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 August 11, 1996
OR
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 September 25, 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)
Twelve Weeks Ended Twenty-Eight Weeks Ended
---------------------- ------------------------
AUGUST 11, August 13, AUGUST 11, August 13,
1996 1995 1996 1995
---------- ---------- ---------- -----------
REVENUES:
Sales $ 125,509 $ 126,741 $ 298,217 $ 328,739
Other income 501 1,505 504 2,109
--------- --------- --------- ---------
126,010 128,246 298,721 330,848
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales, including
buying and occupancy 91,303 94,981 211,072 232,651
Selling, general and
administrative 29,288 31,315 72,763 77,150
Interest and debt expense 4,712 5,505 11,175 12,751
--------- --------- --------- ---------
125,303 131,801 295,010 322,552
--------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES 707 (3,555) 3,711 8,296
INCOME TAX (BENEFIT) PROVISION 50 (640) 260 177
--------- --------- --------- ---------
NET INCOME (LOSS) $ 657 $ (2,915) $ 3,451 $ 8,119
========= ========= ========= =========
NET EARNINGS (LOSS) PER SHARE $ .03 $ (.13) $ .15 $ .35
========= ========= ========= =========
AVERAGE SHARES OUTSTANDING 23,249 23,254 23,249 23,252
========= ========= ========= =========
See accompanying notes.
4
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
AUGUST 11, August 13, January 28,
1996 1995 1996
---------- ---------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,837 $ 70,999 $ 29,901
Accounts and notes receivable 4,091 3,499 3,823
Merchandise inventory 101,561 104,892 88,162
Prepaid expenses and other
current assets 9,759 9,783 9,417
--------- -------- --------
Total current assets 143,248 189,173 131,303
--------- -------- --------
PROPERTY, PLANT AND EQUIPMENT,
LESS ACCUMULATED DEPRECIATION
OF $165,232, $152,461 AND $154,830 227,976 245,071 237,803
INTANGIBLES, LESS ACCUMULATED
AMORTIZATION OF $10,266,
$9,321 AND $9,783 15,653 16,598 16,136
OTHER ASSETS AND DEFERRED CHARGES 10,655 8,668 10,543
--------- --------- ---------
$ 397,532 $ 459,510 $ 395,785
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 45,715 $ 59,229 $ 47,776
Accrued expenses 30,165 30,128 33,012
Provision for store closings and
other costs 1,879 4,382 3,347
Current portion of long-term debt 2,156 73,425 1,974
--------- --------- ---------
Total current liabilities 79,915 167,164 86,109
--------- --------- ---------
LONG-TERM DEBT:
Senior debt 128,796 91,515 124,898
Subordinated debt 65,000 65,000 65,000
--------- --------- ---------
Total long-term debt 193,796 156,515 189,898
--------- --------- ---------
OTHER LIABILITIES AND DEFERRED CREDITS 10,142 10,077 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 81,187 81,186
Retained earnings 83,357 105,890 79,924
--------- --------- ---------
196,295 218,829 192,862
Cost of 8,503,105, 9,606,651
and 8,505,096 shares of
common stock in treasury (80,600) (91,059) (80,618)
Notes receivable from exercise of
stock options (2,016) (2,016) (2,016)
--------- --------- ---------
Total shareholders' equity 113,679 125,754 110,228
--------- --------- ---------
$ 397,532 $ 459,510 $ 395,785
========= ========= =========
See accompanying notes.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Twenty-Eight Weeks Ended
--------------------------
AUGUST 11, August 13,
1996 1995
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,451 $ 8,119
Noncash adjustments:
Depreciation and amortization 11,903 12,227
Other 170 (38)
-------- --------
15,524 20,308
Changes in current assets and current liabilities:
Decrease in accounts and notes receivable 59 2,821
Increase in inventory (13,399) (17,654)
Increase in prepaid expenses (342) (1,194)
Increase (decrease) in accounts payable (2,061) 2,503
Decrease in accrued expenses (2,654) (10,327)
Decrease in provision for store closings and
other costs (1,413) (1,997)
-------- --------
Net cash used for continuing operations (4,286) (5,540)
Net cash used for discontinued operations (194) (155)
-------- --------
(4,480) (5,695)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,799) (2,795)
Other 576 192
-------- --------
Net cash used for investing activities (1,223) (2,603)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 5,137
Debt issue costs (441)
Payment of long-term debt and capital lease
obligations (1,057) (4,065)
-------- --------
Net cash provided by (used for)
financing activities 3,639 (4,065)
-------- --------
Decrease in cash and cash equivalents (2,064) (12,363)
Cash and cash equivalents at beginning of year 29,901 83,362
-------- --------
Cash and cash equivalents at end of quarter $ 27,837 $ 70,999
======== ========
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. Income taxes for the
twelve and twenty-eight week periods of 1995 included the elimination of income
tax reserves of $396,000, which were no longer required.
