-----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, RGlyAm9YmEYubSsHgXj8hBgtix+0ZhqAaTTgBv/jXq6pq21fOAw5ebWXTJynR2xM h6jycz0LB4jGJNg1OZE5Zg== 0000950144-98-011660.txt : 19981026 0000950144-98-011660.hdr.sgml : 19981026 ACCESSION NUMBER: 0000950144-98-011660 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980809 ITEM INFORMATION: FILED AS OF DATE: 19981023 SROS: NYSE 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: 0131 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-13099 FILM NUMBER: 98730150 BUSINESS ADDRESS: STREET 1: 210 TOWNPARK DR CITY: KENNESAW STATE: GA ZIP: 30144 BUSINESS PHONE: 7705909369 8-K/A 1 THE MAXIM GROUP, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) August 9, 1998 ------------------------------- The Maxim Group, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 1-13099 58-2060334 - ------------------------------------------------------------------------------- (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 210 TownPark Drive, Kennesaw, Georgia 30144 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (770) 590-9369 ---------------------------- Not applicable - ------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 2 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Business Acquired: Shaw Residential Retail Group: Report of Independent Public Accountants Combined Balance Sheets -- July 4, 1998 (unaudited), January 3, 1998 and December 28, 1996 Combined Statements of Operations -- For the twenty-six weeks ended July 4, 1998 (unaudited) and June 28, 1997 (unaudited), year ended January 3, 1998 and the period from inception (February 7, 1996) through December 28, 1996 Combined Statements of Changes in Investment by Shaw Industries, Inc. -- For the twenty-six weeks ended July 4, 1998 (unaudited), year ended January 3, 1998 and the period from inception (February 7, 1996) through December 28, 1996 Combined Statements of Cash Flows -- For the twenty-six weeks ended July 4, 1998 (unaudited) and June 28, 1997 (unaudited), year ended January 3, 1998 and the period from inception (February 7, 1996) through December 28, 1996 Notes to Combined Financial Statements New York Carpet World, Inc.: Report of Independent Public Accountants Consolidated and Combined Statement of Operations -- For the six months ended June 30, 1996 Consolidated and Combined Statement of Changes in Stockholders' Equity -- For the six months ended June 30, 1996 Consolidated and Combined Statement of Cash Flows -- For the six months ended June 30, 1996 Notes to Consolidated and Combined Financial Statements Report of Independent Certified Public Accountants Consolidated Balance Sheet -- December 31, 1995 Consolidated Statement of Income -- Year ended December 31, 1995 Consolidated Statement of Stockholders' Equity -- Year ended December 31, 1995 Consolidated Statement of Cash Flows -- Year ended December 31, 1995 Summary of Accounting Policies Notes to Consolidated Financial Statements Indemnification. The financial statements of New York Carpet World, Inc. as of, and for the year ended, December 31, 1995 included in this Current Report on Form 8-K and incorporated by reference to the Company's Registration Statements on Form S-8, file numbers 33-80984, 33-81002, 333-19691, 333-19693, 333-47299 and 333-59423, have been audited by BDO Seidman, LLP, independent public accountants, as indicated in their report with respect thereto. Shaw Industries, Inc. has agreed to indemnify BDO Seidman, LLP for costs and expenses that BDO Seidman, LLP might incur in successfully defending itself against litigation resulting from the inclusion of its report in this Current Report on Form 8-K. Such indemnification, however, shall be null and void should BDO Seidman, LLP be found by a court to be guilty of professional malpractice. Carpetland USA, Inc.: Report of Independent Auditors Balance Sheet -- February 29, 1996 Statement of Operations -- Year ended February 29, 1996 Statement of Changes in Shareholders' Equity -- Year ended February 29, 1996 Statement of Cash Flows -- Year ended February 29, 1996 Notes to Financial Statements -2- 3 (b) Pro Forma Financial Information: Introduction Pro Forma Condensed Balance Sheet -- July 31, 1998 Pro Forma Condensed Statements of Operations -- year ended January 31, 1998 and six months ended July 31, 1998 Notes to Pro Forma Financial Statements (c) Exhibits: 2.1 Agreement and Plan of Merger, dated as of June 23, 1998, between The Maxim Group, Inc., CMAX Acquisition, Inc., Shaw Industries, Inc. and Shaw Carpet Showplace, Inc. (incorporated by reference from the Company's Current Report on Form 8-K dated June 23, 1998). 2.1.1 Amendment, dated August 9, 1998, to Agreement and Plan of Merger, dated as of June 23, 1998, between The Maxim Group, Inc., CMAX Acquisition, Inc., Shaw Industries, Inc. and Shaw Carpet Showplace, Inc. (incorporated by reference from the Company's Current Report on Form 8-K dated August 9, 1998). 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Ernst & Young LLP. 23.3 Consent of BDO Seidman, LLP. -3- 4 SHAW RESIDENTIAL RETAIL GROUP COMBINED FINANCIAL STATEMENTS AS OF JULY 4, 1998, JANUARY 3, 1998, AND DECEMBER 28, 1996 TOGETHER WITH AUDITORS' REPORT 5 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Shaw Industries, Inc.: We have audited the accompanying combined balance sheets of SHAW RESIDENTIAL RETAIL GROUP (a division of Shaw Carpet Showplace, Inc., a wholly owned subsidiary of Shaw Industries, Inc.) as of January 3, 1998 and December 28, 1996 and the related combined statements of operations, changes in investment by Shaw Industries, Inc., and cash flows for the year ended January 3, 1998 and the period from inception (February 7, 1996) through December 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shaw Residential Retail Group as of January 3, 1998 and December 28, 1996 and the results of their operations and their cash flows for the year ended January 3, 1998 and the period from inception (February 7, 1996) through December 28, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia October 22, 1998 -5- 6 SHAW RESIDENTIAL RETAIL GROUP COMBINED BALANCE SHEETS JULY 4, 1998, JANUARY 3, 1998 AND DECEMBER, 28 1996 (IN THOUSANDS) ASSETS
JULY 4, January 3, December 28, 1998 1998 1996 ---------- ---------- ------------ (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents $ 10,980 $ 11,208 $ 11,109 Trade accounts receivable, net of allowance for doubtful accounts of $2,039, $3,574, and $2,452 at July 4, 1998, January 3, 1998, and December 28, 1996, respectively 14,727 19,524 12,066 Related party receivables 0 1,698 1,759 Other receivables 4,321 4,159 2,720 Inventories 45,801 48,593 52,522 Deferred tax asset 5,537 4,568 411 Other current assets 4,583 3,584 3,354 -------- -------- -------- Total current assets 85,949 93,334 83,941 PROPERTY, PLANT, AND EQUIPMENT, NET 19,090 23,902 18,704 GOODWILL, NET 133,667 134,491 94,456 OTHER ASSETS 3,133 2,983 3,626 -------- -------- -------- $241,839 $254,710 $200,727 ======== ======== ========
-6- 7 LIABILITIES AND INVESTMENT BY SHAW INDUSTRIES, INC.
