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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 FOR THE FISCAL YEAR ENDED JANUARY 25, 2004
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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
580 KIRTS BLVD., SUITE 300, TROY, MICHIGAN 48084
(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
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $0.001 PER
SHARE (TITLE OF CLASS)
All of the Company's SEC filings can be found at the Company's website:
www.franks.com.
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 is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter: $13,748,495.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 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 [ ]
As of April 23, 2004, the registrant had 17,807,162 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for its 2004
Annual Meeting of Shareholders are incorporated by reference in Part III of this
Form 10-K.
FRANK'S NURSERY & CRAFTS, INC.
FORM 10-K
FISCAL YEAR END JANUARY 25, 2004
Table of Contents
PART I
ITEM 1. BUSINESS............................................................................................. 1
ITEM 2. PROPERTIES........................................................................................... 6
ITEM 3. LEGAL PROCEEDINGS.................................................................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................ 7
ITEM 6. SELECTED FINANCIAL DATA.............................................................................. 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS............... 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................... 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 23
ITEM 9A. CONTROLS AND PROCEDURES.............................................................................. 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................... 24
ITEM 11. EXECUTIVE COMPENSATION............................................................................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................... 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................... 24
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES............................................................... 24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................................... 25
SIGNATURES.................................................................................................... 26
FINANCIAL SECTION
INDEX TO FINANCIAL STATEMENTS................................................................................. F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS............................................................ F-2
REPORT OF INDEPENDENT AUDITORS................................................................................ F-3
BALANCE SHEETS................................................................................................ F-4
STATEMENTS OF OPERATIONS...................................................................................... F-5
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT).................................................................. F-6
STATEMENTS OF CASH FLOWS...................................................................................... F-7
NOTES TO FINANCIAL STATEMENTS................................................................................. F-8
SCHEDULE II - VALUATION OF QUALIFYING ACCOUNTS................................................................ S-1
EXHIBIT INDEX................................................................................................. E-1
In conjunction with its plan of reorganization (as discussed in Note 1 of the
audited financial statements), on May 20, 2002, Frank's Nursery & Crafts, Inc.,
a Michigan corporation, merged into its parent, FNC Holdings Inc., a New York
corporation. On the merger date, the surviving corporation changed its name to
Frank's Nursery & Crafts, Inc. and was reincorporated in Delaware. Depending
upon the context and the period being referenced, references to the "Company" or
"Frank's" in this Form 10-K refer to Frank's Nursery & Crafts, Inc., a Delaware
corporation, and/or its predecessors.
References in this Form 10-K to a particular year are to the Company's fiscal
year, which is the 52- or 53-week period ending on the last Sunday in January of
the following year (e.g., a reference to "2003" is a reference to the fiscal
year ended January 25, 2004).
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
ability of the Company to maintain normal trade terms with vendors, the ability
of the Company to comply with the various covenant requirements contained in its
financing agreements, customer demand, fashion trends, competitive market
forces, the effect of competitive products and pricing, customer acceptance of
the Company's merchandise mix and retail locations, weather, risks associated
with foreign global sourcing, including political instability and changes in
import regulations, the effects of currency fluctuations, 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.
PART I
ITEM 1. BUSINESS
OVERVIEW
Frank's operates the largest chain (as measured by sales ) in the United States
of specialty retail stores devoted to the sales 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. The Company operates 169 retail stores in 14 states,
primarily in the eastern, middle-Atlantic, and mid-western regions of the United
States, under the name Franks Nursery.
Frank's was incorporated under the laws of the State of Delaware in April 2002
and is the successor of Frank's Nursery & Crafts, Inc., a Michigan corporation
which was incorporated 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 580 Kirts Boulevard, Suite 300, Troy,
Michigan 48084, and its telephone number is (248) 712-7000.
1
THE LAWN AND GARDEN INDUSTRY
The overall retail market for lawn and garden products, defined to include green
goods for both outdoor and indoor usage, fertilizers and chemicals, gardening
accessories, lawn and patio furniture, Christmas trim-a-tree merchandise, power
equipment and tools, barbecue grills, and watering equipment, was estimated at
$98.7 billion in calendar 2003 and grew 4.0% from an estimated $94.9 billion in
calendar 2002, according to Nursery Retailer magazine. During the period from
calendar 1992 through calendar 2003, the lawn and garden industry grew from
$53.6 billion to $98.7 billion, according to Nursery Retailer magazine. 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 (live) 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,
knowledgeable service, and effective advertising. The Company believes that it
competes effectively in these areas, as well as others, and that its competence
level in the retailing of lawn and garden products will enable it to gain market
share in the future by increased penetration of its existing markets.
COMPANY STRATEGY
The Company's objective is to position itself as a convenience nursery, garden
center, and seasonal retailer, from a merchandising and marketing perspective.
The Company's green goods business has shown consistent growth versus prior
years. Focus will continue to be targeted on improvements in the merchandise mix
and overall operations of hardlines, life-like (silk) floral and custom
arrangements, and other products. Ongoing cost reductions, improvements in
inventory management, and vendor quality programs will continue to be a high
priority for the Company and will be critical to its success. The Company will
introduce new product offerings, on a chain-wide basis in 2004, including patio
furniture and grills, which were tested in 2003. These offerings are intended to
complement the Company's core business and increase sales during its slower
selling periods.
The Company's merchandising efforts are focused on maintaining an appropriate
in-stock position for high sales volume items and closely monitoring product
sell-through to minimize markdowns. Utilizing inventory management tools, the
Company has also implemented processes intended to deliver seasonal product in a
manner to prevent overstocks.
2
The Company utilizes marketing and advertising efforts to communicate with its
customers. The Company's marketing and advertising efforts are intended to build
customer traffic at its stores and extend the peak selling seasons of its core
business by implementing multi-media advertising, including radio ads,
aggressive pricing to match competitors on similar items, and promotional events
and discount programs.
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 strategic market position is to
provide better quality product, service and convenience than the home center and
mass merchandise competition, at prices that are a better value proposition than
the local nurseries. In the live goods area, the Company deals with a number of
different vendors for the same product in different areas of the country. In
order to be able to provide live product of consistently high quality, the
Company has instituted a quality assurance program with its vendors and
carefully monitors compliance with the program.
The Company's Christmas trim-a-tree selection is aimed at providing its
customers with a broad and unique assortment of quality artificial trees,
wreaths, tree decorations, and holiday decor.
PRODUCT CATEGORIES
The principal products sold at the Company's retail stores are as
follows:
Percentage of Total Sales
-------------------------
Product Line 2003 2002 2001 Description
- ------------ ---- ---- ---- -----------
Lawn and garden 76% 72% 70% Annual and perennial flowering plants (including
poinsettias), trees (including live Christmas
trees), shrubs, mulches, fertilizers, roses, potted
plants, seeds and bulbs, plant accessories, hoses
and garden tools and equipment, bird houses,
feeders, patio furniture, grills, seed and
accessories
Floral, Garden Decor, Dried, silk and life-like flowers, arrangements,
and Home Decor 12 15 17 candles, garden decor items and decorative home
accessories; also includes craft items, picture
frames, and frame art, which have been discontinued
Christmas Artificial Christmas trees, indoor and outdoor
12 13 13 lights, decorations and trimmings
---- ---- ---
100% 100% 100%
==== ==== ===
LAWN AND GARDEN. 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 customers are drawn 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
3
merchandise. In addition, the Company markets its own line of private label lawn
and garden products.
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 which is less significant than the spring sales
season. In the winter months, sales of lawn and garden products are minimal and
limited essentially to live Christmas trees, poinsettias, and indoor plants. In
2004, the Company is adding a year-round business in patio furniture and grills
to this category. As well, the Company promotes a wild bird business, including
feed and accessories in the winter months.
FLORAL, GARDEN DECOR, AND HOME DECOR. The Company's floral and garden
decor products include a varied assortment of dried, silk and life-like flowers
for the do-it-yourself decorator, as well as pre-made and custom floral
arrangements. The Company also offers a broad assortment of decorative candles,
planters, garden statuary, and accent pieces for the home or patio. The Company
intends to enhance the quality of products selected for this category and expand
the quantity of products in the garden decor area in response to consumer
demand. The Company also intends to support this product category with
advertising in order to make consumers aware of Frank's improved product
selection and presentation.
Floral sales are steady throughout the year and are stimulated by early
spring, fall, and late winter promotions. The garden decor business is
concentrated mainly in the spring, summer, and fall months.
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 products offered include artificial trees, indoor and outdoor
lights, wreaths, holiday plants, and a wide array of trim-a-tree items.
Christmas merchandise is sold almost entirely in November and December.
SEASONALITY
The Company's business is highly seasonal and very susceptible to the
impact of weather conditions which may affect consumer purchasing patterns.
Unusually wet or cold weather reduces consumer purchases during the spring
selling season. In 2003, 47% of the Company's sales occurred during the spring
selling season (late March to mid-June) and 20% occurred during the Christmas
season (November to late December). 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 January until late March
and from mid-July to October.
Like most seasonal retailers, the Company significantly increases
inventory levels leading up to its two peak selling seasons. In the months
leading up to those seasons, the Company orders product for delivery prior to
and during the selling seasons. Frank's negotiates payment terms with suppliers
on a case-by-case basis. Historically, the majority of payments are made during
or shortly
4
after the selling season, and a small percentage is paid prior to the selling
season.
Working capital for pre-seasonal inventory buildup comes from the
Company's two revolving credit facilities and/or cash generated by operations.
The Company's revolving credit facility with Congress Financial Corporation is
asset-based and allows for borrowing at a percentage of inventories on hand, at
cost, net of amounts reserved under the credit agreement. The amounts reserved
are based on a number of variables, including inventory levels, merchandise
purchases and sales levels, and the types of reserves include inventory
shrinkage, letters of credit outstanding, sales taxes and other liabilities of
the Company. The total amount of these reserves varies by season but typically
ranges from 10% to 25% of the cost of eligible inventory. The Company's
revolving credit facility with Kimco Capital Corp. is secured by real estate and
a second lien on the Company's inventory and other assets. Availability under
the facility does not fluctuate from month to month as it is not tied to a
borrowing base. Hence, the Company uses the Kimco revolver to fund most of its
pre-seasonal inventory buildup, and it uses the Congress facility when inventory
levels rise.
VENDORS
Substantially all of the plants and products the Company sells are
purchased from approximately 800 outside vendors. Alternative sources of supply
are generally available for each of the products sold by the Company.
STORES
The Company currently operates 169 stores in 14 states, primarily in
the eastern, middle-Atlantic and midwestern regions of the United States. The
Company's stores are generally located on three-acre sites. A typical store
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
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, while some stores are part of strip shopping centers.
The real estate cost of opening new stores varies by location and is
dependent upon the method of financing. Such financing methods include
build-to-suit leases, conversion of existing buildings and land purchases with
construction funded by the Company. These costs range from approximately
$500,000 per store for build-to-suit leases to a range of $3.0 to $3.5 million,
including the purchase of land, per store for stores owned by the Company. New
stores are financed via build-to-suit operating leases whenever possible. The
Company does not anticipate opening any new stores in 2004, other than
relocations.
The following table sets forth the number of stores opened and closed
during the periods indicated.
5
Fiscal Year
------------------
2003 2002 2001
---- ---- ----
Stores open at beginning of period 170 170 218
Stores opened during period 0 0 1
Stores closed during period 0 0 3
Stores closed as a result of bankruptcy 0 0 46
---- ---- ---
Stores open at the end of the period 170* 170 170
==== ==== ===
* On March 15, 2004, the Company closed its East Windsor, NJ store.
STORE OPERATIONS
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
10:00 a.m. until 8:00 p.m.
The average store has approximately 15 to 20 part and full-time
employees, including a store manager, an assistant manager and up to four
department specialists responsible for the various product lines. During
seasonal peak selling periods, the permanent store staff is generally
supplemented with temporary employees.
EMPLOYEES
At April 19, 2004, the Company's employee base was approximately 3,900
including seasonal employees. The Company's entire employee base is non-union,
and management considers its employee relations to be good.
DISTRIBUTION
The Company operates a distribution center in Howe, Indiana. In 2003,
approximately 52% of all merchandise was delivered to the Company's stores via
warehouse, primarily using contract carriers. The balance of the products was
delivered directly to stores by vendors.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a 48,500 square
foot office space leased by the Company in Troy, Michigan. The lease expires in
March 2007, and the Company has two five-year options to extend the term of the
lease.
The Company currently leases a 346,515 square foot distribution
facility in Howe, Indiana. The lease on the Howe facility expires in June 2010
with one five-year renewal option.
The Company currently operates 169 stores, 107 of which are leased and
62 of which are owned. The stores are located in 14 states, as follows:
6
State Number of Stores
- ----- ----------------
Michigan........................ 33
Illinois........................ 27
Pennsylvania.................... 16
Ohio............................ 15
New York........................ 15
Minnesota....................... 13
New Jersey...................... 12
Indiana......................... 11
Maryland........................ 10
Connecticut..................... 7
Virginia........................ 3
Missouri........................ 3
Florida......................... 2
Kentucky........................ 2
---
Total........................... 169
===
Of the 62 properties owned by the Company, 22 are mortgaged pursuant to
mortgage notes having an aggregate balance of $22.1 million at January 25, 2004.
See Note 7 to the audited financial statements included herein. The Company's
interest in the remaining owned properties and all of the leased properties is
pledged as collateral for the Company's credit facility with Kimco Capital
Corp., as described under "Item 7. Financial Information - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Term Loan and Revolving Credit Facility with
Kimco Capital Corp."
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than routine
litigation incidental to the Company's business, against or involving the
Company or its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 2003, no matters were submitted to a
vote of the Company's shareholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
While the Company's stock is currently being quoted on the
Over-the-Counter Bulletin Board under the symbol "FNCN", trading is sporadic and
there is no established public trading market for the Company's common stock.
The following table sets forth the high and low bid prices of the common stock
for the periods indicated, as reported on the Over-the-Counter Bulletin Board
7
beginning on September 9, 2002, the first day when shares of the Company's
common stock were quoted, through January 25, 2004. These quotations represent
prices between dealers and do not include retail mark-ups, mark-downs, or other
fees or commissions and may not represent actual transactions.