NOTE 3
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1996 presentation.
Interest payments amounted to $1,259,000 and $10,064,000 for the twelve and
twenty-eight weeks ended August 11, 1996, and $1,850,000 and $12,301,000 for
the twelve and twenty-eight weeks ended August 13, 1995. Tax payments amounted
to $35,000 and $40,000 for the twelve and twenty-eight weeks ended August 11,
1996, and $232,000 and $422,000 for the twelve and twenty-eight weeks ended
August 13, 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 August 11, 1996 and August 13, 1995, and
the related consolidated statements of income and of cash flows for the twelve
and twenty-eight week periods ended August 11, 1996 and August 13, 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
August 30, 1996
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second quarter of 1996 compared with second quarter 1995
Results of operations
Sales
Sales for the Company's principal operating subsidiary, Frank's Nursery &
Crafts, Inc., decreased 1% to $125,509,000 for the twelve weeks ended August 11,
1996 compared with $126,741,000 in the 1995 second quarter which ended on August
13, 1995. Same-store sales (stores open for a full year in both years)
decreased .9% for the 1996 second quarter.
Earnings
Net income for the second quarter of 1996 was $657,000 compared to a
net loss of $2,915,000 in the 1995 second quarter.
Cost of sales, including buying and occupancy, decreased $3,678,000 to
$91,303,000 in the second quarter of 1996 compared to $94,981,000 in 1995. As a
percentage of sales, cost of sales decreased 2.2 percentage points due primarily
to an increase in merchandise margins of 2.7 percentage points offset, in part,
by increased buying and occupancy costs. The improved merchandise margins
reflected a less promotional strategy and tighter inventory management.
Selling, general and administrative expenses decreased $2,027,000 to
$29,288,000 in the second quarter of 1996 compared to $31,315,000 in 1995 as the
Company continues its focus on reducing expenses. As a percentage of sales,
selling, general and administrative expenses decreased 1.4 percentage points to
23.3% of sales compared to 24.7% in the 1995 quarter.
Other income, primarily interest income, decreased $1,004,000 to $501,000
in the second quarter of 1996 compared to $1,505,000 in 1995. The decrease was
due to lower levels of cash equivalents compared to 1995 and a 1995 gain from
the sale of real estate.
Interest and debt expense decreased $793,000 to $4,712,000 in the second
quarter of 1996 compared to $5,505,000 in 1995 due to the Company's repayment of
the Adjustable Rate First Mortgage Notes at the end of fiscal 1995, the balance
of which was $72,438,000 at the end of the 1995 second quarter. The Company
replaced this financing, in part, with new mortgage financings which totaled
$39,455,000 at the end of the 1996 second quarter.
Income taxes for the 1995 second quarter included the elimination of income tax
reserves of $396,000, which were no longer required.
9
First half of 1996 compared with the first half of 1995
Results of Operations
Sales
Sales were $298,217,000 for the twenty-eight weeks ended August 11, 1996
compared with $328,739,000 in the 1995 first half which ended August 13, 1995.
Same-store sales decreased 9.1% for the first half of 1996 as a result of
unseasonably cold and wet weather experienced in most of our 16-state operating
area throughout the 1996 first quarter.
Earnings
Net income for the 1996 first half was $3,451,000 compared to $8,119,000 in
the 1995 first half.
Cost of sales, including buying and occupancy, decreased $21,579,000 in the
1996 first half to $211,072,000 compared to $232,651,000 in 1995. As a
percentage of sales, cost of sales remained the same for 1996 and 1995 at 70.8%.
Merchandise margins improved by 1.1 percentage points as a result of a less
promotional strategy and tighter inventory management. Buying and occupancy
costs declined by $208,000 but as a percentage of sales increased by 1.1
percentage points offsetting the improvement in merchandise margins.
Selling, general and administrative expenses decreased $4,387,000 to
$72,763,000 in the 1996 first half compared to $77,150,000 in 1995 as the
Company continued its focus on reducing expenses. As a percentage of sales,
selling, general and administrative expenses increased .9 of a percentage point
to 24.4% of sales in the 1996 first half compared to 23.5% in 1995.
