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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(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 August 12, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5364
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FRANK'S NURSERY & CRAFTS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-1561374
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1175 West Long Lake Road, Troy, Michigan 48098
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (248) 712-7000
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court. Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: Common Stock, $1.00
par value, 1,000 shares outstanding as of September 26, 2001 held by FNC
Holdings Inc. There is no public trading market for the outstanding shares.
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FRANK'S NURSERY & CRAFTS, INC.
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
Twelve Weeks Ended Twenty-Eight Weeks Ended
----------------------- ------------------------
AUGUST 12, August 13, AUGUST 12, August 13,
2001 2000 2001 2000
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(DEBTOR-IN- (DEBTOR-IN-
POSSESSION) POSSESSION)
NET SALES $ 86,701 $ 102,964 $ 239,839 $ 269,920
OPERATING COSTS AND EXPENSES:
Cost of sales, including
buying and occupancy 71,050 75,001 182,640 186,342
Selling, general and
administrative 25,927 29,220 64,366 74,190
Amortization of goodwill 383 562 894 1,312
Reorganization, restructuring
and other related charges 5,279 6,981
Other (income) expense 436 (210) (341) (199)
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Total operating costs and
expenses 103,075 104,573 254,540 261,645
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INCOME (LOSS) FROM OPERATIONS (16,374) (1,609) (14,701) 8,275
INTEREST AND DEBT EXPENSE 2,017 4,709 6,617 12,208
--------- --------- --------- ---------
LOSS BEFORE INCOME TAX BENEFIT
AND EXTRAORDINARY LOSS (18,391) (6,318) (21,318) (3,933)
INCOME TAX BENEFIT (949)
--------- --------- --------- ---------
LOSS FROM OPERATIONS BEFORE
EXTRAORDINARY LOSS (18,391) (6,318) (21,318) (2,984)
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT 4,230
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NET LOSS $ (18,391) $ (6,318) $ (25,548) $ (2,984)
========= ========= ========= =========
See notes to financial statements.
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FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
AUGUST 12, August 13, January 28,
2001 2000 2001
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(UNAUDITED) (Unaudited)
(DEBTOR-IN-
POSSESSION)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,459 $ 4,836 $ 10,607
Marketable securities 1,339 2,126 1,812
Accounts receivable 1,807 955 1,712
Merchandise inventory 69,205 102,552 73,125
Assets to be disposed of 21,449 33,500
Prepaid expenses and other
current assets 5,553 5,775 4,551
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Total current assets 102,812 116,244 125,307
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PROPERTY, PLANT AND EQUIPMENT, NET 113,607 222,547 129,863
GOODWILL, LESS ACCUMULATED
AMORTIZATION OF $860,
$6,325 AND $7,451 15,120 91,317 16,600
OTHER ASSETS AND DEFERRED CHARGES 11,974 14,934 14,251
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$ 243,513 $ 445,042 $ 286,021
========= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
(DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Accounts payable $ 9,545 $ 34,302 $ 32,606
Accounts payable - prepetition 33,378
Accrued expenses 31,855 34,465 39,417
Accrued expense payables - prepetition 19,791
Notes payable to banks 29,040 35,000 47,352
Current portion of long-term debt 27,819 8,812 46,575
Subordinated debt 115,000 115,000
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Total current liabilities 266,428 112,579 280,950
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LONG-TERM DEBT:
Senior debt 4,463 45,515 5,383
Subordinated debt 115,000
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Total long-term debt 4,463 160,515 5,383
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OTHER LIABILITIES AND DEFERRED CREDITS 4,093 12,129 5,627
SHAREHOLDER'S EQUITY (DEFICIENCY IN ASSETS):
Common stock $1.00 par value,
1,000 shares authorized,
1,000 shares issued and outstanding 1 1 1
Capital in excess of par value 165,999 165,999 165,999
Net parent investment 16,193 16,629 16,177
Retained deficit (213,664) (22,810) (188,116)
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Total shareholder's equity
(Deficiency in assets) (31,471) 159,819 (5,939)
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$ 243,513 $ 445,042 $ 286,021
========= ========= =========
See notes to financial statements.
