Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
- ----
X
- ---- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 27, 2002
----------------
OR
- ----
- ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--------------- ---------------
Commission file number 1-5364
------
FRANK'S NURSERY & CRAFTS, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1561374
--------------------------- -------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
1175 West Long Lake, Troy, MI 48098
-------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (248) 712-7000
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
[Cover page 1 of 2 pages]
Securities registered pursuant to Section 12(g) of the Act:
None
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
----------- -----------
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of the registrant's Common Stock, $1.00 par
value, held by non-affiliates as of April 29, 2002: -0-.
Number of voting shares of the registrant's Common Stock outstanding as
of April 29, 2002: 1,000 held by FNC Holdings Inc. There is no public trading
market for the outstanding shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
[Cover page 2 of 2 pages]
PART I
ITEM 1. BUSINESS
OVERVIEW
Frank's Nursery & Crafts, Inc. ("Frank's", the "Company" or the
"Registrant") operates the largest chain (as measured by sales) in the United
States of specialty retail stores devoted to the sale of lawn and garden
products. Frank's also is a leading retailer of Christmas trim-a-tree
merchandise, artificial flowers and arrangements, garden and floral crafts, and
home decorative products. As of January 27, 2002, the Company operated 170
retail stores in 14 states primarily in the East, Middle Atlantic and Midwest
regions of the United States under the name Frank's Nursery & Crafts(R).
References to "Holdings" refer to the sole shareholder of Frank's, FNC Holdings
Inc. (formerly known as General Host Corporation), a New York Corporation. In
December 1997 Holdings was acquired by The Cypress Group LLC ("Cypress"), a New
York based private equity group. Unless otherwise stated, all statistics in this
Item were compiled as of January 27, 2002("fiscal year 2001").
Frank's was incorporated under the laws of the State of Michigan in
1957. The Company operates entirely in one industry segment, the lawn and garden
retail industry as defined below. The Company's principal executive offices are
located at 1175 West Long Lake, Troy, Michigan 48098, and its telephone number
is (248) 712- 7000.
REORGANIZATION/CHAPTER 11 FILING
The Company's decision to seek Chapter 11 protection on February 19,
2001 was, in part, the consequence of several developments during fiscal year
2000 relating to sales, asset disposition and funding.
During the first half of 2000, weather patterns negatively impacted
lawn and garden product sales across the Company's principal markets. During the
third quarter of 2000, the Company decided to close 44 under-performing stores,
liquidate their inventories, and sell the 33 of the 44 closed stores that were
owned by the Company. During the fourth quarter of 2000, consistent with the
general softness in sales and heavy price promotional activities throughout the
retailing industry, it became apparent that the Company's Trim-a-Tree holiday
season sales were below expectations. In the later part of the fourth quarter,
it also became apparent that the Company's expectations from property sales were
not achievable, in part, because of deteriorating retail real estate and
financial market conditions overall.
During January of 2001, notwithstanding excess borrowing availability
under its existing bank credit facilities, the Company was unable to draw down
sufficient funding to meet its working capital needs because its banks asserted
that various conditions to borrowing had not been met. In the relatively short
period between the time that its credit facilities were curtailed and the
necessity of securing alternative financing, it became apparent that the most
appropriate method to secure financing, ensure
1
product availability for the spring season, and achieve restructuring objectives
was through Chapter 11 filings.
On February 19, 2001 (the "Petition Date"), the Company and Holdings
(the "Debtors") each filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code ("Chapter 11 Reorganization") in the United States
Bankruptcy Court for the District of Maryland, Baltimore Division (the "Court").
During the Chapter 11 Reorganization the Company has continued to manage and
operate its assets and business as a debtor-in-possession. Additionally, an
unsecured creditors' committee ("creditors' committee") was appointed and has
the right to review and object to any proposed non-ordinary course of business
transactions and otherwise participate in the Chapter 11 Reorganization.
As of the Petition Date, actions to collect prepetition indebtedness of
the Debtors were stayed and other contractual obligations of the Debtors could
not be enforced against the Debtors. In addition the Debtors may reject
prepetition executory contracts and lease obligations, and parties affected by
these rejections may file claims with the Court in accordance with the
Bankruptcy Code. Substantially all liabilities as of the Petition Date are
subject to settlement under a plan of reorganization, which is to be voted upon
by impaired classes of creditors and equity security holders and is subject to
approval by the Court.
At the outset, the Company obtained a $100 million debtor-in-
possession Financing Agreement (the "DIP Financing Agreement") with a syndicate
of new lenders led by Wells Fargo Retail Finance, LLC., as agent. During the
Chapter 11 Reorganization, Frank's has undertaken numerous actions to improve
the Company's operations including the closing of an additional 47
under-performing stores, the consummation of 26 transactions for the sale of
real property relating to the closed locations, the reduction of the overhead of
the Company, and the development of a business plan in concert with the
Company's financial and legal advisors as well as the creditors' committee. In
addition, the Company engaged a new Chief Executive Officer ("CEO") to lead
Frank's through the remainder of the Chapter 11 Reorganization and remain as CEO
of the reorganized Company. Steven S. Fishman became the new CEO of Frank's on
September 25, 2001.
On February 11, 2002, the Company filed a "Disclosure Statement",
pursuant to Section 1125 of the Bankruptcy Code, and a Joint Plan of
Reorganization with the Court. A First Amended Joint Plan of Reorganization (the
"Plan") was filed on March 13, 2002. The Court has approved the Disclosure
Statement as containing adequate information thus allowing the Company to
solicit votes from creditors and equity holders for approval of the Plan. The
Court has scheduled a hearing on May 1, 2002 for consideration of confirmation
of the Plan. Upon confirmation of the Plan, all claims against and interest in
the Debtors will be discharged.
The type and amount of distributions that each creditor would receive
under the Plan will depend upon the class in which the claim is placed. The
largest class consists of general unsecured claims. They will receive on a pro
rata basis, 100% of the new common stock to be outstanding on the effective date
of the Plan.
2
The Plan, as filed, provides for the distribution of warrants to purchase up to
3% of the new common stock to the Company's prepetition common stock holders.
The Plan calls for the cancellation of the currently outstanding Common Stock on
the effective date of the Plan.
The voting deadline for the Plan was April 19, 2002. The vote for the
class of general unsecured claims was for approval of the Plan. Several of the
mortgagees and certain other creditors objected to the Plan. It is expected that
their objections will be resolved in court on May 1, 2002.
THE LAWN AND GARDEN INDUSTRY
The Company believes that the overall retail market for lawn and garden
products, defined to include green goods for both outdoor and indoor usage,
fertilizers, gardening accessories, lawn and patio furniture, Christmas
Trim-a-Tree merchandise and snow removal, power equipment, barbecues and
watering accessories, was approximately $88.4 billion in 2001 and grew at 4.5%
over the $84.6 billion estimated for 2000. The Company also believes that, for
the 10 years covering the period 1992 through 2001, the lawn and garden industry
grew at a compound annual growth rate of approximately 6%. Among other factors,
the Company believes that the principal reasons for this sustained growth were
the popularity of gardening as a leisure activity, new home construction and
favorable demographic trends such as the aging of the baby-boomer population.
The lawn and garden market is highly seasonal, with the spring season
accounting for the majority of annual product sales. The market for green goods
is generally non-branded and highly differentiated by both specimen and quality
while the market for hard goods, fertilizers and chemicals is composed of both
national and private label brands. At the retail level the lawn and garden
market is highly fragmented and consists of national and regional chains of
specialty retailers, mass merchants and home centers as well as thousands of
local, independent garden centers and nurseries. With the exception of the
garden center and nursery segment, few retailers operate their lawn and garden
centers on a year round basis or as full line lawn and garden retailers. The
Company believes that the primary competitive factors in lawn and garden
retailing include breadth of product assortment, product quality, price and
knowledgeable service. The Company believes that it competes effectively on the
above factors, as well as others, and that its competence in the retailing of
lawn and garden products will enable it to gain market share in the future from
increased penetration of its existing markets.
COMPANY STRATEGY
Management has repositioned the Company's merchandising strategy and
concentrated on three major sectors: lawn and garden, floral and home decor and
Christmas Trim-a-Tree. Merchandising lines such as pet foods and general and
juvenile crafts, among others, which had been a part of Frank's range prior to
the acquisition, were deemed no longer appropriate and a phased
3
discontinuation plan was put into effect. This plan was completed during fiscal
year 2001.
The Company's core strategy centers on the lawn and garden market where
the Company intends to enhance its leadership position within the specialty
retailing segment of that market. The Company's objective is to provide the
gardening enthusiast with the broadest assortment of quality plants, growing
products, specialty tools and gardening accessories at competitive prices backed
by knowledgeable service.
The Company also provides the leading assortment of floral and home
decor products, including premium artificial flowers and arrangements for the
do-it-yourself decorator as well as to those preferring finished arrangements.
In addition, a leading assortment of decorative candles, vases and floral
containers, ribbons, picture frames and accent pieces for the home or patio is
offered. The Company has expanded its garden decor product offering and expects
continued growth in this category.
The Company's Christmas Trim-a-Tree selection is aimed at providing its
customers with the broadest assortment of quality artificial trees, wreaths,
tree decorations, lights and holiday decor and to serve as a one-stop shopping
destination for these holiday related purchases. Frank's plans to broaden its
product selection in this area by expanding its gift items.
The Company utilizes extensive marketing and advertising efforts to
communicate with its customers. Key advertising and promotional programs for
2002 include: improving the quality of media with illustrations of products with
greater impact and color assortments and a new feature in the form of tips for
our customers entitled "Frankly Speaking"; targeting print mailings and media in
a more efficient manner that focuses on the Company's neighborhood presence; and
a new in-store sign package.
During fiscal 2001, the Company completed the installation of a new
point-of-sale system aimed at substantially enhancing transaction processes and
improving customer service flows at its store check- out areas. To further
enhance the effectiveness of the integrated merchandising system the Company
intends to install a major upgrade to the system during 2002 which will provide
increased information accessibility to more effectively manage the business,
particularly in allocating and replenishing product at store level. In addition
a markdown system is planned for implementation that will allow the Company the
ability to clearance inventory by store on a timely basis.
During fiscal 2001, the Company opened one new store, which was
subsequently included in the 2001 store closure program and closed as of the end
of March 2002. The Company does not intend to open additional stores in 2002.
Capital spending for stores will focus on remodeling the interior of the stores
to enhance the customer shopping experience.
4
PRODUCT CATEGORIES
The Company operates a chain of specialty retail stores devoted to the
sale of lawn and garden, Christmas and floral and home decor. The principal
products sold at the Company's retail stores are as follows:
Percentage of
Sales In
Product Line Fiscal Year 2001 Description
- ------------ ---------------- -----------
Lawn and garden 70% Roses, potted plants, annual and
perennial flowering plants, trees
(including live Christmas trees),
shrubs, fertilizers, seeds and
bulbs, mulches, plant accessories,
hoses and garden tools and
equipment, bird houses, feeders,
seed and accessories
Floral and Home Decor 17 Dried, silk and acrylic flowers,
arrangements, candles, paint and
paint accessories, picture frames,
frame art, garden decor items and
decorative home accessories
Christmas 13 Artificial Christmas trees, indoor
--- and outdoor lights, decorations and
trimmings
100%
===
LAWN AND GARDEN. As the nation's largest specialty retailer of lawn and
garden products, the Company enjoys a strong franchise in the lawn and garden
business. The Company offers customers one of the widest selections of live
plants in the industry.
The Company believes that its reputation for a broad selection and high
quality of live goods is the principal reason that draws customers to its
stores. This strength allows the Company to offer a wide assortment of other
lawn and garden products including fertilizers, mulches, garden tools, planting
accessories, decorative planters and other related merchandise. In addition the
Company markets its own line of private label lawn and garden products under the
Frank's name. The lawn and garden business is also characterized by strong gross
margins.
