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UNITED STATES
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 AUGUST 11, 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 of Incorporation) (IRS Employer Identification No.)
580 KIRTS BLVD., SUITE 300
TROY, MICHIGAN 48084
(Address of Principal Executive Offices) (Zip Code)
(248) 712-7000
(Registrant's telephone number, including area code)
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 whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 25, 2002
COMMON STOCK, $1.00 PAR VALUE 10,962,759
FRANK'S NURSERY & CRAFTS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
Item 1. Unaudited Financial Statements:
Balance Sheets as of August 11, 2002, August 12, 2001
and January 27, 2002 3
Statements of Operations for the twelve weeks ended
August 11, 2002 and the twelve weeks ended August 12, 2001 4
Statements of Operations for the twelve weeks ended
August 11, 2002, the sixteen weeks ended May 19, 2002 and
the twenty-eight weeks ended August 12, 2001 5
Statements of Shareholders' Equity (Deficit)
for the twelve weeks ended August 11, 2002 and the sixteen
weeks ended May 19, 2002 6
Statements of Cash Flows for the twelve weeks ended
August 11, 2002, the sixteen weeks ended May 19, 2002
and twenty-eight weeks ended August 12, 2001 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 2a. Quantitative and Qualitative Disclosures about Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
2
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR PAR VALUE)
August 11, August 12, January 27,
2002 2001 2002
---------- ---------- ----------
(Successor) (Predecessor) (Predecessor)
ASSETS (Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 3,375 $ 3,459 $ 1,870
Marketable securities 2,029 1,339 1,061
Notes receivable 1,631
Accounts receivable 1,776 1,807 2,405
Merchandise inventory 41,737 69,205 37,629
Assets to be disposed of 3,047 21,449 9,051
Prepaid expenses and other current assets 5,571 5,553 7,058
---------- ---------- ----------
Total current assets 57,535 102,812 60,705
Property, plant and equipment, net 54,234 113,607 96,055
Goodwill, less accumulated amortization of $860 at August 12, 2001 15,120
Other assets and deferred charges 3,737 11,974 8,553
---------- ---------- ----------
Total assets $ 115,506 $ 243,513 $ 165,313
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 16,188 $ 9,545 $ 8,437
Accounts payable pre-petition 33,378 32,487
Accrued expenses 20,194 31,855 25,350
Accrued expense payables pre-petition 1,000 19,791 26,677
Notes payable to banks 29,040 24,297
Current portion of long term debt 2,521
Pre-petition long-term debt (including subordinated debt of $ 115,000) 142,819 139,315
---------- ---------- ----------
Total current liabilities 39,903 266,428 256,563
---------- ---------- ----------
Long-term debt:
Senior debt, less current portion 26,118 4,463 3,220
Term Loan 17,120
---------- ---------- ----------
Total long-term debt 43,238 4,463 3,220
Other liabilities 3,474 4,093 3,525
Shareholders' equity (deficit):
Predecessor common stock $1.00 par value, 1,000 shares authorized,
1,000 shares issued and outstanding 1 1
Successor preferred stock $1.00 par value, 10,000,000 shares
authorized, none issued
Successor common stock $1.00 par value, 50,000,000 shares authorized,
20,000,000 shares to be issued 20,000
Additional paid-in-capital 6,120 165,999 165,999
Net parent investment 16,193 16,117
Retained earnings (deficit) 2,771 (213,664) (280,112)
---------- ---------- ----------
Total shareholder's equity (deficit) 28,891 (31,471) (97,995)
---------- ---------- ----------
Total liabilities and shareholders' equity (deficit) $ 115,506 $ 243,513 $ 165,313
========== ========== ==========
See accompanying notes to financial statements.
3
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
TWELVE WEEKS ENDED AUGUST 11, 2002 AND AUGUST 12, 2001
(DOLLARS IN THOUSANDS)
Twelve Weeks Twelve Weeks
Ended Ended
August 11, August 12,
2002 2001
------------ ------------
(Successor) (Predecessor)
NET SALES $ 89,070 $ 86,701
OPERATING COSTS AND EXPENSES:
Cost of goods sold, including buying and occupancy 64,646 71,050
Selling, general and administrative 20,746 25,927
Restructuring and other related charges 5,279
Amortization of goodwill 383
Other (income) expense (679) 436
------------ ------------
Total operating costs and expenses 84,713 103,075
------------ ------------
INCOME (LOSS) FROM OPERATIONS 4,357 (16,374)
INTEREST EXPENSE (CONTRACTUAL INTEREST OF $4,737 FOR THE
TWELVE WEEKS ENDED AUGUST 12, 2001) 1,586 2,017
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 2,771 (18,391)
INCOME TAXES
------------ ------------
NET INCOME (LOSS) $ 2,771 $ (18,391)
============ ============
See accompanying notes to financial statements.
4
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
TWELVE WEEKS ENDED AUGUST 11, 2002, THE SIXTEEN WEEKS ENDED MAY 19, 2002
AND THE TWENTY-EIGHT WEEKS ENDED AUGUST 12, 2001
(DOLLARS IN THOUSANDS)
Twelve Sixteen Twenty-Eight
Weeks Weeks Weeks
Ended Ended Ended
August 11, May 19, August 12,
2002 2002 2001
------------ ------------- -------------
(Successor) (Predecessor) (Predecessor)
(Restated)(1)
NET SALES $ 89,070 $ 110,992 $ 239,839
OPERATING COSTS AND EXPENSES:
Cost of goods sold, including buying and occupancy 64,646 80,756 182,640
Selling general and administrative 20,746 31,490 64,366
Restructuring and other related charges 21,839 6,981
Early extinguishment of debt 4,230
Amortization of goodwill 894
Other (income) expense (679) (118) (341)
------------ ------------ ------------
Total operating costs and expenses 84,713 133,967 258,770
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 4,357 (22,975) (18,931)
INTEREST EXPENSE (CONTRACTUAL INTEREST OF $6,210 FOR THE SIXTEEN
WEEKS ENDED MAY 19, 2002 AND $12,057 FOR THE TWENTY-EIGHT
WEEKS ENDED AUGUST 12, 2001 1,586 2,583 6,617
------------ ------------ ------------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS AND INCOME TAXES 2,771 (25,558) (25,548)
------------ ------------ ------------
REORGANIZATION ITEMS:
Gain on cancellation of pre-petition liabilities 184,954
Fresh start adjustments 324
Extinguishment of debt (1,439)
------------ ------------ ------------
Total reorganization items 183,839
------------ ------------ ------------
INCOME TAX EXPENSE
------------ ------------ ------------
NET INCOME (LOSS) $ 2,771 $ 158,281 $ (25,548)
============ ============ ============
(1) The sixteen weeks ended May 19, 2002 have been restated to reflect a
reorganization item for extinguishment of debt of $1,439 belonging to the
Predecessor.