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FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Twenty-eight Weeks Ended
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AUGUST 12, August 13,
2001 2000
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(DEBTOR-IN-
POSSESSION)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (25,548) $ (2,984)
Adjustments to reconcile net loss to
net cash provided by operations:
Depreciation 9,128 9,891
Amortization 1,911 2,052
Noncash portion of reorganization, restructuring
and other related charges 3,241
Debt issue costs (extraordinary loss) 3,458
Other, net (2,224) (162)
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(10,034) 8,797
Changes in operating assets and liabilities:
Marketable securities (45) (67)
Accounts receivable (95) 986
Inventory 3,920 (1,729)
Prepaid expenses (1,062) 1,485
Accounts payable 10,317 19,304
Accrued expenses 14,255 (6,695)
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Net cash provided by operations 17,256 22,081
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,454) (11,988)
Proceeds from asset sales 12,051
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Net cash provided by (used in) investing
activities 10,597 (11,988)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in net parent investment 16 14,977
Decrease in notes payable to banks, net (18,312) (27,000)
Payment of long-term debt and capital lease
obligations (16,705) (2,089)
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Net cash used in financing activities (35,001) (14,112)
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DECREASE IN CASH AND CASH EQUIVALENTS (7,148) (4,019)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,607 8,855
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,459 $ 4,836
========= =========
See notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
Frank's Nursery & Crafts, Inc. (the "Company") and FNC
Holdings Inc. ("Holdings"), the sole shareholder of the
Company, each filed a voluntary petition under Chapter 11
within the United States Bankruptcy Court for the District of
Maryland, Baltimore Division on February 19, 2001. The
Company's financial statements have been prepared assuming
that the Company will continue as a going concern, and not
under the liquidation basis of accounting. In the opinion of
the Company, the financial statements reflect all adjustments
necessary for a fair statement of the results for the interim
periods presented herein. In the opinion of management such
adjustments consisted of normal recurring items. Financial
results of the interim period are not necessarily indicative
of results that may be expected for any other interim period
or for the fiscal year. For further information and
information regarding the Chapter 11 filings, refer to the
financial statements and footnotes thereto included in the
Company's report on Form 10-K for the fiscal year ended
January 28, 2001 dated April 30, 2001.
NOTE 2: REORGANIZATION, RESTRUCTURING AND OTHER RELATED CHARGES
As a result of the bankruptcy, the Company rejected 22 store
leases for which the inventory was liquidated in the first and
second quarter of fiscal 2001. All the stores were closed as
of the end of June, 2001. In addition as the 2001 spring
season came to a close, management identified 12 additional
locations for closing, of which one is owned and 11 are
leased. It is anticipated that the 12 stores will be closed as
of the end of October, 2001.
The reorganization/restructuring charge of $7 million includes
$.3 million for termination and severance payments for the
above stores and $3.2 million for the write-off of the
remaining fixed assets, related goodwill and capital lease
debt associated with these stores. Also included are
bankruptcy related costs (primarily professional fees) of $2.7
million and $1.7 million under a court approved retention
program, offset by $.9 million of leasehold interest sales.
Cost of goods sold includes a lower of cost or market reserve
of $1.6 million for the inventory liquidation of the 12
stores.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: DEBT
At August 12, 2001 the Company had a two year $100 million
debtor-in-possession financing agreement (the "DIP Financing
Agreement") with a lender to finance, among other things, the
Company's working capital requirements during Chapter 11
reorganization proceedings. Borrowings under the DIP Financing
Agreement are limited to the availability under a borrowing
base which includes eligible inventory and certain real estate
interests. Borrowings under the DIP Financing Agreement are
adjusted daily based upon cash availability and availability
under the borrowing base. The interest rates are based upon a
Base rate or Eurodollar rate plus an applicable margin based
on availability as set forth in the DIP Financing Agreement.
