As filed with the Securities and Exchange Commission on January 24, 2003
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FRANK'S NURSERY & CRAFTS, INC.
----------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 47-0863558
- ----------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
580 KIRTS BLVD., SUITE 300
TROY, MICHIGAN 48084
- -------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 712-7000
Securities to be registered pursuant to Section 12(b) of the Act: NONE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
--------------------------------------------
(Title of class)
TABLE OF CONTENTS
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Page
Number
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Item 1. Business 1
Item 2. Financial Information 6
Item 2A. Quantitative and Qualitative Disclosures About Market Risk 20
Item 3. Properties 20
Item 4. Security Ownership of Certain Beneficial Owners and 22
Management
Item 5. Directors and Executive Officers 23
Item 6. Executive Compensation 25
Item 7. Certain Relationships and Related Transactions 28
Item 8. Legal Proceedings 31
Item 9. Market Price of and Dividends on the Registrant's 31
Common Equity and Related Stockholder Matters
Item 10. Recent Sales of Unregistered Securities 32
Item 11. Description of Registrant's Securities to be Registered 33
Item 12. Indemnification of Directors and Officers 35
Item 13. Financial Statements and Supplementary Data 36
Item 14. Changes in and Disagreements with Accountants on 37
Accounting and Financial Disclosure
Item 15. Financial Statements and Exhibits 38
INDEX TO FINANCIAL STATEMENTS F-1
EXHIBIT INDEX X-1
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ii
In conjunction with its plan of reorganization (as discussed in Item 1
below), on May 20, 2002, Frank's Nursery & Crafts, Inc., a Michigan corporation,
merged into its parent, FNC Holdings Inc., a New York corporation. On the merger
date, the surviving corporation changed its name to Frank's Nursery & Crafts,
Inc. and was reincorporated in Delaware. Depending upon the context and the
period being referenced, references to the "Company" or "Frank's" in this Form
10 refer to Frank's Nursery & Crafts, Inc., a Delaware corporation, and/or its
predecessors.
References in this Form 10 to a particular year are to the Company's
fiscal year, which is the 52 or 53 -week period ending on the last Sunday in
January of the following year (e.g., a reference to "2001" is a reference to the
fiscal year ended January 27, 2002).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This filing contains certain forward-looking statements, which reflect
management's current views of future events and financial performance. These
forward-looking statements are based on many assumptions and factors detailed in
the Company's filings with the Securities and Exchange Commission, including the
ability of the Company to maintain normal trade terms with vendors, the ability
of the Company to comply with the various covenant requirements contained in its
financing agreements, customer demand, fashion trends, competitive market
forces, the effect of competitive products and pricing, customer acceptance of
the Company's merchandise mix and retail locations, weather, risks associated
with foreign global sourcing, including political instability and changes in
import regulations, 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 1. BUSINESS
OVERVIEW
Frank's operates the nation's largest chain of lawn and garden
specialty retail stores. Frank's also is a retailer of Christmas trim-a-tree
merchandise, artificial flowers and arrangements, garden decor and home
decorative products. The Company operates 170 retail stores in 14 states,
primarily in the eastern, middle-Atlantic and midwestern regions of the United
States, under the name Frank's Nursery & Crafts.
Frank's was incorporated under the laws of the State of Delaware in
April 2002 and is the successor of Frank's Nursery & Crafts, Inc., a Michigan
corporation which was incorporated in 1957. The Company operates entirely in one
industry segment, the lawn and garden retail industry, as defined below. The
Company's principal executive offices are located at 580 Kirts Boulevard, Suite
300, Troy, Michigan 48084, and its telephone number is (248) 712-7000.
FNC Holdings, Inc. (formerly known as General Host Corporation)
acquired the Company in 1983 with the objective of developing the first national
chain of lawn and garden
1
stores. At the time of the acquisition, Frank's had 95 stores, located
principally in the midwestern United States. In December 1997, FNC Holdings was
acquired by The Cypress Group LLC, and a new senior management team was put in
place with the strategic objective of positioning Frank's as the leading
specialty retailer in the lawn and garden arena. Since 1997, management
repositioned the Company's merchandising strategy and concentrated on three
major sectors: lawn and garden, floral and home decor and Christmas trim-a-tree.
Merchandising lines such as pet foods and general and juvenile crafts, among
others, which had been a part of Frank's range prior to the acquisition, were
completely phased out. By the end of 2000, Frank's operated a total of 262
stores.
During 2000, many factors contributed to a decline in the Company's
sales levels and a deterioration in the Company's financial condition. In early
2001, notwithstanding excess borrowing availability under the Company's credit
facilities, the Company was unable to draw down sufficient funding to meet its
working capital needs because its lenders asserted that various conditions to
borrowing had not been met. Also, in the relatively short period since access to
its credit facilities had been curtailed, the Company was not able to secure
additional funding to meet those working capital needs. Ultimately, the Company
determined the most appropriate method to obtain such financing and achieve its
restructuring objectives was through bankruptcy proceedings, and in February
2001, the Company filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code in U.S. Bankruptcy Court.
Following the bankruptcy filing, management undertook numerous actions
to improve the Company's operations, including the closing of under-performing
stores, the sale of real property and the reduction in the Company's overhead
expenses. On May 20, 2002, the plan of reorganization became effective, and the
Company emerged from the bankruptcy proceedings. As a result of the plan of
reorganization, certain indebtedness was cancelled in exchange for cash and
shares of the Company's common stock, certain executory contracts and leases
were rejected and warrants to acquire the Company's common stock were issued to
certain of the Company's lenders and their affiliates and the Company's former
stockholders.
An initial distribution of cash and shares of the Company's common
stock was made to creditors on September 12, 2002, and subsequent distributions
were made on September 30, 2002 and December 19, 2002. A number of claims
against the Company remain in the process of being resolved, and additional cash
and shares will be issued to creditors upon resolution of such claims. Pursuant
to the plan of reorganization, a total of 20,000,000 shares of the Company's
common stock will be distributed to the Company's former creditors. A total of
13,346,642 shares have been distributed to date to creditors whose claims have
been resolved, and all of the remaining 6,653,358 shares will be distributed
either to creditors whose claims are yet to be resolved or to creditors who have
already been issued shares.
