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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required) For the fiscal year ended December 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) For the transition period from
________________ to _______________
Commission File Number 1-542
GROSSMAN'S INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 38-0524830
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
45 Dan Road, Canton, Massachusetts 02021
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(Address of principal executive offices) (Zip Code)
(617) 830-4000
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Class on Which Registered
- --------------------------------------- ---------------------------
Common Stock, par value $0.01 per share The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 21, 1997 was $6,918,901.
The number of shares of the registrant's class of Common Stock ($.01 par value)
outstanding on March 21, 1997 was 27,675,605.
Documents Incorporated By Reference
A Form 10-K/A, to be filed with the Commission not later than 120 days after the
end of the fiscal year covered hereby, is incorporated by reference into Part
III of this Form 10-K to the extent set forth herein.
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Part I
Item 1. BUSINESS
(a) General Development of Business
Grossman's Inc. (the "Company") was first incorporated in Michigan in 1919 as
E.S. Evans and Co., Inc., then was reincorporated in Delaware in 1923. In 1931,
the Company's name was changed to Evans Products Company. In 1986, in
conjunction with the reorganization of the Company described herein, the Company
adopted the name Grossman's Inc.
On March 11, 1985, Evans Products Company ("Evans") and certain of its
subsidiaries filed voluntary petitions for relief under Chapter 11 of the
Federal Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of Florida. On November 19, 1986, the Company emerged from the Chapter
11 proceedings. Under a court approved Reorganization Plan, the following
transactions took place in 1986. Substantially all of Evans' assets, other than
those of the retail building materials business conducted by Evans' wholly-owned
subsidiary, Grossman's Inc. ("Old Grossman's"), were transferred to Evans Asset
Holding Company and a trust, each beneficially owned by the lenders to Evans and
one of its subsidiaries for the purpose of liquidating such assets. Evans and
its filing subsidiaries (including Old Grossman's) were discharged from
substantially all of their pre-Chapter 11 petition indebtedness. All of Evans'
outstanding shares of common stock and preferred stock were cancelled. Old
Grossman's was then merged into Evans, which adopted the name Grossman's Inc.
(the "Company"), and the Company distributed to its creditors or to a trust or
reserve for unpaid and unliquidated claims, $60,000,000 of its 13% Debentures,
which matured in 1991, $73,000,000 of its 14% Debentures due January 1, 1996,
$105,200,000 face value of its Zero Coupon Notes, which matured and the final
installment paid in January 1993, and 20,000,000 shares of its Common Stock (of
which 1,859,852 shares were sold by the trust and the Company in a private
placement in December 1986).
On July 31, 1987, the Company completed a public offering of 11,000,000 shares
of its Common Stock. Of the shares offered, 6,131,347 shares were sold by the
Company, with the net proceeds of $45,092,000 used to purchase outstanding 13%
and 14% Debentures. The remaining 4,868,653 shares sold in the offering were
sold by stockholders.
On August 25, 1989, the Company sold its Northwest Division, consisting of 28
retail building materials stores located in California to GNW Partners, L.P., a
California limited partnership. Certain of the former management employees of
the Northwest Division were partners in GNW. On September 12, 1989, the Company
sold the assets and business of its Moore's Division to Harcros Lumber &
Building Supplies Inc., an indirect wholly-owned subsidiary of Harrisons &
Crosfield plc of London, England. The Moore's Division consisted of 59 retail
building materials stores and yards located in Maryland, North Carolina, Ohio,
Pennsylvania, Tennessee, Texas, Virginia and West Virginia. Net proceeds from
the 1989 sales of the Moore's and Northwest Divisions totalled $105.7 million.
Such proceeds were principally used for the retirement of long-term debt.
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In the respective fourth quarters of 1993, 1994 and 1995, the Company closed 22,
18 and 11 stores in the East. On March 28, 1996, the Company announced the
closing of the remaining 60 Grossman's stores, located in eight Northeastern
states. The closing of these 60 stores was in conjunction with a series of
financing transactions to provide improved liquidity, principally for the
expansion of the Contractors' Warehouse and Mr. 2nd's Bargain Outlet divisions.
On January 22, 1997, the Company announced that it was experiencing a severe
liquidity shortage. The Company also announced that it was exploring all
available options, including seeking protection from creditors under Chapter 11
of the U.S. Bankruptcy Code.
On February 7, 1997, the Company and JELD-WEN, inc. ("JELD-WEN"), a major
supplier to the Company and an affiliate of its largest shareholder, entered
into a letter of intent which stipulated terms under which the Company would be
provided financing involving JELD-WEN.
On March 4, 1997, the Company announced an agreement with GDI Company, Inc., a
subsidiary of JELD-WEN, pursuant to which the Company has received approximately
$3.1 million, representing the initial funding in a plan agreed to by the
parties.
Following the loan from GDI Company, Inc., Congress Financial Corporation
increased its credit provided to the Company by $10 million, principally
supported by a stand-by letter of credit provided by an affiliate of JELD-WEN in
favor of Congress Financial Corporation.
The Company plans to file for protection from creditors under Chapter 11 of the
U.S. Bankruptcy Code during April 1997. The Company expects that JELD-WEN or
another strategic partner will have a major interest in the Company's voting
stock following confirmation of the Company's Chapter 11 reorganization plan.
(b) Financial Information About Industry Segments
The Company's operations during the last three years have been entirely in the
retail building materials industry.
(c) Narrative Description of Business
The Company operates 43 stores, under the names "Contractors' Warehouse" and
"Mr. 2nd's Bargain Outlet", as listed in Item 2 below.
The following are descriptions of the two ongoing operations:
Contractors' Warehouse
The 15 Contractors' Warehouse stores operate in California, Indiana, Kentucky
and Ohio. Stores range in size from 60,000 to 110,000 square feet on
approximately seven acres. In addition, all stores have large drive-thru lumber
yards, stocked with varieties, sizes and quantities of lumber and building
materials. Drive-thru lumber yards are typically one half of the store size and
are designed for ease in locating and loading products. Focused on the needs of
remodelers, independent contractors,
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homebuilders and other building professionals, Contractors' Warehouse provides
competitive pricing and the convenience of one-stop shopping for these
customers. The Company extends credit on open account to qualified contractors.
Contractors' Warehouse stores operate on the basis of in-depth knowledge about
the requirements of local customers. The result is a merchandise mix selectively
focused on the lumber, materials, products and supplies that satisfy
professional customers in the quantities they need.
Contractors' Warehouse appeals to its target market by providing specialized
services that add value. Contractor services include special order showrooms,
computer estimating services, development of material lists and prices from
blueprints, quick bid job quotes, professional tool rental, specialized delivery
services and early opening hours. Architectural services are also available at
some locations. As a service to home builders and other contractors, trained
sales personnel specializing in contractor sales call upon contractors on the
job site.
Mr. 2nd's Bargain Outlet
These specialty stores, which first opened in 1971, operate at 28 locations in
Massachusetts, New York, and Rhode Island. Mr. 2nd's Bargain Outlet stores offer
close-outs, seconds and over-stocks in a wide range of home improvement
materials and building-related merchandise.
A Mr. 2nd's Bargain Outlet store typically consists of approximately 20,000
square feet located on a two-acre site. These no-frills, low overhead stores
offer steep discount pricing on an everyday basis, communicated to customers
through print advertising.
Mr. 2nd's Bargain Outlet stores are self-service stores which sell
building materials and other building related merchandise, including a
selection of reconditioned appliances. Many of Mr. 2nd's Bargain Outlet
customers are repeat customers aware that these stores often carry non-
repeat merchandise in limited quantities.
The market niche for Mr. 2nd's Bargain Outlet stores is do-it-yourself customers
who are looking for a cost-effective alternative to traditional home improvement
centers.
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Sales Mix
The Company's sales mix by product category, as a percentage of total sales, is
shown in the following table.
Year Ended December 31,
--------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Wood building materials 26% 30% 28% 28% 27%
Non-wood building materials 13 15 15 14 13
Millwork, doors and windows 21 19 16 16 17
Paint, decorator products,
panelling, floor coverings
and ceilings 8 9 10 10 11
Kitchen, bath and plumbing
products 17 13 13 13 13
Hardware, electrical supplies
and tools 14 13 14 15 15
Seasonal and other items 1 1 4 4 4
---- ---- ---- ---- ----
100% 100% 100% 100% 100%
==== ==== ==== ==== ====
The changes in sales mix from 1995 to 1996 are principally a result of the
closing of all stores in the Grossman's Division in March 1996.
Customers
The following table shows the percentage of total sales within each of the
Company's divisions:
Year Ended December 31,
--------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Ongoing Operations
Contractors' Warehouse Division 72.3% 38.4% 28.5% 23.7% 19.4%
Mr. 2nd's Bargain Outlet Stores 15.3 7.2 5.8 5.5 5.4
------ ------ ------ ------ ------
Total Ongoing Operations 87.6 45.6 34.3 29.2 24.8
Closed Stores
Grossman's Stores 12.4 54.4 65.7 70.8 75.2
------ ------ ------ ------ ------
Total Grossman's Inc. 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
The Company's business is spread among thousands of customers and is not
dependent upon any limited number of customers.
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Promotion
With the exception of catalogs provided to customers, which describe stores,
services, prices and products, Contractors' Warehouse advertising is principally
for new store grand openings. Catalogs establish prices for designated periods
of time, e.g. 60 days, and provide customers with a valuable tool in the
preparation of job quotes.
Mr. 2nd's Bargain Outlet stores generally advertise weekly in full page color
newspaper advertisements. These advertisements appear consistently in weekly
sections of newspapers familiar to customers, allowing customers to quickly view
sale prices and products.
Suppliers
The Company purchases its merchandise from several thousand manufacturers and
suppliers. The Company's largest supplier accounted for approximately 10.5% of
total purchases in 1996. Alternative sources of supply are generally available
for most major product categories, except for certain brand name products.
Contractual arrangements with suppliers are generally limited to individual
purchase orders.
The Company stocks inventory at levels designed to meet both the recurring and
seasonal needs of its customers. Inventory levels are highest during the
increased sales activity periods of the second and third quarters. The
Contractors' Warehouse division has an automated, integrated replenishment
system used to maintain in-stock position on all inventory items and allow for
inventory management.
The Company receives merchandise directly from manufacturers or through
distributors. Bulk materials are ordered in full railcar or truckload
quantities. Shipments are made directly to Contractors' Warehouse stores.
Shipments to Mr. 2nd's Bargain Outlet stores are made both directly to stores
and through a distribution center or redistribution locations for ultimate
distribution to stores.
Competition
The Company competes with national building materials and home center chains and
with regional or local firms. In addition, certain general merchandise chains
are significant retail merchandisers of home improvement products. In
California, the Company primarily competes with retail building material
warehouses.
Seasonality
Historically, the Company has recorded its highest sales level in the second and
third quarters. The first quarter has traditionally been a period of low sales
activity with resultant operating losses for most of the stores, as fewer home
improvement projects in the Company's markets are undertaken during winter
months.
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Employees
At December 31, 1996, the Company employed approximately 1,400 people, including
400 part-time employees.
Trade Names
The Company has no material patents, trademarks, licenses, franchises, or
concessions.
Executive Officers of the Company
YEARS
OF
NAME AGE POSITION SERVICE (1)
---- --- -------- -------
Seymour Kroll 69 President and Chief Executive - (2)
Officer
Thomas A. Ford 40 Executive Vice President and 23
Chief Operating Officer
Richard E. Kent 68 Vice President, Secretary and 25
General Counsel
Arthur S. Ryan 52 Vice President and Treasurer 10
Steven L. Shapiro 39 Vice President - Controller 11
(1) Years of service represent total years with the Company and its
predecessors.
(2) Mr. Kroll was elected President and Chief Executive Officer and
began employment on February 28, 1997. Robert K. Swanson served as
President and Chief Executive Officer from October 4, 1996, when
Sydney L. Katz retired from such position, until he resigned such
position on February 7, 1997. On February 7, 1997, David J. Ferrari
of Argus Management Corporation, a business and management
consulting firm which provides interim management, was elected
President and Chief Executive Officer, and served in that position
until February 28, 1997. Mr. Swanson continues as Chairman of the
Board and has served in that position since November 29, 1994.
SEYMOUR KROLL President and Chief Executive
Officer
Mr. Kroll has been President and Chief Executive Officer since February 28,
1997. Prior to such date, he was President of Sugarcreek Window & Door Company
since May 1995. From 1992 to 1994, he was President and Chief Executive Officer
of Acorn Window Systems, Inc. From 1983 to 1992, he was President of SNE, a
subsidiary of Sentry Insurance.
THOMAS A. FORD Executive Vice President and Chief
Operating Officer
Mr. Ford has been Executive Vice President and Chief Operating Officer
since February 7, 1997. Prior to that time he was President of the
Company's Mr. 2nd's Bargain Outlet Division, a position held since
December 8, 1996. From 1994 through such date he was Divisional Vice
President and General Manager of the Mr. 2nd's Bargain Outlet Division.
From 1992 to 1994, he was Vice President of Operations in the Company's
Eastern Division. Mr. Ford has been employed by the Company in a variety
of operational positions since 1973.
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RICHARD E. KENT Vice President, Secretary and
General Counsel
Mr. Kent has been Vice President, Secretary and General Counsel since
November 19, 1986. He was in the private practice of law in Portland,
Oregon from May 1984 to November 19, 1986 and prior to May 1984 was Vice
President, Secretary and General Counsel of Evans for more than five
years. Mr. Kent serves as a director and Vice Chairman of Epigen, Inc.
ARTHUR S. RYAN Vice President and Treasurer
Mr. Ryan has been Vice President and Treasurer since December 1994. Prior
to such date, he was a Vice President since 1988. He began his employment
with Grossman's in 1987. Prior to such time, he was employed by Thermo
Electron Corporation, Honeywell Information Systems, Inc. and General
Electric.
STEVEN L. SHAPIRO Vice President - Controller
Mr. Shapiro has been Controller since May 3, 1993 and Vice President since
September 1995. Prior to such date he was Assistant Controller since
August 11, 1986. Mr. Shapiro was employed as a Certified Public
Accountant with Arthur Andersen & Co. from September 1979 to August 1986.
Item 2. PROPERTIES
See Item 1 (c) Narrative Description of Business for descriptions of the
Company's store sizes and markets.
The Company's 43 stores operate under the names Contractors' Warehouse and Mr.
2nd's Bargain Outlet, and are located in cities and towns in seven states, as
follows:
OPERATING PROPERTIES
- --------------------
CONTRACTORS' WAREHOUSE
----------------------
CALIFORNIA INDIANA OHIO
- ---------- ------- ----
Carson Fort Wayne Cincinnati
Colton Indianapolis Columbus
La Habra Dayton
Long Beach
Montebello KENTUCKY
North Hollywood --------
Pomona Lexington
Sacramento
Ventura
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MR. 2ND'S BARGAIN OUTLET
------------------------
MASSACHUSETTS NEW YORK RHODE ISLAND
- ------------- -------- ------------
Auburn Brighton Central Falls
Braintree Buffalo Warwick
Brighton Cheektowaga Woonsocket
Fitchburg Cortland
Framingham Dewitt
Malden Herkimer
Marshfield Kingston
Peabody North Syracuse
Walpole Renssalaer
Waltham Rochester
Worcester Schenectady
Tonawanda
Webster
West Seneca
Within the 43 operating properties, 13 are owned and 30 are leased, of which 3
have leases that expire without renewal or purchase options within the next ten
years. Historically, leases without renewal options have been actively
negotiated and renewed by the Company prior to expiration. Two leases have
options for the Company to purchase the stores from the lessors at various times
at an aggregate purchase price estimated to be below aggregate current market
value. The Company also leases a distribution center for Mr. 2nd's Bargain
Outlet stores. The Company's properties are considered well maintained and in
good condition.
