<PAGE> 1
CONFORMED
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 1-542
GROSSMAN'S INC.
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-0524830
----------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
in corporation or organization) Identification No.)
45 Dan Road
Canton, Massachusetts 02021
----------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
(617) 830-4000
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(Registrant's telephone number, including area code)
200 Union Street, Braintree, Massachusetts
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - $.01 Par Value - 27,307,593 shares as of August 8, 1996.
<PAGE> 2
FORM 10-Q
QUARTER ENDED JUNE 30, 1996
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
GROSSMAN'S INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1996, December 31, 1995 and June 30, 1995............. 3
Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1996 and 1995....... 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995........................ 6
Notes to Unaudited Interim Consolidated Financial Statements..... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 14
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 21
SIGNATURES.......................................................... 22
<PAGE> 3
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GROSSMAN'S INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1995
--------- ------------ --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 679 $ 2,536 $ 2,838
Receivables, less allowance of
$745 in 1996, $3,339 at
December 31, 1995 and $3,673
at June 30, 1995 for doubtful
accounts 14,548 23,940 22,155
Inventories 61,229 102,009 135,111
Note receivable, net - 13,000 -
Property held for sale 4,802 2,572 5,861
Other current assets 3,884 3,940 3,500
-------- -------- --------
Total current assets 85,142 147,997 169,465
PROPERTY, PLANT AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION OF $15,220
ON JUNE 30, 1996, $54,663 ON
DECEMBER 31, 1995 AND $56,347 ON
JUNE 30, 1995 30,324 94,256 97,207
PROPERTY HELD FOR SALE 38,232 - -
INVESTMENT IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATE 125 108 893
OTHER ASSETS 927 1,168 1,529
-------- -------- --------
TOTAL ASSETS $154,750 $243,529 $269,094
======== ======== ========
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
GROSSMAN'S INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1995
-------- ------------ --------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 71,444 $ 91,308 $101,403
Accrued interest 410 1,403 1,134
Current portion of long-term debt and
capital lease obligations
14% Debentures, paid April 1996 - 16,201 16,201
Mortgage notes, paid April 1996 - 385 364
Mortgage notes payable 4,802 - -
Other notes and capital lease
obligations 2,293 3,859 5,783
-------- -------- ---------
Total current portion of long-term
debt and capital lease obligations 7,095 20,445 22,348
-------- -------- ---------
Total current liabilities 78,949 113,156 124,885
REVOLVING TERM NOTE PAYABLE 20,310 32,844 46,748
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS
Mortgage notes payable 15,674 3,126 3,323
Other long-term debt and capital
lease obligations 6,443 2,542 4,401
-------- -------- --------
Total Long-Term Debt and Capital
Lease Obligations 22,117 5,668 7,724
PENSION LIABILITY 8,247 8,270 3,790
OTHER LIABILITIES 8,390 9,796 15,244
-------- -------- ---------
Total liabilities 138,013 169,734 198,391
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT
Common stock, $.01 par value,
Shares authorized - 50,000
Shares issued - 26,519 on June 30,
1996 and 26,137 on December 31,
1995 and June 30, 1995 265 261 261
Additional paid-in-capital 156,229 155,768 155,816
Retained earnings (accumulated deficit) (121,839) (64,206) (73,624)
Minimum pension liability (16,476) (16,476) (10,576)
Cumulative foreign currency translation
adjustment (1,442) (1,442) (872)
Less shares in treasury, at cost -
45 at December 31, 1995 and
124 at June 30, 1995 - (110) (302)
--------- --------- ---------
Total Stockholders' Investment 16,737 73,795 70,703
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
INVESTMENT $154,750 $243,529 $269,094
========= ========= =========
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
GROSSMAN'S INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $ 87,704 $193,990 $200,685 $320,760
COST OF SALES 66,448 149,258 152,929 245,035
--------- --------- --------- ---------
Gross Profit 21,256 44,732 47,756 75,725
OPERATING EXPENSES
Selling and administrative 22,929 39,424 60,963 77,512
Depreciation and amortization 997 2,853 2,846 5,864
Store closing expense - - 40,150 -
Store preopening expense 395 10 756 145
--------- --------- --------- ---------
24,321 42,287 104,715 83,521
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (3,065) 2,445 (56,959) (7,796)
OTHER EXPENSES (INCOME)
Interest expense 1,016 2,130 2,636 4,327
Net gain on disposals of
property - (152) (27) (198)
Other (1,243) (833) (2,251) (1,565)
-------- --------- --------- ---------
(227) 1,145 358 2,564
EQUITY IN NET LOSS OF
UNCONSOLIDATED AFFILIATE 108 127 316 325
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (2,946) 1,173 (57,633) (10,685)
PROVISION (CREDIT) FOR INCOME
TAXES - 117 - (1,069)
--------- --------- --------- ---------
NET INCOME (LOSS) $ (2,946) $ 1,056 $(57,633) $ (9,616)
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON
SHARE (PRIMARY AND FULLY
DILUTED) $(0.11) $0.04 $(2.21) $(0.37)
========= ========= ========= =========
WEIGHTED AVERAGE SHARES AND
EQUIVALENT SHARES OUTSTANDING
Primary 26,458 25,935 26,276 25,857
========= ========= ========= =========
Fully Diluted 26,458 26,026 26,276 25,857
