1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 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
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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
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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 December 16, 1997.
2
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)
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(In thousands, except per share amounts)
Twelve Weeks Ended Forty Weeks Ended
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NOVEMBER 2, November 3, NOVEMBER 2, November 3,
1997 1996 1997 1996
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REVENUES:
Sales $ 82,481 $ 83,305 $ 385,178 $ 381,522
Other income 2,743 75 2,583 579
--------- --------- --------- ---------
85,224 83,380 387,761 382,101
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COSTS AND EXPENSES:
Cost of sales, including
buying and occupancy 69,132 66,050 280,982 277,122
Selling, general and
administrative 29,059 27,595 104,974 100,358
Interest and debt expense 4,833 4,868 16,280 16,043
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103,024 98,513 402,236 393,523
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LOSS FROM OPERATIONS BEFORE
INCOME TAX BENEFIT (17,800) (15,133) (14,475) (11,422)
INCOME TAX BENEFIT (260)
--------- --------- --------- ---------
NET LOSS $ (17,800) $ (14,873) $ (14,475) $ (11,422)
========= ========= ========= =========
NET LOSS PER SHARE $ (.73) $ (.61) $ (.59) $ (.47)
========= ========= ========= =========
AVERAGE SHARES OUTSTANDING 24,414 24,414 24,414 24,414
========= ========= ========= =========
See accompanying notes.
4
CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands)
NOVEMBER 2, November 3, January 26,
1997 1996 1997
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ASSETS (Unaudited) (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 12,195 $ 12,082 $ 43,320
Accounts and notes receivable 4,916 3,425 4,420
Merchandise inventory 122,588 129,436 81,575
Prepaid expenses and other
current assets 11,730 11,243 10,671
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Total current assets 151,429 156,186 139,986
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PROPERTY, PLANT AND EQUIPMENT,
LESS ACCUMULATED DEPRECIATION
OF $180,957, $169,953 AND $173,228 204,031 224,958 220,626
INTANGIBLES, LESS ACCUMULATED
AMORTIZATION OF $11,264,
$10,462 AND $10,653 14,592 15,457 15,266
OTHER ASSETS AND DEFERRED CHARGES 11,795 10,262 10,544
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$ 381,847 $ 406,863 $ 386,422
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 44,845 $ 53,063 $ 43,868
Accrued expenses 32,017 33,936 40,595
Notes payable to banks 16,000 15,000
Current portion of long-term debt 2,394 2,202 2,254
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Total current liabilities 95,256 104,201 86,717
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LONG-TERM DEBT:
Senior debt 127,482 128,262 127,761
Subordinated debt 65,000 65,000 65,000
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Total long-term debt 192,482 193,262 192,761
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OTHER LIABILITIES AND DEFERRED CREDITS 8,421 10,587 7,449
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock $1.00 par value,
100,000,000 shares authorized,
31,752,450 shares issued 31,752 31,752 31,752
Capital in excess of par value 81,186 81,186 81,186
Retained earnings 43,652 68,484 58,127
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156,590 181,422 171,065
Cost of 7,338,764, 8,503,105
and 7,338,605 shares of
common stock in treasury (69,561) (80,600) (69,561)
Notes receivable from exercise of
stock options (1,341) (2,009) (2,009)
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Total shareholders' equity 85,688 98,813 99,495
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$ 381,847 $ 406,863 $ 386,422
========= ========= =========
See accompanying notes
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Forty Weeks Ended
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NOVEMBER 2, November 3,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from operations $(14,475) $(11,422)
Noncash adjustments:
Depreciation and amortization 16,484 17,043
Gains from sales of property, plant and
equipment (2,981)
Other 1,086 677
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114 6,298
Changes in current assets and current liabilities:
Decrease in accounts and notes receivable 146 845
Increase in inventory (41,013) (41,274)
Increase in prepaid expenses (1,184) (1,826)
Increase in accounts payable 977 5,287
Decrease in accrued expenses (8,367) (2,137)
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Net cash used for continuing operations (49,327) (32,807)
Net cash used for discontinued operations (133) (235)
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(49,460) (33,042)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (10,041) (3,583)
Other 12,587 653
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Net cash provided by (used for)
investing activities 2,546 (2,930)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 1,625 5,137
Debt issue costs (72) (439)
Increase in notes payable to banks 16,000 15,000
Payment of long-term debt and capital lease
obligations (1,764) (1,545)
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Net cash provided by financing activities 15,789 18,153
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Decrease in cash and cash equivalents (31,125) (17,819)
Cash and cash equivalents at beginning of year 43,320 29,901
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Cash and cash equivalents at end of quarter $ 12,195 $ 12,082
======== ========
See accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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.