JULY 4, January 3, December 28, 1998 1998 1996 -------- --------- ------------ (UNAUDITED) CURRENT LIABILITIES: Current maturities of long-term debt and capital lease obligations $ 288 $ 1,026 $ 1,268 Accounts payable 4,800 10,079 16,418 Related party payables 46,116 32,348 3,969 Accrued expenses 21,517 35,853 43,616 -------- -------- -------- Total current liabilities 72,721 79,306 65,271 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, LESS CURRENT MATURITIES 1,244 2,049 3,044 DEFERRED INCOME TAXES 5,537 4,568 411 OTHER LIABILITIES 1,047 1,965 0 -------- -------- -------- Total liabilities 80,549 87,888 68,726 COMMITMENTS AND CONTINGENCIES (NOTE 8) INVESTMENT BY SHAW INDUSTRIES, INC. (NOTE 1) 161,290 166,822 132,001 -------- -------- -------- $241,839 $254,710 $200,727 ======== ======== ========
The accompanying notes are an integral part of these combined balance sheets. -7- 8 SHAW RESIDENTIAL RETAIL GROUP COMBINED STATEMENTS OF OPERATIONS FOR THE 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997, FOR THE YEAR ENDED JANUARY 3, 1998, AND FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1996) THROUGH DECEMBER 28, 1996 (IN THOUSANDS)
26 Weeks Ended Fiscal Year Ended ------------------------ ---------------------------- JULY 4, June 28, January 3, December 28, 1998 1997 1998 1996 -------- -------- ---------- ------------ (UNAUDITED) NET SALES $ 266,944 $ 283,252 $ 583,843 $330,871 COST OF SALES, INCLUDING PURCHASES FROM SHAW INDUSTRIES, INC. TOTALING $89,436, $60,175, $140,619, AND $30,673, RESPECTIVELY 165,082 174,758 366,578 198,268 --------- --------- --------- -------- Gross profit 101,862 108,494 217,265 132,603 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE, INCLUDING COSTS ALLOCATED FROM SHAW INDUSTRIES, INC. TOTALING $4,226 $5,950, $26,732, AND $0, RESPECTIVELY 114,669 125,902 254,002 127,211 OTHER EXPENSE (INCOME): Interest expense, net 289 0 146 258 Preopening costs 0 0 735 0 Store closing costs 0 0 14,711 0 Other expense (income) 115 (64) 230 1,557 --------- --------- --------- -------- (Loss) earnings before income taxes (13,211) (17,344) (52,559) 3,577 PROVISION FOR INCOME TAXES 0 0 0 3,247 --------- --------- --------- -------- NET (LOSS) EARNINGS $ (13,211) $ (17,344) $ (52,559) $ 330 ========= ========= ========= ========
The accompanying notes are an integral part of these combined statements. -8- 9 SHAW RESIDENTIAL RETAIL GROUP COMBINED STATEMENTS OF CHANGES IN INVESTMENT BY SHAW INDUSTRIES, INC. FOR THE 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997, FOR THE YEAR ENDED JANUARY 3, 1998, AND FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1996) THROUGH DECEMBER 28, 1996 (IN THOUSANDS) BALANCE, FEBRUARY 7, 1996 $ 0 Net investment by Shaw Industries, Inc. 131,671 Net earnings for the period from inception (February 7, 1996) through December 28, 1996 330 --------- BALANCE, DECEMBER 28, 1996 132,001 Net investment by Shaw Industries, Inc. 87,380 Net loss for the year ended January 3, 1998 (52,559) --------- BALANCE, JANUARY 3, 1998 166,822 Net investment by Shaw Industries, Inc. (unaudited) 7,679 Net loss for the 26 weeks ended July 4, 1998 (unaudited) (13,211) --------- BALANCE, JULY 4, 1998 (UNAUDITED) $ 161,290 =========
The accompanying notes are an integral part of these combined statements. -9- 10 SHAW RESIDENTIAL RETAIL GROUP COMBINED STATEMENTS OF CASH FLOWS FOR THE 26 WEEKS ENDED JULY 4, 1998 AND JUNE 28, 1997, FOR THE YEAR ENDED JANUARY 3, 1998, AND FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1996) THROUGH DECEMBER 28, 1996 (IN THOUSANDS)
26 Weeks Ended Fiscal Year Ended ------------------- ------------------------ JULY 4, June 28, January 3, December 28, 1998 1997 1998 1996 --------- -------- ---------- ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) earnings $(13,211) $(17,344) $(52,559) $ 330 -------- -------- -------- --------- Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities: Depreciation and amortization 6,328 5,491 10,981 4,403 Changes in operating assets and liabilities: Trade accounts receivable 4,869 (3,028) 263 (2,575) Related party receivables 1,698 1,759 61 (1,759) Inventories 2,792 7,127 18,286 6,156 Accounts payable (5,279) 38,822 (12,990) (22,771) Related party payables 13,768 (3,969) 28,379 3,969 Accrued expenses (41,986) (23,417) (15,235) 27,428 Other, net (1,383) 3,373 1,430 (116) -------- -------- -------- --------- Total adjustments (19,193) 26,158 31,175 14,735 -------- -------- -------- --------- Net cash (used in) provided by operating activities (32,404) 8,814 (21,384) 15,065 -------- -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures 0 (7,241) (2,827) (1,763) Retirements of fixed assets, net 1,834 0 0 0 -------- -------- -------- --------- Net cash provided by (used in) investing activities 1,834 (7,241) (2,827) (1,763) -------- -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contribution 31,885 311 29,892 0 Principal payments on long-term debt and capital lease obligations (1,543) (2,374) (7,681) (2,895) Cash acquired from contributed entities 0 1,610 2,099 1,849 Distribution of capital 0 0 0 (1,147) -------- -------- -------- --------- Net cash provided by (used in) financing activities 30,342 (453) 24,310 (2,193) -------- -------- -------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (288) 1,120 99 11,109 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,208 11,109 11,109 0 -------- -------- -------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,980 $ 12,229 $11,208 $11,109 ======== ======== ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 289 $ 73 $ 146 $ 42 ======== ======== ======= =======
The accompanying notes are an integral part of these combined statements. -10- 11 SHAW RESIDENTIAL RETAIL GROUP NOTES TO COMBINED FINANCIAL STATEMENTS JULY 4, 1998, JANUARY 3, 1998 AND DECEMBER 28, 1996 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Shaw Residential Retail Group (the "Company" or the "Group") operates retail floorcovering outlets throughout the United States and was formed on February 7, 1996 ("Inception"). The Group's stores offer a wide variety of carpet, linoleum, vinyl and ceramic tile, and other floorcovering products for residential use. It has heretofore been operated as a division of Shaw Carpet Showplace, Inc., a wholly owned subsidiary of Shaw Industries, Inc. ("Shaw"), and is headquartered in Dalton, Georgia. On August 9, 1998, substantially all of the assets and selected liabilities of the Group were sold to The Maxim Group, Inc. ("Maxim") for $25,000,000 in cash, a note payable to Shaw of approximately $18,048,000 and 3,150,000 shares of Maxim's common stock (the "Sale") subject to post-closing adjustments. FISCAL PERIOD The Group's fiscal year-end is the Saturday closest to December 31. Fiscal 1997 consisted of 53 weeks while fiscal 1996 consisted of 52 weeks. BASIS OF PRESENTATION The accompanying combined financial statements include the accounts of the Group. The accompanying combined financial statements do not include information relating to Shaw Carpet Showplace stores, a distinct retail concept also operated by Shaw Carpet Showplace, Inc. Intragroup balances and transactions have been eliminated. As indicated above, the accompanying combined financial statements present the financial position, results of operations, and cash flows of the Group as if it were a separate entity for all periods presented. In accordance with Staff Accounting Bulletin No. 54 of the Securities and Exchange Commission. Shaw performs certain services and incurs certain costs for the Group. Services provided include tax, treasury, risk management, employee benefits, legal, data processing, -11- 12 application of cash receipts and other general corporate services. The costs of these services provided by Shaw have been allocated to the Group based on a combination of estimated use of the services and the relative sales of the Group's business to the total consolidated operations of Shaw. Corporate costs of Shaw totaling $26,732,000 have been allocated to the Group for the year ended January 3, 1998. No such services were provided to the Group during the period from Inception through December 28, 1996. In the opinion of management, the method of allocating these costs is reasonable. However, the costs of services charged to the Group are not necessarily indicative of the costs that would have been incurred if the Group had performed these functions. Subsequent to the transfer of substantially all of the assets and selected liabilities to Maxim referred to above, the Group performs these functions using its own resources or purchased services, including services purchased from Shaw during a transition period. Shaw administers its self-insurance programs on a corporate-wide basis and charges its individual participating subsidiaries and divisions based on estimated claims and loss experience. The accompanying combined balance sheets include accruals for workers' compensation and employee group health claims. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. REVENUE RECOGNITION The Group recognizes revenue upon installation or delivery of the merchandise, depending on the terms of the sale. CASH AND CASH EQUIVALENTS The Group considers all investments with an original maturity of three months or less to be cash equivalents. TRADE ACCOUNTS RECEIVABLE The Group accounts for receivables sold to a financial institution under its private label credit card financing program in accordance with Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". Approximately $43,296,000 and $0 of accounts receivable sold under this program were outstanding at January 3, 1998 and December 28, 1996, respectively. At January 3, 1998, the Group had recorded a liability of approximately $3,816,000 for recourse provisions under this financing program. -12- 13 INVENTORIES Inventories, consisting primarily of floorcovering products held for resale, are recorded at the lower of cost or market, with cost determined on a specific identification basis and market determined based on the lower of replacement cost or estimated realizable value. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment is recorded at cost. Renewals and betterments are capitalized; maintenance, repairs, and minor replacements are charged to expense as incurred. The cost and accumulated depreciation of property retired or otherwise disposed of are removed from the accounts, and any gains or losses thereon are included in income for the period. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, as follows: Buildings 15 to 39 years Leasehold improvements Related lease terms Machinery and equipment 5 to 14 years GOODWILL Costs in excess of the fair value of net assets of businesses acquired are recorded as goodwill and amortized on a straight-line basis over 20 years. The recoverability of goodwill is periodically reviewed by management based on current and anticipated conditions. The Group evaluates the carrying value of goodwill in relation to the operating performance and future undiscounted cash flows of the underlying businesses and adjusts the carrying amount of the goodwill if the unamortized balance exceeds the estimate of future undiscounted cash flows. Accumulated amortization was approximately $9,449,000 and $2,866,000 at January 3, 1998 and December 28, 1996, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The Group's financial instruments consist primarily of cash, trade accounts receivable, accounts payable and long-term debt. The carrying amounts of cash, trade accounts receivable and accounts payable approximate their fair values due to the short-term maturity of such instruments. The carrying amount of long-term debt approximates its fair value, as interest rates on debt approximate current market rates. EMPLOYEE BENEFIT PLANS Certain of the Group's employees who meet eligibility requirements are included in a Shaw-sponsored defined contribution plan. Shaw's Retirement Savings Plan provides, among other things, for voluntary contributions by employees not to exceed 15% of their gross salaries and wages. Shaw provides matching contributions of 25% to 50% based on the employee's contributions. PREOPENING EXPENSES Preopening and start-up expenses applicable to new stores are expensed as incurred. -13- 14 ADVERTISING COSTS The costs of the Group's advertising activities are expensed as incurred and are reflected as operating expenses in the accompanying combined statements of operations. OCCUPANCY COSTS Occupancy costs, consisting primarily of depreciation of store assets, rent, utilities and property taxes are reflected as costs of goods sold in the accompanying combined statements of operations. Occupancy cost was approximately $22,302,000, $22,142,000, $47,840,000, and $22,033,000 for the 26 week periods ended July 4, 1998 and June 28, 1997, the year ended January 3, 1998, and the period from Inception through December 28, 1996, respectively. INCOME TAXES For federal and state income tax purposes, the operations of the Group have been included in Shaw's consolidated tax returns. Income taxes in the accompanying combined financial statements have been computed assuming that the Group was a stand-alone entity. The group accounts for income taxes based on the liability method of accounting and, consequently, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. INVESTMENT BY SHAW INDUSTRIES, INC. Investment by Shaw Industries, Inc. represents the net, noninterest bearing assets invested in the Group by Shaw. INTERIM FINANCIAL INFORMATION The combined financial statements and related information for the 26 week periods ended July 4, 1998 and June 28, 1997 are unaudited and have been prepared in accordance with the Securities and Exchange Commission's requirements for such interim financial statements. The unaudited interim combined financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the Group's financial position, results of operations and cash flows at the dates and for the periods presented have been included. All such interim adjustments are of a normal recurring nature. -14- 15 included herein. Interim results of operations are not necessarily indicative of the results to be expected for a full year. 2. ACQUISITIONS The following acquisitions were accounted for under the purchase method of accounting, applying the provisions of Accounting Principles Board ("APB") Opinion No. 16, and as a result, the Group recorded the tangible and identifiable intangible assets and liabilities of the acquired businesses at their estimated fair values with the excess of the purchase price over these amounts being recorded as goodwill which is amortized over 20 years. The accompanying combined financial statements reflect the operations of the acquired businesses for the periods after their respective dates of acquisition. During the periods presented in the accompanying combined financial statements, Shaw acquired numerous entities which were contributed to the Group, the most significant of which are as follows: Effective February 7, 1996, Shaw acquired substantially all of the net assets of Carpetland USA, a residential floorcovering retailer. The purchase price was approximately $36,200,000 and resulted in goodwill of approximately $30,970,000 at the acquisition date. Effective July 31, 1996, Shaw acquired substantially all of the net assets of New York Carpet World, Inc. and subsidiaries, a residential floorcovering retailer. The purchase price was approximately $94,000,000 and resulted in goodwill of approximately $60,864,000 at the acquisition date. Effective January 1, 1997, Shaw acquired substantially all of the net assets of The Carpet Exchange, a residential floorcovering retailer. The purchase price was approximately $22,000,000 and resulted in goodwill of approximately $18,000,000 at the acquisition date. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at January 3, 1998 and December 28, 1996 is summarized as follows (in thousands):
1997 1996 ------- ------- Land and improvements $ 73 $ 73 Buildings and leasehold improvements 21,563 13,303 Machinery and equipment 10,545 8,082 ------- ------- 32,181 21,458 Less accumulated depreciation and amortization (8,279) (2,754) ------- ------- $23,902 $18,704 ======= =======
-15- 16 Depreciation expense for the year ended January 3, 1998 and the period from Inception through December 28, 1996 was approximately $4,398,000 and $1,537,000, respectively, and is recorded in operating expense in the accompanying combined statements of operations. 4. ACCRUED EXPENSES Accrued expenses at January 3, 1998 and December 28, 1996 consisted of the following (in thousands):
1997 1996 ------- ------- Customer deposits $ 9,199 $ 5,753 Accrued payroll 4,526 6,185 Other accrued expenses 22,128 31,678 ------- ------- Total $35,853 $43,616 ======= =======
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations at January 3, 1998 and December 28, 1996 are summarized as follows (in thousands):
1997 1996 ------ ------ Equipment note payable to a bank, 6.6% interest rate, matures September 1998 $ 69 $ 156 Equipment note payable to a bank, 8.25% interest rate, matures November 2005 455 494 Installment note payable to a bank, 6.9% interest rate, matures August 2005 249 273 Capitalized leases 2,302 3,389 ------ ------ 3,075 4,312 Less current portion 1,026 1,268 ------ ------ $2,049 $3,044 ====== ======
-16- 17 The aggregate annual maturities of long-term debt and capital lease obligations during the years subsequent to January 3, 1998 are as follows (in thousands): 1998 $1,026 1999 1,032 2000 334 2001 285 2002 93 2003 and thereafter 305 ------ $3,075 ======
6. INCOME TAXES The current provision for income taxes consisted of the following for the year ended January 3, 1998 and the period from Inception through December 28, 1996 (in thousands):
1997 1996 ---- ------ U.S. federal $ 0 $2,767 State and local 0 480 ---- ------ $ 0 $3,247 ==== ======
The differences between the federal statutory income tax rate and the Group's effective tax rate were as follows at January 3, 1998 and December 28, 1996 (in thousands):
1997 1996 ------ ------ Federal statutory rate $(17,870) $ 1,427 State income taxes, net of federal tax benefit (3,101) 0 Nondeductible goodwill 296 3 Change in valuation allowance 10,723 2,935 Other, net 9,952 (1,118) -------- ------- $ 0 $ 3,247 ======== =======
-17- 18 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at January 3, 1998 and December 28, 1996 are presented below (in thousands):
1997 1996 --------- --------- Deferred income tax assets: Property, plant, and equipment $ 361 $ (31) Accounts receivable, principally due to allowance for doubtful accounts 1,502 820 Inventories, principally due to additional costs inventoried for tax purposes 809 1,187 Accrued expenses 1,026 1,466 Net operating loss carryforwards 13,889 0 --------- --------- Total gross deferred income tax assets 17,587 3,442 Deferred income tax liabilities: State tax expense (298) (298) Lease expense (227) (41) Other, net (3,404) (168) --------- --------- Total gross deferred income tax liabilities (3,929) (507) --------- --------- Net deferred income tax assets 13,658 2,935 Less valuation allowance (13,658) (2,935) --------- --------- $ 0 $ 0 ========= =========
7. CHARGE TO RECORD STORE CLOSING COSTS In December 1997, the Group announced a plan to close approximately 52 retail stores which resulted in a charge to operations of $14,711,000 consisting primarily of reductions in the carrying value of long-lived assets of approximately $3,600,000 and reserves for exit costs and employee termination benefits of approximately $8,836,000 and $2,335,000, respectively. The stores to be closed had combined net sales of approximately $90,000,000 in 1997, but contributed negatively to the Group's profitability. -18- 19 8. COMMITMENTS AND CONTINGENCIES LEGAL The Group is party to several lawsuits incidental to its various activities and incurred in the ordinary course of business. The Group believes that it has meritorious defenses in each case. After consultation with counsel, it is the opinion of management that, although there can be no assurance given, none of the claims, when resolved, will have a material adverse effect on the Group. LEASES The Company is a party to noncancellable lease agreements involving property and equipment, which extend for varying periods up to 20 years. Certain of these leases have options to renew at varying terms. Rental expense for operating leases amounted to $30,016,000 and $12,644,000 for the year ended January 3, 1998 and the period from Inception through December 28, 1996, respectively. The Group has entered into several capitalized leases for machinery and equipment at a cost of $1,291,000 at January 3, 1998 and December 28, 1996. These assets are amortized on a straight-line basis over the lease terms and amortization is included in depreciation expense. Accumulated amortization of capital lease cost was $483,000 and $193,000 at January 3, 1998 and December 28, 1996, respectively. The related obligations are included in long-term debt. Minimum future lease obligations on long-term noncancellable leases in effect at January 3, 1998 are summarized as follows (in thousands):
TOTAL CAPITAL OPERATING FUTURE LEASES LEASES PAYMENTS ------- --------- --------- 1998 $1,226 $ 24,888 $ 26,114 1999 1,141 23,139 24,280 2000 323 21,876 22,199 2001 213 19,914 20,127 2002 6 13,156 13,162 2003 and thereafter 0 39,348 39,348 ------ -------- -------- Total minimum lease payments 2,909 $142,321 $145,230 Less amount representing interest 607 ======== ======== ------ $2,302 ======
-19- 20 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS AND SCHEDULES AS OF JUNE 30, 1996 TOGETHER WITH AUDITORS' REPORT -20- 21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Shaw Industries, Inc.: We have audited the accompanying consolidated and combined statements of operations, stockholders' equity, and cash flows of NEW YORK CARPET WORLD, INC. (a Michigan corporation) AND SUBSIDIARIES (see Note 1) for the six-month period ended June 30, 1996. These financial statements are the responsibility of Shaw Industries, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of New York Carpet World, Inc. and subsidiaries for the six-month period ended June 30, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia October 22, 1998 -21- 22 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996 (IN THOUSANDS) NET SALES $ 215,588 COST OF SALES 120,189 --------- Gross profit 95,399 --------- OPERATING EXPENSES 107,789 --------- OTHER EXPENSE (INCOME) Loss on disposal of assets 222 Interest income (103) Interest expense 1,102 Franchise income (93) --------- 1,128 --------- Loss before income taxes and minority interest (13,518) PROVISION FOR INCOME TAXES 91 MINORITY INTERESTS IN NET INCOME OF SUBSIDIARIES 29 --------- NET LOSS $ (13,638) =========