========= ========= ========= =========
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
GROSSMAN'S INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(57,633) $ (9,616)
Adjustments to reconcile net loss to net
cash (used for) operating activities:
Depreciation and amortization 2,846 5,864
Net (gain) on disposals of property (27) (198)
Provision for losses on accounts receivable 776 797
Provision for store closing 29,613 -
Undistributed loss of unconsolidated affiliate 316 325
(Increase) decrease in assets:
Receivables 7,799 (3,503)
Inventories 27,736 (18,509)
Note receivable and other assets 12,677 (123)
(Decrease) in accounts payable and accrued
liabilities and other liabilities (30,205) 8,754
--------- ---------
Total adjustments 51,531 (6,593)
NET CASH (USED FOR) OPERATING ACTIVITIES (6,102) (16,209)
INVESTING ACTIVITIES
Capital expenditures (1,759) (2,122)
Proceeds from sales of property, net 16,004 15,707
Investment in unconsolidated affiliate (333) (194)
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 13,912 13,391
FINANCING ACTIVITIES
Proceeds from mortgage financing 33,000 -
Payments on mortgage financing (12,524) -
--------- ---------
Net proceeds from mortgage financing 20,476 -
Payments on long-term debt and capital lease
obligations (17,643) (14,784)
Net borrowings from revolving term note payable (12,534) 16,860
Issuance of common stock as payment for
Directors' fees 34 537
Issuance of other common stock - 9
--------- ---------
NET CASH (USED FOR) PROVIDED BY FINANCING
ACTIVITIES (9,667) 2,622
Net decrease in cash and cash equivalents (1,857) (196)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,536 3,034
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 679 $ 2,838
========= =========
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
</TABLE>
<PAGE> 7
GROSSMAN'S INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The accompanying Unaudited Interim Consolidated Financial Statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis and, in the opinion of management, include
all adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the results for the interim periods. The results of
operations for the interim periods are not necessarily indicative of
results to be expected for the year.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Annual Report on Form 10-K of Grossman's Inc. for the
year ended December 31, 1995. The balance sheet as of December 31, 1995
has been derived from the audited financial statements as of that date.
The Unaudited Interim Consolidated Financial Statements include the
accounts of Grossman's Inc. and its wholly-owned subsidiaries (the
"Company") after elimination of intercompany balances and transactions.
The Company's fiscal year end is December 31. The Company records
activity in quarterly accounting periods of equal length, ending on the
last Saturday of each quarter. The differences in amounts presented and
those which would have been presented using actual quarter end dates are
not material.
Certain amounts in the consolidated financial statements for prior periods
have been reclassified to conform to the current period classification.
Such reclassifications had no effect on previously reported results of
operations.
NOTE 2 - RESTRUCTURING, REFINANCING AND UNAUDITED CONDENSED PRO FORMA
FINANCIAL STATEMENTS
---------------------------------------------------------------------
In March 1996, the Company announced a restructuring and refinancing plan
under which its 60 Grossman's stores, located in eight Northeastern
states, were closed and a $40.2 million restructuring charge was recorded.
The total non-cash portion of the reserve was approximately $22.2 million;
$12.8 million for inventory liquidation costs and $9.4 million for the net
unrecoverable amount of property, plant and equipment. Estimated
severance payments, most of which had been completed as of June 30, 1996,
total $8.0 million. Estimated additional cash payments total $10.0
million, including $6.0 million paid through June 30, 1996, for
incremental professional fees, including consultants, attorneys,
accountants, environmental surveys, title fees, inventory liquidation fees
and property due diligence fees. The remaining $4.0 million of cash
payments is expected to be paid over a three year period for estimated
lease payments and carrying costs to be incurred during the period in
which leases are terminated and properties sold.
The Company began the closing and liquidation of its Grossman's stores on
March 28, 1996. The Company entered into an Agency Agreement for the
<PAGE> 8
NOTE 2 - RESTRUCTURING, REFINANCING AND UNAUDITED CONDENSED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------------------------
liquidation of inventories at closed stores, and payments for inventory
totalling approximately $34.0 million were received between March and June
1996. All stores were closed by the end of May 1996. Concurrent with the
timing of the store closings, administrative support functions in the
Company's headquarters were reduced. Additional reductions will result
upon the completion of certain remaining administrative functions. Upon
completion, the Company's total workforce will have been reduced from
approximately 3,400 to 1,800.
Four transactions were undertaken to improve liquidity. The $15.8 million
note receivable from Kmart Corporation was sold in March 1996. The
Company's 14% Debentures due January 1996 were refinanced, with cash and
notes issued in April 1996. A $33.0 million mortgage loan, secured by
owned properties, was funded in April 1996. A new $50.0 million long-term
revolving credit agreement, with increased borrowing availability, was
signed in May 1996.