Lawn and garden sales are highest in the spring with the largest impact
being in the first fiscal quarter and the early part of the second fiscal
quarter, then declining during middle and late summer. There is an early fall
sales season in these products that is less significant than the spring sales
season. In the winter
5
months, sales of such products are minimal and limited essentially to indoor
plants.
FLORAL AND HOME DECOR. The Company's floral and home decor products
include a varied assortment of dried, silk and acrylic flowers for the
do-it-yourself decorator as well as complete floral arrangements. The Company
also offers a broad assortment of decorative candles, picture frames, framed art
and accent pieces for the home or patio. These products exhibit high inventory
turns, strong gross margins and low seasonality. Frank's expects this product
line to be an integral part of its future growth plan. The quality of products
selected for this category will be enhanced and the fast growing garden decor
area will be expanded.
The Company intends to support this product category with significant
advertising in order to make consumers aware of Frank's improved product
selection and presentation.
Floral and home decor sells steadily throughout the year, and is
stimulated by early spring, fall and late winter promotions. During the winter
months (outside of the Christmas season) this category constitutes a large
portion of the Company's sales.
CHRISTMAS. During the Christmas holiday season, the Company's second
most important selling season after spring, the Company transforms substantial
portions of its stores into Christmas trim- a-tree layouts and offers a broad
selection of seasonal merchandise and Christmas decoration for the holiday
season. The Company provides one of the largest selections of artificial trees,
indoor and outdoor lights, wreaths and holiday plants as well as a wide array of
trim-a-tree items. Christmas merchandise is sold almost entirely in November and
December.
The Company plans significant improvement in its product selection for
2002 including an expanded offering of gift items.
SEASONALITY
The Company's business is highly seasonal and subject to the impact of
weather conditions, which may affect consumer purchasing patterns. In fiscal
2001, 46% of the Company's sales occurred during the spring season (late March
to mid-June) and 23% occurred during the Christmas season (November to late
December) based upon the 170 store base. Normally, spring is the most profitable
season, and Christmas is the next most profitable season. Operating losses
usually are experienced during the other periods of the year. The Company's
slowest selling seasons are typically the period from the beginning of the
calendar year until the start of the spring selling season, and from mid-July to
October.
VENDORS
Substantially all of the plants and products the Company sells are
purchased from approximately 758 outside vendors. Alternative sources of supply
are generally available for all products sold by the Company.
6
STORE OPERATIONS AND MANAGEMENT
As of January 27, 2002, the Company operated 170 stores. The Company's
stores are generally located on three-acre sites. A typical store in which the
overhang area leading to the yard has been enclosed includes 18,500 square feet
of indoor space (16,000 square feet of sales area and 2,500 square feet of
storage area), 17,000 square feet of outdoor selling area and ample onsite
parking. The stores are designed in a "supermarket" format familiar to
customers, and shopping is done with carts in wide aisles with attractive
displays. Traffic design is intended to enhance the opportunity for impulse
purchases. Most stores are free-standing and located adjacent to or near
shopping centers; some stores are part of strip centers.
The Company's stores are normally open 84 hours per week during the
spring and Christmas season, with the average store opening at 8 a.m. and
closing at 9 p.m. During other times of the year, the average store is open from
9:00 a.m. until 8:00 p.m.
The average store has approximately 20-25 part and full-time employees,
including a store manager, an assistant manager and up to six department
specialists responsible for the various product lines. The permanent store staff
is generally supplemented at seasonal peaks by temporary employees.
The Company continually reviews its store base and determines whether
particular stores need to be improved or closed based upon profitability and
growth potential. At the end of fiscal 2000, the Company was in the process of
closing 44 stores. Since the Petition Date, the Company closed an additional 47
stores with Court approval. The Company believes that the remaining 170 stores
as of April 29, 2002 represent a viable base for the future growth of the
Company. The Company, however, intends to continue monitoring store performance
and will make additional adjustments if appropriate.
The Company does not intend to open any new stores in fiscal 2002 due
to the current financial condition of the Company. The aggregate cost of any
future expansion is dependent upon the method of financing new stores. Such
methods include build-to-suit leases, conversion of existing buildings, and land
purchases with Company-funded construction. The cost of these methods ranges
from approximately $500,000 per store for build-to-suit leases to $3 to $3.5
million per store for Company-owned stores, including the purchase of land. New
stores are financed via build-to-suit operating leases whenever possible.
EMPLOYEES
At January 27, 2002, the Company's employee base was approximately
4,100 including seasonal employees. The Company's entire employee base is
non-union and management considers its employee relations to be good.
7
DISTRIBUTION
The Company operates distribution centers in Harrisburg,
Pennsylvania and Howe, Indiana.
These centers delivered approximately 52% of all merchandise to the
Company's stores in fiscal 2001, primarily using contract carriers. The balance
of the products were delivered directly to stores by vendors.
ITEM 2. PROPERTIES
The Company is currently headquartered in two facilities located in
Troy, Michigan. One building is 27,000 square feet and is subject to a lease
which expires in November 2007. However, this lease will be rejected in the
Chapter 11 Reorganization and the related building will be vacated by the
Company during the second quarter of fiscal 2002. The second building measures
approximately 48,500 square feet and is subject to a lease which expires in
March 2007 with two five year options.
The Company currently leases a 292,300 square foot distribution
facility in Harrisburg Pennsylvania as well as a 346,515 square foot facility in
Howe, Indiana. The lease on the Harrisburg facility will expire in March 2003
with four one year renewal options. The Howe property carries a lease expiring
in June 2007 with one five-year renewal option.
As of January 27, 2002, the Company operated 170 Frank's stores, 130 of
which were leased and 40 of which were owned. The following is a summary of
store properties by state:
NUMBER OF FRANK'S STORES PER STATE
Michigan........................................33
Illinois........................................27
Pennsylvania....................................16
Ohio............................................15
New York........................................15
Minnesota.......................................13
New Jersey......................................13
Indiana.........................................11
Maryland........................................10
Connecticut......................................7
Virginia........................................ 3
Missouri.........................................3
Florida..........................................2
Kentucky...................................... 2
----
Total......................................... 170
====
Under Chapter 11 Reorganization, the Company has the right,
subject to Court approval, to assume or reject executory contracts
and unexpired leases. The Company has either assumed and assigned,
rejected, or entered into lease cancellation agreements for value
with various landlords for over 47 retail leases. Additionally,
8
the Company has consummated 26 transactions for the sale of real property
relating to closed locations.
As of January 27, 2002, fifteen owned and two leased real properties
relating to closed locations remain to be disposed. In fiscal 2001, the Company
closed 47 stores, completed the closure of 44 stores from fiscal 2000 and opened
one new location that was subsequently closed in March, 2002. See "Store
Operations and Management".
ENVIRONMENTAL MATTERS
The Company and its operations are subject to Environmental Laws. As an
owner/lessor or former owner/lessor of numerous properties, as well as a seller
of certain environmentally sensitive products such as herbicides and pesticides,
the Company has an inherent risk of liability under Environmental Laws,
including, for example, contamination that may have occurred in the past on its
current or former properties or as a result of its operations. The Company
believes it complies in all material respects with applicable Environmental Laws
and does not anticipate any obligations with respect to Environmental Laws that
would have a material adverse effect on its operations. The Company may also be
affected by Holdings' or Holdings' present or former subsidiaries' liabilities
and potential liabilities with respect to Environmental Laws, which have been
and may continue to be significant to Holdings. Nonetheless, any liabilities
that arose prior to the Chapter 11 Reorganization shall be discharged in
connection with confirmation of a plan of reorganization.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business the Company is subject to various
claims. These claims should be resolved in connection with the Chapter 11
Reorganization. In the opinion of management, any ultimate liability arising
from or related to these claims should not have a material adverse effect on
future results of operations or the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in
conjunction with the Financial Statements included in Item 14 and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7.
Four Weeks Forty-Eight
Ended Weeks Ended
January 25, December 28,
For the fiscal year: 2001 2000 1999 1998 1998 1997
--------- --------- -------- --------- ---------- -----------
(In thousands)
Net Sales $ 371,417 $ 436,947 $487,332 $512,101 $ 14,814 $515,204
Reorganization,
restructuring
and other related
charges 40,887 127,047 -0- -0- -0- -0-
Income (loss) before
extraordinary item (87,766) (168,290) (9,296) 7,522 (12,904) (18,465)
Extraordinary item (4,230) -0- -0- (5,148) -0- -0-
Net income (loss) (91,996) (168,290) (9,296) 2,374 (12,904) (18,465)
Balance Sheet Data:
Total Assets 165,313 286,021 449,633 433,263 433,679 469,998
Total debt, including
current portion 166,832 214,310 233,416 194,695 178,969 169,067
Shareholder's equity
(deficiency in assets) $( 97,995) $ (5,939) $147,826 $151,063 $152,403 $166,441
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Annual Report are forward-looking statements that involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, any bankruptcy court actions or
proceedings related to the bankruptcy of the Company, and other factors
discussed in the Company's filings with the Securities and Exchange Commission.
Consequently, all of the forward-looking statements made in this Annual Report
are qualified by these cautionary statements and there can be no assurance that
the actual results or developments anticipated by the Company will be realized,
or even if substantially realized, that they will have the expected consequences
to or effect on the Company or its business operations.
Reorganization/Chapter 11 Filing
On February 19, 2001 (the "Petition Date"), the Company and Holdings
(the "Debtors") each filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code ("Chapter 11 Reorganization") in the United States
Bankruptcy Court for the District of Maryland, Baltimore Division (the "Court").
The Company's decision to seek Chapter 11 Reorganization was, in part,
the consequence of several developments during fiscal year 2000 relating to
sales, asset disposition and funding.
During the first half of 2000, weather patterns negatively impacted
lawn and garden product sales across the Company's principal markets. During the
third quarter of 2000, the Company decided to close 44 under-performing stores,
liquidate their inventories, and sell 33 of the 44 closed stores that were owned
by the Company. Later in 2000, it became apparent that the Company's Trim-a-Tree
holiday season sales were below expectations, which was consistent with the
general softness in sales at retailers during this period. In the later part of
the fourth quarter, it also became apparent that the Company's expectations from
property sales were not achievable in part, because of deteriorating retail real
estate and financial market conditions overall.
During January of 2001, notwithstanding excess borrowing availability
under its existing bank credit facilities, the Company was unable to draw down
sufficient funding to meet its working capital needs because its banks asserted
that various conditions to borrowing had not been met. In the relatively short
period between the time that its credit facilities were curtailed and the
necessity of securing alternative financing, it became apparent that the most
appropriate method to secure financing, ensure product availability for the
spring season, and achieve restructuring objectives was through the Chapter 11
filings.
11
During the Chapter 11 Reorganization the Company has continued to
manage and operate its assets and business as a debtor-in- possession.
Additionally, an unsecured creditors' committee was appointed and has the right
to review and object to any proposed non-ordinary course of business
transactions and otherwise participate in the Chapter 11 Reorganization.
As of the Petition Date, actions to collect prepetition indebtedness of
the Debtors were stayed and other contractual obligations of the Debtors could
not be enforced against the Debtors. In addition the Debtors may reject
prepetition executory contracts and lease obligations, and parties affected by
these rejections may file claims with the Court in accordance with the
Bankruptcy Code. Substantially all liabilities as of the Petition Date are
subject to settlement under a plan of reorganization, which is to be voted upon
by impaired classes of creditors and equity security holders and is subject to
approval by the Court.
