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 10, 1997
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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
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GENERAL HOST CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
NEW YORK STATE 13-0762080
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
One Station Place, P.O. Box 10045, Stamford, Connecticut 06904
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (203) 357-9900
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________________________________________________________________________________
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by 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
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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,
24,413,686 shares outstanding as of September 24, 1997.
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.
The consolidated financial statements and notes are presented in
accordance with the rules and regulations of the Securities and
Exchange Commission and do not contain certain information included
in the Company's Annual Report. Therefore, the interim statements
should be read in conjunction with the Company's Annual Report on Form
10-K For the year ended January 26, 1997.
3
Consolidated Statements of Income (Unaudited)
(In thousands, except per share amounts)
Twelve Weeks Ended Twenty-Eight Weeks Ended
----------------------- ------------------------
August 10, August 11, August 10, August 11,
1997 1996 1997 1996
---------- ----------- ----------- -----------
Revenues:
Sales $ 124,454 $ 125,509 $ 302,697 $ 298,217
Other income (expense) (195) 501 (160) 504
--------- --------- --------- ---------
124,259 126,010 302,537 298,721
--------- --------- --------- ---------
Costs and expenses:
Cost of sales, including
buying and occupancy 89,904 91,303 211,850 211,072
Selling, general and
administrative 31,809 29,288 75,915 72,763
Interest and debt expense 4,823 4,712 11,447 11,175
--------- --------- --------- ---------
126,536 125,303 299,212 295,010
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Income (loss) before
income taxes (2,277) 707 3,325 3,711
Income tax provision 50 260
--------- --------- --------- ---------
Net income (loss) $ (2,277) $ 657 $ 3,325 $ 3,451
========= ========= ========= =========
Net earnings (loss) per share $ (.09) $ .03 $ .14 $ .14
--------- --------- --------- ---------
Average shares outstanding 24,414 24,414 24,414 24,414
========= ========= ========= =========
See accompanying notes.
4
Consolidated Balance Sheets
(Dollars in thousands)
August 10, August 11, January 26,
1997 1996 1997
---------- ---------- -----------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 50,359 $ 27,837 $ 43,320
Accounts and notes receivable 4,387 4,091 4,420
Merchandise inventory 94,448 101,561 81,575
Prepaid expenses and other
current assets 10,787 9,759 10,671
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Total current assets 159,981 143,248 139,986
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Property, plant and equipment,
less accumulated depreciation
of $177,330, $165,232 AND $173,228 207,605 227,976 220,626
Intangibles, less accumulated
amortization of $11,098,
$10,266 AND $10,653 14,821 15,653 15,266
Other assets and deferred charges 11,781 10,655 10,544
--------- --------- ---------
$ 394,188 $ 397,532 $ 386,422
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 52,537 $ 45,715 $ 43,868
Accrued expenses 36,288 32,044 40,595
Current portion of long-term debt 2,329 2,156 2,254
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Total current liabilities 91,154 79,915 86,717
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Long-term debt:
Senior debt 126,463 128,796 127,761
Subordinated debt 65,000 65,000 65,000
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Total long-term debt 191,463 193,796 192,761
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Other liabilities and deferred credits 8,131 10,142 7,449
Commitments and contingencies
Shareholders' equity:
Common stock $1.00 par value,
100,000,000 shares authorized,
31,752,450 shares issued 31,752 31,752 31,752
Capital in excess of par value 81,186 81,186 81,186
Retained earnings 61,452 83,357 58,127
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174,390 196,295 171,065
Cost of 7,338,764, 8,503,105
and 7,338,605 shares of
common stock in treasury (69,561) (80,600) (69,561)
Notes receivable from exercise of
stock options (1,389) (2,016) (2,009)
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Total shareholders' equity 103,440 113,679 99,495
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$ 394,188 $ 397,532 $ 386,422
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See accompanying notes.