BID PRICES
-------------
FISCAL QUARTER HIGH LOW
- --------------------------------------------- ----- -----
Third Fiscal Quarter - 2002 (Partial Quarter)
(September 9 through November 3, 2002) $2.95 $0.50
Fourth Fiscal Quarter - 2002
(November 4, 2002 through January 26, 2003) $1.45 $1.15
First Fiscal Quarter - 2003
(January 27 through May 18, 2003) $1.50 $0.62
Second Fiscal Quarter - 2003
(May 19 through August 10, 2003) $1.47 $0.80
Third Fiscal Quarter - 2003
(August 11 through November 2, 2003) $1.22 $0.91
Fourth Fiscal Quarter - 2003
(November 3, 2003 through January 25, 2004) $1.05 $0.72
HOLDERS
As of April 23, 2004, 17,807,162 shares of the Company's common stock
were outstanding and held by approximately 364 holders of record.
DIVIDENDS
The Company has not declared or paid any cash dividends on its common
stock and does not expect to pay cash dividends in the foreseeable future. The
Company anticipates that, for the foreseeable future, the Company's earnings
will be reinvested in the business and used to service indebtedness. The
declaration and payment of dividends by the Company are subject to the
discretion of the Company's Board of Directors. Absent waiver by the lenders, so
long as any advance or obligation of the Company under its credit facility with
Congress Financial Corporation remains unpaid, the Company cannot declare or pay
any dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On March 17, 2003, under the Company's plan of reorganization, the
Company issued an aggregate of 382,092 shares of its common stock to former
creditors in exchange for the claims that such creditors had against the
Company. On June 17, 2003, under the plan, the Company issued an aggregate of
228,262 shares of its common stock to former creditors in exchange for the
claims that such creditors had against the Company. On October 31, 2003, under
the plan, the Company issued an aggregate of 3,007,498 shares of its common
stock to former creditors in exchange for the claims that such creditors had
against the Company. On November 7, 2003, under the plan, the Company
8
issued an aggregate of 290,284 shares of its common stock to former creditors in
exchange for the claims that such creditors had against the Company.
The Company believes the offer and sale of the common stock under the
plan of reorganization satisfies the requirements under Section 1145(a)(1) of
the U.S. Bankruptcy Code and, therefore, are exempt from registration under the
Securities Act and state securities laws.
On January 29, 2003, the Company granted an option to purchase 100,000
shares of its common stock at a price of $1.19 per share to an employee of the
Company pursuant to the Company's 2002 Stock Option Plan in consideration of
such employee's services to the Company. These options were only offered to such
employee and were granted in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act as the grant did not involve a
public offering.
On February 11, 2003, the Company granted options to purchase an
aggregate of 412,500 shares of its common stock at a price of $1.10 per share to
employees of the Company pursuant to the Company's 2002 Stock Option Plan in
consideration of such employees' services to the Company. The options were
offered only to such employees and were granted in reliance on the exemption
from registration contained in Section 4(2) of the Securities Act as the grants
did not involve a public offering.
On April 1, 2003, the Company granted options to purchase an aggregate
of 1,000,000 shares of its common stock at a price of $0.80 per share to Mr.
Bruce Dale, the Company's former Chief Executive Officer, pursuant to the
Company's 2002 Stock Option Plan, as amended, in consideration of his services
to the Company. The option was offered only to such employee and was granted in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act as the grant did not involve a public offering.
On January 21, 2004, the Company granted options to purchase an
aggregate of 1,000,000 shares of its common stock at a price of $0.75 per share
to Abacus Advisors, LLC as part of an agreement with the Company to provide
strategic and operational advisory and consulting services. The option was
offered only to such entity and was granted in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act as the grant did
not involve a public offering.
For all of the transactions described above involving options to
acquire the Company's common stock, no general solicitation or advertising was
involved. The securities were not offered to any other parties and no monetary
consideration was paid by any of such parties for the receipt of such
securities. Each of the recipients of the options has access to information
regarding the Company (including Forms 10-K and 10-Qs filed by the Company)
which the Company believes is comparable to the information that would be
included in a registration statement.
ITEM 6. SELECTED FINANCIAL DATA
9
The following sets forth selected financial data for the periods
indicated. The selected financial data should be read in conjunction with the
Company's audited financial statements included herein. All dollar amounts are
stated in thousands.
The Company's predecessors filed voluntary petitions for reorganization
under Chapter 11 of the U.S. Bankruptcy Code in February 2001. Their plan of
reorganization was confirmed by the bankruptcy court on May 7, 2002 and was
consummated on May 20, 2002. With the change in ownership resulting from the
plan of reorganization, the Company has adopted fresh-start reporting in
accordance with the recommended accounting principles for entities emerging from
Chapter 11 bankruptcy set forth in 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 adjustments to
reflect the consummation of the plan of reorganization, including the gain on
discharge of pre-petition liabilities and the adjustments to record assets and
liabilities at their fair values, have been reflected in the accompanying
financial data for the sixteen weeks ended May 19, 2002. For financial reporting
purposes, references to "Predecessor" refer to the Company's predecessors on and
prior to May 20, 2002, and references to "Successor" refer to the Company on and
after May 20, 2002, after giving effect to the implementation of fresh start
reporting. Accordingly, the financial data for the sixteen weeks ended May 19,
2002 (Predecessor), the thirty-six weeks ended January 26, 2003 (Successor),
and the year ended January 25, 2004 (Successor) are not prepared on a basis
comparable to the prior periods presented. Amounts are in $1,000's.
Fiscal Thirty-Six Weeks Sixteen Weeks Fiscal Years
Year Ended January 26, Ended May 19, -------------------------------------------
2003 2003 2002 2001 2000 1999
(Successor) (Successor) (Predecessor) (Predecessor) (Predecessor) (Predecessor)
----------- ----------- ------------- ------------- ------------- -------------
Restated** Restated**
Net Sales $ 316,870 $ 204,156 $ 110,992 $ 371,417 $ 436,947 $ 487,332
Restructuring and other
related charges 2,875 1,127 21,839 40,887 127,047 --
Net (loss) income (23,797) (17,685) 158,272 (91,996) (168,290) (9,296)
Balance Sheet Data:
Total assets 108,521 107,427 187,081 165,313 286,021 449,633
Total debt, including current 42,624 57,988 155,084 166,832 214,310 233,416
Shareholder's (deficit) equity (13,966) 9,792 (123,562) (97,995) (5,939) 147,826
Loss per share * (1.19) (0.88)
* only Successor earnings (loss) per share is shown above
**see Note 1 of the accompanying audited financial statements for description of
prior year
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
FRESH START REPORTING AND FACTORS AFFECTING COMPARABILITY OF FINANCIAL
INFORMATION
The Company emerged from Chapter 11 bankruptcy proceedings on May 20,
2002, which for financial reporting purposes, the Company deemed the effective
date of the plan of
10
reorganization. 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 audited financial
statements included herein for a discussion of the fresh start adjustments. For
financial reporting purposes, references to "Predecessor" refer to the Company's
predecessors on and prior to May 20, 2002, and references to "Successor" refer
to the Company 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 discussion of
results of operations, the thirty-six weeks ended January 26, 2003 (Successor)
has been combined with the sixteen weeks ended May 19, 2002 (Predecessor) and
compared with the fiscal year ended January 25, 2004.
OVERVIEW
During the critical spring selling season of 2003, the Company implemented new
marketing initiatives intended to drive additional weekend customer traffic into
stores. These initiatives utilized radio advertisements in addition to ongoing
print media and focused on a "Get up and garden!" theme. The company also
offered greater promotional discounts, partly to drive incremental sales and
partly to sell-through slower moving home decor product. The initiatives
resulted in higher sales and income from operations for the first half of 2003
versus the prior year.
In the fourth quarter of 2003, the Christmas trim-a-tree business fell well
below expectations believed to be due to early inclement weather patterns that
may have curtailed outdoor decorating in many markets, a general declining trend
in the traditional live Christmas tree business, and an extremely promotional
competitive marketplace. Profits were further eroded by the Company's decision
to heavily discount holiday goods in an effort to meet competition, improve
sales trends, minimize inventory levels of holiday goods, and generate cash.
Throughout the year, management undertook various actions to improve the
Company's future operations, including:
- Workforce reduction initiatives at the Company's headquarters.
- Closure of the Harrisburg, PA distribution center in the fourth quarter.
- Decision to close one under-performing store effective March 2004.
- Other expense reduction initiatives including renegotiation of various
leases and vendor agreements.
Net loss for the 52 weeks ended January 25, 2004 was $164.4 million worse than
the same period in 2002. However, included in 2002 was reorganization income of
$183.8 million recorded in accordance with Fresh Start Accounting (see Note 1 of
the accompanying audited financial statements). The loss before reorganization
items in 2003 was $19.5 million better than the prior year, mainly due to
restructuring charges in 2002.
As of January 25, 2004, the Company's debt under its revolving credit facilities
was approximately $20.5 million higher than at January 26, 2003. This additional
debt was largely due to increased cash requirements resulting from operating
losses incurred in 2003.
11
The higher total inventory and related higher trade accounts payable at the end
of 2003 versus 2002 reflects management's initiative to carry a complete
selection of lawn and garden products on a year-round basis. The Company
believes this sends an important message to the consumer and reinforces Frank's
presence as a lawn and garden destination in the markets served.
RESULTS OF OPERATIONS
2003 COMPARED TO 2002
The following table shows the 2003 period in comparison to the
corresponding combined 2002 periods (dollars in thousands):
Fifty-two weeks Fifty-two weeks Thirty-six Sixteen weeks
ended ended weeks ended ended
---------------- --------------- ------------- ---------------
January 25, 2004 January 26, January 26, May 19, 2002
2003 2003
---------------- --------------- ------------- ---------------
("Combined") ("Successor") ("Predecessor")
(Restated) (Restated) (Restated)
Net sales $ 316,870 $ 315,148 $ 204,156 $ 110,992
Operating costs and expenses:
Cost of sales, including buying and
occupancy 238,640 234,709 153,953 80,756
Selling, general, and administrative 90,026 93,388 61,898 31,490
Restructuring and other related charges 2,875 22,966 1,127 21,839
--------- ---------- ---------- ----------
Total operating costs and expenses 331,541 351,063 216,978 134,085
Loss from operations (14,671) (35,915) (12,822) (23,093)
Other income (expenses):
Interest expense and amortization of debt
costs (9,107) (7,617) (5,034) (2,583)
Other income
(19) 280 171 109
--------- ---------- ---------- ----------
Total other expenses (9,126) (7,337) (4,863) (2,474)
Loss before reorganization income (23,797) (43,252) (17,685) (25,567)
Reorganization income - 183,839 - 183,839
--------- ---------- ---------- ----------
Net (loss) earnings $ (23,797) $ 140,587 $ (17,685) $ 158,272
========= ========== ========== ==========
NET SALES. Net sales were $316.9 million for the fifty-two weeks ended
January 25, 2004 ("2003"), an increase of $1.8 million, or 0.5%, compared with
nets sales of $315.1 million for the fifty-two weeks ended January 26, 2003
("2002"). Green (live) goods sales in 2003 were 8.1% higher than in 2002, while
all other merchandise categories declined by 3.8%. There were 170 stores open
for all periods presented.
COST OF SALES, INCLUDING BUYING AND OCCUPANCY. Cost of sales was $238.6
million for 2003 compared with $234.7 million for 2002, an increase of $3.9
million, or 1.7%. In 2002, the Company adjusted its inventory valuation reserve
resulting in a $2.0 million lower of cost or market charge in accordance with
its accounting policy.
Cost of sales, as a percentage of net sales, was 75.3% in 2003 compared
with 74.5% in 2002. The merchandise gross profit margin (defined as net sales
less cost of sales, excluding
12
buying and occupancy costs) declined in 2003 compared to 2002 due to special
promotional discounts designed to drive customer traffic, higher markdowns taken
to exit certain home decor categories, and earlier discounts on Christmas
merchandise. This decline was partly offset by reductions in buying and
occupancy costs in 2003 compared to 2002. At the end of 2003, as a result of the
exit from certain home decor categories and earlier discounts on Christmas
merchandise, the Company carried significantly less discontinued and Christmas
product than at the end of 2002.
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses
were $90.0 million for 2003, a decrease of $3.4 million, or 3.6%, compared with
$93.4 million for 2002. This decline was due primarily to headcount reductions
and headquarters cost savings initiatives in the second quarter. As a
percentage of net sales, SG&A expenses were 28.4% for 2003 compared with 29.6%
for 2002.
RESTRUCTURING AND OTHER RELATED CHARGES. The charge for 2003 was $2.9
million compared with $23.0 million for 2002. The charge for 2003 included the
following: $2.0 million for employee severance due to headcount reductions and
$0.9 million for asset impairment related to the closings of the Harrisburg, PA
distribution center and the East Windsor, NJ store. The charge for 2002
included the following: $15.5 million for costs of lease rejections; $2 million
for additional pre-petition claim payments; $2.8 million for professional fees;
$1.8 million for severance and employee retention plans approved by the
bankruptcy court while under Chapter 11 bankruptcy; $1.1 million for costs of
mortgage debt; and miscellaneous expenses of $0.8 million offset by a $1.0
million adjustment to the net selling price of the properties classified as
assets to be disposed of that were sold during 2002. 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 of
reorganization, 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 of
reorganization.
OTHER (EXPENSE) INCOME. Other income, primarily related to gains from
the sale of property, interest income, and miscellaneous income. Other
(expense) income was $(19) thousand for 2003, a decrease of $0.3 million, or
106.8%, compared with $0.3 million for 2002. The decrease was due primarily to
$1.5 million of costs associated with a partial roof collapse at the Company's
leased Harrisburg, PA warehouse facility. The $0.3 million of other income for
2002 was due primarily to gains from the sale of property and leases of $0.2
million.
INTEREST EXPENSE AND AMORTIZATION OF DEBT COSTS AND WARRANTS. Interest
expense and amortization of debt costs and warrants ("interest expense") was
$9.1 million for 2003, an increase of $1.5 million, or 19.5%, compared with $7.6
million for 2002. Higher interest expense for 2003 was due primarily to an
increase in borrowings.
REORGANIZATION ITEMS. A gain of $183.8 million was recognized for 2002.
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).