At the outset the Company obtained a $100 million debtor-in-possession
Financing Agreement (the "DIP Financing Agreement") with a syndicate of new
lenders led by Wells Fargo Retail Finance, LLC., as agent. During the Chapter 11
Reorganization, Frank's has undertaken numerous actions to improve the Company's
operations, including the closing of an additional 47 under-performing stores,
the consummation of 26 transactions for the sale of real property relating to
the closed locations, the reduction of the overhead of the Company, and the
development of a business plan in concert with the Company's financial and legal
advisors as well as the creditors' committee. In addition, the Company engaged a
new Chief Executive Officer ("CEO") to lead Frank's through the remainder of the
Chapter 11 Reorganization and remain as CEO of the reorganized Company. Steven
S. Fishman became the new CEO of Frank's on September 25, 2001.
On February 11, 2002, the Company filed a "Disclosure Statement"
pursuant to Section 1125 of the Bankruptcy Code, and a Joint Plan of
Reorganization with the Court. A First Amended Joint Plan of Reorganization (the
"Plan") was filed on March 13, 2002. The Court has approved the Disclosure
Statement as containing adequate information thus allowing the Company to
solicit votes from creditors and equity holders for approval of the Plan. The
Court has scheduled a hearing on May 1, 2002 for consideration of confirmation
of the Plan. Upon confirmation of the Plan, all claims against and interest in
the Debtors will be discharged.
The type and amount of distributions that each creditor would receive
under the Plan will depend upon the class in which the claim is placed. The
largest class consists of general unsecured claims. They will receive on a pro
rata basis, 100% of the new common stock to be outstanding on the effective date
of the Plan. The Plan, as filed, provides for the distribution of warrants to
purchase up to 3% of the new common stock to the Company's prepetition common
stock holders. The Plan calls for the cancellation of the currently outstanding
Common Stock on the effective date of the Plan.
The voting deadline for the Plan was April 19, 2002. The vote
for the class of general unsecured claims was for approval of the
12
Plan. Several of the mortgagees and certain other creditors objected to the
Plan. It is expected that their objections will be resolved in court on May 1,
2002.
The accompanying financial statements in Item 14 of this Annual Report
have been presented in accordance with the AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
and have been prepared on a going concern basis, which contemplates continuity
of operations, realization of assets and liquidation of liabilities in the
ordinary course of business. Pending the outcome of the May 1, 2002 hearing on
confirmation of the Plan, circumstances related to this event, and future
financing, such realization of assets and liquidation of liabilities, is subject
to uncertainty. Further, the Plan would materially change the amounts reported
in the financial statements, which do not give effect to any adjustments to the
carrying value of assets or amounts of liabilities that will be necessary under
fresh start accounting upon the effective date of the Plan. The ability of the
Company to continue as a going concern will depend upon, among other things,
confirmation of the Plan, future profitable operations, the Company's ability to
comply with requirements of new financing agreements upon emergence from the
Chapter 11 Reorganization and the ability to generate sufficient cash from
operations and financing sources to meet the Company's obligations.
Additionally, the accompanying financial statements do not include any
adjustments that would be required if the Company were in liquidation.
Substantially all of the Company's prepetition liabilities are subject
to compromise under the Chapter 11 Reorganization. The Company's senior
subordinated notes and mortgage debt are in default under the terms of the
applicable debenture and loan agreements, respectively. For financial reporting
purposes subsequent to the Petition date, those liabilities and obligations have
been segregated and reclassified as prepetition debt on the Balance Sheet. The
Company discontinued accruing interest on the senior subordinated notes. The
ultimate adequacy of security for any secured debt obligations and settlement of
all liabilities and obligations cannot be determined until the Plan is
confirmed.
Results of Operations
FISCAL 2001 COMPARED TO FISCAL 2000
Net Sales. Sales were $371 million for the 2001 fiscal year ("2001") compared to
$437 million for the 2000 fiscal year ("2000"), a decrease of 15%. Comparable
store sales increased .3%. Sales for the 170 comparable store base (described
below) increased .9%.
Excluding the first eight weeks of the first quarter, which were
negatively impacted by the Chapter 11 Reorganization, net sales for the 170
comparable store base, increased 3%.
The comparable store base results from the 2001 Program, as discussed
in Note 3 of the Notes to Financial Statements, which closed 22 stores as of the
end of June 2001, 12 stores as of the end of October, 2001 and an additional 12
that were closed in
13
March, 2002. In addition to the 46 stores closed the Company closed one
additional store due to lease expiration, thus bringing the operating store base
to 170 stores.
Cost of Sales Including Buying and Occupancy. Cost of sales including buying and
occupancy expenses were $297.9 million in 2001 compared to $317.1 million in
2000. This reduction of $19.2 million amounted to a 6% decrease. Cost of sales,
as a percentage of net sales, increased by 7 percentage points to 80% in 2001
compared to 73% in 2000. Included in the costs were $4.1 million in 2001 and
$3.2 million in 2000 for the loss on inventory liquidated under the store
closure programs as discussed in Note 3 of the Notes to Financial Statements. In
addition, 2001 includes a charge of $8.1 million to write-down inventory
designated as clearance product primarily in the floral, home decor and
Christmas Trim-a-Tree product lines to net realizable value. Merchandise
margins, excluding charges for inventory liquidation losses and the inventory
clearance reserve, declined by 5 percentage points due to increased promotional
activity resulting from the competitive lawn and garden market as well as a very
competitive Christmas season and the impact of inventory clearance activity.
This decline includes 1 percentage point of margin loss related to the 22 stores
liquidated directly by the Company. Buying and occupancy costs decreased by
approximately 14% or $10.3 million due principally to reduced occupancy costs
from the 2001 program. This cost decrease and the 15% sales decline contributed
to a 2% increase in buying and occupancy costs as a percentage of sales.
Selling, General & Administrative Expense. Selling, general and administrative
expense for 2001 was $109.4 million compared to $136.7 million in 2000. The
decline of $27.3 million results from lower store expense due to the reduced
store base and reduced advertising and corporate expenses. As a percentage of
net sales, selling, general and administrative expenses decreased by 1
percentage points to 30% in 2001 compared to 31% in 2000.
Operating loss (defined as "net sales less cost of sales including buying and
occupancy costs, and selling, general and administrative expenses"). The
operating loss for 2001 was $35.8 million compared to $16.9 million in 2000. The
increased operating loss was primarily the result of the liquidation of the
stores under the 2001 Program and expenses incurred to complete the liquidation
of the 2000 Program in 2001 compared to the operating loss generated by these
stores during 2000, as well as the loss on inventory liquidated under the 2001
Program, as explained above. The operating loss, as a percentage of net sales,
was 10% for 2001, an increase of 6 percentage points from 4% for 2000. Excluding
the impact of the 2001 and 2000 Programs and the inventory reserves in 2001 and
2000, the operating loss for 2001 was $ 14.1 million compared with $11.8 million
for 2000. The increase of $2.3 million was due to the lower merchandise margins
as explained above.
14
Reorganization, restructuring and other related charges. The net charge was
$40.9 million in 2001 compared with $127 million in 2000. The charge for 2001
resulting from the Chapter 11 Reorganization, asset impairment analysis and
store closures is as follows:
2001
------
Write-down of goodwill $ 14.4
Write-down of fixed assets 15.2
Store closure program (Note 3) 2.6
Bankruptcy related costs 8.7
------
Total $ 40.9
======
Bankruptcy related costs for fiscal 2001 include $4.6 million for
professional fees, $3.2 million for severance and employee retention plans
approved by the Court under the Chapter 11 Reorganization and $.9 million for
miscellaneous items.
Other Income. Other income for 2001 was $1.2 million compared to $1
million in 2000.
Interest and Debt Expense. Interest and debt expense was $10.6 million in 2001
compared with $23.9 million in 2000. Lower interest in 2001 relates to the
discontinuance of an interest accrual for the senior subordinated notes since
the prepetition date. In accordance with AICPA Statement of Position 90-7, no
interest is accrued if it is probable the interest will not be an allowed claim.
Contractual interest for 2001 was $21.5 million.
Income Taxes. For 2000 income taxes represent a benefit resulting from the
realization of certain net operating losses for which a full valuation allowance
had been previously established. The Company reduced its valuation allowance by
$.9 million based upon regulatory approval for certain tax matters and
immediately realized the related deferred tax asset when the tax refund was
received. As of January 27, 2002, the Company's remaining net deferred tax asset
position is fully offset with a valuation allowance, due to the Company's
historical operating results. Due to the previously unrecognized tax benefits,
no income tax provision has been provided for in 2001 and 2000.
Extraordinary loss for 2001 primarily represents the write-off of debt issue
costs to retire the Company's outstanding obligations under a credit facility
that existed at January 28, 2001. The total debt retired and associated fees
paid under the DIP Financing Agreement was $62.1 million.
Results of Operations
FISCAL 2000 COMPARED TO FISCAL 1999
Net Sales. Sales were $437 million for the 2000 fiscal year ("2000") compared to
$487.3 million for the 1999 fiscal year ("1999"), a decrease of 10%. Comparable
store sales declined 11%. Comparative net sales were negatively impacted by
lower lawn and garden sales resulting from unfavorable weather patterns in
15
virtually all markets where the Company operates with the midwest and northeast
especially adversely effected. In addition, Christmas trim-a-tree sales declined
as a result of general softness in retail during that period, and craft sales
decreased due to a lower number of customers resulting from the lawn and garden
and Christmas factors explained above.
Cost of Sales Including Buying and Occupancy. Cost of sales including buying and
occupancy expenses were $317.1 million in 2000 compared to $337.2 million in
1999. This reduction of $20.1 million amounted to a 6% decrease. Cost of sales,
as a percentage of net sales, increased by 4 percentage points to 73% in 2000
compared to 69% in 1999. Included in the 2000 costs was a $3.2 million loss on
the inventory liquidated under the 2000 Program as discussed in Note 3 of the
Notes to Financial Statements. Buying and occupancy costs decreased by
approximately 4% or $2.6 million due principally to increased occupancy costs of
$3.5 million for new stores opened during 1999 and 2000. These cost increases
and the 10% sales decline contributed to a 2% increase in buying and occupancy
costs as a percentage of sales. Overall merchandise margins approximated the
prior year.
Selling, General & Administrative Expense. Selling, general and administrative
expense for 2000 was $136.7 million compared to $137.7 million in 1999. The
decline of $1 million includes the effect of a $2.5 million increase in payroll
and other store expenses for new stores opened in 1999 and 2000. As a percentage
of net sales, selling, general and administrative expenses increased by 3
percentage points to 31% in 2000 compared to 28% in 1999.
Operating Income (defined as "net sales less cost of sales including buying and
occupancy costs, and selling, general and administrative expenses"). The
operating loss for 2000 was $16.9 million compared to operating income of $12.5
million in 1999. The increased operating loss was primarily the result of
decreased sales levels and the loss on the inventory liquidated under the 2000
Program, as explained above. The operating loss, as a percentage of net sales,
was (4)% for 2000, an increase of 7 percentage points from 3% of operating
income for 1999.
Reorganization, restructuring and other related charges. As a result of the
Company's operating losses for 2000 and the Chapter 11 filings on February 19,
2001, the Company performed an impairment analysis as required under Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." The estimated
fair value of the impaired assets was determined by comparing expected future
cash flows for each store to the combined net property, plant and equipment and
allocated goodwill. This analysis and the impact of the Chapter 11 filings, in
connection with which the Company rejected store leases relating to a store
closing provision from fiscal 1993 and 22 current store leases, resulted in the
Company recording a charge of $127 million for 2000. The charge consisted of
$73.6 million for the write-down of goodwill, $46.2 million for the write-down
of fixed assets, $14 million for the 2000 Program and $.8 million for bankruptcy
costs offset by $7.6 million for the elimination of previously recorded
16
store closing liabilities from fiscal 1993 as a result of rejected store leases.