The accompanying notes are an integral part of this consolidated and combined statement. -22- 23 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES CONSOLIDATED AND COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996 (IN THOUSANDS)
COMMON STOCK ADDITIONAL ------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------ ------ ---------- -------- -------- BALANCE, DECEMBER 31, 1995 2 $174 $16,665 $ 18,451 $ 35,290 Net loss 0 0 0 (13,638) (13,638) Dividends paid 0 0 0 (3,905) (3,905) Distribution of life insurance policies 0 0 0 (733) (733) Contributed capital 0 0 10,131 0 10,131 -- ---- ------- -------- -------- BALANCE, JUNE 30, 1996 2 $174 $26,796 $ 175 $ 27,145 == ==== ======= ======== ========
The accompanying notes are an integral part of this consolidated and combined statement. -23- 24 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996 (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(13,638) -------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,215 Minority interest in net income of subsidiaries 29 Loss on disposal of fixed assets 222 Changes in operating assets and liabilities: Accounts receivable 2,937 Employee advances 59 Inventories (1,632) Related party receivables 355 Prepaid expenses and other current assets 2,141 Customer deposits 2,053 Accounts payable 2,156 Accrued liabilities 2,076 Other current liabilities 248 -------- Total adjustments 11,859 -------- Net cash used in operating activities (1,779) -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,410) Purchase of minority interests (1,950) Proceeds from the sale of fixed assets 13 -------- Net cash used in investing activities (3,347) -------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions from stockholders 10,131 Principal payments under capital lease obligations (368) Repayment of debt (58) Payment of dividends to stockholders (3,905) Other (220) -------- Net cash provided by financing activities 5,580 -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 454 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 792 -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,246 ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 929 ======== Income taxes $ 526 ========
The accompanying notes are an integral part of this consolidated and combined statement. -24- 25 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS JUNE 30, 1996 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS New York Carpet World, Inc. (the "Company" or "New York") is engaged in retail, wholesale, and commercial distribution of carpet, linoleum, vinyl and ceramic tile, and other floor covering products for residential and commercial purposes throughout the midwest, northeast, and southeast United States. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of New York Carpet World, Inc. and all majority-owned subsidiaries. New York Carpet World of Florida, Inc., New York Carpet World of St. Louis, Inc., New York Carpet World of New England, Inc., and New York Carpet World Franchising, Inc. are separate corporations under common control and management, and have also been combined in the accompanying financial statements. All material intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash is defined as cash in bank and cash on hand. REVENUE RECOGNITION The Company and its subsidiaries recognize revenue upon delivery of merchandise to the customer. Customers' deposits represent amounts received on uncompleted transactions. INCOME TAXES Deferred income taxes are recorded to reflect the future tax consequences of temporary differences between the financial reporting bases and tax bases of the Company's assets and liabilities. -25- 26 MINORITY INTERESTS Minority interests in consolidated subsidiaries represents that portion of stockholders' equity and consolidated net income attributable to the minority interests. Losses in excess of the minority interest's capital are not allocated to minority owners. 2. DEPRECIATION EXPENSE The Company depreciates its fixed assets on a straight-line basis over their estimated useful lives, ranging from 3 to 10 years. Depreciation expense for the six months ended June 30, 1996 was approximately $1,180,000 and is recorded in operating expense in the accompanying statement of operations. 3. INCOME TAXES The Company and four of its consolidated subsidiaries have elected, with the consent of its stockholders, to be treated as Subchapter S corporations for federal income tax purposes. This election provides, among other things, that the corporation's taxable income is taxable to the individual stockholders. Accordingly, taxes on income included in the consolidated statement of operations represent income taxes incurred only by those subsidiaries which are taxed separately as regular corporations. The income before taxes and minority interests attributable to these taxable corporations was approximately $242,072 for the six-month period ended June 30, 1996. The current provision for income taxes consists of the following: U.S. federal $78,000 State and local 13,000 ------- $91,000 =======
The provision for income taxes differs from the amount computed by applying a combined state and U.S. federal income tax rate of 39.9% to pretax loss as a result of the following: Expected benefit from federal and state taxes, at statutory rates $(5,394,000) Exclusion of losses of Subchapter S corporations 5,485,000 ----------- $ 91,000 ===========
4. RELATED-PARTY TRANSACTIONS Net sales of $780,502 for the six-month period ended June 30, 1996 were made to two affiliated partnerships which are owned 50% by three of the stockholders of New York Carpet World, Inc. -26- 27 5. STOCKHOLDERS' EQUITY During the six-month period ended June 30, 1996, the Company distributed interests in split-dollar life insurance policies to certain of its stockholders and certain members of management. These distributions are reflected as deductions in the accompanying consolidated and combined statement of stockholders' equity. During the six-month period ended June 30, 1996, the Company received cash contributions from certain of its stockholders for the purpose of funding certain obligations and for the buyout of certain minority interests. 6. EMPLOYEE BENEFIT PLAN The Company has a qualified defined contribution cash option profit-sharing plan for all eligible employees of the Company. The Company's contribution to the plan is equal to one-half of the amount of salary reduction elected by each participant, with limits based on years of service with the Company. Any additional contribution, as determined by the board of directors, is discretionary but may not exceed 25% of the annual aggregate compensation (as defined) paid to all participating employees. The contributions to the plan for the six-month period ended June 30, 1996 were $54,026. 7. MANAGEMENT RETIREMENT PLAN OBLIGATION The Company has entered into retirement plan agreements with certain members of management whereby the Company is obligated to pay each employee participating in the plan annual payments for fifteen years, beginning at age 65. If the employee dies prior to age 65, the Company is obligated to pay the employee's beneficiary annual amounts for a period of 15 years. The Company is informally funding these agreements with the purchase of whole life insurance on each employee participating in the plan. The expense charged to operations with respect to the plan for the six-month period ended June 30, 1996 was $961,200. 8. COMMITMENTS AND CONTINGENCIES WORKERS' COMPENSATION COSTS The Company is self-insured for workers' compensation claims in all states in which it does business. However, the self-insurance limits vary by geographic area. In Michigan, the Company is self-insured up to $350,000 per occurrence and approximately $1,000,000 in the aggregate. If Michigan claims in a plan year were to exceed $5,000,000, the Company would be responsible for all claims in excess of that amount. In states other than Michigan, the Company is self-insured for workers' compensation claims up to $250,000 per occurrence and $2,500,000 in the aggregate. -27- 28 The Company recognizes the estimated total costs for self-insured workers' compensation claims, including claims incurred but not reported. LEGAL The Company is party to several lawsuits incidental to its various activities and incurred in the ordinary course of business. The Company believes that it has meritorious claims and defenses in each case. After consultation with counsel, it is of the opinion of management that, although there can be no assurance given, none of the associated claims, when resolved, will have a material adverse effect on the Company. 9. SUBSEQUENT EVENT Effective July 1, 1996, the Company was purchased by Shaw Industries, Inc. ("Shaw") for $35,000,000 in cash and a $35,000,000 promissory note payable on January 15, 1997. The Company also entered into an earnout agreement with Shaw which provided for an additional payment of up to $30,000,000. This earnout agreement was rescinded on October 31, 1996 and was replaced by an agreement which provided for a cash payment of $24,000,000 by June 30, 1999. -28- 29 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 TOGETHER WITH AUDITORS' REPORT 30 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Stockholders and Board of Directors New York Carpet World, Inc. Southfield, Michigan We have audited the accompanying consolidated balance sheet of New York Carpet World, Inc. and subsidiaries as of December 31, 1995 and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of New York Carpet World, Inc. and subsidiaries at December 31, 1995 and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP Troy, Michigan March 29, 1996 -29- 31 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
=============================================================================== December 31, 1995 - ------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and equivalents $ 791,795 Receivables Trade, less allowance of $750,000 for possible losses 10,895,672 Related parties (Note 1) 1,529,946 Note (Note 2) 855,232 Officers and employees 359,858 Inventories (Note 3) 48,346,608 Prepaid expenses and other current assets 2,764,012 - ------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 65,543,123 - ------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT Fixtures and equipment 13,944,863 Leasehold improvements 12,189,109 Leased property under capital leases (Note 6) 6,172,804 Delivery equipment 3,336,509 - ------------------------------------------------------------------------------- 35,643,285 Less accumulated depreciation and amortization 22,553,951 - ------------------------------------------------------------------------------- NET PROPERTY AND EQUIPMENT 13,089,334 - ------------------------------------------------------------------------------- OTHER Cash surrender value of life insurance - management (Note 9) 1,738,593 Cash surrender value of life insurance - officers ($10,600,000 face value), less loans and accrued interest of $2,382,260 (Note 10) 627,408 Deposits and other assets 1,153,446 Receivable - related parties (Note 1) 612,503 - ------------------------------------------------------------------------------- TOTAL OTHER ASSETS 4,131,950 - ------------------------------------------------------------------------------- $ 82,764,407 ===============================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. -30- 32