13
INCOME TAXES. No income tax benefit was recognized for the net loss
before reorganization items for 2003 and 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 was recognized on
the reorganization items. The items of income and expense included in the
reorganization income are non-taxable and non-deductible, respectively.
2002 COMPARED TO 2001
NET SALES. Net sales were $315.1 million for the fifty-two weeks ended
January 26, 2003 ("2002"), a decrease of $56.3 million, or 15.2%, compared to
$371.4 million for the fifty-two weeks ended January 27, 2002 ("2001"). Factors
contributing to the net sales decrease were unfavorable weather patterns in
virtually all markets where the Company operates which negatively impacted the
lawn and garden sales for the first quarter of 2002 and a general weakness in
economic conditions during 2002. In addition, net sales for 2001 included sales
related to the store closure programs of $35.8 million.
The comparable store base results from the 2001 store closing programs,
as discussed in Note 3 of the audited financial statements included herein. In
addition to the 46 stores closed under the 2001 store closing programs, the
Company closed three additional stores as a result of lease expiration, bringing
the operating store base to 170 stores.
COST OF SALES INCLUDING BUYING AND OCCUPANCY. Cost of sales were $234.7
million for 2002, a decrease of $63.2 million, or 21.2%, compared with $297.9
million for 2001. As a result of the reorganization efforts of the Company
during bankruptcy, a charge of $8.1 million for a lower of cost or market
reserve for inventory was recorded in 2001 (an "inventory clearance reserve").
The categories of inventory included specific classes within the floral, home
decor, Christmas Trim-a-Tree and basic craft (such as paints, yarn, and
stitchery) product lines that would no longer be purchased or that were
determined to be obsolete for the business upon emergence from bankruptcy. In
2002 the Company adjusted its inventory valuation reserve resulting in a $2.0
million lower of cost or market charge in accordance with its accounting
policy. Cost of sales, as a percentage of net sales, was 74.5% in 2002 compared
with 80.2% in 2001. Excluding cost of sales for the stores that were part of
the store closing programs in 2001, cost of sales for 2002 would have been
73.6% of net sales compared with 74.3% for 2001. The 2002 merchandise gross
profit margin declined due to the 2002 competitive Christmas trim-a-tree
discounts. In addition sales of inventory clearance merchandise (categories
described above) produced a lower margin in 2002 (net of items sold below cost)
compared to the prior year when the items sold at full or slightly discounted
retail prior to the start of the program in the fourth quarter. Also included
in 2001 were costs of $4.1 million for the loss on inventory liquidated under
the store closure programs and the $8.1 million inventory clearance reserve.
SELLING, GENERAL & ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses were
$93.4 million for 2002, a decrease of $16.0 million, or 14.6%, compared with
$109.4 million for 2001. This decline was due primarily to lower store expenses
resulting from the lower store base and lower corporate expenses. As a
percentage of net sales, SG&A expenses were 29.6% for 2002 compared with 29.5%
for 2001. Excluding expenses for the stores that were part of the store closing
programs in 2001, SG&A expenses for 2001, as a percentage of net sales, would
have been
14
31.0%.
RESTRUCTURING AND OTHER RELATED CHARGES. The charge for 2002 was $23
million compared with $40.9 million for 2001. The charge for 2002 included the
following: $15.5 million for costs of lease rejections; $2 million for
additional pre-petition claim payments; $2.8 million for professional fees; $1.8
million for severance and employee retention plans approved by the bankruptcy
court while under Chapter 11 bankruptcy; $1.1 million for costs of mortgage
debt; and miscellaneous expenses of $0.8 million offset by a $1 million
adjustment to the net selling price of the properties classified as assets to be
disposed of that were sold during 2002. 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 of reorganization,
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 of reorganization.
The charge for 2001 includes $14.4 million for the write-down of goodwill and
$15.2 million for the write-down of fixed assets as a result of the bankruptcy
and asset impairment analysis. Charges related to the store closings included
$0.3 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 $4.6 million and $3.2 million for severance and employee retention plans and
$0.9 million of miscellaneous.
OTHER INCOME. Other income, primarily related to gains from the sale of
property and leases was $0.3 million for 2002 compared to $1.2 million for 2001.
The decrease was due primarily to gains from the sale of property and leases
that was $0.2 million for 2002 compared to $0.9 million for 2001.
INTEREST EXPENSE AND AMORTIZATION OF DEBT COSTS AND WARRANTS. Interest
expense for 2002 was $7.6 million, a decrease of $3.0 million, or 28.3%,
compared with $10.6 million for 2001. Lower interest for 2002 related to the new
exit financing arrangements and refinancing of existing mortgage debt.
EARLY EXTINGUISHMENT OF DEBT. The early extinguishment of debt for 2001
primarily represented the write-off of debt issue costs in connection with the
retirement of an outstanding credit facility with various banks and financial
institutions utilizing proceeds from the debtor-in-possession credit facility
at the petition date. The total debt retired and associated fees totaled $62.1
million, resulting in the early extinguishment of debt of $4.2 million
primarily for the write-off of debt issue costs.
REORGANIZATION ITEMS. A gain of $183.8 million was recognized for 2002.
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).
15
INCOME TAXES. No income tax benefit was recognized for the net loss
before reorganization items for 2002 and 2001. 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 was recognized on
the reorganization items. The items of income and expense included in the
reorganization income are non-taxable and non-deductible, respectively.
LIQUIDITY AND CAPITAL RESOURCES
REVOLVING CREDIT FACILITY WITH CONGRESS FINANCIAL CORPORATION
The Company entered into a revolving credit facility with Congress
Financial Corporation on May 20, 2002 ("the Congress facility"). The Congress
facility is a $50 million, secured revolving loan facility, which includes $25
million of availability for letters of credit. On November 25, 2003, Congress
and the Company executed an amendment to the credit facility which, among other
things, limited borrowings under the facility to $42 million until additional
lenders become parties to the credit facility and provide aggregate commitments
of at least $8 million. The availability of borrowings under this facility
generally is based on a percentage of eligible inventory and certain other
assets, subject to certain reserves. The amounts reserved are based on a number
of variables, including inventory levels, merchandise purchases and sales
levels, and the types of reserves include inventory shrinkage, letters of credit
outstanding, sales taxes and other liabilities of the Company. The total amount
of these reserves varies by season but typically ranges from 10% to 25% of the
cost of eligible inventory. As of January 25, 2004, there were $7.7 million in
borrowings outstanding under the Congress facility and outstanding letters of
credit aggregated $4.9 million. Excess availability as of January 25, 2004 was
$5.3 million.
The Congress facility allows the Company the option of prime rate loans
or Eurodollar loans. Depending upon the Company's excess availability, loans
under the facility bear interest either at the prime rate plus 0.50% or 1.00% or
a Eurodollar rate plus 2.75%, 3.25%, or 3.50%. These rates were increased by an
amendment to the Congress facility on January 27, 2004, and prior to such
amendment, the interest rates under the Congress facility either were the prime
rate plus 0.25% or 0.75% or a Eurodollar rate plus 2.75%, 3.25%, or 3.50%. The
interest rate at January 25, 2004 is 4.75%. The Congress facility has an initial
term of three years and renews for successive one-year terms thereafter, unless
the lender or the Company elects to terminate the Congress facility as of the
end of the initial term or any renewal term. The Congress facility includes an
unused line fee of 0.25% per year, a servicing fee of $10,000 per calendar
quarter, and an early termination fee in an amount equal to 1.00% of the amount
of the maximum credit if the Congress facility is terminated in whole during the
second year and 0.50% if terminated during the third year.
The Congress facility contains a number of covenants, which restrict,
among other things, Frank's ability to incur additional debt 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. The Congress facility also prohibits
the declaration or payment by the Company of dividends on shares of its capital
stock.
The Congress facility, as amended, contains two financial
covenants: a minimum quarterly level of adjusted EBITDA (as described below) and
a minimum ratio of accounts payable
16
to inventory. The financial covenants are measured only if (1) the Company's
excess availability, plus the amount of cash equivalents maintained by the
Company in an account under the control of Congress Financial, falls below $4.0
million at any time or (2) the Company's average excess availability, plus the
average amount of cash equivalents maintained in such account, for any four-week
period falls below $9.0 million. In such event, the minimum adjusted EBITDA
covenant and the minimum accounts payable to inventory ratio covenant are
measured quarterly, and the minimum levels required by each covenant varies from
quarter to quarter. On January 27, 2004, the parties entered into an amendment
to the credit facility which eliminated the minimum accounts payable to
inventory ratio covenant and the adjusted EBITDA covenant with respect to
accounting periods in the fiscal year ending January 25, 2004 and reset the
accounts payable to inventory ratio covenant and adjusted EBITDA covenant for
the accounting periods in the fiscal year ended January 30, 2005 and thereafter,
as set forth in the tables below. The Company's accounts payable to inventory
ratio was 47.2% at January 25, 2004. Adjusted EBITDA for the period from January
27, 2003 through January 25, 2004, was $(11.3) million, as shown below.
Adjusted EBITDA, as measured under the Congress facility, equals the
net income of the Company for the applicable fiscal period, minus extraordinary
gains included in such net income for such fiscal period, plus interest expense,
income taxes, depreciation and amortization, other non-cash charges (other than
to the extent requiring an accrual or reserve for future cash expenses) and
non-cash extraordinary losses deducted from such net income for such fiscal
period, all as determined in accordance with generally accepted accounting
principles ("GAAP"). A summary of the calculation of the Company's adjusted
EBITDA for the period from January 27, 2003 through January 25, 2004 is set
forth below.
(000's)
----------
Net loss using GAAP $ (23,797)
Plus:
Depreciation 3,358
Interest 9,107
Non cash losses -
---------
Adjusted EBITDA $ (11,332)
=========
The adjusted EBITDA set forth above should not be considered
an alternative to GAAP net income as an indication of the Company's performance.
The computation of adjusted EBITDA required by the Congress facility may differ
from the methodology for calculating adjusted EBITDA utilized by other
companies, and therefore, may not provide an appropriate comparison to the
results of other companies.
The following table summarizes the minimum adjusted EBITDA levels
required by the Congress Financial credit facility for each applicable period.
As used in the table, "Accounting Period" refers to the 13 four-week calendar
periods within the Company's fiscal year; provided, however, that the last
Accounting Period in each fiscal year may consist of five weeks.
17
Period Amount
------ ------
The period of 4 Accounting Periods ending on the $ 6,676,000
last day of the fourth Accounting Period of the
fiscal year of the Company ending in 2005
The period of 7 Accounting Periods ending on the $12,918,000
last day of the seventh Accounting Period of the
fiscal year of the Company ending in 2005
The period of 10 Accounting Periods ending on the ($ 275,000)
last day of the tenth Accounting Period of the
fiscal year of the Company ending in 2005
The period of 13 Accounting Periods ending on the ($ 2,710,000)
last day of the fiscal year of the Company ending in
2005
The period of 13 Accounting Periods ending on the $ 695,000
last day of each fourth, seventh, tenth and
thirteenth Accounting Period thereafter
The following table summarizes the minimum accounts payable to
inventory ratio required by the Congress Financial credit facility for each
applicable period.
Accounting Period Ratio
----------------- -----
The fourth Accounting Period of the fiscal year of 21.1%
the Company ending in 2005
The seventh Accounting Period of the fiscal year of 30.2%
the Company ending in 2005
The tenth Accounting Period of the fiscal year of 26.7%
the Company ending in 2005
The thirteenth Accounting Period of the fiscal year 23.2%
of the Company ending in 2005
18
Accounting Period Ratio
----------------- -----
The fourth, seventh, tenth and thirteenth Accounting 21.1%
Period of the fiscal year of the Company ending in
2006 and each fourth, seventh, tenth and thirteenth
Accounting Period of each fiscal year thereafter
TERM LOAN AND REVOLVING CREDIT FACILITY ARRANGED BY KIMCO CAPITAL CORP.
The Company has a three-year, $65 million credit facility, expiring
May, 2005, arranged by Kimco Capital Corp. ("the Kimco facility"). Originally,
the Kimco facility provided for a $20 million term loan and $10 million of
revolving loans. Frank's and Kimco Capital Corp. amended the Kimco facility on
January 23, 2003, providing for an increase in the amount of revolving loans
available under the Kimco facility to $20 million. The Company and Kimco Capital
Corp. entered into an amendment to the Kimco facility as of October 30, 2003 to
allow for overline revolving loan advances of up to $7 million during the period
from January 1, 2004 to April 1, 2004. On January 16, 2004, the Company and
Kimco Capital Corp. entered into an amendment to the Kimco facility to allow for
overline revolving loan advances of up to $8 million. On January 21, 2004, the
Company and Kimco Capital Corp. entered into an amendment to the Kimco facility
to allow for overline revolving loan advances of up to $25 million until May,
2005. The last $3 million of borrowings are available only under certain
circumstances. The Kimco facility is secured by a first priority lien on certain
of the Company's owned real property and a second lien on the Company's
inventory and other assets. These loans bear interest at 10.25% per year for an
initial term of three years, with the option for the Company to renew the loans
for up to an additional two years, provided that the Company is not then in
default. A portion of the Kimco facility has been participated by Kimco Capital
Corp. to Third Avenue Trust and/or its designees. As of January 25, 2004 total
debt outstanding under the Kimco facility was $48.0 million.
The Kimco facility contains a number of 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 or issue preferred stock. In addition, Frank's is required to
prepay borrowings under this facility with the net cash proceeds from the sale
of certain assets. The Kimco facility does not contain any financial covenants,
but a default by the Company under its credit facility with Congress Financial
would trigger a default under the Kimco facility.
Kimco Capital Corp. is an affiliate of (i) Kimco Realty Services, Inc.
and Kimco Realty Corporation, which, based on the most recent filings with the
Securities Exchange Commission, are the beneficial owners of 51.9% of the
Company's common stock, (ii) Kimco Select Investments, and (iii) Kimco Realty
Corporation. A portion of the credit facility has been participated by Kimco
Capital Corp. to Third Avenue Trust and/or its designees, which, collectively
with its affiliates, is the beneficial owner of 22.6% of the Company's common
stock, based on the most recent filings with the Securities Exchange Commission.
19
ADEQUACY OF CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from
operations and borrowings under the two credit facilities. Based on current and
anticipated levels of operations, the Company's management believes that cash
flows from operations, together with amounts available under the Company's
credit facilities, will be adequate to meet the Company's anticipated cash
requirements, including debt service requirements and planned capital
expenditures.