Other Income. Other income for 2000 was $1 million compared to $3.5 million in
1999 which included a gain of $2.1 million from the reversion of a
noncontributory, defined benefit pension plan which covered former employees of
several discontinued operations of Holdings.
Interest and Debt Expense. Interest and debt expense was $23.9 million in 2000
compared with $22.8 million in 1999. The increase is the result of a higher
level of outstanding borrowings and interest rates under the credit facility
during 2000.
Income Taxes. For 2000 income taxes represent a benefit resulting from the
realization of certain net operating losses for which a full valuation allowance
had been previously established. The Company reduced its valuation allowance by
$.9 million based upon regulatory approval for certain tax matters and
immediately realized the related deferred tax asset when the tax refund was
received. As of January 28, 2001, the Company's remaining net deferred tax asset
position is fully offset with a valuation allowance, due to the Company's
historical operating results. Due to the previously unrecognized tax benefits,
no income tax provision has been provided for in 2000 and 1999.
Liquidity and Capital Resources
2001 and 2000 Store Closure Programs. During 2001, as part of the restructuring
process, the Court approved the Company's plan to close 46 stores (the "2001
Program"). The last 12 were closed as of March 2002. As a result, the Company
recorded charges of $6.7 million in 2001, of which $4.1 million, included in
cost of goods sold, represents the loss on the inventory that was liquidated.
The remaining $2.6 million included in the reorganization/restructuring charge
of $40.9 million, primarily represents fixed asset write- downs to fair value.
During the fourth quarter of 2000 the Company implemented a store
closure program under which the Company closed 44 underperforming stores (the
"2000 Program"). All the stores were closed as of the end of March 2001. The
2000 Program resulted in a $17.2 million charge in 2000, of which $3.2 million
represented the loss on the inventory that was liquidated and was included in
cost of goods sold. The remaining $14 million was included in the
reorganization/restructuring charge of $127 million and was comprised of $.8
million for termination benefits and severance costs, and $13.2 million related
primarily to the write-down of fixed assets to fair value. Fair value was
measured by using the estimated net selling price based upon actual bids and
appraisals. The estimated fair value of the 33 owned stores was $33.5 million at
January 28, 2001 and was classified in the caption of "Assets to be disposed of"
on the Balance Sheet. During 2001 the Company sold 21 of the 33 properties and
added three locations from the 2001 Program. In addition the Company reevaluated
the estimated fair value for these stores based upon the current retail market
and actual bids which resulted in an additional write-down in 2001 of
17
$6.2 million that is included in the reorganization/restructuring charge. The
estimated fair value of "Assets to be Disposed of" for the 15 remaining stores
at January 27, 2002 is $9.1 million.
Operating Activities. Net cash provided by operations for 2001 was $18.6 million
compared with $26.4 million for 2000 due primarily to an increase in the 2001
net loss adjusted for noncash items. The increase in accrued expense is due
primarily to the Chapter 11 Reorganization that resulted in prepetition amounts
of $26.7 million.
Investing Activities. Net cash provided by investing activities for 2001 was
$17.2 million compared to net cash used of $16.5 million in 2000, due to the net
proceeds of $20 million received from the sale of owned properties from the 2000
Program that were recorded as assets held for disposal at January 28, 2001.
Capital expenditures during the Chapter 11 Reorganization were limited by the
Company to general store expenditures of $2.8 million in 2001 compared with
$17.6 million in 2000. Capital expenditures in 2000 included approximately $7.3
million for new stores, $3.3 million for store refurbishments and new fixtures
and $7 million for new information technology systems. Expenditures exclude
another $3.9 million of equipment under capital lease for the Company's new POS
system.
Financing Activities. Net cash used in financing activities for 2001 was $44.6
million which related primarily to the reduction in bank debt and the payment of
mortgage debt from the proceeds of asset sales discussed above. The $8.1 million
used in 2000 related to payment of bank debt offset by an increase in the net
parent investment for a $15 million equity contribution from Cypress.
On February 19, 2001, the Company entered into a two-year, $100 million
debtor-in-possession financing agreement (the "DIP Financing Agreement") with a
lender to finance, among other things, the Company's working capital
requirements during Chapter 11 Reorganization. Borrowings under the DIP
Financing Agreement are limited to the availability under a borrowing base which
includes eligible inventory and certain real estate interests. Borrowings are
adjusted daily based upon cash availability and availability under the borrowing
base. The interest rates are based upon a Base rate or Eurodollar rate plus an
applicable margin based on availability as set forth in the DIP Financing
Agreement. The minimum interest rate is 7%. At January 27, 2002, availability
under the DIP Financing Agreement approximated $19.3 million with borrowings
outstanding of $24.3 million.
The initial borrowings under the DIP Financing Agreement were used to
retire the Company's outstanding obligations under a credit facility that
existed at January 28, 2001. The total debt retired and associated fees totaled
$62.1 million, resulting in an extraordinary loss from the early extinguishment
of debt of $4.2 million in the 2001 first half, primarily for the write-off of
debt issue costs.
The DIP Financing Agreement requires the Company to maintain certain
financial ratios. The Company was not in compliance with the EBITDA (earnings
before interest, taxes, depreciation,
18
amortization, reorganization/restructuring and extraordinary charges) covenant
at January 27, 2002. The lender did not provide a waiver for noncompliance of
the default.
At January 28, 2001 the senior subordinated notes and mortgage debt
were classified as current due to cross defaults when the covenants were
violated under the credit facility as well nonpayment of interest under the
senior subordinated notes and nonpayment of monthly principal and interest under
the mortgage notes as a result of the bankruptcy filing.
To fill the future liquidity needs of the Company the Plan includes
commitments for exit financing from the Chapter 11 Reorganization. Two separate
financing facilities will fund the distributions under the Plan and the
Company's future working capital needs. One is a $50 million revolving loan
secured by the Company's receivables, inventory and certain other assets. This
facility at the option of the Company would bear interest at: (a) prime rate
plus .25% or .50%; or (b) Eurodollar rate plus 2.75%, 3%, or 3.25%, in each case
depending upon the Company's excess availability under the facility, for an
initial term of three years, with renewal rights. The second facility is
comprised of $30 million of term and revolving loans secured by the Company's
owned but unmortgaged and leased real property. These two loans would bear
interest at 10.25% per annum for an initial term of three years, with renewal
rights. Finalization of these facilities is anticipated no later than May 1,
2002.
The Company's most significant cash requirements are for merchandise
inventory that fluctuate throughout the year due to the seasonality of the
business. Working capital requirements increase substantially in August and
September in anticipation of the Christmas season and in March and April for the
lawn and garden season. Additionally, the Company's business depends, in part,
on normal weather patterns across its markets. Any unusual weather patterns in
the Company's markets can have a material and adverse impact on the Company's
business and financial condition, particularly the lawn and garden sector. The
ability of the Company to continue as a going concern, will depend upon, among
other things, confirmation of the Plan, future profitable operations, the
Company's ability to comply with the requirements of the exit financing
agreements and the ability to generate sufficient cash from operations and
financing sources to meet the Company's obligations.
In fiscal 2002 the Company anticipates spending $5 million for capital
expenditures primarily for upgrades to the information technology systems and
for store remodelization.
As previously discussed, the Company will continue to operate its
business as debtor-in-possession until the effective date of the Plan. There can
be no assurances that the Plan will be approved, which could result in continued
operation under Chapter 11 while a new Plan is formulated or possible
liquidation of the Company.
19
Critical Accounting Policies
The accompanying financial statements were prepared in conformity with
accounting principles generally accepted in the United States. Application of
the Company's accounting policies for inventory valuation and impairment of
long-lived assets, described in Note 2 of the Notes to Financial Statements,
require the Company to make best estimates and judgments in preparing the
financial statements in accordance with generally accepted accounting
principles. As a result actual results could differ from these estimates.
Inflation
Inflation has been modest in recent years and has not had a significant effect
on the Company. If merchandise costs were to increase because of inflation,
management believes such increases could be recovered through higher selling
prices, since virtually all retailers would be similarly affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company perceives its only market interest rate risk to be limited
to borrowings under the DIP Financing Agreement. These borrowings are at
variable interest rates; and therefore, the related interest expense is
sensitive to changes in the general level of U.S. interest rates and the
Eurodollar rate. The Company had borrowings outstanding under this DIP Financing
Agreement of $24.3 million at January 27, 2002 with a weighted average interest
of approximately 8.2% compared with $62.3 million at January 28, 2001 with a
weighted average interest rate of approximately 10% under a previously held
credit facility. The Company's $115 million senior subordinated notes interest
is fixed at 10 1/4% and subject to compromise under the Chapter 11
Reorganization.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
The Company's financial statements and supplementary data are listed in
Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the persons serving as the
directors and executive officers of the Company. Each director will hold office
until the next annual meeting of shareholders and until the director's successor
is elected and qualified or until the earlier of the director's death,
resignation or removal. The Plan, if confirmed, provides for new directors on
the Plan's effective date. Thereafter, the Board of Directors would consist of
five members, including the Chief Executive Officer and four additional members
to be selected by the creditors' committee. The members of the existing Board of
Directors set forth below will have no continuing obligation to the Company on
or after the Plan's effective date.
NAME AGE POSITION
----------------- --- -----------------------
Steven S. Fishman 50 Chief Executive Officer and
Director
Adam Szopinski 56 President, Chief Operating
Officer and Director
Larry T. Lakin 62 Vice Chairman, Chief Financial
Officer, Treasurer and Director
David P. Spalding 47 Director
James A. Stern 51 Director
Bahram Shirazi 38 Director
Jeffrey P. Hughes 61 Director
Steven S. Fishman is Chief Executive Officer and has held this position
since September 2001 after having served as President of SSF Resources, Inc., an
investment and consulting firm founded by Mr. Fishman in 1999. Previous to that
Mr. Fishman served as Chairman and Chief Executive Officer of Pamida Holdings
Corporation from 1993 to 1999.
Adam Szopinski is President, Chief Operating Officer and director since
April 1999. Prior thereto he was Executive Vice President, Chief Operating
Officer and director since December 1997 after having served as the Vice
President of Operations of Toys "R" Us International since 1989.
Larry T. Lakin is Vice Chairman, Chief Financial Officer and director
since April 1999. In June 1998 Mr. Lakin was named Treasurer. Prior thereto he
was Executive Vice President, Chief Financial Officer and director since
December 1997. Mr. Lakin previously served as the Chief Financial Officer and a
principal of Shiara, Inc. ("Shiara"), a private fragrance company and cosmetic
venture, from April 1994 to December 1997.
21
David P. Spalding became a director in December 1997 and has served as
Vice Chairman of Cypress since its formation in April 1994. Prior to joining
Cypress, he was a Managing Director in the Merchant Banking Group at Lehman
Brothers Inc. Mr. Spalding is also a director of Lear Corporation, AMTROL Inc.
and Williams Scotsman, Inc.
James A. Stern became a director in December 1997 and has been Chairman
of Cypress since its formation in April 1994. Prior to joining Cypress, Mr.
Stern spent his entire career with Lehman Brothers Inc., most recently as head
of the Merchant Banking Group. Mr. Stern is also a director of AMTROL Inc.,
Cinemark USA, Inc., Lear Corporation, WESCO International, Inc., and a trustee
of Tufts University.