See accompanying notes to financial statements.
5
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
SIXTEEN WEEKS ENDED MAY 19, 2002 AND TWELVE WEEKS ENDED AUGUST 11, 2002
(DOLLARS IN THOUSANDS)
Retained Total
Common Stock Additional Earnings Net Shareholders'
Number Par paid-in (accumulated Parent Equity
of shares Value Capital deficit) Investment (deficit)
---------- ------- ---------- ------------ ---------- ------------
Predecessor:
Balance at January 27, 2002 1,000 $ 1 $ 165,999 $ (280,112) $ 16,117 $ (97,995)
Net loss excluding plan of
reorganization and fresh start
adjustments (25,558) (25,558)
Effect of plan of reorganization
and fresh start adjustments:
Cancellation of old common stock (1,000) (1) (165,999) (166,000)
New common stock to be issued 20,000,000 20,000 3,000 23,000
Cancellation of net parent investment (16,117) (16,117)
Extinguishment of debt (1,439) (1,439)
Other fresh start adjustments 307,109 307,109
---------- ------- --------- ---------- -------- ----------
Successor:
Balance at May 20, 2002 20,000,000 20,000 3,000 -0- -0- 23,000
Issuance of 5,000,000 warrants in
connection with Term Loan debt 3,120 3,120
Net income 2,771 2,771
---------- ------- --------- ---------- -------- ----------
Balance at August 11, 2002 20,000,000 $20,000 $ 6,120 $ 2,771 $ -0- $ 28,891
========== ======= ========= ========== ======== ==========
See accompanying notes to financial statements.
6
FRANK'S NURSERY & CRAFTS, INC
STATEMENTS OF CASH FLOWS (UNAUDITED)
TWELVE WEEKS ENDED AUGUST 11, 2002, SIXTEEN WEEKS ENDED MAY 19, 2002 AND
TWENTY-EIGHT WEEKS ENDED AUGUST 12, 2001
(DOLLARS IN THOUSANDS)
Twelve Weeks Sixteen Weeks Twenty-Eight
Ended Ended Weeks Ended
August 11, May 19, August 12,
2002 2002 2001
------------ ------------- ------------
Successor Predecessor Predecessor
Restated(1)
OPERATING ACTIVITIES:
Net income (loss) $ 2,771 $ 158,281 $ (25,548)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,602 4,900 9,128
Amortization 333 632 1,911
Non cash portion of restructuring and other related charges 17,572 3,241
Debt issue costs 1,079 3,458
Gain on cancellation of pre-petition liabilities (184,991)
Fresh start adjustments (324)
Other (659) (939) (27)
------------ ------------ ------------
4,047 (3,790) (7,837)
Changes in assets and liabilities, net of effects of fresh start
adjustments and gain on cancellation of pre-petition liabilities:
Marketable securities (1,028) (9) (45)
Notes receivable 1,631
Accounts receivable 144 885 (95)
Inventory 19,888 (23,996) 3,920
Prepaid expenses 82 1,405 (1,062)
Other non current assets (1,327) (349) (2,197)
Accounts payable (27,557) 35,440 10,317
Accrued expenses (10,182) 8,284 14,255
------------ ------------ ------------
Net cash provided by (used in) operating activities (15,933) 19,501 17,256
------------ ------------ ------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,171) (605) (1,454)
Net proceeds from asset sales 4,053 2,566 12,051
------------ ------------ ------------
Net cash provided by investing activities 2,882 1,961 10,597
------------ ------------ ------------
FINANCING ACTIVITIES:
Decrease in notes payable to banks (net) (13,647) (10,650) (18,312)
Payment of long-term debt and capital leases (426) (2,183) (16,705)
Borrowings under term loan 20,000
Increase in net parent investment 16
------------ ------------ ------------
Net cash provided by (used in) financing activities 5,927 (12,833) (35,001)
------------ ------------ ------------
Net change in cash and cash equivalents (7,124) 8,629 (7,148)
Cash and cash equivalents at beginning of period 10,499 1,870 10,607
------------ ------------ ------------
Cash and cash equivalents at end of period $ 3,375 $ 10,499 $ 3,459
============ ============ ============
(1) The sixteen weeks ended May 19, 2002 have been restated to reflect a
reorganization item for extinguishment of debt of $1,439 belonging to the
Predecessor.
Supplemental disclosure of non cash financing information:
Fair valuing of assets due to fresh start accounting of $36,171 for the sixteen
weeks ended May 19, 2002.
See accompanying notes to financial statements.
7
FRANK'S NURSERY & CRAFTS, INC.
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(TABLES IN THOUSANDS)
(1) GENERAL
Frank's Nursery & Crafts, Inc., a Delaware corporation ("Frank's" or the
"Company"), 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.
CHAPTER 11 PROCEEDINGS AND REORGANIZATION
On February 19, 2001 (the "Petition Date"), Frank's Nursery & Crafts, Inc., a
Michigan corporation ("Old Frank's"), and FNC Holdings Inc. ("Holdings"), the
sole shareholder of Old Frank's, (collectively with Old Frank's, the "Debtors"),
filed voluntary petitions for reorganization under chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Maryland (the "Bankruptcy Court"). The chapter 11
cases for the Debtors (the "Chapter 11 Cases") were jointly administered for
procedural purposes. From the Petition Date until May 19, 2002, the Debtors
operated their businesses as debtors-in-possession pursuant to the Bankruptcy
Code. On May 7, 2002, the Bankruptcy Court confirmed the Debtors' Second Amended
Joint Plan of Reorganization, with certain modifications (as so modified, the
"Plan"). On May 20, 2002 (the "Effective Date"), the Plan became effective and
the Debtors successfully emerged from their chapter 11 bankruptcy proceedings.
Pursuant to the Plan, the following transactions were completed on or about the
Effective Date:
- - all of Old Frank's and Holdings issued and outstanding common stock was
cancelled;
- - Old Frank's merged with and into Holdings, and then changed its name to
Frank's which was reincorporated in Delaware (the "Merger");
- - certain indebtedness of the Debtors was cancelled in exchange for cash
and/or common stock, par value $1.00 per share, of Frank's ("Common Stock"),
the first installment of which was issued on September 12, 2002;
- - executory contracts or unexpired leases to which any Debtor was a party were
assumed, or rejected;
- - members of the boards of directors and officers of Frank's were elected and
began serving their respective terms; and
- - the overall corporate structure was simplified through the restructuring and
dissolution of certain Old Frank's and Holdings subsidiaries.
