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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE) FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 16, 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: 0-50158
FRANK'S NURSERY & CRAFTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 47-0863558
(State of Incorporation) (IRS Employer Identification No.)
580 KIRTS BLVD., SUITE 300
TROY, MICHIGAN 48084
(Address of Principal Executive Offices) (Zip Code)
(248) 712-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2004
COMMON STOCK $.001 PAR VALUE 17,798,428
FRANK'S NURSERY & CRAFTS, INC.
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of May 16, 2004 (Unaudited), May 18, 2003 (Unaudited), and
January 25, 2004 3
Statements of Operations for the sixteen weeks ended May 16, 2004 (Unaudited)
and the sixteen weeks ended May 18, 2003 (Unaudited) 4
Statements of Cash Flows for the sixteen weeks ended May 16, 2004 (Unaudited)
and the sixteen weeks ended May 18, 2003 (Unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk 11
Item 4 Controls and Procedures 12
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
CERTIFICATIONS
2
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(in thousands, except for par value)
May 16, May 18, January 25,
2004 2003 2004
------- ------- -----------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 13,909 $ 14,107 $ 1,026
Accounts receivable, net 493 948 2,258
Merchandise inventory 71,343 76,593 42,283
Prepaid expenses and other current assets 3,674 4,275 3,758
------------ ---------- ----------
Total current assets 89,419 95,923 49,325
Property, plant and equipment, net 56,081 55,575 54,934
Other assets and deferred charges 4,805 4,286 4,262
------------ ---------- ----------
Total assets $ 150,305 $ 155,784 $ 108,521
============ ========== ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 48,964 $ 59,432 $ 19,978
Accrued expenses 23,895 25,337 19,157
Accrued expense payables pre-petition 204 1,701 217
Revolving credit facility 30,379 12,214 7,738
Revolving credit facility - related party 14,500 - 28,000
Current portion of long term debt 1,461 1,474 1,255
------------ ---------- ----------
Total current liabilities 119,403 100,158 76,345
Long-term debt:
Senior debt, less current portion 23,413 24,409 23,460
Term Loan - related party, net of unamortized discount 18,397 16,811 17,909
------------ ---------- ----------
Total long-term debt 41,810 41,220 41,369
Other liabilities 4,923 3,603 4,773
Shareholders' (deficit) equity:
Common stock $.001 par value, 20 20 20
50,000,000 shares authorized, 17,798,428 shares
issued and outstanding and 2,201,572 shares
to be issued
Additional paid-in-capital 27,509 27,457 27,496
Accumulated deficit (43,360) (16,674) (41,482)
------------ ---------- ----------
Total shareholders' (deficit) equity (15,831) 10 803 (13,966)
------------ ---------- ----------
Total liabilities and shareholders' (deficit) equity $ 150,305 $ 155,784 $ 108,521
============ ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sixteen Weeks Sixteen Weeks
Ended Ended
May 16, May 18,
2004 2003
------------- -------------
NET SALES $111,108 $116,652
OPERATING COSTS AND EXPENSES:
Cost of goods sold, including buying and occupancy 75,431 81,300
Selling, general, and administrative 32,460 31,480
Restructuring charges 459 -
--------- --------
Total operating costs and expenses 108,350 112,780
-------- --------
INCOME FROM OPERATIONS 2,758 3,872
OTHER (EXPENSE) INCOME:
Interest expense and amortization of debt costs (3,772) (2,967)
Sundry (expense) income (864) 106
-------- --------
Total other expense (4,636) (2,861)
-------- --------
NET (LOSS) INCOME $ (1,878) $ 1,011
======== ========
(LOSS) INCOME PER SHARE - BASIC $ (0.09) $ 0.05
======== ========
(LOSS) INCOME PER SHARE - DILUTED $ (0.09) $ 0.05
======== ========
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.