The net book value of the Company's owned real properties as of December 31,
1996 is approximately $26.2 million, including $11.0 million for operating
properties and $15.2 million for non-operating properties. Mortgage debt of
approximately $6.6 million was outstanding on December 31, 1996, secured by all
owned real properties.
NON-OPERATING PROPERTIES
- ------------------------
The Company has 14 owned properties available for sale, primarily former store
locations. The Company is actively marketing these properties, listed below. In
addition, the Company has 6 leased facilities, which were former operating
stores.
CONNECTICUT NEW YORK MASSACHUSETTS
- ----------- -------- -------------
Torrington Camillus Auburn
West Haven* Canandaigua Gardner
Depew Pittsfield*
NEW HAMPSHIRE Hamburg
- ------------- Lakewood RHODE ISLAND
Concord Latham* ------------
Laconia Wappingers Falls* Johnston
Salem Watertown*
MAINE NEW JERSEY
- ----- ----------
Houlton* Lawrenceville
Scarborough
*Leased facilities
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Changes in the number of stores since 1991, including relocations, are as
follows:
Mr. 2nd's
Contractors' Bargain
Store Count Warehouse Outlet Grossman's Total
----------- ------------ --------- ---------- -----
December 31, 1991 7 18 114 139
Stores opened 1 - - 1
Stores closed - - 2 2
December 31, 1992 8 18 112 138
Stores opened 3 3 1 7
Stores closed - 3 23 26
December 31, 1993 11 18 90 119
Stores opened 1 1 - 2
Stores closed - - 16 16
December 31, 1994 12 19 74 105
Stores opened 3 2 - 5
Stores closed - - 14 14
December 31, 1995 15 21 60 96
Stores opened 1 5 - 6
Stores closed 1 - 60 61
December 31, 1996 15 26 - 41
Stores opened - 2 - 2
Stores closed - - - -
----- ----- ----- -----
March 31, 1997 15 28 - 43
===== ===== ===== =====
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation incidental to the conduct of its business,
most of which is covered by insurance and none of which is expected to have a
material adverse effect on the Company. Since the Company's announcement of its
plan to file for protection from its creditors under Chapter 11 of the U.S.
Bankruptcy Code, a number of vendors have filed actions to recover overdue
accounts and have requested attachments. If the Company were not to file under
Chapter 11, and such litigation is not stayed and attachments removed, the
litigation would curtail liquidity and thereby would materially adversely affect
the business of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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Part II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SECURITY HOLDER MATTERS
Grossman's Inc. Common Stock trades on The Nasdaq Stock Market under the symbol
GROS. The number of holders of record of the Company's Common Stock on December
31, 1996 was 1,659. This number does not include beneficial owners holding
Common Stock in bank or broker name, which the Company believes represents
approximately 6,500 owners.
1996 1995
----------------- ----------------
High Low High Low
---- --- ---- ---
First Quarter $1 15/16 $ 13/16 $2 7/8 $2
Second Quarter 1 7/8 1 3/8 2 5/8 1 15/16
Third Quarter 2 1 5/16 2 7/16 1 11/16
Fourth Quarter 1 13/16 9/16 1 7/8 15/16
No cash dividends have been paid on the Company's Common Stock since its initial
issuance on November 19, 1986.
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Item 6. SELECTED FINANCIAL DATA
The following selected financial and statistical data for the five years ended
December 31, 1996 are derived from the audited consolidated financial statements
of the Company and other available operating information. The data should be
read in conjunction with the consolidated financial statements, related notes
and Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(Dollar amounts in thousands, except 1996 1995 1994
per share and per square foot data)
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OPERATING INFORMATION
Sales $385,756 $669,899 $759,156
Gross profit 92,082 159,679 187,061
Store closing expense 62,536 4,500 6,500
Other operating expenses 110,039 168,940 178,498
Total operating expenses 172,575 173,440 184,998
Operating income (loss) (80,493) (13,761) 2,063
Interest expense 5,332 8,211 7,376
Other income (expenses) (4,883) (4,095) (3,322)
Income (loss) before income taxes (81,208) (198) (2,117)
Income taxes (credits) - - (212)
Extraordinary items, net - - -
Net income (loss) (81,208) (198) (1,905)
Net income (loss) per share (3.03) (0.01) (0.07)
Weighted average number of shares (000's) 26,832 25,946 25,752
SELECTED OPERATING INFORMATION
AS A PERCENTAGE OF SALES
Gross profit 23.9% 23.8% 24.6%
Operating expenses 44.7 25.9 24.4
Operating income (loss) (20.9) (2.1) 0.3
Interest expense 1.4 1.2 1.0
Income (loss) before income taxes (21.1) - (0.3)
Net income (loss) (21.1) - (0.3)
BALANCE SHEET INFORMATION
Inventories $ 56,662 $102,009 $116,602
Current assets 85,188 146,002 146,799
Property, plant and equipment, net 25,549 94,256 114,897
Total assets 123,441 243,529 266,620
Current liabilities 102,878 113,156 104,649
Working capital (17,690) 32,846 42,150
Long-term obligations 634 38,512 59,927
Total stockholders' investment 12,688 73,795 80,645
OTHER FINANCIAL INFORMATION
Capital expenditures, excluding
capital lease additions $ 2,103 $ 9,452 $ 4,801
Long-term debt to equity ratio 0.5:1 0.8:1 0.9:1
Inventory turnover (1) 4.4 4.2 4.4
STORES AND EMPLOYEES
Number of stores - year end 41 96 105
Average sales per store (2) $ 7,418 $ 6,504 $ 6,718
Square footage (000's) 2,357 3,983 3,996
Average sales per square foot (3) $ 146.65 $ 164.84 $ 183.20
Number of employees
Full time 1,000 2,200 2,300
Part time 400 1,200 1,800
----- ----- -----
1,400 3,400 4,100
(1) Calculated based upon inventory at the end of each quarterly period.
(2) Calculated based upon the number of stores in operation at the end of
each quarterly period.
(3) Calculated based upon the square footage at the end of each quarterly
period.
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(Dollar amounts in thousands, except 1993 1992
per share and per square foot data) (53 Weeks)
- --------------------------------------------------------------
OPERATING INFORMATION
Sales $841,974 $833,370
Gross profit 212,855 223,390
Store closing expense 34,263 -
Other operating expenses 207,957 208,902
Total operating expenses 242,220 208,902
Operating income (loss) (29,335) 14,488
Interest expense 8,422 8,275
Other income (expenses) 578 3,839
Income (loss) before income taxes (38,120) 10,052
Income taxes (credits) 30,228 3,820
Extraordinary items, net - -
Net income (loss) (68,348) 6,232
Net income (loss) per share (2.66) 0.24
Weighted average number of shares (000's) 25,661 26,193
SELECTED OPERATING INFORMATION
AS A PERCENTAGE OF SALES
Gross profit 25.3% 26.8%
Operating expenses 28.8 25.1
Operating income (loss) (3.5) 1.7
Interest expense 1.0 1.0
Income (loss) before income taxes (4.5) 1.2
Net income (loss) (8.1) 0.7
BALANCE SHEET INFORMATION
Inventories $121,820 $123,230
Current assets 153,223 175,417
Property, plant and equipment, net 130,164 134,693
Total assets 287,448 339,002
Current liabilities 119,768 112,980
Working capital 33,455 62,437
Long-term obligations 64,505 52,985
Total stockholders' investment 72,368 161,023
OTHER FINANCIAL INFORMATION
Capital expenditures, excluding
capital lease additions $ 15,050 $ 26,602
Long-term debt to equity ratio 1.1:1 0.4:1
Inventory turnover (1) 4.3 4.6
STORES AND EMPLOYEES
Number of stores - year end 119 138
Average sales per store (2) $ 6,200 $ 5.995
Square footage (000's) 4,216 4,628
Average sales per square foot (3) $ 174.40 $ 180.57
Number of employees
Full time 2,700 3,100
Part time 1,600 1,900
----- -----
4,300 5,000
(1) Calculated based upon inventory at the end of each quarterly period.
(2) Calculated based upon the number of stores in operation at the end of
each quarterly period.
(3) Calculated based upon the square footage at the end of each quarterly
period.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Overview and Impending Chapter 11 Filing
At December 31, 1996, the Company's balance sheet reflects the initial stages of
a liquidity shortage which grew in early 1997 and ultimately led to a decision
to file for protection from creditors under Chapter 11 of the U.S. Bankruptcy
Code, planned in April 1997.
Forecasted cash flows at December 31, 1996 reflected limited availability under
the revolving credit agreement and operating deficits in excess of what would
normally result from seasonality. Additionally, credit extended by vendors was
being utilized by the Company in excess of normal levels. During the early part
of January 1997, management's continued efforts to secure additional financing
were unsuccessful, and liquidity continued to deteriorate. As conditions
worsened, a delay in vendor payments was required in order to meet the Company's
cash flow needs. By mid-January, many of the Company's suppliers began to refuse
to ship orders. Concurrent with seeking additional financing, management
reevaluated all of its 1997 operating plans, including all potential measures to
accelerate cash flows. Despite these efforts, no available solution was found
which solved either the immediate cash need or the projected required cash flow
to provide acceptable inventory levels to operate its stores.
On January 22, 1997, the Company announced its significant liquidity shortage
and that it was exploring all available options, including protection from
creditors under Chapter 11 of the U.S. Bankruptcy Code. Discussions were ongoing
with both the Company's secured lender, Congress Financial Corporation
("Congress"), and other potential sources of financing. Ultimately, an
arrangement was reached with JELD-WEN, inc. ("JELD-WEN"), a major supplier to
the Company and an affiliate of its largest shareholder.
On February 7, 1997, the Company and JELD-WEN signed a letter of intent which
stipulated terms under which a financing arrangement would be provided involving
JELD-WEN. In early March 1997, the Company received $13.1 million of proceeds in
an arrangement between the Company, JELD-WEN and its affiliates, and Congress.
The proceeds received were used for essential expenses and the restocking of
inventories. Included in the proceeds was a $10 million increase in the
Company's line of credit provided by Congress, which was supported by a $10
million letter of credit provided by an affiliate of JELD-WEN in favor of
Congress and by an additional $5 million of real estate pledged by a Grossman's
affiliate, GRS Realty Company, Inc. ("GRS").
The Company plans to file for protection from creditors under Chapter 11 of the
U.S. Bankruptcy Code during April 1997. The Company expects that JELD-WEN or
another strategic partner will have a major interest in the Company's voting
stock following the confirmation of the Company's Chapter 11 reorganization
plan. The Company's future financing, capitalization, expansion plans, liquidity
and its ability to meet future obligations will depend on the approval of plans
by the Bankruptcy Court and cannot be reasonably predicted at this time.
14
<PAGE> 15
1996 Restructuring and Refinancing
Liquidity problems also existed in early 1996, resulting in a 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 in an effort to
improve liquidity. A $40.2 million restructuring charge was recorded in March
1996 and additional reserves related to these closings totalling $17.8 million
were recorded in December 1996, as part of a total $22.3 million charge. The
December provision included a $14.8 million writedown of surplus property
values, taking into consideration more recent estimates of realizable market
values, particularly in view of an accelerated disposition schedule. The
December provision also included a net charge of $3.0 million, representing
revised estimates of amounts provided for in March 1996.
In addition to the real property writedown, the combined provisions included
$12.8 million for inventory liquidation costs, $7.3 million for severance and
payroll related expenses, $12.3 million for personal property and leasehold
improvement writedowns and uncollectible accounts receivable, and $10.8 million
for capital lease settlements, professional service and other fees and shutdown
expenses through the estimated disposition periods of the properties. Of the
combined $58.0 million, $33.3 million was non-cash, $21.1 million was paid in
cash in 1996 and $3.6 million will be paid over an estimated two year period
during which properties are sold and leases are terminated.
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.
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 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 funded in
April 1996. A new $50 million revolving credit agreement, with increased
borrowing availability, was obtained in May 1996 from Congress.
The $16.2 million in principal and accrued interest on the Company's 14%
Debentures, which were due in January 1996, were refinanced in April 1996 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%, were issued. These notes are convertible
at the holder's option into shares of the Company's Common Stock at $1.30 per
share. On each April 9, July 9, and July 26, 1996, a $500 thousand note was
converted into 384,615 shares of Common Stock. An additional $2.7 million of
non-convertible notes payable were also issued. Interest on the non-convertible
notes payable accrues at 15% per annum and may be converted as payment-in-kind,
in lieu of a semi-annual payment, to additional notes payable. As of December
31, 1996, $271 thousand of interest had been converted. These notes may be
repaid prior to maturity from proceeds of real estate sales, after full
repayment of the mortgage notes described below.
15
<PAGE> 16
GRS issued a series of mortgage notes payable to Gordon Brothers Partners, Inc.
The mortgage notes are secured by both closed and operating owned properties
conveyed to GRS and are required to be repaid with proceeds from the sale of
closed stores. Proceeds from the mortgage notes payable received in the second
quarter of 1996 totalled $33.0 million, $2.9 million of which was non-interest
bearing and was repaid from the first sale of properties. An additional $4.0
million is 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 bears interest at 15% per annum, payable monthly. As of December 31,
1996, the $4.0 million convertible note remained unpaid, along with $2.6 million
of the interest bearing note. The remaining mortgage notes of $6.6 million were
secured by real estate with a net book value of $26.2 million at December 31,
1996, of which $15.2 million is held for sale. The interest bearing mortgage
notes contained a two year pay down schedule which has been greatly exceeded.
Fees due under the various notes, totalling $2.9 million, were paid in April
1996 upon the loan closing, of which $1.9 million was ultimately reimbursed to
the Company due to the accelerated pay down achieved.
The significant pay down on the mortgage notes was achieved due to success in
selling surplus properties. Surplus properties for sale included 40 stores
closed in March 1996 along with 15 existing surplus properties. In the fourth
quarter of 1996, a decision was made to lower asking prices in an effort to
accelerate the time frame in which the loans would be fully paid and,
consequently, remaining proceeds would belong to the Company. As of December 31,
1996, 34 properties had been sold with net proceeds of $27.5 million. Seven
properties have subsequently been sold, with net proceeds of $4.1 million. The
14 remaining properties are all expected to sell within 1997.
In May 1996, the Company entered into a three year line of credit with Congress
for borrowings up to $50 million, including letters of credit of up to $15
million, under a formula based upon a percentage of qualified inventory and
accounts receivable. The Congress agreement replaced the revolving term note
agreement previously in effect. Borrowings pursuant to the Congress agreement
are secured by inventory, receivables and other assets. The agreement, which
bears interest at 1% over Prime Rate, contains no financial ratio covenants or
dollar limitations on spending for new store properties. At December 31, 1996,
cash borrowings under the new loan and security agreement totalled $30.0
million, outstanding standby letters of credit totalled $5.4 million, and
availability under the loan totalled $1.8 million.