For the 1996 forty week period the tax provision was unfavorably impacted by an
increase in the valuation allowance as a result of the current year loss not
being benefitted.
NOTE 3
Primary earnings per share is based upon the weighted average number of shares
of common stock outstanding.
NOTE 4
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1997 presentation.
Interest payments amounted to $8,301,000 and $18,362,000 for the twelve and
forty weeks ended November 2, 1997, and $8,442,000 and $18,506,000 for the
twelve and forty weeks ended November 3, 1996. Tax payments amounted to $46,000
for the forty weeks ended November 2, 1997, and $15,000 and $55,000 for the
twelve and forty weeks ended November 3, 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 November 2, 1997 and November 3, 1996,
and the related consolidated statements of income and of cash flows for the
twelve and forty week periods ended November 2, 1997 and November 3, 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
December 5, 1997
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third quarter of 1997 compared with third quarter 1996
Results of Operations
Sales
Sales for the Company's principal operating subsidiary, Frank's Nursery
& Crafts, Inc. ("Frank's"), decreased 1.0% to $82,481,000 for the twelve weeks
ended November 2, 1997 compared with $83,305,000 in the 1996 third quarter which
ended on November 3, 1996. Same-store sales (stores open for a full year in both
years) decreased .5% for the 1997 third quarter.
Earnings
The loss from operations for the third quarter of 1997 was $17,800,000
compared to $14,873,000 in the 1996 third quarter.
Cost of sales, including buying and occupancy, increased $3,082,000 to
$69,132,000 in the third quarter of 1997 compared to $66,050,000 in 1996. As a
percentage of sales, cost of sales was 83.8% in 1997 compared to 79.3% in 1996.
The increase of 4.5 percentage points was directly related to a 3.9 percentage
point decline in merchandise margins. The decline in merchandise margins results
from a more promotional strategy in the fall lawn and garden business and
markdowns taken to clear some seasonal and aged merchandise. Buying and
occupancy costs for the 1997 third quarter decreased by $347,000, but as a
percentage of sales increased by .6 of a percentage point compared to the 1996
third quarter.
Selling, general and administrative expenses increased 5.3% or
$1,464,000 to $29,059,000 in the third quarter of 1997 compared to $27,595,000
in 1996. The increase was primarily attributable to costs associated with the
development of a new store concept and increased store labor and supervisory
expenses. As a percentage of sales, selling, general and administrative expenses
were 35.2% in the 1997 third quarter compared to 33.1% in the 1996 quarter.
Other income increased $2,668,000 to $2,743,000 in the third quarter of
1997 compared to $75,000 in 1996. The increase was due primarily to a gain of
$2,834,000 associated with the termination of a leased store.
Interest and debt expense decreased $35,000 to $4,833,000 in the third
quarter of 1997 compared to $4,868,000.
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Due to previously unrecognized tax benefits no income tax provision,
for financial reporting purposes, has been provided for in the 1997 third
quarter. In the 1996 third quarter the income tax provision was calculated using
an annual effective rate method. The difference between the statutory rate for
federal purposes and taxes provided in 1996 is due to the utilization of
previously unrecognized tax benefits. The tax provision for the 1996 quarter was
negatively impacted by an increase in the valuation allowance as a result of the
current year to date loss not being benefitted.
