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 November 4, 2001
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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 __________
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 December 19, 2001 held by FNC Holdings
Inc. There is no public trading market for the outstanding shares.
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 Forty Weeks Ended
------------------------ ------------------------
NOVEMBER 4, November 5, NOVEMBER 4, November 5,
2001 2000 2001 2000
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(DEBTOR-IN- (DEBTOR-IN-
POSSESSION) POSSESSION)
NET SALES $ 45,704 $ 58,506 $ 285,543 $ 328,426
OPERATING COSTS AND EXPENSES:
Cost of sales, including
buying and occupancy and
reserves (1) 50,503 50,266 233,143 236,608
Selling, general and
administrative 20,823 26,151 85,189 100,341
Amortization of goodwill 369 563 1,263 1,875
Reorganization, restructuring
and other related charges 5,112 12,093
Other (income) expense (70) (126) (411) (325)
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Total operating costs and
expenses 76,737 76,854 331,277 338,499
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LOSS FROM OPERATIONS (31,033) (18,348) (45,734) (10,073)
INTEREST AND DEBT EXPENSE 2,084 5,859 8,701 18,067
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LOSS BEFORE INCOME TAX BENEFIT
AND EXTRAORDINARY LOSS (33,117) (24,207) (54,435) (28,140)
INCOME TAX BENEFIT (949)
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LOSS FROM OPERATIONS BEFORE
EXTRAORDINARY LOSS (33,117) (24,207) (54,435) (27,191)
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT 4,230
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NET LOSS $ (33,117) $ (24,207) $ (58,665) $ (27,191)
========= ========= ========= =========
(1) The twelve and forty weeks ended November 4, 2001 include a $9.5 million
charge for an inventory clearance reserve. Refer to notes to financial
statements.
See notes to financial statements.
-2-
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
NOVEMBER 4, November 5, January 28,
2001 2000 2001
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(UNAUDITED) (Unaudited)
(DEBTOR-IN-
POSSESSION)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,580 $ 10,118 $ 10,607
Marketable securities 1,184 1,939 1,812
Accounts receivable 1,144 889 1,712
Merchandise inventory 74,778 125,889 73,125
Assets to be disposed of 11,398 33,500
Prepaid expenses and other
current assets 6,497 5,822 4,551
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Total current assets 98,581 144,657 125,307
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PROPERTY, PLANT AND EQUIPMENT, NET 110,216 222,064 129,863
GOODWILL, LESS ACCUMULATED
AMORTIZATION OF $1,229,
$6,888 AND $7,451 14,751 90,754 16,600
OTHER ASSETS AND DEFERRED CHARGES 11,219 14,470 14,251
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$ 234,767 $ 471,945 $ 286,021
========= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
(DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Accounts payable $ 17,678 $ 46,832 $ 32,606
Accounts payable - prepetition 32,560
Accrued expenses 31,157 32,095 39,417
Accrued expense payables - prepetition 19,588
Notes payable to banks 51,592 77,000 47,352
Current portion of long-term debt 23,587 8,840 46,575
Subordinated debt 115,000 115,000
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Total current liabilities 291,162 164,767 280,950
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LONG-TERM DEBT:
Senior debt 4,113 44,435 5,383
Subordinated debt 115,000
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Total long-term debt 4,113 159,435 5,383
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OTHER LIABILITIES AND DEFERRED CREDITS 4,097 12,146 5,627
SHAREHOLDER'S EQUITY (DEFICIENCY IN ASSETS):
Common stock $1.00 par value,
1,000 shares authorized,
1,000 shares issued and outstanding 1 1 1
Capital in excess of par value 165,999 165,999 165,999
Net parent investment 16,176 16,614 16,177
Retained deficit (246,781) (47,017) (188,116)
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Total shareholder's equity
(Deficiency in assets) (64,605) 135,597 (5,939)
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$ 234,767 $ 471,945 $ 286,021
========= ========= =========
See notes to financial statements.