March 1997 Financing Activity
Following the Company's January 1997 announcement of a significant liquidity
shortage, inventory shipments were withheld by vendors and large out-of-stock
positions resulted. As a result, the effective percentage of qualified inventory
by which Congress calculated borrowings available to the Company was reduced. As
part of the agreement reached in March 1997 which resulted in Congress providing
a supplemental facility of $10 million, an amendment to the credit line was
reached under which the calculated percentage was temporarily frozen, the letter
of credit and additional collateral discussed above was provided. Additionally,
the interest rate on the supplemental facility was fixed at 1% over Prime
16
<PAGE> 17
Rate, while the interest rate on the base credit line was increased to 1 1/2%
over Prime Rate. Congress had notified the Company that the Company was in
default of its credit line due to adverse business conditions and agreed to
forbear all know defaults for 90 days from March 5, 1997 as part of the credit
agreement amendment.
Also as part of the March 1997 financing arrangement, the $4.0 million
convertible note was purchased by GDI Company, Inc. ("GDI"), a subsidiary of
JELD-WEN, and segregated cash collateral totalling $1.1 million from the sale of
real estate was released to the Company. In addition to this $1.1 million and
the $10 million provided by Congress, a $2 million secured loan was granted by
GDI to GRS for general use by the Company.
Other Financial Condition Items
Receivables, inventories, accounts payable and accrued liabilities at December
31, 1996, compared to December 31, 1995, reflect the closing of the Grossman's
stores. Inventory supply problems, which were experienced during the first
quarter of 1996, normalized during the second quarter, as vendors were paid for
amounts due. The final $2.0 million of payments due former suppliers of
Grossman's stores were paid in July 1996.
In December 1996, the Company terminated its investment in Construcentro, which
had been a 50% owned unconsolidated joint venture since 1993. Accordingly, its
investment of $415 thousand was written off along with $1,442 thousand of
cumulative foreign currency translation adjustments, which had represented the
1995 devaluation of the Mexican peso in relation to the U.S. dollar not yet
reflected as a charge to income. During 1996, additional cash of $534 thousand
was invested in the joint venture and a loss of $368 thousand was reflected in
the Company's financial statements.
On December 31, 1996, the actuarial assumption for the discount rate used to
value pension benefit obligations was changed from 7.25% to 7.75%, on par with
yields for appropriate high-quality debt instruments. This change, combined with
Company contributions and plan performance, resulted in the fair value of plan
assets exceeding the actuarially computed plan benefits. Accordingly, the
minimum pension liability of $17,066 thousand, the intangible asset of $590
thousand and the offsetting adjustment to stockholders' equity of $16,476
thousand were all reversed. The minimum liability, intangible asset and
adjustment to stockholders' investment will be measured annually and will change
based upon interest rate assumptions, changes in the benefit obligation and
changes in the value of plan assets.
RESULTS OF OPERATIONS
1996 Compared with 1995
Results of operations include both the results of ongoing operations and of the
Grossman's Division, whose operations terminated on March 28, 1996, as
previously described. Pro forma results of operations, which exclude the
Grossman's Division, are presented in the Notes To Financial Statements.
17
<PAGE> 18
Sales and results of operations during 1996 were affected by first quarter
inventory supply problems and out-of-stock-situations, which resulted in the
eventual March 1996 closing of all stores operating under the name "Grossman's".
During the second quarter, vendor relationships were reestablished, vendors were
paid for past obligations and inventory positions returned to desired levels.
During this period and throughout the remainder of the year, efforts focused on
reestablishing customer relationships, which had been strained during the period
of inventory shortages. Sales rebounded as the out-of-stock situations were
rectified, but within Contractors' Warehouse stores this rebound was slower than
expected, and sales never returned to prior levels. Operational enhancements
made to stimulate sales, particularly in Southern California, did not result in
the desired impact and contributed to poor operating results, particularly in
the fourth quarter.
Of the Company's two ongoing operating divisions, the Contractors' Warehouse
Division was more significantly impacted by low inventory levels earlier in
1996. Contractors' Warehouse sales are often dependent on the ability to supply
customers with a complete array of merchandise necessary to complete projects.
The inability to provide this expected level of service resulted in a decline in
customer traffic. Recovery from this decline in customer traffic in 1996 was
slow and customer traffic did not return to prior levels.
Mr. 2nd's Bargain Outlet stores advertise on a "quantities limited" basis and
customers do not necessarily expect to find all items in stock. The inability to
stock sufficient quantities earlier in 1996 affected sales, but recovery in this
division was quicker once the low inventory levels were rectified.
The following table shows three year comparative sales results by store type
(dollars in millions):
1996 1995 1994
------ ------ ------
SALES
Ongoing Operations
Contractors' Warehouse Division $278.9 $257.6 $216.8
Mr. 2nd's Bargain Outlet Stores 58.9 48.0 43.5
------ ------ ------
Total Ongoing 337.8 305.6 260.3
Closed Stores
Grossman's Stores 48.0 364.3 498.9
------ ------ ------
Total Grossman's Inc. $385.8 $669.9 $759.2
====== ====== ======
% OF TOTAL SALES
Ongoing Operations
Contractors' Warehouse Division 72.3% 38.4% 28.5%
Mr. 2nd's Bargain Outlet Stores 15.3 7.2 5.8
------- ------- -------
Total Ongoing 87.6 45.6 34.3
Closed Stores
Grossman's Stores 12.4 54.4 65.7
------- ------- -------
Total Grossman's Inc. 100.0% 100.0% 100.0%
======= ======= =======
18
<PAGE> 19
1996 1995 1994
------ ------ ------
SALES % INCREASE (DECREASE)
VERSUS PRIOR YEAR
Ongoing Operations
Contractors' Warehouse Division 8.3 % 18.8 % 8.7 %
Mr. 2nd's Bargain Outlet Stores 22.7 10.3 (5.9)
-------- -------- --------
Total Ongoing 10.5 17.4 6.0
Closed Stores
Grossman's Stores (86.8) (27.0) (16.8)
-------- -------- --------
Total Grossman's Inc. (42.4)% (11.8)% (9.8)%
======== ======== ========
COMPARABLE STORE SALES % INCREASE
(DECREASE) VERSUS PRIOR YEAR
Ongoing Operations
Contractors' Warehouse Division (4.9)% 4.3 % (4.3)%
Mr. 2nd's Bargain Outlet Stores (1.1) 2.4 2.2
-------- -------- --------
Total Ongoing (4.3) 4.0 (3.2)
Closed Stores
Grossman's Stores NA (9.3) 2.2
-------- -------- --------
Total Grossman's Inc. (4.3)% (3.7)% 0.4 %
======== ======== ========
NUMBER OF STORES AT YEAR END
Grossman's Stores - 60 74
Mr. 2nd's Bargain Outlet Stores 26 21 19
Contractors' Warehouse Division 15 15 12
-------- -------- ---------
Total Number of Stores 41 96 105
======== ======== =========
The affect of the out-of-stock situations can be seen when comparing the
comparable store sales percentage results in the operating divisions in each
quarter during the last two years:
Quarter Ended
Mar. 31, June 30, Sept. 30, Dec. 31,
-------- -------- --------- --------
Contractors' Warehouse Division
1996 (3.7)% (8.4)% (3.5)% (3.5)%
1995 (6.7)% 3.6 % 9.3 % 6.7 %
Mr. 2nd's Bargain Outlet Stores
1996 (12.7)% (2.1)% 7.3 % 4.6 %
1995 12.9 % 2.7 % 0.3 % (5.0)%
19
<PAGE> 20
Sales results were also affected by store openings and closings. The 1996
results include the results of three Contractors' Warehouse stores opened in
1995, two opened subsequent to the second quarter, and one store opened in
mid-May 1996. The 1996 results also include the sales from two Mr. 2nd's Bargain
Outlets opened in 1995, one which opened late in the first quarter and one in
the second quarter, the results of three stores opened in March 1996 and three
additional stores opened in May 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 $67.6 million, reflecting the closing of the Grossman's
stores, the store openings described above, and an increase in gross margin from
23.8% in 1995 to 23.9% in 1996. A first quarter, gross margin decline from 24.4%
in 1995 to 23.5% in 1996 was followed by two quarters of increases. In the
second quarter, gross margin increased from 23.1% to 24.2%, followed by a third
quarter increase from 24.3% to 25.9%. In the fourth quarter, gross margin
declined from 23.7% in 1995 to 21.9% in 1996. Gross margin in the second, third,
and fourth quarters of 1996 all incurred declines due to the closing of the
Grossman's stores, which achieved higher margins due to the retail mix of
business in these stores. Increasing overall margins during these periods was
the effect of margins earned on commodity lumber. Commodity lumber margins,
which were extremely low in 1995 due to falling prices, rebounded in 1996 when
prices were relatively stable.
Contractors' Warehouse stores experienced a gross margin decline from 22.9% in
1995 to 22.2% in 1996, principally related to its Midwest stores, where the
impact of first quarter out-of-stock situations was most severe, in part due to
the larger size of these stores.
Gross margin in Mr. 2nd's Bargain Outlet stores, which is impacted both by
successfully obtaining "deal" merchandise and by appropriately pricing such
merchandise, increased from 31.6% in 1995 to 32.2% in 1996. The closed
Grossman's Division achieved a gross margin of 23.4% during 1995 and 24.5%
during the three months it was in operation during 1996.
Selling and administrative expenses declined by $52.7 million from 1995 to 1996
and increased as a percent of sales from 23.4% in 1995 to 27.0% in 1996, both
resulting primarily 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. During 1996, service levels at Contractors' Warehouse
stores in Southern California were increased to support sales to large
contractor customers. Subsequent to year end 1996, these services have been
consolidated into fewer locations, which is expected to reduce costs without
materially impacting sales levels. Management continues to reevaluate and adjust
administrative service levels and functions, which is expected to yield
additional future savings.
Included within selling and administrative expense is pension expense, which
decreased from $2.5 million in 1995 to $1.4 million in 1996. The reduction
resulted from both the downsizing and a revaluation of the pension plan as of
May 1996, relative to the downsizing. In the revaluation, the discount rate
assumption was changed from 7.25% to 8.25%.
20
<PAGE> 21
An additional revaluation was performed at December 31, 1996 and the discount
rate was adjusted to 7.75%, which affects future expense. Pension expense in
1997 will decline significantly from the 1996 amount. The change in estimate
during 1996 resulted in an improvement to full year net income by $520 thousand,
or 2 cents per share.
Depreciation and amortization declined from $11.2 million in 1995 to $4.9
million in 1996, reflecting the store closings, partially offset by depreciation
for new stores. Depreciation for ongoing operations was approximately $1.0
million in each quarter in 1996, as limited capital spending has occurred.
As a result of the restructuring and refinancing plan related to the closing of
Grossman's Division, a $40.2 million restructuring charge was recorded 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. In December 1996, a $22.3 million store closing provision
was recorded, including an additional $17.8 million related to these closings.
The $17.8 million included a $14.8 million writedown of surplus property values,
taking into consideration more recent estimates of realizable market values,
particularly in view of an accelerated disposition schedule and a net charge of
$3.0 million, representing net revised estimates of amounts provided for in
March 1996. The remaining store closing expense in December included $2.6
million related to the closing of a store in Reno, Nevada and $1.9 million
related to the termination of the Company's Mexican joint venture.
Store preopening expense increased from $724 thousand in 1995 to $842 thousand
in 1996, reflecting the store opening activity described above.
Interest expense declined from $8.2 million in 1995 to $5.3 million in 1996,
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 decline further in 1997, as a result of paydowns of the mortgage
debt throughout 1996 and 1997.
Included in the 1995 results is a third quarter $18.1 million pre-tax gain on
the sale of the Company's former headquarters site, net of a discount on the
note received from Kmart Corporation, certain site shutdown costs which were
incremental to the normal operations of the facility and closing costs
associated with the transaction.
Other income increased by $788 thousand due primarily to an increase in tool
rental income in both new and existing Contractors' Warehouse stores. The
Company's share of the net loss of its Mexican joint venture declined from $666
thousand in 1995 to $368 thousand in 1996. The Company terminated this joint
venture arrangement in December 1996.
1995 Compared with 1994
A net loss of $198 thousand in 1995 compares to a net loss of $1.9 million in
1994, with non-recurring items occurring in each year. The 1995 results include
a pre-tax gain on the sale of the Company's former headquarters site and a
provision for the closing of 11 Eastern Division stores. The 1994 results
include a provision for the closing of 18
21
<PAGE> 22
Eastern Division stores. Before non-recurring items, an operating loss of $9.3
million resulted in 1995, as compared to operating income of $8.6 million in
1994. Operating expense savings in 1995 were insufficient to offset a gross
profit decrease of $27.4 million, which resulted from both sales and margin rate
decreases. Competitive conditions, declining housing starts and turnover rates,
low selling prices and margins on commodity lumber prices, and sluggish economic
conditions, particularly in the Northeast, contributed to the 1995 results.
Total sales results reflect 18 and 11 Grossman's stores closed in late 1994 and
1995, respectively, and four Contractors' Warehouse openings; one in 1994 and
three in 1995. Three Mr. 2nd's Bargain Outlet stores opened, one in late 1994
and two in 1995.
Within Grossman's stores, throughout 1994 and 1995 the Company continued its
repositioning efforts to focus store operations upon a market niche dedicated to
serve the professional customer and offset the loss of market share with the
retail customer. Throughout 1994, this strategy produced comparable store sales
increases to professionals, more than offsetting retail comparable store sales
declines. In the first half of 1995, retail sales continued to decline and
professional sales continued to increase, but at lesser rates. Beginning in
April 1995, professional sales increases were insufficient to offset retail
declines and by the third quarter, comparable store sales to professionals began
to decline.
In advance of and during the fourth quarter of 1995, the Company undertook
initiatives to improve future sales, particularly with respect to professional
sales. Additional sales personnel, both on the road and within stores, were
added in both Contractors' Warehouse and Grossman's stores to expand service to
professional customers. These initiatives had positive results in Contractors'
Warehouse stores, and its comparable store sales increased by 9.7% in the fourth
quarter. Within Grossman's stores, however, both retail and professional
comparable store sales continued to decline, with fourth quarter decreases of
29.1% and 13.1%, respectively. As discussed above, in light of these results,
the Company began a course of action to explore alternatives including the
closing of the Grossman's stores.
Contractors' Warehouse comparable stores sales increased for the full year 1995
by 4.3%. Within these stores, a comparable store sales decline of 1.3% for the
first six months of 1995, affected by heavy rains in the first quarter, was
offset by the third and fourth quarter increases of 9.4% and 9.7%, respectively.
The gross profit decline of $27.4 million was the result of both the sales
decrease and a decline in the gross margin rate from 24.6% in 1994 to 23.8% in
1995, reflecting lower commodity lumber margins. Margin declines also occurred
as a result of increased sales to professional customers.