The Company had borrowings outstanding under the DIP Financing
Agreement of $29 million at August 12, 2001. The DIP Financing
Agreement requires the Company to maintain certain financial
ratios. The Company was not in compliance with the EBITDA
(earnings before interest, taxes, depreciation, amortization,
reorganization/restructuring and extraordinary charges)
covenant at August 12, 2001. The Company obtained a waiver
dated August 31, 2001 of noncompliance with the EBITDA
covenant through August 12, 2001. Currently the Company is
negotiating with the DIP financer to amend the DIP Financing
Agreement for future periods.
In accordance with AICPA Statement of Position 90-7,
contractual interest for the 2001 second quarter and first
half was $4.7 million and $12.1 million, respectively.
NOTE 4: EXTRAORDINARY LOSS
On February 21, 2001 the initial borrowings under the DIP
Financing Agreement described above in Note 3 were used to
retire the Company's outstanding obligations under a credit
facility that existed at January 28, 2001. The total debt and
associated fees retired totaled $62.1 million. This resulted
in an extraordinary loss from the early extinguishment of debt
of $4.2 million in the 2001 first half, primarily for the
write-off of debt issue costs.
NOTE 5: NET PARENT INVESTMENT
The Cypress Group LLC ("Cypress") contributed $15 million in
the 2000 first half and received 2,801,204 shares of Holdings
common stock. The capital contribution, used primarily to fund
the Company's POS system, resulted in an increase to the
Company's net parent investment of $15 million.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INCOME TAXES
Income taxes for the 2000 first half represent a benefit
resulting from the realization of certain net operating losses
for which a full valuation allowance had been previously
established. The Company reduced their valuation allowance by
$.9 million based upon regulatory approval for certain tax
matters and immediately realized the related deferred tax
asset when the tax refund was received. As of August 12, 2001,
the Company's remaining net deferred tax asset position was
fully offset with a valuation allowance, due to the Company's
historical operating results.
Due to previously unrecognized tax benefits, no income tax
provision has been provided for the first half of 2001 and
2000.
NOTE 7: RECENT ACCOUNTING DISCLOSURES
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141,
"Business Combinations", and No. 142, "Goodwill and Other
Intangible Assets", effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill will no
longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for
goodwill and other intangible assets beginning in the first
quarter of fiscal 2002. Application of the nonamortization
provisions of the Statement is expected to result in an
increase in net income of $1.6 million per year. During 2002,
the Company will perform the required tests under the new
rules and therefore has not yet determined what the effect of
these tests will be on the earnings and financial position of
the Company.
NOTE 8: LITIGATION AND LEGAL PROCEEDINGS UNDER CHAPTER 11
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 cases.
Since the filing of Chapter 11 on February 19, 2001 the
Company sought court approval for extending the Exclusive
Proposal Period from June 19, 2001 through October 19, 2001
and the Exclusive Solicitation Period from August 18, 2001
through December 18, 2001. Section 1121(b) of the Bankruptcy
Code provides for an initial period of 120 days after the
commencement of a Chapter 11 case during which a debtor has
the exclusive right to propose and file a plan of
reorganization. The Court approved the extension to October
19, 2001 and the Exclusive
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LITIGATION AND LEGAL PROCEEDINGS UNDER CHAPTER 11
(CONTINUED)
Solicitation Period through December 18, 2001. The Company
anticipates requesting an additional 120-day extension and
plans to file a reorganization plan within that extended
period.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second quarter of 2001 compared with second quarter of 2000
Results of operations
Net Sales
NET SALES were $86.7 million for the twelve week 2001 second quarter
which ended August 12, 2001 compared with $103 million in the 2000 second
quarter which ended August 13, 2000. Total net sales decreased 15.8% for the
quarter due primarily to prior year sales for the 2000 store closure program and
the 22 stores closed in the 2001 second quarter. Comparable store sales for the
second quarter decreased 1.6%.