In December 1995, the Company announced that it was renegotiating the
$16.2 million of 14% Debentures and related interest due in January 1996.
In March 1996, settlement with holders of these Debentures was reached.
Holders were paid in April 1996 for principal and interest due, in a
combination of cash and notes payable. Cash payments totalled
approximately $12 million. Convertible notes payable of $3 million due in
three years, with interest payable semi-annually at 10% per annum, were
issued. These notes are convertible at the holder's option into shares of
Common Stock at $1.30 per share. On each of April 9, July 9, and July 26,
1996, $500 thousand was converted into 384,615 shares of Common Stock, for
a total of 1,153,845 shares converted. An additional $2.7 million of non-
convertible notes payable, with interest payable semi-annually at 15% per
annum, were also issued. These notes are due in three years and may be
repaid prior to maturity from proceeds of real estate sales, after full
repayment of the mortgage notes described below. Interest on these notes
may be deferred at the Company's option.
The Company's $15.8 million note receivable from Kmart Corporation,
originally discounted for financial reporting purposes to $12.4 million,
was sold for cash of $13.0 million on March 22, 1996.
In April 1996, GRS Realty Company, Inc., a subsidiary of the Company,
issued $33.0 million of mortgage notes payable to a non-affiliated
investor group. The mortgage notes are secured by both closed and
operating owned properties conveyed to GRS Realty Company, Inc. and are
required to be repaid with proceeds from the sale of closed stores. The
mortgage notes include $2.9 million of notes which are non-interest
bearing and were repaid from the first sale of properties. An additional
$4.0 million of notes are non-interest bearing and convertible into Common
Stock at $0.75 per share, subsequent to repayment of the mortgage notes.
The remaining $26.1 million of notes bear interest at 15% per annum,
payable monthly, and include a right to convert $2.0 million into shares
of Common Stock at $1.50 per share upon certain events, including default
at maturity. As of June 30, 1996, $9.6 million of the interest bearing
note had been repaid. Subsequent to June 30, 1996, an additional $4.8
million was paid. Minimum required principal payments remaining after
these payments are as follows: $2.2 million is due by October 1997 and the
remainder is due by April 1998. Fees due under the various notes,
totalling $2.9 million, were paid in April 1996 upon the loan closing.
<PAGE> 9
NOTE 2 - RESTRUCTURING, REFINANCING AND UNAUDITED CONDENSED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------------------------
The pro forma balance sheet adjustments also reflect the retirement of
$3.4 million of mortgage notes paid in April 1996.
In May 1996, the Company received a three-year line of credit for
borrowings up to $50 million, including letters of credit up to $15
million, under a formula based on a percentage of qualified inventory and
accounts receivable. The new agreement replaces the revolving credit
agreement previously in effect. Borrowings pursuant to this new agreement
are secured by inventory, receivables and other assets. The new
agreement, which provides interest at 1% over Prime Rate, contains no
financial ratio covenants or dollar limitations on spending for new store
properties.
The following unaudited condensed pro forma financial statements have been
prepared in accordance with applicable rules of the Securities and
Exchange Commission, giving effect to the restructuring and refinancing
plan transactions as if they had been completed, for balance sheet
purposes, on June 30, 1996 and, for statement of operations purposes, on
January 1, 1996. The pro forma information is not necessarily indicative
of the results that would have been reported had such events actually
occurred on the dates specified, nor is it indicative of the Company's
future results.
<PAGE> 10
NOTE 2 - RESTRUCTURING, REFINANCING AND UNAUDITED CONDENSED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------------------------
<TABLE>
<CAPTION>
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
(in thousands, except per share data)
June 30, 1996
---------------------------------
Pro Forma
As Pro Forma Continuing
Reported Adjustments Operations
-------- ----------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 679 $ - $ 679
Receivables, net 14,548 (2,133)(a) 12,415
Inventories 61,229 - 61,229
Note receivable, net - - -
Property held for sale 4,802 - 4,802
Other current assets 3,884 - 3,884
--------- --------- ---------
Total current assets 85,142 (2,133) 83,009
PROPERTY, PLANT AND EQUIPMENT, NET 30,324 - 30,324
PROPERTY HELD FOR SALE 38,232 - 38,232
OTHER ASSETS 1,052 - 1,052
--------- --------- ---------
TOTAL ASSETS $154,750 $ (2,133) $152,617
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 71,854 $ (5,620)(a) $ 66,234
Current portion of long-term debt
and capital lease obligations 7,095 (1,154)(a) 5,941
--------- --------- ---------
Total current liabilities 78,949 (6,774) 72,175
REVOLVING TERM NOTE PAYABLE 20,310 4,641 (b) 24,951
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 22,117 - 22,117
OTHER LIABILITIES 16,637 - 16,637
--------- --------- ---------
Total liabilities 138,013 (2,133) 135,880
TOTAL STOCKHOLDERS' INVESTMENT 16,737 - 16,737
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
INVESTMENT $154,750 $ (2,133) $152,617
========= ========= =========
</TABLE>
<F1>
(a) Elimination of amounts pertaining to closed Grossman's stores.