5
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
Twenty-Eight Weeks Ended
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August 10, August 11,
1997 1996
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Cash flows from operating activities:
Net income $ 3,325 $ 3,451
Noncash adjustments:
Depreciation and amortization 11,196 11,903
Other 727 170
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15,248 15,524
Changes in current assets and current liabilities:
(Increase) decrease in accounts and
notes receivable (390) 59
Increase in inventory (12,873) (13,399)
Increase in prepaid expenses (116) (342)
Increase (decrease) in accounts payable 8,669 (2,061)
Decrease in accrued expenses (4,529) (4,067)
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Net cash provided by (used for)
continuing operations 6,009 (4,286)
Net cash used for discontinued operations (48) (194)
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5,961 (4,480)
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Cash flows from investing activities:
Additions to property, plant and equipment (3,863) (1,799)
Other 6,164 576
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Net cash provided by (used for)
investing activities 2,301 (1,223)
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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 (1,223) (1,057)
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Net cash provided by (used for)
financing activities (1,223) 3,639
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Increase (decrease) in cash and cash equivalents 7,039 (2,064)
Cash and cash equivalents at beginning of year 43,320 29,901
--------- ---------
Cash and cash equivalents at end of quarter $ 50,359 $ 27,837
========= =========
See accompanying notes.
6
Notes to Consolidated Financial Statements
(Unaudited)
Note 1
On February 26, 1997 the Company declared a 5% stock dividend for shareholders
of record on March 14, 1997. The stock dividend representing 1,164,341 shares
was paid on April 4, 1997. Share and per share data for 1996 have been
restated to reflect the 5% stock dividend.
Note 2
No income tax provision for financial reporting purposes has been provided for
1997 due to previously unrecognized tax benefits. The effective income tax
rate used in 1996 reflects 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.
Note 4
Certain reclassification have been made to the prior years' financial
statements to conform to the 1997 presentation.
Interest payments amounted to $1,197,000 and $10,061,000 for the twelve and
twenty-eight weeks ended August 10, 1997, and $1,259,000 and $10,064,000 for
the twelve and twenty-eight weeks ended August 11, 1996. Tax payments amounted
to $30,000 and $46,000 for the twelve and twenty-eight weeks ended August 10,
1997, and $35,000 and $40,000 for the twelve and twenty-eight weeks ended
August 11, 1996.
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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 10, 1997 and August 11, 1996, and
the related consolidated statements of income and of cash flows for the twelve
and twenty-eight week periods ended August 10, 1997 and August 11, 1996. 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 26, 1997, 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 26, 1997 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 26,
1997, 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
September 4, 1997
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second quarter of 1997 compared with second quarter 1996
Results of operations
Sales
Sales for the Company's principal operating subsidiary, Frank's Nursery &
Crafts, Inc.("Frank's"), decreased .8% to $124,454,000 for the twelve weeks
ended August 10, 1997 compared with $125,509,000 in the 1996 second quarter
which ended on August 11, 1996. Same-store sales (stores open for a full year
in both years) decreased .2% for the 1997 second quarter.
Earnings
The net loss for the second quarter of 1997 was $2,277,000 compared to net
income of $657,000 in the 1996 second quarter.
Cost of sales, including buying and occupancy, decreased $1,399,000 to
$89,904,000 in 1997 compared to $91,303,000 in 1996. As a percentage of sales,
cost of sales was 72.2% in 1997 compared to 72.7% in 1996. The improvement of
.5 of a percentage point resulted from lower buying and occupancy costs, as
merchandise margins remained constant with the prior year.
Selling, general and administrative expenses increased $2,521,000 to
$31,809,000 in 1997 compared to $29,288,000 in 1996. Included in the 1997
second quarter is a charge of $1,248,868 for a reduction in the amount of loans
due to the Company by the Chairman of the Board of Directors. The loans,
issued pursuant to various Stock Option Plans, were reduced from $2,480,209 to
$1,231,341. In addition higher advertising costs and store labor costs, as
well as costs associated with the development of a new store concept
contributed to the increase in 1997. As a percentage of sales, selling,
general and administrative expenses increased 2.3 percentage points to 25.6% of
sales in 1997 compared to 23.3% in 1996.
Other income/expense in the 1997 second quarter included a charge of $926,000
associated with the sale of the Frank's headquarters. Interest on marketable
securities in the 1997 second quarter increased $258,000 due to higher levels
of cash during the quarter compared to 1996.