The Company's most significant cash requirements are for merchandise
inventory, and these requirements fluctuate 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 revenues,
particularly on the lawn and garden sector.
In the months leading up to the Company's peak selling seasons, the
Company orders product for delivery prior to and during the selling seasons.
Frank's negotiates payment terms with suppliers on a case-by-case basis.
Historically, the majority of payments are made during or shortly after the
selling season, and a small percentage is paid prior to the influx of sales
receipts. Working capital for pre-seasonal inventory buildup comes from the
Company's two revolving credit facilities and/or cash generated by operations.
The Company's revolving credit facility with Congress Financial Corporation is
asset-based and allows for borrowing at a percentage of inventories on hand, net
of amounts reserved under the credit agreement. The amounts reserved are based
on a number of variables, including inventory levels, merchandise purchases and
sales levels, and the types of reserves include inventory shrinkage, letters of
credit outstanding, sales taxes and other liabilities of the Company. The total
amount of these reserves varies by season but typically ranges from 10% to 25%
of the cost of eligible inventory. The Company's revolving credit facility with
Kimco Capital Corp. is secured by real estate and a second lien on the Company's
inventory and other assets. Availability under the facility does not fluctuate
from month to month as it is not tied to a borrowing base. Hence, the Company
uses the Kimco revolver to fund most of the pre-seasonal inventory buildup, and
the Congress facility when inventory levels and advance rates rise.
20
The Company believes that its existing credit facilities will be
adequate to cover its working capital needs until the facilities expire in May
2005. At that time, the Company plans to either renew the facilities or seek
alternative outside financing. In the event that cash flows from operations,
together with available borrowings under the Company's credit facilities are not
sufficient to meet the Company's cash requirements, the Company would be
required to obtain alternative financing and/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 existing credit
facilities or that reductions in planned capital expenditures would be
sufficient to cover any cash shortfalls.
The Company regularly reviews opportunities to engage in
sales-leaseback transactions.
The Company anticipates spending approximately $2.4 million for capital
expenditures for 2004, primarily for store REMODELING. No store openings are
planned for the remainder of 2004.
The following table sets forth a summary of the Company's contractual
commitments as of January 25, 2004 (revolving portion of the Company's credit
facilities is assumed to be repaid in 2004):
Payments due by Fiscal Year
---------------------------------------------------------------------------------
2009
Total 2004 2005 2006 2007 2008 and after
-------- -------- -------- -------- -------- -------- --------
Long-term debt $ 22,087 $ 687 $ 949 $ 825 $ 766 $ 757 $ 18,103
Capital lease obligations
(including interest) 3,463 792 592 477 387 387 828
Operating leases 100,005 13,589 12,777 11,822 9,716 8,169 43,932
Revolving Credit Facilities 35,738 35,738 - - - - -
Kimco Term Loan 20,000 - 20,000 - - - -
-------- -------- -------- -------- -------- -------- --------
Total Contractual Obligations $181,293 $ 50,806 $ 34,318 $ 13,124 $ 10,869 $ 9,313 $ 62,863
======== ======== ======== ======== ======== ======== ========
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. The Company's significant accounting
policies and estimates for restructuring costs are discussed in Notes 2 and 4 of
the notes to the audited financial statements included herein. The Company's
critical accounting policies are subject to judgments and uncertainties that
affect the application of these policies. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. On an on-going basis, the Company evaluates
its estimates, including those related to revenue recognition, valuation of
inventory, deferred tax assets,
21
impairment of long-lived assets and restructuring costs. In the event estimates
or assumptions prove to be different from actual amounts, adjustments are made
in the subsequent period to reflect more current information. The material
accounting policies that the Company believes are most critical to the
understanding of the Company's financial position and results of operation are
discussed below.
REVENUE RECOGNITION. The Company recognizes revenue when the customer
takes possession of the merchandise at the point of sale. The Company has a
formal right of return policy that requires original receipt. The Company
annually reviews sales returns to determine the length of time between the date
of sale and the return date. Based upon its annual review and the applicable
rules guiding revenue recognition, the Company has deemed that a reserve for
sales returns is necessary.
INVENTORY VALUATION. Inventories are valued at the lower of cost or
market; cost being determined under weighted average method which approximates
the first in, first out method. Calculations of the carrying value of inventory
are made on an item-by-item basis. The Company annually reviews its inventory
levels in order to identify obsolete, slow-moving merchandise and uses
merchandise markdowns to clear such merchandise throughout the year. Where the
markdown may result in an item being sold for less than its cost the Company
provides a reserve for the difference between the cost and the expected selling
price of all inventory items expected to be sold below cost. Additionally, the
Company reduces the ending inventory value for estimated losses related to
shrink. This estimate is determined based upon analysis of historical shrink
losses as well as the results of interim cycle counts of seasonal inventory and
its annual physical inventory. If there are items in inventory that do not sell
as expected or there is an increase or decrease in inventory shrink as compared
to historical norms, then the recorded reserves would be subject to change.
DEFERRED INCOME TAXES AND VALUATION ALLOWANCE. Deferred income tax
assets and liabilities represent the future income tax effect of temporary
differences between the book and tax bases of the Company's assets and
liabilities, assuming they will be realized and settled at the amounts reported
in the Company's financial statements. The Company records a valuation allowance
to reduce its deferred tax assets to the amount that it believes is more likely
than not to be realized. This assessment includes consideration for the
scheduled reversal of temporary taxable differences, projected future taxable
income and tax planning strategies.
IMPAIRMENT OF LONG-LIVED ASSETS. It is the Company's policy to review
the long-lived assets annually or whenever events or circumstances indicate that
the carrying value of an asset may not be recoverable. As a result of the
bankruptcy proceedings and fresh-start accounting, the Company's long-lived
assets have been revalued in accordance with SOP 90-7. Assumptions and estimates
used in the evaluation of impairment, including current and future economic
trends for stores are subject to judgment and changes in the assumptions and
estimates may affect the carrying value of long-lived assets, and could result
in additional impairment charges in future periods.
22
RESTRUCTURING COSTS. As a result of the bankruptcy proceedings, certain
estimates for pre petition claim payments, amounts for personal injury claims
and attorney fees have been recorded. Resolution of these claims can affect the
accuracy of the current estimates that could result in additional charges or
reversals of previously recorded estimates in future periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company perceives its market risk is related to interest rate risk
and foreign currency exchange rate risk for its borrowings under the credit
facility with Congress Financial, which is a variable rate financing agreement.
Borrowings under the credit facility may be based upon the U.S. prime interest
rate or the Eurodollar rate. The Company does not use swaps or other interest
rate protection agreements to hedge this risk. During the period beginning
January 27, 2003 through January 25, 2004, the Company's average outstanding
balance under the credit facility was $14.5 million. At such level, a 200 basis
point change in the interest rate on the credit facility would result in an
increase in interest expense of $290,000 per year. The Company's borrowings
outstanding under the Congress facility at January 25, 2004 were $7.7 million.
Interest under the credit facility with Kimco Capital Corporation is fixed at
10-1/4% per annum and $48.0 million was outstanding at January 25, 2004. The
Company does not enter into derivative or interest rate transactions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item
are included in the Financial Statements set forth on pages F-1 through F-29,
attached hereto and found following the signature page of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's principal executive officer and principal financial officer have
evaluated the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended
(the "Act") as of the end of the period covered by this report and have
determined that such disclosure controls and procedures are effectively designed
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
Based on that evaluation, and in concert with the Company's independent
certified public accountants, Grant Thornton LLP, management advised the audit
committee of the Company's board of directors that it had identified ineffective
policies and procedures regarding accounting for leases, which resulted from a
lack of sufficient accounting personnel. The Company and Grant Thornton LLP,
considered this to be a deficiency in the Company's internal controls, which
constitute a material weakness under standards established by the American
Institute of Certified Public Accountants.
The Company has implemented a new process for accounting for leases to remedy
the deficiencies noted above. Additionally, the Company has implemented a new
internal control review process, which includes sub-certifications and
attestations by key operating executives and staff, with respect to critical
processes and procedures. The Company is also reviewing its staffing
requirements in the accounting area and plans to take appropriate action in
2004, as deemed necessary.
There was no change in the Company's internal control over financial
reporting that occurred during the fourth quarter of fiscal 2003 that has
materially affected, or that is likely to materially affect, the Company's
internal control over financial reporting.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by Part III (Items 10, 11, 12, 13, and 14) of this Form
10-K is incorporated by reference from the Company's definitive Proxy Statement
for its 2004 Annual Meeting of Shareholders. The Proxy Statement will be filed
with the Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year covered by this report on
Form 10-K.
24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements filed with this Report are listed on
page F-1.
2. FINANCIAL STATEMENTS SCHEDULE
The financial statements schedule filed with this Report is
listed on page F-1.
3. EXHIBITS
The exhibits filed with this Report are listed in the Exhibit
Index on pages E-1 through E-3.
(b) REPORTS ON FORM 8-K
None.
25
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.
Dated: April 23, 2004 FRANK'S NURSERY & CRAFTS, INC.
By: /s/ Alan Minker
-----------------------------
Alan Minker
Interim Chief Operating Officer,
Senior Vice President,
Chief Financial Officer and Treasurer
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 April 23, 2004.
SIGNATURE TITLE
--------- -----
/s/ Alan Minker Interim Chief Operating Officer,
- ------------------------------------- Senior Vice President,
Alan Minker Chief Financial Officer and Treasurer
(Principal Executive, Financial, and Accounting Officer)
/s/ Richard Montag Director
- -------------------------------------
Richard Montag
/s/ Gerald Hellerman Director
- -------------------------------------
Gerald Hellerman
/s/ Joseph Nusim Director
- -------------------------------------
Joseph Nusim
26
INDEX TO FINANCIAL STATEMENTS
Page Number
-----------
1.Audited Financial Statements:
Report of Independent Certified Public Accountants............................... F-2
Report of Independent Auditors................................................... F-3
Balance Sheets as of January 25, 2004 and January 26, 2003....................... F-4
Statements of Operations for the fiscal year ended January 25, 2004, the
thirty-six weeks ended January 26, 2003, the sixteen weeks ended May 19, 2002,
and the fiscal year ended January 27, 2002...................................... F-5
Statements of Changes in Shareholder's (Deficit) Equity for the fiscal year
ended January 25, 2004, the thirty-six weeks ended January 26, 2003, the sixteen
weeks ended May 19, 2002, and the fiscal year ended January 27, 2002............ F-6
Statements of Cash Flows for the fiscal year ended January 25, 2004, thirty-six
weeks ended January 26, 2003, the sixteen weeks ended May 19, 2002, and the
fiscal year ended January 27, 2002.............................................. F-7
Notes to Financial Statements.................................................... F-8
2.Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts for the fiscal year ended
January 25, 2004, the thirty-six weeks ended January 26, 2003, the sixteen weeks
ended May 19, 2002, and the fiscal year ended January 27, 2002.................. S-1
F-1
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Frank's Nursery & Crafts, Inc.
We have audited the accompanying balance sheets of Frank's Nursery & Crafts,
Inc. as of January 25, 2004 and January 26, 2003, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the year ending
January 25, 2004, the period from January 28, 2002 to May 19, 2002 (predecessor
operations), the period from May 20, 2002 to January 26, 2003 (successor
operations). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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.
as of January 25, 2004 and January 26, 2003 and the results of its operations
and its cash flows for the year ending January 25, 2004, the period from January
28, 2002 to May 19, 2002 (predecessor operations), and the period from May 20,
2002 to January 26, 2003 (successor operations) in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1, the accompanying financial statements as of and for
the thirty-six weeks ended January 26, 2003 and for the sixteen weeks ended
May 19, 2002 have been adjusted to properly reflect a 1999 defined benefit plan
reversion.
We have also audited Schedule II of Frank's Nursery & Crafts, Inc. for the year
ending January 25, 2004, for the period from January 28, 2002 to May 19, 2002
(predecessor operations) and the period from May 20, 2002 to January 26, 2003
(successor operations). In our opinion this schedule presents fairly, in all
material respects, the information required to be set forth therein.
/s/ Grant Thornton LLP
Southfield, Michigan
April 14, 2004
F-2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder
Frank's Nursery & Crafts, Inc.
We have audited the accompanying statements of operations, changes in
shareholder's equity (deficiency in assets), and cash flows of Frank's Nursery &
Crafts, Inc. (the "Company") for the year ended January 27, 2002. Our audit also
included the financial statement schedule listed in the Index at Item on page
F-1. 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 audit 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 results of operations of Frank's Nursery & Crafts,
Inc. and its cash flows for the year 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.