-3-
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Forty Weeks Ended
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NOVEMBER 4, November 5,
2001 2000
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(DEBTOR-IN-
POSSESSION)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (58,665) $ (27,191)
Adjustments to reconcile net loss to
net cash provided by operations:
Depreciation 12,829 14,183
Amortization 2,758 2,954
Noncash portion of reorganization, restructuring
and other related charges 7,336
Inventory clearance reserve 9,545
Debt issue costs (extraordinary loss) 3,458
Other, net (2,036) (18)
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(24,775) (10,072)
Changes in operating assets and liabilities:
Marketable securities (88) (93)
Accounts receivable 568 1,052
Inventory (11,198) (25,066)
Prepaid expenses (2,006) 1,438
Accounts payable 17,632 31,834
Accrued expenses 13,432 (8,854)
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Net cash used in operations (6,435) (9,761)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,850) (15,797)
Proceeds from asset sales 18,306
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Net cash provided by (used in) investing
activities 16,456 (15,797)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in net parent investment (1) 14,962
Increase in notes payable to banks, net 4,240 15,000
Payment of long-term debt and capital lease
obligations (21,287) (3,141)
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Net cash provided by (used in)
financing activities (17,048) 26,821
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,027) 1,263
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,607 8,855
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,580 $ 10,118
========= =========
See notes to financial statements.
-4-
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 was owned and 11 were leased. All the stores were closed as of
the end of September, 2001.
The reorganization/restructuring charge of $12.1 million includes a
2001 third quarter charge of $4 million representing the revaluation
of the estimated net selling price (fair value) of the remaining 14
properties classified as assets to be disposed of and losses on
properties that sold below their estimated net selling price
originally established at January 28, 2001. Charges related to the
store closings, discussed above, include $.3 million for termination
and severance payments and $3.2 million for the write-off of the
remaining fixed assets, capital lease debt and related goodwill. Also
included are bankruptcy related costs (primarily professional fees)
of $3.8 million and $1.7 million under a court approved retention
program, offset by $.9 million of leasehold interest sales.
-5-
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 2: REORGANIZATION, RESTRUCTURING AND OTHER RELATED CHARGES
(CONTINUED)
During the third quarter the Company assessed its inventory position
and decided to dispose of certain discontinued inventory primarily in
the floral, home decor and Christmas Trim-a-Tree product lines to
improve the Company's cash flow and return on investment. The
clearance sale for the liquidation of this merchandise will be
conducted during the fourth quarter. As the result of this decision
the Company recorded a charge of $9.5 million to write-down the
inventory to net realizable value ("inventory clearance reserve").
This charge is included in cost of sales, including buying and
occupancy, in the accompanying statements of operations. In addition,
cost of sales for the 2001 forty weeks includes a lower of cost or
market reserve of $1.6 million for the inventory liquidation of the
12 stores that was completed during the third quarter.
NOTE 3: STORE CLOSINGS
Subsequent to November 4, 2001 the Company obtained bankruptcy court
approval to conduct the liquidation of an additional twelve stores of
which two are owned and ten are leased. The liquidation will be
completed by a third party and is expected to be completed in the
early part of fiscal 2002. A write-down of the inventory will be
booked in the fourth quarter of fiscal 2001. The inventory value of
these twelve stores at November 4, 2001 is approximately $5.3
million.
NOTE 4: DEBT
At November 4, 2001 the Company had a $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 minimum interest rate is 7%. The Company had
borrowings outstanding under the DIP Financing Agreement of $51.6
million at November 4, 2001.
-6-
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 4: DEBT (CONTINUED)
The DIP Financing Agreement requires the Company to maintain certain
financial ratios. The Company was in compliance with all of its
covenants under the DIP Financing Agreement at November 4, 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 third quarter and forty weeks was $4.8 million
and $16.9 million, respectively.
NOTE 5: EXTRAORDINARY LOSS
On February 21, 2001 the initial borrowings under the DIP Financing
Agreement described above in Note 4 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 forty weeks,
primarily for the write-off of debt issue costs.
