1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
(MARK ONE) FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 19, 1996
------ ----
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 1-1066
-------------
GENERAL HOST CORPORATION
------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK STATE 13-0762080
- -------------------------- ---------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
One Station Place, P.O. Box 10045, Stamford, Connecticut 06904
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (203) 357-9900
- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-------- --------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court.
Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: Common Stock, $1.00 par value,
23,249,345 shares outstanding as of July 3, 1996.
2
GENERAL HOST CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been reviewed
by Price Waterhouse LLP, independent accountants, whose report
thereon is included elsewhere in this Item 1. The review by Price
Waterhouse LLP was based on procedures adopted by the American
Institute of Certified Public Accountants and was not an audit.
In the opinion of the Company, the accompanying consolidated financial
statements reflect all adjustments necessary to a fair statement of
the results for the interim periods presented herein. In the opinion
of management such adjustments consisted of normal recurring items.
Financial results of the interim period are not necessarily indicative
of results that may be expected for any other interim period or for
the fiscal year.
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Sixteen Weeks Ended
-----------------------
MAY 19, May 21,
1996 1995
----------- ----------
REVENUES:
Sales $ 172,708 $ 201,998
Other income 3 604
--------- ---------
172,711 202,602
--------- ---------
COSTS AND EXPENSES:
Cost of sales, including buying and occupancy 119,769 137,670
Selling, general and administrative 43,475 45,835
Interest and debt expense 6,463 7,246
--------- ---------
169,707 190,751
--------- ---------
INCOME BEFORE INCOME TAXES 3,004 11,851
INCOME TAXES 210 817
--------- ---------
NET INCOME $ 2,794 $ 11,034
========= =========
NET EARNINGS PER SHARE:
Primary $ .12 $ .47
========= =========
Fully diluted $ .12 $ .41
========= =========
AVERAGE SHARES OUTSTANDING:
Primary 23,249 23,250
========= =========
Fully diluted 23,249 30,504
========= =========
See accompanying notes.
4
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
MAY 19, May 21, January 28,
1996 1995 1996
--------- --------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 83,806 $ 125,979 $ 29,901
Accounts and notes receivable 4,206 3,219 3,823
Merchandise inventory 121,926 118,054 88,162
Prepaid expenses and other
current assets 9,033 9,057 9,417
--------- --------- ---------
Total current assets 218,971 256,309 131,303
--------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT,
LESS ACCUMULATED DEPRECIATION
OF $160,454, $148,747 AND $154,830 231,482 247,765 237,803
INTANGIBLES, LESS ACCUMULATED
AMORTIZATION OF $10,061,
$9,105 AND $9,783 15,858 16,814 16,136
OTHER ASSETS AND DEFERRED CHARGES 10,637 11,457 10,543
--------- --------- ---------
$ 476,948 $ 532,345 $ 395,785
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 120,952 $ 121,895 $ 47,776
Accrued expenses 34,101 35,768 33,012
Provision for store closings and
other costs 2,539 4,791 3,347
Current portion of long-term debt 2,115 74,576 1,974
--------- --------- ---------
Total current liabilities 159,707 237,030 86,109
--------- --------- ---------
LONG-TERM DEBT:
Senior debt 129,337 91,742 124,898
Subordinated debt, less original
issue discount 65,000 65,000 65,000
--------- --------- ---------
Total long-term debt 194,337 156,742 189,898
--------- --------- ---------
OTHER LIABILITIES AND DEFERRED CREDITS 9,882 9,803 9,550
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock $1.00 par value,
100,000,000 shares authorized,
31,752,450 shares issued 31,752 31,752 31,752
Capital in excess of par value 81,186 81,297 81,186
Retained earnings 82,700 108,826 79,924
--------- --------- ---------
195,638 221,875 192,862
Cost of 8,503,105, 9,615,548
and 8,505,096 shares of
common stock in treasury (80,600) (91,144) (80,618)
Notes receivable from exercise of
stock options (2,016) (1,961) (2,016)
--------- --------- ---------
Total shareholders' equity 113,022 128,770 110,228
--------- --------- ---------
$ 476,948 $ 532,345 $ 395,785