<F2>
(b) Projected borrowings necessary after reflecting activity described
in (a).
<PAGE> 11
NOTE 2 - RESTRUCTURING, REFINANCING AND UNAUDITED CONDENSED PRO FORMA
FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------------------------
<TABLE>
<CAPTION>
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
(in thousands, except per share data)
Six Months Ended June 30, 1996
-----------------------------------------
Less Pro Forma
As Closed Pro Forma Continuing
Reported Operations Adjustments Operations
-------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
SALES $200,685 $ 47,953 $ - $152,732
COST OF SALES 152,929 36,161 - 116,768
--------- --------- --------- ---------
Gross Profit 47,756 11,792 - 35,964
OPERATING EXPENSES
Selling and administrative 60,963 17,060 (921)(a) 42,982
Depreciation and amortization 2,846 875 1,971
Store closing expense 40,150 40,150 - -
Preopening expense 756 45 - 711
--------- --------- --------- ---------
104,715 58,130 (921) 45,664
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (56,959) (46,338) (921) (9,700)
OTHER EXPENSES (INCOME)
Interest expense 2,636 645 112 (b) 2,103
Net gain on disposals
of property (27) (12) - (15)
Other (2,251) (173) - (2,078)
--------- --------- --------- ---------
358 460 112 10
EQUITY IN NET LOSS OF
UNCONSOLIDATED AFFILIATE 316 - - 316
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES (57,633) (46,798) 809 (10,026)
PROVISION FOR INCOME TAXES - - - -
--------- --------- --------- ---------
NET INCOME (LOSS) $(57,633) $(46,798) $ 809 $(10,026)
========= ========= ========= =========
NET LOSS PER COMMON SHARE
(PRIMARY AND FULLY DILUTED) $(2.21) $(0.38)
========= =========
WEIGHTED AVERAGE SHARES AND
EQUIVALENT SHARES OUTSTANDING
Primary and Fully Diluted 26,276 26,276
========= =========
</TABLE>
<F1>
(a) Represents amounts previously allocated to the closed operations,
reduced by reductions to corporate overhead occurring as a result of
the reorganization.
<F2>
(b) Assumes increases for the new secured debt and notes payable, net of
savings from the retirement of the 14% Debentures, and reductions to
capital lease obligations and revolving credit borrowings.
<PAGE> 12
NOTE 3 - LONG-TERM DEBT AND REVOLVING CREDIT AGREEMENT
------------------------------------------------------
<TABLE>
<CAPTION>
Long-term debt consists of the following (in thousands):
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1995
-------- ------------ --------
<S> <C> <C> <C>
14% Debentures, due January 1, 1996 $ - $16,201 $16,201
Convertible notes payable, due
April 1999 2,500 - -
Non-convertible notes payable, due
April 1999 2,700 - -
Mortgage notes 20,476 3,511 3,687
Other notes payable 304 552 711
Capital lease obligations 3,232 5,849 9,473
------- ------- -------
29,212 26,113 30,072
Less current portion 7,095 20,445 22,348
------- ------- -------
$22,117 $ 5,668 $ 7,724
======= ======= =======
</TABLE>
In May 1996, the Company received a three year line of credit for
borrowings up to $50 million, including letters of credit up to $15
million, under a formula based on a percentage of qualified inventory and
accounts receivable. The new agreement replaces the revolving credit
agreement previously in effect. Borrowings pursuant to this new agreement
are secured by inventory, receivables and other assets. The new
agreement, which bears interest at 1% over Prime Rate, contains no
financial ratio covenants or dollar limitations on spending for new store
properties.
At June 30, 1996, cash borrowings under the Company's new loan and
security agreement totalled $20.3 million and outstanding standby letters
of credit totalled $8.8 million. The maximum borrowings under this new
agreement during the six months ended June 30, 1996 were $31.1 million,
including letters of credit of $8.8 million. The weighted average annual
interest rate on such borrowings was 11.1%. At June 30, 1996, the loan
and security agreement provided for borrowings of $39.1 million.
Upon entering into the loan and security agreement, the Company's prior
revolving credit agreement with BankAmerica Business Credit, Inc. was
terminated. The maximum borrowings in 1996 under this agreement were
$52.3 million, including letters of credit of $9.2 million. The maximum
borrowings in 1995 under this agreement was $63.1 million, including
letters of credit of $11.8 million. The weighted average annual interest
rate on such borrowings in 1996 and 1995 was 9.9% and 9.5%, respectively.
In April 1996, the Company repaid $3.4 million of outstanding mortgage
notes.
See Note 2 for discussion of payment of the 14% Debentures, new debt
agreements funded in April 1996, repayment of mortgage notes, conversions
of notes payable to Common Stock, and the refinancing of the loan and
security agreement.