THE LAWN AND GARDEN INDUSTRY
The overall retail market for lawn and garden products, defined to
include green goods for both outdoor and indoor usage, fertilizers, gardening
accessories, lawn and patio furniture, Christmas trim-a-tree merchandise and
snow removal, power equipment, barbecues and watering accessories, was estimated
at $88.4 billion in 2001 and grew 4.5% from an estimated $84.6
2
billion in 2000, according to Nursery Retailer magazine. During the 10-year
period from 1992 through 2001, the lawn and garden industry grew at an average
annual growth rate of approximately 6%. Among other factors, the Company
believes that the principal reasons for this sustained growth were the
popularity of gardening as a leisure activity, new home construction and
favorable demographic trends such as the aging of the baby-boomer population.
The lawn and garden market is highly seasonal, with the spring season
accounting for the majority of annual product sales. The market for green goods
is generally non-branded and highly differentiated by both specimen and quality,
while the market for hard goods, fertilizers and chemicals is composed of both
national and private label brands. At the retail level, the lawn and garden
market is highly fragmented and consists of national and regional chains of
specialty retailers, mass merchants and home centers, as well as thousands of
local, independent garden centers and nurseries. With the exception of the
garden center and nursery segment, few retailers operate their lawn and garden
centers on a year round basis or as full line lawn and garden retailers. The
Company believes that the primary competitive factors in lawn and garden
retailing include breadth of product assortment, product quality, price and
knowledgeable service. The Company believes that it competes effectively in
these areas, as well as others, and that its competence in the retailing of lawn
and garden products will enable it to gain market share in the future by
increased penetration of its existing markets.
COMPANY STRATEGY
As part of the emergence from bankruptcy, the Company is instituting
new merchandising and marketing strategies to position itself as a convenience
nursery, home decor and seasonal retailer. Initiatives are in place for
improvements in store and product presentation, merchandise mix, marketing and
overall operations. Ongoing cost reductions, inventory management efforts and
vendor quality programs will continue to be a high priority for the Company and
will be critical to its success.
The Company's core strategy centers on the lawn and garden market,
where the Company intends to enhance its leadership position within the
specialty retailing segment of that market. The Company's objective is to
provide gardening enthusiasts and home owners with the broadest assortment of
quality plants, growing products, specialty tools and gardening accessories at
competitive prices backed by knowledgeable service. In the live goods area, the
Company deals with a number of different vendors for the same product in
different areas of the county. As a result, the quality of the Company's live
product varies from location to location. In order to provide live product of
consistently high quality, the Company has instituted a quality assurance
program with its vendors.
The Company's home decor product line focuses on frames and framed art,
wicker, accent furniture, silk greenery and scented product. The Company's
pricing strategy focuses both on high and low price points, and the Company
promotes its home decor products in conjunction with other products to increase
multiple sales.
The Company's Christmas trim-a-tree selection is aimed at providing its
customers with the broadest assortment of quality artificial trees, wreaths,
tree decorations, lights and holiday
3
decor and serving as a one-stop shopping destination for these holiday-related
purchases. Frank's plans to broaden its product selection in this area.
The Company utilizes extensive marketing and advertising efforts to
communicate with its customers. Key advertising and promotional programs
instituted in 2002 included improvements in the quality of media with
illustrations of products with greater impact and color assortments; a new
in-store sign package and targeted print mailings and media that focuses on the
Company's neighborhood presence.
PRODUCT CATEGORIES
The principal products sold at the Company's retail stores are as
follows:
Percentage of Total Sales
-------------------------
Product Line 2001 2000 1999 Description
- ------------ ---- ---- ---- -----------
Lawn and garden 70% 67% 64% Annual and perennial flowering plants
(including poinsettias), trees (including
live Christmas trees), shrubs, mulches,
fertilizers, roses, potted plants, seeds
and bulbs, plant accessories, hoses and
garden tools and equipment, bird houses,
feeders, seed and accessories
Floral and Home Decor 17 19 21 Dried, silk and acrylic flowers,
arrangements, candles, picture frames,
frame art, garden decor items and
decorative home accessories; also
includes craft items which have been
discontinued
Christmas 13 14 15 Artificial Christmas trees, indoor and
-- -- -- outdoor lights, decorations and trimmings
100% 100% 100%
==== ==== ====
LAWN AND GARDEN. The Company offers customers one of the widest
selections of live plants in the industry. The Company believes that its
reputation for a broad selection and high quality of live goods is the principal
reason that draws customers to its stores. This strength allows the Company to
offer a wide assortment of other lawn and garden products, including
fertilizers, mulches, garden tools, planting accessories, decorative planters
and other related merchandise. In addition, the Company markets its own line of
private label lawn and garden products.
Lawn and garden sales are highest in the spring, with the largest
impact being in the first fiscal quarter and the early part of the second fiscal
quarter, then declining during middle and late summer. There is an early fall
sales season in these products which is less significant than the spring sales
season. In the winter months, sales of lawn and garden products are minimal and
limited essentially to live Christmas trees, poinsettias and indoor plants.
FLORAL AND HOME DECOR. The Company's floral and home decor products
include a varied assortment of dried, silk and acrylic flowers for the
do-it-yourself decorator, as well as
4
complete floral arrangements. The Company also offers a broad assortment of
decorative candles, picture frames, framed art and accent pieces for the home or
patio. The Company intends to enhance the quality of products selected for this
category and expand the fast growing garden decor area. The Company also intends
to support this product category with advertising in order to make consumers
aware of Frank's improved product selection and presentation.
Floral and home decor sales are steady throughout the year and are
stimulated by early spring, fall and late winter promotions. During the winter
months (outside of the Christmas season), this category constitutes a large
portion of the Company's sales.
CHRISTMAS. During the Christmas holiday season, the Company's second
most important selling season after spring, the Company transforms substantial
portions of its stores into Christmas trim-a-tree layouts and offers a broad
selection of seasonal merchandise and Christmas decoration for the holiday
season. The Company provides a large selection of artificial trees, indoor and
outdoor lights, wreaths and holiday plants, as well as a wide array of
trim-a-tree items. Christmas merchandise is sold almost entirely in November and
December.
SEASONALITY
The Company's business is highly seasonal and very susceptible to the
impact of weather conditions which may affect consumer purchasing patterns. In
2001, 46% of the Company's sales occurred during the spring season (late March
to mid-June) and 23% occurred during the Christmas season (November to late
December). Normally, spring is the most profitable season, and Christmas is the
next most profitable season. Operating losses usually are experienced during the
other periods of the year. The Company's slowest selling seasons are typically
the period from January until the start of the spring selling season and from
mid-July to October.