Operating expenses, excluding non-recurring store closing expense, decreased by
$9.6 million in 1995 compared to 1994, principally the result of continued
expense control and downsizing in selling and administrative expense areas,
which account for $7.5 million of the decrease; reduction in depreciation and
amortization of $1.4 million, due to the closing of Eastern Division stores in
both years and the sale of the Eastern Division Distribution Center in 1995; and
a reduction in store preopening expense of $654 thousand. Included in selling
and administrative expenses is
22
<PAGE> 23
pension expense, which decreased from $4.5 million in 1994 to $2.5 million in
1995 as the result of changes in assumptions used to actuarially determine the
pension liability and expense. The reduction in selling and administrative
expenses was tempered by additional costs, principally payroll, incurred during
the first quarter related to Eastern Division store modifications directed
toward the professional. Operating expenses related to the Company's 80% owned
installed sales subsidiary totalled $3.5 million in 1995, compared to $5.3
million in 1994. The Company has not supported this subsidiary since December
31, 1995.
At the end of the third quarter in both 1994 and 1995, non-recurring charges for
store closings were recorded to cover costs related to leases, severance and
outplacement expenses, inventory writedowns, other expenses and property, plant
and equipment costs. In 1995, the Company closed 11 underperforming stores and a
$4.5 million provision was recorded, and in 1994, 18 stores were closed and a
$6.5 million provision was recorded. Sales from stores closed represented 16.3%
and 5.8% of total sales in 1994 and 1995, respectively.
Interest expense increased to $8.2 million in 1995 from $7.4 million in 1994,
reflecting both an increase in average revolving credit borrowings and the rate
on such borrowings. The weighted average rate on revolver borrowings increased
from 7.5% in 1994 to 8.8% in 1995.
Included in the 1995 results is a third quarter $18.1 million pre-tax gain on
the sale of the Company's former headquarters site, net of a discount on the
note received from Kmart Corporation, certain site shutdown costs which were
incremental to the normal operations of the facility and closing costs
associated with the transaction.
The 1995 full year results include a $666 thousand net loss related to the
Company's 50% owned Mexican joint venture, compared with a $490 thousand loss in
1994, when the venture began operations midway through the second quarter.
23
<PAGE> 24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Grossman's Inc. has prepared the accompanying financial
statements and is responsible for their integrity and objectivity. The
statements, which include amounts that are based on management's best estimates
and judgments, have been prepared in conformity with generally accepted
accounting principles and, in management's opinion, are free of material
misstatement. Management also prepared the other information in the annual
report and is responsible for its accuracy and consistency with the financial
statements.
Grossman's Inc. consolidated financial statements have been audited by Ernst &
Young LLP, independent auditors, whose appointment has been approved by
stockholders. Management has made available to Ernst & Young LLP the Company's
financial records and related data, as well as minutes of the stockholders' and
directors' meetings. Furthermore, management believes that representations made
to Ernst & Young LLP were correct and complete. The Company's Board of
Directors, through its Audit and Finance Committee, monitors the system of
internal control, as well as the Company's accounting and financial reporting
practices. Ernst & Young LLP has open access to, and meets regularly with, the
Audit and Finance Committee, with and without management present.
Grossman's Inc. maintains a system of internal control over financial reporting,
which is designed to provide reasonable assurance to the Company's management
and Board of Directors regarding the preparation of reliable annual and interim
financial statements. The system contains self-monitoring mechanisms, and
actions are taken to correct deficiencies as they are identified. Even an
effective internal control system, no matter how well designed, has inherent
limitations - including the possibility of the circumvention or overriding of
controls - and, therefore, can provide only reasonable assurance with respect to
financial statement preparation. Further, because of changes in conditions,
internal control system effectiveness may vary over time.
The Company assessed its internal control system as of December 31, 1996 in
relation to criteria for effective internal control over the preparation of its
annual and interim financial statements described in "Internal Control
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, the Company believes that, as of
December 31, 1996, its system of internal control met those criteria.
Management also recognizes its responsibility for fostering a strong ethical
climate so that the Company's affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's Code of Conduct, which addresses,
among other things, the necessity of ensuring open communication within the
Company; determining and avoiding potential conflicts of interest; compliance
with all domestic and foreign laws, including those relating to financial
disclosure; the confidentiality of insider and proprietary information; and
relationships with vendors and customers. The Company maintains a systematic
program to assess compliance with these policies.
/s/ Seymour Kroll /s/ Steven L. Shapiro
- ----------------------- ---------------------
President and Chief Vice President - Controller
Executive Officer
24
<PAGE> 25
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Grossman's Inc.
We have audited the accompanying consolidated balance sheets of Grossman's Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, changes in stockholders' investment, and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial position of Grossman's Inc.
and subsidiaries as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully discussed in Note 2 to
the financial statements, the Company has incurred significant operating losses
during 1995 and 1996. In addition, the Company is currently in default under its
revolving credit and other debt agreements, and the Company has also announced
plans to file for protection from creditors under Chapter 11 of the U.S.
Bankruptcy Code in the near future. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Boston, Massachusetts
March 21, 1997
25
<PAGE> 26
GROSSMAN'S INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
-------------------------
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,058 $ 2,536
Receivables, less allowance of
$2,810 in 1996 and $3,339 in 1995
for doubtful accounts 10,710 23,940
Inventories 56,662 102,009
Property held for sale 15,199 -
Note receivable, net - 13,000
Other current assets 1,559 4,517
--------- ---------
Total current assets 85,188 146,002
PROPERTY, PLANT AND EQUIPMENT
Land 5,507 20,229
Buildings and leasehold improvements 20,932 78,783
Machinery and equipment 15,132 47,902
Construction in progress 92 2,005
--------- ---------
41,663 148,919
Accumulated depreciation and
amortization (16,114) (54,663)
--------- ---------
25,549 94,256
INVESTMENT IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATE - 108
PREPAID PENSION ASSET 9,536 -
OTHER ASSETS 3,168 3,163
--------- ---------
TOTAL ASSETS $123,441 $243,529
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
26
<PAGE> 27
GROSSMAN'S INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
---------------------------
1996 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 60,229 $ 91,308
Accrued interest 397 1,403
Revolving term note payable 30,024 -
Current portion of long-term debt and
capital lease obligations 12,228 20,445
--------- ---------
Total current liabilities 102,878 113,156
REVOLVING TERM NOTE PAYABLE - 32,844
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 634 5,668
PENSION LIABILITY - 8,270
OTHER LIABILITIES 7,241 9,796
--------- ---------
Total liabilities 110,753 169,734
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT
Common stock, $.01 par value:
Shares authorized - 50,000
Shares issued - 27,676 in 1996 and
26,137 in 1995 277 261
Retained earnings (deficit) (145,414) (64,206)
Additional paid-in-capital 157,825 155,768
Cumulative foreign currency translation
adjustment - (1,442)
Minimum pension liability - (16,476)
Less 45 shares in 1995 in treasury,
at cost - (110)
--------- ---------
Total stockholders' investment 12,688 73,795
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $123,441 $243,529
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
27
<PAGE> 28
GROSSMAN'S INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
---------------------------------
1996 1995 1994
---- ---- ----
SALES $385,756 $669,899 $759,156
COST OF SALES 293,674 510,220 572,095
--------- --------- ---------
Gross Profit 92,082 159,679 187,061
OPERATING EXPENSES
Selling and administrative 104,254 156,995 164,495
Depreciation and amortization 4,943 11,221 12,625
Store closing expense 62,536 4,500 6,500
Preopening expense 842 724 1,378
--------- --------- ---------
172,575 173,440 184,998
--------- --------- ---------
OPERATING INCOME (LOSS) (80,493) (13,761) 2,063
OTHER EXPENSES (INCOME)
Interest expense 5,332 8,211 7,376
Net gain on disposals of property (102) (18,345) (364)
Other (4,883) (4,095) (3,322)
--------- --------- ---------
347 (14,229) 3,690
EQUITY IN NET LOSS OF UNCONSOLIDATED
AFFILIATE 368 666 490
--------- --------- ---------
(LOSS) BEFORE INCOME TAXES (81,208) (198) (2,117)
PROVISION (CREDIT) FOR INCOME TAXES - - (212)
--------- --------- ---------
NET (LOSS) $(81,208) $ (198) $ (1,905)
========= ========= =========
NET (LOSS) PER COMMON SHARE
(Primary and Fully Diluted) $ (3.03) $ (0.01) $ (0.07)
========= ========= =========
WEIGHTED AVERAGE SHARES AND EQUIVALENT
SHARES OUTSTANDING
(Primary and Fully Diluted) 26,832 25,946 25,752
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
28
<PAGE> 29
GROSSMAN'S INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES
Net (loss) $(81,208) $ (198) $ (1,905)
Adjustments to reconcile net (loss)
to net cash (used for) provided by
operating activities:
Depreciation and amortization 4,943 11,221 12,625
Net gain on disposals of property (102) (18,345) (364)
Provision for losses on accounts receivable 3,729 1,841 1,300
Provision for store closings 41,436 4,500 5,100
Undistributed loss of unconsolidated
affiliate 368 666 490
Increase (decrease) in assets:
Receivables 8,084 (6,332) 2
Inventories 32,003 12,237 5,218
Other assets 12,209 (66) (2,007)
(Decrease) in accounts payable
and accrued and other liabilities (37,476) (8,264) (19,614)
--------- --------- ---------
Total adjustments 65,194 (2,542) 2,750
--------- --------- ---------
NET CASH (USED FOR) PROVIDED BY OPERATING
ACTIVITIES (16,014) (2,740) 845
INVESTING ACTIVITIES
Capital expenditures (2,103) (9,452) (4,801)
Proceeds from sales of property, net 32,134 27,711 13,589
Investment in unconsolidated affiliate (534) (320) (1,900)
--------- --------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 29,497 17,939 6,888
FINANCING ACTIVITIES
Proceeds from mortgage financing 33,000 - 422
Payments on mortgage financing (26,448) - -
-------- --------- ---------
Net proceeds from mortgage financings 6,552 - 422
Payments on long-term debt and capital
lease obligations (19,157) (18,942) (14,164)
Net borrowings from (repayments of)
revolving term note payables (2,820) 2,956 6,650
Issuance of common stock 464 289 230
-------- --------- ---------
NET CASH (USED FOR) FINANCING ACTIVITIES (14,961) (15,697) (6,862)
-------- --------- ---------
Net (decrease) increase in cash and cash
equivalents (1,478) (498) 871
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 2,536 3,034 2,163
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,058 $ 2,536 $ 3,034
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
29
<PAGE> 30
GROSSMAN'S INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(in thousands, except per share data)
<TABLE>
<CAPTION>
Additional Retained Minimum Cumulative Total
Common Stock Paid-In- Earnings Pension Treasury Foreign Currency Stockholders'
$.01 Par Value Capital (Deficit) Liability Stock Translation Adjustment Investment
-------------- ---------- ----------- --------- -------- ---------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $261 $155,852 $ (62,103) $(20,528) $(1,114) $ - $ 72,368
Net (loss) (1,905) (1,905)
Exercise of stock options (12) 242 230
Minimum pension liability 9,952 - 9,952
---- --------- ---------- --------- -------- ---------- ---------
Balance at December 31, 1994 261 155,840 (64,008) (10,576) (872) - $ 80,645
Net (loss) (198) (198)
Cumulative foreign currency
translation adjustment (1,442) (1,442)
Issuance of restricted stock (17) 418 401
Exercise of stock options 9 9
Minimum pension liability (5,900) (5,900)
Issuance of treasury stock (55) 335 280
---- --------- ---------- --------- -------- ---------- ---------
Balance at December 31, 1995 261 155,768 (64,206) (16,476) (110) (1,442) 73,795
Net (loss) (81,208) (81,208)
Cumulative foreign currency
translation adjustment 1,442 1,442
Issuance of restricted stock (23) 110 87
Exercise of stock options 1 248 249
Minimum pension liability 16,476 16,476
Issuance of common stock 15 1,832 1,847
---- --------- ---------- --------- -------- ---------- ---------
Balance at December 31, 1996 $277 $157,825 $(145,414) $ - $ - $ - $ 12,688
==== ========= ========== ========= ======== ========== =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
30
<PAGE> 31
GROSSMAN'S INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements present the results of operations,
financial position and cash flows of Grossman's Inc. and its subsidiaries (the
"Company"). All significant intercompany balances and transactions have been
eliminated.
Fiscal Periods
- --------------
The Company's year end is December 31. Activity is recorded in quarterly
accounting periods of equal length ending on the last Saturday of each quarter.
Differences in amounts presented and those which would have been presented using
actual quarter-end dates are not material.
Cash Equivalents
- ----------------
All highly liquid investments, with a maturity of three months or less at date
of purchase, are considered to be cash equivalents.
Accounts Receivable
- -------------------
Credit is extended on open account to qualified contractors and remodelers.
Finance charge income, included in other income, amounted to $150 thousand, $444
thousand and $513 thousand in 1996, 1995 and 1994, respectively.
Inventories
- -----------
Merchandise inventories are valued at the lower of cost or market, as determined
by the average cost or retail method.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost and are depreciated using the
straight-line method over estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the improvements, which range up to 20 years. Ranges of useful
lives by principal classification for property, plant and equipment are as
follows:
Buildings 20 - 33 years
Machinery and equipment 3 - 7 years
Furniture and fixtures 3 - 10 years
31
<PAGE> 32
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------------------
Long-Lived Assets
- -----------------
In 1996, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of" ("FAS 121"), which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flow estimated to be generated by those
assets are less than the assets' carrying amount. The Company has evaluated all
long-lived assets and determined that no impairment exists at December 31, 1996.
FAS 121 also addresses the accounting for long-lived assets that are expected to
be disposed of. Assets to be disposed are actively being marketed and have been
reduced to their estimated net sales values. Such properties are classified as
property held for sale in the accompanying balance sheet.
Accrued Insurance Claims
- ------------------------
Insurance coverage is maintained for general liability and workers' compensation
risks under contractual arrangements which retroactively adjust premiums for
claims paid subject to specified limitations. Expenses associated with such
risks are accrued as amounts required to cover incurred incidents can be
estimated.
Leases
- ------
Capital leases, those leases which transfer substantially all benefits and risks
of ownership, are accounted for as acquisitions of assets and incurrences of
obligations. Capital lease amortization is included in depreciation and
amortization expense, with the amortization period restricted to the lease term.
Interest on the related obligation is recognized over the lease term at a
constant periodic rate.
Income Taxes
- ------------
Tax provisions and credits are recorded at statutory rates for taxable items
included in the consolidated statements of operations regardless of the period
for which such items are reported for tax purposes. Deferred income taxes are
recognized for temporary differences between financial statement and income tax
bases of assets and liabilities. Deferred tax assets are reduced by a valuation
allowance when the determination cannot be made that it is more likely than not
that some portion or all of the related tax asset will be realized.
Pension Plan
- ------------
Pension costs for the Company's noncontributory retirement plan are funded in
accordance with the Employee Retirement Income Security Act. Prior service
costs, the unrecognized net transition asset, and gains and losses, whether
realized or unrealized, are amortized over estimated average remaining service
periods.
32
<PAGE> 33
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ----------------------------------------------------
Stock-Based Compensation
- ------------------------
In 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123"). As permitted by FAS
123, the Company continues to account for its stock-based plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
provides pro forma disclosures of the compensation expense determined under the
fair value provisions of FAS 123.
Preopening Expense
- ------------------
Expenses associated with the opening of new stores and facilities and the
expansion or major remodeling of existing stores are expensed as incurred.
Store Closing Expense
- ---------------------
Store closing costs include lease payments, the net unrecoverable amount from
sales of property, plant and equipment and all other expenses related to the
closing of stores.