On the Effective Date, 50,000,000 shares of Common Stock were authorized and (a)
20,000,000 shares of Common Stock were reserved for distribution in respect of
claims against the Debtors, (b) 913,044 shares of Common Stock were reserved for
issuance of warrants to purchase shares of common Stock ("Warrants") at an
exercise price of $1.38 for the old equity holders of Holdings (c) 3,652,174
shares of Common Stock were reserved for a new stock option plan, which was
implemented in accordance with the Plan and (d) 5,869,565 shares of Common Stock
were reserved for the conversion rights of Kimco Realty Corporation and its
affiliates ("Kimco") as part of the exit financing. In addition, on the
Effective Date, Frank's entered into a three-year $50 million secured revolving
credit facility, that includes $25 million for letters of credit (the "Exit
Revolver Facility") with Congress Financial Corporation as agent for a syndicate
of lenders and a $30 million term and revolving loan with Kimco (the "Exit Term
and Revolving Loan"). See note 2 for a more detailed description of the exit
financing.
FRESH START ADJUSTMENTS
The Debtors emerged from their chapter 11 bankruptcy proceedings on May 20,
2002, which for financial reporting purposes was deemed the effective date of
the Plan. In accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Company adopted
fresh start reporting because holders of existing voting shares of Holdings
immediately before filing and confirmation of the Plan received less than 50% of
the Common Stock distributed under the Plan and the Company's reorganization
value was less than the Debtors' post-petition liabilities and allowed claims in
the aggregate on a consolidated basis.
Fresh start reporting requires that the reorganization value of the Company be
allocated to its assets in conformity with Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations". The excess of the fair value
of the specific tangible or identifiable intangible net assets over
reorganization value, or negative goodwill, is to be allocated to non-current
non-monetary assets on a pro rata basis. Based on the consideration of many
factors and various valuation methods, including a discounted cash flow, a
comparable public company analysis, a comparable acquisitions analysis, and
other applicable analyses believed by the Company's
8
management to be appropriate for the Company's business and industry, the
Company and its financial advisors determined the reorganization value of the
Company to be approximately $90 million, which served as the basis for the Plan
approved by the Bankruptcy Court. Approximately $67 million of the
reorganization value related to debt and other obligations outstanding as of the
Effective Date, and the remaining reorganization value of approximately $23
million was assigned as the initial equity of the Company. Due to the cyclical
nature of the business and the timing of emergence, the reorganization value
related to debt was based upon average historical levels and is not equal to the
debt levels of the successor company at May 19, 2002, thus resulting in a change
to the original estimated negative goodwill of $58 million in the Plan.
The fair value of the net assets exceeded the reorganization value by $36.2
million, resulting in negative goodwill. The negative goodwill has been
allocated to property, plant and equipment.
The following table reflects the adjustments to Old Frank's balance sheet as of
May 20, 2002:
Fresh
Plan of Start
Predecessor Reorganization Adjustments Successor
----------- -------------- ----------- ---------
Assets:
Current assets $ 88,516 $ (360)(b) $ 88,156
Property, plant and equipment, net 90,836 $ (36,171)(f) 54,665
Other assets 7,729 (4,851)(a)(b) (373)(e) 2,505
----------- ------------ ----------- ---------
Total assets $ 187,081 $ (5,211) $ (36,544) $ 145,326
=========== ============ =========== =========
Liabilities and shareholders' equity (deficit):
Accounts payable $ 43,825 $ (80)(a) $ 959(f) $ 44,704
Accounts Payable pre-petition 32,539 (32,539)(a)
Accrued expenses 32,834 751(a) (3,169)(e)(f) 30,416
Accrued expense - pre-petition 21,514 (20,514)(a) 1,000
Accrued interest - pre-petition 5,894 (5,894)(c)
Notes payable to banks 13,647 13,647
Liability for lease rejections 15,450 (15,450)(a)
Pre-petition long-term debt (including
subordinated debt of $115,000) 137,909 (115,000)(c) (22,909)(e)
Current portion of long-term debt 2,521(e) 2,521
Senior mortgage debt 23,016(e) 23,016
Obligations under capital lease 3,528 3,528
Other liabilities 3,494 3,494
----------- ------------ ----------- ---------
Total liabilities 310,634 (188,726) 418 122,326
Shareholders' equity (deficit) (123,553) 183,515(d) (36,962)(g) 23,000
----------- ------------ ----------- ---------
Total liabilities and shareholders' equity (deficit) $ 187,081 $ (5,211) $ (36,544) $ 145,326
=========== ============ =========== =========
(a) To record elimination of pre-petition liabilities which were cancelled.
(b) To record extinguishment of debt.
(c) To record elimination of subordinated debt and related accrued interest.
(d) To record gain on cancellation of pre-petition liabilities ($184.9 million)
and loss on extinguishment of debt ($1.4 million).
(e) To record refinanced mortgages.
(f) To reflect assets and liabilities at fair value, resulting in negative
goodwill ($36.2 million).
(g) To record common stock to be issued and write-off of Old Frank's accumulated
deficit and net parent investment.
9
BASIS OF PRESENTATION
References in these financial statements to "Predecessor" refer to Old Frank's
on and prior to May 20, 2002 References to "Successor" refer to Frank's on and
after May 20 2002, after giving effect to the implementation of fresh start
reporting.
The accompanying financial statements for the sixteen weeks ended May 19, 2002
(Predecessor) and as of January 27, 2002 (Predecessor) have been presented in
accordance with SOP 90-7 and assumed that the Debtors would continue as a going
concern. In the Chapter 11 Cases, substantially all unsecured liabilities as of
the Petition Date were subject to compromise or other treatment under the Plan.
For financial reporting purposes, those liabilities and obligations whose
treatment and satisfaction were dependent on the outcome of the Chapter 11 Cases
have been segregated and classified as pre-petition liabilities in the
accompanying balance sheets as of August 12, 2001 and January 27, 2002.
Pursuant to SOP 90-7, professional fees and other costs associated with the
Chapter 11 Cases were expensed as incurred and reported as restructuring items.
Interest expense was reported only to the extent that it was expected to be paid
following the Chapter 11 Cases.
Certain reclassifications have been made to prior periods (Predecessor) to
conform to the financial statements for the twelve weeks ended August 11, 2002
(Successor).
The accompanying unaudited financial statements include all adjustments,
consisting only of normal, recurring adjustments and accruals, which are, in the
opinion of management, necessary for fair presentation of the results of
operations and financial position. Results of operations for interim periods may
not be indicative of future results. The unaudited financial statements should
be read in conjunction with the audited financial statements included in Old
Frank's Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission for the fiscal year ended January 27, 2002.