============================================================================== December 31, 1995 - ------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable, bank (Note 4) $ 500,000 Accounts payable 23,981,285 Customers' deposits 5,210,587 Accruals Compensation 5,021,550 Taxes, other than on income 885,244 Other (Note 11) 4,759,885 Current obligations under capital leases (Note 6) 691,413 Current maturities of long-term debt (Note 5) 117,556 - ------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 41,167,520 LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES, less current obligations (Note 6) 2,969,766 LONG-TERM DEBT, less current maturities (Note 5) 650,151 MANAGEMENT RETIREMENT PLAN OBLIGATION (Note 9) 2,538,812 - ------------------------------------------------------------------------------ TOTAL LIABILITIES 47,326,249 - ------------------------------------------------------------------------------ MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 148,034 - ------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES (Notes 6, 8, 10 and 11) STOCKHOLDERS' EQUITY (Note 10) Common stock, Class A voting, $100 par - shares authorized, 1,000; issued and outstanding, 600 60,000 Common stock, Class B non-voting, $100 par - shares authorized, 1,500; issued and outstanding, 1,140 114,000 Additional paid-in capital 16,664,932 Retained earnings 18,451,192 - ------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 35,290,124 - ------------------------------------------------------------------------------ $82,764,407 ==============================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. -31- 33 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
============================================================================ Year Ended December 31, 1995 - ---------------------------------------------------------------------------- NET SALES $ 434,135,900 COST OF SALES 245,976,814 - ---------------------------------------------------------------------------- GROSS PROFIT 188,159,086 OPERATING EXPENSES 186,667,184 - ---------------------------------------------------------------------------- OPERATING INCOME 1,491,902 - ---------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest Expense Capital leases (814,408) Other (862,802) Interest income 353,529 Franchise income 278,870 - ---------------------------------------------------------------------------- TOTAL OTHER EXPENSE, NET (1,044,811) - ---------------------------------------------------------------------------- INCOME BEFORE TAXES ON INCOME AND MINORITY INTERESTS 447,091 TAXES ON INCOME (Note 7) 36,000 - ---------------------------------------------------------------------------- INCOME BEFORE MINORITY INTERESTS 411,091 MINORITY INTERESTS IN NET INCOME OF CONSOLIDATED SUBSIDIARIES (44,678) - ---------------------------------------------------------------------------- NET INCOME $ 366,413 ============================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. -32- 34 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1995 ================================================================================
Common Stock ---------------------------------------------------- Class A Voting Class B Non-Voting Additional ---------------------- -------------------- Paid-In Retained Shares Amount Shares Amount Capital Earnings - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, January 1, 1995 600 $60,000 1,140 $114,000 $6,793,164 $ 28,125,549 Net income -- -- -- -- -- 366,413 Dividends -- -- -- -- -- (10,040,770) Additional paid-in capital New York Carpet World of New England, Inc. -- -- -- -- 3,670,000 -- Additional paid-in capital New York Carpet World of Florida, Inc. -- -- -- -- 1,455,000 -- Additional paid-in capital New York Carpet World of St. Louis, Inc. -- -- -- -- 4,746,768 -- - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, December 31, 1995 600 $ 60,000 1,140 $ 114,000 $16,664,932 $18,451,192 ==============================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. -33- 35 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
=============================================================================================== Year Ended December 31, 1995 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 366,413 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation 2,130,582 Amortization 556,645 Minority interests in net income of consolidated subsidiaries 44,678 Gain on disposal of assets (181) Changes in operating assets and liabilities Increase in receivables (3,675,106) Increase in inventories (1,254,086) Increase in prepaids and other current assets (1,926,417) Decrease in other assets 191,448 Increase in accounts payable 778,707 Decrease in customers' deposits (300,333) Increase in accruals 1,982,209 Increase in management retirement plan obligation 113,103 - ----------------------------------------------------------------------------------------------- NET CASH USED IN OPERATING ACTIVITIES (992,338) - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (3,813,587) Proceeds from disposal of assets 52,432 - ----------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (3,761,155) - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contribution by stockholders 6,361,000 Dividends paid to stockholders (10,040,770) Principal payments under capital lease obligations (738,694) Reduction of long-term debt (79,190) Dividends paid to minority interests (39,000) - ------------------------------------------------------------------------------------------------ NET CASH USED IN FINANCING ACTIVITIES (4,536,654) - ----------------------------------------------------------------------------------------------- NET DECREASE IN CASH AND EQUIVALENTS (9,290,147) CASH AND EQUIVALENTS, at beginning of year 10,081,942 - ----------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS, at end of year $ 791,795 ===============================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. -34- 36 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES =========================================================================== BUSINESS The Company's operations include the retail, wholesale and commercial distribution of carpet, linoleum, vinyl and ceramic tile and other floor covering products for residential and commercial purposes throughout the midwest, northeast and southeast United States. PRINCIPLES OF The consolidated financial statements include the CONSOLIDATION accounts of New York Carpet World, Inc., and all majority-owned subsidiaries. New York Carpet World of Florida, Inc., New York Carpet World of St. Louis, Inc., New York Carpet World of New England, Inc. and New York Carpet World Franchising, Inc., separate corporations under common control and management, have also been combined in the accompanying financial statements. All material intercompany accounts and transactions have been eliminated. USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and (2) revenues and expenses during the reporting period. Actual results could differ from these estimates which are made. FAIR VALUE OF In 1995, the Company adopted SFAS No. 107, FINANCIAL "Disclosures About Fair Value of Financial INSTRUMENTS Instruments", which requires disclosure of fair value information about certain financial instruments. The carrying amounts of the Company's financial instruments, which consist of cash, receivables, notes payable, accounts payable and long-term debt, approximate their fair values. CONCENTRATION OF Financial instruments which potentially subject the CREDIT RISK Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit qualified financial institutions. At times, the amount of cash on deposit in banks may be in excess of the respective financial institutions' FDIC insurance limit. -35- 37 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES =============================================================================== Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different industries and geographies. As of December 31, 1995, the Company had no significant concentrations of credit risk related to trade receivables. INVENTORIES Inventories, consisting of floorcovering held for resale, are valued at cost not in excess of market. Cost is determined using both the last-in, first-out (LIFO) and first-in, first-out (FIFO) methods for specific inventories. LIFO inventories represented approximately 53% of inventories at December 31, 1995. PROPERTY, Property and equipment are stated at cost. EQUIPMENT, Depreciation and amortization are computed over the DEPRECIATION AND estimated useful lives of the assets using both AMORTIZATION straight-line and accelerated methods. PRE-OPENING Pre-opening and start-up expenses applicable to new EXPENSES stores are expensed as incurred. REVENUE RECOGNITION The Company and its subsidiaries recognize revenue upon delivery of merchandise to the customer. Customers' deposits represent amounts received on uncompleted transactions. ADVERTISING COSTS The Company expenses the costs of advertising as incurred. Advertising expense was approximately $29,700,000 for the year ended December 31, 1995. INCOME TAX Deferred income taxes are recorded to reflect the future tax consequences of temporary differences between the financial reporting bases and tax bases of the Company's assets and liabilities. -36- 38 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES ============================================================================== MINORITY INTERESTS Minority interests in consolidated subsidiaries represents that portion of stockholders' equity and consolidated net income attributable to the minority interests. Losses in excess of the minority interest in a subsidiary's or combined corporation's capital is reflected as a part of the consolidated net loss attributable to the parent. STATEMENTS OF CASH For purposes of the statements of cash flows, cash is FLOWS defined as currency on hand, demand deposits with banks or other financial institutions, and highly liquid money market funds. -37- 39 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ============================================================================== 1. RELATED PARTY During the year ended December 31, 1995, net sales TRANSACTIONS of approximately $1,900,000 were made to an affiliated partnership which is owned 50% by three of the stockholders of New York Carpet World, Inc. The Company had trade receivables due from this affiliated partnership at December 31, 1995 of $1,255,964. The Company also has receivables due from other related entities totalling $273,982 at December 31, 1995. At December 31, 1995, the Company had non-interest bearing receivables of $612,503 due from three of its stockholders. The receivables represent the Company's interest in the death benefits of split dollar life insurance policies on the three stockholders. 2. NOTE RECEIVABLE At December 31, 1995, the Company had an $826,000 note receivable and related accrued interest income of $29,232 due from a vendor. The note receivable bore interest at 8%, was due on demand and collateralized by certain equipment. The note receivable and related accrued interest income was collected in February 1996. 3. INVENTORIES If the first-in, first-out (FIFO) method of inventory valuation had been used by the Company, inventories would have been approximately $2,750,000 higher than reported at December 31, 1995. 4. LINE-OF-CREDIT At December 31, 1995, the Company had a $15,000,000 unsecured line-of-credit with a bank. Amounts borrowed are due on demand and bear interest at the bank's prime rate (8.5% at December 31, 1995). At December 31, 1995, the balance outstanding under the line-of-credit was $500,000. -38- 40 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ============================================================================= In accordance with the terms of the line-of-credit agreement, the Company is required to maintain minimum levels of working capital and net worth and debt to equity levels. At December 31, 1995, the Company was in compliance with these requirements. 5. LONG-TERM Long-term debt consists of: DEBT