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 Note 1, 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-3
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR PAR VALUE)
January 25, January 26,
2004 2003
----------- -----------
ASSETS Restated
Current assets:
Cash and cash equivalents $ 1,026 $ 3,068
Accounts receivable, net 2,258 1,218
Merchandise inventory, net 42,283 39,050
Assets to be disposed of - 200
Prepaid expenses and other current assets 3,758 4,173
--------- ---------
Total current assets 49,325 47,709
Property, equipment and leasehold improvements, net 54,934 56,102
Other assets and deferred charges 4,262 3,616
--------- ---------
Total assets $ 108,521 $ 107,427
========= =========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 19,978 $ 18,009
Accrued expenses 19,157 16,402
Accrued expenses payable pre-petition 217 1,902
Revolving credit facility 7,738 -
Revolving credit facility - related party 28,000 15,250
Current portion of long-term debt 1,255 1,685
--------- ---------
Total current liabilities 76,345 53,248
Long-term debt:
Senior debt, less current portion 23,460 24,730
Term Loan - related party, net of unamortized discount 17,909 16,323
--------- ---------
Total long-term debt 41,369 41,053
Other liabilities 4,773 3,334
Shareholders' (deficit) equity:
Successor common stock $.001 par value,
50,000,000 shares authorized, 17,217,241 shares issued
and outstanding and 2,782,759 shares to be issued 20 20
Additional paid-in-capital 27,496 27,457
Accumulated deficit (41,482) (17,685)
--------- ---------
Total shareholders' (deficit) equity (13,966) 9,792
--------- ---------
Total liabilities and shareholders' (deficit) equity $ 108,521 $ 107,427
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS
THE FISCAL YEAR ENDED JANUARY 25, 2004 ("2003"), THE THIRTY-SIX WEEKS ENDED
JANUARY 26, 2003,
THE SIXTEEN WEEKS ENDED MAY 19, 2002, AND THE FISCAL YEAR ENDED JANUARY 27,
2002 ("2001")
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Thirty-six Sixteen Weeks
Weeks Ended Ended
January 26, May 19,
2003 2003 2002 2001
---- ---- ---- ----
(Successor) (Successor) (Predecessor) (Predecessor)
Restated Restated
NET SALES $ 316,870 $ 204,156 $ 110,992 $ 371,417
OPERATING COSTS AND EXPENSES:
Cost of goods sold, including buying and occupancy 238,640 153,953 80,756 297,850
Selling, general, and administrative 90,026 61,898 31,490 109,404
Restructuring charges 2,875 1,127 21,839 40,887
Early extinguishment of debt - - - 4,230
Amortization of goodwill - - - 1,631
--------- --------- --------- ---------
Total operating costs and expenses 331,541 216,978 134,085 454,002
LOSS FROM OPERATIONS (14,671) (12,822) (23,093) (82,585)
OTHER (EXPENSES) INCOME:
Interest expense (contractual interest of $6,210 for
the sixteen weeks ended May 19, 2002) and amortization
of debt costs (9,107) (5,034) (2,583) (10,632)
Sundry (expense) income (19) 171 109 1,221
--------- --------- --------- ---------
Total other expenses (9,126) (4,863) (2,474) (9,411)
--------- --------- --------- ---------
LOSS BEFORE REORGANIZATION ITEMS (23,797) (17,685) (25,567) (91,996)
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 -
--------- --------- --------- ---------
NET (LOSS) EARNINGS $ (23,797) $ (17,685) $ 158,272 $ (91,996)
========= ========= ========= =========
LOSS PER SHARE - BASIC $ (1.19) $ (0.88)
========= =========
LOSS PER SHARE - DILUTED $ (1.19) $ (0.88)
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 20,000 20,000
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 20,000 20,000
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
2003, THE THIRTY-SIX WEEKS ENDED JANUARY 26, 2003, THE SIXTEEN WEEKS
ENDED MAY 19, 2002, AND 2001
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
Total
Common Stock Additional Net Shareholders'
Number Par Paid-in Accumulated Parent Equity
of Shares Value Capital Deficit Investment (Deficit)
---------- ------- ----------- ----------- ----------- -------------
Predecessor:
Balance at January 28,2001 1,000 $ 1 $ 165,999 $ (188,116) $ 16,177 $ (5,939)
Net loss (91,996) (91,996)
Decrease in net parent investment (60) (60)
---------- ------ ----------- ----------- ----------- ----------
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 (25,567) (25,567)
Effect of plan of reorganization and fresh
start adjustments:
Cancellation of old common stock (1,000) (1) (165,999) (166,000)
New common stock 20,000,000 (1) 20 22,980 23,000
Cancellation of net parent investment (16,117) (16,117)
Extinguishment of debt (1,439) (1,439)
Other fresh start adjustments 307,118 307,118
---------- ------ ----------- ----------- ----------- ----------
Successor:
Balance at May 20, 2002 20,000,000 20 22,980 - - 23,000
Issuance of 10,869,565 warrants in connection
with Term
Loan debt 4,436 4,436
Expense for stock options issued 41 41
Net loss (17,685) (17,685)
---------- ------ ----------- ----------- ----------- ----------
Balance at January 26, 2003 20,000,000 20 27,457 (17,685) - 9,792
Net loss (23,797) (23,797)
Expense for stock options issued 39 39
---------- ------ ----------- ----------- ----------- ----------
Balance at January 25, 2004 20,000,000 $ 20 $ 27,496 $ (41,482) $ - $ (13,966)
========== ====== =========== =========== ========== ==========
(1) 17,217,241 shares issued and 2,782,759 to be issued.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS
2003, THE THIRTY- SIX WEEKS ENDED JANUARY 26, 2003, THE SIXTEEN WEEKS ENDED MAY
19, 2002, AND 2001
(DOLLARS IN THOUSANDS)
Thirty-six Sixteen
Weeks Weeks
Ended Ended
2003 January 26, 2003 May 19, 2002 2001
----------- --------------- ------------- -------------
(Successor) (Successor) (Predecessor) (Predecessor)
Restated Restated
OPERATING ACTIVITIES:
Net (loss) earnings $ (23,797) $ (17,685) $ 158,272 $ (91,996)
--------- ------------- --------- ---------
Adjustments to reconcile net (loss) earnings to net
cash provided by (used in) operating activities:
Depreciation 3,358 2,284 4,900 16,515
Amortization of debt costs and warrants 2,258 1,080 632 3,600
Non cash portion of restructuring and other related charges 1,991 1,247 17,572 34,309
Inventory clearance reserve - 1,994 8,076
Debt issue costs - - 1,079 3,458
Gain on cancellation of pre-petition liabilities - - (184,991) -
Fresh start adjustments - - (324) -
Other 1,730 (91) (939) (25)
--------- ------------- --------- ---------
(14,460) (11,171) (3,799) (26,063)
Changes in assets and liabilities, net of effects of
fresh start adjustments and gain on cancellation of
pre-petition liabilities:
Marketable securities - - - (102)
Notes receivable - - 1,631 -
Accounts receivable (1,040) 407 885 (1,093)
Inventory (3,233) 20,581 (23,996) 27,420
Prepaid expenses 416 1,222 1,405 (2,686)
Other non current assets (1,318) (1,521) (349) (2,057)
Accounts payable 1,969 (26,964) 35,440 8,318
Accrued expenses (921) (13,245) 8,284 14,868
--------- ------------- --------- ---------
Net cash (used in) provided by operating activities (18,587) (30,691) 19,501 18,605
--------- ------------- --------- ---------
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (2,496) (2,726) (605) (2,794)
Net proceeds from asset sales 240 7,269 2,566 20,019
--------- ------------- --------- ---------
Net cash (used in) provided by investing activities (2,256) 4,543 1,961 17,225
--------- ------------- --------- ---------
FINANCING ACTIVITIES:
Decrease in notes payable to banks (net) - (13,647) (10,650) (23,055)
Increase in revolving credit facilities (net) 20,488 15,250 - -
Payment of long-term debt and capital leases (1,687) (2,886) (2,183) (21,452)
Borrowings under Kimco Term Loan - 20,000 - -
Decrease in net parent investment - - - (60)
--------- ------------- --------- ---------
Net cash provided by (used in) financing activities 18,801 18,717 (12,833) (44,567)
--------- ------------- --------- ---------
Net change in cash and cash equivalents (2,042) (7,431) 8,629 (8,737)
Cash and cash equivalents at beginning of period 3,068 10,499 1,870 10,607
--------- ------------- --------- ---------
Cash and cash equivalents at end of period $ 1,026 $ 3,068 $ 10,499 $ 1,870
========= ============= ========= =========
Supplemental disclosure of non cash financing information:
Capital lease additions of $794 for 2003. Fair
adjustments of assets due to fresh start
accounting of $35,170 for the sixteen weeks ended
May 19, 2002
Cash paid for interest $ 5,827 $ 1,906 $ 933 $ 4,800
========= ============= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-7
FRANK'S NURSERY & CRAFTS, INC.
Notes to Financial Statements
January 25, 2004, January 26, 2003 and January 27, 2002
(Tables in thousands, except for per share data)
NOTE 1: REORGANIZATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Frank's Nursery & Crafts, Inc., a Delaware corporation ("Frank's" or the
"Company"), operates the nation's largest chain of lawn and garden specialty
retail stores (as measured by sales). Frank's is also a retailer of Christmas
trim-a-tree merchandise, artificial flowers and arrangements, garden decor 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 $.001 per share, of
Frank's ("Common Stock");
- executory contracts or unexpired leases to which any Debtor
was a party were assumed or rejected;
- members of the board of directors and officers of Frank's were
elected or appointed and began serving their respective terms;
and
F-8
- 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 Services Inc., an
affiliate of Kimco Capital Corporation ("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 Capital Corp.(the "Exit Term and Revolving Loan"). See Note 7 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 management to be appropriate
for the Company's business and industry, the Company 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 20, 2002,
thus resulting in a change to the original estimated negative goodwill of $58
million in the Plan.
F-9
The fair value of the net assets exceeded the reorganization value by $35.2
million, resulting in negative goodwill. The negative goodwill has been
allocated to property, equipment and leasehold improvements.
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
----------- -------------- ----------- ---------
Restated Restated
Assets:
Current assets $ 88,516 $ (360)(b) $ 88,156
Property, equipment and leasehold improvements, net 90,836 - $ (35,170)(f) 55,666
Other assets 7,729 (4,851)(a)(b) (1,374)(e) 1,504
--------- --------- --------- ---------
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 ($35.2 million).
(g) To record common stock to be issued and write-off of Old Frank's
accumulated deficit and net parent investment.
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 fiscal year ended January 25,
2004, the thirty-six weeks ended January 26, 2003, the sixteen weeks ended May
19, 2002 (Predecessor), the fiscal years ended January 27, 2002 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.
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.
F-10
Certain reclassifications have been made to prior periods (Predecessor) to
conform to the financial statements for the fiscal year ended January 25, 2004
(Successor).
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In October, 2003, the Company became aware of certain potential accounting
issues related to marketable securities from a 1999 defined benefit plan
reversion that the Company has determined were not properly recorded in the
Company's accounting records. Under the direction and oversight of the Audit
Committee and with the assistance of outside legal advisors and accounting
consultants, the Company conducted an inquiry into these and related accounting
issues. As a result of this process, the Company is, by means of this filing,
restating its previously issued financial statements for the thirty-six weeks
ended January 26, 2003.
At May 19, 2002, the balance of $1 million was reclassified to property,
equipment, and leasehold improvements as an adjustment to fresh-start
accounting. The restatement of the Company's Balance Sheets as of January 26,
2003 resulted in a decrease in assets of $54 thousand and an increase in
accumulated deficit of $54 thousand. The restatement of the Company's Statements
of Operations thirty-six weeks ended January 26, 2003 resulted in an increase in
selling, general, and administrative expenses ("SG&A") of $25 thousand and a
decrease in interest income of $29 thousand.
Unless otherwise expressly stated, all financial information in this Annual
Report on Form 10-K is presented inclusive of these revisions.
LIQUIDITY
The Company has sustained losses from operations since emergence from bankruptcy
on May 20, 2002 and has a deficit in working capital and stockholders equity as
of January 25, 2004. As discussed in note 7, the Company and its lenders have
amended the existing credit agreements to eliminate certain covenant
requirements through January 25, 2004 and has reset future financial covenants
while at the same time providing a significant increase in borrowing capacity.
Management believes they can remain in compliance with the new covenants through
fiscal 2005. On April 6, 2004, the Company also entered into a commitment letter
with Kimco Capital Corp., which provides for additional financing of $15
million. Kimco's commitment is subject to the negotiations, execution and
delivery of an amendment to the Kimco credit facility in form and substance
satisfactory to Kimco.
The Company believes these financing transactions coupled with Management's
efforts to improve operations are sufficient to provide the Company with the
ability to continue its operations for the next fiscal year. There can be no
guarantee of the success of such efforts and accordingly, the Company may need
to develop strategic alternatives.
F-11
NOTE 2: DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The fiscal year is comprised of 52 or 53 weeks, ending on the last Sunday in
January. The 2003 fiscal year reflects a 52-week period ended January 25, 2004
("2003"). The 2002 fiscal periods aggregate 52 weeks ended January 26, 2003
("2002") and the 2001 fiscal year reflects a 52-week period ended January 27,
2002 ("2001").
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 at the point of sale. The Company has a formal right of return
policy that requires original receipt. The Company annually reviews sales
returns to determine the length of time between the date of sale and the return
date. Based upon its annual review, the Company recorded a reserve for sales
returns based on historical trends.
FAIR VALUE OF BALANCE SHEET FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value
because of the immediate or short-term maturity of these financial instruments.
The fair value of other financial instruments are included in Note 7.
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.
ACCOUNTS RECEIVABLE
Management estimates the allowance for doubtful accounts based upon the
circumstances surrounding each individual receivables' collectibility. At the
end of 2003, management determined that certain receivables were uncollectible
and a bad debt expense and allowance of $26,000 was recorded. During the fourth
quarter of 2002 management determined that certain receivables were
uncollectible and a bad debt expense and allowance of $295,000 was recorded. At
the end of 2001, no allowance for doubtful accounts was considered necessary and
there was no bad debt expense recognized.
MERCHANDISE INVENTORIES
F-12
Merchandise inventories are stated at the lower of cost or market, with cost
being determined under the weighted average method which approximates the
first-in, first-out method.
ADVERTISING COSTS
Advertising costs are expensed when the advertising first takes place.
Advertising expenditures were $17.5 million for 2003, $13.7 million for 2002,
and $16.8 million for 2001.
STORE CLOSING COSTS
In 2001, provisions for store closing costs were charged to operations in the
period when the decision was made to close a retail unit.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, including significant
improvements thereto, are recorded at cost and depreciated over the estimated
useful lives of the related assets using the straight-line method. Expenditures
for repairs and maintenance are charged to expense as incurred. Estimated useful
lives, including capital leases, are: buildings, 10-40 years or, if shorter, the
terms of the lease; equipment, 5-10 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 benefited, not to exceed forty years. As a result
of the Chapter 11 Reorganization and recurring operating losses, the Company
reevaluated the useful lives and recoverability of its remaining goodwill and
wrote-off the remaining balance of goodwill of $14.4 million during 2001. This
impairment loss was reflected in restructuring charges in the statements of
operations.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets consist primarily of land, furniture and equipment and
leasehold improvements. It is the Company's policy to review the long-lived
assets for possible impairment annually or when events and circumstances warrant
such a review by the Company in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." 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. Assets to be disposed of are reported at the amount of fair
value less costs to sell and classified as assets held for sale.
LEASES
Leases that meet the accounting criteria for capital leases are recorded as
property, equipment and leasehold improvements, and the related capital lease
obligations (the aggregate present value of minimum future lease payments,
excluding executory costs such as taxes, maintenance
F-13
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
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. This method also requires the recognition of future tax benefits such
as net operating loss carryforwards to the extent that realization of such
benefits is more likely than not.