(2) LONG-TERM DEBT AND LIQUIDITY
Long-term debt consists of the following:
AUGUST 11, AUGUST 12, JANUARY 27,
2002 2001 2002
----------- ----------- -----------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
Exit Term Loan (see note 4) $ 17,120
Mortgages notes due 2012 with interest rates from 7% to 7.6%
(estimated) 24,233
Pre-petition mortgage notes originally due on varying dates from
February 1, 2001 to September 1, 2007 $ 26,277 $ 22,045
DIP Financing Facility 29,040 24,297
10 -1/4% Senior Subordinated Notes originally due March 1, 2008 115,000 115,000
Capital lease obligations 4,406 6,005 5,490
----------- ----------- -----------
Total debt 45,759 176,322 166,832
Less:
Current portion of long-term debt (2,521)
Notes payable to banks (29,040)
Current portion of long-term debt in default (142,819) (163,612)
----------- ----------- -----------
Total long-term debt $ 43,238 $ 4,463 $ 3,220
=========== =========== ===========
EXIT REVOLVER FACILITY
As discussed in note 1, the Company entered into the Exit Revolver Facility on
the Effective Date. The Exit Revolver Facility is a three-year $50 million
secured revolving loan facility, which includes $25 million of letters of
credit. The availability of borrowings under the Exit Revolver Facility
generally is based on a percentage of eligible accounts receivable, eligible
inventory and certain other assets, subject to certain reserves.
The Exit Revolver Facility allows the Company the option of prime rate loans or
Eurodollar loans. Depending upon the Company's excess availability under the
Exit Revolver Facility the loans 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 annual renewal rights. The Exit Revolver Facility includes an
unused line fee of .25% per annum, a servicing fee of $10,000 per calendar
quarter, and an early termination fee in an amount equal
10
to 2% of the amount of the maximum credit if the Exit Revolver Facility is
terminated in whole during the first year, 1% during the second year, and 0.5%
during the third year.
The Exit Revolver Facility ("Facility") contains a number of negative covenants,
which restrict, among other things, Frank's ability to incur additional debt,
pay dividends or make other restricted payments, grant liens, make loans,
advances, and investments, engage in transactions with affiliates, dispose of
assets, prepay and refinance debt, and make certain changes in its business. As
of August 11, 2002, there were no amounts outstanding under the Facility and
outstanding letters of credit aggregated $15.3 million. Availability as of
August 11, 2002 was $8.2 million. The Company, as a result of obtaining more
favorable vendor terms than originally anticipated and improved inventory
management, was not in compliance with the cost of inventory to accounts payable
ratio provision of the Facility at August 11, 2002. The Company obtained a
waiver of this provision dated September 17, 2002. The Company considers this to
have been a technical violation of the Facility terms and is presently in
contact with the Lender to revise or eliminate this provision.
EXIT TERM AND REVOLVING LOAN
On the Effective Date, Frank's also entered into an Exit Term and Revolving
Loan. The Exit Term and Revolving Loan is comprised of a $20 million term loan
(the "Exit Term Loan") and $10 million of revolving loans, both secured by the
Company's owned but unmortgaged and leased real property. These two loans bear
interest at 10.25% per annum for an initial term of three years, with renewal
rights for up to two years. The Exit Term and Revolving Loan has at the lender's
option purchase rights under a warrant agreement to purchase up to 5,869,565
shares of common stock at $1.15, subject to adjustment for anti-dilution (see
note 4). In addition Frank's is required to prepay the Exit Term and Revolving
Loans with the net cash proceeds from the sale of certain assets.
The Exit Term Loan also contains a number of negative covenants, which restrict,
among other things, Frank's ability to incur additional debt, pay dividends or
make other restricted payments, grant liens, make loans, advances and
investments, engage in transactions with affiliates, dispose of assets, enter
into sale-leaseback arrangements, effect mergers, consolidations, and
dissolutions.
Upon emergence from bankruptcy, the $20 million Exit Term Loan was utilized to
retire the borrowings under the DIP Financing Facility. As of August 11, 2002,
$20 million was outstanding under the Exit Term Loan.
DIP FINANCING FACILITY
On February 19, 2001, the Debtors entered into a $100 million debtor-in-
possession financing facility (the "DIP Financing Facility") with Wells Fargo,
as administrative agent for a syndicate of financing institutions. The DIP
Financing Facility expired by its terms on the Effective Date. Frank's had
borrowings outstanding of $13.6 million on the expiration date. A portion of the
Exit Term Loan proceeds was utilized to retire the DIP Financing Facility on the
Effective Date. In conjunction with the retirement, a charge of $1.4 million for
extinguishment of debt primarily related to the write-off of debt issue costs
was recognized as a reorganization item.
SENIOR SUBORDINATED DEBT
Frank's had outstanding $115 million of 10-1/4% Senior Subordinated Notes
originally due March 1, 2008 (the "10-1/4% Notes"). The 10-1/4% Notes were
general unsecured obligations of Old Frank's, were subordinated in right of
payment to all existing and future senior indebtedness.
No interest payments were made on the 10-1/4% Notes during the pendency of the
Chapter 11 Cases.
On the Effective Date, pursuant to the Plan, indebtedness under the 10 1/4%
Notes of $115 million, was cancelled, and the holders became entitled to receive
Common Stock.
SENIOR DEBT
As part of the Plan, the pre-petition mortgage notes were renegotiated, of which
the final principal balance calculations are not yet complete. The renegotiated
notes will have interest rates between 7% and 7.6% with ten-year terms. As a
result, a five year payment schedule was unavailable at the time of filing this
Quarterly Report.
REJECTED CONTRACTS AND LEASES
During the pendency of the Chapter 11 Cases, the Debtors reviewed their
executory contracts and unexpired leases and received approval from the
Bankruptcy Court to reject certain contracts and leases. In this context,
"rejection" means that the Debtors were relieved from their obligations to
perform further under the contract or lease. Any claim for damages resulting
from the rejection of a contract or lease was treated as a general unsecured
claim in the Chapter 11 Cases and a $15.5 million charge for the estimated
maximum allowed claim under bankruptcy law was recognized as a reorganization
item.
11
(3) INCOME TAXES
The Company's management, in assessing the realizability of deferred tax assets,
must consider whether it is more likely than not that part or all of the
deferred tax assets may not be realized. This assessment includes consideration
for the scheduled reversal of temporary taxable difference, projected future
taxable income, and tax planning strategies.
PREDECESSOR PERIODS
No income tax benefit was recognized for the loss from operations before
reorganization items for the sixteen weeks ended May 19, 2002. Instead, the
increase in net deferred tax assets as a result of the loss was offset by an
equal increase in the valuation allowance. In addition, no income tax expense or
benefit was recognized on the reorganization items for the sixteen weeks ended
May 19, 2002. The items of income and expense included in the reorganization
income are non-taxable and non-deductible, respectively.
SUCCESSOR PERIODS
The Company did not recognize an income tax expense for the income realized in
the twelve weeks ended August 11, 2002 because it does not expect to report
taxable income for the current fiscal year.
BANKRUPTCY IMPACT
In connection with the reorganization, a gain on cancellation of indebtedness
was realized. This gain will not be taxable since the gain resulted from
reorganization under the Bankruptcy Code. However, the Company will be required,
as of the beginning of its 2003 taxable year, to reduce certain attributes
including net operating loss carryforwards ("NOLs"), certain tax credits and tax
bases in assets in an amount equal to such gain on extinguishment.