NOTE 6: NET PARENT INVESTMENT
The Cypress Group LLC ("Cypress") contributed $15 million in the 2000
forty weeks 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.
NOTE 7: INCOME TAXES
Income taxes for the fiscal 2000 forty weeks 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 November 4, 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 net losses, no income tax provision has been provided for the
twelve and forty weeks of fiscal 2001 and 2000.
-7-
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 8: 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 9: 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
obtained 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. Subsequent to November 4, 2001 the court approved an
additional 120-day extension of the Exclusive Proposal Period to
February 18, 2002 and the Exclusive Solicitation Period through April
17, 2002. The Company anticipates filing a reorganization plan with
the court within this period.
-8-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third quarter of 2001 compared with third quarter of 2000
Results of operations
Net Sales
NET SALES were $45.7 million for the twelve week 2001 third quarter which
ended November 4, 2001 compared with $58.5 million in the 2000 third quarter
which ended November 5, 2000. Total net sales decreased 21.9% for the quarter
due primarily to prior year sales at stores which have subsequently been closed.
Comparable store sales for the third quarter increased .1%.
Earnings
COST OF SALES, INCLUDING BUYING AND OCCUPANCY EXPENSES, were $50.5 million
in the 2001 third quarter compared to $50.3 million in the 2000 third quarter.
During the third quarter the Company assessed its inventory position and decided
to dispose of certain discontinued inventory primarily in the floral, home decor
and Christmas Trim-a-Tree product lines to improve the Company's cash flow and
return on investment. The clearance sale to liquidate this inventory will be
conducted during the fourth quarter. As a result of this decision the Company
recorded a charge to cost of sales for $9.5 million to write-down the inventory
to net realizable value ("inventory clearance reserve"). Cost of sales, as a
percentage of net sales, was 89.6% excluding the $9.5 million inventory
clearance reserve, in the 2001 third quarter compared to 85.9% in the 2000 third
quarter. Merchandise margins, excluding the inventory clearance reserve declined
by 4.8 percentage points primarily due to inventory clearance activities in the
last period of the 2001 third quarter. Buying and occupancy costs decreased by
approximately 24.7% due principally to reduced occupancy costs from the 2000 and
2001 store closure programs resulting in a 1.1 percentage point decrease in
buying and occupancy costs as a percentage of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in the 2001 third quarter were
$20.8 million compared to $26.2 million in the 2000 third quarter. This decrease
of $5.4 million or 20.6% 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 .9 percentage points to
45.6% in the 2001 third quarter compared to 44.7% in the 2000 third quarter.
-9-
OPERATING LOSS (DEFINED AS "NET SALES LESS COST OF SALES, INCLUDING BUYING
AND OCCUPANCY COSTS, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES") for the
2001 third quarter was $25.6 million, an increase of $7.7 million, compared to
$17.9 million for the 2000 third quarter. The increased operating loss was
primarily the result of the inventory clearance reserve charge of $9.5 million
offset in part by reduced operating losses of $2.8 million for stores in the
store closure programs (defined in the forty weeks results of operations).
Excluding the impact of the store closure programs and the inventory clearance
reserve charge, the operating loss increased by $1 million due to lower gross
margins. The operating loss, as a percentage of net sales, was 56.1% for the
2001 third quarter, an increase of 25.5 percentage points compared to 30.6% for
the 2000 third quarter.
REORGANIZATION/RESTRUCTURING CHARGE of $5.1 million primarily relates to a
$4 million charge representing the revaluation of the estimated net selling
price of the remaining 14 properties classified as assets to be disposed of and
losses on properties that sold below their originally estimated net selling
price established at January 28, 2001. The remaining charge of $1.1 is for
bankruptcy related costs, primarily professional fees.
OTHER INCOME (EXPENSE) was $70,000 for the 2001 third quarter compared with
$126,000 for the 2000 third quarter.