Bahram Shirazi became a director in December 1997. Mr. Shirazi has been
a managing director of Cypress since 1998. Prior to 1998 he was a principal of
Cypress since its formation in April 1994. Prior to joining Cypress, he was a
Vice President in the Merchant Banking Group at Lehman Brothers Inc from 1992 to
1994. Mr. Shirazi is also a director of Clubcorp, Inc. and Homeruns.com, Inc.
Jeffrey P. Hughes became a director in February 2001 and has been Vice
Chairman of Cypress since its formation in April 1994. Prior to joining Cypress,
Mr. Hughes spent 26 years at Lehman Brothers as a senior investment banker and
merchant banker and became a partner in 1976. Mr. Hughes is also on the Board of
Duke University Law School.
Joseph R. Baczko was previously Chairman of the Board and Chief
Executive Officer and left the Company in June 2001.
22
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company currently pays no compensation to its non-employee
directors, nor does it pay any additional remuneration to employees or executive
officers of the Company for serving as directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table summarizes, for the fiscal years indicated, the
principal components of compensation for services rendered in all capacities to
the Company for the Chief Executive Officer, the Company's former Chief
Executive Officer, the two highest compensated executive officers and one former
executive officer in fiscal year 1999 who, if he been employed with the Company
on January 27, 2002, would have been included among the Company's highest paid
executive officers for 2001 (collectively, the "named executive officers").
SUMMARY COMPENSATION TABLE
Annual Compensation
------------------------------------
Other All Other
Fiscal Annual Compensation
Name and Principal Position Year Salary($) Bonus ($) Compensation(1) ($)(2)
- --------------------------- ------ --------- ------------ --------------- ------------
Steven S. Fishman 2001 $ 207,693 $ 200,000 (3) $ 18,775 $ 5,844
Chief Executive Officer
Adam Szopinski 2001 $ 350,766 (4) $ -0- $ 56,375 $ 29,414
President 2000 $ 300,000 $ -0- $ 49,328 $ 11,254 (5)
Chief Operating Officer 1999 $ 294,222 $ -0- $ 44,113 $ 9,232 (5)
Larry T. Lakin 2001 $ 350,766 (4) $ -0- $ 45,877 $ 27,713
Vice Chairman 2000 $ 300,000 $ -0- $ 46,933 $ 12,165
Chief Financial Officer 1999 $ 294,222 $ -0- $ 46,973 $ 7,702
Joseph R. Baczko 2001 $ 276,450 $ 666,370 (6) $ 37,139 $ 20,440
Former Chairman and Chief 2000 $ 575,000 $ -0- $ 52,714 $ 11,710
Executive Officer (7) 1999 $ 566,360 $ -0- $ 357,385 (8) $ 6,632
William C. Boyd 1999 $ 163,000 $ -0- $ -0- $ 67
Executive Vice President
(1) Represents living expenses paid by the Company including the tax
effect.
(2) Amounts reflect premiums and claims paid by the Company for health and
life insurance coverage.
(3) Reflects a sign-on bonus.
(4) Includes $50,000 as Co-Chief Executive Officer of the Company during
fiscal 2001.
(5) Includes the Company match under the Company's 401(k) plan on behalf of
Mr. Szopinski of $3,461 for 2000 and $5,000 for 1999.
(6) Amount shown reflects a prorated Key Employee Retention Program bonus
of $91,370 and $575,000 pursuant to the Company's Severance Plan.
(7) Mr.Baczko resigned from the Company effective June 30, 2001.
(8) Of this amount, $294,770 represents relocation paid to Mr. Baczko
including the tax effect.
23
EMPLOYMENT AGREEMENTS
Effective September 25, 2001, the Company entered into an Employment
agreement with Steven S. Fishman. On November 14, 2001, the Court entered an
Order authorizing the Company to enter into the Employment Agreement with Mr.
Fishman. The Employment Agreement provides for continued employment from
September 25, 2001 to January 31, 2005. Under the terms of the Employment
Agreement, Mr. Fishman is employed as Chief Executive Officer of the Company.
The Employment agreement provides for a Base Salary, a Sign-On Bonus, and an
Annual Bonus based upon the Executive's performance and the Company's EBITDA
Plan, as approved by the Board of Directors. The specific details of the
Employment Agreement are contained in a copy included as an exhibit to the Form
10-Q filed on December 19, 2001.
During fiscal 2001 the Employment agreements and Severance Policy
between the Company and Adam Szopinski and Larry Lakin were modified and
approved by the Court. The specific details of which are contained in a copy
included as an exhibit to the Form 10-Q filed on September 26, 2001.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the Company's 2001 fiscal year, Mr. Spalding, Mr. Stern
and Mr. Shirazi were the members of the Company's Compensation
Committee.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICIES
The Compensation Committee (the "Committee"), which is comprised of
three non-employee directors, is responsible for establishing the Company's
executive compensation policies, reviewing the compensation of officers and key
employees, recommending and approving changes in compensation and reviewing and
recommending changes in the Company's employee benefit programs and management
succession plans.
In connection with its responsibility to guide the Company's policies,
plans and programs, the Committee approves the annual compensation of the
Company's executive officers and other key employees, which consists primarily
of base salary and bonus.
ELEMENTS OF EXECUTIVE OFFICER COMPENSATION
Base Salaries
The Company maintains salary ranges for its executive officers based on
the practices of other companies with revenues and operating characteristics
similar to those of the Company, geographic criteria and responsibility level.
Using the ranges as a guideline, the Company establishes salaries at levels
necessary to attract and retain talented executive officers and other key
employees.
24
The Committee's approval of salary increases for executive officers
depends on the Company's performance in the prior fiscal year, achievement of
non-financial objectives and overall personal performance.
Bonuses
The program provides that the executive officers of the Company are
eligible to receive bonus payments based on the achievement of profit levels
that are determinable at the discretion of the Committee and personal
performance. The Committee has the authority to waive performance or
profitability criteria under the program when awarding salary increases or when
granting bonuses.
Committee Members: David P. Spalding
James A. Stern
Bahram Shirazi
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding capital stock of the Company is owned by
Holdings. The authorized capital stock of Holdings consists of 100,000,000
shares of Holdings Common Stock and 1,000,000 shares of preferred stock, par
value $1.00 per share. As of April 29, 2002, 33,801,204 shares of Holdings
Common Stock and no shares of preferred stock were issued and outstanding on a
fully diluted basis.
The following table sets forth certain information as to the beneficial
ownership of Holdings Common Stock as of April 29, 2002 by (i) owners of more
than 5% of the outstanding shares of Holdings Common Stock, (ii) each executive
officer and director of Holdings, and (iii) all executive officers and directors
of Holdings, as a group. Except as indicated in the footnotes to this table, the
Company believes that the persons named in the table have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
Shares of Holdings Common Stock
-------------------------------
Amount Percentage
Beneficially of
Owned Class
-------------- ----------------
Beneficial Owners
- -----------------
PRINCIPAL SHAREHOLDERS:
Cypress Merchant Banking Partners L.P.(a) 31,959,182 94.6%
Cypress Offshore Partners L.P. (a)(b) 1,655,275 4.9%
EXECUTIVE OFFICERS AND DIRECTORS:
Joseph R. Baczko 186,747 *
Steven S. Fishman --- ---
Adam Szopinski --- ---
Larry T. Lakin --- ---
William C. Boyd --- ---
David P. Spalding(b) --- ---
James A. Stern(b) --- ---
Bahram Shirazi --- ---
Jeffrey P. Hughes --- ---
All executive officers and directors as a group 186,747 *
- -------------------
* Represents holding of less than 1%.
(a) Cypress Offshore and CMBP are affiliates of Cypress. Messrs. Spalding and
Stern are members of Cypress and may be deemed to share beneficial
ownership of the shares of Holdings Common Stock shown as beneficially
owned by the Cypress Funds. Both of such individuals disclaim beneficial
ownership of such shares.
(b) Cypress Offshore owns its interest in Holdings through its wholly owned
subsidiary Cypress Garden Ltd.
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. List of documents filed as part of this report:
1. FINANCIAL STATEMENTS
Page No.
--------------
- Report of Independent Auditors F-1 to F-2
- Balance Sheets - as of January 27, 2002 F-3
and January 28, 2001.
- Statements of Operations - for the F-4
years ended January 27, 2002, January
28, 2001 and January 30, 2000.
- Statements of Changes in F-5
Shareholder's Equity (Deficiency in Assets -
for the years ended January 27, 2002,
January 28, 2001, and January 30, 2000.
- Statements of Cash Flows - for the years ended January 27, F-6
2002, January 28, 2001 and January 30, 2000.
- Notes to Financial Statements F-7 to F-22
2. FINANCIAL STATEMENT SCHEDULES
-----------------------------
Schedules not included have been omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
II - Valuation and qualifying accounts- F-23 to F-25
years ended January 27, 2002, January 28, 2001 and
January 30, 2000.
3. EXHIBITS
Exhibit No. Description of Exhibit
2.1 Agreement and Plan of Merger dated as of November 22, 1997,
between FNC Holdings Inc. (formerly General Host Corporation)
and Cyrus Acquisition Corp. (Incorporated by reference to the
Company's Registration Statement (Form
27
S-4), Registration No. 333-50815 ("the Form S-4"), Exhibit
2.1.)
3.1 Restated Articles of Incorporation of the Company
(Incorporated by reference to the Form S-4, Exhibit 3.1.)
3.2 Bylaws of the Company (Incorporated by reference to the Form
S-4, Exhibit 3.2.)
4.1 Indenture dated as of February 26, 1998 between the Company
and Bankers Trust Company (Incorporated by reference to the
Form S-4, Exhibit 4.1.)
10. Material Contracts
10.1 Credit Agreement dated as of December 24, 1997 among the
Company, Cyrus Acquisition Corp., General Host Corporation,
the lenders party thereto, The Chase Manhattan Bank and
Goldman Sachs Credit Partners LLP (Incorporated by reference
to the Form S-4, Exhibit 10.1.)
10.2 Amendment No. 2 and Waiver, dated as of December 20, 1999, to
the Credit Agreement dated as of December 24, 1997, as amended
by Amendment No. 1, dated as of April 15, 1998, among Frank's
Nursery & Crafts, Inc., FNC Holdings Inc., the lenders party
thereto, The Chase Manhattan Bank and Goldman Sachs Credit
Partners L.P. (Incorporated by reference to the 1999 Form 10-Q
filed December 22, 1999 Exhibit 10.2., File No. 1-5364)
10.3 Amendment No. 3, dated as of April 20, 2000, to the Credit
Agreement dated as of December 24, 1997, as amended by
Amendment No. 2, dated as of December 25, 1999 and Amendment
No. 1, dated as of April 15, 1998, among Frank's Nursery &
Crafts, Inc., FNC Holdings Inc., the lenders party thereto,
The Chase Manhattan Bank and Goldman Sachs Credit Partners
L.P. (Incorporated by reference to the 1999 Form 10-K filed
April 28, 2000)
10.4 Stock Purchase Agreement dated as of April 27, 2000, between
FNC Holdings Inc., Cypress Merchant Banking Partners, L.P. and
Cypress Gardens Ltd. (Incorporated by reference to the 1999
Form 10-K filed April 28, 2000)
10.5 Amended and Restated Debtor In Possession Loan and Security
Agreement dated as of February 19, 2001, by and among Frank's
Nursery & Crafts, Inc., the lenders that are signatories
thereto, Wells Fargo Retail Finance, LLC, as agent
(Incorporated by reference to the 2000 Form 10-K filed April
30, 2001)
10.6 Employment Agreement dated as of January 18, 2001 by and
between the Company and Joseph R. Baczko (Incorporated by
reference to the 2000 Form 10-K filed April 30, 2001)
28
10.7 Employment Agreement dated as of January 18, 2001 by and
between the Company and Larry T. Lakin (Incorporated by
reference to the 2000 Form 10-K filed April 30, 2001)
10.8 Employment Agreement dated as of January 18, 2001 by and
between the Company and Adam Szopinski (Incorporated by
reference to the 2000 Form 10-K filed April 30, 2001)
10.9 Certificate of the Secretary dated June 20, 2001 for Board
Approval of a salary supplement for the Co-CEO's and
modification of the Severance Policy for the Co-CEO's
(Incorporated by reference to the Form 10-Q filed on September
26, 2001)
10.10 Key Employee Retention and Incentive Program dated June 7,
2001 (Incorporated by reference to the Form 10-Q filed on
September 26, 2001)
10.11 Frank's Nursery & Crafts, Inc. Severance Plan (Incorporated by
reference to the Form 10-Q filed on September 26, 2001)
10.12 Employment Agreement dated as of September 25, 2001 by and
between the Company and Steven S. Fishman (Incorporated by
reference to the Form 10-Q filed on December 19, 2001)
B. Reports on Form 8-K
During the last quarter of the period covered by this report,
the Company did not file a report on Form 8-K.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FRANK'S NURSERY & CRAFTS, INC.