The reorganization of the Company on the Effective Date constituted an ownership
change under Section 382 of the Internal Revenue Code. Consequently, the use of
any of the NOLs and tax credits generated prior to the ownership change, that
are not reduced pursuant to the provisions discussed above, will be subject to
an annual limitation.
(4) SHAREHOLDERS' EQUITY
The Exit Term and Revolving Loan incorporated stock purchase warrants
("Warrants"). The warrants are exercisable to purchase the Company's Common
Stock, par value $1.00 per share, at a price of $1.15 per share subject to
adjustments for anti-dilution The warrants are redeemable upon certain
conditions being met and will expire on May 20, 2005, subject to extension under
the Exit Term and Revolving Loan. Accounting Principles Board 14 "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants, Emerging Issues
Task Force (EITF) 00-27 "Application of EITF Issue No 98-5 to Certain
Convertible Instruments" requires the issuer to allocate the proceeds received
in a financing transaction that includes a convertible instrument to the
convertible instrument and any other detachable instruments included in the
exchange on a relative fair value basis. As of May 20, 2002 warrants available
for exercise and included for valuation purposes were 5,000,000. The remaining
warrants of 869,565 will be exercisable upon initial utilization of the
revolving portion of the Exit Term and Revolving Loan, at which time the fair
value of such warrants will be determined. The valuation of the $20 million
proceeds under the Exit Term Loan resulted in an allocation to the warrants of
$3.1 million as shown in the statement of shareholders' equity and the remaining
$16.9 million to the Exit Term Loan. The $3.1 million is being amortized to
interest expense over the initial term of the debt. As of August 11, 2002, the
un-amortized discount is $2.9 million.
(5) EARNINGS PER SHARE
Due to the Company's emergence from bankruptcy and the implementation of fresh
start reporting, the presentation of earnings per share is not meaningful for
the periods presented in the accompanying financial statements.
12
(6) RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001, and specifies criteria for the recognition and reporting of
intangible assets apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. Intangible assets with definite
useful lives will be amortized over such lives to their estimated residual
values. SFAS No. 142 was adopted as of May 19, 2002. As a result of the chapter
11 bankruptcy proceedings and the write-off of goodwill in the fiscal year ended
January 27, 2002, the adoption of SFAS No. 141 and SFAS No.142 by Old Frank's in
the sixteen weeks ended May 19, 2002 had no impact on the Company's earnings or
financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145, among other things, prohibits the classification of gains and
losses from extinguishment of debt as extraordinary unless they meet the
criteria defined in Opinion 30. The provisions of SFAS No. 145 were adopted in
the 2002 quarter, and as such, the loss recognized by Old Frank's on the
extinguishment of debt resulting from the emergence from the chapter 11
bankruptcy proceedings has been classified as a reorganization item. Restatement
of previously issued financial statements is required, and as such, the loss
recognized by Old Frank's on the extinguishment of debt for the 2001 first half
has been reclassified as part of the loss from operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 applies to costs associated with
an exit activity (including a restructuring) or with a disposal of long-lived
assets. Under SFAS No. 146, a company will record a liability for a cost
associated with an exit or disposal activity when that liability is incurred and
can be measured at fair value. A liability is incurred when an event obligates
the entity to transfer or use assets. Under current accounting guidance, a
liability can be recorded when management has committed to an exit plan. The
requirements under SFAS No. 146 are effective prospectively for exit or disposal
activities initiated after December 31, 2002. Restatement of previously issued
financial statements is not permitted
(7) SUBSEQUENT EVENTS
Pursuant to the Plan, the Company issued, 10,962,759 shares of common stock to
creditors of record on September 12, 2002. The Company will issue additional
stock, as disputed claims are resolved. The stock is traded on the OTC Bulletin
Board. The ticker symbol is FNCN.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CORPORATE STRATEGY
As part of the emergence from bankruptcy, the Company is instituting new
merchandising and marketing strategies to position itself as a convenience
nursery, home decor and seasonal retailer. Initiatives are already in place for
improvements in store and product presentation, merchandise mix, marketing and
overall operations. Ongoing cost reductions, inventory management efforts, and
vendor quality programs will continue to be a high priority for the success of
the Company.
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included elsewhere in this Quarterly
Report, and with the audited financial statements and notes thereto included in
the Annual Report on Form 10-K of Frank's Nursery & Crafts, Inc., a Michigan
Corporation ("Old Frank's"), as filed with the Securities and Exchange
Commission for the fiscal year ended January 27, 2002. Frank's Nursery & Crafts,
Inc., a Delaware corporation, is referred to herein as "Frank's" or the
"Company."
FRESH START REPORTING AND FACTORS AFFECTING COMPARABILITY OF FINANCIAL
INFORMATION
The Debtors emerged from their chapter 11 bankruptcy proceedings on May 20,
2002, which for financial reporting purposes, the Company deemed the Effective
Date of the Plan. Fresh start reporting has been implemented as of May 20, 2002,
and accordingly, at such date all assets and liabilities were restated to
reflect their respective fair values. See note 1 to the unaudited financial
statements included elsewhere in this Quarterly Report for a discussion of the
fresh start adjustments. For financial reporting purposes, references to
"Predecessor" refer to Old Frank's on and prior to May 20, 2002, and references
to "Successor" refer to Frank's on and after May 20, 2002, after giving effect
to the implementation of fresh start reporting. Successor financial statements
are not comparable to Predecessor financial statements. However, for purposes of
discussion of results of operations, the twelve weeks ended August 11, 2002
(Successor) has been compared to the twelve weeks ended August 12, 2001
(Predecessor). Similarly, for year-to-date discussion of results of operations,
the twelve weeks ended August 11, 2002 (Successor) has been combined with the
sixteen weeks ended May 19, 2002 (Predecessor) and compared with the
twenty-eight weeks ended August 12, 2001 (Predecessor).