INTEREST AND DEBT EXPENSE was $2.1 million for the 2001 third quarter
compared with $5.9 million for the 2000 third quarter. Lower interest for the
2001 third quarter relates to no interest being accrued for the subordinated
notes since the Chapter 11 filing in accordance with AICPA Statement of Position
90-7 (refer to the interest and debt section of the results of operations for
the forty weeks). Contractual interest for the 2001 third quarter was $4.8
million.
INCOME TAXES. Due to net losses no income tax provision has been provided
for in the third quarters of 2001 and 2000.
-10-
Forty weeks of 2001 compared with the forty weeks of 2000
Results of operations
Net Sales
NET SALES were $285.5 million for the first forty weeks of 2001 ("2001")
which ended November 4, 2001 compared with $328.4 million for the first forty
weeks of 2000 ("2000") which ended on November 5, 2000. Total net sales
decreased 13.1%. Comparable store sales for the forty weeks increased .4%.
Excluding the first eight weeks of the first quarter, which were negatively
impacted by the Chapter 11 filing on February 19, 2001, net sales for the 183
comparable store base, described below, increased 4%.
In early 2001 the Company identified 22 leased stores for closure (the
"2001 store closure program"). These stores were closed as of the end of June,
2001. An additional 12 stores were closed as of the end of October, 2001 and
become part of the 2001 store closure program. In addition to the 78 stores
closed the Company opened one new store in Richmond, Virginia and closed three
stores bringing the operating store base to 183 stores.
Earnings
COST OF SALES, INCLUDING BUYING AND OCCUPANCY EXPENSES, were $233.1 million
in 2001 compared to $236.6 million in 2000. Included in 2001 are lower of cost
or market reserves of $9.5 million for the inventory clearance reserve and $1.6
million for the inventory liquidation of the 12 stores completed in the 2001
third quarter. Cost of sales, as a percentage of net sales, increased to 81.6%
in 2001 compared to 72% in 2000, an increase of 9.6 percentage points. This
increase was due in part to the inventory clearance reserve which accounted for
approximately 34% of the increase, or 3.3 percentage points. Merchandise
margins, excluding the inventory clearance reserve, declined by 6.1 percentage
points due to the liquidation sales for the 2001 store closure programs (which
accounted for approximately 2 percentage points) and increased promotional
activity due to the competitive lawn and garden market. Buying and occupancy
costs decreased by approximately 11.9% due principally to reduced occupancy
costs from the 2000 store closure program. This cost decrease offset by the
13.1% sales decrease results in a .2 percentage point increase in buying and
occupancy costs as a percentage of sales.
-11-
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in 2001 were $85.2 million
compared to $100.3 million in 2000. This decrease of $15.1 million or 15.1% 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 .8 of a percentage point to 29.8%
in 2001 compared to 30.6% in 2000.
OPERATING LOSS (DEFINED AS "NET SALES LESS COST OF SALES, INCLUDING BUYING
AND OCCUPANCY COSTS, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES") for 2001
was $32.8 million, an increase of $24.3 million, compared to $8.5 million for
2000. The increase in the operating loss was primarily the result of the
liquidation of the stores under the 2001 store closure program and expenses
incurred to complete the liquidation of the 2000 store closure program in 2001
compared to the operating loss generated by these stores during 2000, as well as
the inventory clearance reserve of $9.5 million. The operating loss, as a
percentage of net sales was 11.5% for 2001, an increase of 8.9 percentage points
from the 2.6% for 2000. Excluding the impact of the 2000 and 2001 store closure
programs and the inventory clearance reserve, the operating loss for 2001 was
$13.3 million compared with $6.7 million in 2000. The increase of $6.6 million
was due to the lower merchandise margins as explained above.