<PAGE> 13
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
-------------------------------------------------
<TABLE>
<CAPTION>
Accounts payable and accrued liabilities consist of the following (in
thousands):
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1995
-------- ------------ --------
<S> <C> <C> <C>
Accounts payable $42,515 $63,236 $ 73,846
Accrued salaries, wages, commissions
and related taxes 2,976 3,630 5,743
Accrued income and franchise taxes 325 391 -
Accrued taxes other than income and
franchise 3,171 2,819 3,839
Accrued store closing costs 5,758 4,593 1,470
Accrued insurance 11,209 9,933 8,713
Other accrued liabilities 5,490 6,706 7,792
------- ------- --------
$71,444 $91,308 $101,403
======= ======= ========
</TABLE>
NOTE 5 - OTHER LIABILITIES
--------------------------
<TABLE>
<CAPTION>
Other long-term liabilities consist of the following (in thousands):
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1995
--------- ------------ --------
<S> <C> <C> <C>
Accrued insurance claims $6,129 $6,955 $ 8,675
Accrued store closing costs 1,855 2,347 5,965
Other accrued liabilities 406 494 604
------ ------ -------
$8,390 $9,796 $15,244
====== ====== =======
</TABLE>
<PAGE> 14
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
FINANCIAL CONDITION
-------------------
June 30, 1996 Compared with December 31, 1995
---------------------------------------------
Financial condition at June 30, 1996 reflects the actions taken with
regard to the restructuring and refinancing plan announced on March 28,
1996. Under this plan, the remaining 60 Grossman's stores were closed and
several actions were taken to improve liquidity. A $40.2 million
restructuring charge was recorded in March 1996. The total non-cash
portion of the reserve was approximately $22.2 million; $12.8 million for
inventory liquidation costs and $9.4 million for the net unrecoverable
amount of property, plant and equipment. Estimated severance payments,
most of which had been completed as of June 30, 1996, total $8.0 million.
Estimated additional cash payments total $10.0 million, including $6.0
million paid through June 30, 1996, for incremental professional fees,
including consultants, attorneys, accountants, environmental surveys,
title fees, inventory liquidation fee and property due diligence fees.
The remaining $4.0 million of cash payments are expected to be paid over a
three year period for estimated lease payments and carrying costs to be
incurred during the period in which leases are terminated and properties
sold.
All stores operating under the name "Grossman's" were closed by the end of
May 1996. The Company entered into an Agency Agreement for the
liquidation of inventories at closed stores, and payments for inventory
totalling approximately $34.0 million were received between March and June
1996. Furniture, fixtures and equipment in the stores were also
liquidated during this time period, with net proceeds of approximately
$3.0 million. Forty of the stores closed were owned and have been
actively marketed for sale, along with 15 other owned surplus properties
which were already being marketed for sale. Through early August 1996, 20
properties have been sold and 35 properties continue to be actively
marketed.
Four transactions were undertaken to improve liquidity. The $15.8 million
note receivable from Kmart Corporation, originally discounted for
financial reporting purposes to $12.4 million, was sold for cash of $13.0
million in March 1996. The Company's 14% Debentures were refinanced, with
cash and notes issued in April 1996. A $33.0 million mortgage loan,
secured by owned properties was obtained, with funding in April 1996. A
new $50.0 million long-term revolving credit agreement, with increased
borrowing availability, was signed in May 1996.
The $16.2 million of 14% Debentures and related interest, which were due
in January 1996, were refinanced in April 1996 with a combination of cash
and notes payable. Cash payments totalled approximately $12 million.
Convertible notes payable of $3 million due in three years, with interest
payable semi-annually at 10% per annum, were issued. These notes are
convertible at the holder's option into shares of Common Stock at $1.30
per share. On each of April 9, July 9, and July 26, 1996, notes for $500
thousand were converted into 384,615 shares of Common Stock, for a total
of 1,153,845 shares converted. An additional $2.7 million of
non-convertible notes payable, with interest payable semi-annually at 15%
per annum, were also issued. These notes are due in three years and may
<PAGE> 15
FINANCIAL CONDITION
-------------------
June 30, 1996 Compared with December 31, 1995 (CONTINUED)
---------------------------------------------------------
be repaid prior to maturity from proceeds of real estate sales, after full
repayment of the mortgage notes described below. Interest on these notes
may be deferred at the Company's option.
In April 1996, GRS Realty Company, Inc., a subsidiary of the Company,
issued $33.0 million of mortgage notes payable to a non-affiliated
investor group. The mortgage notes are secured by both closed and
operating owned properties conveyed to GRS Realty Company, Inc. and are
required to be repaid with proceeds from the sale of closed stores. The
mortgage notes include $2.9 million of notes which are non-interest
bearing and were repaid from the first sale of properties. An additional
$4.0 million of notes are non-interest bearing and convertible into Common
Stock at $0.75 per share, subsequent to repayment of the mortgage notes.