Interest and debt expense increased $111,000 to $4,823,000 in 1997 compared
to $4,712,000 in 1996 primarily due to the costs associated with the Company's
secured credit agreement.
Due to previously unrecognized tax benefits no income tax provision, for
financial reporting purposes, has been provided for in the 1997 second quarter.
In the 1996 second quarter the income tax provision was calculated using an
annual effective rate method. The difference between the statutory rate for
federal income tax purposes and the taxes provided is due to utilization of
previously unrecognized tax benefits.
9
First half of 1997 compared with the first half of 1996
Results of Operations
Sales
Sales were $302,697,000 for the twenty-eight weeks ended August 10, 1997
compared with $298,217,000 in the 1996 first half which ended August 11, 1996.
Same-store sales increased 2.1% for the first half of 1997.
Earnings
Net income for the 1997 first half was $3,325,000 compared to $3,451,000 in
the 1996 first half.
Cost of sales, including buying and occupancy, increased $778,000 in 1997 to
$211,850,000 compared to $211,072,000 in 1996. As a percentage of sales, cost
of sales decreased .8 of a percentage point to 70.0% of sales compared to 70.8%
for 1996. Merchandise margins improved by .3 percentage points and buying and
occupancy costs declined by $1,058,000 or .5 percent of sales.
Selling, general and administrative expenses increased $3,152,000 to
$75,915,000 in 1997 compared to $72,763,000 in 1996. Included in the 1997
first half is a charge of $1,248,868 related to a reduction in the amount of
loans due to the Company by the Chairman of the Board of Directors. Increases
in advertising costs, particularly electronic media as the company looks to
broaden its customer reach, and costs associated with development of a new
store concept contributed to the increase in expenses in 1997 compared to 1996.
As a percentage of sales, selling, general and administrative expenses
increased .7 of a percentage point to 25.1% of sales in 1997 compared to 24.4%
in 1996.
Other income/expense for 1997 included a loss on the sale of the Frank's
headquarters of $926,000 and a charge of $250,000 associated with the closing
of a leased store. Interest income increased $278,000 in the 1997 first half
due to higher levels of cash during 1997 compared to 1996. The 1996 first half
included a charge of $263,000 for the write-off of leasehold improvements
incurred in the closing of a leased store and a loss on the sale of an
unprofitable store that was closed in the 1996 first quarter.
Interest and debt expense increased $272,000 to $11,447,000 in 1997 compared
to $11,175,000 in 1996, primarily due to the costs associated with the
Company's secured credit agreement.
Due to previously unrecognized tax benefits no income tax provision, for
financial reporting purposes, has been provided for in the 1997 first half. In
the 1996 first half the income tax provision was calculated using an annual
effective rate method. The difference between the statutory rate for federal
income tax purposes and the taxes provided is due to utilization of previously
unrecognized tax benefits.
10
With regard to current accounting pronouncements, the Company has determined
that Statement of Accounting Standards No. 128, "Earnings per Share", relating
to the presentation of earnings per share (EPS), will not be material to the
financial statements. If the statement was applied for fiscal 1996 there would
be no effect on the financial statements as the Company's primary EPS equalled
basic EPS. Differences could exist in the future based on the dilutive effect
of the Company's outstanding options.
Liquidity and Capital Resources
Net cash provided by operations was $6,009,000 in the 1997 first half
compared to net cash used of $4,286,000 in the 1996 first half. Inventory
increased $12,873,000 for 1997 compared to an increase of $13,399,000 in 1996
while accounts payable increased $8,669,000 in 1997 compared to a decrease in
1996 of $2,061,000. The accounts payable change for 1997 and 1996, described
above, included amounts payable to brokers of $15,998,000 at August 10, 1997
compared to $15,998,000 at January 26, 1997, and $9,999,000 at August 11, 1996
compared to $19,997,000 at January 28, 1996. At August 10, 1997 the remaining
store closing reserve of $738,000 primarily represented lease termination costs
for the remaining four store locations and estimated losses associated with the
sale and or sublease of real estate. During 1997 the Company utilized net cash
of $1,394,000 in connection with the store closing reserve.