Earnings
COST OF SALES, INCLUDING BUYING AND OCCUPANCY EXPENSES, were $71
million in the 2001 second quarter compared to $75 million in the 2000 second
quarter. Cost of sales, as a percentage of net sales, was 81.9% in the 2001
second quarter compared to 72.8% in the 2000 second quarter. The 2001 second
quarter includes a $1.6 million lower of cost or market reserve for the
inventory liquidation of the 12 stores closing in 2001. Merchandise margins
declined by 8 percentage points primarily due to liquidation sales for the 2001
store closure programs. Excluding the 2000 and 2001 store closure programs
(defined in the first half results of operations), merchandise margins declined
by 2.7 percentage points as a result of increased promotional activity due to a
competitive lawn and garden market. Buying and occupancy costs decreased by
approximately 10% due principally to reduced occupancy costs from the 2000 store
closure program. This cost decrease offset by the 15.8% sales decrease results
in a 1.1 percentage point increase in buying and occupancy costs as a percentage
of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in the 2001 second quarter
were $25.9 million compared to $29.2 million in the 2000 second quarter. This
decrease of $3.3 million or 11.3% was primarily due to lower store expenses as a
result of fewer stores and reduced corporate expenses. As a percentage of net
sales, selling general and administrative expenses increased 1.6 percentage
points to 29.9% in the 2001 second quarter compared to 28.3% in the 2000
quarter.
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OPERATING INCOME (DEFINED AS "NET SALES LESS COST OF SALES, INCLUDING
BUYING AND OCCUPANCY COSTS, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES")
for the 2001 second quarter was a loss of $10.2 million, an increase of $9
million, compared to a loss of $1.2 million for the 2000 second quarter. The
increased operating loss was primarily the result of the liquidation of the
stores under the 2001 store closure programs and remaining expenses under the
2000 store closure program compared to the operating income generated by these
stores during the second quarter of 2000. The operating loss, as a percentage of
net sales, was 11.8% for the 2001 second quarter, an increase of 10.6 percentage
points compared to 1.2% for the 2000 second quarter. Excluding the impact of the
2000 and 2001 store closure programs, the operating loss increased by $3.2
million primarily due to the 1.6% comparable store sales decrease and the 2.7
percentage point merchandise margin decline.
REORGANIZATION/RESTRUCTURING CHARGE of $5.3 million includes $.3
million for termination and severance payments for the 2001 store closure
programs and $3.2 million for the write-off of the remaining fixed assets and
related goodwill and capital lease debt related to those stores, offset by $.9
million of leasehold interest sales. Also included are bankruptcy related costs,
primarily professional fees, of $1 million and $1.7 million under a court
approved retention program.
OTHER INCOME (EXPENSE) was $(.4) million for the 2001 second quarter
compared with $.2 million for the 2000 second quarter. The 2001 second quarter
includes a reclassification of $.6 million for a leasehold interest sale to
reorganization/restructuring expense.
INTEREST AND DEBT EXPENSE was $2 million for the 2001 second quarter
compared with $4.7 million for the 2000 second quarter. Lower interest for the
2001 second quarter relates to no interest being accrued for the subordinated
notes in accordance with AICPA Statement of Position 90-7 (refer to the interest
and debt section of the results of operations for the first half). Contractual
interest for the 2001 second quarter was $4.7 million.
INCOME TAXES. Due to previously unrecognized tax benefits no income tax
provision has been provided for in the second quarters of 2001 and 2000.
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First half of 2001 compared with the first half of 2000
Results of operations
Net Sales
NET SALES were $239.8 million for the twenty-eight week 2001 first half
which ended August 12, 2001 compared with $269.9 million for the twenty-eight
week 2000 first half which ended on August 13, 2000. Total net sales decreased
11.2%. Comparable store sales for the first half increased .4%. Excluding the
prior year first half sales for the 2000 store closure program (44 stores that
were closed in the fourth quarter of fiscal 2000) and the 2001 store closure
programs described below, net sales would have shown an increase of .6%.
Excluding the first eight weeks of the first quarter, which were
negatively impacted by the Chapter 11 filing on February 19, 2001, first half
net sales for the 183 store base, described below, increased 4%.