Earnings Per Common Share
- -------------------------
Earnings per common share are computed based on the weighted average number of
common and common equivalent shares outstanding, less shares in treasury.
Business Segment
- ----------------
The Company operates in one business segment: the retail sale and distribution
of building materials, home improvement items and related products.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Classification
- --------------
Certain amounts in the consolidated financial statements for prior years have
been reclassified to conform to the current year presentation. Such
reclassifications had no effect on previously reported results of operations.
NOTE 2 - REFINANCING, PROJECTED REORGANIZATION AND BASIS OF PRESENTATION
- ------------------------------------------------------------------------
In each of the past four years, the Company has downsized its operations
and closed stores. Net losses were reported in each of these years and
significant operating losses were reported in the past two years. The
33
<PAGE> 34
NOTE 2 - REFINANCING, PROJECTED REORGANIZATION AND BASIS OF PRESENTATION
(CONTINUED)
- ------------------------------------------------------------------------
largest group of store closings occurred in March 1996 when the Company closed
its 60 store Grossman's Division. Inventory shortages were experienced in all
divisions prior to and shortly after these store closings, and sales results
were harmed through the remainder of 1996. During early January 1997, limited
availability under the Company's revolving credit agreement, combined with
operating deficits, resulted in an inability to meet current obligations.
On January 22, 1997, the Company announced that it was experiencing a severe
liquidity shortage. The Company also announced that it was exploring all
available options, including seeking protection from creditors under Chapter 11
of the U.S. Bankruptcy Code.
On February 7, 1997, the Company and JELD-WEN, inc. ("JELD-WEN"), a major
supplier to the Company and an affiliate of its largest shareholder, entered
into a letter of intent which stipulated terms under which the Company would be
provided financing involving JELD-WEN.
On March 4, 1997, the Company announced an agreement with GDI Company, Inc.
("GDI"), a subsidiary of JELD-WEN, pursuant to which the Company had received
approximately $3.1 million, representing the initial funding in a plan agreed to
by the parties.
The funds received by the Company included approximately $2 million pursuant to
a note secured by real estate of GRS Realty, Inc. ("GRS"), a wholly-owned
subsidiary of the Company. In addition, GDI purchased the $4 million convertible
note payable by GRS to Combined Investors LLP, an affiliate of Gordon Brothers
Partners, Inc. Following the purchase, $1.1 million of segregated cash
collateral from the sale of real estate was released to the Company.
Following the loan from GDI Company, Inc., Congress Financial Corporation
("Congress") amended its credit agreement with the Company and provided the
Company an additional $10 million, supported by a stand-by letter of credit
provided by an affiliate of JELD-WEN, in favor of Congress, and $5 million of
additional real estate collateral pledged by GRS. The total $13.1 million of
proceeds received were used for essential expenses and the restocking of
inventories.
The interest rate on the additional credit from Congress was fixed at 1% over
Prime Rate, while the interest rate on the base credit line was increased to 1
1/2% over Prime Rate in conjunction with the amendment. Congress had notified
the Company that the Company was in default of its credit line due to adverse
business conditions and agreed to forbear all known defaults for 90 days from
March 5, 1997 as part of the credit agreement amendment.
The Company plans to file for protection from creditors under Chapter 11 of the
U.S. Bankruptcy Code during April 1997. The Company expects that JELD-WEN or
another strategic partner will have a major interest in the Company's voting
stock following confirmation of the Company's Chapter 11 reorganization plan.
The Company's future financing, capitalization, expansion plans, liquidity and
its ability to meet future obligations will depend on the future approval of
plans by the Bankruptcy Court and, therefore, cannot be reasonably predicted at
this time.
34
<PAGE> 35
NOTE 3 - 1996 STORE CLOSINGS AND UNAUDITED CONDENSED PRO FORMA STATEMENT
OF OPERATIONS
- ------------------------------------------------------------------------
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. In December 1996,
the Company closed its Reno, Nevada store and also reevaluated its existing
store closing reserves, resulting in a total additional store closing provision
of $22.3 million. This provision included $2.6 million related to the Reno store
closing and a $1.9 million write-off of the Company's Mexican joint venture (see
Note 15). A $14.8 million writedown of surplus property values was recorded,
taking into consideration more recent estimates of realizable market values,
particularly in view of an accelerated disposition schedule. The remaining $3.0
million provided for related to net revised estimates of amounts provided in
March 1996.
A summary of the components of the 1996 provisions, and the cash and non-cash
portions of the provisions is as follows:
1996 Provisions Cash
-------------------- -----------------
Paid To Be
March December Total Non-cash (Received) Paid
----- -------- ----- -------- ---------- -----
Inventory liquidation
costs $12.8 $ 0.3 $13.1 $13.1 $ - $ -
Severance and payroll
related expenses 8.0 (0.7) 7.3 - 5.4 1.9
Personal property and
leasehold improvement
writedowns 9.4 1.7 11.1 11.1 - -
Uncollectible accounts
receivable - 3.5 3.5 3.5 - -
Capital lease
settlements - 3.7 3.7 - 3.7 -
Realized (gains) on
real estate sales - (6.6) (6.6) - (6.6) -
Real property write-
downs - 14.8 14.8 14.8 - -
Professional fees 6.0 (0.5) 5.5 - 5.3 0.2
Mexican joint venture
write-off - 1.9 1.9 1.9 - -
Shutdown expenses,
including leases 4.0 4.2 8.2 - 6.7 1.5
----- ------ ----- ----- ----- ----
$40.2 $22.3 $62.5 $44.4 $14.5 $3.6
===== ====== ===== ===== ===== ====
Between March 1996 and December 1996, the Company sold 27 properties and
realized gains of $6.6 million. These gains were recorded as increases to the
store closing reserve and were principally offset by shutdown expenses in excess
of original estimates. In the table above, these offsetting gains and expenses
are reflected in December 1996 in order to accurately reflect the full amount of
cash payments and receipts during the year. Following receipt, the $6.6 million
was used for repayment of mortgage debt.
35
<PAGE> 36
NOTE 3 - 1996 STORE CLOSINGS AND UNAUDITED CONDENSED PRO FORMA STATEMENT
OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------
At year end, store closing reserves total $5.1 million, which includes the $3.6
million of cash yet to be paid and an additional $1.5 million of cash to be paid
toward items reserved prior to 1996. The $5.1 million will be paid over an
estimated two year period during which properties will be sold and leases
terminated.
The Company began the closing and liquidation of its Grossman's stores on March
28, 1996 and 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.
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 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 funded in
April 1996. A new $50.0 million revolving credit agreement, with increased
borrowing availability, was signed in May 1996.
The following unaudited condensed pro forma statement of operations has been
prepared in accordance with applicable rules of the Securities and Exchange
Commission, giving effect to the restructuring and refinancing plan transactions
as if it had been completed 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.
36
<PAGE> 37
NOTE 3 - 1996 STORE CLOSINGS AND UNAUDITED CONDENSED PRO FORMA STATEMENT
OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31, 1996
-----------------------------------------
Less Pro Forma
As Closed Pro Forma Continuing
Reported Operations Adjustments Operations
-------- ---------- ----------- ----------
SALES $385,756 $ 47,953 $ - $337,803
COST OF SALES 293,674 36,161 - 257,513
--------- --------- --------- ---------
Gross Profit 92,082 11,792 - 80,290
OPERATING EXPENSES
Selling and administrative 104,254 17,060 (921)(a) 86,273
Depreciation and amortization 4,943 875 - 4,068
Store closing expense 62,536 62,536 - -
Preopening expense 842 45 - 797
--------- --------- --------- ---------
172,575 80,516 (921) 91,138
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (80,493) (68,724) 921 (10,848)
OTHER EXPENSES (INCOME)
Interest expense 5,332 645 112 (b) 4,799
Net gain on disposals
of property (102) (12) - (90)
Other (4,883) (173) - (4,710)
--------- --------- --------- ---------
347 460 112 (1)
--------- --------- --------- ---------
EQUITY IN NET LOSS OF
UNCONSOLIDATED AFFILIATE 368 368 - -
--------- --------- --------- ---------
(LOSS) BEFORE INCOME TAXES (81,208) (69,552) 809 (10,847)
PROVISION FOR INCOME TAXES - - - -
--------- --------- --------- ---------
NET (LOSS) $(81,208) $(69,552) $ 809 $(10,847)
========= ========= ========= =========
NET (LOSS) PER COMMON SHARE
(PRIMARY AND FULLY DILUTED) $(3.03) $(0.40)
========= =========
WEIGHTED AVERAGE SHARES AND
EQUIVALENT SHARES OUTSTANDING
Primary and Fully Diluted 26,832 26,832
========= =========
(a) Represents amounts previously allocated to the closed operations, reduced by
reductions to corporate overhead occurring as a result of the
reorganization.
(b) Assumes increases for the new secured debt and note payable, net of savings
from the retirement of the 14% Debentures, and reductions to capital lease
obligations and revolving credit borrowings.
37
<PAGE> 38
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- -------------------------------------------------
Accounts payable and accrued liabilities consist of the following (in
thousands):
December 31,
--------------------------------
1996 1995
------------ ------------
Accounts payable $ 37,856 $ 63,236
Accrued salaries, wages,
commissions and related taxes 2,857 3,630
Accrued income and franchise taxes 245 391
Accrued taxes other than income and
franchise 3,218 2,819
Accrued store closing costs 4,322 4,593
Accrued insurance 7,403 9,933
Other accrued liabilities 4,328 6,706
-------- --------
$ 60,229 $ 91,308
======== ========
NOTE 5 - REVOLVING TERM NOTE PAYABLE
- ------------------------------------
On December 15, 1993, the Company entered into a loan and security agreement
with BankAmerica Business Credit, Inc. ("BABC") which provides for borrowings up
to $60 million, including letters of credit up to $15 million, under a formula
based arrangement based on a percentage of qualified inventory and accounts
receivable. Borrowings pursuant to this agreement were secured by inventories,
receivables and certain other assets. In March 1995, available borrowings,
including letters of credit up to $15 million, under the loan and security
agreement, were increased from $60 million to $75 million. In December 1995, the
term of the agreement was extended to April 30, 1997, with interest payable
monthly at 1 3/4% over Prime Rate and an available Eurodollar option. In March
1996, the loan facility was reduced to $40 million and available borrowings were
reduced to $37.5 million.
At December 31, 1995, cash borrowings under the BABC agreement totalled $32.8
million, outstanding standby letters of credit totalled $9.0 million and
availability under the loan totalled $15.3 million. The maximum borrowings under
this agreement during 1995 were $70.8 million, including letters of credit of
$12.0 million. The maximum borrowings in 1996 under the BABC agreement were
$52.3 million, including letters of credit of $9.2 million. The weighted average
annual interest rate on such borrowings in 1996 and 1995 was 9.9% and 8.8%,
respectively.
In May 1996, the Company received a three year line of credit from Congress
Financial Corporation ("Congress") 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 replaced the BABC
agreement. Borrowings pursuant to this agreement are secured by inventory,
receivables and other assets. The
38
<PAGE> 39
NOTE 5 - REVOLVING TERM NOTE PAYABLE (CONTINUED)
- ------------------------------------------------
interest rate on this line of credit was 1% over Prime Rate through March 5,
1997, when it was increased to 1 1/2% over Prime Rate in conjunction with the
amendment described in Note 2. The agreement contains no financial ratio
covenants or dollar limitations on spending for new store properties.
At December 31, 1996, cash borrowings under the Company's agreement with
Congress totalled $30.0 million, outstanding standby letters of credit totalled
$5.4 million and availability under the loan totalled $2.1 million. The maximum
borrowings under this new agreement during 1996 were $38.5 million, including
letters of credit of $5.6 million. The weighted average annual interest rate on
such borrowings in 1996 was 8.8%.
See Note 2 for discussion of amendment to the Congress agreement signed March 5,
1997, including forbearance of reported default for 90 days. The revolving term
note payable has been classified as current in the accompanying balance sheet
due to the temporary nature of the default forbearance.
NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
- -----------------------------------------------------
Long-term debt and capital lease obligations consist of the following (in
thousands):
December 31,
----------------------------------
1996 1995
-------------- --------------
14% Debentures $ - $16,201
Convertible notes payable, due
April 1999 1,500 -
Non-convertible notes payable,
due April 1999 2,971 -
Mortgage notes 6,552 3,511
Other notes payable 224 552
Capital lease obligations 1,615 5,849
------- -------
12,862 26,113
Less current portion 12,228 20,445
------- -------
$ 634 $ 5,668
======= =======
In April 1996, as part of the restructuring and refinancing plan undertaken,
$33.0 million of mortgage notes payable, were funded by Gordon Brothers
Partners, Inc., secured by owned properties. Non-interest bearing notes of $4.0
million, convertible into Common Stock at $0.75 per share, were issued. The
remaining notes were interest bearing at 15% per annum, payable monthly. At
December 31, 1996, the convertible note remained unpaid, along with $2.6 million
of the interest bearing note.
39
<PAGE> 40
NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
- -----------------------------------------------------------------
Subsequent to December 31, 1996, the interest bearing note was paid in full and
$1.1 million was placed in escrow toward payment of the convertible note. The
mortgage notes are secured by real estate with a net book value of $26.2 million
at December 31, 1996.
See Note 2 for discussion of the sale of the convertible note and release of the
escrowed funds back to the Company.
Also as part of the restructuring and refinancing plan, the Company's 14%
Debentures due January 1996 were refinanced in cash and notes. 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, a $500
thousand note 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, were also issued. Interest on the non-convertible notes payable accrues
at 15% per annum and may be converted as payment-in-kind, in lieu of a
semi-annual payment, to additional notes payable. As of December 31, 1996, $271
thousand of interest had been converted. These notes may be repaid prior to
maturity from proceeds of real estate sales, after full repayment of the
mortgage notes described above. These notes are due April 1999, but have been
classified as current in the accompanying balance sheet due to technical
defaults.
The mortgage notes and certain lease agreements contain various covenants which,
among other things, restrict dividends and distributions on and repurchases of
Common Stock; require specified levels of net worth; limit capital expenditures;
restrict liens, the incurrence of indebtedness and lease obligations; and
restrict loans and investments. Under the most restrictive of these agreements,
the Company had no retained earnings available for the payment of dividends at
December 31, 1996.
As of December 31, 1996, debt maturities, excluding the impact of acceleration
of payments due to technical defaults, in each of the next five fiscal years and
thereafter are as follows (in thousands):
Notes Payable Mortgage Notes
------------- --------------
Year Ending December 31,
1997 $ 158 $ 6,552
1998 66 -
1999 4,471 -
------- -------
$ 4,695 $ 6,552
======= =======
Interest paid during 1996, 1995 and 1994 amounted to (in thousands) $7,344,
$8,363 and $7,995, respectively.
40
<PAGE> 41
NOTE 7 - LEASE COMMITMENTS (in thousands)
- -----------------------------------------
Leases have been entered into for certain retail locations, office space,
equipment and vehicles. The fixed terms of the leases range up to fourteen years
and, in general, leases for retail locations contain multiple renewal options
for various periods between one and ten years. Certain leases contain provisions
which include additional payments based upon sales performance, operating and
real estate tax escalations and purchase options.