14
RESULTS OF OPERATIONS
The following table shows the combined 2002 periods in comparison to the
corresponding 2001 period (dollars in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------ ------------------------
August 11, August 12, August 11, August 12,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $ 89,070 $ 86,701 $ 200,062 $ 239,839
Operating costs and expenses:
Cost of goods sold, including buying and occupancy 64,646 71,050 145,402 182,640
Selling general and administrative 20,746 25,927 52,236 64,366
Restructuring and other related charges 5,279 21,839 6,981
Early extinguishment of debt 4,230
Amortization of goodwill 383 894
Other (income) expense (679) 436 (797) (341)
Total operating costs and expenses 84,713 103,075 218,680 258,770
Income (loss) from operations 4,357 (16,374) (18,618) (18,931)
Interest expense 1,586 2,017 4,169 6,617
Reorganization income 183,839
Income taxes
---------- ---------- ---------- ----------
Net income (loss) $ 2,771 $ (18,391) $ 161,052 $ (25,548)
========== ========== ========== ==========
NET SALES. Net sales were $89.1 million for the twelve weeks ended August 11,
2002 ("2002 quarter"), an increase of $2.4 million or 2.8% compared with the
twelve weeks ended August 12, 2001 ("2001 quarter"). Comparative store sales
increased 15.2% for the 2002 quarter. Net sales for the twenty-eight weeks ended
August 11, 2002 ("2002 first half") were $200.1 million, a decrease of $39.7
million or 16.6% compared with the twenty-eight weeks ended August 12, 2001
("2001 first half"). Comparative store sales decreased 3% for the 2002 first
half. The unfavorable weather patterns in virtually all markets where the
Company operates negatively impacted the lawn and garden sales for the 2002
first quarter thus contributing to the net sales decrease for the 2002 first
half. Net sales for the 2001 quarter and 2001 first half included sales related
to the store closure programs that amounted to $8.8 million and $31.2 million,
respectively.
COST OF SALES, INCLUDING BUYING AND OCCUPANCY. Cost of sales were $64.6 million
for the 2002 quarter, a decrease of $6.5 million or 9.1% compared with the 2001
quarter. Cost of sales, as a percentage of net sales, was 72.6% in the 2002
quarter compared with 81.9% in the 2001 quarter. On a comparative base (170
stores) cost of sales, as a percentage of net sales, for the 2001 quarter would
have been 76.6%. Merchandise margins on a comparative base declined 2.4
percentage points for the 2002 quarter. Cost of sales were $145.4 million for
the 2002 first half compared with $182.6 million for the 2001 first half. Cost
of sales, as a percentage of net sales, was 72.7% in the 2002 first half
compared with 76.1% in the 2002 first half. On a comparative base, cost of
sales, as a percentage of net sales, for the 2001 first half would have been
72%. Merchandise margins on a comparative base declined 0.9% for the 2002
quarter. The merchandise margin decline for both the 2002 first quarter and 2002
first half is due to increased promotional activity of crafts as the Company
exits certain categories and expands it new home decor lines. The 2001 quarter
and 2001 first half included a $1.6 million lower of cost or market reserve for
the inventory liquidation of 12 stores closed in 2001 and lower merchandise
margins due to liquidation sales.
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses were $20.7
million for the 2002 quarter, a decrease of $5.2 million or 20% compared with
the 2001 quarter SG&A expenses, as a percentage of net sales, were 23.2%
compared with 29.9% for the 2001 quarter. On a comparative base, SG&A expenses,
as a percentage of net sales for the 2001 quarter would have been 30%. SG&A
expenses for the 2002 first half were $52.2 million compared with $64.4 million
for the 2001 first half. As a percentage of net
15
sales, SG&A expenses were 26.1% for the 2002 first half compared with 26.9% for
the 2001 first half. On a comparative base, the 2001 first half would have been
27.2%. The decline was due primarily to lower store expenses resulting from the
lower store base and lower corporate expenses.
EARLY EXTINGUISHMENT OF DEBT. The early extinguishment of debt for the 2001
first half primarily represented the write-off of debt issue costs to retire an
outstanding credit facility obligation utilizing proceeds from the DIP Financing
Facility at the petition date.
RESTRUCTURING AND OTHER RELATED CHARGES. The 2002 first half includes a charge
of $21.8 million compared with $7 million in the 2001 first half. The 2002 first
half charge 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 while under chapter 11; $1.1 million for costs of mortgage
debt to be refinanced and $.8 million for miscellaneous items. The $15.5 million
liability for the costs of rejected store leases represented an estimate of the
maximum claim allowed under bankruptcy law. In accordance with the Plan, these
claims were treated as general unsecured claims and resulted in a cancellation
of debt and recognized as a reorganization item. The $1.1 million liability for
costs of mortgage debt represented an estimate to properly state the
pre-petition long-term debt in accordance with the Plan. The 2001 charge
includes $.3 million for termination and severance payments for the store
closure programs and $3.2 million for the write-off of the remaining assets,
related goodwill, and capital lease debt related to the store closure programs,
offset by $0.9 million of leasehold interest sales. Also included are
professional fees of $2.7 million and $1.7 million under a key employee
retention program.
OTHER (INCOME) EXPENSE. Other income was $0.6 million for the 2002 quarter that
primarily represented a revaluation of assets held for resale based upon
purchase agreements. Other expense for the 2001 quarter was $0.4 million.
INTEREST EXPENSE. Interest expense was $1.6 million for the 2002 quarter
compared with $2 million for the 2001 quarter. Lower interest in the 2002
quarter results from no borrowings under the Exit Revolver Facility, offset in
part by the interest under the Exit Term Loan. The 2002 first half expense was
$4.2 million compared with $6.6 million for the 2001 first half. Lower interest
for the 2002 first half in part related to the discontinuance of an interest
accrual for the senior subordinated notes since the pre-petition date and lower
levels of outstanding borrowing in the 2002 first half.
REORGANIZATION ITEMS. Gains of $183.8 million were recognized in the 2002 first
half. The gain was due to the cancellation of pre-petition liabilities upon
emergence ($184.9 million), the fresh start accounting adjustments ($0.3
million), offset by a loss from the extinguishment of debt ($1.4 million).
LIQUIDITY AND CAPITAL RESOURCES
EXIT REVOLVER FACILITY
As discussed above and in note 1 to the unaudited financial statements included
elsewhere in this Quarterly Report, the Company entered into the Exit Revolver
Facility on the Effective Date. The Exit Revolver Facility (Facility") is a
three-year $50 million secured revolving loan facility, which includes $25
million of letters of credit. The availability of borrowings under the Facility
generally is based on a percentage of eligible accounts receivable, eligible
inventory, and certain other assets, subject to certain reserves
The 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 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 annual
renewal rights. The Facility includes an unused line fee of .25% per annum, a
servicing fee of $10,000 per calendar quarter, and an early termination fee in
an amount equal to 2% of the amount of the maximum credit if the Facility is
terminated in whole during the first year, 1% during the second year, and 0.5%
during the third year.
The Exit Revolver Facility contains a number of negative covenants, which
restrict, among other things, Frank's ability to incur additional debt, pay
dividends or make other restricted payments, grant liens, make loans, advances,
and investments, engage in transactions with affiliates, dispose of assets,
prepay and refinance debt, and make certain changes in its business. As of
August 11, 2002, there were no amounts outstanding under the Facility and
outstanding letters of credit aggregated $15.3 million. Availability as of
August 11, 2002 was $8.2 million. The Company, as a result of obtaining more
favorable vendor terms than originally anticipated and improved inventory
management, was not in compliance with the cost of inventory to accounts payable
ratio provision of the Facility at August 11, 2002. The Company obtained a
waiver of this provision dated September 17, 2002. The Company considers this to
have been a technical violation of the Facility terms and is presently in
contact with the Lender to revise or eliminate this provision.