The Company completed further store analysis in early 2001, which
identified an additional 22 leased stores for closing (the "2001 store closure
program"). These stores were closed as of the end of June, 2001. An additional
12 stores are in process of closure and are expected to be closed before the end
of October and become part of the 2001 store closure program. In addition to the
78 stores either closed or in process of being closed under store closure
programs, the Company opened one new store in Richmond, Virginia and closed
three stores during the first half of 2001 bringing the operating store base to
183 stores. These 183 stores had sales of $219.6 million for the first half
compared with $218.2 million for the same period last year.
Earnings
COST OF SALES, INCLUDING BUYING AND OCCUPANCY EXPENSES, were $182.6
million in the 2001 first half compared to $186.3 million in the 2000 first
half. Included in the 2001 first half is a $1.6 million lower of cost or market
reserve for the inventory liquidation of the 12 stores. Cost of sales, as a
percentage of net sales, increased to 76.1% in the 2001 first half compared to
69% in the 2000 first half, an increase of 7.1 percentage points. Merchandise
margins declined by 6.2 percentage points due to liquidation sales for the 2001
store closure programs which accounted for 2.4 percentage points of the decline
and increased
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promotional activity due to the competitive lawn and garden market. Buying and
occupancy costs decreased by approximately 6.2% due principally to reduced
occupancy costs from the 2000 store closure program. This cost decrease offset
by the 11.2% sales decrease results in a .9 percentage point increase in buying
and occupancy costs as a percentage of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in the 2001 first half
were $64.4 million compared to $74.2 million in the 2000 first half. This
decrease of $9.8 million or 13.2% was primarily due to lower store expenses as a
result of fewer stores and reduced advertising and corporate expenses. As a
percentage of net sales, selling general and administrative expenses decreased
.6 of a percentage point to 26.9% in the 2001 first half compared to 27.5% in
the 2000 half.
OPERATING INCOME (DEFINED AS "NET SALES LESS COST OF SALES, INCLUDING
BUYING AND OCCUPANCY COSTS, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES")
for the 2001 first half was a loss of $7.2 million, a decrease of $16.6 million,
compared to operating income of $9.4 million for the 2000 first half. The
decline in operating income was primarily the result of the liquidation of the
stores under the 2001 store closure program during the 2001 first half and
expenses incurred to complete the liquidation of the 2000 store closure program
compared to the operating income generated by these stores during the first half
of 2000. Operating income, as a percentage of net sales, declined to a negative
3% of net sales for the 2001 first half, a decrease of 6.5 percentage points
from the 3.5% for the 2000 first half. Excluding the impact of the 2000 and 2001
store closure programs the operating income for the 2001 first half was $1.9
million compared with $7.5 million in the 2000 first half. The decline of $5.6
million was primarily the result of lower merchandise margins as explained
above.
REORGANIZATION/RESTRUCTURING CHARGE of $7 million includes $.3 million
for termination and severance payments for the 2001 store closure programs and
$3.2 million for the write-off of the remaining fixed assets and related
goodwill and capital lease debt related to those stores, offset by $.9 million
of leasehold interest sales. Also included are bankruptcy related costs,
primarily professional fees, of $2.7 million and $1.7 million under a court
approved retention program.
OTHER (INCOME) EXPENSE was $.3 million for the 2001 first half compared
with $.2 million for the 2000 first half.
INTEREST AND DEBT EXPENSE was $6.6 million for the 2001 first half
compared with $12.2 million for the 2000 first half. Lower interest for the 2001
first half relates to no interest being accrued for the subordinated notes.
During the Chapter 11 proceedings no interest is being accrued for the
subordinated notes in accordance with AICPA Statement of Position 90-7, as it is
not considered probable that the interest will be an allowed claim. Contractual
interest for the 2001 first half was $12.1 million.