4
FRANK'S NURSERY & CRAFTS, INC
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Sixteen Weeks Sixteen Weeks
Ended Ended
May 16, May 18,
2004 2003
------------- -------------
OPERATING ACTIVITIES:
Net (loss) income $ (1,878) $ 1,011
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 1,100 1,029
Amortization of debt costs and warrants 859 666
Non-cash portion of restructuring and other related charges 459 -
Issuance of Stock Options 13 -
Other 150 229
--------- ----------
703 2,935
Changes in assets and liabilities, net of effects of fresh start
adjustments and gain on cancellation of pre-petition liabilities:
Accounts receivable 1,765 270
Inventory (29,060) (37,543)
Prepaid expenses 83 (150)
Other non-current assets (914) (800)
Accounts payable 28,986 40,980
Accrued expenses 4,266 9,177
--------- ----------
Net cash provided by operating activities 5,829 14,869
--------- ----------
INVESTING ACTIVITIES:
Additions to property, plant, and equipment (1,647) (502)
Net proceeds from asset sales - 240
--------- ----------
Net cash used in investing activities (1,647) (262)
--------- ----------
FINANCING ACTIVITIES:
Increase (decrease) in revolving credit facilities (net) 9,141 (3,036)
Payment of long-term debt and capital leases (440) (532)
--------- ----------
Net cash provided by (used in) financing activities 8,701 (3,568)
--------- ----------
Net change in cash and cash equivalents 12,883 11,039
Cash and cash equivalents at beginning of period 1,026 3,068
--------- ----------
Cash and cash equivalents at end of period $ 13,909 $ 14,107
========= ==========
Supplemental disclosure of non cash financing information:
Cash paid for interest $ 2,514 $ 1,821
========= ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
FRANK'S NURSERY & CRAFTS, INC.
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) GENERAL
Frank's Nursery & Crafts, Inc., a Delaware corporation ("Frank's" or the
"Company"), operates the largest chain (as measured by sales) in the United
States of specialty retail stores devoted to the sale of lawn and garden
products. Frank's also is a leading retailer of indoor garden products and
accessories, including silk floral arrangements, as well as Christmas decor
merchandise.
BASIS OF PRESENTATION
The accompanying unaudited financial statements include all adjustments,
consisting only of normal, recurring adjustments and accruals, which are, in the
opinion of management, necessary for fair presentation of the results of
operations and financial position. Results of operations for interim periods may
not be indicative of future results. The unaudited financial statements should
be read in conjunction with the audited financial statements included in Frank's
Annual Report on Form 10-K, as filed with the Securities and Exchange Commission
for the fiscal year ended January 25, 2004.
(2) RECLASSIFICATIONS
Certain amounts reported in previous periods have been reclassified to conform
to the 2004 presentation.
(3) 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 May 16, 2004. As discussed in Item 2, 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 the Company can remain in compliance with the new covenants
through fiscal 2004. On June 30, 2004, the Company also entered into an
amendment to the Kimco revolving credit facility, which provides for additional
financing of $15 million.
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 for the current fiscal year, including debt
service requirements and planned capital expenditures. There can be no guarantee
of the success of such efforts, and accordingly, the Company may need to develop
strategic alternatives.
(4) (LOSS) INCOME PER SHARE
Basic (loss) income per share is computed by dividing net (loss) income on
common shares by the weighted average number of common shares outstanding during
each period. For purposes of the per share calculation, 20,000,000 shares were
used which represent 17,798,428 shares outstanding and 2,201,572 shares to be
issued. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
For the 2004 first quarter, all warrants and options outstanding have been
excluded from the computation of diluted loss per share as the effect would be
anti-dilutive.
(5) STOCK OPTIONS
The Company accounts for stock-based compensation issued to its employees and
non-employee directors in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and related Interpretations. Accordingly, the
Company has adopted the "disclosure only" provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 requires new prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
For SFAS No. 148 purposes, the fair value of each option granted under the
Company's stock option plan is estimated as of the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: expected dividend yield of 0%; stock price volatility of 10.8%;
risk free interest rates ranging from 2.86% to 3.60%; and an expected option
term of 5 years.
6
If the Company had elected to recognize the compensation cost of its stock
option plan based on the fair value method of accounting, net (loss) income and
net (loss) income per share would have been decreased to the pro forma amounts
below (dollars in thousands, except per share amounts):
Sixteen Weeks Sixteen Weeks
Ended Ended
May 16, 2004 May 18, 2003
------------ ------------
Net (loss) income, as reported $ (1,878) $ 1,011
Total stock-based compensation expense determined
under the fair value method (21) (170)
-------- ---------
Pro forma net (loss) income $ (1,899) $ 841
======== =========
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) income per share:
As reported - basic $ (0.09) $ 0.05
======== =========
As reported - diluted $ (0.09) $ 0.05
======== =========
Pro forma - basic $ (0.09) $ 0.04
======== =========
Pro forma - diluted $ (0.09) $ 0.04
======== =========
(6) RESTRUCTURING
During the fourth fiscal quarter of 2003 and the first fiscal quarter of 2004,
the Company implemented a corporate overhead restructuring initiative to reduce
costs at its corporate headquarters. As a result of the restructuring
initiative, the Company recorded charges for workforce reductions of $2.0
million during the fourth fiscal quarter of 2003 and $0.5 million during the
first fiscal quarter of 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 May 16, 2004, is as
follows:
Balance at January 2004 2004 2004 Ending Balance at
25, 2004 Charges Payments Adjustments May 16, 2004
------------------ ------- -------- ----------- -----------------
Employee separation costs (a) $ 1,526 459 (569) (90) $ 1,326
========= === ==== === =======
(a) Of the planned downsizing, all reductions had been implemented as of May 16,
2004.