VENDORS
Substantially all of the plants and products the Company sells are
purchased from approximately 800 outside vendors. Alternative sources of supply
are generally available for each of the products sold by the Company.
STORES
The Company currently operates 170 stores in 14 states, primarily in
the eastern, middle-Atlantic and midwestern regions of the United States. The
Company's stores are generally located on three-acre sites. A typical store
includes 18,500 square feet of indoor space (16,000 square feet of sales area
and 2,500 square feet of storage area), 17,000 square feet of outdoor selling
area and ample onsite parking. The stores are designed in a "supermarket" format
familiar to customers, and shopping is done with carts in wide aisles with
attractive displays. Traffic design is intended to enhance the opportunity for
impulse purchases. Most stores are free-standing and located adjacent to or near
shopping centers, while some stores are part of strip shopping centers.
5
The real estate cost of opening new stores varies by location and is
dependent upon the method of financing. Such financing methods include
build-to-suit leases, conversion of existing buildings and land purchases with
construction funded by the Company. These costs range from approximately
$500,000 per store for build-to-suit leases to a range of $3.0 to 3.5 million,
including the purchase of land, per store for stores owned by the Company. New
stores are financed via build-to-suit operating leases whenever possible. The
Company does not anticipate opening any new stores in 2003.
STORE OPERATIONS
The Company's stores are normally open 84 hours per week during the
spring and Christmas season, with the average store opening at 8 a.m. and
closing at 9 p.m. During other times of the year, the average store is open from
10:00 a.m. until 8:00 p.m.
The average store has approximately 15 to 20 part and full-time
employees, including a store manager, an assistant manager and up to four
department specialists responsible for the various product lines. During
seasonal peak selling periods, the permanent store staff is generally
supplemented with temporary employees.
EMPLOYEES
At December 20, 2002, the Company's employee base was approximately
4,500 including seasonal employees. The Company's entire employee base is
non-union, and management considers its employee relations to be good.
DISTRIBUTION
The Company operates distribution centers in Harrisburg, Pennsylvania
and Howe, Indiana. These centers delivered approximately 52% of all merchandise
to the Company's stores in 2001, primarily using contract carriers. The balance
of the products were delivered directly to stores by vendors.
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following sets forth selected financial data for the periods
indicated. The selected financial data for 1997 through 2001 should be read in
conjunction with the Company's audited financial statements included herein for
1999 through 2001. Because of the acquisition of the Company by its former
owners on December 24, 1997, the summary financial data for fiscal 1997
represents the operations data for the forty-eight week period prior to the
acquisition and the four-week period subsequent to the acquisition. The selected
financial data for the twenty-four weeks ended November 3, 2002, the sixteen
weeks ended May 19, 2002, and the forty weeks ended November 4, 2001 should be
read in conjunction with the Company's unaudited financial statements and notes
included herein for such periods and includes all adjustments that
6
are necessary for a fair presentation of the results of the interim periods.
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. All dollar amounts are stated in thousands.
The Company's plan of reorganization was confirmed by the bankruptcy
court on May 7, 2002 and was consummated on May 20, 2002. With the change in
ownership resulting from the plan of reorganization, the Company has adopted
fresh-start reporting in accordance with the recommended accounting principles
for entities emerging from Chapter 11 bankruptcy set forth in the American
Institute of Certified Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").
The adjustments to reflect the consummation of the plan of reorganization,
including the gain on discharge of pre-petition liabilities and the adjustments
to record assets and liabilities at their fair values, have been reflected in
the accompanying financial data for the sixteen weeks ended May 19, 2002. For
financial reporting purposes, references to "Predecessor" refer to the Company's
predecessors on and prior to May 20, 2002, and references to "Successor" refer
to the Company on and after May 20, 2002, after giving effect to the
implementation of fresh start reporting. Accordingly, the financial data for the
sixteen weeks ended May 19, 2002 (Predecessor) and the twenty-four weeks ended
November 3, 2002 (Successor) are not prepared on a basis comparable to the prior
periods presented.
Fiscal Years
-------------------------------------------------------
Twenty-four Forty
Weeks Ended Sixteen Weeks Weeks Ended
November 3, Ended May 19, November 4,
2002 2002 2001 2001 2000 1999 1998
(Successor) (Predecessor) (Predecessor) (Predecessor) (Predecessor) (Predecessor) (Predecessor)
----------- ------------- ------------- ------------- ------------- ------------- -------------
Net Sales $128,682 $110,992 $285,543 $371,417 $436,947 $487,332 $512,101
Reorganization,
restructuring
and other
related charges 1,397 21,839 12,093 40,887 127,047 0 0
Net income (loss) (13,168) 158,281 (58,665) (91,996) (168,290) (9,296) 2,374
Balance Sheet Data:
Total assets 133,737 187,081 234,767 165,313 286,021 449,633 433,263
Total debt,
including 60,047 155,084 194,292 166,832 214,310 233,416 194,695
current portion
Shareholder's
equity
(deficiency in 12,952 (123,553) (64,605) (97,995) (5,939) 147,826 151,063
assets)
Four Weeks Forty-Eight
Ended Weeks Ended
January 25, December 28,
1998 1997
(Predecessor) (Predecessor)
------------- -------------
Net Sales $14,814 $515,204
Reorganization,
restructuring
and other
related charges 0 0
Net income (loss) (12,904) (18,465)
Balance Sheet Data:
Total assets 433,679 469,998
Total debt,
including 178,969 169,067
current portion
Shareholder's
equity
(deficiency in 152,403 166,441
assets)
7
PRO FORMA OPERATING RESULTS
The following unaudited pro forma statement of operations reflects the
financial results of the Company for the forty weeks ended November 3, 2002, the
forty weeks ended November 4, 2001 and the year ended January 27, 2002 as if the
Company's plan of reorganization had been effective and the store closure
programs had been completed as of the beginning of 2001. All amounts are stated
in thousands, except for per share data.
