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.
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
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
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
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.
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Part II
Item 5.
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.
Item 6.
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) - -------------------------------------------------------------------------- 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.
(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.
Item 7.
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.
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.
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
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.
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% ======= ======= =======
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)%
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%.
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
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
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.
Item 8.
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
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
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.
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.
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.
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.
GROSSMAN'S INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
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
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.
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
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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
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.
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.
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) ====== ====== =======
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
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, ------------ 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) ======== ========
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.
------------------------------------------------ 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 ========= ========= ========= ========= =========
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
------------------------------------------------ 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 ========= ========= ========= ========= =========
Item 9.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part III
Item 10.
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.
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.
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.
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.
Part IV
Item 14.
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
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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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