========= ========= =========
See accompanying notes.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Sixteen Weeks Ended
-----------------------
MAY 19, May 21,
1996 1995
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,794 $ 11,034
Noncash adjustments:
Depreciation and amortization 6,815 6,931
Other 75
--------- ---------
9,684 17,965
Changes in current assets and current liabilities:
(Increase) decrease in accounts and
notes receivable (63) 570
Increase in inventory (33,764) (30,816)
(Increase) decrease in prepaid expenses 384 (468)
Increase in accounts payable 73,176 65,169
Increase (decrease) in accrued expenses 1,235 (4,741)
Decrease in provision for store closings and
other costs (753) (1,588)
--------- ---------
Net cash provided by continuing operations 49,899 46,091
Net cash used for discontinued operations (148) (126)
--------- ---------
49,751 45,965
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (553) (664)
Other 548 3
--------- ---------
Net cash used for investing activities (5) (661)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 5,137
Debt issue costs (421)
Payment of long-term debt and capital lease
obligations (557) (2,687)
--------- ---------
Net cash provided by (used for)
financing activities 4,159 (2,687)
--------- ---------
Increase in cash and cash equivalents 53,905 42,617
Cash and cash equivalents at beginning of year 29,901 83,362
--------- ---------
Cash and cash equivalents at end of quarter $ 83,806 $ 125,979
========= =========
See accompanying notes.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
On February 28, 1996 the Company declared a 5% stock dividend for shareholders
of record on March 15, 1996. The stock dividend representing 1,109,008 shares
was paid on April 5, 1996. Share and per share data for 1995 have been
restated to reflect the 5% stock dividend.
NOTE 2
The income tax provision for financial reporting purposes has been calculated
using an annual effective rate method. The difference between the statutory
rate for federal purposes and taxes provided for in 1996 and 1995 is due to the
utilization of previously unrecognized tax benefits.
NOTE 3
Primary earnings per share is based upon the weighted average number of shares
of common stock outstanding.
Fully diluted earnings per share is based on the assumed conversion of all of
the 8% Convertible Subordinated Notes into common stock. Interest expense, net
of taxes, on the 8% Convertible Subordinated Notes is added back to net
earnings.
NOTE 4
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1996 presentation.
Interest payments amounted to $8,805,000 for the sixteen weeks ended May 19,
1996 and $10,451,000 for the sixteen weeks ended May 21, 1995. Tax payments
amounted to $5,000 for the sixteen weeks ended May 19, 1996 and $190,000 for
the sixteen weeks ended May 21, 1995.
7
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
General Host Corporation
We have reviewed the accompanying consolidated balance sheets of General Host
Corporation and its subsidiaries as of May 19, 1996 and May 21, 1995, and the
related consolidated statements of income and of cash flows for the
sixteen-week periods ended May 19, 1996 and May 21, 1995. This financial
information is the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial information for it to be in conformity
with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of January 28, 1996, and the related
consolidated statements of income, of changes in shareholders' equity, and of
cash flows for the year then ended (not presented herein), and in our report
dated February 28, 1996 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying consolidated balance sheet information as of January 28,
1996, is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
Price Waterhouse LLP
Detroit, Michigan
June 13, 1996
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of operations
Sales
Sales for the Company's principal operating subsidiary, Frank's Nursery &
Crafts, Inc., decreased 14.5% to $172,708,000 for the sixteen weeks ended May
19, 1996 compared with $201,998,000 in the 1995 first quarter which ended May
21, 1995. Same-store sales (stores open for a full year in both years)
decreased 14.3% for the 1996 first quarter as a result of unseasonably cold and
wet weather experienced in most of our 16- state operating area throughout the
entire quarter.
Earnings
Net income was $2,794,000 in the 1996 quarter compared to $11,034,000 in the
1995 quarter.