STOCK OPTIONS
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Company applies the accounting provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations and provides pro forma
net income and earning per share disclosures for stock option grants as if the
fair-value based method defined in SFAS No. 123 had been applied.
The Company applies APB Opinion No. 25 and related interpretations and
accordingly, no compensation expense has been recognized for stock options
issued to employees and non-employee directors in the financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date consistent with the method prescribed in SFAS No. 123, the Company's pro
forma net loss and loss per share for 2003 and the thirty-six weeks ended
January 26, 2003 would have been as follows: ($ in thousands, except per share
data)
F-14
Thirty-six weeks
ended
2003 January 26, 2003
--------- ----------------
Net loss, as reported $(23,797) $(17,685)
Total stock-based compensation expense determined
Under the fair value method (108) (742)
-------- --------
Pro forma net loss $(23,905) $(18,427)
======== ========
Weighted average number of shares
outstanding - basic 20,000 20,000
Weighted average number of shares
outstanding - diluted 20,000 20,000
Basic and diluted loss per share:
As reported - basic $ (1.19) $ (0.88)
======== ========
As reported - diluted $ (1.19) $ (0.88)
======== ========
Pro forma - basic $ (1.20) $ (0.92)
======== ========
Pro forma - diluted $ (1.20) $ (0.92)
======== ========
The per share weighted-average fair value of stock options granted in 2003 was
$0.16 on the grant date using the Black-Scholes option-pricing model with
weighted average assumptions as follows: expected dividend yield of 0%; stock
price volatility of 10.8%; a risk free interest rate of 3.02%; and an expected
option term of 5 years. The per share weighted-average fair value of stock
options granted in the thirty-six weeks ended January 26, 2003 was $.54 on the
grant date using the Black-Scholes option-pricing model with weighted average
assumptions as follows: expected dividend yield of 0%; stock price volatility of
50%; a risk free interest rate of 3.07%; and an expected option term of 5 years.
LOSS PER SHARE
Basic loss per share is computed by dividing earnings on common shares by the
weighted average number of common shares outstanding during each period. Diluted
earnings per share reflect per share amounts that would have resulted if
dilutive potential common stock had been converted to common stock. For 2003 and
the thirty-six weeks ended January 26, 2003 the incremental shares that would
have been exercisable and outstanding (142,350 shares at January 25, 2004 and
189,000 shares at January 26, 2003) and warrant agreements (0 shares at January
25, 2004 and 1,189,000 shares at January 26, 2003) were not included in the
computation of diluted earnings per share because the effect would be
anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin 51, "Consolidated Financial Statements," for
certain entities that do not have sufficient equity at risk
F-15
for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not have
the characteristics of a controlling financial interest ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both. FIN 46 applies immediately to variable interest
entities created after December 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after March 15, 2004, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 is effective for the Company in the
fiscal quarter ending May 16, 2004. The adoption of FIN 46 is being
evaluated to determine what impact, if any, the adoption of the provisions will
have on the Company's financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company determined that there was no impact on the
Company's financial condition or results of operations.
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, represented a loss
for the inventory that was liquidated. The remaining $2.6 million included in
the restructuring charge of $40.9 million (Note 4), represented fixed asset
write-downs to fair value.
NOTE 4: 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, equipment and leasehold improvements and
allocated goodwill. In 2000, the Company rejected store leases and reversed a
store closing provision for remaining lease obligations from 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 the thirty-six weeks ended January 26, 2003
included $2 million for additional pre-petition claim payments and $0.2 million
for professional fees offset by a $1 million adjustment for the net selling
price of the properties classified as assets to be disposed of that were sold
during 2002. Bankruptcy costs for the sixteen weeks ended May 19, 2002
F-16
included $15.5 million for costs of lease rejections, $2.6 million for
professional fees, $1.8 million for severance and employee retention plans, $1.1
million for costs of mortgage debt and $0.8 million of miscellaneous. Bankruptcy
related costs for 2001 included $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 $0.9 million for miscellaneous items.
The impairment analysis and the Chapter 11 Reorganization resulted in the
following charges: ($ in thousands)
Thirty-six Sixteen
Weeks Weeks
Ended Ended
2003 January 26, 2003 May 19, 2002 2001
----------- ---------------- ------------- -------------
(Successor) (Successor) (Predecessor) (Predecessor)
Write-down of goodwill $ - $ - $ - $ 14,382
Write-down of fixed assets - - - 15,197
Store closure program (Note 3) - - - 2,600
Write-off of fixed assets related to 22 store leases - - - -
Write-off remaining store lease obligations from 1993 - - - -
Bankruptcy related costs - 1,127 21,839 8,708
------ --------- -------- ---------
Total $ - $ 1,127 $ 21,839 $ 40,887
====== ========= ======== =========
During the fourth fiscal quarter of 2002 and the second fiscal quarter of 2003,
the Company implemented two corporate overhead restructuring initiatives to
reduce costs at its corporate headquarters. Additionally, during the fiscal
second quarter of 2003, the Company announced the closure of its Harrisburg, PA
warehouse and during the fourth quarter of 2003, the Company announced the
closure of its East Windor, NJ store and the termination of its chief executive
officer. As a result of the two restructuring initiatives, the Company recorded
non-recurring charges for workforce reductions of $0.7 million during the fourth
fiscal quarter of 2002, $0.9 million during the fiscal second quarter of 2003,
and $2.0 million during the fourth fiscal quarter of 2003. The Company also
recorded $0.9 million for asset impairment during the fourth fiscal quarter of
2003. For the fiscal year ended January 26, 2003, the Company recorded
restructuring charges based on Emerging Issues Task Force ("EITF") 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." For
the fiscal year ended January 25, 2004, the Company records restructuring
charges based on Financial Accounting Standards Board ("FASB") No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities."
Reconciliation of the restructuring liability, as of January 25, 2004, is as
follows: ($ in thousands)
F-17
Balance at January 2003 2003 Ending Balance at
26, 2003 2003 Charges Payments Adjustments January 25, 2004
------------------ ------------ -------- ----------- -----------------
Employee separation costs (a) $ 747 $ 1,991 $ (1,145) $ (67) $ 1,526
Asset impairment (b) 884
---------
$ 2,875
=========
(a) Of the planned downsizing of 59 position, 57 reductions had been implemented
as of January 25, 2004.
(b) Asset impairment relates to the closing of the Harrisburg, PA warehouse and
the March 2004 closing of the East Windsor, NJ store.
The Company expects that substantially all remaining payments will be made
within the next twelve months.
NOTE 5: INCOME TAXES
In connection with the reorganization, a gain on cancellation of indebtedness
was realized by the Predecessor in the amount of approximately $185 million.
This gain is not taxable since the gain resulted from reorganization under the
Bankruptcy Code. However, the Company is required, as of the beginning of its
fiscal 2003 tax year, to reduce net operating loss carryforwards ("NOLs"), in an
amount equal to such gain on extinguishment.
F-18
The reconciliation of income taxes computed at the federal statutory tax rate to
income tax benefit is: ($ in thousands)
Thirty-six Sixteen
Weeks Ended Weeks Ended
2003 January 26, 2003 May 19, 2002 2001
----------- ---------------- ------------- -------------
(Successor) (Successor) (Predecessor) (Predecessor)
----------- ---------------- ------------- -------------
Federal income tax (benefit) based
on statutory rates $ (8,091) $ (5,995) $ 53,816 $ (29,840)
State and local income tax (benefit) (476) (353) 3,165 (1,755)
Reorganization adjustments 66,182 - (58,941) -
Change in valuation allowance (56,340) 6,332 1,956 26,815
Nondeductible expenses including
goodwill amortization and write-off 37 16 4 6,000
Other (1,312) - - (1,220)
-------- ---------- --------- ---------
$ - $ - $ - $ -
======== ========== ========= =========
Deferred tax assets and liabilities are composed of the following:
2003 2002
----------- -----------
(Successor) (Successor)
----------- -----------
(Restated)
DEFERRED TAX ASSETS:
Inventory $ 616 $ 1,214
Accrued expenses 1,246 651
Other 3,029 2,834
Property, plant & equipment 10,814 12,362
Credit carryforwards 1,337 1,337
NOL carryforward 27,384 82,440
--------- ---------
Total deferred tax assets 44,426 100,838
DEFERRED TAX LIABILITIES:
Assets to be disposed of - (72)
Other - -
--------- ---------
Total deferred tax liabilities - (72)
--------- ---------
Net deferred tax assets 44,426 100,766
Valuation allowance (44,426) (100,766)
--------- ---------
$ - $ -
========= =========
Due to the Company's historical operating results, a valuation allowance for the
net deferred tax asset balance is recorded at January 25, 2004 and January 26,
2003.
At January 25, 2004 the federal tax NOL carryforwards, on a consolidated basis,
approximated $76.1 million, and will expire over various dates from 2021-2024.
F-19
The reorganization of the Company as it emerged from bankruptcy constituted an
ownership change under Internal Revenue Code Section 382. Consequently, the use
of any of the NOLs and tax credits generated prior to this change may be subject
to an additional annual limitation.
NOTE 6: PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Upon emergence from bankruptcy, the Company revalued its property, equipment and
leasehold improvements in accordance with SOP 90-7 as discussed in Note 1.
Major categories of property, equipment and leasehold improvements are as
follows: ($ in thousands)
2003 2002
----------- -----------
(Successor) (Successor)
Restated
Land $21,011 $21,010
Buildings:
Owned 18,380 18,154
Capital leases (Note 8) 9,732 10,576
Equipment 13,879 9,323
Leasehold improvements 5,871 5,059
Construction in progress 831 884
------- -------
69,704 65,006
Less accumulated depreciation, including
capital lease amounts of $8,755 and $7,207 14,770 8,904
------- -------
$54,934 $56,102
======= =======
F-20
NOTE 7: FINANCING AND LONG-TERM DEBT
Long-term debt consists of the following: ($ in thousands)
2003 2002
----------- -----------
(Successor) (Successor)
$20 million Term Loan - Kimco due May 20, 2005 (net of
unamortized discount of $2,091 for 2003 and $3,677 for 2002) $ 17,909 $ 16,323
Revolving Credit Facility 7,738 -
Revolving Credit Facility - Kimco 28,000 15,250
Mortgages notes due 2012 with interest rates from 4.0% to 7.6% 22,087 22,600
10 1/4% Senior Subordinated Notes originally due March 1, 2008 - -
Capital lease obligations 2,628 3,815
---------- ----------
Total debt 78,362 57,988
Less:
Current portion of long-term debt 1,255 1,685
Revolving Credit Facility 7,738 -
Revolving Credit Facility - Kimco 28,000 15,250
---------- ----------
Total long-term debt $ 41,369 $ 41,053
========== ==========
Revolving Credit Facility with Congress Financial Corporation
The Company entered into a revolving credit facility with Congress
Financial Corporation on May 20, 2002 ("the Congress facility"). The Congress
facility is a $50 million, secured revolving loan facility, which includes $25
million of availability for letters of credit. On November 25, 2003, Congress
and the Company executed an amendment to the credit facility which, among other
things, limited borrowings under the facility to $42 million until additional
lenders become parties to the credit facility and provide aggregate commitments
of at least $8 million. The November 25, 2003 amendment is discussed further
below. The availability of borrowings under this facility generally is based on
a percentage of eligible inventory and certain other assets, subject to certain
reserves. The amounts reserved are based on a number of variables, including
inventory levels, merchandise purchases and sales levels, and the types of
reserves include inventory shrinkage, letters of credit outstanding, sales taxes
and other liabilities of the Company. The total amount of these reserves varies
by season but typically ranges from 10% to 25% of the cost of eligible
inventory. As of January 25, 2004, there were $7.7 million in borrowings
outstanding under the Congress facility and outstanding letters of credit
aggregated $4.9 million. Excess availability as of January 25, 2004 was $5.3
million.
The Congress facility allows prime rate loans or Eurodollar loans.
Depending upon the Company's excess availability, loans under the facility bear
interest either at the prime rate plus 0.50% or 1.00% or a Eurodollar rate plus
2.75%, 3.25%, or 3.50%. These rates were increased by an amendment to the
Congress facility on January 27, 2004, and prior to such amendment, the interest
rates under the Congress facility either were the prime rate plus 0.25% or 0.75%
or a Eurodollar rate plus 2.75%, 3.25%, or 3.50% These rates were increased
F-21
by an amendment to the Congress facility on February 10, 2003, and prior to such
amendment, the interest rates under the Congress facility either were the prime
rate plus 0.25% or 0.50% or a Eurodollar rate plus 2.75%, 3.00%, or 3.25%. The
interest rate at January 25, 2004 is 4.75%. The Congress facility has an initial
term of three years and renews for successive one-year terms thereafter unless
the lender or the Company elects to terminate the Congress facility as of the
end of the initial term or any renewal term. The Congress facility includes an
unused line fee of 0.25% per year, a servicing fee of $10,000 per calendar
quarter, and an early termination fee in an amount equal to 1.00% of the amount
of the maximum credit if the Congress facility is terminated in whole during the
second year and 0.50% if terminated during the third year.
The Congress facility contains a number of covenants, which restrict,
among other things, Frank's ability to incur additional debt 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. The Congress facility also prohibits
the declaration or payment by the Company of dividends on shares of its capital
stock.
The Congress facility, as amended, contains two financial covenants; a
minimum quarterly level of adjusted EBITDA (as described below) and a minimum
ratio of accounts payable to inventory. On February 10, 2003, the Company and
Congress Financial entered into an amendment to the facility which revised the
measurement of minimum level of inventory from a daily to a weekly basis,
lowered the minimum quarterly adjusted EBITDA levels, revised the minimum ratio
of inventory to accounts payable to be a ratio of accounts payable to inventory,
and increased the interest rates for the Congress facility as described above.