EXIT TERM AND REVOLVING LOAN
On the Effective Date, Frank's also entered into an Exit Term and Revolving
Loan. The Exit Term and Revolving Loan is comprised of a $20 million term loan
(the "Exit Term Loan") and $10 million of revolving loans, both secured by the
Company's owned but unmortgaged and leased real property. These two loans bear
interest at 10.25% per annum for an initial term of three years, with renewal
rights for up to two years. The Exit Term and Revolving Loan has at the lenders
option purchase rights under a warrant
16
agreement to purchase up to 5,869,565 shares of common stock at $1.15, subject
to adjustment for anti-dilution. In addition Frank's is required to prepay the
Exit Term and Revolving Loans with the net cash proceeds from the sale of
certain assets.
The Exit Term and Revolving Loan also contains a number of negative covenants,
which restrict, among other things, Frank's ability to incur additional debt,
pay dividends or make other restricted payments, grant liens, make loans,
advances and investments, engage in transactions with affiliates, dispose of
assets, enter into sale-leaseback arrangements, effect mergers, consolidations,
and dissolutions.
Upon emergence from bankruptcy, the $20 Exit Term Loan was utilized to retire
the borrowings under the DIP Financing Facility. In conjunction with the
retirement of the DIP Financing Facility a charge of $1.4 million for
extinguishment of debt primarily related to the write-off of debt issue costs
was recognized as a reorganization item. As of August 11, 2002, $20 million was
outstanding under the Exit Term Loan.
ADEQUACY OF CAPITAL RESOURCES
The Company's principal sources of liquidity will be cash flows from operations
and borrowings under the Exit Revolver Facility and the Exit Term and Revolving
Facility. Based on current and anticipated levels of operations, the Company's
management believes that cash flows from operations, together with amounts
available under the Exit Revolver Facility, will be adequate to meet the
Company's anticipated cash requirements, including debt service requirements and
planned capital expenditures. In the event that the Company's borrowing base,
comprised of a percentage of eligible accounts receivable and inventory after
reserves, becomes insufficient to support additional borrowing under the Exit
Revolver Facility, the Company may borrow under the Exit Term and Revolving
Facility up to a maximum principal amount of $10 million. The Company's most
significant cash requirements are for merchandise inventory that fluctuates
throughout the year due to the seasonality of the business. Cash requirements
increase substantially in August and September in anticipation of the Christmas
season and in March and April for the lawn and garden business. Additionally,
the Company's business depends, in part, on normal weather patterns across its
markets. Any unusual weather patterns can have a material and adverse impact on
the Company's business, particularly the lawn and garden sector. In the event
that cash flows, together with available borrowings under the Exit Revolver
Facility and the Exit Term and Revolving Facility are not sufficient to meet the
Company's cash requirements, the Company would be required to obtain alternative
financing or reduce planned capital expenditures. The Company can provide no
assurance that alternative financing would be available on acceptable terms,
especially in light of the fact that, except for miscellaneous real property and
equipment, substantially all of the Company's existing assets are pledged as
collateral for the Exit Revolver Facility and Exit Term Loan and Revolving
Facility or that reductions in planned capital expenditures would be sufficient
to cover any cash shortfalls.
The Company anticipates spending approximately $5 million for capital
expenditures for the current fiscal year, primarily for upgrades to the
information technology systems and for store remodelization. No store openings
are planned for the remainder of the fiscal year.
NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001, and specifies criteria for the recognition and reporting of
intangible assets apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. Intangible assets with definite
useful lives will be amortized over such lives to their estimated residual
values. SFAS No. 141 and SFAS No. 142 were adopted as of May 19, 2002. As a
result of the chapter 11 bankruptcy proceedings and the write-off of goodwill in
the fiscal year ended January 27, 2002, the adoption of SFAS No. 141 and SFAS
No. 142 by Old Frank's in the sixteen weeks ended May 19, 2002 had no impact on
the Company's earnings or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145, among other things, prohibits the classification of gains and
losses from extinguishment of debt as extraordinary unless they meet the
criteria defined in Opinion 30. The provisions of SFAS No. 145 were adopted in
the 2002 quarter, and as such, the loss recognized by Old Frank's on the
extinguishment of debt resulting from the emergence from the chapter 11
bankruptcy proceedings is classified as a reorganization item. Restatement of
previously issued financial statements is required, and as such, the loss
recognized by Old Frank's on the extinguishment of debt for the 2001 first half
has been reclassified as part of the loss from operations.
17
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 applies to costs associated with
an exit activity (including a restructuring) or with a disposal of long-lived
assets. Under SFAS No. 146, a company will record a liability for a cost
associated with an exit or disposal activity when that liability is incurred and
can be measured at fair value. A liability is incurred when an event obligates
the entity to transfer or use assets. Under current accounting guidance, a
liability can be recorded when management has committed to an exit plan. The
requirements under SFAS No. 146 are effective prospectively for exit or disposal
activities initiated after December 31, 2002. Restatement of previously issued
financial statements is not permitted.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This filing contains certain forward-looking statements, which reflect
management's current views of future events and financial performance. These
forward-looking statements are based on many assumptions and factors detailed in
the Company's filings with the Securities and Exchange Commission, including the
effect of currency translations, customer demand, fashion trends, competitive
market forces, uncertainties related to the effect of competitive products and
pricing, customer acceptance of the Company's merchandise mix and retail
locations, unseasonable weather, risks associated with foreign global sourcing,
including political instability and changes in import regulations, economic
conditions worldwide, and the ability of the Company to execute its business
plans effectively. Any changes in such assumptions or factors could produce
significantly different results. The Company undertakes no obligation to update
forward-looking statements, whether as a result of new information, future
events, or otherwise.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company perceives its only market interest rate risk to be limited to
borrowings under the Exit Revolving Facility. 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. No
amounts have been borrowed under the Exit Revolving Facility for the 2002
quarter. Interest under the Exit Term Loan of $20 million is fixed at 10-1/4%
per annum.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Old Frank's Current Reports on Form 8-K filed on May 22,
2002, June 25, 2002, July 3, 2002, July 25, 2002, and September 12, 2002, and
Part I, Item 3. Legal Proceedings, of the Annual Report on Form 10-K for the
fiscal year ended January 27, 2002 filed on April 29, 2002. See note 1 to the
unaudited financial statements included elsewhere in this Quarterly Report and
Part I, Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of the Chapter 11 Cases. Such discussion
is incorporated herein by this reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Plan became effective on May 20, 2002. On the Effective Date, pursuant to
the Plan all of Old Frank's and Holdings issued and outstanding common stock was
cancelled without consideration; Old Frank's merged with Holdings, and then
changed its name to Frank's, which was reincorporated in Delaware; and a new
Certificate of Incorporation (the "Certificate") and Bylaws (the "Bylaws") of
Frank's. Additionally, on the Effective Date, pursuant to the Plan (a)
20,000,000 shares of Common Stock were reserved for distribution in respect of
claims against the Debtors, (b) 913,044 shares of Common Stock were reserved for
issuance upon the exercise of Warrants for old equity holders of Holdings (c)
3,652,174 shares of Common Stock were reserved for a new stock option plan,
which was implemented in accordance with the Plan, and (d) 5,869,565 shares of
Common Stock were reserved for the conversion rights of Kimco Realty Corporation
and its affiliates ("Kimco") as part of the exit financings. Descriptions of the
Common Stock and Warrants are included the Plan as filed in the Company's
Current Report on Form 8-K dated May 7 an filed May 22, 2002. Copies of the
Certificate and Bylaws are filed as Exhibits 3.1 and 3.2, respectively, to this
Quarterly Report.
Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of
securities under a plan of reorganization from registration under the Securities
Act and state securities laws if three principal requirements are satisfied: (a)
the securities must be offered and sold under a plan of reorganization and must
be securities of the debtor, an affiliate participating in a joint plan with the
debtor or a successor to the debtor under the plan; (b) the recipients of the
securities must hold a pre-petition or administrative expense claim against the
debtor or an interest in the debtor; and (c) the securities must be issued
entirely in exchange for the recipient's claim against or interest in the
debtor, or principally in such exchange and partly for cash or property. Section
1145(a)(2) of the Bankruptcy Code exempts the offer of a security through any
warrant, option, right to purchase or conversion privilege that is sold in the
manner specified in section 1145(a)(1) and the sale of a security upon the
exercise of such a warrant, option, right or privilege. Frank's
18
believes that the offer and sale of the Common Stock and the Warrants under the
Plan satisfy the requirements of section 1145(a)(1) of the Bankruptcy Code and,
therefore, are exempt from registration under the Securities Act and state
securities laws. Similarly, Frank's believes that the offer of Common Stock
through the Warrants and the sale of Common Stock upon the exercise of the
Warrants satisfy the requirements of section 1145(a)(2) of the Bankruptcy Code
and, therefore, are exempt from registration under the Securities Act and state
securities laws.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
3.1 Certificate of Incorporation
3.2 By-laws of the Company
4.1 Investor Rights Agreement, dated as of May 20, 2002, by and
between Frank's Nursery & Crafts, Inc. and entities listed on
Schedule I
4.2 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Kimco Realty Services, Inc.
4.3 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Third Avenue Trust
4.4 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Cypress Merchant Banking Partners L.P.
4.5 Stock Purchase Warrant, dated as of May 20, 2002 granted to
Cypress Garden Ltd.
4.6 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Joseph Baczko
10.1 Stock Option Plan (Incorporated by reference to the Form 8-K
dated May 7, 2002 and filed May 22, 2002)
10.2 Stock Option Agreement dated between the Company and Steven S.
Fishman
10.3 Stock Option Agreement dated between the Company and Alan J.
Minker
10.4 Stock Option Agreement dated between the Company and Adam S.
Szopinski
10.5 First Amendment to Loan and Security Agreement, dated as of
May 20, 2002, among Frank's Nursery & Crafts, Inc, Congress
Financial Corporations, as Administrative Agent, and the
Lenders party thereto
99.1 Chief Executive Officer Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
During the quarter ended August 11, 2002, Old Frank's and Frank's
filed the following Current Reports on Form 8-K:
Current Report on Form 8-K dated and filed July 25, reporting
information under "Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits" listing exhibits for the
Credit and Security Agreement, dated as of May 20, 2002 with
Kimco Capital Corporation and the Loan and Security Agreement,
dated as of May 20, 2002 with Congress Financial Corporation.
Current Report on Form 8-K dated and filed September 12,
reporting information under "Item 5. Other Events" regarding
the issuance of Common Stock.
19
SIGNATURE
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.
DATE: September 25, 2002 FRANK'S NURSERY & CRAFTS, INC.
(Registrant)
By: /s/ Steven S. Fishman
------------------------------
Steven S. Fishman
Chairman and Chief Executive Officer
/s/ Alan J. Minker
------------------------------
Alan J. Minker
Senior Vice President and
Chief Financial Officer
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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL OFFICER PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven S. Fishman, certify, pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, with respect to the Quarterly Report of Frank's Nursery & Crafts,
Inc. on Form 10-Q for the quarterly period ended August 11, 2002 ("Report")
that (1) I have reviewed the Report being filed; (2) based on my knowledge,
the Report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by the Report; and (3) based on my knowledge,
the financial statements, and other financial information included in the
Report, fairly present in all material respects the financial condition,
results of operations and cash flows of the issuer as of, and for, the periods
presented in the Report.
By: /s/ Steven S. Fishman
-----------------------------------------
Name: Steven S. Fishman
Title: Chairman and Chief Executive Officer
I, Alan J. Minker, certify, pursuant to Rule 13a-14 of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, with respect to the Quarterly Report of Frank's Nursery & Crafts, Inc. on
Form 10-Q for the quarterly period ended August 11, 2002 ("Report") that (1) I
have reviewed the Report being filed; (2) based on my knowledge, the Report does
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by the Report; and (3) based on my knowledge, the financial statements,
and other financial information included in the Report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the issuer as of, and for, the periods presented in the Report.
By: /s/ Alan J. Minker
-----------------------------------------
Name: Alan J. Minker
Title: Senior Vice President and Chief
Financial Officer
Exhibit Index
Exhibit No. Description
3.1 Certificate of Incorporation
3.2 By-laws of the Company
4.1 Investor Rights Agreement, dated as of May 20, 2002, by and
between Frank's Nursery & Crafts, Inc. and entities listed on
Schedule I
4.2 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Kimco Realty Services, Inc.
4.3 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Third Avenue Trust
4.4 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Cypress Merchant Banking Partners L.P.
4.5 Stock Purchase Warrant, dated as of May 20, 2002 granted to
Cypress Garden Ltd.
4.6 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Joseph Baczko
10.1 Stock Option Plan (Incorporated by reference to the Form 8-K
dated May 7, 2002 and filed May 22, 2002)
10.2 Stock Option Agreement dated between the Company and Steven S.
Fishman
10.3 Stock Option Agreement dated between the Company and Alan J.
Minker
10.4 Stock Option Agreement dated between the Company and Adam S.
Szopinski
10.5 First Amendment to Loan and Security Agreement, dated as of
May 20, 2002, among Frank's Nursery & Crafts, Inc, Congress
Financial Corporations, as Administrative Agent, and the
Lenders party thereto
99.1 Chief Executive Officer Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
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