Total rent expense charged to operations during 1996, 1995 and 1994 amounted to
$7,555, $8,635 and $5,698, respectively. Total contingent rentals included in
rent expense were $84, $545 and $757, respectively. Included in property, plant
and equipment as of December 31, 1996 and 1995 is $7,539 and $26,360,
respectively, of machinery and equipment under capital leases. The related
accumulated amortization is $6,079 and $20,901, respectively. Capital lease
additions for machinery and equipment totalled $854 in 1996 and $1,263 in 1995.
Future minimum lease payments in each of the next five years and thereafter are
as follows:
Capital Leases Operating Leases
-------------- ----------------
Year Ending December 31,
1997 $ 1,047 $ 8,381
1998 595 7,071
1999 122 5,419
2000 - 2,909
2001 - 2,278
Thereafter - 9,016
------- -------
Total minimum lease payments 1,764 $35,074
Less imputed interest 149 =======
-------
Present value of net minimum
lease payments 1,615
Less current portion 1,047
-------
Long-term capital lease obligations $ 568
=======
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
Fair values are estimated based on the following assumptions: cash and cash
equivalents are reported in the balance sheet at fair value; and the carrying
values of long-term debt and revolving term note payable are estimated using
discounted cash flow analyses, based upon the Company's current incremental
borrowing rates for similar types of arrangements.
41
<PAGE> 42
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- --------------------------------------------------------
The estimated fair values are as follows (in thousands):
December 31,
----------------------------------------
1996 1995
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Revolving term note payable $30,024 $30,024 $32,844 $32,844
14% Debentures - - 16,201 16,201
Convertible notes payable,
due April 1999 1,500 1,425 - -
Non-convertible note payable,
due April 1999 2,971 2,822 - -
Mortgage notes 6,552 6,498 3,511 3,700
Other notes payable 224 208 552 500
------- ------- ------- -------
$41,271 $40,977 $53,108 $53,245
======= ======= ======= =======
NOTE 9 - SALE OF HEADQUARTERS
- -----------------------------
In September 1995, the Company completed the sale of its 35 acre headquarters
site in Braintree, Massachusetts to Kmart Corporation for $32 million. Cash of
$16.2 million was received, along with a note receivable for the remaining
balance of $15.8 million. The note, originally discounted for financial
reporting purposes to $12.4 million, was sold for cash of $13.0 million on March
22, 1996.
NOTE 10 - STOCKHOLDERS' INVESTMENT
- ---------------------------------
The Company's Restated Certificate of Incorporation contains certain provisions
restricting accumulations of Common Stock. Under these provisions, as modified
by the Board of Directors and currently in effect, no person may acquire shares
of Common Stock on or prior to December 31, 1999 (or such later date as may be
fixed by the Board of Directors) if the number of shares actually and
constructively owned by such person, as defined, would exceed 5% of the
outstanding Common Stock on any date. Attempted acquisitions of Common Stock in
excess of these limits will be null and void and all shares purportedly acquired
in excess of these limits will have no rights, except the right to receive out
of the proceeds of resale thereof an amount not in excess of the amount paid for
such excess shares plus brokers' commissions. Such restrictions may be waived by
the Board of Directors and are not applicable to an acquisition of more than 50%
of the outstanding shares of Common Stock for cash pursuant to a tender offer,
merger or other business combination in which all holders of Common Stock are
afforded an opportunity to sell all their shares.
42
<PAGE> 43
NOTE 11 - EMPLOYEE BENEFIT PLANS
- --------------------------------
A noncontributory defined benefit pension plan, the Grossman's Inc. Retirement
Plan (the "Retirement Plan"), is sponsored covering substantially all associates
employed at December 31, 1995. Associates hired after that date are not eligible
to participate in the Retirement Plan. Benefits through 1990 are based upon
years of service multiplied by a percentage of reference earnings. Beginning in
1991, the benefit is based upon annual reference earnings.
The components of net periodic pension cost are as follows (in thousands):
Year Ended December 31,
--------------------------
1996 1995 1994
------ ------ ------
Service cost for the year $ 1,046 $ 1,245 $ 1,942
Interest accrued on projected benefit
obligation 5,105 4,820 4,724
Return on plan assets (5,050) (4,628) (4,244)
Net amortization and deferral 708 1,040 2,120
-------- -------- --------
Net periodic pension cost for the year $ 1,809 $ 2,477 $ 4,542
======== ======== ========
The reduction in net periodic pension cost from 1995 to 1996 resulted from both
the Company's March 1996 downsizing and a revaluation of the Retirement Plan as
of May 1996, relative to the downsizing. In the revaluation, the discount rate
assumption was changed from 7.25% to 8.25%. In addition to the net periodic
pension cost in 1996, a special curtailment charge of $265 thousand was recorded
to reflect a partial termination of the plan also related to the downsizing. The
$265 thousand charge and $447 thousand of pension expense related to terminated
employees was provided for in the store closing provision recorded in March
1996. Accordingly, these amounts have been charged against store closing
reserves, resulting in a net amount of $1,362 thousand being reflected as
pension expense in the accompanying statement of operations.
43
<PAGE> 44
NOTE 11 - EMPLOYEE BENEFIT PLANS (CONTINUED)
- --------------------------------------------
The funded status of the Retirement Plan is as follows (in thousands):
December 31,
----------------------
1996 1995
------ ------
Actuarial present value of projected benefit obligation:
Vested employees $ 57,954 $ 67,105
Non-vested employees 1,567 1,073
--------- ---------
Accumulated benefit obligation 59,521 68,178
Impact of future salary increases 2,286 2,606
--------- ---------
Projected benefit obligation for service rendered
to date 61,807 70,784
Market value of plan assets, primarily cash
equivalents and publicly traded stocks and bonds 61,863 59,908
--------- ---------
Projected benefit obligation in excess of (below)
market value of plan assets (56) 10,876
Items not yet recognized in earnings:
Unrecognized net transition asset 225 749
Unrecognized prior service cost (184) (590)
Adjustment required to recognize minimum liability - 17,066
Unrecognized net loss (9,521) (19,831)
--------- --------
Pension liability (asset) $ (9,536) $ 8,270
========= ========
Statement of Financial Accounting Standards No. 87 requires the recognition of a
minimum liability, to the extent that actuarially computed plan benefits exceed
the fair value of plan assets, and the recognition of a related intangible
asset, to the extent of any unrecognized prior service cost. In 1995, this
situation existed and the balance sheet reflected a minimum pension liability
adjustment of $17,066 thousand, an intangible asset of $590 thousand, and an
offsetting charge to stockholders' equity of $16,476 thousand. In 1996, the
discount rate was reevaluated and increased to 7.75%. This change, combined with
Company contributions and plan performance, resulted in the fair value of plan
assets exceeding the actuarially computed plan benefits and, accordingly, these
balances were reversed.
Assumptions used by the Retirement Plan's actuaries to develop the funded status
of the Retirement Plan under the unit credit actuarial cost method are as
follows:
1996 1995 1994
------ ------ ------
Discount rate 7.75% 7.25% 8.5%
Expected long-term rate of return on assets 9.0 9.0 9.0
Rate of general wage increase 4.5 4.5 4.5
44
<PAGE> 45
NOTE 11 - EMPLOYEE BENEFIT PLANS (CONTINUED)
- --------------------------------------------
A savings plan is also sponsored for the benefit of substantially all employees.
The plan provides that employees may contribute up to 14% of their compensation,
with a fully vested Company match of a portion of the contribution. The Company
contributed $284 thousand in 1996, $455 thousand in 1995 and $552 thousand in
1994 to the plan.
NOTE 12 - OTHER LIABILITIES
- ---------------------------
Other long-term liabilities consist of the following (in thousands):
December 31,
-----------------------
1996 1995
---------- ----------
Accrued insurance claims $ 6,129 $ 6,955
Accrued store closing costs 768 2,347
Other accrued liabilities 344 494
------- -------
$ 7,241 $ 9,796
======= =======
Standby letters of credit which guarantee general liability and workers'
compensation insurance claims are outstanding under the Company's revolving term
note payable.
NOTE 13 - EMPLOYEE STOCK OPTION PLANS
- -------------------------------------
A nonqualified stock option plan covers officers and other key management
employees ("1986 Plan"). The 1986 Plan provided for granting of nonqualified
options up to a total of 3,750,000 shares of Common Stock. At December 31, 1996,
1,617,083 shares were outstanding under the 1986 Plan and no shares were
available for future grants of options.
A nonqualified stock option plan covers key management employees who are not
officers ("1993 Plan"). The 1993 Plan provides for nonqualified options to
purchase a total of 600,000 shares of Common Stock, with a maximum of 5,000
shares per employee. The maximum number of options which may be granted in any
calendar year is 300,000 shares. At December 31, 1996, 427,750 shares were
available for future grants of options under the 1993 Plan.
The 1995 Non-Employee Directors' Stock and Option Plan (the "Directors' Plan")
was approved by stockholders in April 1995, covering Directors who are not
employees of the Company. The Directors' Plan provides for the issuance of
shares of Common Stock, or the granting of nonstatutory stock options for shares
of Common Stock, up to an aggregate total of 700,000 shares. The number of
shares issued is determined based upon the fair market value of shares as of the
payment date. Annual Director's fees are
45
<PAGE> 46
NOTE 13 - EMPLOYEE STOCK OPTION PLANS (CONTINUED)
- -------------------------------------------------
paid in shares issued under this plan. During 1995 and 1996, respectively,
115,709 shares and 103,665 shares were issued to Directors for services
rendered. At December 31, 1996, 305,636 shares were available for future grants
of options or payments for services rendered under the Directors' Plan.
In 1996, additional options were granted, subject to future stockholder
approval, to four officers of the Company, with provisions for cash payments
should approval not be given and value exist in the options. A total of 265,000
options were granted, 220,000 of which were subsequently cancelled when two of
the officers left the Company's employ.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, the alternative fair value
accounting provided for under FAS 123 requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. Pro forma information regarding net income and earnings
per share is required by FAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of FAS 123.
The Company has determined that the fair value of employee stock options has no
material impact on pro forma net income.
46
<PAGE> 47
NOTE 13 - EMPLOYEE STOCK OPTION PLANS (CONTINUED)
- -------------------------------------------------
A summary of option activity and related information is as follows:
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Options outstanding, January 1 2,746,600 2,954,100 3,312,700
Price range $1.31-$2.41 $2.25-$3.88 $2.75-$4.38
Weighted average
exercise price $ 2.98 $ 3.11 $ 3.47
Options granted 1,446,000 627,950 668,300
Price range $0.78-$1.84 $1.31-$2.41 $2.25-$3.88
Weighted average
exercise price $ 2.31 $ 2.14 $ 2.74
Options exercised 6,250 3,750 99,500
Price range $ 2.31 $ 2.31 $ 2.31
Weighted average
exercise price $ 2.31 $ 2.31 $ 2.31
Options cancelled 1,602,017 831,700 927,400
Price range $0.78-$4.50 $2.13-$4.50 $2.31-$4.50
Weighted average
exercise price $ 2.74 $ 2.82 $ 4.24
------------ ------------ ------------
Options outstanding,
December 31 2,584,333 2,746,600 2,954,100
Price range $0.78-$4.50 $1.31-$4.50 $2.25-$4.50
Weighted average
exercise price $ 2.27 $ 2.98 $ 3.11
============ ============ ============
Options exercisable,
December 31 1,417,771 1,518,875 1,640,000
Price range $0.97-$4.50 $2.13-$4.50 $2.31-$4.50
Weighted average
exercise price $ 2.80 $ 3.14 $ 3.47
============ ============ ============
All options granted are ten-year nonqualified options and were granted at market
value. Of the options outstanding at December 31, 1996, 255,000 were exercisable
when issued, the 1996 options granted subject to stockholder approval vest in
1997, and the balance become exercisable in either three or four equal annual
installments following the respective dates of grant. All outstanding options
become exercisable upon a change in control, as defined in the option
agreements.
47
<PAGE> 48
NOTE 14 - INCOME TAXES
- ----------------------
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". This standard
requires, among other things, recognition of future tax benefits, measured by
enacted tax rates, attributable to deductible temporary differences between
financial statement and income tax bases of assets and liabilities and net
operating loss carryforwards to the extent that management assesses the
utilization of such net operating loss carryforwards to be more likely than not.
The statement also requires deferred tax assets to be reduced by a valuation
allowance if, based on the weight of available evidence, management cannot make
a determination that it is more likely than not that some portion or all of the
related tax benefits will be realized. Furthermore, the statement requires that
a valuation allowance be established or adjusted if a change in circumstances
causes a change in judgment about the future realizability of the deferred tax
assets.
At December 31, 1996, the Company has net operating loss carryforwards of $296
million, expiring as follows: 1998-$15 million, 1999-$28 million, 2000-$23
million, 2001-$106 million, 2008-$28 million and 2009-$8 million, 2010-$6
million and 2011-$82 million.
The provision (credit) for income taxes consists of the following (in
thousands):
Year Ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
Federal
Current $ - $ - $ -
Deferred - - -
----- ------ -------
- - -
State
Current 237 357 319
Deferred (237) (357) (531)
------ ------ -------
- - (212)
------ ------ -------
$ - $ - $ (212)
====== ====== =======
48
<PAGE> 49
NOTE 14 - INCOME TAXES (CONTINUED)
- ----------------------------------
The difference between income taxes at the Company's effective tax rate and the
U.S. federal statutory rate is as follows (in thousands):
Year ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
U.S. federal income tax
(benefit) at statutory rate $ (31) $ (69) $(720)
1993 taxable losses for which
tax benefits were not recognized - - -
Valuation allowance for deferred
tax assets 31 69 720
Other items - - -
------ ------ ------
Total federal - - -
State and other local income
taxes (benefit) - - (212)
------ ------ ------
$ - $ - $(212)
====== ====== ======
Deferred income taxes reflect the future tax benefits attributable to net
operating loss carryforwards and temporary differences as follows (in
thousands):
December 31,
----------------------
1996 1995
---------- ----------
Net operating loss carryforwards $103,761 $ 75,108
Allowance for doubtful accounts 732 1,217
Accrued store closing costs 2,682 1,983
Depreciation 577 (667)
Proceeds from sale of former headquarters site - (2,691)
Other (2,542) (1,308)
--------- ---------
105,210 73,642
Less valuation allowance (105,210) (73,642)
--------- ---------
Deferred income taxes $ - $ -
========= =========
The Company's tax returns for years subsequent to 1982 have not been reviewed by
the Internal Revenue Service ("IRS"). Availability of the net operating loss
carryforwards might be challenged by the IRS upon review of such returns and may
be limited under the Tax Reform Act of 1986 as a result of changes that may
occur in the ownership of the Company's stock in the future, principally
relating to a change in control. The Company believes; however, that IRS
challenges that would limit the utilization of available net operating loss
carryforwards are unlikely, and that the
49
<PAGE> 50
NOTE 14 - INCOME TAXES (CONTINUED)
- ----------------------------------
adjustments to tax liability, if any, for years through 1995 will not have a
material adverse effect on the Company's financial position.
Income and franchise taxes paid in 1996, 1995 and 1994 amounted to (in
thousands) $237, $503 and $423, respectively.