Net cash used for discontinued operations in 1997 and 1996 related to
payments for operations disposed of in prior years.
Net cash provided by investing activities was $2,301,000, which included
$3,863,000 for additions to property, plant and equipment and net proceeds from
the sale of property, plant and equipment of $6,164,000, which included
$2,717,000 received from a sale/leaseback of an owned store and $2,778,000 from
the sale of the Frank's headquarters. 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 for financing activities in 1997 represented payments of
long-term and capital leases. In 1996 net cash provided by financing
activities was $3,639,000 which included $5,137,000 of new mortgage financing
offset in part by debt issue costs of $441,000 and payments of long-term debt
and capital leases of $1,057,000.
On February 26, 1997 the Company declared a 5% stock dividend for
shareholders of record on March 14, 1997. The stock dividend representing
1,164,341 shares was paid on April 4, 1997. share and per share data for 1996
have been restated to reflect the 5% stock dividend.
Working capital at August 10, 1997 was $68,827,000 or $5,494,000 higher than
the $63,333,000 working capital level at August 11, 1996. The quarter-end
included $50,359,000 of cash and cash equivalents, of which $15,998,000
represented amounts payable to brokers.
11
The Company has a $20 million revolving credit facility which, among
other things, requires the Company to maintain minimum levels of earnings,
tangible net worth and certain minimum financial ratios. At August 10, 1997
the Company was in compliance with the aforementioned loan covenants. During
the first quarter of 1997, the Company borrowed $21 million under the agreement
and fully repaid all amounts outstanding as of April 23, 1997. There were no
amounts outstanding as of August 10, 1997. An amendment to the revolving
credit agreement, effective July 25, 1997, (i) extended the maturity of the
facility to December 31, 1997 and, (ii) permanently reduced the amounts
available under the facility by $5 million on the effective date of the
amendment and by $5 million, $5 million, $6 million and $4 million on December
15, 22, 29, and 31, respectively. The revolving credit facility is secured by
52 properties with an appraised value in excess of $69 million, some part or
all of which the Company plans to use in long-term financing transactions,
including sale and leaseback financing and mortgages, to replace the maturing
revolving credit facility. The Company is also reviewing unsecured debt and
equity offerings.
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 $15,570,000 at
August 10, 1997.
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 $9,700,000 of fixed interest charges and to
fund capital expenditures of approximately $9,400,000 for the remainder of
fiscal 1997. At this time management does not anticipate relocating or opening
any new stores during the remainder of the year.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4a) First Amendment to Mortgage-Backed Credit Agreement dated
as of June 13, 1997, between the Company and Frank's
Nursery & Crafts, Inc. and Comerica Bank.
(4b) Second Amendment to Mortgage-Backed Credit Agreement dated
as of July 25, 1997, between the Company and Frank's
Nursery & Crafts, Inc. and Comerica Bank.
(10) First Amendment dated as of June 30, 1997, to Employment
Agreement dated as of January 1, 1992, between the Company
and Harris J. Ashton.
(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,
Registrant filed no reports on Form 8-K.
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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/ Theodore Everingham
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J. Theodore Everingham
Vice President, General
Counsel and Secretary
By: /s/ James R. Simpson
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James R. Simpson
Vice President and Controller
Dated: September 24, 1997
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EXHIBIT INDEX
Exhibit Number Description of Exhibit
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(4a) First Amendment to Mortgage-Backed Credit Agreement
dated as of June 13, 1997, between the Company and
Frank's Nursery & Crafts, Inc. and Comerica Bank.
(4b) Second Amendment to Mortgage-Backed Credit Agreement
dated as of July 25, 1997, between the Company and
Frank's Nursery & Crafts, Inc. and Comerica Bank.
(10) First Amendment dated as of June 30, 1997, to
Employment Agreement dated as of January 1, 1992,
between the Company and Harris J. Ashton.
(11) Additional Earnings Per Share Information.
(15) Letter regarding unaudited interim financial
information.
(27) Financial Data Schedule.