Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 19, 2002
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 1-5364
FRANK'S NURSERY & CRAFTS, INC.
------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 47-0863558
-------------------- ---------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
580 Kirts Blvd. Suite 300 Troy, Michigan 48084
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (248) 712-7000
-------------------
-------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: Common Stock, $1.00
par value, -0- shares outstanding as of July 3, 2002.
FRANK'S NURSERY & CRAFTS, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
DEBTOR-IN-POSSESSION
(IN THOUSANDS)
Sixteen Weeks Ended
----------------------
MAY 19, May 20,
2002 2001
--------- ---------
NET SALES $ 110,992 $ 153,138
OPERATING COSTS AND EXPENSES:
Cost of sales, including buying and occupancy 80,756 111,590
Selling, general and administrative 31,490 38,439
Reorganization, restructuring and other related
charges 21,839 1,702
Amortization of goodwill 511
Other income (118) (777)
--------- ---------
Total operating costs and expenses 133,967 151,465
--------- ---------
INCOME (LOSS) FROM OPERATIONS (22,975) 1,673
INTEREST AND DEBT EXPENSE 2,583 4,600
--------- ---------
LOSS FROM OPERATIONS BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS (25,558) (2,927)
INCOME TAXES
--------- ---------
LOSS FROM OPERATIONS BEFORE EXTRAORDINARY
LOSS (25,558) (2,927)
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT 4,230
--------- ---------
NET LOSS $ (25,558) $ (7,157)
========= =========
See notes to financial statements.
-2-
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
DEBTOR-IN-POSSESSION
(IN THOUSANDS)
MAY 19, May 20, January 27,
2002 2001 2002
--------- --------- ---------
(UNAUDITED) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,820 $ 19,619 $ 1,870
Marketable securities 1,001 1,544 1,061
Notes receivable 1,631
Accounts receivable 1,920 1,115 2,405
Merchandise inventory 61,625 96,631 37,629
Assets to be disposed of 6,497 22,675 9,051
Prepaid expenses and other
current assets 5,653 4,581 7,058
--------- --------- ---------
Total current assets 88,516 146,165 60,705
--------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT,NET 90,836 124,063 96,055
GOODWILL, LESS ACCUMULATED
AMORTIZATION OF $511 AT MAY 20, 2001 16,089
OTHER ASSETS AND DEFERRED CHARGES 7,729 12,713 8,553
--------- --------- ---------
$ 187,081 $ 299,030 $ 165,313
========= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
(DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Accounts payable $ 43,825 $ 49,757 $ 8,437
Accounts payable - prepetition 32,539 33,418 32,487
Accrued expenses 32,834 30,750 25,350
Accrued expense payables - prepetition 27,408 23,184 26,677
Liability for Lease Rejections 15,450
Notes payable to banks 13,647 18,780 24,297
Prepetition long-term debt (including
subordinated debt of $115,000) 137,909 145,793 139,315
--------- --------- ---------
Total current liabilities 303,612 301,682 256,563
--------- --------- ---------
OBLIGATIONS UNDER CAPITAL LEASE 3,528 4,832 3,220
OTHER LIABILITIES 3,494 5,613 3,525
SHAREHOLDER'S EQUITY (DEFICIENCY IN ASSETS):
Common stock $1.00 par value,
1,000 shares authorized, 1,000 shares
issued and outstanding 1 1 1
Capital in excess of par value 165,999 165,999 165,999
Net parent investment 16,117 16,176 16,117
Retained deficit (305,670) (195,273) (280,112)
--------- --------- ---------
Total shareholder's equity
(deficiency in assets) (123,553) (13,097) (97,995)
--------- --------- ---------
$ 187,081 $ 299,030 $ 165,313
========= ========= =========
See notes to financial statements.
-3-
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
DEBTOR-IN-POSSESSION
(IN THOUSANDS)
Sixteen Weeks Ended
--------------------
MAY 19, May 20,
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net loss $(25,558) $ (7,157)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 4,900 5,318
Amortization 632 1,053
Debt issue costs (extraordinary loss) 3,458
Noncash portion of reorganization,
restructuring and other related charges 17,572
Other, net (364) (2,476)
-------- --------
(2,818) 196
Changes in operating assets and liabilities:
Marketable securities (9) (28)
Notes receivable 1,631
Accounts receivable 885 597
Inventory (23,996) (23,506)
Prepaid expenses 1,405 (30)
Accounts payable 35,440 50,569
Accrued expenses 8,284 16,289
-------- --------
Net cash provided by operating activities 20,822 44,087
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (605) (995)
Proceeds from asset sales 2,566 10,825
-------- --------
Net cash provided by investing activities 1,961 9,830
-------- --------
FINANCING ACTIVITIES:
Decrease in net parent investment (1)
Decrease in notes payable to banks, net (10,650) (28,572)
Payment of long-term debt and capital lease
obligations (2,183) (16,332)
-------- --------
Net cash used in financing activities (12,833) (44,905)
-------- --------
Increase in cash and cash equivalents 9,950 9,012
Cash and cash equivalents at beginning of period 1,870 10,607
-------- --------
Cash and cash equivalents at end of period $ 11,820 $ 19,619
======== ========
See notes to financial statements.