December 31, 1995 ----------------------------------------------------- Promissory note payable, secured by equipment, payable $7,897 monthly, including interest at 6.60% $ 237,720 Promissory note payable, secured by equipment, payable $6,536 monthly, including interest at 8.25% 529,987 ----------------------------------------------------- 767,707 Less current maturities 117,556 ----------------------------------------------------- TOTAL LONG-TERM DEBT $ 650,151 =====================================================
The aggregate amounts of long-term debt maturing in each of the following years are as follows: 1996 - $117,556; 1997 - $126,190; 1998 - $111,646; 1999 - $46,131; 2000 - $50,084; 2001 and later years $316,100. 6. LEASES The Company leases various warehouse and retail locations, many of which are owned individually, or through related partnerships, by the stockholders of the Company. Leases which meet certain criteria are classified as capital leases, and assets and related liabilities are recorded at amounts equal to the lesser of the present value of future minimum lease payments or the fair value of the leased properties at the inception of the lease term. Leases which do not meet such criteria are classified as operating leases and related rentals are charged to expense as incurred. -39- 41 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ===============================================================================
The following is an analysis of leased property under capital leases: December 31, 1995 - ------------------------------------------------------------------------------- Retail and warehouse facilities $ 6,172,804 Less accumulated amortization 4,675,308 - ------------------------------------------------------------------------------- NET LEASED PROPERTY UNDER CAPITAL LEASES $ 1,497,496 =============================================================================== As of December 31, 1995, future net minimum lease payments under capital leases, and future minimum rental payments required under operating leases that have initial or remaining noncancelable terms in excess of one year, are as follows: Capital Operating Leases Leases - ------------------------------------------------------------------------------- 1996 $ 1,367,000 $ 13,223,000 1997 1,186,000 12,083,000 1998 1,147,000 9,551,000 1999 1,147,000 8,455,000 2000 329,000 7,728,000 Later years 219,000 26,573,000 - ------------------------------------------------------------------------------- TOTAL MINIMUM LEASE PAYMENTS 5,395,000 $ 77,613,000 ============= Less amount representing interest 1,733,821 - ------------------------------------------------------------------------------- PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS 3,661,179 Less current obligations 691,413 - ------------------------------------------------------------------------------- LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES $ 2,969,766 ===============================================================================
Amortization expense under capital lease agreements was $556,645 for the year ended December 31, 1995. -40- 42 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Rent expense under operating lease agreements was as follows for the year ended December 31, 1995:
1995 ----------------------------------------------------- Minimum rent $ 14,300,000 Contingent rent 600,000 ----------------------------------------------------- $ 14,900,000 =====================================================
Contingent rents are based upon a percentage of gross sales as specified in the various lease agreements. 7. TAXES ON The Company and four of its combined corporations INCOME have elected, with the consent of its stockholders, to be treated as Subchapter S corporations for federal income tax purposes. This election provides, among other things, that the corporation's taxable income is taxable to the individual stockholders. Accordingly, taxes on income included in the consolidated statements of income represent income taxes incurred only by those subsidiaries which are taxed separately as regular corporations. The income before taxes on income and minority interests attributable to these regular corporations was $139,462 for the year ended December 31, 1995. 8. EMPLOYEE The Company has a qualified defined contribution cash BENEFIT PLAN option profit-sharing plan for all eligible employees of the Company. The Company's contribution to the plan is equal to one-half of the amount of salary reduction elected by each participant, limited to either a $25 maximum per participant or $50 maximum for those with five years or more of service with the Company. Any additional contribution, as determined by the Board of Directors, is discretionary but may not exceed 25 percent of the annual aggregate compensation (as defined) paid to all participating employees. The contribution to the plan for the year ended December 31, 1995 was $58,115. -41- 43 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 9. MANAGEMENT The Company has entered into retirement plan RETIREMENT PLAN agreements with certain members of management OBLIGATION whereby the Company is obligated to pay each employee participating in the plan annual payments for fifteen years, beginning at age 65. If the employee dies prior to age 65, the Company is obligated to pay the employee's beneficiary annual amounts for a period of fifteen years. The present value of the accrued benefit for the employees participating in the plan is approximately $2,538,812 at December 31, 1995 and is considered a long-term liability. The Company is informally funding these agreements with the purchase of whole life insurance on each employee participating in the plan. The expense charged to operations with respect to the plan for the year ended December 31, 1995 was $106,744. 10. STOCK The Company has entered into a stock redemption REDEMPTION agreement with three related corporations and certain stockholders whereby, upon the death of a stockholder, the corporations shall repurchase the decedent's shares of stock at the greater of (1) 50% of the aggregate book value of the corporations as defined in the agreement or (2) the life insurance proceeds actually received by the corporations under any life insurance policy on the life of the deceased. The corporations have approximately $7,000,000 of life insurance (net of loans and accrued interest) on the stockholders for the purpose of repurchasing the decedent's shares in such an event. Under certain circumstances and for a five year period subsequent to the death of a stockholder, the agreement requires the corporations to remit to the legal representative of the deceased stockholder a portion of the corporations' earnings represented by the deceased stockholder's stock ownership percentage multiplied by earnings as defined in the agreement. Such additional amounts shall constitute additional purchase price for the deceased stockholder's shares of stock. -42- 44 NEW YORK CARPET WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 11. COMMITMENTS WORKERS' COMPENSATION COSTS AND CONTINGENCIES The Company is self-insured for workers' compensation claims in all states in which it does business. However, the self-insurance limits vary by geographic area. In Michigan, the Company is self-insured up to $350,000 per occurrence and approximately $1,000,000 in the aggregate. If Michigan claims in a plan year were ever to exceed $5,000,000, the Company would be responsible for all claims in excess of that amount. In states other than Michigan, the Company is self-insured for workers' compensation claims up to $250,000 per occurrence and $2,500,000 in the aggregate. The Company recognizes the estimated total costs for self-insured workers' compensation claims, including claims incurred but not reported. The estimated liability for workers' compensation claims at December 31, 1995 was $555,000 and is included in other accruals in the consolidated balance sheet. MEDICAL COSTS The Company is self-insured for medical claims up to an annual deductible of $175,000 per person. The Company recognizes the estimated total costs for self-insured medical claims, including claims incurred but not reported. The estimated liability for medical claims of $560,000 at December 31, 1995 is included in other accruals in the consolidated balance sheet. LITIGATION At December 31, 1995, the Company is a defendant in several lawsuits. To the extent that the lawsuits may be found in favor of the plaintiffs, and to the extent that these matters may not be covered by the Company's insurance, the Company may be liable in these matters. In the opinion of management, such liabilities, if any, would not have a material effect on the consolidated financial position of the Company. -43- 45 LETTERS OF CREDIT The Company utilizes letters of credit to back certain insurance policies and aggregate approximately $1,600,000 at December 31, 1995.
12. SUPPLEMENTAL Year Ended December 31, 1995 DISCLOSURES OF ----------------------------------------------------- CASH FLOW CASH PAID DURING THE YEAR FOR INFORMATION Interest $ 1,671,210 Income tax 8,081 =====================================================
During the year ended December 31, 1995, the stockholders converted notes payable and the related accrued interest totalling $3,525,768 into additional paid-in capital. In addition, the Company financed the purchase of property and equipment in the amount of $532,860. -44- 46 Carpetland USA, Inc. Financial Statements Year ended February 29, 1996 CONTENTS Report of Independent Auditors Financial Statements Balance Sheet Statement of Operations Statement of Cash Flows Statement of Changes in Shareholders' Equity Notes to Financial Statements