First three quarters of 1997 compared with the first three quarters
of 1996
Results of Operations
Sales
Sales were $385,178,000 for the forty weeks ended November 2, 1997 (the
"1997 three quarters") compared with $381,522,000 for the forty weeks ended
November 3, 1996 (the "1996 three quarters"). Same-store sales for the 1997
three quarters increased 1.5% compared to the 1996 three quarters.
Earnings
The loss from continuing operations for the 1997 three quarters was
$14,475,000 compared to $11,422,000 in the 1996 three quarters.
Cost of sales, including buying and occupancy, increased $3,860,000 in
the 1997 three quarters to $280,982,000 compared to $277,122,000 in 1996. As a
percentage of sales, cost of sales increased .3 of a percentage point.
Merchandise margins, as a percentage of sales, declined by .7 of a percentage
point due primarily to the promotional and markdown strategy employed in the
1997 third quarter. Buying and occupancy costs for the 1997 three quarters
decreased $711,000, and as a percentage of sales decreased by .4 of a percentage
point compared to the 1996 three quarters.
Selling, general and administrative expenses increased $4,616,000 to
$104,974,000 in the 1997 three quarters compared to $100,358,000 in the 1996
three quarters. Included in the 1997 three quarters 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 costs associated with the development of a new store concept
contributed to the increase in the 1997 three quarters. As a percentage of
sales, selling, general and administrative expenses were 27.3% in the 1997 three
quarters compared to 26.3% in the 1996 three quarters.
10
Other income increased $2,004,000 to $2,583,000 in the 1997 three
quarters compared to $579,000 in the 1996 three quarters. The increase was due
primarily to a gain of $2,834,000 associated with the termination of a leased
store. The increase was offset in part by a loss of $941,000 associated with the
sale of the Frank's headquarters and $408,000 associated with the closing of
stores. The 1996 three quarters included a 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.
Interest and debt expense increased $237,000 to $16,280,000 in the 1997
three quarters compared to $16,043,000 in the 1996 three quarters due primarily
to the costs associated with the Company's secured credit agreement.
Due to the previously unrecognized tax benefits no income tax
provision, for financial reporting purposes, has been provided for in the 1997
three quarters. In the 1996 three quarters the income tax provision was
calculated using an annual effective rate method. The difference between the
statutory rate for federal purposes and the taxes provided 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. 128, "Earnings per Share",
relating to the presentation of earning 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.
Capital Resources and Liquidity
Net cash used for continuing operations was $49,327,000 in the 1997
three quarters compared to $32,807,000 in the 1996 three quarters. Inventory
increased $41,013,000 for the 1997 three quarters compared to an increase of
$41,274,000 in 1996 while accounts payable increased $977,000 in 1997 compared
to $5,287,000 in 1996. The accounts payable change for 1997 and 1996, described
above, included no amounts payable to brokers at November 2, 1997 and November
3, 1996 compared to $15,998,000 at the end of fiscal 1996 and $19,997,000 at the
end of fiscal 1995. The decrease in accrued expenses for 1997 of $8,367,000
compared to $2,137,000 for 1996 was due to timing of payments. At November 2,
1997 the remaining store closing reserve of $162,000 primarily represented lease
termination costs for the remaining three store locations and estimated losses
associated with the sale and/or sublease of real estate. During 1997 the Company
utilized net cash of $970,000 in connection with the store closing reserve.
Net cash used for discontinued operations in the 1997 and 1996 three
quarters related to payments for operations disposed of in prior years.