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INCOME TAXES for the 2000 first half represent a benefit resulting from
the realization of certain net operating losses for which a full valuation
allowance had been previously established. The Company reduced their valuation
allowance by $.9 million based upon regulatory approval for certain tax matters
and immediately realized the related deferred tax asset when the tax refund was
received. As of August 12, 2001, the Company's remaining net deferred tax asset
position was fully offset with a valuation allowance, due to the Company's
historical operating results. Due to previously unrecognized tax benefits, no
income tax provision has been provided for in the first half of 2001 and 2000.
EXTRAORDINARY LOSS for the 2001 first half primarily represents the
write-off of debt issue costs to retire the Company's outstanding obligations
under a credit facility that existed at January 28, 2001. The total debt and
associated fees retired totaled $62.1 million and was paid by the DIP financer
under the DIP Financing Agreement.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Net cash provided by operations in the 2001 first
half was $17.3 million compared to $22.1 million in the 2000 first half due
primarily to the lower level of earnings for the 2001 first half. The lower
level of earnings was offset by the increase in accounts payable and accrued
expense compared to the prior year half. This increase is due primarily to the
Chapter 11 filings that resulted in prepetition amounts of $33.4 million for
accounts payable and $19.8 million for accrued expense. In addition the decrease
in inventory for 2001 compared to an increase in 2000 is due to the reduction in
the store base and earlier receipt of Christmas merchandise in 2000.
INVESTING ACTIVITIES. Net cash provided by investing activities in the
2001 first half was $10.6 million, due to the net proceeds of $12.1 million
received from the sale of 11 of the 33 properties from the 2000 store closure
program that were recorded as assets held for disposal at January 28, 2001.
Since the end of the 2001 second quarter three additional properties have been
sold providing net proceeds of approximately $2.4 million. In addition there was
$1.5 million for capital expenditures, primarily related to the new store opened
in Richmond, Virginia in the first quarter and remaining expenditures for the
new POS system.
FINANCING ACTIVITIES. Net cash used in financing activities in the 2001
first half was $35 million which related primarily to the repayment of bank
debt.
Cypress contributed $15 million in the 2000 first half and received
2,801,204 shares of Holdings common stock. The capital contribution, used
primarily to fund the Company's POS system, resulted in an increase to the
Company's net parent investment of $15 million.
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At August 12, 2001 the Company had a two year $100 million DIP
Financing Agreement with a lender to finance, among other things, the Company's
working capital requirements during Chapter 11 reorganization proceedings.
Borrowings under the DIP Financing Agreement are limited to the availability
under a borrowing base which includes eligible inventory and certain real estate
interests. Borrowings under the DIP Financing Agreement are adjusted daily based
upon cash availability and availability under the borrowing base. The interest
rates are based upon a Base rate or Eurodollar rate plus an applicable margin
based on availability as set forth in the DIP Financing Agreement. The Company
had borrowings outstanding under the DIP Financing Agreement of $29 million at
August 12, 2001. The DIP Financing Agreement requires the Company to maintain
certain financial ratios. The Company was not in compliance with the EBITDA
covenant at August 12, 2001. The Company obtained a waiver dated August 31, 2001
of noncompliance with the EBITDA covenant through August 12, 2001. Currently the
Company is negotiating with the DIP financer to amend the DIP Financing
Agreement for future periods.
Total long-term debt (including the current portion of long- term debt)
at August 12, 2001 was $176.3 million including borrowings under the DIP
Financing Agreement, mortgages, capital leases and subordinated notes. Cash and
cash equivalents were $3.5 million at the end of the 2001 first half.
The Company's most significant cash requirements for fiscal 2001 are
for seasonal buildup of merchandise inventories and bankruptcy related
expenditures (primarily professional fees). The Company anticipates spending an
additional $2.5 million for the remainder of fiscal 2001 for capital
expenditures related to the POS system and general store capital expenditures.
The Company opened one store in the 2001 first quarter. No additional store
openings are planned for fiscal 2001 while in Chapter 11.