Cost of sales, including buying and occupancy, decreased $17,901,000 to
$119,769,000 in 1996 compared to $137,670,000 in 1995. As a percentage of
sales, cost of sales increased 1.1 percentage points. The increase resulted
from buying and occupancy costs, which as a percentage of sales increased 1.5%.
This increase was offset, in part, by improved merchandise margins of .4 of a
percentage point that reflected a less promotional strategy and tighter
inventory management.
Selling, general and administrative expenses decreased $2,360,000 to
$43,475,000 in 1996 compared to $45,835,000 in 1995 as the Company renewed its
intensity for expense control. As a percentage of sales, selling, general and
administrative expenses increased 2.5 percentage points to 25.2% of sales
compared to 22.7% in the 1995 quarter.
Other income, primarily interest income, decreased $601,000 to $3,000 in the
1996 quarter compared to $604,000 in the 1995 quarter due primarily to the
write-off of leasehold improvements incurred in the closing of one leased store
and a loss on the sale of an unprofitable store that was closed in the 1996
quarter.
9
Interest and debt expense decreased by $783,000 to $6,463,000 in the 1996
quarter compared to $7,246,000 in the 1995 quarter due to the Company's
repayment of the Adjustable Rate First Mortgage Notes at the end of fiscal
1996, the balance of which was $73,625,000 at the end of the 1995 first
quarter. The Company replaced this financing, in part, with new mortgage
financings which totaled $39,709,000 at the end of the 1996 first quarter.
The income tax provision for financial reporting purposes has been calculated
using an annual effective rate method. The difference between the statutory
rate for federal purposes and taxes provided for in 1996 and 1995 is due to the
utilization of previously unrecognized tax benefits.
With regard to current accounting pronouncements, the Company has determined
that Statement of Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets," will not be material to the results of operations or the
consolidated financial position of the Company. The implementation of
Statement of Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" sets forth standards for accounting for stock-based compensation
under which the Company intends to continue to account for stock-based
compensation in accordance with APB Opinion No. 25 and provide the additional
disclosure in the notes to the financial statements.
Liquidity and Capital Resources
Net cash provided by continuing operations increased $3,808,000 to
$49,899,000 in the 1996 quarter. Inventory increased $33,764,000 in 1996
compared to an increase of $30,816,000 in 1995 while accounts payable increased
$73,176,000 in 1996 compared to an increase of $65,169,000 in 1995. The
accounts payable increase for the 1996 and 1995 quarters, described above,
included amounts payable to brokers at May 19, 1996 of $24,996,000 compared to
$19,997,000 at the end of fiscal 1995 and $14,997,000 at May 21, 1995 compared
to $14,998,000 at the end of fiscal 1994. At May 19, 1996 the remaining store
closing reserve of $3,539,000 primarily represented lease termination costs for
the remaining four store locations and estimated losses associated with the
sale and or sublease of real estate. The Company utilized net cash of $753,000
in the 1996 quarter to pay lease termination costs for one lease terminated in
the 1996 first quarter and to pay brokers fees and legal costs.
Net cash used for discontinued operations in the first quarter of 1996 and
1995 related to payments for operations disposed of in prior years.
10
Net cash used for investing activities was $5,000 which included $548,000 for
the write-off of leasehold improvements incurred in the closing of one leased
store and a loss on the sale of an unprofitable store that was closed in the
1996 quarter. Net cash used for investing activities was $661,000 in the 1995
quarter.
Net cash provided by financing activities was $4,159,000 in the 1996 quarter
compared to net cash used for financing activities of $2,687,000 in the 1995
quarter. The Company entered into additional new mortgage financings in the
1996 quarter of $5,137,000. Interest rates on the new mortgage notes vary from
9.28% to 9.625% and the notes mature with balloon payments on varying dates
from March 1, 2006 to April 1, 2006. The 1995 quarter included payments of
$2,375,000 for the Adjustable First Rate Mortgage notes which were repaid as of
the end of fiscal 1996.