For the Forty Weeks Ended November 3, 2002
---------------------------------------------------------------------------------------
Twenty-four Sixteen
Weeks Ended Weeks Ended
November 3, May 19,
2002 2002 Restructuring Closed Fresh-start Financing
(Successor) (Predecessor) Items Stores Adjustments Agreements Proforma
----------- ------------- ------------ --------- ------------- ---------- -----------
Net Sales $128,682 $110,992 $239,674 (1)
Operating costs and expenses:
Cost of sales, including buying and 99,221 80,756 (812) (5,419) 173,746 (1),(2)
Occupancy
Selling, general and administrative 38,015 31,490 (398) (982) 68,125 (1),(2)
Restructuring and other related 1,397 21,839 (23,236) 0 (1)
Charges
Amortization of goodwill 0
Other income (180) (118) (298)
---------- ------------- ------------ --------- ------------- ---------- -----------
138,453 133,967 (23,236) (1,210) (6,401) 0 241,573
---------- ------------- ------------ --------- ------------- ---------- -----------
Income (loss) from operations (9,771) (22,975) 23,236 1,210 6,401 0 (1,899)
Interest expense 3,397 2,583 (310) 5,670 (3)
---------- ------------- ------------ --------- ------------- ---------- -----------
Loss before reorganization items and (13,168) (25,558) 23,236 1,210 6,401 310 (7,569)
income taxes
---------- ------------- ------------ --------- ------------- ---------- -----------
Reorganization items:
Gain on cancellation of 184,954 (184,954) 0 (1)
pre-petition
liabilities
Fresh start adjustments 324 (324) 0 (1)
Extinguishment of debt (1,439) 1,439 0 (1)
---------- ------------- ------------ --------- ------------- ---------- -----------
Total reorganization items 183,839 (183,839) 0 0 0 0
---------- ------------- ------------ --------- ------------- ---------- -----------
Income tax expense 0
---------- ------------- ------------ --------- ------------- ---------- -----------
Net income (loss) $(13,168) $158,281 ($160,603) $1,210 $6,401 $310 ($7,569)
========== ============= ============ ========= ============= ========== ===========
Basic and diluted loss per share ($0.38) (4)
Basic and diluted weighted average common
shares outstanding 20,000 (4)
(1) Reported results have been adjusted to eliminate the net expense resulting
from the Company's Chapter 11 bankruptcy proceedings, subsequent
reorganization efforts and store closures.
8
(2) To eliminate historical depreciation expense and record proforma
depreciation using the "fresh start" cost basis for property, equipment and
leasehold improvements. The Company estimates that annual depreciation
expense will be approximately $2.4 million on the "fresh-start cost" basis.
(3) To eliminate interest on the Company's debtor-in-possession credit facility
(the "DIP Facility") and related debt issue costs and record interest on
the Company's term loan with Kimco Capital Corp. (the "Term Loan") and the
Company's revolving credit facility with Congress Financial Corporation
(the "Revolving Facility") of $2.3 million plus amortization of new debt
issue costs related to the Term Loan and the Revolving Facility of $0.4
million and new amortization of $0.9 million for the warrants associated
with the Term Loan. Revolving Facility interest is based on fees associated
with outstanding letters of credit of $14 million and no outstanding
borrowings.
(4) Proforma weighted average common shares outstanding represents the shares
of new common stock issued under the reorganization plan.
For the Forty Weeks Ended November 4, 2001
---------------------------------------------------------------------------------
As Restructuring Closed Fresh-start Financing
Reported Items Stores Adjustments Agreements Proforma
------------ ------------ ------------ ----------------------------------------
Net Sales $285,543 (33,527) $252,016 (1)
Operating costs and expenses:
Cost of sales, including buying and 233,143 (44,577) (8,191) 180,375 (1),(2)
Occupancy
Selling, general and administrative 85,189 (9,865) (1,631) 73,693 (1),(2)
Restructuring and other related 12,093 (12,093) 0 (1)
Charges
Early extinguishment of debt 4,230 (4,230) 0 (3)
Amortization of goodwill 1,263 (1,263) 0 (4)
Other income (411) (411)
------------ ------------ ------------ ------------- ------------ ------------
335,507 (12,093) (54,442) (11,085) (4,230) 253,657
------------ ------------ ------------ ------------- ------------ ------------
Income (loss) from operations (49,964) 12,093 20,915 11,085 4,230 (1,641)
Interest expense 8,701 (2,338) 6,363 (3)
------------ ------------ ------------ ------------- ------------ ------------
Loss before reorganization items and (58,665) 12,093 20,915 11,085 6,568 (8,004)
Income taxes
------------ ------------ ------------ ------------- ------------ ------------
Income tax expense 0
------------ ------------ ------------ ------------- ------------ ------------
Net income (loss) ($58,665) $12,093 $20,915 $11,085 $6,568 ($8,004)
============ ============ ============ ============= ============ ============
Basic and diluted loss per share ($0.40) (5)
Basic and diluted weighted average common
Shares outstanding 20,000 (5)
(1) Reported results have been adjusted to eliminate the net expense resulting
from the Company's Chapter 11 bankruptcy proceedings, subsequent
reorganization efforts, store closures and related inventory reserves of
$9.5 million and $1.6 million that are included in cost of sales.
(2) To eliminate historical depreciation expense and record proforma
depreciation using the "fresh start" cost basis for property, equipment and
leasehold improvements. The Company estimates that annual depreciation
expense will be approximately $2.4 million on the "fresh-start cost" basis.
(3) To eliminate interest on the DIP Facility and related debt issue costs and
record interest on the Term Loan and the Revolving Facility of $2.3 million
plus amortization of new debt issue costs related to the Term Loan and
9
the Revolving Facility of $0.4 million and new amortization of $0.9 million
for the warrants associated with the Term Loan. Revolving Facility interest
is based on fees associated with outstanding letters of credit of $14
million and no outstanding borrowings. In addition, eliminates early
extinguishment of debt related to a credit facility that existed at the
petition date.
(4) To eliminate historical goodwill amortization that was written off as a
result of the Chapter 11 bankruptcy proceedings.
(5) Proforma weighted average common shares outstanding represents the shares
of new common stock issued under the reorganization plan.
