 388,768 664,426 664,426 457,339 220,748 (1,023) 6,801 15,097 (24,831) (5,656) (19,175) 0 377 0 (19,552) (1.10) (1.10) Includes non-recurring charges of $23,713 Includes gain on sale of Image of $24,863
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