On February 28, 1996 the Company declared a 5% stock dividend for
shareholders of record on March 15, 1996. The stock dividend representing
1,109,008 shares was paid on April 5, 1996. Share and per share data for 1995
have been restated to reflect the 5% stock dividend.
Working capital at May 19, 1996 was $59,264,000 or $14,070,000 higher than
the $45,194,000 working capital level at January 28, 1996. The quarter-end
included $83,806,000 of cash and cash equivalents, of which $24,996,000
represented amounts payable to brokers.
The Company has a $25,000,000 unsecured credit agreement ("the agreement")
with a bank which expires July 15, 1996. The Company is presently negotiating
an extension to the agreement. If the Company is unable to extend the
agreement or secure a replacement facility, the Company believes its cash flow
from operations will be sufficient to meet its working capital requirements.
The Company, if necessary, could raise capital through additional mortgage
financings, expense reductions, or new debt offerings.
During the 1996 first quarter, the Company borrowed $25,000,000 under the
agreement and fully repaid the loan as of May 13, 1996. The bank agreement
requires the Company, among other things, to maintain minimum levels of
earnings, tangible net worth and certain minimum financial ratios. At May 19,
1996 the Company obtained a waiver of the minimum fixed charge coverage ratio.
The waiver enabled the Company to comply with the aforementioned bank loan
covenants at May 19, 1996.
Under the most restrictive provisions of any of the Company's debt
agreements, total shareholders' equity available to pay cash dividends or
purchase treasury stock was below the required minimum level by $7,938,000 at
May 19, 1996.
11
Under $4,950,000 of new mortgage financings, the Company is required to
maintain a minimum credit facility of $15,000,000 until May 31, 1997. If the
facility has a remaining term of 30 days or less the Company is required to
deposit $4,950,000 with the lender. On June 17, 1996 the Company made such a
deposit. In the event of expiration or termination of the credit facility
prior to May 31, 1997, the loan shall become due and payable upon demand by the
lender. The deposit may then be liquidated by the lender and applied toward the
repayment of the loan. The Company is permitted to withdraw the deposit when
the credit facility is renewed, extended or replaced with a similar facility
with a maturity longer than 30 days.
The Company has sufficient cash and cash equivalents and plans to generate
sufficient cash flow from operations to meet its seasonal working capital
needs, pay approximately $13,900,000 of fixed interest charges and to fund
capital expenditures of approximately $3,950,000 during the remainder of 1996.
At this time management anticipates relocating one store during the remainder
of the year.
12
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting (the "Annual Meeting") of Shareholders of the
Company was held May 16, 1996. Messrs. Harris J. Ashton, Christopher
A. Forster and S. Joseph Fortunato were elected directors of the
Company for three year terms with votes cast as follows: Mr. Ashton
- 18,714,016 shares voted in favor and 1,489,456 shares withheld; Mr.
Forster - 18,818,885 shares voted in favor and 1,489,456 shares
withheld; Mr. Fortunato - 18,811,664 shares voted in favor and
1,489,456 shares withheld. The appointment of Price Waterhouse, LLP as
the Company's independent accountants for the 1996 fiscal year was
ratified as follows: 19,825,578 shares in favor; 249,190 shares
against; 146,110 shares abstained. The proposal to adopt the Company's
1996 Stock Incentive Plan was approved as follows: 10,762,831 shares
in favor; 4,904,645 shares against; 259,539 shares abstained.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Additional Earnings Per Share Information.
(15) Letter regarding unaudited interim financial information.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter and through the date of this Report, the
Registrant filed no reports on Form 8-K.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL HOST CORPORATION
By: /s/ J. Theodore Everingham
------------------------------
J. Theodore Everingham
Vice President, General Counsel
and Secretary
By: /s/ James R. Simpson
------------------------------
James R. Simpson
Vice President and Controller
Dated: July 3, 1996
14
EXHIBIT INDEX
Exhibit Number Description of Exhibit
(11) Additional Earnings Per Share Information.
(15) Letter regarding unaudited interim financial information.
(27) Financial Data Schedule.