For the Fiscal Year Ended January 27, 2002
---------------------------------------------------------------------------------
As Restructuring Closed Fresh-start Financing
Reported Items Stores Adjustments Agreements Proforma
------------ ------------ ------------ ----------------------------------------
Net Sales $371,417 (35,799) $335,618 (1)
Operating costs and expenses:
Cost of sales, including buying and 297,850 (45,582) (10,801) 241,467 (1),(2)
Occupancy
Selling, general and administrative 109,404 (10,380) (2,130) 96,894 (1),(2)
Restructuring and other related 40,887 (40,887) 0 (1)
Charges
Early extinguishment of debt 4,230 (4,230) 0 (3)
Amortization of goodwill 1,631 (1,631) 0 (4)
Other income (1,221) (1,221)
------------ ------------ ------------ ------------- ------------ ------------
452,781 (40,887) (55,962) (14,562) (4,230) 337,140
------------ ------------ ------------ ------------- ------------ ------------
Income (loss) from operations (81,364) 40,887 20,163 14,562 4,230 (1,522)
Interest expense 10,632 (2,477) 8,155 (3)
------------ ------------ ------------ ------------- ------------ ------------
Loss before reorganization items and (91,996) 40,887 20,163 14,562 6,707 (9,677)
Income taxes
------------ ------------ ------------ ------------- ------------ ------------
Income tax expense 0
------------ ------------ ------------ ------------- ------------ ------------
Net income (loss) ($91,996) $40,887 $20,163 $14,562 $6,707 ($9,677)
============ ============ ============ ============= ============ ============
Basic and diluted loss per share ($0.48) (5)
Basic and diluted weighted average common
Shares outstanding 20,000 (5)
(1) Reported results have been adjusted to eliminate the net expense resulting
from the Company's Chapter 11 proceedings, subsequent reorganization
efforts, store closures and related inventory reserves of $8.1 million and
$1.6 million that are included in cost of sales.
(2) To eliminate historical depreciation expense and record proforma
depreciation using the "fresh start" cost basis for property, equipment and
leasehold improvements. The Company estimates that annual depreciation
expense will be approximately $3 million on the "fresh-start cost" basis.
(3) To eliminate interest on the DIP Facility and related debt issue costs and
record interest on the Term Loan and Revolving Facility of $2.3 million
plus amortization of new debt issue costs related to the Term Loan and
Revolving Facility of $0.5 million and new amortization of $1.2 million for
the warrants associated with the
10
Term Loan. Revolving Facility interest is based on fees associated with
outstanding letters of credit of $14 million and no outstanding borrowings.
In addition, eliminates early extinguishment of debt related to a credit
facility that existed at the petition date.
(4) To eliminate historical goodwill amortization that was written off as a
result of the Chapter 11 bankruptcy proceedings.
(5) Proforma weighted average common shares outstanding represents the shares
of new common stock issued under the reorganization plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FRESH START REPORTING AND FACTORS AFFECTING COMPARABILITY OF FINANCIAL
INFORMATION
The Company emerged from Chapter 11 bankruptcy proceedings on May 20,
2002, which for financial reporting purposes, the Company deemed the effective
date of the plan of reorganization. Fresh start reporting has been implemented
as of May 20, 2002, and accordingly, at such date all assets and liabilities
were restated to reflect their respective fair values. See note 1 to the
unaudited financial statements included herein for a discussion of the fresh
start adjustments. For financial reporting purposes, references to "Predecessor"
refer to the Company's predecessors on and prior to May 20, 2002, and references
to "Successor" refer to the Company on and after May 20, 2002, after giving
effect to the implementation of fresh start reporting. Successor financial
statements are not comparable to Predecessor financial statements. However, for
year-to-date discussion of results of operations, the twenty-four weeks ended
November 3, 2002 (Successor) has been combined with the sixteen weeks ended May
19, 2002 (Predecessor) and compared with the forty weeks ended November 4, 2001
(Predecessor).
RESULTS OF OPERATIONS
FORTY WEEKS ENDED NOVEMBER 3, 2002 COMPARED TO FORTY WEEKS ENDED
NOVEMBER 4, 2001
The following table shows the combined 2002 periods in comparison to the
corresponding 2001 period (dollars in thousands):
11
Twenty-four Sixteen Weeks Forty Weeks Ended
Weeks Ended Ended ----------------------------------
November 3, May 19, November 3, November 4,
2002 2002 2002 2001
(Successor) (Predecessor) (Combined) (Predecessor)
--------------- ---------------- --------------- ---------------
Net sales $ 128,682 $ 110,992 $ 239,674 $ 285,543
Operating costs and expenses:
Cost of sales, including buying and occupancy 99,221 80,756 179,977 233,143
Selling general and administrative 38,015 31,490 69,505 85,189
Restructuring and other related charges 1,397 21,839 23,236 12,093
Early extinguishment of debt (1) 4,230
Amortization of goodwill 1,263
Other income (180) (118) (298) (411)
Total operating costs and expenses 138,453 133,967 272,420 335,507
Loss from operations (9,771) (22,975) (32,746) (49,964)
Interest expense 3,397 2,583 5,980 8,701
Reorganization income 183,839 183,839
Income taxes
--------------- ---------------- --------------- ---------------
Net income (loss) $ (13,168) $ 158,281 $ 145,113 $ (58,665)
=============== ================ =============== ===============
(1) Represents a reclassification in accordance with SFAS No. 145
that was previously reported as an extraordinary loss.
NET SALES. Net sales for the forty weeks ended November 3, 2002 (the
first three quarters of 2002) were $239.7 million, a decrease of $45.8 million
or 16% compared with the forty weeks ended November 4, 2001 (the first three
quarters of 2001). Comparative store sales decreased 4% for the first three
quarters of 2002. Unfavorable weather patterns in virtually all markets where
the Company operates negatively impacted the lawn and garden sales for the first
quarter of 2002 thus contributing to the net sales decrease for the first three
quarters of 2002. Net sales for first three quarters of 2001 included sales
related to the store closure programs of $36 million.
COST OF SALES, INCLUDING BUYING AND OCCUPANCY. Cost of sales were $180
million for the first three quarters of 2002 compared with $233.1 million for
the first three quarters of 2001. During the third quarter of 2001, the Company
recorded a charge of $9.5 million for a lower of cost or market reserve for
inventory designated as clearance product in the floral, home decor and
Christmas trim-a-tree product lines (an "inventory clearance reserve"). Cost of
sales, as a percentage of net sales, was 75.1% in the first three quarters of
2002 compared with 78.3% in the first three quarters of 2001, excluding the $9.5
million inventory clearance reserve. On a comparative base (the current 170
stores), cost of sales for the first three quarters of 2001 would have been
74.8% of net sales. The merchandise margin decline for the first three quarters
of 2002 is primarily due to increased promotional activity of crafts as the
Company exited certain categories. This decline was partially offset by higher
margins in the new home decor lines. The first three quarters of 2001 also
included a $1.6 million lower of cost or market reserve for the inventory
liquidation of 12 stores closed in 2001 and the $9.5 million inventory clearance
reserve.