The remaining $26.1 million of notes bear interest at 15% per annum,
payable monthly, and include a right to convert $2.0 million into shares
of Common Stock at $1.50 per share upon certain events, including default
at maturity.
During and following the second quarter of 1996, significant progress was
made with respect to sales of the 55 surplus properties and payment of the
mortgage notes. As of June 30, 1996, 14 properties had been sold, with
net proceeds of $12.5 million. Six additional properties, with net
proceeds of $4.8 million, were sold in July and early August, and the
remaining 35 properties continue to be actively marketed. Minimum
required payments for the total series of mortgage notes have been met
with respect to $4.5 million due in October 1996 and $6.0 million due in
April 1997. In addition, $6.8 million of the required $9.0 million due in
October 1997 has been paid. The remainder of the notes are due in April
1998. Fees due under the various notes, totalling $2.9 million, were paid
in April 1996 upon the loan closing.
In May 1996, the Company entered into a three year line of credit for
borrowings up to $50 million, including letters of credit up to $15
million, under a formula based upon a percentage of qualified inventory
and accounts receivable. The new agreement replaces the revolving credit
agreement previously in effect. Borrowings pursuant to this new agreement
are secured by inventory, receivables and other assets. The new
agreement, which bears interest at 1% over Prime Rate, contains no
financial ratio covenants or dollar limitations on spending for new stores
properties. At June 30, 1996, cash borrowings under the new loan and
security agreement totalled $20.3 million, outstanding standby letters of
credit totalled $8.8 million, and availability under the loan totalled
$10.0 million. Management anticipates the use of the revolving credit
facility throughout the remainder of 1996 and beyond, with availability
sufficient to meet requirements.
In April 1996, the Company repaid $3.4 million of outstanding mortgage
notes.
Receivables, inventories, accounts payable and accrued liabilities at June
30, 1996, compared to December 31, 1995, reflect the closing of the
Grossman's stores. Inventory supply problems, which were experienced
during the first quarter, normalized during the second quarter, as vendors
<PAGE> 16
FINANCIAL CONDITION
-------------------
June 30, 1996 Compared with December 31, 1995 (CONTINUED)
---------------------------------------------------------
were paid for amounts due. The final $2.0 million of payments due former
suppliers of Grossman's stores were paid in July 1996. At June 30, 1996,
all stores were considered adequately stocked with inventory.
Property held for sale totals $43.0 million at June 30, 1996, reflecting
the book value of owned real property. Market values of real property are
expected to exceed book values and, in accordance with generally accepted
accounting principles, gains, if any, will be deferred until final sales
disposition.
RESULTS OF OPERATIONS
---------------------
Six months ended June 30, 1996 compared with six months ended
-------------------------------------------------------------
June 30, 1995
-------------
Results of operations include both the results of ongoing operations and
of the Grossman's stores, whose operations terminated on March 28, 1996,
as previously described. Pro forma results of operations, which exclude
the Grossman's stores, are presented in the Notes To Financial Statements.
Sales and results of operations throughout the first six months of 1996
were affected by first quarter inventory supply problems and
out-of-stock-situations. During the second quarter, vendor relationships
were reestablished, vendors were paid for past obligations, inventory
positions returned to required levels, and substantial progress was made
toward reestablishing customer relationships, which had been strained
during the period of inventory shortages. Efforts are continuing to both
renew old and establish new customer relationships.
<PAGE> 17
RESULTS OF OPERATIONS
---------------------
Six months ended June 30, 1996 compared with six months ended
-------------------------------------------------------------
June 30, 1995 (CONTINUED)
-------------------------
<TABLE>
<CAPTION>
The following table shows comparative sales results by division and store
type during each quarter and for the total six months (dollars in
millions):
Three Months Three Months Six Months
Ended March Ended June Ended June
-------------- -------------- --------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SALES
Ongoing Operations
Contractors' Warehouse $ 54.5 $ 51.1 $ 70.2 $ 65.3 $124.7 $116.4
Mr. 2nd's Bargain Outlet 10.5 10.3 17.5 14.6 28.0 24.9
------ ------ ------ ------ ------ ------
Total Ongoing
Operations 65.0 61.4 87.7 79.9 152.7 141.3
Closed Stores
Grossman's 48.0 65.4 - 114.1 48.0 179.5
------ ------ ------ ------ ------ ------
Total Grossman's Inc. $113.0 $126.8 $ 87.7 $194.0 $200.7 $320.8
====== ====== ====== ====== ====== ======
% OF TOTAL SALES
Ongoing Operations
Contractors' Warehouse 48.2% 40.3% 80.0% 33.7% 62.1% 36.2%
Mr. 2nd's Bargain Outlet 9.3 8.1 20.0 7.5 14.0 7.8
------ ------ ------ ------ ------ ------