-4-
NOTES TO FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
Frank's Nursery & Crafts, Inc. (the "Company" or "Franks") and FNC
Holdings Inc. ("Holdings"), the sole shareholder of the Company, each
filed a voluntary petition under Chapter 11 in the United States
Bankruptcy Court for the District of Maryland, Baltimore Division on
February 19, 2001. The Company's financial statements have been
prepared assuming that the Company will continue as a going concern,
and not under the liquidation basis of accounting. In the opinion of
the Company, the financial statements reflect all adjustments necessary
for a fair statement of the results for the interim periods presented
herein. In the opinion of management such adjustments consisted of
normal recurring items. Financial results of the interim period are not
necessarily indicative of results that may be expected for any other
interim period or for the fiscal year. For further information and
information regarding the Chapter 11 filings, refer to the financial
statements and footnotes thereto included in the Company's report on
Form 10-K for the fiscal year ended January 27, 2002 dated April 29,
2002.
NOTE 2: DEBT
At May 19, 2002 the Company had a two year $100 million
debtor-in-possession financing agreement (the "DIP Financing
Agreement"). The Company had borrowings outstanding under the DIP
Financing Agreement of $13.6 million at May 19, 2002. The DIP Financing
Agreement required 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 May
19, 2002. The lender did not provide a waiver for noncompliance of the
default (See Note 4).
NOTE 3: EXTRAORDINARY LOSS
The extraordinary loss for the 2001 first quarter primarily represented
the write-off of debt issue costs to retire an outstanding credit
facility obligation utilizing proceeds from the DIP Financing Agreement
at February 19, 2001. The total debt retired and associated fees paid
was $62.1 million.
-5-
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: SUBSEQUENT EVENT
During the Chapter 11 Reorganization the Company formulated a Plan of
Reorganization (the "Plan") that was approved by the requisite number
of prepetition creditors and was confirmed by the Court on May 7, 2002.
The Plan was subsequently consummated by the Company on May 20, 2002
(the "Effective Date"). In conjunction with the Company's emergence
from Chapter 11, on the Effective Date the Company entered into two
separate financing agreements totaling $80 million. A portion of the
initial loan proceeds was used to retire the DIP Financing Agreement on
the Effective Date. Under the Plan, the Company will settle prepetition
debt claims by issuing new common stock in the newly reorganized
Frank's. The Plan, provides for the distribution of warrants to
purchase up to 3% of the new common stock to the Company's prepetition
common stockholders. The Plan calls for the cancellation of the
currently outstanding Common stock on the Effective Date. As a result
of the consummation of the Plan the Company's leverage and debt service
requirements will be significantly reduced from prepetition levels.
-6-
ITEM 2.
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 Form 10-Q 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 Form 10-Q 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").
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 the Company continued to manage and operate its assets and
business as a debtor-in-possession, pending the formulation and confirmation of
a Plan of Reorganization (the "Plan"). Frank's undertook numerous actions to
improve the Company's operations during fiscal 2001, 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 Plan. In addition, the Company
engaged a new Chief Executive Officer.
-7-
The Plan was approved by the requisite number of prepetition creditors
and was confirmed by the Court on May 7, 2002. The Plan was subsequently
consummated by the Company on May 20,2002 (the "Effective Date"). In conjunction
with the Company's emergence from Chapter 11, on the Effective Date the Company
entered into two separate financing agreements. A portion of the initial loan
proceeds was used to retire the DIP Financing Agreement on the Effective Date.
Under the Plan, the Company will settle prepetition debt claims by issuing new
common stock in a reorganized Frank's. The Plan, provides for the distribution
of warrants to purchase up to 3% of the new common stock to the Company's
prepetition common stockholders. The Plan calls for the cancellation of the
currently outstanding Common stock on the Effective Date. As a result of the
consummation of the Plan the Company's leverage and debt service requirements
will be significantly reduced from prepetition levels.
With the change in ownership resulting from the Plan, the Company will
adopt fresh-start accounting in accordance with the recommended accounting
principles for entities emerging from Chapter 11 set forth in the AICPA
Statement of Position 90-7 "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7") effective for the Company's 2002 second
quarter which ends on August 11, 2002.
The financial statements for the 2002 first quarter have been presented
in accordance with SOP 90-7 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. The financial
statements 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.
Results of operations
Net Sales
NET SALES were $111 million for the sixteen week 2002 first quarter
which ended May 19, 2002 ("2002") compared with $153.1 million for the sixteen
week 2001 first quarter which ended on May 20, 2001 ("2001"). Unfavorable
weather patterns in virtually all markets where the Company operates negatively
impacted the lawn and garden sales for 2002 thus contributing to the net sales
decrease. On a comparable store basis net sales decreased 14%.