12
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses
for the first three quarters of 2002 were $69.5 million compared with $85.2
million for the first three quarters of 2001. As a percentage of net sales, SG&A
expenses were 29% for the first three quarters of 2002 compared with 29.8% for
the first three quarters of 2001. On a comparative base, SG&A expenses would
have been 30.3% of net sales for the first three quarters of 2001. This decline
was due primarily to lower store expenses resulting from the lower store base
and lower corporate expenses.
RESTRUCTURING AND OTHER RELATED CHARGES. The charge for the first three
quarters of 2002 was $23.2 million compared with $12.1 million for the first
three quarters of 2001. The charge for the first three quarters of 2002 included
the following: $15.5 million for costs of lease rejections; $2 million for
additional pre-petition claim payments; $2.6 million for professional fees; $1.8
million for severance and employee retention plans approved by the bankruptcy
court while under Chapter 11 bankruptcy; $1.1 million for costs of mortgage debt
to be refinanced and $0.2 million for miscellaneous items. The $15.5 million
liability for the costs of rejected store leases represented an estimate of the
maximum claim allowed under bankruptcy law. In accordance with the plan of
reorganization, these claims were treated as general unsecured claims and
resulted in a cancellation of debt and recognized as a reorganization item. The
$1.1 million liability for costs of mortgage debt represented an estimate to
properly state the pre-petition long-term debt in accordance with the plan of
reorganization. The charge for the first three quarters of 2001 includes $4
million for the revaluation of the estimated net selling price of the 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 included $0.3 million for termination and
severance payments for the store closure programs and $3.2 million for the
write-off of the remaining assets, related goodwill, and capital lease debt
related to the store closure programs, offset by $0.9 million of leasehold
interest sales. Also included are professional fees of $3.8 million and $1.7
million under a key employee retention program.
EARLY EXTINGUISHMENT OF DEBT. The early extinguishment of debt for the
first three quarters of 2001 primarily represented the write-off of debt issue
costs in connection with the retirement of an outstanding credit facility
utilizing proceeds from the debtor-in-possession credit facility at the petition
date.
INTEREST EXPENSE. Interest expense for the first three quarters of 2002
was $6 million compared with $8.7 million for the first three quarters of 2001.
Lower interest for the first three quarters of 2002 in part related to the
discontinuance of an interest accrual for the senior subordinated notes
following the pre-petition date and lower levels of outstanding borrowing in the
first three quarters of 2002.
REORGANIZATION ITEMS. A gain of $183.8 million was recognized for the
first three quarters of 2002. The gain was due to the cancellation of
pre-petition liabilities upon emergence ($184.9 million), the fresh start
accounting adjustments ($0.3 million), offset by a loss from the extinguishment
of debt ($1.4 million).
13
INCOME TAXES. No income tax benefit was recognized for the net loss
before reorganization items for the first three quarters of 2002. Instead, the
increase in net deferred tax assets as a result of the loss was offset by an
equal increase in the valuation allowance. In addition, no income tax expense or
benefit was recognized on the reorganization items. The items of income and
expense included in the reorganization income are non-taxable and
non-deductible, respectively.
2001 COMPARED TO 2000
NET SALES. Sales were $371 million for 2001 compared to $437 million
for 2000, a decrease of 15%. Comparable store sales increased 0.3%. Sales for
the 170 comparable store base (described below) increased 0.9%. Excluding the
first eight weeks of the first quarter, which were negatively impacted by the
Chapter 11 reorganization, net sales for the 170 comparable store base,
increased 3%.
The comparable store base results from the 2001 store closing program,
as discussed in note 3 of the audited financial statements included herein,
which closed 22 stores as of the end of June 2001, 12 stores as of the end of
October 2001 and an additional 12 stores in March 2002. In addition to the 46
stores closed, the Company closed one store as a result of lease expiration,
bringing the operating store base to 170 stores.
COST OF SALES INCLUDING BUYING AND OCCUPANCY. Cost of sales including
buying and occupancy expenses were $297.9 million in 2001 compared to $317.1
million in 2000. This reduction of $19.2 million amounted to a 6% decrease. Cost
of sales, as a percentage of net sales, increased by 7 percentage points to 80%
in 2001 compared to 73% in 2000. Included in the costs were $4.1 million in 2001
and $3.2 million in 2000 for the loss on inventory liquidated under the store
closure programs as discussed in note 3 to the audited financial statements
included herein. In addition, 2001 includes a charge of $8.1 million to
write-down inventory designated as clearance product primarily in the floral,
home decor and Christmas trim-a-tree product lines to net realizable value.
Merchandise margins, excluding charges for inventory liquidation losses and the
inventory clearance reserve, declined by 5 percentage points due to increased
promotional activity resulting from the competitive lawn and garden market as
well as a very competitive Christmas season and the impact of inventory
clearance activity. This decline includes 1 percentage point of margin loss
related to the 22 stores liquidated by the Company. Buying and occupancy costs
decreased by approximately 14% or $10.3 million due principally to reduced
occupancy costs from the 2001 program. This cost decrease and the 15% sales
decline contributed to a 2% increase in buying and occupancy costs as a
percentage of sales.
SELLING, GENERAL & ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for 2001 was $109.4 million compared to $136.7 million in
2000. The decline of $27.3 million results from lower store expense due to the
reduced store base and reduced advertising and corporate expenses. As a
percentage of net sales, selling, general and administrative expenses decreased
by 1 percentage points to 30% in 2001 compared to 31% in 2000.
OPERATING LOSS. Operating loss (defined as net sales less cost of sales
including buying and occupancy costs, and selling, general and administrative
expenses) for 2001 was $35.8
14
million compared to $16.9 million in 2000. The increased operating loss was
primarily the result of the liquidation of the stores under the 2001 store
closing program and expenses incurred to complete the liquidation of the 2000
store closing program in 2001 compared to the operating loss generated by these
stores during 2000, as well as the loss on inventory liquidated under the 2001
store closing program. The operating loss, as a percentage of net sales, was 10%
for 2001, an increase of 6 percentage points from 4% for 2000. Excluding the
impact of the 2001 and 2000 store closing programs and the inventory reserves in
2001 and 2000, the operating loss for 2001 was $14.1 million compared with $11.8
million for 2000. The increase of $2.3 million was due to the lower merchandise
margins as explained above.