47 Report of Independent Auditors To the Board Carpetland USA, Inc. We have audited the accompanying balance sheet of Carpetland USA, Inc. (effective February 19, 1996, a wholly owned subsidiary of Shaw Industries, Inc.) as of February 29, 1996, and the related statements of operations, cash flows, and changes in shareholders' equity, for the year then ended. These financial statements are the responsibility of the Carpetland USA, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Carpetland USA, Inc. at February 29, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP June 26, 1996 -46- 48 Carpetland USA, Inc. Balance Sheet February 29, 1996 ASSETS Current assets: Cash and cash equivalents $ 334,000 Accounts receivable from customers, net of allowance for doubtful accounts of $666,000 2,433,000 Receivable from franchisees 328,000 Inventories 5,401,000 Prepaid expenses and other current assets 2,401,000 ----------- Total current assets 10,897,000 Property and equipment, at cost, net of accumulated depreciation and amortization 4,057,000 Other assets 67,000 =========== Total assets $15,021,000 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 3,455,000 Trade accounts payable to Parent 386,000 Customer deposits 3,384,000 Accrued expenses 3,116,000 ----------- Total current liabilities 10,341,000 Shareholders' Equity: Common stock, $1 par value: Authorized 10,000 shares; 4,510 shares issued 5,000 Additional paid-in capital 1,134,000 Retained earnings 3,699,000 ----------- 4,838,000 Less cost of treasury shares: 87 shares 158,000 ----------- Total shareholders' equity 4,680,000 =========== Total liabilities and shareholders' equity $15,021,000 ===========
See accompanying notes. -47- 49 Carpetland USA, Inc. Statement of Operations Year ended February 29, 1996 INCOME Net sales $ 82,755,000 License fees 2,760,000 Other 1,562,000 ------------ 87,077,000 COSTS AND EXPENSES Costs of goods sold 44,990,000 Selling 12,630,000 Payroll 20,133,000 Occupancy 7,730,000 Administrative 3,393,000 Interest 19,000 ------------ Total costs and expenses 88,895,000 ------------ Loss before income taxes 1,818,000 Income taxes 366,000 ------------ Net loss $ 2,184,000 ============
See accompanying notes. -48- 50 Carpetland USA, Inc. Statements of Cash Flows Year ended February 29, 1996 OPERATING ACTIVITIES Net loss $(2,184,000) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,116,000 Bad debts 196,000 Change in operating assets and liabilities: Accounts receivable from customers 14,000 Receivable from franchises 135,000 Inventories 159,000 Prepaid expenses and other current assets 61,000 Other assets 61,000 Accounts payable 971,000 Customer deposits 1,776,000 Accrued expenses (238,000) ----------- Net cash provided by operating activities 2,067,000 ----------- INVESTING ACTIVITIES Purchases of property and equipment (1,736,000) Issuance of notes receivable from officers/shareholders (161,000) Payments of notes receivable from officers/shareholders 433,000 ----------- Net cash used by investing activities (1,464,000) ----------- FINANCING ACTIVITIES Repayment of debt (139,000) Repurchase of stock from officers/employees (158,000) Dividends paid (4,471,000) ----------- Net cash used by financing activities (4,768,000) ----------- Net decrease in cash and cash equivalents (4,165,000) Cash and cash equivalents at beginning of year 4,499,000 =========== Cash and cash equivalents at end of year $ 334,000 ===========
See accompanying notes. -49- 51 Carpetland USA, Inc. Statement of Changes in Shareholders' Equity
NUMBER ADDITIONAL NUMBER COST OF OF COMMON PAID-IN RETAINED OF TREASURY SHARES STOCK CAPITAL EARNINGS SHARES STOCK TOTAL --------------------------------------------------------------------------------------- Balance at February 28, 1995 4,510.42 $5,000 $1,134,000 $ 7,062,000 $ 8,201,000 Net loss -- -- -- (2,184,000) -- -- (2,184,000) Dividends declared -- -- -- (1,179,000) -- -- (1,179,000) Repurchase of shares from officers/employers -- -- -- -- 87.00 (158,000) (158,000) --------------------------------------------------------------------------------------- Balance at February 29, 1996 4,510.42 $5,000 $1,134,000 $ 3,699,000 87.00 $(158,000) $ 4,680,000 =======================================================================================
See accompanying notes. -50- 52 Carpetland USA, Inc. Notes to Financial Statements February 29, 1996 1. SALE OF THE COMPANY AND BASIS OF PRESENTATION On February 19, 1996, the shareholders of the Company sold all of their outstanding shares to Shaw Industries, Inc. (Shaw) for $34.2 million and the Company became a wholly owned subsidiary of Shaw. The accompanying financial statements for the Company are presented on the basis of historical cost and do not reflect any purchase accounting adjustments to be made by Shaw. In connection with the sale of the Company, certain property was distributed to the former majority shareholder of the Company (see Note 3). In addition, the Company made a charitable contribution of $600,000 which is included in administrative expenses in the accompanying statement of operations. 2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The Company operates and franchises a chain of hardfloor covering retail outlet stores throughout the United States. The Company's sales are primarily carpeting sold to a vast array of customers ranging from individuals to contractors. FRANCHISING OPERATIONS The Company records license fees charged to its franchisees under the accrual method of accounting. These fees are determined in accordance with franchise agreements and are based on a percentage of the franchisees sales volume. INVENTORIES Prior to 1992, inventories were valued under the last in, first out (LIFO) method, which cost approximated the lower of cost on a first in, first out basis (FIFO) or market. Since 1992, LIFO cost has exceeded market and, accordingly, inventories are valued at market which approximates FIFO cost. -51- 53 Carpetland USA, Inc. Notes to Financial Statements (continued) 2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEPRECIATION AND AMORTIZATION Property and equipment acquired on or after March 1, 1987 are depreciated under the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the estimated useful life of the property or over the term of the lease, whichever is shorter. Property, equipment, and leasehold improvements acquired prior to March 1, 1987 are depreciated or amortized over their estimated useful lives under straight line or declining balance methods. CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. USE OF ESTIMATES IN THE FINANCIAL STATEMENTS Accounting estimates are an integral part of financial statements prepared in conformity with generally accepted accounting principles. Judgments made by management affect the amounts and related disclosures of assets, liabilities, revenues, and expenses reported in the financial statements. Actual results could differ from these estimates. -52- 54 Carpetland USA, Inc. Notes to Financial Statements (continued) 3. PROPERTY AND EQUIPMENT The cost and accumulated depreciation relating to property and equipment consist of the following at February 29, 1996: Land $ -- Buildings -- Signs and equipment 4,462,000 Leasehold improvements 6,440,000 ------------ Total cost 10,902,000 Accumulated depreciation and amortization (6,845,000) ============ Net property and equipment $ 4,057,000 ============
As part of the acquisition of the Company by Shaw (see Note 1), land and buildings and a Company-owned automobile were distributed to the selling majority shareholder. The net book value of these assets of $491,000 (with a cost of $1,354,000) has been recorded as a dividend in the statement of changes in shareholders' equity. 4. LINE-OF-CREDIT AGREEMENT As of February 29, 1996, the Company has an unsecured bank line of credit of $2,000,000 for working capital requirements. The line of credit is renewable annually and bears interest at the prime rate plus one-half percent. There is a compensating balance requirement of $150,000. No amounts were borrowed against the line of credit at February 29, 1996. 5. LEASES The Company's retail stores are leased under noncancellable operating leases expiring between 1997 and 2010. Four of the leases require additional rentals contingent upon sales in excess of specified amounts, in addition to the minimum annual rentals. Rentals paid under operating leases and charged to rental expenses were $3,211,000 in fiscal 1996, including $1,672,000 to related parties prior to the sale of the Company (see Note 1). Rentals exclude real estate taxes, insurance, maintenance and other costs, which are applicable to leased property and are paid by the Company. -53- 55 Carpetland USA, Inc. Notes to Financial Statements (continued) 5. LEASES (CONTINUED) Future minimum payments under all noncancellable operating leases in effect as of February 29, 1996, with initial or remaining lease terms of one year or more, are as follows:
FISCAL YEAR TOTAL ---------------------------------------------------- February 28, 1997 $ 3,406,000 February 28, 1998 3,131,000 February 28, 1999 2,975,000 February 29, 2000 2,855,000 February 28, 2001 2,524,000 Thereafter 13,309,000 ============ $ 28,200,000 ============
6. TAXES Prior to February 19, 1996, the Company elected to be taxed as an S Corporation under applicable provisions of the Internal Revenue Code. Accordingly, federal and state taxable income through February 19, 1996 is reported on the individual shareholder's personal income tax returns. The Board of Directors declared dividends to reimburse shareholders for their pro rata share of income taxes at the highest statutory federal income tax rate and the effective state income tax rate. Such dividends amounted to $688,000 for fiscal 1996. The provision for income taxes in the statement of operations represents taxes for those states that do not recognize the federal S Corporation status and for state taxes resulting from the termination of the S Corporation. -54- 56 Carpetland USA, Inc. Notes to Financial Statements (continued) 7. CARPETLAND USA SAVINGS AND INVESTMENT PLAN AND TRUST The Company contributes to the Carpetland USA Savings and Investment Plan (a defined contribution plan qualified under section 401(k) of the Internal Revenue Code) which covers substantially all employees. Employees can contribute up to a maximum of 10% of eligible compensation. The Company makes matching contributions to the plan equal to 25% of the first 6% contributed by the employee. In addition, the Company makes a discretionary contribution based largely on the overall profitability of the Company. Total Company contributions to the plan totaled $179,000 for fiscal 1996. 