Other income decreased $1,605,000 to $504,000 in the first half of 1996
compared to $2,109,000 in the 1995 first half. The decrease is due to lower
levels of cash equivalents compared to 1995, the write-off of leasehold
improvements incurred in the closing of one leased store and a loss on the sale
of an unprofitable store in the 1996 first quarter as well as a 1995 second
quarter gain from the sale of real estate.
Interest and debt expense decreased $1,576,000 to $11,175,000 in the 1996
first half compared to $12,751,000 in the 1995 first half due to the Company's
repayment of the Adjustable Rate First Mortgage Notes at the end of fiscal 1995,
the balance of which was $72,438,000 at the end of the 1995 first half. The
Company replaced this financing, in part, with new mortgage financings which
totaled $39,455,000 at the end of the 1996 first half.
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
10
previously unrecognized tax benefits. Income taxes for the first half of 1995
included the elimination of income tax reserves of $396,000, which were no
longer required.
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 used for continuing operations was $4,286,000 in the 1996 first
half compared to $5,540,000 in the 1995 first half. Inventory increased
$13,399,000 for the 1996 first half compared to an increase of $17,654,000 in
1995 while accounts payable decreased $2,061,000 in 1996 compared to an increase
in 1995 of $2,503,000. The accounts payable change for 1996 and 1995, described
above, included amounts payable to brokers of $9,999,000 at August 11, 1996
compared to $19,997,000 at January 28, 1996, and $14,998,000 at August 13, 1995
compared to $14,998,000 at the end of fiscal 1994. The decrease in accrued
expenses for 1996 of $2,654,000 compared to $10,327,000 for 1995 was due to
timing of payments. At August 11, 1996 the remaining store closing reserve of
$2,879,000 primarily represented lease termination costs for the remaining five
store locations and estimated losses associated with the sale and or sublease of
real estate. The Company utilized net cash of $1,413,000 in the 1996 first half
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 half of 1996 and
1995 related to payments for operations disposed of in prior years.
Net cash used for investing activities was $1,223,000 in 1996 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 first quarter. Net cash used in 1995 was $2,603,000.
Net cash provided by financing activities was $3,639,000 in 1996 compared
to net cash used for financing activities of $4,065,000 in 1995. The Company
entered into additional new mortgage financings in the 1996 first quarter of
$5,137,000. The 1995 first half included the payments of $3,562,000 for the
Adjustable First Rate Mortgage Notes which were repaid as of the
11
end of fiscal 1995.
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 August 11, 1996 was $63,333,000 or $18,139,000 higher
than the $45,194,000 working capital level at January 28, 1996. The quarter-end
included $27,837,000 of cash and cash equivalents, of which $9,999,000
represented amounts payable to brokers.
The Company has a $25,000,000 unsecured credit agreement ("the agreement")
with a bank which is scheduled to expire on December 31, 1996. The Company
plans to either extend the maturity of the existing credit facility or negotiate
a new credit facility prior to December 31, 1996. If the Company is unable to
secure a replacement facility, the Company believes that it will be able to meet
its working capital requirements through cash flow from operations and, if
necessary, alternative financing arrangements such as: a) real estate
financings, b) expense reductions, or c) new debt or equity offerings. During
the 1996 first half, the Company borrowed $25,000,000 under the agreement and
fully repaid the loan on May 13, 1996. The agreement requires the Company,
among other things, to maintain minimum levels of earnings, tangible net worth,
and certain minimum financial ratios. At August 11, 1996 the Company was in
compliance with the aforementioned loan covenants.
The third quarter is traditionally the Company's slowest selling season
and the period in which it has its highest working capital requirements as it
builds its inventories for the all-important fourth quarter, which encompasses
the Christmas selling season. Given the highly seasonal nature of the
Company's business and the timing of the start of the Christmas selling season
(mid-to-late November), the Company cannot assure that compliance with its bank
loan covenants at the end of the 1996 third quarter, which ends November 3,
1996, will be met. However, the Company anticipates that it will have repaid
all outstanding bank loans by the time it is able to determine if it is in
compliance with the covenants at November 3, 1996.
As of September 17, 1996 the Company has borrowed $10,000,000 under the
agreement.
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 $6,936,000 at
August 11, 1996.
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. 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 expects to have sufficient cash and cash equivalents when
coupled with the availability of its credit line and to generate sufficient cash
flow from operations based upon current projections to meet its seasonal working
capital needs, pay approximately $9,400,000 of fixed interest charges and to
fund capital expenditures of approximately $2,000,000 for the remainder of
fiscal 1996. At this time management does not anticipate relocating or opening
any new stores during the remainder of the year.
12
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Additional Earnings Per Share Information.
(15) Letter regarding unaudited interim financial information.
(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: September 25, 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.