REORGANIZATION, RESTRUCTURING AND OTHER RELATED CHARGES. The net charge
was $40.9 million in 2001 compared with $127 million in 2000. The charge for
2001 resulting from the Chapter 11 reorganization, asset impairment analysis and
store closures is as follows:
Write-down of goodwill $14.4
Write-down of fixed assets 15.2
Store closure program (see above) 2.6
Bankruptcy related costs 8.7
-----
Total $40.9
=====
Bankruptcy related costs for 2001 include $4.6 million for professional
fees, $3.2 million for severance and employee retention plans approved by the
bankruptcy court under the Chapter 11 reorganization and $0.9 million for
miscellaneous items.
EARLY EXTINGUISHMENT OF DEBT. For 2001 consists primarily of 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 retired
and associated fees paid under the debtor in possession credit facility was
$62.1 million.
INTEREST AND DEBT EXPENSE. Interest and debt expense was $10.6 million
in 2001 compared with $23.9 million in 2000. Lower interest in 2001 relates to
the discontinuance of an interest accrual for the senior subordinated notes
since the prepetition date. In accordance with AICPA Statement of Position 90-7,
no interest is accrued if it is probable the interest will not be an allowed
claim. Contractual interest for 2001 was $21.5 million.
INCOME TAXES. For 2000 income taxes 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 its valuation
allowance by $0.9 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 January 27, 2002, the Company's remaining net deferred tax asset
position is fully offset with a valuation allowance, due to the Company's
historical operating results. Due to the previously unrecognized tax benefits,
no income tax provision has been provided for in 2001 and 2000.
15
2000 COMPARED TO 1999
NET SALES. Sales were $437 million for 2000 compared to $487.3 million
for 1999, a decrease of 10%. Comparable store sales declined 11%. Comparative
store net sales were negatively impacted by lower lawn and garden sales
resulting from unfavorable weather patterns in virtually all markets where the
Company operates with the midwest and northeast especially adversely affected.
In addition, Christmas trim-a-tree sales declined as a result of general
softness in retail during that period, and craft sales decreased due to a lower
number of customers resulting from the lawn and garden and Christmas factors
explained above.
COST OF SALES INCLUDING BUYING AND OCCUPANCY. Cost of sales including
buying and occupancy expenses were $317.1 million in 2000 compared to $337.2
million in 1999. This reduction of $20.1 million amounted to a 6% decrease. Cost
of sales, as a percentage of net sales, increased by 4 percentage points to 73%
in 2000 compared to 69% in 1999. Included in the 2000 costs was a $3.2 million
loss on the inventory liquidated under the 2000 Program as discussed in note 3
to the audited financial statements included herein. Buying and occupancy costs
increased by approximately 4% or $2.6 million due principally to increased
occupancy costs of $3.5 million for new stores opened during 1999 and 2000.
These cost increases and the 10% sales decline contributed to a 2% increase in
buying and occupancy costs as a percentage of sales. Overall merchandise margins
approximated the prior year.
SELLING, GENERAL & ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for 2000 was $136.7 million compared to $137.7 million in
1999. The decline of $1 million includes the effect of a $2.5 million increase
in payroll and other store expenses for new stores opened in 1999 and 2000. As a
percentage of net sales, selling, general and administrative expenses increased
by 3 percentage points to 31% in 2000 compared to 28% in 1999.
OPERATING INCOME (LOSS). Operating loss (defined as net sales less cost
of sales including buying and occupancy costs, and selling, general and
administrative expenses) for 2000 was $16.9 million compared to operating income
of $12.5 million in 1999. The increased operating loss was primarily the result
of decreased sales levels and the loss on the inventory liquidated under the
2000 store closing program, as explained above. The operating loss, as a
percentage of net sales, was (4)% for 2000, an increase of 7 percentage points
from 3% for 1999.
REORGANIZATION, RESTRUCTURING AND OTHER RELATED CHARGES. As a result of
the Company's operating losses for 2000 and the Chapter 11 bankruptcy filings on
February 19, 2001, the Company performed an impairment analysis as required
under Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
The estimated fair value of the impaired assets was determined by comparing
expected future cash flows for each store to the combined net property, plant
and equipment and allocated goodwill. This analysis and the impact of the
Chapter 11 bankruptcy filings, in connection with which the Company rejected
store leases relating to a store closing provision from 1993 and 22 current
store leases, resulted in the Company recording a charge of $127 million for
2000. The charge consisted of $73.6 million for the write-down of goodwill,
$46.2 million for the write-down of fixed assets, $14 million for the 2000 store
closing program and $0.8 million for bankruptcy costs offset by $7.6 million for
the elimination of previously recorded store closing liabilities from 1993 as a
result of rejected store leases.
16
OTHER INCOME. Other income for 2000 was $1 million compared to $3.5
million in 1999 which included a gain of $2.1 million from the reversion of a
noncontributory, defined benefit pension plan which covered former employees of
several discontinued operations of the Company's predecessors.
INTEREST AND DEBT EXPENSE. Interest and debt expense was $23.9 million
in 2000, compared with $22.8 million in 1999. The increase is the result of a
higher level of outstanding borrowings and interest rates under the credit
facility during 2000.
INCOME TAXES. For 2000, income taxes represented a benefit resulting
from the realization of certain net operating losses for which a full valuation
allowance had been previously established. The Company reduced its valuation
allowance by $0.9 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 January 28, 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 the previously unrecognized tax benefits,
no income tax provision was made in 2000 and 1999.
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 facility is a $50 million, secured
revolving loan facility, which includes $25 million of availability for letters
of credit. The availability of borrowings under this facility generally is based
on a percentage of eligible accounts receivable, eligible inventory, and certain
other assets, subject to certain reserves.
The credit 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 at either the prime rate plus 0.25% or 0.50% or
a Eurodollar rate plus 2.75%, 3% or 3.25%. The 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 facility as of the end of the
initial term or any renewal term. The 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 2% of the amount of the maximum credit if
the facility is terminated in whole during the first year, 1% if terminated
during the second year, and 0.5% if terminated during the third year.
The credit 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, prepay
and refinance debt, and make certain changes in its business. As of November 3,
2002, there was $16.3 million outstanding under the facility in addition to
outstanding letters of credit which aggregated $11.4 million. Availability as of
November 3, 2002 was $13.5 million. For certain days during the third quarter of
2002, the Company was not in compliance with financial covenants in the facility
that required minimum levels of inventory and financial ratios.
17
The lender under the facility waived that non-compliance on December 17, 2002.