The amended financial covenants are measured only if (1) the Company's excess
availability, plus the amount of cash equivalents maintained by the Company in
an account under the control of Congress Financial, falls below $4.0 million at
any time or (2) the Company's average excess availability, plus the average
amount of cash equivalents maintained in such account, for any four-week period
falls below $9.0 million. In such event, the minimum adjusted EBITDA covenant is
measured quarterly and the minimum accounts payable to inventory ratio covenant
is measured for each accounting period, and the minimum levels required by each
covenant varies from period to period. Management believes that the amended
covenants are less restrictive and provide the Company with more flexibility
than the original covenants. The required minimum accounts payable to inventory
ratio for January 25, 2004 was 30.1%, and the company's actual ratio at such
date was 47.2%. On January 27, 2004, the parties entered into an amendment to
the credit facility which eliminated the minimum accounts payable to inventory
ratio covenant with respect to accounting periods in the fiscal year ending
January 25, 2004 and reset the accounts payable to inventory ratio covenant for
the accounting periods in the fiscal year ended January 30, 2005 and thereafter,
as set forth in the table below. Adjusted EBITDA for the period from January 27,
2003 through January 25, 2004 was $(11.3) million, as shown below.
Adjusted EBITDA, as measured under the Congress facility, equals the
net income of the Company for the applicable fiscal period, minus extraordinary
gains included in such net income for such fiscal period, plus interest expense,
income taxes, depreciation and amortization, other non-cash charges (other than
to the extent requiring an accrual or reserve for future cash
F-22
expenses) and non-cash extraordinary losses deducted from such net income for
such fiscal period, plus, for the fifth, sixth and seventh accounting periods of
the Company's 2002 fiscal year, restructuring charges of up to $500,000 in the
aggregate for such accounting periods deducted from such net income for such
fiscal period, all as determined in accordance with generally accepted
accounting principles ("GAAP"). A summary of the calculation of the Company's
adjusted EBITDA for the period from January 27, 2003 through January 25, 2004 is
set forth below.
(000's)
-------
Net loss using GAAP $(23,797)
Plus:
Depreciation 3,358
Interest 9,107
Non cash losses -
--------
Adjusted EBITDA $(11,332)
========
The adjusted EBITDA set forth above should not be considered an
alternative to GAAP net income as an indication of the Company's performance.
The computation of adjusted EBITDA required by the Congress facility may differ
from the methodology for calculating adjusted EBITDA utilized by other
companies, and therefore, may not provide an appropriate comparison to the
results of other companies.
On November 25, 2003, the Company and Congress Financial Corporation
entered into an amendment to the Congress facility which eliminated the
requirement to comply with the accounts payable to inventory ratio covenant and
the adjusted EBITDA covenant for any accounting period during the fiscal year
ending January 25, 2004, and limited total borrowings under the facility to $42
million until additional lenders become parties to the credit facility and
provide aggregate commitments of at least $8 million. The amendment also
provides that the accounts payable to inventory ratio covenant will be reset for
the accounting periods in the fiscal year ended January 30, 2005 based upon the
good faith and reasonable projections by the Company, to be determined by the
agreement of Congress and the Company.
The following table summarizes the minimum adjusted EBITDA levels
required by the Congress Financial credit facility for each applicable period.
As used in the table, "Accounting Period" refers to the 13 four-week calendar
periods within the Company's fiscal year; provided, however, that the last
Accounting Period in each fiscal year may consist of five weeks.
Period Amount
------ ------
The period of 4 Accounting Periods ending on the $ 6,676,000
last day of the fourth Accounting Period of the
fiscal year of the Company ending in 2005
F-23
Period Amount
------ ------
The period of 7 Accounting Periods ending on the $12,918,000
last day of the seventh Accounting Period of the
fiscal year of the Company ending in 2005
The period of 10 Accounting Periods ending on the ($ 275,000)
last day of the tenth Accounting Period of the
fiscal year of the Company ending in 2005
The period of 13 Accounting Periods ending on the ($ 2,710,000)
last day of the fiscal year of the Company ending in
2005
The period of 13 Accounting Periods ending on the $ 695,000
last day of each fourth, seventh, tenth and
thirteenth Accounting Period thereafter
The following table summarizes the minimum accounts payable to
inventory ratio required by the Congress Financial credit facility for each
applicable period.
Accounting Period Ratio
----------------- -----
The fourth Accounting Period of the fiscal year of 21.1%
the Company ending in 2005
The seventh Accounting Period of the fiscal year of 30.2%
the Company ending in 2005
The tenth Accounting Period of the fiscal year of 26.7%
the Company ending in 2005
The thirteenth Accounting Period of the fiscal year 23.2%
of the Company ending in 2005
The fourth, seventh, tenth and thirteenth Accounting 21.1%
Period of the fiscal year of the Company ending in
2006 and each fourth, seventh, tenth and thirteenth
Accounting Period of each fiscal year thereafter
F-24
TERM LOAN AND REVOLVING CREDIT FACILITY ARRANGED BY KIMCO CAPITAL CORP.
The Company has a three-year, $65 million credit facility arranged by
Kimco Capital Corp. ("the Kimco facility"). Originally, the facility provided
for a $20 million term loan and $10 million of revolving loans. Frank's and
Kimco Capital Corp. amended the Kimco facility on January 23, 2003, providing
for an increase in the amount of revolving loans available under the Kimco
facility to $20 million. The Company and Kimco Capital Corp. entered into an
amendment to the Kimco facility as of October 30, 2003 to allow for overline
revolving loan advances of up to $7 million during the period from January 1,
2004 to April 1, 2004. On January 21, 2004, the Company and Kimco Capital Corp.
entered into an amendment to the Kimco facility to allow for overline revolving
loan advances of up to $25 million. The last $3 million of borrowings are
available only under certain circumstances. The Kimco facility is secured by a
first priority lien on certain of the Company's owned real property and a second
lien on the Company's inventory and other assets. These loans bear interest at
10.25% per year for an initial term of three years, with the option for the
Company to renew the loans for up to an additional two years, provided that the
Company is not then in default. A portion of the Kimco facility has been
participated by Kimco Capital Corp. to Third Avenue Trust and/or its designees.
As of January 25, 2004 total debt outstanding under the Kimco facility was $48.0
million.
The Kimco facility contains a number of 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 or issue preferred stock. In addition, Frank's is required to
prepay borrowings under this facility with the net cash proceeds from the sale
of certain assets. The Kimco facility does not contain any financial covenants,
but a default by the Company under its credit facility with Congress Financial
would trigger a default under the Kimco facility.
Kimco Capital Corp. is an affiliate of (i) Kimco Realty Services, Inc.
and Kimco Realty Corporation, which, as of April 23, 2004, are the beneficial
owners of 51.9% of the Company's common stock, (ii) Kimco Select Investments,
and (iii) Kimco Realty Corporation. A portion of the credit facility has been
participated by Kimco Capital Corp. to Third Avenue Trust and/or its designees,
which, collectively with its affiliates, is the beneficial owner of 22.6% of the
Company's common stock as of April 23, 2004.
In connection with the facility, the Company issued warrants to the
participating lenders and their affiliates to purchase up to an aggregate of
5,869,565 shares of common stock at an exercise price of $1.15 per share,
subject to certain anti-dilution adjustments. In connection with the amendment
of the credit facility on January 23, 2003, the Company issued warrants to the
lenders and their affiliates to acquire an additional 5,000,000 shares of common
stock at an exercise price of $2.00 per share, subject to certain anti-dilution
adjustments. The warrants may be exercised in whole or in part at any time until
the later or May 20, 2005 or the repayment or termination of the credit
facility.
In accordance with Accounting Principles Board 14 "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants" the issuer is
required to allocate the proceeds
F-25
received in a financing transaction that includes detachable warrants to the
debt instrument and detachable warrants included in the exchange on a relative
fair value basis. For 2002 all warrants became available for exercise and were
included for valuation purposes. The independent valuation issued in connection
with the Term Loan and Revolving Credit Facility $20 million proceeds resulted
in an allocation to the warrants of $4.4 million as shown in the statement of
shareholders' equity and the remaining $15.6 million to the Term Loan. The fair
value of the warrants was based upon the Black-Scholes option pricing model. The
following assumptions were used in the Black-Scholes option pricing model for
warrants issued: risk-free interest rate of approximately 3.95%; an expected
life of 3 years from the vest date based upon the warrant expiration date; 50%
expected volatility; and no payments of dividends. The stock price volatility
during the life of the warrants was estimated by reviewing the historical price
volatility of other publicly traded specialty retailers. This was done due to
the limited historical time period that Frank's common stock has been publicly
traded (since September 2002). The $4.4 million is being amortized to interest
expense over the initial term of the debt. As of January 25, 2004, the
un-amortized discount is $2.1 million.
The carrying and fair values of these financial instruments for 2003 and 2002
are presented below. The fair values for 2003 and 2002 approximate market. ($ in
thousands)
SUCCESSOR SUCCESSOR
------------------------- -------------------------
2003 2002
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- --------- ----------
Kimco Revolving Facility $ 28,000 $ 28,000 $ 15,250 $ 15,250
Kimco Term Loan 17,909 20,000 16,323 20,000
Mortgage notes 22,087 22,087 22,600 22,600
Congress Revolving Facility 7,738 7,738 - -
Capital lease obligations 2,628 2,628 3,815 3,815
--------- --------- --------- ---------
Total $ 78,362 $ 80,453 $ 57,988 $ 61,665
========= ========= ========= =========
Scheduled Maturities
Aggregate maturities of long-term debt for each of the five years following
January 25, 2004 and thereafter, assuming the unpaid balance at January 25, 2004
under the revolving credit facility remains unchanged and excluding capital
lease obligations, are as follows: ($ in thousands)
YEAR AMOUNT
- ---------- ----------
2004 $ 36,425
2005 20,949
2006 825
2007 766
2008 757
Thereafter 18,103
----------
Total $ 77,825
==========
F-26
The scheduled maturities reflect the expiration of the Kimco Revolving Loans in
2004 and the payment of the Kimco Term Loan for $20 million in 2005. The
scheduled maturities are based on contractual payment terms.
NOTE 8: LEASES
The Company's capital leases are principally for retail store locations, for
periods ranging up to 25 years. The Company's operating leases are principally
for retail store locations, some of which include renewal, purchase or
escalation clauses.
Annual minimum lease payments under all capital and operating leases with lease
terms longer than one year at January 25, 2004 are as follows: ($ in thousands)
CAPITAL OPERATING
LEASES LEASES
---------- ---------
2004 $ 792 $ 13,589
2005 592 12,777
2006 477 11,822
2007 387 9,716
2008 387 8,169
Thereafter 828 43,932
---------- ---------
Total debt $ 3,463 $ 100,005
========== =========
Amount representing future interest (835)
----------
Present value of net minimum lease obligations $ 2,628
==========
Future sublease rental income $ 4,852
=========
Rent expense was $17.4 million for 2003, $10.8 million for the thirty-six weeks
ended January 26, 2003, $6.0 million for the sixteen weeks ended May 19, 2002,
$15.4 million in 2002, and $22.6 million in 2001. Rent expense includes
additional rentals based on retail store sales (in excess of the minimums
specified in leases) of $119,000 for 2003, $69,000 for the thirty-six weeks
ended January 26, 2003, $42,000 for the sixteen weeks ended May 19, 2002, and
$133,000 in 2001 and is reduced by sublease rental income of $797,000 for 2003,
$511,000 for the thirty-six weeks ended January 26, 2003, $260,000 for the
sixteen weeks ended May 19, 2002, and $673,000 in 2001.
NOTE 9: SHAREHOLDERS' EQUITY
The Company's authorized capital stock consists of 50,000,000 shares of common
stock, par value $.001 per share and 10,000,000 shares of preferred stock, par
value $.001 per share. On May 20, 2002, pursuant to the Plan, 20,000,000 shares
of common stock were reserved and will be distributed to the Company's former
creditors of which 17,217,241 shares have been distributed as of January 25,
2004.
F-27
The holders of the Company's common stock are entitled to one vote per share
upon each matter submitted to a vote at a meeting of stockholders. Holders of
common stock are entitled to receive ratable dividends, if any, as may be
declared by the Company's board of directors out of funds legally available.
On May 20, 2002 the Company issued warrants to acquire an aggregate of 913,044
shares of the Company's common stock at an exercise price of $1.38 per share for
the old equity holders of FNC Holdings, Inc. These warrants may be exercised in
whole or in part at any time until May 20, 2006. In addition the Company issued
warrants to acquire an aggregate of 5,869,565 shares of the Company's common
stock to certain of the Company's lenders and their affiliates. These warrants
may be exercised in whole or in part at any time until the later of May 20, 2005
or the repayment or termination of the related credit facility. The warrant can
be exercised at a price of $1.15 per share, subject to certain adjustments in
the event that the Company issues any shares of its common stock or securities
convertible into such shares at below fair market value. On January 23, 2003,
the Company issued warrants to acquire an aggregate of 5,000,000 shares of the
Company's common stock to Kimco Realty Services, Inc., an affiliate of Kimco
Capital Corp., in connection with, and in consideration for, an amendment to the
Company's credit facility with Kimco Capital Corp. These warrants may be
exercised in whole or in part at any time until the later of May 20, 2005 or the
repayment or termination of the related credit facility. These warrants can be
exercised at a price of $2.00 per share, subject to certain adjustments.
On May 20, 2002 pursuant to the plan of reorganization, the Company adopted its
2002 Stock Option Plan. The plan, which is administered by the Compensation
Committee of the Company's Board of Directors, allows for the issuance of stock
options to the Company's key employees and non-employee directors representing
the right to acquire up to an aggregate of 3,652,174 shares of the Company's
common stock. The Committee has the discretion to determine which key employees
and non-employee directors receive options under the Plan, the number of options
granted to such participants, and the grant date, vesting schedule, and the
expiration date of the options granted. The exercise price of the options
granted under the Plan also will be determined by the Committee but will be not
less than the fair value of the underlying stock on the date of grant, if the
option is intended to qualify as performance-based compensation under Section
162 (m) of the Internal Revenue Code. In addition, any incentive options granted
to an owner of more than 10% of the Company's voting capital stock will have an
exercise price of not less than 110% of the fair market value of the underlying
stock on the date of grant. Options issued to date under this plan generally
vest over a three-year period and expire ten years from the grant date.
On September 12, 2002 the Company granted options to key executives and outside
directors for 2,476,117 in two groupings with a grant price of $1.15 per share.
The first group of options for 1,826,117 were to vest as follows: 50% vested at
September 12, 2002 and the remaining 50% on May 20, 2003. The options that
vested at September 12, 2002 expired July 31, 2003 and the remaining 50% were
cancelled. The second group of options for 650,000 will vest over three years
(33 1/3% per year) beginning May 20, 2003 and will expire ten years from grant
date if not exercised.