The Company expects that substantially all remaining payments will be made
within the next twenty-four months.
(7) RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN 46"). In
January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and determine when the assets, liabilities, non-controlling
interests and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the VIE's expected residual returns, if they occur.
FIN 46 also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. The provisions of this interpretation
apply to the end of the first interim period or annual period ending after
December 15, 2003 to VIEs in which a company holds a variable interest that it
acquired before February 1, 2003 and by the end of the first reporting period
that ends after March 15, 2004 to entities acquired or created after February 1,
2003. The Company does not believe that the adoption of this standard will have
a material impact on its financial position or results of operations.
7
(8) SUBSEQUENT EVENT
Subsequent to the end of the quarter, the Company completed a sale and leaseback
transaction for its Huntington, New York store location. The Company will
realize a gain on this transaction in the second quarter of approximately $6
million. The Company regularly reviews opportunities to engage in
sales-leaseback transactions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included elsewhere in this Quarterly
Report, and with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ended January 25, 2004.
RESULTS OF OPERATIONS
The following table shows the 2004 period in comparison to the corresponding
2003 period (dollars in thousands).
Sixteen weeks ended
May 16, 2004 May 18, 2003
------------ ------------
Net sales $ 111,108 $ 116,652
Operating costs and expenses:
Cost of sales, including buying and occupancy 75,431 81,300
Selling, general, and administrative 32,460 31,480
Restructuring and other related charges 459 -
--------- ---------
Total operating costs and expenses 108,350 112,780
--------- ---------
Income from operations 2,758 3,872
Other (expenses) income:
Interest expense and amortization of debt costs (3,772) (2,967)
Other (expenses) income (864) 106
--------- ---------
Total other expenses (4,636) (2,861)
--------- ---------
Net (loss) income (1,878) 1,011
========= =========
NET SALES. Net sales were $111.1 million for the sixteen weeks ended May
16, 2004 ("2004 quarter"), a decrease of $5.5 million, or 4.8%, compared with
net sales of $116.7 million for the sixteen weeks ended May 18, 2003 ("2003
quarter"). Comparable store sales (stores open for the full time for the periods
presented) decreased 4.2% in the 2004 quarter compared to the 2003 quarter. The
fiscal quarter-to-date sales decrease is believed to be the result of unusually
wet weather in the Midwest region, as both Chicago and Detroit experienced
record rain amounts in the month of May. The East region sales increased 0.1%,
and the Midwest region declined 8.7%, versus the 2003 quarter. Outdoor live
goods, including annuals and perennials, sales increased 3.1% versus the 2003
quarter.
There were 169 stores open for the 2004 quarter and 170 stores open for
the 2003 quarter.
COST OF SALES, INCLUDING BUYING AND OCCUPANCY. Cost of sales was $75.4
million for the 2004 quarter, a decrease of $5.9 million, or 7.2% compared with
$81.3 million for the 2003 quarter. Cost of sales, as a percentage of net sales,
was 67.9% for the 2004 quarter compared with 69.7% for the 2003 quarter. This
percentage decline of 1.8% is due primarily to lower distribution costs related
to the late-2003 closure of the Harrisburg, PA warehouse, and improved gross
margins on outdoor live goods and floral arrangements, partially offset by
third-party distribution costs.
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses were
$32.5 million for the 2004 quarter, an increase of $1.0 million, or 3.1%,
compared with $31.5 million for the 2003 quarter. As a percentage of net sales,
SG&A expenses were 29.2% for the 2004 quarter compared with 27.0% for the 2003
quarter. This percentage increase is largely due to increased advertising costs
and consulting expenses.