REORGANIZATION/RESTRUCTURING CHARGE of $12.1 million includes a 2001 third
quarter charge of $4 million representing the revaluation of the estimated net
selling price of the remaining 14 properties classified as assets to be disposed
of and losses on properties that sold below their estimated net selling price
originally established at January 28, 2001. Charges related to the store
closings, include $.3 million for termination and severance payments and $3.2
million for the write-off of the remaining fixed assets, capital lease debt and
related goodwill, offset by $.9 million of leasehold interest sales. Also
included are bankruptcy related costs, primarily professional fees, of $3.8
million and $1.7 million under a court approved retention program.
OTHER INCOME (EXPENSE) was $.4 million for 2001 compared with $.3 million
for 2000.
INTEREST AND DEBT EXPENSE was $8.7 million for 2001 compared with $18.1
million for 2000. Lower interest for 2001 relates to no interest being accrued
for the subordinated notes since the Chapter 11 filing. 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
2001 was $16.9 million.
-12-
INCOME TAXES for 2000 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
November 4, 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 net losses no income tax provision has been provided
for in 2001 and 2000.
EXTRAORDINARY LOSS for 2001 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 and paid by the DIP financer under the DIP Financing Agreement was $62.1
million.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Net cash used in operations in 2001 was $6.4 million
compared to $9.8 million in 2000 due primarily to the increase in accrued
expense compared to the prior year offset by the lower level of earnings for
2001. The increase in accrued expense is due primarily to the Chapter 11 filings
that resulted in prepetition amounts of $19.6 million.
INVESTING ACTIVITIES. Net cash provided by investing activities in 2001 was
$16.5 million, due to the net proceeds of $18.3 million received from the sale
of 19 of the 33 owned properties from the 2000 store closure program that were
recorded as assets held for disposal at January 28, 2001. In addition there was
$1.9 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. Capital expenditures were $15.8 million in 2000 primarily for
new store openings and the new POS system.
FINANCING ACTIVITIES. Net cash used in financing activities in 2001 was $17
million which related primarily to the reduction in bank debt and the payment of
mortgage debt from the proceeds of asset sales discussed above.
Cypress contributed $15 million in 2000 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.
At November 4, 2001 the Company had a $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.
-13-
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 minimum interest
rate is 7%. The Company had borrowings outstanding under the DIP Financing
Agreement of $51.6 million at November 4, 2001. The DIP Financing Agreement
requires the Company to maintain certain financial ratios. The Company was in
compliance with all of its covenants under the DIP Financing Agreement at
November 4, 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
November 4, 2001 was $194.3 million including borrowings under the DIP Financing
Agreement, mortgages, capital leases and subordinated notes. Cash and cash
equivalents were $3.6 million at November 4, 2001.
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
$1.3 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.
Subsequent to November 4, 2001 the Company obtained bankruptcy court
approval to conduct the liquidation of an additional twelve stores of which two
are owned and ten are leased. The liquidation will be completed by a third party
and is expected to be completed in the early part of fiscal 2002. A write-down
of the inventory will be booked in the fourth quarter of fiscal 2000. The
inventory value of these twelve stores at November 4, 2001 is approximately $5.3
million.
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.
-14-
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.
-15-
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 obtained
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. Subsequent to November 4, 2001 the court approved an additional
120-day extension of the Exclusive Proposal Period to February 18, 2002 and the
Exclusive Solicitation Period through April 17, 2002. The Company anticipates
filing a reorganization plan with the court within this period.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.12 Employment Agreement dated as of September 25,
2001 by and between the Company and Steven S.
Fishman (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.
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANK'S NURSERY & CRAFTS, INC.
By: /s/ Steven S. Fishman
------------------------------
Steven S. Fishman
Chief Executive Officer
By: /s/ Larry T. Lakin
------------------------------
Larry T. Lakin
Vice Chairman,
Chief Financial Officer and
Treasurer
Dated: December 19, 2001
-17-
EXHIBIT INDEX
Exhibit
Number Description
10.12 Employment Agreement dated as of September 25, 2001 by
and between the Company and Steven S. Fishman (Filed
herewith)