Date: April 29, 2002 By /s/Steven S. Fishman
----------------------------
Steven S. Fishman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: April 29, 2002 /s/Steven S. Fishman
------------------------------
Steven S. Fishman
Chief Executive Officer
Director
(Principal Executive Officer)
Date: April 29, 2002 /s/Adam Szopinski
------------------------------
Adam Szopinski
President,
Chief Operating Officer
and Director
Date: April 29, 2002 /s/ Larry T. Lakin
------------------------------
Larry T. Lakin
Vice Chairman, Chief
Financial Officer, Treasurer
and Director
(Principal Financial and
Accounting Officer)
Date: April 29, 2002 /s/ David P. Spalding
----------------------------
David P. Spalding
Director
30
Date: April 29, 2002 /s/James A. Stern
----------------------------
James A. Stern
Director
Date: April 29, 2002 /s/Bahram Shirazi
----------------------------
Bahram Shirazi
Director
Date: April 29, 2002 /s/Jeffrey P. Hughes
----------------------------
Jeffrey P. Hughes
Director
31
Report of Independent Auditors
The Board of Directors and Shareholder
Frank's Nursery & Crafts, Inc.
We have audited the accompanying balance sheets of Frank's Nursery & Crafts,
Inc. (the "Company") as of January 27, 2002 and January 28, 2001, and the
related statements of operations, changes in shareholder's equity (deficiency in
assets), and cash flows for each of the three years in the period ended January
27, 2002. Our audits also included the financial statement schedule listed in
the Index at Item 14(A). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Frank's Nursery & Crafts, Inc.
at January 27, 2002 and January 28, 2001, and the results of its operations and
its cash flows for each of the three years in the period ended January 27, 2002,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
F-1
The accompanying financial statements have been prepared assuming that Frank's
Nursery & Crafts, Inc. will continue as a going concern. As more fully described
in Notes 1 and 8, the Company has incurred recurring operating losses, has a
working capital deficiency and is in default of certain covenants under the
terms of the agreement for its senior subordinated notes and its
debtor-in-possession financing agreement. The Company also filed for
reorganization under Chapter 11 of the United States Bankruptcy Code on February
19, 2001. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to these matters
are also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Detroit, Michigan
March 29, 2002
F-2
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
JANUARY 27, JANUARY 28,
2002 2001
----------- -----------
(DEBTOR-IN-
POSSESSION)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,870 $ 10,607
Marketable securities 1,061 1,812
Accounts receivable 2,405 1,712
Notes receivable 1,631
Merchandise inventory 37,629 73,125
Assets to be disposed of 9,051 33,500
Prepaid expenses and other current assets 7,058 4,551
---------- ----------
Total current assets 60,705 125,307
PROPERTY, PLANT AND EQUIPMENT, NET 96,055 129,863
GOODWILL, LESS ACCUMULATED AMORTIZATION OF
$7,451 FOR 2000 16,600
OTHER ASSETS AND DEFERRED CHARGES 8,553 14,251
---------- ----------
$ 165,313 $ 286,021
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY
IN ASSETS)
CURRENT LIABILITIES:
Accounts payable $ 8,437 $ 32,606
Accounts payable prepetition 32,487
Accrued expenses 25,350 39,417
Accrued expenses prepetition 26,677
Notes payable to banks 24,297 47,352
Prepetition long-term debt 139,315
Current portion of long-term debt 161,575
---------- ----------
Total current liabilities 256,563 280,950
---------- ----------
OBLIGATIONS UNDER CAPITAL LEASES 3,220 5,383
OTHER LIABILITIES 3,525 5,627
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY (DEFICIENCY IN ASSETS):
Common stock, $1.00 par value, 1,000
shares authorized, 1,000 shares issued
and outstanding 1 1
Capital in excess of par value 165,999 165,999
Net parent investment 16,117 16,177
Retained deficit (280,112) (188,116)
---------- ----------
Total shareholder's equity (deficiency in
assets) (97,995) (5,939)
---------- ----------
$ 165,313 $ 286,021
========== ==========
See accompanying notes.
F-3
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Fiscal Year Ended
------------------------------------------
JANUARY 27, January 28, January 30,
2002 2001 2000
------------ ----------- -----------
(DEBTOR-IN-
POSSESSION)
NET SALES $ 371,417 $ 436,947 $ 487,332
OPERATING COSTS AND EXPENSES:
COST OF SALES, INCLUDING
BUYING AND OCCUPANCY 297,850 317,090 337,212
SELLING, GENERAL AND
ADMINISTRATIVE 109,404 136,730 137,657
REORGANIZATION, RESTRUCTURING
AND OTHER RELATED CHARGES 40,887 127,047
AMORTIZATION OF GOODWILL 1,631 2,438 2,438
OTHER INCOME (1,221) (1,017) (3,506)
---------- ---------- ----------
TOTAL OPERATING COSTS AND
EXPENSES 448,551 582,288 473,801
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (77,134) (145,341) 13,531
INTEREST AND DEBT EXPENSE 10,632 23,898 22,827
---------- ---------- ----------
LOSS BEFORE INCOME TAX BENEFIT
AND EXTRAORDINARY LOSS (87,766) (169,239) (9,296)
INCOME TAX BENEFIT (949)
---------- ---------- ----------
NET LOSS BEFORE EXTRAORDINARY
LOSS (87,766) (168,290) (9,296)
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT (4,230)
--------- ---------- ----------
NET LOSS $ (91,996) $ (168,290) $ (9,296)
========== ========== ==========
See accompanying notes.
F-4
FRANK'S NURSERY & CRAFTS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
FISCAL YEARS ENDED JANUARY 27, 2002, JANUARY 28, 2001, AND JANUARY 30, 2000
(IN THOUSANDS)
Capital in Total
Common Excess of Net Parent Retained Shareholder's
Stock Par Value Investment Deficit Equity
-------- ---------- ---------- --------- -------------
Balance at January 31, 1999 $ 1 $165,999 $ (4,407) $ (10,530) $151,063
Net loss (9,296) (9,296)
Increase in net parent investment 6,059 6,059
------- -------- -------- --------- --------
Balance at January 30, 2000 1 165,999 1,652 (19,826) 147,826
Net loss (168,290) (168,290)
Capital contribution 15,000 15,000
Decrease in net parent investment (475) (475)
------- -------- -------- --------- --------
Balance at January 28, 2001 1 165,999 16,177 (188,116) (5,939)
Net loss (91,996) (91,996)
Decrease in net parent investment (60) (60)
------- -------- -------- --------- --------
Balance at January 27, 2002 $ 1 $165,999 $ 16,117 $(280,112) $(97,995)
======= ======== ======== ========= ========
See accompanying notes.
F-5
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Fiscal Year Ended
------------------------------------
JANUARY 27, January 28, January 30,
2002 2001 2000
----------- ----------- -----------
(DEBTOR-IN
POSSESSION)
OPERATING ACTIVITIES:
Net loss $ (91,996) $ (168,290) $ (9,296)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation 16,515 18,361 17,590
Amortization 3,600 3,874 3,714
Debt issue costs (extraordinary loss) 3,458
Provision for store closings and other costs 1,360
Inventory clearance reserve 8,076
Noncash portion of reorganization,
restructuring and other related charges 34,309 125,891
Gain from pension plan reversion (2,094)
Other, net (2,082) 773 (954)
---------- --------- ---------
(28,120) (19,391) 10,320
Changes in operating assets and liabilities:
Marketable securities (102) (117) (2,877)
Notes receivable 483
Accounts receivable (1,093) 262 227
Merchandise inventory 27,420 27,698 (2,892)
Prepaid expenses and other current assets (2,686) 2,709 (976)
Accounts payable 8,318 17,608 (18,784)
Accrued expenses 14,868 (2,349) (634)
---------- --------- --------
Net cash provided by (used in)
operating activities 18,605 26,420 (15,133)
---------- --------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,794) (17,572) (29,695)
Net proceeds from asset sales 20,019 1,032 910
---------- --------- ---------
Net cash provided by (used in) investing
activities 17,225 (16,540) (28,785)
---------- --------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in net parent investment (60) 14,525 (2,326)
Payment of long-term debt and capital lease
obligations (21,452) (8,005) (3,279)
Proceeds from pension plan reversion 11,222
Increase (decrease) in notes payable to
banks, net (23,055) (14,648) 42,000
---------- --------- ---------
Net cash provided by (used in)
financing activities (44,567) (8,128) 47,617
---------- --------- ---------
Increase (decrease) in cash and cash equivalents (8,737) 1,752 3,699
Cash and cash equivalents at beginning of
period 10,607 8,855 5,156
---------- --------- ---------
Cash and cash equivalents at end of period $ 1,870 $ 10,607 $ 8,855
========== ========= =========
See accompanying notes.
F-6
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE INDICATED)
NOTE 1: REORGANIZATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
On February 19, 2001 (the "Petition Date"), the Company and Holdings (the
"Debtors") each filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11 Reorganization") in the United States Bankruptcy
Court for the District of Maryland, Baltimore Division (the "Court").
The Company's decision to seek Chapter 11 Reorganization was, in part, the
consequence of several developments during fiscal year 2000 relating to sales,
asset disposition and funding.
During the first half of 2000, weather patterns negatively impacted lawn and
garden product sales across the Company's principal markets. During the third
quarter of 2000, the Company decided to close 44 under-performing stores,
liquidate their inventories, and sell 33 of the 44 closed stores that were
owned by the Company. Later in 2000, it became apparent that the Company's
Trim-a-Tree holiday season sales were below expectations, which was consistent
with the general softness in sales at retailers during this period.
During January of 2001, notwithstanding excess borrowing availability under its
existing bank credit facilities, the Company was unable to draw down sufficient
funding to meet its working capital needs because its banks asserted that
various conditions to borrowing had not been met. In the relatively short period
between the time that its credit facilities were curtailed and the necessity of
securing alternative financing, it became apparent that the most appropriate
method to secure financing, ensure product availability for the spring season,
and achieve restructuring objectives was through the Chapter 11 filings.
During the Chapter 11 Reorganization the Company has continued to manage and
operate its assets and business as a debtor-in-possession. Additionally, an
unsecured creditors' committee was appointed and has the right to review and
object to any proposed non-ordinary course of business transactions and
otherwise participate in the Chapter 11 Reorganization.
As of the Petition Date, actions to collect prepetition indebtedness of the
Debtors were stayed and other contractual obligations of the Debtors could not
be enforced against the Debtors. In addition the Debtors may reject prepetition
executory contracts and lease obligations, and parties affected by these
rejections may file claims with the Court in accordance with the
F-7
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 (CONTINUED)
Bankruptcy Code. Substantially all liabilities as of the Petition Date are
subject to settlement under a plan of reorganization, which is to be voted upon
by impaired classes of creditors and equity security holders and is subject to
approval by the Court.