RESTRUCTURING AND OTHER RELATED CHARGES. The Company recorded a charge of
$0.5 million in the 2004 quarter related to headcount reductions at the
Company's headquarters. No restructuring or related charges were taken in the
2003 quarter.
INTEREST EXPENSE AND AMORTIZATION OF DEBT COSTS AND WARRANTS. Interest
expense and amortization of debt costs and warrants ("interest expense") was
$3.8 million for the 2004 quarter, an increase of $0.8 million, or 27.1%,
compared with interest
8
expense of $3.0 million for the 2003 quarter. The fiscal quarter-to-date
increase in interest expense was due to increased borrowings and increased
amortization of deferred debt costs due to loan amendments.
OTHER INCOME (EXPENSES). Other income primarily relates to gains from the
sale of property, interest income, and miscellaneous income. Other expense was
$0.9 million for the 2004 quarter compared to other income of $0.1 million for
the 2003 quarter. This variance is due to continued costs associated with the
2003 Harrisburg, PA warehouse roof collapse.
INCOME TAXES. No income tax benefit was recognized for the loss for 2004
and 2003. Instead, the increase in net deferred tax assets as a result of the
loss was offset by an equal increase in the valuation allowance.
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 May 16, 2004, there were $30.4 million in
borrowings outstanding under the Congress facility and outstanding letters of
credit aggregated $4.9 million. Excess availability as of May 16, 2004 was $11.1
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 May 16, 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. For the amendments
dated January 21, 2004 and June 29, 2004, the Company paid amendment fees of
$100,000 and $125,000, respectively.
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. 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 June 29,
2004, the parties entered into an amendment to the credit facility which
eliminated the adjusted EBITDA covenant with respect to accounting periods in
the fiscal quarter ending May 16, 2004 and reset the adjusted EBITDA covenant
for the accounting periods in the fiscal year ended January 30, 2005 and
thereafter. The amendment also reduces some of the borrowing base reserves noted
above and provides Congress with a second lien on certain real estate. The
Company's accounts payable to inventory ratio was 68.6% and the minimum covenant
was 21.1% at May 16, 2004. Adjusted EBITDA for the period from January 26, 2004
through May 16, 2004, was $3.0 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
9
accepted accounting principles ("GAAP"). A summary of the calculation of the
Company's adjusted EBITDA for the period from January 26, 2004 through May 16,
2004 is set forth below.
(000's)
-------
Net loss using GAAP $ (1,878)
Plus:
Depreciation 1,100
Interest 3,772
---------
Adjusted EBITDA $ 2,994
=========
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.
TERM LOAN AND REVOLVING CREDIT FACILITY ARRANGED BY KIMCO CAPITAL CORP.
The Company has a three-year, $80 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. On June 30, 2004 the Company and Kimco Capital Corp. entered into an
amendment to the Kimco facility to allow for additional overline revolving loan
advances of up to $15 million, with such additional advances available only in
the Company's 4-week accounting periods ending October 3, 2004 and October 31,
2004, with such advances not to exceed $1 million and $6 million in those
periods respectively, unless otherwise consented to by Kimco. Amendment fees of
$500,000 and $375,000 were paid to Kimco by the Company for the January 21, 2004
and the June 30, 2004 amendments respectively.
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 May 16, 2004 total debt
outstanding under the Kimco revolver facility was $14.5 million. There is also a
$20 million term loan outstanding under this facility.
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 53.1% of the
Company's common stock, and (ii) Kimco Select Investments. A portion of the
Kimco 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 U.S. Securities and Exchange Commission.
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 for the current fiscal year, including debt service requirements
and planned capital expenditures.
10
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.
The Company believes that its existing credit facilities, along with cash
flows from operations, 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 anticipates spending approximately $2.0 million for capital
expenditures for the remainder of 2004, primarily for store remodeling. No store
openings are planned for the remainder of 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
effect of currency translations, customer demand, fashion trends, competitive
market forces, uncertainties related to the effect of competitive products and
pricing, customer acceptance of the Company's merchandise mix and retail
locations, unseasonable weather, risks associated with foreign global sourcing,
including political instability and changes in import regulations, economic
conditions worldwide, and the ability of the Company to execute its business
plans effectively. Any changes in such assumptions or factors could produce
significantly different results. The Company undertakes no obligation to update
forward-looking statements, whether as a result of new information, future
events, or otherwise.