-8-
Earnings
COST OF SALES, INCLUDING BUYING AND OCCUPANCY EXPENSES, were $80.8
million in 2002 compared to $111.6 million in 2001. Cost of sales, as a
percentage of net sales was 73% for both 2002 and 2001. Merchandise margins for
the current 170 store operating base were flat compared with 2001. Buying and
occupancy costs decreased by approximately 21% due principally to reduced
occupancy costs resulting from the store closure programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in 2002 were $31.5 million
compared to $38.4 million in 2001. This decline of $6.9 million results from
lower store expense due to the reduced store base and lower corporate expenses.
As a percentage of net sales, selling general and administrative expenses
increased 3 percentage points to 28% in 2002 first quarter compared to 25% in
2001.
OPERATING INCOME (LOSS) (DEFINED AS "NET SALES LESS COST OF SALES,
INCLUDING BUYING AND OCCUPANCY COSTS, AND SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES") for 2002 was $(1.3) million, a decline of $4.4 million compared to
operating income of $3.1 million for 2001. The decline was primarily the result
of the lower sales in 2002. The operating loss, as a percentage of net sales was
(1)% of net sales for 2002, a decrease of 3 percentage points from the 2% for
2001.
REORGANIZATION, RESTRUCTURING AND OTHER RELATED CHARGES for 2002 was
$21.8 million compared with $1.7 million of professional fees in 2001. The
charge for 2002 includes: $15.5 million for costs of lease rejections; $2.6
million for professional fees; $1.8 million for severance and employee retention
plans approved by the Court under the Chapter 11 Reorganization; $1.1 million
for costs of mortgage debt and $.8 million for miscellaneous items. The $15.5
million liability for the costs of rejected store leases in 2002 represents an
estimate of the maximum claim allowed under bankruptcy law. In accordance with
the Plan, these claims will be treated as general unsecured claims. The $1.1
million liability for costs of mortgage debt represents an estimate to properly
state the prepetition long-term debt in accordance with the Plan.
OTHER INCOME was $118 for 2002 compared with $777 for 2001. The amount
for 2001 included a net gain from the sale of a leasehold interest of $581.
INTEREST AND DEBT EXPENSE was $2.6 million for 2002 compared with $4.6
million for 2001. Lower interest for 2002 in part relates to the discontinuance
of an interest accrual for the senior subordinated notes since the prepetition
date and lower levels of outstanding borrowings in 2002. In accordance with SOP
90-7, no interest is accrued if it is probable the interest will not be an
allowed claim. Contractual interest for 2002 and 2001 was $6.2 million and $7.3
million, respectively.
-9-
Due to increases in tax valuation allowances, no income tax benefits
have been provided for in the first quarters of 2002 and 2001.
EXTRAORDINARY LOSS for 2001 primarily represented the write-off of debt
issue costs to retire an outstanding credit facility obligation utilizing
proceeds from the DIP Financing Agreement at February 19, 2001. The total debt
retired and associated fees paid was $62.1 million.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Net cash provided by operations in 2002 was $20.8
million compared to $44.1 million in 2001. The 2001 increase includes the
build-up of prepetition liability balances for accounts payable and accrued
expenses of $33.4 million and $23.2 million, respectively.
INVESTING ACTIVITIES. Net cash provided by investing activities in 2002
and 2001 was due to net proceeds received from the sale of properties from the
store closure programs that were recorded as assets held for disposal. Since the
end of fiscal 2001 four properties have been sold. The estimated fair value of
"Assets to be Disposed of" for the 11 remaining properties at May 19, 2002 is
$6.5 million.
FINANCING ACTIVITIES. Net cash used in financing activities for 2002
and 2001 related primarily to the repayment of bank debt.
At May 19, 2002 the Company had a two year $100 million DIP Financing
Agreement. The Company had borrowings outstanding under the DIP Financing
Agreement of $13.6 million at May 19, 2002. 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 May 19, 2002. The lender did not provide a waiver for noncompliance of the
default.
Subsequent to the end of the 2002 first quarter, on the Effective Date,
the Company secured 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 allows the Company the option of prime rate loans or Eurodollar loans.
Depending upon the Company's excess availability under the facility the loans
would bear interest at: (a) prime rate plus .25% or .50%; or (b) Eurodollar rate
plus 2.75%, 3%, or 3.25%, for an initial term of three years, with renewal
rights. The second facility is comprised of a $20 million term loan and $10
million of revolving loans, both secured by the Company's owned but
-10-
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.
The Company's most significant cash requirements for fiscal 2002 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, 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. No store openings are planned for fiscal 2002.
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
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 in the first quarter of 2001 had no impact on the Company's
earning and financial position.
Critical Accounting Policies
The 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 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.
-11-
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes that would require disclosure
since January 27, 2002.
Part II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
During the quarter and through the date of this Report, the
Registrant filed two reports on Form 8-K dated May 22, 2002
and June 25, 2002.
-12-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANK'S NURSERY & CRAFTS, INC.
By: /s/ Steven S. Fishman
-------------------------------
Steven S. Fishman
Chief Executive Officer
By: /s/ Julie G. Herzog
-------------------------------
Julie G. Herzog
Vice President, Controller
Principal Financial Officer
Dated: July 3, 2002
-13-