NOTE 15 - INVESTMENT IN UNCONSOLIDATED AFFILIATE
- ------------------------------------------------
The Company terminated its 50% interest in a Mexican retailer of building
materials and related products in December 1996, which was accounted for under
the equity method of accounting. Accordingly, its investment in and advance to
unconsolidated affiliate of $415 thousand was written off along with $1,442
thousand of cumulative foreign currency translation adjustment. The joint
venture was formed in 1993 and began operations in 1994. Summarized financial
information for this joint venture during the Company's period of investment is
as follows (in thousands):
December 31,
1995
------------
Assets:
Current assets $ 1,754
Other assets 477
--------
Total assets $ 2,231
========
Liabilities and Equity:
Current liabilities $ 1,872
Equity 359
--------
Total liabilities and equity $ 2,231
========
Company's share of equity $ 180
========
Year Ended December 31,
-------------------------------
1996 1995
---- ----
Gross revenue $10,010 $ 8,460
Cost of sales and expenses 10,746 9,792
-------- --------
Net (loss) $ (736) $(1,332)
======== ========
Company's interest in net loss $ (368) $ (666)
======== ========
50
<PAGE> 51
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (in thousands, except per share
data) should be read in conjunction with the consolidated financial statements,
related notes and Management's Discussion and Analysis of Financial Condition
and Results of Operations. Certain amounts in individual quarters have been
reclassified to conform with year end presentation.
1996
------------------------------------------------
Three Months Ended
--------------------------------------
March 31 June 30 Sept. 30 Dec. 31 Full Year
--------- --------- -------- --------- ---------
SALES $112,981 $ 87,704 $ 95,972 $ 89,099 $385,756
COST OF SALES 86,481 66,448 71,122 69,623 293,674
-------- -------- -------- -------- --------
Gross Profit 26,500 21,256 24,850 19,476 92,082
OPERATING EXPENSES
Selling and
administrative 38,034 22,929 22,675 20,616 104,254
Depreciation and
amortization 1,849 997 1,043 1,054 4,943
Store closing expense 40,150 - - 22,386 62,536
Preopening expense 361 395 51 35 842
--------- --------- --------- --------- ---------
80,394 24,321 23,769 44,091 172,575
--------- --------- --------- --------- ---------
OPERATING INCOME
(LOSS) (53,894) (3,065) 1,081 (24,615) (80,493)
OTHER EXPENSES (INCOME)
Interest expense 1,620 1,016 1,444 1,252 5,332
Net gain on disposals
on property (27) - (72) (3) (102)
Other (1,008) (1,243) (1,939) (693) (4,883)
--------- --------- --------- --------- ---------
585 (227) (567) 556 347
EQUITY IN NET (INCOME)
LOSS OF UNCONSOLIDATED
AFFILIATE 208 108 78 (26) 368
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (54,687) (2,946) 1,570 (25,145) (81,208)
PROVISION (CREDIT)
FOR INCOME TAXES - - - - -
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $(54,687) $ (2,946) $ 1,570 $(25,145) $(81,208)
========= ========= ========= ========= =========
NET INCOME (LOSS)
PER COMMON SHARE
(Primary and
Fully Diluted) $ (2.10) $ (0.11) $ 0.05 $ (0.91) $ (3.03)
========= ========= ========= ========= =========
WEIGHTED AVERAGE
SHARES AND EQUIVALENT
SHARES OUTSTANDING
Primary 26,089 26,458 34,044 27,607 26,832
========= ========= ========= ========= =========
Fully Diluted 26,089 26,458 34,044 27,607 26,832
========= ========= ========= ========= =========
51
<PAGE> 52
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
1995
------------------------------------------------
Three Months Ended
--------------------------------------
March 31 June 30 Sept. 30 Dec. 31 Full Year
--------- --------- -------- --------- ---------
SALES $126,770 $193,990 $193,978 $155,161 $669,899
COST OF SALES 95,777 149,258 146,778 118,407 510,220
--------- --------- --------- --------- ---------
Gross Profit 30,993 44,732 47,200 36,754 159,679
OPERATING EXPENSES
Selling and
administrative 38,088 39,424 39,405 40,078 156,995
Depreciation and
amortization 3,011 2,853 2,786 2,571 11,221
Store closing expense - - 4,500 - 4,500
Preopening expense 135 10 317 262 724
--------- --------- --------- --------- ---------
41,234 42,287 47,008 42,911 173,440
--------- --------- --------- --------- ---------
OPERATING INCOME
(LOSS) (10,241) 2,445 192 (6,157) (13,761)
OTHER EXPENSES (INCOME)
Interest expense 2,197 2,130 2,111 1,773 8,211
Net gain on disposals
of property (46) (152) (18,115) (32) (18,345)
Other (732) (833) (985) (1,545) (4,095)
--------- --------- --------- --------- ---------
1,419 1,145 (16,989) 196 (14,229)
EQUITY IN NET (INCOME)
LOSS OF UNCONSOLIDATED
AFFILIATE 198 127 158 183 666
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (11,858) 1,173 17,023 (6,536) (198)
PROVISION (CREDIT)
FOR INCOME TAXES (1,186) 117 1,703 (634) -
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $(10,672) $ 1,056 $ 15,320 $ (5,902) $ (198)
========= ========= ========= ========= =========
NET INCOME (LOSS)
PER COMMON SHARE
(Primary and
Fully Diluted) $ (0.41) $ 0.04 $ 0.59 $ (0.23) $ (0.01)
========= ========= ========= ========= =========
WEIGHTED AVERAGE
SHARES AND EQUIVALENT
SHARES OUTSTANDING
Primary 25,782 25,935 26,031 26,028 25,946
========= ========= ========= ========= =========
Fully Diluted 25,782 26,026 26,031 26,028 25,946
========= ========= ========= ========= =========
52
<PAGE> 53
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the information called for by
this item regarding Directors is hereby incorporated by reference to the
Company's Form 10-K/A to be filed with the Commission not later than 120 days
after the end of the fiscal year covered by this Form 10-K. Information
regarding the Company's Executive Officers is set forth above following Item 1
of Part I of this report.
Item 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) of Form 10-K, the information called for by
this item is hereby incorporated by reference to the Company's Form 10-K/A to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Form 10-K.
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3) of Form 10-K, the information called for by
this item is hereby incorporated by reference to the Company's Form 10-K/A to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3) of Form 10-K, the information called for by
this item is hereby incorporated by reference to the Company's Form 10-K/A to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Form 10-K.
53
<PAGE> 54
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1 - Index to Financial Statements
Page
Number
in this
Report
Consolidated Balance Sheets
December 31, 1996 and 1995................................... 26
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994................. 28
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994................. 29
Consolidated Statements of Changes in Stockholders' Investment
Years Ended December 31, 1996, 1995 and 1994................. 30
Notes to Consolidated Financial Statements..................... 31
(a) 2 - Index to Financial Statement Schedules
The following consolidated financial statement schedules of Grossman's Inc.
and Subsidiaries are included in Item 14(d) and filed herewith (page
numbers refer to page numbers in this Form 10-K):
Schedule II - Valuation and Qualifying Accounts................ 62
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions, or are inapplicable, and, therefore, have been
omitted.
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and Exchange
Commission, dated and filed January 12, 1996, reporting on the Sixth
and Seventh Amendments to the Loan and Security Agreement between
Grossman's Inc. and BankAmerica Business Credit, Inc.
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.
The Company filed a Form 8-K with the Securities and Exchange
Commission, dated and filed March 19, 1997, reporting on the Amendment
to the By-laws of the Company as adopted by the Board of Directors of
the Company February 28, 1997.
(a) 3. and (c) - Exhibits
54
<PAGE> 55
Exhibit
Number
2(e) Final Decree and Order Closing Cases, dated October
2, 1987, of the United States Bankruptcy Court for
the Southern District of Florida, filed as Exhibit
2(e) to the Company's Form 10-Q for the quarter ended
September 30, 1987, is incorporated herein by
reference.
2(f) Asset Purchase Agreement between GNW Partners, L.P.
and Grossman's Inc., dated June 28, 1989, without
exhibits, filed as Exhibit 2(f) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-542), is incorporated
herein by reference.
2(g) Asset Purchase Agreement between Harcros Lumber &
Building Supplies Inc. and Grossman's Inc., dated
August 14, 1989, without exhibits, filed as Exhibit
2(a) to the Company's Form 8-K, dated September 12,
1989, is incorporated herein by reference.
3(a) Restated Certificate of Incorporation of the Company,
as in effect November 19, 1986, filed as Exhibit 3(a)
to the Company's Form 8-K, dated November 19, 1986
(File No. 1-542), is incorporated herein by
reference.
3(a)-1 Resolutions adopted by the Company's Board of Directors
on December 15, 1987, modifying and extending
restrictions on acquisition of Common Stock under
Article Ninth of Company's Restated Certificate of
Incorporation, filed as Exhibit 3(a)-1 to the Company's
Form 8-K, dated December 15, 1987 (File No. 1-542), is
incorporated herein by reference.
3(a)-2 Notice to Stockholders of modification and extension
of restrictions on acquisition of Common Stock
pursuant to Article Ninth of Company's Restated
Certificate of Incorporation, filed as Exhibit 3(a)-2
to the Company's Form 8-K, dated December 15, 1987
(File No. 1-542), is incorporated herein by
reference.
3(a)-3 Certificate of Designation Relating to Certain
Restrictions on the Acquisition of Common Stock
pursuant to Article Ninth of the Company's Restated
Certificate of Incorporation, filed as Exhibit 3(1)-2
to the Company's Form 8-K dated November 19, 1986
(File No. 1-542), is incorporated herein by
reference.
3(a)-4 Resolutions adopted by the Company's Board of Directors
on October 23, 1990 extending restrictions on
acquisition of Common Stock under Article Ninth of
Company's Restated Certificate of Incorporation, filed
as Exhibit 3(a)-4 to the Company's Annual Report on Form
10-K for the year ended December 31, 1990 (File No.
1-542), is incorporated herein by reference.
55
<PAGE> 56
3(a)-5 Notice to Stockholders of extension of restrictions
on acquisition of Common Stock pursuant to Article
Ninth of the Company's Restated Certificate of
Incorporation, filed as Exhibit 3(a)-5 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1990 (File No. 1-542), is
incorporated herein by reference.
3(a)-6 Certificate of Designation Relating to Certain
Restrictions on the Acquisition of Common Stock pursuant
to Article Ninth of the Company's Restated Certificate
of Incorporation, filed as Exhibit 3(a)-6 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990 (File No. 1-542), is incorporated
herein by reference.
3(a)-7 Notice to Stockholders of extension of restrictions
on acquisition of Common Stock pursuant to Article
Ninth of the Company's Restated Certificate of
Incorporation, filed as Exhibit 3(a)-7 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1993 (File No. 1-542), is
incorporated herein by reference.
3(a)-8 Certificate of Designation Relating to Certain
Restrictions on the Acquisition of Common Stock pursuant
to Article Ninth of the Company's Restated Certificate
of Incorporation, filed as Exhibit 3(a)-8 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-542), is incorporated
herein by reference.
3(a)-9 Certificate of Designation Relating to Certain
Restrictions on the Acquisition of Common Stock
pursuant to Article Ninth of the Company's Restated
Certificate of Incorporation, is filed as Exhibit
3(a)-9 to the Company's Form 10-Q, dated November 14,
1996, (File No. 1-542), is incorporated herein by
reference.
3(b) By-Laws of the Company, as in effect November 19, 1986,
filed as Exhibit 3(b) to the Company's Form 8-K, dated
November 19, 1986 (File No. 1-542), is incorporated
herein by reference.
3(b)-1 Copy of the amendments to the Grossman's Inc. By-Laws as
adopted by the Board of Directors of Grossman's Inc. on
December 15, 1987, filed as Exhibit 3(b)-1 to the
Company's Form 8-K, dated December 15, 1987 (File No.
1-542), is incorporated herein by reference.
3(b)-2 Amendment to the By-laws of the Company as adopted by
the Board of Directors of the Company February 28, 1997,
filed as Exhibit 3(b)-2 to the Company's Form 8-K, dated
March 19, 1997 (File No. 1-542), is incorporated herein
by reference.
56
<PAGE> 57
4(p) Schedule of Tranche A Convertible Promissory Notes
and Tranche B Promissory Notes Delivered on April 9,
1996, filed as Exhibit 4(p) to the Company's Form
10-Q, dated May 13, 1996, (File No. 1-542), is
incorporated herein
by reference.
4(p)-1 Tranche A Convertible Promissory Note, dated April 9,
1996, between Grossman's Inc. and Continental Assurance
Company, filed as Exhibit 4(p)-1 to the Company's Form
10-Q, dated May 13, 1996, (File No. 1-542), is
incorporated herein by reference.
4(p)-2 Tranche B Convertible Promissory Note, dated April 9,
1996, between Grossman's Inc. and Continental Assurance
Company, filed as Exhibit 4(p)-2 to the Company's Form
10-Q, dated May 13, 1996, (File No. 1-542), is
incorporated herein by reference.
4(q) Loan Agreement, dated April 4, 1996, between GRS Realty
Company, Inc. and Combined Investors, L.L.C., filed as
Exhibit 4(q) to the Company's Form 10-Q, dated May 13,
1996, (File No. 1-542), is incorporated herein by
reference.
4(r) Loan and Security Agreement, dated May 2, 1996, by
and between Congress Financial Corporation (New
England) and Grossman's Inc., filed as Exhibit 4(r)
to the Company's Form 10-Q, dated May 13, 1996, (File
No. 1-542), is incorporated herein by reference.
4(r)-1 Amendment No. 1 to Financing Agreements, dated March 5,
1997, between Congress Financial Corporation (New
England) and Grossman's Inc., filed as Exhibit 4(r)-1 to
the Company's Form 8-K, dated March 17, 1997, (File No.
1-542), is incorporated herein by reference.
4(s) Loan Agreement, dated as of February 25, 1997, between
GDI Company, Inc., as lender, and Grossman's Inc., GRS
Holding Company, Inc. and GRS Realty Company, Inc. as
borrowers, filed as Exhibit 4(s) to the Company Form 8-
K, dated March 17, 1997, (File No. 1-542), is
incorporated herein by reference.
10(iii)(h)-2 Employment Agreement, dated December 1, 1994 between
Grossman's Inc and Sydney L. Katz, filed as Exhibit
10(iii)(h)-2 to the Company's Form 10-K for the year
ended December 31, 1994 (File No. 1-542), is
incorporated herein by reference.
10(iii)(h)-3 Retirement Agreement, dated as of October 4, 1996,
between Grossman's Inc. and Sydney L. Katz, filed as
Exhibit 10(iii)(h)-3 to the Company Form 10-Q, dated
November 14, 1996, (File No. 1-542), is incorporated
herein by reference.
57
<PAGE> 58
10(iii)(l) Amended and Restated Employment Agreement, dated July 1,
1991, between Grossman's Inc. and Richard E. Kent, filed
as Exhibit 10(iii)(l) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993 (File No.
1-542), is incorporated herein by reference.
10(iii)(l)-1 Amendment No. 1, dated September 26, 1994, to Amended
and Restated Employment Agreement dated as of July 1,
1991, between Grossman's Inc. and Richard E. Kent, filed
as Exhibit 10(iii)(l)-1 to the Company's Form 10-Q for
the quarter ended September 30, 1994 (File No. 1-542),
is incorporated herein by reference.
10(iii)(o) Employment Agreement, dated November 23, 1994, between
Grossman's Inc. and Robert K. Swanson, filed as Exhibit
10(iii)(o) to the Company's Form 10-K for the year ended
December 31, 1994 (File No. 1-542), is incorporated
herein by reference.