ITEM 3. 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 Congress 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 25, 2004 through May 16, 2004, the Company's average outstanding balance
under the Congress facility was $21.7 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 $434,000 per year. The Company had $30.4 million
outstanding under the Congress facility at May 16, 2004. Interest under the
$80.0 million credit facility with Kimco Capital is fixed at 10.25% per annum
and $34.5 million was outstanding at May 16, 2004, consisting of $14.5 million
of revolving facility debt and $20.0 million of term loan debt. The Company does
not enter into derivative or interest rate transactions.
11
ITEM 4. CONTROLS AND PROCEDURES
In Item 9A, Controls and Procedures of the Company's Form 10-K for the fiscal
year ended January 25, 2004 the following matter was identified as a material
weakness:
Based on an evaluation, and in concert with the Company's independent certified
public accounts, 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.
During the first fiscal quarter of 2004, the Company has taken the following
actions to address and correct this condition:
1. The Company initiated a process to fill an open position in its
accounting department responsible for lease accounting. The position
has been filled as of the date of the filing.
2. The Company developed a new process to streamline the management of
its current lease portfolio.
As of May 16, 2004, an evaluation was carried out under the supervision and with
the participation of the Company's management, including its Interim Chief
Operating Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) under the Securities Exchange Act of 1934). Based
upon that evaluation, the Interim Chief Operating Officer and Chief Financial
Officer concluded that the design and operation of these disclosure controls and
procedures were effective for gathering, analyzing and disclosing information
required to be disclosed in connection with the Company's filing of its
Quarterly Report on Form 10-Q for the sixteen weeks ended May 16, 2004. Except
as discussed above, no significant changes were made in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on June 17, 2004. The
only matter submitted to the stockholders for approval at the annual meeting was
the election of the Company's board of directors.
Gerald Hellerman, Richard E. Montag, and Joseph Nusim were elected directors of
the Company for a one year term with votes cast as follows:
Shares Voted:
For Withheld Against
---------- ------------- -------
Gerald Hellerman 14,678,905 20,216 0
Richard E. Montag 14,678,905 20,216 0
Joseph Nusim 14,678,905 20,216 0
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Sixth Amendment to Credit and Security Agreement, dated as of
June 30, 2004, among the Registrant and Kimco Capital Corp.
Exhibit to the Congress Financial Corporation Amendment
10.2 Waiver and Amendment No. 5 to the Loan and Security
Agreement, dated as of June 29, 2004, among the Registrant,
Congress Financial Corporation, as Administrative Agent,
and the Lenders party thereto
10.3 Amendment to Employment Agreement for Alan Minker, Chief
Financial Officer and Interim Chief Operating Officer
10.4 Amendment to Employment Agreement for Keith Oreson, Vice
President - Human Resources
31.1 Principal Executive Officer Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Principal Financial Officer Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Principal Executive Officer Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Principal Financial Officer Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
During the quarter ended May 16, 2004, Frank's filed the following
Reports on Form 8-K:
Report on Form 8-K dated February 10, 2004, reporting under
Item 7 the issuance of a press release announcing the
Company's Agreement with Abacus Advisors LLC dated January 21,
2004, the Fifth Amendment to the Credit and Security
Agreement, dated as of January 21, 2004, between the
Registrant and Kimco Capital Corp., and the 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.
Report on Form 8-K dated April 26, 2004, reporting under Item
12 the issuance of a press release announcing the Company's
earnings for the fiscal year ended January 25, 2004.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: June 30, 2004 FRANK'S NURSERY & CRAFTS, INC.
(Registrant)
By: /s/ Alan Minker
-------------------------------
Alan Minker
Interim Chief Operating Officer,
Senior Vice President,
Chief Financial Officer and Treasurer
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Sixth Amendment to Credit and Security Agreement, dated as of June
30, 2004, among the Registrant and Kimco Capital Corp. Exhibit to
the Congress Financial Corporation Amendment
10.2 Waiver and Amendment No. 5 to the Loan and Security Agreement,
dated as of June 29, 2004, among the Registrant, Congress
Financial Corporation, as Administrative Agent, and the Lenders
party thereto
10.3 Amendment to Employment Agreement for Alan Minker, Chief Financial
Officer and Interim Chief Operating Officer
10.4 Amendment to Employment Agreement for Keith Oreson, Vice President
- Human Resources
31.1 Principal Executive Officer Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Principal Financial Officer Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Principal Executive Officer Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Principal Financial Officer Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002