Total Ongoing
Operations 57.5 48.4 100.0 41.2 76.1 44.0
Closed Stores
Grossman's 42.5 51.6 - 58.8 23.9 56.0
------ ------ ------ ------ ------ ------
Total Grossman's Inc. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE> 18
RESULTS OF OPERATIONS
---------------------
Six months ended June 30, 1996 compared with six months ended
-------------------------------------------------------------
June 30, 1995 (CONTINUED)
-------------------------
<TABLE>
<CAPTION>
(TABLE CONTINUED)
Three Months Three Months Six Months
Ended March Ended June Ended June
-------------- -------------- --------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SALES % INCREASE (DECREASE)
VERSUS PRIOR YEAR
Ongoing Operations
Contractors' Warehouse 6.7 % 5.8 % 7.5 % 19.4 % 7.1 % 13.0 %
Mr. 2nd's Bargain Outlet 1.9 21.2 19.9 15.0 12.4 17.5
------ ------ ------- ------ ------ ------
Total Ongoing
Operations 5.9 8.1 9.8 18.5 8.1 13.8
Closed Stores
Grossman's (26.6) (16.5) (100.0) (25.3) (73.3) (22.3)
------ ------ ------- ------ ------ ------
Total Grossman's Inc. (10.9)% (6.1)% (54.8)% (11.9)% (37.4)% (9.8)%
====== ====== ======= ====== ====== ======
COMPARABLE STORE SALES %
INCREASE (DECREASE)
VERSUS PRIOR YEAR
Ongoing Operations
Contractors' Warehouse (3.7)% (6.6)% (8.4)% 3.5 % (6.4)% (1.3)%
Mr. 2nd's Bargain Outlet (12.7) 12.9 (2.1) 2.4 (7.2) 6.6
------ ------ ------- ------ ------ ------
Total Ongoing
Operations (5.2) (3.7) (7.3) 3.3 (6.5) 0.1
Closed Stores
Grossman's NA 4.0 NA (8.2) NA (4.1)
------ ------ ------- ------ ------ ------
Total Grossman's Inc. (5.2)% 0.3 % (7.3)% (4.2)% (6.5)% (2.4)%
====== ====== ======= ====== ====== ======
TOTAL NUMBER OF STORES
Ongoing Operations
Contractors' Warehouse 15 13 16 13
Mr. 2nd's Bargain Outlet 24 20 24 20
Closed Stores
Grossman's - 72 - 72
------ ------ ------ ------
Total Number of Stores 39 105 40 105
====== ====== ====== ======
</TABLE>
<PAGE> 19
Six months ended June 30, 1996 compared with six months ended
-------------------------------------------------------------
June 30, 1995 (CONTINUED)
-------------------------
Sales results also reflect other store openings and closings. The 1996
results include the results of three Contractors' Warehouse stores opened
in 1995, two of which were opened subsequent to the second quarter, and
one store opened in mid-May 1996. The 1996 results also include the sales
of two Mr. 2nd's Bargain Outlets opened in 1995, one which opened late in
the first quarter and one subsequent to the first quarter, and three
stores opened in March 1996. The 1996 results exclude the results of 18
Grossman's stores which closed in late 1995. Additionally, Contractors'
Warehouse sales results in 1995 reflect heavy rainfall in California in
the months of January and March, which were partially offset by second
quarter increases.
Gross profit declined by $28.0 million, reflecting the closing of the
Grossman's stores, the store openings described above, and an increase in
gross margin from 23.6% in 1995 to 23.8% in 1996. A first quarter gross
margin decline from 24.4% in 1995 to 23.5% in 1996 was offset by a second
quarter increase from 23.1% in 1995 to 24.2% in 1996. The first quarter
declines reflected the increase in Contractors' Warehouse sales, which
focus on lower margin professional sales, as a percent of total sales.
First quarter 1996 margins were also affected by the Company's inability
to avoid out-of-stock situations. The margin increase in the second
quarter principally related to margins on commodity lumber. Commodity
lumber margins, which were extremely low in 1995 due to falling prices,
recovered in 1996 when prices were relatively stable.
Selling and administrative expenses declined by $16.5 million from 1995 to
1996 and increased as a percent of sales from 24.2% in 1995 to 30.4% in
1996, both resulting from the effect of downsizing. Selling and
administrative expenses, the largest component of which is payroll, are
expected to remain at higher than historic percentages of sales, due to
the Company's structure following the downsizing. Management continues
to reevaluate and adjust administrative service levels and functions,
which is expected to yield future savings.
Depreciation and amortization declined from $5.9 million in 1995 to $2.8
million in 1996, reflecting the store closings, partially offset by
depreciation for new stores. Depreciation for ongoing operations was
approximately $1.0 million in both the first and second quarters of 1996,
as limited capital spending has occurred.
As a result of the restructuring and refinancing plan, the Company
recorded a $40.2 million restructuring charge in the first quarter of 1996
related to severance costs, lease payments, inventory liquidation costs,
other expenses and the net unrecoverable amount of property plant and
equipment.
Store preopening expense increased from $145 thousand in 1995 to $756
thousand in 1996, reflecting the store opening activity described above.
Interest expense declined from $4.3 million in 1995 to $2.6 million,
reflecting lower revolving credit borrowings, lower levels of capital
lease obligations as a result of closing stores in both 1995 and 1996,
and savings related to long-term debt paid as part of the refinancing.