10(iii)(o)-1 Amended and Restated Agreement, dated as of October 4,
1996, between Grossman's Inc. and Robert K. Swanson,
filed as Exhibit 10(iii)(o)-1 to the Company Form 10-Q,
dated November 14, 1996, (File No. 1-542), is
incorporation herein by reference.
10(iii)(o)-2 Letter of Termination of the Amended and Restated
Agreement, dated as of October 4, 1996, between
Grossman's Inc. and Robert K. Swanson, filed herewith.
10(b) Restated and Amended Grossman's Inc./Evans Asset
Holding Company General Pension Plan, filed as
Exhibit 10(b) to the Company's Annual Report on Form
10-K for the year ended December 31, 1986 (File No.
1-542), is incorporated herein by reference.
10(c) Agreement Re General Pension Plan, dated November 18,
1986, among Evans Products Company, Grossman's Inc.,
Evans Financial Corp., Evans Transportation Company and
Evans Asset Holding Company, filed as Exhibit 10(c) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1986 (File No. 1-542), is
incorporated herein by reference.
10(c)-1 Agreement Re Spin-off of General Pension Plan, dated
January 1, 1987, among the Company, Evans Asset Holding
Company, Evans Financial Corp. and Evans Transportation
Company, filed as Exhibit 10(c)-1 to the Company's
Annual Report on Form 10-K for the year ended December
31, 1987 (File No. 1-542), is incorporated herein by
reference.
58
<PAGE> 59
10(c)-2 Letter, dated December 30, 1987, documenting certain
understandings reached among the Company, Grossman's
Inc. Retirement Plan, Evans Asset Holding Company and
Evans Asset Holding Company/Grossman's Inc. General
Pension Plan, regarding the proper interpretation of the
Agreement Re Spin-off of General Pension Plan (Exhibit
10(c)-1 above), filed as Exhibit 10(c)-2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1987 (File No. 1-542), is incorporated
herein by reference.
10(c)-8 Grossman's Inc. Restated Retirement Plan, dated
February 15, 1995, filed as Exhibit 10(c)-8 to the
Company's Form 10-K for the year ended December 31, 1994
(File No. 1-542), is incorporated herein by reference.
10(c)-9 Grossman's Inc. ERISA Excess Plan, as amended and
restated, effective October 26, 1995, filed as Exhibit
10(c)-9 to the Company's Form 10-K for the year ended
December 31, 1995 (File No. 1-542), is incorporated
herein by reference.
10(c)-10 Grossman's Inc. Supplemental ERISA Excess Plan,
effective January 1, 1995, filed as Exhibit 10(c)-10 to
the Company's Form 10-K for the year ended December 31,
1995 (File No. 1-542), is incorporated herein by
reference.
10(d) Claim Allocation Agreement, dated November 19, 1986,
by and between Evans Asset Holding Company, EFC
Mortgage Trust and Grossman's Inc., filed as Exhibit
10(d) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1986 (File No. 1-542), is
incorporated herein by reference.
10(e) EPC Asset Transfer Agreement, dated November 19, 1986,
among Evans Products Company, Evans Asset Holding
Company, EPC Properties Company, Minneapolis Electric
Steel Castings Company, Racine Steel Castings Company,
RSC Properties Company, Duluth Steel Castings Company,
Aberdeen Forest Products Company and Evans Engineered
Products Company, filed as Exhibit 10(e) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1986 (File No. 1-542), is incorporated
herein by reference.
10(f) EFC Asset Transfer Agreement, dated November 19, 1986,
among Evans Financial Corp. and EFC Mortgage Trust,
filed as Exhibit 10(f) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1986 (File No.
1-542), is incorporated herein by reference.
59
<PAGE> 60
10(g) Assumption Agreement, dated November 19, 1986, among
Evans Asset Holding Company, EFC Mortgage Trust,
Evans Products Company, Evans Financial Corp. and
Bank of America National Trust and Savings
Association, as agent, filed as Exhibit 10(g) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1986 (File No. 1-542), is
incorporated herein by reference.
10(h) Grossman's Inc. 1986 Nonqualified Stock Option Plan,
filed as Exhibit A to the Company's Proxy Statement for
the 1987 Annual Meeting of Stockholders, dated September
28, 1987, is incorporated herein by reference.
10(h)-1 Amendment, dated December 11, 1990, to 1986
Nonqualified Stock Option Plan, filed as Exhibit
10(h)-1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990 (File No.
1-542), is incorporated herein by reference.
10(h)-2 Amendment, dated January 28, 1992, to 1986
Nonqualified Stock Option Plan, filed as Exhibit
10(h)-2 to the Company's Form 10-Q for the quarter
ended March 31, 1992 (File No. 1-542), is
incorporated herein by reference.
10(h)-3 Amendment, dated July 29, 1992, to 1986 Nonqualified
Stock Option Plan and certain Stock Option Agreements
outstanding thereunder, filed as Exhibit 10(h)-3 to
the Company's Form 10-K for the year ended December
31, 1995 (File No. 1-542), is incorporated herein by
reference.
10(i)-3 Grossman's Inc. Restated Executive Severance Plan, dated
December 14, 1994, filed as Exhibit 10(i)-3 to the
Company's Form 10-K for the year ended December 31, 1994
(File No. 1-542), is incorporated herein by reference.
10(m)-1 Grossman's Inc. Supplemental Executive Retirement Plan,
dated January 1, 1992, filed as Exhibit 10(m)-1 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-542), is incorporated
herein by reference.
10(n)-5 Grossman's Inc. Restated Savings and Profit Sharing
Plan, dated February 15, 1995, filed as Exhibit 10(n)-5
to the Company's Form 10-K for the year ended
December 31, 1994 (File No. 1-542), is incorporated
herein by reference.
10(o) Grossman's Inc. 1993 Key Employee Stock Option Plan,
dated April 27, 1993, filed as Exhibit 10(o) to the
Company's Form 10-K for the year ended December 31, 1993
(File No. 1-542), is incorporated herein by reference.
10(p) Grossman's Inc. 1995 Directors' Stock and Option Plan,
filed as Exhibit 10(p) to the Company's Form 10-Q for
the quarter ended June 30, 1995 (File No. 1-542), is
incorporated herein by reference.
60
<PAGE> 61
10(q) Grossman's Inc. 1995 Restricted Stock Plan, filed as
Exhibit 10(q) to the Company's Form 10-Q for the quarter
ended June 30, 1995 (File No. 1-542), is incorporated
herein by reference.
10(r) Agreement for Purchase of Real Estate by and Between
Grossman's Inc. and buyer, dated May 14, 1993, First
Amendment to Agreement for Purchase of Real Estate,
dated September 2, 1993, Second Amendment to Agreement
for Purchase of Real Estate, dated September 29, 1993,
Third Amendment to Agreement for Purchase of Real
Estate, dated June 20, 1995 and Fourth Amendment for
Purchase of Real Estate, dated June 22, 1995, filed as
Exhibit 10(r) to the Company's Form 8-K, filed June 23,
1995 (File No. 1-542), is incorporated herein by
reference.
10(s) Agency Agreement, dated March 29, 1996, by and between
Gordon Brothers Partners, Inc. and Grossman's Inc.,
filed as Exhibit 10(q) to the Company's Form 10-Q, dated
November 14, 1996, (File No. 1-542), is incorporated
herein by reference.
11(a) Statement re computation of earnings per share, filed
herewith.
22 Subsidiaries of the Company, filed as Exhibit 22 to the
Company's Form 10-K for the year ended December 31, 1995
(File No. 1-542), is incorporated herein by reference.
23 Consent of Ernst & Young LLP, Independent Auditors,
filed herewith.
61
<PAGE> 62
GROSSMAN'S INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions (1) of Year
- ----------- ---------- ---------- -------------- -------
Year Ended
December 31, 1996
Allowance for
doubtful accounts $3,339 $3,729 $4,258 $2,810
======== ======== ======== ========
Year Ended
December 31, 1995
Allowance for
doubtful accounts $4,157 $1,841 $2,659 $3,339
======== ======== ======== ========
Year Ended
December 31, 1994
Allowance for
doubtful accounts $5,212 $1,300 $2,355 $4,157
======== ======== ======== ========
(1) Write-off of bad debts less recoveries.
62
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GROSSMAN'S INC.
---------------
Company
Date: March 31, 1997 By /s/ Steven L. Shapiro
-----------------------------
Steven L. Shapiro
Vice President - Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Seymour Kroll President and Chief March 31, 1997
- ---------------------------- Executive Officer
Seymour Kroll (Principal Executive Officer)
/s/ Steven L. Shapiro Vice President - Controller March 31, 1997
- ---------------------------- (Principal Accounting
Steven L. Shapiro Officer) (Principal
Financial Officer)
/s/ Robert K. Swanson Chairman of the Board March 31, 1997
- ---------------------------- of Directors
Robert K. Swanson
/s/ Thomas E. Arnold, Jr. Director March 31, 1997
- ----------------------------
Thomas E. Arnold, Jr.
/s/ Russell Cox Director March 31, 1997
- ----------------------------
Russell Cox
/s/ Theodore Schnormeier Director March 31, 1997
- ----------------------------
Theodore Schnormeier
/s/ Richard Wendt Director March 31, 1997
- ----------------------------
Richard Wendt
/s/ Lawrence Wetter Director March 31, 1997
- ----------------------------
Lawrence Wetter
/s/ Dr. Abraham Zaleznik Director March 31, 1997
- ----------------------------
Dr. Abraham Zaleznik
63
<PAGE> 64
Directors Officers
Thomas E. Arnold 1 Seymour Kroll
President of Thomas E. Arnold & Associates President and Chief
Executive Officer
Russell Cox 1
President of Resort Management, Inc. Thomas A. Ford
Executive Vice President
Theodore Schnormeier 1 and Chief Operating Officer
Senior Vice President - JELD-WEN, inc.
Richard E. Kent
Robert K. Swanson Vice President, Secretary
Chairman of the Board of Directors and General Counsel
Chairman of RKS, Inc.
Robert J. Haggerty
Richard Wendt 2 Vice President of Human
Chairman - JELD-WEN, inc. Resources
Lawrence Wetter 2 Charles O. Hofeller
Vice Chairman - JELD-WEN, inc. Vice President - Real Estate
Dr. Abraham Zaleznik 2 Arthur S. Ryan
The Konosuke Matsushita Professor Vice President - Treasurer
of Leadership Emeritus at
Harvard Business School Steven L. Shapiro
Vice President - Controller
1 - Member of the Audit and Finance Committee.
2 - Member of the Compensation Committee.
- -----------------------------------------------------------------
64
<PAGE> 65
Grossman's Inc. and Subsidiaries
Stockholder Information
- --------------------------------------------------------------------------
Form 10-K:
Copies of the Grossman's Inc. Annual Report on Form 10-K for the Year
Ended December 31, 1996, as filed with the Securities and Exchange
Commission, are available without charge. Address requests to:
Mr. Steven L. Shapiro
Vice President - Controller
Grossman's Inc.
45 Dan Road
Canton, Massachusetts 02021-2817
- --------------------------------------------------------------------------------
Investor Information:
The Company maintains an Investor Relations Department to assist
stockholders. Investors and security analysts should direct inquiries
to:
Grossman's Inc.
Investor Relations Department
45 Dan Road
Canton, MA 02021-2817
617-830-4767
- --------------------------------------------------------------------------------
Press Release and Public Filings:
Grossman's Inc. press releases and public filings can be accessed
on the Internet through Business Wire's Home Page:
http:/www.businesswire.com/cnn/gros.htm
- --------------------------------------------------------------------------------
Transfer Agent and Registrar:
National Bank of North Carolina
Shareholder Services Group - 1154
South Tryon Street
Charlotte, NC 28288-1154
800-829-8432
- --------------------------------------------------------------------------------
Independent Auditors:
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
617-266-2000
- --------------------------------------------------------------------------------
Legal Counsel:
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
65
<PAGE> 1
Exhibit 10(iii)(o)-2
January 31, 1997
Grossman's Inc.
45 Dan Road
Canton, Massachusetts 02021
Gentlemen:
I hereby resign from the office of Chief Executive Officer of
Grossman's Inc. (the "Company"), effective on the date hereof. Subject to your
acceptance of the terms of this letter, this resignation shall be deemed to be:
(i) a termination on my part of the Amended and Restated Agreement dated October
4, 1996 (the "Engagement Agreement") between the Company and myself, as amended
and in effect on the date hereof, as provided in Sections 3(d), 8(a) and 8(d) of
the Engagement Agreement; and (ii) a waiver of this requirement, as provided in
the Engagement Agreement or otherwise, of prior notice of such termination.
Nothing in this letter shall be construed to constitute my resignation
from my positions as a director of or as Chairman of the Board of the Company. I
shall continue to serve in such positions on such terms as are provided in the
Certificate of Incorporation of the Company, the By-laws of the Company, and any
applicable resolutions of the Board of Directors or the shareholders of the
Company.
By your acceptance hereof, you agree that Section 13 of the Engagement
Agreement survives this termination.
Very truly yours,
/s/ Robert K. Swanson
-----------------------
Robert K. Swanson
Agreed and Accepted:
GROSSMAN'S INC.
- --------------------------
By:
Title:
<PAGE> 1
Exhibit 11(a)
GROSSMAN'S INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
Net (loss) for
primary and
fully diluted
earnings per
share $(81,208) $ (198) $ (1,905)
======== ======== ========
Weighted average
number of shares
outstanding 26,832 25,946 25,752
Net effect of
dilutive stock
options -- -- --
-------- -------- --------
Total weighted average
shares outstanding and
common stock equivalents
used in primary
calculation of earnings
per share 26,832 25,946 26,752
Additional dilution
from stock options -- -- --
-------- -------- --------
Total weighted average
shares outstanding and
common stock equivalents
used in fully diluted
calculation of earnings
per share 26,832 25,946 26,752
======== ======== ========
Net (Loss) Per
Common Share
(Primary and
Fully Diluted) $ (3.03) $ (0.01) $ (0.07)
======== ======== ========
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-18114 and 33-52861) pertaining to the stock option plans of
Grossman's Inc. of our report dated March 21, 1997 with respect to the
consolidated financial statements and schedule of Grossman's Inc. and
subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
ERNST & YOUNG LLP
Boston, Massachusetts
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,058
<SECURITIES> 0
<RECEIVABLES> 13,520
<ALLOWANCES> 2,810
<INVENTORY> 56,662
<CURRENT-ASSETS> 85,188
<PP&E> 41,663
<DEPRECIATION> 16,114
<TOTAL-ASSETS> 123,441
<CURRENT-LIABILITIES> 102,878
<BONDS> 634
<COMMON> 277
0
0
<OTHER-SE> 12,411
<TOTAL-LIABILITY-AND-EQUITY> 123,441
<SALES> 385,756
<TOTAL-REVENUES> 385,756
<CGS> 293,674
<TOTAL-COSTS> 293,674
<OTHER-EXPENSES> 172,575
<LOSS-PROVISION> 3,729
<INTEREST-EXPENSE> 5,332
<INCOME-PRETAX> (81,208)
<INCOME-TAX> 0
<INCOME-CONTINUING> (81,208)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (81,208)
<EPS-PRIMARY> (3.03)
<EPS-DILUTED> (3.03)
</TABLE>