The Company operates its business as debtor-in-possession, but may not
engage in transactions outside of the ordinary course of business without
approval of the Bankruptcy Court. The Company is planning to implement a
reorganization plan that would include cost reductions, improved operating
efficiencies and increased financial flexibility. In addition, the Company's DIP
financing imposes certain operating and financial covenant restrictions that are
dependent on the Company achieving satisfactory levels of profitability and cash
flow from operations. Additionally, the Company's business depends, in part, on
normal weather patterns across its markets. The ability of the Company to
continue as a going concern is dependent upon, among other things, confirmation
of a plan of reorganization, continued profitable operations, the ability to
comply with the DIP financing covenants and the ability to generate sufficient
cash from operations and financing sources to meet obligations. There can be no
assurances that the Company will be successful in reorganizing under Chapter 11,
which could result in liquidation.
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RECENT MANAGEMENT CHANGE
The Company announced September 25, 2001 that its Board of Directors
named Steven S. Fishman Chief Executive Officer and a member of the Board of
Directors, effective September 25, 2001. Mr. Fishman was previously the
President of SSF Resources, Inc., an investment and consulting firm. Before
founding SSF Resources, Mr. Fishman had served for six years as Chairman and
Chief Executive Officer of Pamida Holdings Corporation, a general merchandise
discount retail chain of 230 stores located in small towns, which was acquired
by Shopko in 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill will no longer
be amortized but will be subject to annual impairment tests in accordance with
the Statements. Other intangible assets will continue to be amortized over their
useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of fiscal 2002.
Application of the nonamortization provisions of the Statement is expected to
result in an increase in net income of $1.6 million per year. During 2002, the
Company will perform the required tests under the new rules and therefore has
not yet determined what the effect of these tests will be on the earnings and
financial position of the Company.
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SAFE HARBOR STATEMENT under the Private Securities Litigation Reform Act of
1995: Except for the historical information contained herein, the matters
discussed in this Annual Report are forward-looking statements that involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes that would require disclosure
since January 28, 2001.
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Part II - OTHER INFORMATION
ITEM 1. LITIGATION AND LEGAL PROCEEDINGS UNDER CHAPTER 11
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 cases.
Since the filing of Chapter 11 on February 19, 2001 the Company sought
court approval for extending the Exclusive Proposal Period from June 19, 2001
through October 19, 2001 and the Exclusive Solicitation Period from August 18,
2001 through December 18, 2001. Section 1121(b) of the Bankruptcy Code provides
for an initial period of 120 days after the commencement of a Chapter 11 case
during which a debtor has the exclusive right to propose and file a plan of
reorganization. The Court approved the extension to October 19, 2001 and the
Exclusive Solicitation Period through December 18, 2001. The Company anticipates
requesting an additional 120-day extension and plans to file a reorganization
plan within that extended period.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.9 Certificate of the Secretary dated June 20, 2001 for
Board Approval of a salary supplement for the
Co-CEO's and modification of the Severance Policy for
the Co-CEO's (Filed herewith)
10.10 Key Employee Retention and Incentive Program dated
June 7, 2001 (Filed herewith)
10.11 Frank's Nursery & Crafts, Inc. Severance Plan
(Filed herewith)
B. Reports on Form 8-K
During the quarter and through the date of this Report, the
Registrant filed no reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANK'S NURSERY & CRAFTS, INC.
By: /s/ Adam Szopinski
------------------------------
Adam Szopinski
Co-Chief Executive Officer,
Chief Operating Officer and
President
By: /s/ Larry T. Lakin
------------------------------
Larry T. Lakin
Co-Chief Executive Officer,
Vice Chairman,
Chief Financial Officer and
Treasurer
Dated: September 26, 2001
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBITS
----------- -----------------------
10.9 Certificate of the Secretary dated June 20, 2001 for
Board Approval of a salary supplement for the Co-CEO's
and modification of the Severance Policy for the
Co-CEO's (Filed herewith)
10.10 Key Employee Retention and Incentive Program dated
June 7, 2001 (Filed herewith)
10.11 Frank's Nursery & Crafts, Inc. Severance Plan (Filed
herewith)