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Net cash provided by investing activities was $2,546,000 in the 1997
three quarters which included $10,041,000 for the addition of property, plant
and equipment. In addition, proceeds from the sales of property, plant and
equipment amounted to $11,950,000 and included $5,950,000 from the
sale/leaseback of three owned stores, $3,000,000 from the termination of a
leased location and $3,000,000 from the sale of the Frank's headquarters. Net
cash used in the 1996 three quarters was $2,930,000 which included $3,583,000
for the addition of property, plant and equipment.
Net cash provided by financing activities was $15,789,000 in the 1997
three quarters which included additional new mortgage financings of $1,625,000
and bank borrowings, under the Company's revolving credit line, of $16,000,000.
The 1996 three quarters provided net cash of $18,153,000 which included
additional new mortgage financings of $5,137,000 and bank borrowings of
$15,000,000.
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 November 2, 1997 was $56,173,000 or $4,188,000
higher than the $51,985,000 working capital level at November 3, 1996.
The Company has a $20 million revolving credit facility which expires
December 31, 1997. The facility requires that the Company maintain minimum
levels of earnings, tangible net worth and certain minimum financial ratios. At
November 2, 1997 the Company was not in compliance with the earnings covenant,
the tangible net worth covenant and the fixed charge coverage ratio. The Company
obtained waivers for the covenants at November 2, 1997. During the third quarter
the Company borrowed $16 million under the facility, of which the full amount
was outstanding as of November 2, 1997. On December 8, 1997 the Company fully
repaid all outstanding amounts under the facility and plans no further
borrowings. 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, $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.
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 $32,994,000 at
November 2, 1997.
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Subsequent Event
On November 24, 1997 the Company announced that it had entered into an
Agreement and Plan of Merger (the "Merger Agreement"), dated as of November 22,
1997, with Cyrus Acquisition Corp., a New York corporation ("Purchaser") formed
by The Cypress Group L.L.C., pursuant to which Purchaser has commenced a tender
offer (the "Offer") to purchase all of the outstanding shares of common stock,
$1.00 par value per share (the "Shares"), of the Company for $5.50 per Share in
cash. Following the Offer, Purchaser will be merged (the "Merger") with and into
the Company and each Share not purchased in the Offer (other than Shares held by
Purchaser, the Company or dissenting shareholders) will be converted into the
right to receive $5.50 per Share in cash, or such higher amount as paid in the
Offer. Each of the Offer and the Merger are subject to certain conditions which
are set forth in the Offer to Purchase with respect thereto dated November 25,
1997 and the Merger Agreement.
The Offer, will be open for 20 business days, is subject to extension
if any of the Offer conditions are not met and, in the sole discretion of
Purchaser, is subject to further extension for up to an aggregate of an
additional 20 business days. The Offer is currently scheduled to expire
on December 23, 1997. The closing of the Merger will occur as soon as
practicable following the consummation of the Offer.
Contemporaneously with the Offer, the Company has begun a
tender offer and consent solicitation for at least a majority in principal
amount of the Company's outstanding 11 1/2% Senior Notes due 2002 (the "Senior
Notes"). As of 5:00 p.m. on December 5, 1997, the Company had received the
requested consents of not less than a majority of the outstanding principal
amount of the Senior Notes to amend the Indenture under which the Senior Notes
were issued, pursuant to the terms set forth in such consent solicitation. The
tender offer for the Senior Notes is subject to certain conditions which are set
forth in the Offer to Purchase and the Consent Solicitation Statement with
respect thereto dated November 25, 1997.
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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.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter and through the date of this
Report, the Registrant filed the following report on
Form 8-K:
November 22, 1997 - reporting the announcement that
the Registrant had entered into an Agreement and
Plan of Merger with Cyrus Acquisition Corp., a New
York Corporation formed by The Cypress Group
L.L.C..
14
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
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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: December 16, 1997
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EXHIBIT INDEX
Exhibit Number Description of Exhibit
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(11) Additional Earnings Per Share Information.
(15) Letter regarding unaudited interim financial
information.
(27) Financial Data Schedule.