On February 11, 2002, the Company filed a "Disclosure Statement" pursuant to
Section 1125 of the Bankruptcy Code, and a Joint Plan of Reorganization with the
Court. A First Amended Joint Plan of Reorganization (the "Plan") was filed on
March 13, 2002. The Court has approved the Disclosure Statement as containing
adequate information thus allowing the Company to solicit votes from creditors
and equity holders for approval of the Plan. The Court has scheduled a hearing
on May 1, 2002 for consideration of confirmation of the Plan. Upon confirmation
of the Plan, all claims against and interest in the Debtors will be discharged.
The type and amount of distributions that each creditor would receive under the
Plan will depend upon the class in which the claim is placed. The largest class
consists of general unsecured claims. They will receive on a pro rata basis,
100% of the new common stock to be outstanding on the effective date of the
Plan. The Plan, as filed, provides for the distribution of warrants to purchase
up to 3% of the new common stock to the Company's prepetition common stock
holders. The Plan calls for the cancellation of the currently outstanding Common
Stock on the effective date of the Plan.
Management's plans in regard to the recurring operating losses, working capital
deficiency, and defaults of certain covenants under the terms of the agreement
for its senior subordinated notes and its debtor-in-possession financing
agreement are more fully described in the Plan.
The accompanying financial statements have been presented in accordance with the
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" and have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
Pending the outcome of the May 1, 2002 hearing on confirmation of the Plan,
circumstances related to this event, and future financing, such realization of
assets and liquidation of liabilities is subject to uncertainty. Further, the
Plan would materially change the amounts reported in the financial statements,
which do not give effect to
F-8
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 (CONTINUED)
any adjustments to the carrying value of assets or amounts of liabilities that
will be necessary under fresh start accounting upon the effective date of the
Plan. The ability of the Company to continue as a going concern will depend
upon, among other things, confirmation of the Plan, future profitable
operations, the Company's ability to comply with requirements of a new financing
agreement upon emergence from the Chapter 11 Reorganization and the ability to
generate sufficient cash from operations and financing sources to meet the
Company's obligations. Additionally, the accompanying financial statements do
not include any adjustments that would be required if the Company were in
liquidation.
Substantially all of the Company's prepetition liabilities are subject to
compromise under the Chapter 11 Reorganization. The Company's senior
subordinated notes and mortgage debt are in default with the terms of the
applicable debenture and loan agreements, respectively. For financial reporting
purposes subsequent to the Petition date, those liabilities and obligations have
been segregated and reclassified as prepetition debt on the Balance Sheet. The
Company discontinued accruing interest on the senior subordinated notes. The
ultimate adequacy of security for any secured debt obligations and settlement of
all liabilities and obligations cannot be determined until the Plan is
confirmed.
NOTE 2: DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
Frank's Nursery & Crafts, Inc. ("Frank's" or the "Company") is a wholly-owned
subsidiary of FNC Holdings Inc. ("Holdings"). Holdings is principally owned by
The Cypress Group LLC ("Cypress").
The Company operates the largest chain of specialty retail stores in the United
States devoted to the sale of lawn and garden products, Christmas trim-a-tree
merchandise, artificial flowers and arrangements, garden and floral crafts, and
home decorative products. As of January 27, 2002 the Company operated 170 retail
stores located in 14 states primarily in the East, Middle Atlantic and Midwest
regions of the United States.
F-9
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 (CONTINUED)
FISCAL YEAR
The fiscal year is comprised of 52 or 53 weeks, ending on the last Sunday in
January. The 2001 fiscal year reflects a 52-week period ended January 27, 2002
("2001"). The 2000 fiscal year reflects a 52-week period ended January 28, 2001
("2000") and the 1999 fiscal year reflects a 52-week period ended January 30,
2000 ("1999").
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements. Estimates also affect reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when the customer takes possession of the
merchandise.
FAIR VALUE OF BALANCE SHEET FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, marketable securities, notes receivable, accounts receivable and
accounts payable approximate fair value because of the immediate or short-term
maturity of these financial instruments. Due to the Chapter 11 Reorganization
and its potential impact on final settlement of all prepetition liabilities, it
is not practicable to measure the fair value of the Company's debt at January
27, 2002.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments, such as U.S. government
securities and bank certificates of deposit having original maturities of three
months or less, and are carried at cost plus accrued interest.
MARKETABLE SECURITIES
Marketable securities represent an investment in a guaranteed fund restricted
for the funding of the Company's 401(k) match program (Note 11). The securities
are classified as held-to-maturity in accordance with Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" and are reported at amortized cost. The fair value of these
securities approximate their costs at January 27, 2002.
F-10
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 (CONTINUED)
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost or market, with cost
being determined under the first-in, first-out method.
PRE-OPENING COSTS
Pre-opening costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed when the advertising first takes place.
Advertising expenditures were $15,969 for 2001, $22,707 for 2000 and $22,300 for
1999.
STORE CLOSING COSTS
Provisions for store closing costs are charged to operations in the period when
the decision is made to close a retail unit.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including significant improvements thereto, are
recorded at cost. Expenditures for repairs and maintenance are charged to
expense as incurred. The cost of plant and equipment is depreciated over the
estimated useful lives of the related assets using the straight-line method.
Estimated useful lives, including capital leases, are: buildings, 10-40 years
or, if shorter, the terms of the lease; equipment, 3-20 years. Leasehold
improvements are depreciated over the lease terms of the respective leases or
the estimated useful lives. Upon sale or other disposition of assets, the cost
and related accumulated depreciation are removed from the accounts and the
resulting gain or loss, if any, is recognized in the statement of operations.
GOODWILL
Goodwill represented the costs in excess of the fair value of identifiable
assets for acquired businesses and was amortized on a straight-line basis over
the estimated future periods benefitted, not to exceed forty years. Due to
recent events and circumstances, including the Chapter 11 Reorganization and
recurring operating losses, the Company reevaluated the useful lives and
recoverability of its remaining goodwill . As a result the Company wrote-off the
remaining balance of goodwill of $14,382 during 2001. This impairment loss was
reflected in the reorganization, restructuring and other related charges in the
statements of operations.
F-11
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment of long-lived assets, including goodwill, is reviewed annually or
when events and circumstances warrant such a review by the Company in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
(FAS 121). If indicators are present, estimated future undiscounted cash flows
associated with the asset are compared to the asset's carrying value to
determine if an impairment exists. If the expected future cash flows and
eventual disposition are less than the carrying amount of such assets, the
Company recognizes an impairment loss for the difference between the carrying
amount and the estimated fair value. Fair value is estimated using discounted
future cash flows.
LEASES
Leases that meet the accounting criteria for capital leases are recorded as
property, plant and equipment, and the related capital lease obligations (the
aggregate present value of minimum future lease payments, excluding executory
costs such as taxes, maintenance and insurance) are included in debt.
Depreciation and interest are charged to expense, and rent payments are treated
as payments of long-term debt, accrued interest and executory costs. All other
leases are accounted for as operating leases and rent payments are charged to
expense as incurred.
INCOME TAXES
Income taxes for Frank's are included in the consolidated U.S. federal income
tax return of Holdings. In preparing its financial statements, Frank's has
determined its tax provision on a separate return basis. Deferred tax assets and
liabilities are determined based on differences between the financial reporting
and income tax bases of assets and liabilities using enacted tax rates and laws
in effect when the differences are expected to reverse.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS 141,
"Business Combinations", and FAS 142, "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
F-12
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 (CONTINUED)
continue to be amortized over their useful lives. As a result of the Chapter 11
Reorganization and the write-off of goodwill in fiscal 2001, the adoption of FAS
141 and FAS 142 will not have a significant impact on the Company's earnings and
financial position.
In October 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" effective for fiscal years beginning after
December 15, 2001. This standard superseded FAS 121 and provides a single
accounting model for long-lived assets to be disposed. FAS 144 provides guidance
on differentiating between assets held and used and assets to be disposed.
Assets to be disposed would be classified as held for sale (and depreciation
would cease) when management, having the authority to approve the action,
commits to a plan to sell the assets meeting all required criteria. The Company
plans to adopt this statement on January 28, 2001, but has not yet determined
what effect, if any, FAS 144 will have on its earnings and financial position.
NOTE 3: STORE CLOSURE PROGRAMS
During fiscal 2001, as part of the restructuring process, the Court approved the
Company's plan to close 46 stores the ("2001 Program"). The last 12 were closed
as of March 2002. As a result, the Company recorded charges of $6.7 million in
2001, of which $4.1 million, included in cost of goods sold, represents a loss
for the inventory that was liquidated. The remaining $2.6 million is included in
the reorganization/restructuring charge of $40.9 million (Note 4), which
represents fixed asset write-downs to fair value.
During the fourth quarter of 2000 the Company implemented a store closure
program under which the Company closed 44 underperforming stores (the "2000
Program"). All the stores were closed as of the end of March 2001. The 2000
Program resulted in a $17.2 million charge in fiscal 2000, of which $3.2 million
represented a loss for the inventory that was liquidated and was included in
cost of goods sold. The remaining $14 million was included in the
reorganization/restructuring charge of $127 million (Note 4) and was comprised
of $.8 million for termination benefits and severance costs, and $13.2 million
related to the write-down of fixed assets to fair value. Fair value was measured
by using the estimated net
F-13
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 (CONTINUED)
selling price based upon actual bids and appraisals. The estimated fair value of
the 33 owned stores was $33.5 million at January 28, 2001 and was classified in
the caption of "Assets to be disposed of" on the Balance Sheet. During 2001 the
Company sold 21 of the 33 properties and added three locations from the 2001
Program. In addition the Company reevaluated the estimated fair value for these
stores based upon the current retail market and actual bids which resulted in an
additional write-down in 2001 of $6.2 million that is included in the
reorganization/restructuring charge (Note 4). The estimated fair value of
"Assets to be disposed of" for the 15 remaining stores at January 27, 2002 is
$9.1 million.
NOTE 4: REORGANIZATION, RESTRUCTURING AND OTHER RELATED CHARGES
As a result of the Company's operating losses for 2001 and 2000, and the Chapter
11 Reorganization (Note 1), the Company performed an impairment analysis as
required under FAS 121 for both 2001 and 2000. The estimated fair value of the
impaired assets was determined by comparing expected future cash flows for each
store to the combined net property, plant and equipment and allocated goodwill.
In 2000 the Company rejected store leases and reversed the store closing
provision that originated in fiscal 1993. Additionally, the Company recorded a
fixed asset impairment charge related to 22 leased stores that were approved for
closure by the Court subsequent to 2000.
Bankruptcy related costs for 2001 include $4.6 million for professional fees,
$3.2 million for severance and employee retention plans approved by the Court
under the Chapter 11 Reorganization and $.9 million for miscellaneous items.
The impairment analysis and the Chapter 11 Reorganization resulted in the
following charges:
2001 2000
------- -------
Write-down of goodwill $14,382 $73,591
Write-down of fixed assets 15,197 42,771
Store closure program (Note 3) 2,600 14,031
Write-off of fixed assets
related to 22 store leases 3,423
Write-off of 1993 store
closing related liabilities (7,583)
Bankruptcy related costs 8,708 814
------ -------
Total $40,887 $127,047
====== =======
F-14
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: OTHER INCOME
2001 2000 1999
------ ------ ------
Interest on cash
equivalents and
marketable securities $ 128 $ 430 $ 644
Gain on the sale of
property and the termination
or sale of leases 856 559 556
Gain on reversion of pension
plan 2,094
Other 237 28 212
------ ------ ------
$1,221 $1,017 $3,506
====== ====== ======
The gain of $2,094 in 1999 resulted from the reversion of a noncontributory,
defined benefit pension plan which covered former employees of several
discontinued operations of Holdings.