F-28
On December 5, 2002, the Company granted an option to purchase 25,000
shares of its common stock at a price of $1.65 per share to Mr. Joseph Nusim,
one of the Company's directors, pursuant to, and in consideration for, a
consulting arrangement with Mr. Nusim which terminates April 2004. This option
is exercisable from the date of grant through December 5, 2012. This option was
offered only to Mr. Nusim and was granted in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act as the grant did
not involve a public offering.
On January 29, 2003, the Company granted an option to purchase 100,000 shares of
its common stock at a price of $1.19 per share to an employee of the Company
pursuant to the Company's 2002 Stock Option Plan in consideration of such
employee's services to the Company. These options were only offered to such
employee and were granted in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act as the grant did not involve a
public offering.
On February 11, 2003, the Company granted options to purchase an aggregate of
412,500 shares of its common stock at a price of $1.10 per share to employees of
the Company pursuant to the Company's 2002 Stock Option Plan in consideration of
such employees' services to the Company. The options were offered only to such
employees and were granted in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act as the grants did not involve a
public offering.
On April 1, 2003, the Company granted options to purchase an aggregate of
1,000,000 shares of its common stock at a price of $0.80 per share to Mr. Bruce
Dale, the Company's Chief Executive Officer, pursuant to the Company's 2002
Stock Option Plan, as amended, in consideration of his services to the Company.
The option was offered only to such employee and was granted in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act as
the grant did not involve a public offering.
On January 21, 2004, the Company granted options to purchase an aggregate of
1,000,000 shares of its common stock at a price of $0.75 per share to Abacus
Advisors, LLC as part of an agreement with the Company to provide strategic and
operational advisory and consulting services. The option was offered only to
such entity and was granted in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act as the grant did not involve a
public offering.
The Company applied APB Opinion No. 25 and related interpretations in accounting
for stock option grants issued under the 2002 Stock Option Plan; accordingly, no
compensation cost has been recognized (Note 2). The Company applied SFAS No. 123
and related interpretation in accounting for stock option grants issued outside
of the 2002 Stock Option Plan; accordingly, consulting fees of $39 thousand and
$41 thousand for 2003 and 2002, respectively, have been recognized.
F-29
A summary of changes in stock options are as follows:
Weighted
Average
Shares Share Price
---------- -----------
Outstanding at January 27, 2002 -
Options Granted 2,501,117 $1.15
Option Cancelled (913,059) $1.15
-----------
Outstanding at January 26, 2003 1,588,058
Options Granted 2,549,543 $0.84
Option Cancelled (1,086,558) $1.15
-----------
Outstanding at January 25, 2004 3,051,043
===========
Options outstanding:
Number outstanding 3,051,043
Weighted average remaining
contractual life 5.8
Weighted average exercise price $ 0.97
Options exercisable:
Number exercisable 241,667
Weighted average exercise price $ 1.20
In addition, the Company had 1,626,131 additional shares available for future
grants under the 2002 Stock Option Plan at January 25, 2004.
NOTE 10: 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 has been amended to provide an
employer match of 25% of the employee contribution. The Company's contribution
is limited to 1.5% of salary and became effective November 1998. Total expenses
related to the 401(k) plan were $123 thousand for 2003 and $0 for 2002.
NOTE 11: 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.
NOTE 12: RELATED PARTY TRANSACTIONS
Included in cost of sales and interest expense for 2003 is approximately $0.9
million and $3.5 million for lease payments and interest payments, respectively,
to Kimco Capital Corp. and its affiliates, a majority shareholder of the
Company. Included in cost of sales and interest expense for 2002 is
approximately $0.8 million and $1.3 million for lease payments and interest
F-30
payments, respectively.
At January 25, 2004, the Company recorded a receivable for approximately $43
thousand, an accrual for interest expense payable to Kimco of $289 thousand, and
prepaid rent of $15 thousand.
The Company believes its lease payments to Kimco Capital Corp. and its
affiliates approximate fair market value.
NOTE 13: SUBSEQUENT EVENT
On March 15, 2004, the Company closed its East Windsor, NJ store.
NOTE 14: Selected Quarterly Financial Data (Unaudited)
The following tables present unaudited financial data of the Company
for each fiscal quarter of 2003 and 2002. All dollar amounts are stated in
thousands, except per share data.
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
(SUCCESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
------------- -------------- ------------- --------------
2003 Restated Restated
Net sales $116,652 $91,388 $40,284 $68,546
Gross profit 35,364 25,723 5,752 11,391
Restructuring and other related charges 0 893 0 1,982
Net earnings (loss) 1,011 2,936 (14,454) (13,290)
Net (loss) earnings per share - basic 0.05 0.15 (0.72) (0.66)
Net (loss) earnings per share - diluted 0.05 0.14 (0.72) (0.66)
Weighted average shares outstanding - basic 20,000 20,000 20,000 20,000
Weighted average shares outstanding - diluted 20,000 20,256 20,000 20,000
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
------------- -------------- ------------- --------------
2002 Restated Restated Restated Restated
Net sales $110,992 $89,070 $39,612 $75,474
Gross profit 30,236 24,424 5,037 20,742
Restructuring and other related charges 21,839 (603) 2,000 (270)
Reorganization income 183,839 - - -
Net earnings (loss) 158,272 2,753 (15,959) (4,479)
Earnings (loss) per share - basic and diluted (2) 0.14 (0.80) (0.22)
Weighted average shares outstanding - basic and diluted (1) (2) 20,000 20,000 20,000
(1) Basic earnings per share for 2003 and the second, third, and fourth
quarters of 2002 is computed by dividing earnings on common shares by
the weighted average number of common shares outstanding during each
quarter. Diluted earnings per share reflect per share amounts that
would have resulted if dilutive potential common stock had been
converted to common stock.
(2) No earnings (loss) per share is shown for the Predecessor quarter. The
outstanding common stock of 1,000 shares was held by FNC Holdings,
Inc., the sole shareholder of the Predecessor company. There was no
public trading market for the outstanding shares.
F-31
FRANK'S NURSERY & CRAFTS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
2003, THE THIRTY-SIX WEEKS ENDED JANUARY 26, 2003, SIXTEEN WEEKS ENDED
MAY 19, 2002, AND 2001
(DOLLARS IN THOUSANDS)
ADDITIONS DEDUCTIONS
------------------------- --------------------------------
BALANCE AT CHARGED TO
BEGINNING OF CHARGED TO OTHER WRITE-OFFS/ BALANCE AT END
PERIOD EXPENSE ACCOUNTS RECOVERIES OF PERIOD
------------ ---------- ---------- ----------- --------------
ALLOWANCE FOR:
RETURNS & ALLOWANCES AND DOUBTFUL ACCOUNTS
Successor:
2003 $ 295 $ 26 $ - $ 295 $ 26
Thirty-six weeks ended January 26, 2003 $ - $ 295 $ - $ - $ 295
INVENTORY VALUATION RESERVE:
Successor:
2003 $ 3,120 $ 675 $ - $ 2,078 $ 1,717
Thirty-six weeks ended January 26, 2003 $ 3,251 $ 1,994 $ - $ 2,125 (1) $ 3,120
Predecessor:
Sixteen weeks ended May 19, 2002 $ 7,503 $ - $ - $ 4,252 (1) $ 3,251
2001 $ 1,274 $ 8,076 $ - $ 1,847 (1) $ 7,503
PROVISION FOR STORE CLOSINGS:
Predecessor:
Sixteen weeks ended May 19, 2002 $ 18 - - $ 18 -
2001
Current $ 1,498 $ 92 (3) $ - $ 873 (2) $ -
699 (4) 18
(1) Represents reduction against cost of goods sold.
(2) Represents severance and taxes for the 2000 Store Closure Program.
(3) Represents charge for restructuring.
(4) Represents payments of liabilities.
S-1
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Second Amended Joint Plan of Reorganization of Frank's Nursery
and Crafts, Inc and FNC Holding, Inc. (filed as Exhibit 2.1 to
the Registrant's Current Report on Form 8-K dated May 7, 2002)
(File No. 033-43504-01)
3.1 Certificate of Incorporation (filed as Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended August 11, 2002) (File No. 033-43504-01)
3.2 Bylaws, as amended March 30, 2004.
3.3 Certificate of Merger of FNC Holdings, Inc. and New Frank's
Delaware, Inc. (filed as Exhibit 3.3 to the Registrant's
Registration Statement on Form 10) (File No. 000-50158)
4.1 Investor Rights Agreement, dated as of May 20, 2002, by and
between the Registrant and certain holders of warrants to
acquire common stock of the Registrant (filed as Exhibit 4.1
to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended August 11, 2002) (File No.
033-43504-01)
4.2 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Kimco Realty Services, Inc. (filed as Exhibit 4.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended August 11, 2002) (File No. 033-43504-01)
4.3 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Third Avenue Trust (filed as Exhibit 4.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
August 11, 2002) (File No. 033-43504-01)
4.4 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Cypress Merchant Banking Partners, L.P. (filed as Exhibit 4.4
to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended August 11, 2002) (File No.
033-43504-01)
4.5 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Cypress Garden Ltd. (filed as Exhibit 4.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
August 11, 2002) (File No. 033-43504-01)
4.6 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Joseph Baczko (filed as Exhibit 4.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
August 11, 2002) (File No. 033-43504-01)
E-1
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.7 Stock Purchase Warrant, dated as of January 23, 2003, granted
to Kimco Realty Services, Inc. (filed as Exhibit 4.7 to the
Registrant's Registration Statement on Form 10) (File No.
000-50158)
10.1 Loan and Security Agreement, dated May 20, 2002, by and among
the Registrant and Congress Financial Corporation, as agent
for the lenders (filed as Exhibit 10.14 to the Registrant's
Current Report on Form 8-K dated July 25, 2002) (File No.
033-43504-01)
10.2 First Amendment to Loan and Security Agreement, dated as of
May 20, 2002, among the Registrant, Congress Financial
Corporation, as Administrative Agent, and the Lenders party
thereto (filed as Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended August 11,
2002) (File No. 033-43504-01)
10.3 Credit and Security Agreement, dated as of May 20, 2002,
between the Registrant and Kimco Capital Corp. (filed as
Exhibit 10.13 to the Registrant's Current Report on Form 8-K
dated July 25, 2002) (File No. 033-43504-01)
10.4 First Amendment and Waiver to Credit and Security Agreement,
dated as of January 23, 2003, among the Registrant and Kimco
Capital Corp. (filed as Exhibit 10.4 to the Registrant's
Registration Statement on Form 10) (File No. 000-50158)
10.5 2002 Stock Option Plan, as amended (filed as Exhibit 10.5 to
the Registrant's Registration Statement of Form 10-K for the
fiscal year ended January 26, 2003 (File No. 000-50158)
10.6 Employment Agreement, dated as of December 1, 2002, between
the Registrant and Adam Szopinski (filed as Exhibit 10.9 to
the Registrant's Registration Statement on Form 10) (File No.
000-50158)
10.7 Employment Agreement, dated as of December 1, 2002, between
the Registrant and Alan J. Minker (filed as Exhibit 10.10 to
the Registrant's Registration Statement on Form 10) (File No.
000-50158)
10.8 Employment Agreement, dated as of December 1, 2002, between
the Registrant and Kim Horner (filed as Exhibit 10.11 to the
Registrant's Registration Statement on Form 10) (File No.
000-50158)
10.9 Employment Agreement, dated as of December 1, 2002, between
the Registrant and Keith Oreson (filed as Exhibit 10.12 to the
Registrant's Registration Statement on Form 10) (File No.
000-50158)
E-2
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.10 Agreement, dated as of December 1, 2002, between the
Registrant and Joseph Nusim, with regard to consulting
services (filed as Exhibit 10.13 to the Registrant's
Registration Statement on Form 10) (File No. 000-50158)
10.11 Employment Agreement, dated as of December 1, 2002, between
the Registrant and John Heidt (filed as Exhibit 10.14 to the
Registrant's Registration Statement on Form 10) (File No.
000-50158)
10.12 Waiver and Amendment No. 2 to Loan and Security Agreement,
dated as of February 10, 2003, among the Registrant, Congress
Financial Corporation, as Administrative Agent, and the
Lenders party thereto (filed as Exhibit 10.15 to the
Registrant's Registration Statement on Form 10) (File No.
000-50158)
10.13 Employment Agreement, dated as of April 1, 2003, between the
Registrant and Bruce Dale (filed as Exhibit 10.13 to the
Registrant's Registration Statement on Form 10-K for the
fiscal year ended January 26, 2004) (File No. 000-50158)
10.14 Waiver and Amendment No. 3 to Loan and Security Agreement,
dated as of October 30, 2003, among the Registrant, Congress
Financial Corporation, as Administrative Agent, and the
Lenders party thereto (filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form 10-Q for the
quarterly period ended November 2, 2003) (File No. 000-50158)
10.15 Third Amendment and Waiver to Credit and Security Agreement,
dated as of October 30, 2003, among the Registrant and Kimco
Capital Corp. (filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form 10-Q for the quarterly period
ended November 2, 2003) (File No. 000-50158)
10.16 Agreement with Abacus Advisors LLC dated January 21, 2004
(filed as Exhibit 10.1 to the Registrant's Current Report on
Form 8-K dated January 21, 2004) (File No. 000-50158)
10.17 Fourth Amendment and Waiver to Credit and Security Agreement,
dated as of January 16, 2004, among the Registrant and Kimco
Capital Corp.
10.18 Fifth Amendment and Waiver to Credit and Security Agreement,
dated as of January 21, 2004, among the Registrant and Kimco
Capital Corp. (filed as Exhibit 10.2 to the Registrant's
Current Report on Form 8-K dated January 21, 2004) (File No.
000-50158)
E-3
EXHIBIT INDEX (CONTINUED)
10.19 Waiver and Amendment No. 4 to Loan and Security Agreement,
dated as of January 27, 2004, among the Registrant, Congress
Financial Corporation, as Administrative Agent, and the
Lenders party thereto (filed as Exhibit 10.3 to the
Registrant's Current Report on Form 8-K dated January 21,
2004) (File No. 000-50158)
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of
2002
32.2 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of
2002
E-4