Interest expense is expected to continue to decline as properties are sold
and mortgage debt is paid.
<PAGE> 20
Six months ended June 30, 1996 compared with six months ended
-------------------------------------------------------------
June 30, 1995 (CONTINUED)
-------------------------
Other income increased by $686 thousand due primarily to an increase in
tool rental income in both new and existing Contractors' Warehouse stores.
Three months ended June 30, 1996 compared with three months ended
------------------------------------------------------------------
June 30, 1995
-------------
A net loss of $2.9 million for the second quarter of 1996 compared with
net income of $1.1 million in 1995. The lingering effects of first
quarter inventory supply problems and out-of-stock situations affected
sales and results of operations throughout the second quarter, although to
a lesser extent as the quarter progressed. Second quarter sales in 1995
include $114.1 million from the now closed Grossman's stores. Sales from
ongoing operations increased by 9.8% from 1995 to 1996, reflecting sales
from the new stores described above, offset in part by a 7.3% comparable
store sales decline.
Gross profit declined by $23.5 million, reflecting the closing of the
Grossman's stores, the store openings described above, and an increase in
gross margin from 23.1% in 1995 to 24.2% in 1996, principally related to
margins on commodity lumber. Commodity lumber margins, which were
extremely low in 1995 due to falling prices, recovered in 1996 when prices
were relatively stable.
Selling and administrative expenses declined by $16.5 million from 1995 to
1996, but increased as a percent of sales from 20.3% in 1995 to 26.1% in
1996, both resulting from the effect of downsizing. Selling and
administrative expenses, the largest component of which is payroll, are
expected to remain at higher than historic percentages of sales, due to
the Company's structure following the downsizing. Management continues to
reevaluate and adjust administrative service levels and functions, which
is expected to yield future savings.
Depreciation and amortization declined from $2.9 million in 1995 to $1.0
million in 1996, reflecting the store closings, partially offset by
depreciation for new stores. Depreciation for ongoing operations was
approximately $1.0 million in the second quarter of 1996.
Store preopening expense, which was insignificant in the 1995 first
quarter, totalled $395 thousand in 1996, reflecting the store opening
activity described above.
Interest expense declined from $2.1 million in 1995 to $1.0 million,
reflecting lower revolving credit borrowings, lower levels of capital
lease obligations as a result of closing stores in both 1995 and 1996, and
savings related to long-term debt paid as part of the refinancing.
Interest expense is expected to continue to decline as properties are sold
and mortgage debt is paid.
Other income increased by $410 thousand due primarily to an increase in
tool rental income in both new and existing Contractors' Warehouse stores.
<PAGE> 21
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11(a) Statement re computation of earnings per share,
filed herewith.
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K with the Securities and
Exchange Commission, dated and filed April 16, 1996,
reporting on Item 2 - Acquisition or Disposition of Assets,
pertaining to the closing of 60 retail stores.
<PAGE> 22
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GROSSMAN'S INC.
Company
by /s/ Steven L. Shapiro
--------------------------------------
Steven L. Shapiro
Vice President - Controller
DATE: August 9, 1996
EXHIBIT 11(a)
-------------
<TABLE>
GROSSMAN'S INC.
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) for
primary and fully diluted
earnings per share $(2,946) $ 1,056 $(57,633) $(9,616)
======== ======== ========= ========
Weighted average number
of shares outstanding 26,455 25,935 26,275 25,857
Net effect of dilutive
stock options - 91 - -
-------- -------- --------- --------
Total weighted average
shares outstanding and
common stock equivalents
used in primary
calculation of earnings
per share 26,455 26,026 26,275 25,857
Additional dilution from
stock options - - - -
-------- -------- --------- --------
Total weighted average
shares outstanding and
common stock equivalents
used in fully diluted
calculation of earnings
per share 26,455 26,026 26,275 25,857
======== ======== ======== ========
Primary earnings (loss)
per share $(0.11) $0.04 $(2.19) $(0.37)
======== ======== ======== ========
Fully diluted earnings
(loss) per share $(0.11) $0.04 $(2.19) $(.037)
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 2,838
<SECURITIES> 0
<RECEIVABLES> 15,293
<ALLOWANCES> 745
<INVENTORY> 61,229
<CURRENT-ASSETS> 85,142
<PP&E> 83,776
<DEPRECIATION> 15,220
<TOTAL-ASSETS> 154,750
<CURRENT-LIABILITIES> 78,949
<BONDS> 42,427
<COMMON> 265
0
0
<OTHER-SE> 16,472
<TOTAL-LIABILITY-AND-EQUITY> 154,750
<SALES> 87,704
<TOTAL-REVENUES> 87,704
<CGS> 66,448
<TOTAL-COSTS> 66,448
<OTHER-EXPENSES> 24,321
<LOSS-PROVISION> 776
<INTEREST-EXPENSE> 1,016
<INCOME-PRETAX> (2,946)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,946)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