F-15
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INCOME TAXES
The reconciliation of income taxes computed at the federal statutory tax rate to
income tax benefit is:
2001 2000 1999
---------- ---------- ----------
Federal income tax (benefit) based
on statutory rates $ (29,840) $ (57,541) $ (3,161)
State and local income tax (benefit) (1,755) (3,385) (186)
Increases (decreases) in rates
resulting from:
Limitation (utilization)
of tax loss carryforwards 26,815 27,467 2,492
Nondeductible expenses including
goodwill amortization and
write-off 6,000 33,347 829
Other (1,220) 112 26
Federal income tax refund from
net operating loss carrybacks --- 949 ---
--------- ---------- ---------
$ --- $ 949 $ ---
========= ========== =========
Deferred tax assets and liabilities are composed of the following:
2001 2000
---------- ----------
DEFERRED TAX ASSETS:
Inventory $ 2,792 $ 490
Accrued expenses 1,853 1,478
Other 4,455 5,487
Store closing reserve 6 225
Property, plant & equipment 12,530 19,848
Credit carryforwards 1,337 1,337
NOL carryforward 65,685 41,744
--------- ---------
Total deferred tax assets 88,658 70,609
--------- ---------
DEFERRED TAX LIABILITIES:
Assets to be disposed of (3,259) (12,060)
Other (382) (652)
--------- ---------
Total deferred tax liabilities (3,641) (12,712)
--------- ---------
Net deferred tax assets 85,017 57,897
Valuation allowance (85,017) (57,897)
--------- ---------
$ --- $ ---
========= =========
F-16
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 (CONTINUED)
Income taxes for fiscal 2000 represent a benefit resulting from the realization
of certain net operating losses for which a full valuation allowance has been
previously established. The Company reduced their valuation allowance by $.9
million based upon regulatory approval for certain tax matters and immediately
realized the related deferred tax asset when the tax refund was received.
Due to the Company's historical operating results, a valuation allowance for the
net deferred tax asset balance is recorded at January 27, 2002 and January 28,
2001.
As discussed in Note 2, Frank's files a consolidated tax return with Holdings.
At January 27, 2002 the federal tax NOL carryforwards, for Holdings, on a
consolidated basis, approximated $208,000, the federal tax NOL carryforwards
attributable to Frank's on a separate return basis approximated $182,000. The
net operating loss will expire as follows: in January 2009 - $30,000, January
2010 - $2,000, January 2011 - $4,000, January 2012 - $8,000, January 2013 -
$27,000, January 2020 - $3,000, January 2021 - $42,000 and January 2022 -
$66,000.
Holdings underwent an ownership change on December 24, 1997. Net operating
losses incurred prior to the ownership change will be subject to usage
limitations imposed by Internal Revenue Code Section 382. Of Holdings total net
operating loss carryforward of $208,000, approximately $130,000 is not subject
to these limitations. Approximately $7,200 of the NOL subject to limitations may
be utilized each tax year.
As a result of the proposed bankruptcy plan of reorganization, Frank's will
undergo an additional ownership change and losses incurred prior to the
effective date of the reorganization will also be subject to an additional
Section 382 limitation. In addition, Frank's will recognize cancellation of
indebtedness income which will be exempt from tax, thus reducing its net
operating losses and tax credits as well as other tax attributes.
F-17
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
2001 2000
--------- ---------
Land $ 18,862 $ 22,596
Buildings:
Owned 101,544 110,963
Capital leases (Note 10) 7,855 14,415
Equipment 83,917 76,782
Leasehold improvements 42,483 48,050
Construction in progress 721 9,024
-------- --------
255,382 281,830
Less accumulated depreciation,
including capital lease amounts
of $6,985 and $11,079 159,327 151,967
-------- --------
$ 96,055 $129,863
======== ========
NOTE 8: FINANCING AND LONG-TERM DEBT
2001 2000
---------- ----------
SENIOR DEBT:
Mortgage notes originally due
on varying dates from
February 1, 2001
to September 1, 2007 $ 22,045 $ 27,096
Notes payable to banks 24,297 14,957
Capital leases (Note 10) 5,490 9,905
-------- --------
51,832 51,958
SUBORDINATED DEBT:
10 1/4% Senior Subordinated Notes
originally due March 1, 2008 115,000 115,000
-------- --------
166,832 166,958
Less debt classified as prepetition
debt 163,612
Less debt classified as current 161,575
-------- --------
Obligations under capital leases $ 3,220 $ 5,383
======== ========
F-18
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 (CONTINUED)
On February 19, 2001, the Company entered into a two-year, $100 million
debtor-in-possession financing agreement (the "DIP Financing Agreement") with a
lender to finance, among other things, the Company's working capital
requirements during Chapter 11 Reorganization. Borrowings under the DIP
Financing Agreement are limited to the availability under a borrowing base which
includes eligible inventory and certain real estate interests. Borrowings are
adjusted daily based upon cash availability and availability under the borrowing
base. The interest rates are based upon a Base rate or Eurodollar rate plus an
applicable margin based on availability as set forth in the DIP Financing
Agreement. The minimum interest rate is 7%. At January 27, 2002, availability
under the DIP Financing Agreement approximated $19.3 million with borrowings
outstanding of $24.3 million.
The initial borrowings under the DIP Financing Agreement were used to retire the
Company's outstanding obligations under a credit facility that existed at
January 28, 2001. The total debt retired and associated fees totaled $62.1
million, resulting in an extraordinary loss from the early extinguishment of
debt of $4.2 million in the 2001 first half, primarily for the write-off of debt
issue costs.
The DIP Financing Agreement requires the Company to maintain certain financial
ratios. The Company was not in compliance with the EBITDA (earnings before
interest, taxes, depreciation, amortization, reorganization/restructuring and
extraordinary charges) covenant at January 27, 2002. The lender did not provide
a waiver for noncompliance of the default.
In accordance with AICPA Statement of Position 90-7 no interest is being accrued
post-petition for the subordinated notes. Contractual interest for fiscal 2001
was $21.5 million.
At January 28, 2001 the senior subordinated notes and mortgage debt were
classified as current due to cross defaults when the covenants were violated
under the previously held credit facility as well nonpayment of interest under
the subordinated notes and nonpayment of monthly principal and interest under
the mortgage notes as a result of the bankruptcy filing.
The mortgage notes have interest rates varying from 7.8% to 9.625%, and the
notes mature with balloon payments on varying dates from February 1, 2001 to
September 1, 2007. The mortgage notes are secured by retail properties owned by
the Company.
F-19
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 (CONTINUED)
As discussed in Note 2, the current market value of the Company's long-term debt
would be substantially below the recorded amounts and is not readily estimable.
Cash interest paid was $4.8 million in 2001, $21,281 in 2000 and $20,436 in
1999.
NOTE 9: NET PARENT INVESTMENT
Cypress contributed $15 million in 2000 and received 2,801,204 shares of
Holdings common stock. The capital, used primarily to fund the company's POS
system, resulted in an increase to the company's net parent investment by $15
million.
In addition the Company is responsible for certain liabilities of discontinued
operations for businesses that Holdings had sold in prior years. These
liabilities are included in the net parent investment account. The remaining
liability was $1.1 million at January 27, 2002.
F-20
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: LEASES
The Company's capital leases are principally for retail store locations, for
periods ranging up to 25 years. The Company's operating leases are principally
for retail store locations, some of which include renewal, purchase or
escalation clauses.
Under the Chapter 11 Reorganization (Note 1), the Company has the right, subject
to Court approval, to assume or reject executory contracts and unexpired leased
as disclosed in the Disclosure Statement. Therefore, the commitments shown below
may not reflect the actual cash outlay in the future.
Annual minimum lease payments under all capital and operating leases with lease
terms longer than one year at January 27, 2002, are as follows:
- -----------------------------------------------------------------
Capital Operating
Leases Leases
- -----------------------------------------------------------------
2002 $ 1,846 $ 12,100
2003 1,528 11,392
2004 812 10,598
2005 810 9,640
2006 690 8,232
Thereafter 1,426 39,476
-------- --------
Total minimum lease obligations 7,112 $ 91,438
========
Amount representing future interest (1,622)
--------
Present value of net minimum lease
obligations $ 5,490
========
Future sublease rental income $ 3,682
========
Rent expense was $20,410 in 2001, $23,031 in 2000 and $22,399 in 1999. Rent
expense includes additional rentals based on retail store sales (in excess of
the minimums specified in leases) of $133 in 2001, $170 in 2000 and $322 in 1999
and is reduced by sublease rental income of $673 in 2001, $581 in 2000 and $547,
in 1999.
F-21
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: 401(k) PLAN
The Company provides a 401(k) Plan permitting employees to invest from 1% to 15%
of their salary in outside mutual funds. The plan provides an employer match of
50% of the employee contribution. The Company's contribution is limited to 3% of
salary and became effective November 1998. Subsequent to January 27, 2002 the
Company suspended the Company match.
NOTE 12: LITIGATION AND OTHER CONTINGENCIES
In the normal course of business the Company is subject to various claims. These
claims should be resolved in connection with the Company's Chapter 11
Reorganization. In the opinion of management, any ultimate liability arising
from or related to these claims should not have a material adverse effect on
future results of operations or the consolidated financial position of the
Company.
F-22
Schedule II
FRANK'S NURSERY & CRAFTS, INC.
(DEBTOR-IN-POSSESSION)
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEAR ENDED JANUARY 27, 2002
(In thousands)
Additions
-----------------------
Balance, Charged Charged Balance,
Beginning to Costs to Other End
of Year and Expenses Accounts Deductions of Year
--------- ------------ -------- ---------- ---------
Inventory valuation reserve: $ 1,274 $8,076 $1,847 (1) $ 7,503
Provision for store closing reserve:
Current 1,498 92 (2) 873 (3)
699 (4) 18
(1) Represents reduction against cost of goods sold.
(2) Represents charge for restructuring.
(3) Represents payment of severance and tax liability for the 2000 Store
Closure Program.
(4) Represents payments of liabilities.
F-23
Schedule II
FRANK'S NURSERY & CRAFTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEAR ENDED JANUARY 28, 2001
(In thousands)
Additions
-----------------------
Balance, Charged Charged Balance,
Beginning to Costs to Other End
of Year and Expenses Accounts Deductions of Year
--------- ------------ -------- ---------- ---------
Inventory valuation reserve: $ 1,556 $ 282 (1) $ 1,274
Provision for store closing reserve:
Current 2,502 $ 873 (2) $ 100 (3) 1,126 (4)
851 (5) 1,498
Noncurrent 6,205 100 (6)
6,105 (5) -0-
(1) Represents reduction against cost of goods sold.
(2) Represents severance and taxes for the 2000 Store Closure Program.
(3) Reclassification from noncurrent portion of reserve.
(4) Represents payments of liabilities and loss on sale of property.
(5) Represents charge for restructuring and asset impairment.
(6) Reclassification to current portion of reserve.
F-24
Schedule II
FRANK'S NURSERY & CRAFTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEAR ENDED JANUARY 30, 2000
(In thousands)
Additions
-----------------------
Balance, Charged Charged Balance,
Beginning to Costs to Other End
of Year and Expenses Accounts Deductions of Year
--------- ------------ -------- ---------- ---------
Inventory valuation reserve: $ 2,855 $ 1,299 (1) $ 1,556
Provision for store closing reserve:
Current 2,547 $ 1,720(3) 1,765 (2) 2,502
Noncurrent 6,565 $1,360 1,720 (4) 6,205
(1) Represents reduction against cost of goods sold.
(2) Represents payments of liabilities and loss on sale of property.
(3) Reclassification from noncurrent portion of reserve.
(4) Reclassification to current portion of reserve.
F-25