8. GUARANTEES The Company has guaranteed certain leases, mortgages, and other obligations associated with qualified new franchise operations. The total amount of guarantees as of February 29, 1996 is $608,000. The maximum amount of guarantees and loans is limited to $1,500,000. -55- 57 THE MAXIM GROUP, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION DOLLARS IN THOUSANDS INTRODUCTION The following unaudited pro forma condensed balance sheet and statements of operations have been prepared to reflect The Maxim Group, Inc.'s (the "Company") purchase from Shaw Industries, Inc. of substantially all of the assets and the assumption of selected liabilities of the Shaw Residential Retail Group ("Shaw") (the "Purchase Transaction"). The Purchase Transaction was effective on August 9, 1998. The consideration paid by the Company to Shaw Industries, Inc. in connection with the Purchase Transaction was approximately $114,300, consisting of cash of $25,000, a note of approximately $12,029, and 3,150,000 shares of the Company's common stock and the assumption of certain liabilities of approximately $24,900, subject to post-closing adjustments. The unaudited pro forma condensed statements of operations for the year ended January 3, 1998 and the six months ended July 31, 1998, and the unaudited pro forma condensed balance sheet as of January 31, 1998, set forth below, have been prepared by combining the Company's audited consolidated statement of operations for the year ended January 31, 1998 with Shaw's audited combined statement of operations for the year ended January 3, 1998; combining the Company's unaudited condensed consolidated statement of operations for the six months ended July 31, 1998 with Shaw's unaudited condensed combined statement of operations for the six months ended June 28, 1998; and combining the Company's unaudited condensed consolidated balance sheet as of July 31, 1998 with Shaw's unaudited condensed combined balance sheet as of July 3, 1998. The unaudited pro forma condensed statements of operations for the year ended January 31, 1998 and the six months ended July 31, 1998 were prepared as if the Purchase Transaction had occurred on February 1, 1997 and 1998, respectively. The unaudited pro forma condensed balance sheet as of July 31, 1998 was prepared giving effect to the Purchase Transaction on such date. For purposes of presenting pro forma results, no changes in revenues and expenses have been made to reflect the result of any modification to operations that might have been made had the Purchase Transaction been consummated on the assumed effective date of such transaction. The pro forma expenses include the recurring costs which are directly attributable to the Purchase Transaction, such as interest expense and amortization of goodwill, and their related tax effects. The pro forma adjustments made to the pro forma condensed balance sheet include (i) adjustments to remove selected Shaw assets not acquired and liabilities not assumed in the Purchase Transaction, (ii) $25,000 of additional borrowings under the Company's credit facility, (iii) the payment to Shaw Industries, Inc. of $25,000 cash, a note in the amount of $18,048 and 3,150,000 shares of the Company's common stock, (iv) execution of the Company's plan to exit certain of the acquired locations and dispose of certain of the acquired assets, and (v) the recognition of goodwill resulting from the Purchase Transaction. The pro forma financial information does not purport to be indicative of -56- 58 the results which would actually have been attained had such transactions been completed as of the date and for the periods presented or which may be attained in the future. The unaudited pro forma condensed balance sheet reflects the preliminary allocation of purchase price to the assets acquired and liabilities assumed in the Purchase Transaction to the Company's tangible and intangible assets and liabilities. The final allocation of such purchase price, and the resulting depreciation and amortization expense in the accompanying unaudited pro forma statements of operations, will differ from the preliminary estimates due to the final allocation being based on actual closing date amounts of assets and liabilities, management's final formulation of a plan to exit certain of the acquired locations, and a final determination of the fair market values of property and other assets as of the closing date. -57- 59 THE MAXIM GROUP, INC. PRO FORMA CONDENSED BALANCE SHEET JULY 31, 1998 (UNAUDITED)
PRO FORMA ADJUSTMENTS MAXIM SHAW ------------------------ PRO FORMA JULY 31, 1998 JULY 4, 1998 DEBIT CREDIT TOTAL ------------ ------------ -------- ---------- -------- ASSETS: Current assets: Cash and cash equivalents $ 25,030 $ 10,980 $ 25,000 (b) $ (25,000)(c) $ 30,347 (5,663)(a) Trade accounts receivable (net) 69,461 14,727 894 (a) 85,082 Other receivable 4,322 4,321 (3,155)(a) 5,488 Notes receivable 1,562 372 (372)(a) 1,562 Inventory 64,808 45,801 (7,346)(a) 103,263 Deferred tax 5,804 5,537 (5,537)(a) 5,804 Other current assets 6,430 4,211 (684)(a) 9,957 -------- -------- -------- Total current assets 177,417 85,949 241,503 Property and equipment 156,662 19,090 877 (a) (1,800)(d) 174,829 Intangibles 11,453 133,667 29,414 (c) (133,667)(a) 46,667 5,800 (d) Other assets 17,899 3,133 0 (2,328)(a) 18,704 -------- -------- -------- Total assets $363,431 $241,839 $481,703 -------- -------- -------- LIABILITIES: Current liabilities: Accounts payable $ 19,369 $ 50,916 (40,918)(a) $ 29,367 Accrued liabilities 52,138 21,517 (8,735)(a) 4,000 (d) 68,920 Notes payable 0 0 12,029 (c) 12,029 Lease obligations 503 0 503 Current maturities 150 288 (33)(a) 405 -------- -------- -------- Total current liabilities 72,160 72,721 111,224 Lease obligations 1,174 0 1,174 Long-term debt (net) 169,025 1,244 (314)(a) 25,000 (b) 194,955 Other Liabilities 3,676 6,584 (5,675)(a) 4,585 -------- -------- -------- Total liabilities 246,035 80,549 311,938 -------- -------- -------- EQUITY: Common stock 18 0 3 (c) 21 Paid-in capital 121,214 0 52,366 (c) 173,580 Retained earnings 15,142 0 15,142 Treasury stock (18,978) 0 (18,978) Investment by Shaw Industries 0 161,290 (101,306)(a) 0 (59,984)(c) -------- -------- -------- Total equity 117,396 161,290 169,765 -------- -------- -------- -------- -------- Total liabilities and equity $363,431 $241,839 $278,950 $278,950 $481,703 ======== ======== ======== ======== ========
-58- 60 THE MAXIM GROUP, INC. PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 1998 (UNAUDITED)
MAXIM SHAW SIX MONTHS SIX MONTHS ENDED ENDED PRO FORMA PRO FORMA JULY 31, 1998 JULY 4, 1998 ADJUSTMENTS TOTAL ------------- ------------- ----------- --------- REVENUES $ 205,413 $266,944 $ 472,357 COST OF SALES 143,200 165,082 308,282 ----------- -------- ------------ Gross profit 62,213 101,862 164,075 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 44,299 114,669 $ 881 (e) 159,849 INTEREST EXPENSE, NET 4,782 289 1,405 (f) 6,476 OTHER (INCOME) EXPENSE, NET (307) 115 (192) NONRECURRING CHARGE 33,000 0 33,000 ----------- -------- ------------ LOSS BEFORE INCOME TAXES (19,561) (13,211) (35,058) INCOME TAX BENEFIT (5,315) 0 (892)(g) (6,207) ----------- -------- -------- ------------ NET LOSS $ (14,246) $(13,211) $ (1,394) $ (28,851) =========== ======== ======== =========== EARNINGS PER SHARE (G): Basic $ (0.87) N/A $ (1.48) ----------- -------- ------------ Diluted $ (0.87) N/A $ (1.48) ----------- -------- ------------ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (G): Basic 16,364,000 N/A $19,514,000 ----------- -------- ------------ Diluted 16,364,000 N/A $19,514,000 ----------- -------- ------------
-59- 61 THE MAXIM GROUP, INC. PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1998 (UNAUDITED)
MAXIM SHAW FISCAL YEAR FISCAL YEAR ENDED ENDED PRO FORMA PRO FORMA JANUARY 31, 1998 JANUARY 3, 1998 ADJUSTMENTS TOTAL ---------------- --------------- ------------ ---------- REVENUES $ 365,127 $ 583,843 $ 948,970 COST OF SALES 249,381 366,578 615,959 ----------- -------- ----------- Gross profit 115,746 217,265 333,011 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 83,955 254,002 $ 1,761 (e) 339,718 INTEREST EXPENSE, NET 5,715 146 2,810 (f) 8,671 OTHER (INCOME) EXPENSE, NET (394) 15,676 15,282 ----------- -------- ----------- EARNINGS (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY CHARGE 26,470 (52,559) (30,660) INCOME TAX EXPENSE 10,314 - (1,783)(g) 8,531 EARNINGS (LOSS) BEFORE EXTRAORDINARY ----------- -------- -------- ----------- CHARGE 16,156 (52,559) (39,191) EXTRAORDINARY CHARGE, NET OF INCOME TAX BENEFIT 785 - 785 ----------- --------- ------- ----------- NET EARNINGS (LOSS) $ 15,371 $ (52,559) $ 2,788 $ (39,976) =========== ========= ======= =========== EARNINGS PER COMMON SHARE (G): Basic: Earnings (loss) before extraordinary charge $ 1.00 N/A $ (2.72) Extraordinary charge (0.05) N/A (0.04) ----------- -------- ----------- Basic earnings (loss) $ 0.95 N/A $ (2.76) ----------- -------- ----------- Diluted: Earnings (loss) before extraordinary charge $ 0.96 N/A $ (2.72) Extraordinary charge (0.04) N/A (0.04) ----------- -------- ----------- Diluted earnings (loss) $ 0.92 N/A $ (2.76) ----------- -------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (G): Basic 16,158,000 N/A 19,308,000 ----------- -------- ----------- Diluted 16,766,000 N/A 19,308,000 ----------- -------- -----------
-60- 62 NOTES TO PRO FORMA FINANCIAL STATEMENTS (a) To remove selected Shaw assets not acquired and liabilities not assumed in the Purchase Transaction. (b) To recognize $25,000 of additional borrowings under the company's credit facility. (c) To recognize the payment to Shaw Industries, Inc. of $25,000 cash, a promissory note in the amount of $12,029, and 3,150,000 shares of the Company's common stock at its fair value at the date of issuance and the excess of the cost of the assets acquired over their fair market value at the date of acquisition as goodwill. (d) To recognize (i) liabilities associated with lease obligations of approximately $4,000 in connection with the Company's preliminary plan to exit certain of the acquired locations and (ii) the Company's planned disposal of certain of the acquired assets. (e) To reflect amortization of goodwill recorded in connection with (c) above. The Company amortized goodwill on a straight-line basis over a period of 20 years. (f) To reflect interest on (i) increased borrowings under the Company's credit facility at an assumed rate equal to the average LIBOR rate for the relevant period plus 1.75% (7.39% for the year ended January 31, 1998 and the six months ended July 31, 1998, respectively) and (ii) the promissory note issued to Shaw Industries, Inc. at a rate of 8%. (g) To provide for the federal and state tax effects of the pro forma adjustments in (e) and (f) above. (h) Net earnings per common share are computed assuming that the 3,150,000 shares of the Company's common stock issued in connection with the Purchase Transaction are outstanding for the entire periods presented. -61- 63 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized. THE MAXIM GROUP, INC. By: /s/ Gary F. Brugliera ------------------------------------- Gary F. Brugliera Executive Vice President and Chief Financial Officer Dated: October 23, 1998 -62- 64 EXHIBIT INDEX
EXHIBIT NO DESCRIPTION OF EXHIBIT - ---------- ------------------------------- 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Ernst & Young LLP. 23.3 Consent of BDO Seidman, LLP.
EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Current Report on Form 8-K/A (Amendment No. 1) into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-80984, 33-81002, 333-19691, 333-19693, 333-47299 and 333-59423). /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia October 22, 1998 EX-23.2 3 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated June 26, 1996, with respect to the financial statements of Carpetland USA, Inc. included in this Current Report on Form 8-K/A (Amendment No. 1) and to the incorporation by reference of our report into the Maxim Group Inc. previously filed Registration Statements on Form S-8 (File Nos. 33-80984, 33-81002, 333-19691, 333-19693, 333-47299 and 333-59423). /s/ ERNST & YOUNG LLP ----------------------------------- Chicago, Illinois October 23, 1998 EX-23.3 4 CONSENT OF BDO SEIDMAN, LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report included in this Current Report on Form 8-K/A (Amendment No. 1) into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-80984, 33-81002, 333-19691, 333-19693, 333-47299 and 333-59423). /s/ BDO SEIDMAN, LLP Troy, Michigan October 23, 1998 -----END PRIVACY-ENHANCED MESSAGE-----