As a result of obtaining more favorable vendor terms than originally anticipated
and improved inventory management, the assumptions on which the financial
projections were based in determining the financial covenants for the facility
have changed. The Company is presently in negotiations with the lender to revise
certain financial ratios under the facility, but there is no assurance that the
Company will be able to obtain any such revisions. On November 3, 2002, the
Company was in compliance with the financial covenants of the facility.
TERM LOAN AND REVOLVING CREDIT FACILITY ARRANGED BY KIMCO CAPITAL CORP.
On the effective date of the plan of reorganization, Frank's also
entered into a credit facility arranged by Kimco Capital Corp., providing for a
$20 million term loan and $10 million of revolving loans. Frank's and Kimco
Capital Corp. amended the facility on January 23, 2003, providing for an
increase in the amount of revolving loans available under the credit facility to
$20 million. The credit facility is secured by certain of the Company's owned
and leased real property and a second lien on the Company's inventory. 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 credit
facility has been participated by Kimco Capital Corp. to Third Avenue Trust
and/or its designees. On November 3, 2002, $20 million was outstanding under the
term loan.
In connection with the facility, the Company issued warrants to the
participating lenders and their affiliates to purchase up to an aggregate of
5,869,565 shares of common stock at an exercise price of $1.15 per share,
subject to certain anti-dilution adjustments. In connection with the amendment
of the credit facility on January 23, 2003, the Company issued warrants to the
lenders and their affiliates to purchase up to 5,000,000 shares of common stock
at an exercise price of $2.00 per share, subject to certain anti-dilution
adjustments.
The credit 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.
ADEQUACY OF CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from
operations and borrowings under the two credit facilities. Based on current and
anticipated levels of operations, the Company's management believes that cash
flows from operations, together with amounts available under the Company's
credit facilities, will be adequate to meet the Company's anticipated cash
requirements, including debt service requirements and planned capital
expenditures.
The Company's most significant cash requirements are for merchandise
inventory, and these requirements fluctuate throughout the year due to the
seasonality of the business. Cash requirements increase substantially in August
and September in anticipation of the Christmas
18
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 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 $4 million for capital
expenditures for 2002, primarily for upgrades to the information technology
systems and for store remodeling. No store openings are planned for the
remainder of 2002.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Our significant accounting policies
and restructuring costs are discussed in notes 1 and 2 of the notes to the
audited financial statements included herein. Our critical accounting policies
are subject to judgments and uncertainties which affect the application of these
policies. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. On an on-going basis, the Company evaluates its estimates,
including those related to the valuation of inventory, deferred tax assets,
impairment of long-lived assets and restructuring costs. In the event estimates
or assumption prove to be different from actual amounts, adjustments are made in
the subsequent period to reflect more current information. The material
accounting policies that the Company believes are most critical to the
understanding of the Company's financial position and results of operation are
discussed below.
INVENTORY VALUATION. Inventories are valued at the lower of cost or
market; cost being determined under the first in, first out method. Calculations
of the carrying value of inventory are made on an item-by-item basis. The
Company annually reviews its inventory levels in order to identify obsolete,
slow-moving merchandise and uses merchandise markdowns to clear such merchandise
throughout the year. Where the markdown may result in an item being sold for
less than its cost the Company provides a reserve for the difference between the
cost and the expected selling price of all inventory items expected to be sold
below cost. Additionally, the Company reduces the ending inventory value for
estimated losses related to shrink. This estimate is determined based upon
analysis of historical shrink losses as well as the results of interim cycle
counts of seasonal inventory and its annual physical inventory.
19
DEFERRED INCOME TAXES AND VALUATION ALLOWANCE. Deferred income tax
assets and liabilities represent the future income tax effect of temporary
differences between the book and tax bases of the Company's assets and
liabilities, assuming they will be realized and settled at the amounts reported
in the Company's financial statements. The Company records a valuation allowance
to reduce its deferred tax assets to the amount that it believes is more likely
than not to be realized. This assessment includes consideration for the
scheduled reversal of temporary taxable differences, projected future taxable
income and tax planning strategies.
RESTRUCTURING COSTS. As a result of the bankruptcy proceedings, certain
estimates for pre petition claim payments, amounts for personal injury claims
and attorney fees have been recorded. Resolution of these claims can affect the
accuracy of the current estimates that could result in additional charges or
reversals of previously recorded estimates in future periods.
IMPAIRMENT OF LONG-LIVED ASSETS. It is the Company's policy to review
the long-lived assets annually or whenever events or circumstances indicate that
the carrying value of an asset may not be recoverable. As a result of the
bankruptcy proceedings and fresh-start accounting, the Company's long-lived
assets have been revalued in accordance with SOP 90-7. Assumptions and estimates
used in the evaluation of impairment, including current and future economic
trends for stores are subject to judgment and changes in the assumptions and
estimates may affect the carrying value of long-lived assets, and could result
in additional impairment charges in future periods.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company perceives its only market interest rate risk to be its
borrowings under the credit facility with Congress Financial. These borrowings
are at variable interest rates, and therefore, the related interest expense is
sensitive to changes in the general level of U.S. interest rates and the
Eurodollar rate. The Company had borrowings outstanding under the facility of
$16.3 million at November 3, 2002, with a current interest rate of 5 1/4%.
Interest under the credit facility with Kimco Capital of $20 million is fixed at
10 1/4% per annum.
ITEM 3. PROPERTIES
The Company's corporate headquarters are located in a 48,500 square
foot building leased by the Company in Troy, Michigan. The lease expires in
March 2007, and the Company has two five-year options to extend the term of the
lease.
The Company currently leases a 292,300 square foot distribution
facility in Harrisburg, Pennsylvania and a 346,515 square foot distribution
facility in Howe, Indiana. The lease on the Harrisburg facility expires in March
2003 with four one-year renewal options, and the lease on the Howe facility
expires in June 2010 with one five-year renewal option.
20
The Company operates 170 stores, 108 of which are leased and 62 of
which are owned. The stores are located in 14 states, as follows:
State Number of Stores
----- ----------------
Michigan...................................33
Illinois...................................27
Pennsylvania...............................16
Ohio.......................................15
New York...................................15
Minnesota..................................13
New Jersey.................................13
Indiana....................................11
Maryland...................................10
Connecticut.................................7
Virginia....................................3
Missouri....................................3
Florida.....................................2
Kentucky....................................2
-
Total.....................................170
===
Of the 62 properties owned by the Company, 22 are mortgaged pursuant to
mortgage notes having an aggregate balance of $24.1 million at November 3, 2002.
See note 2 to the unaudited financial statements included herein. The Company's
interest in the remaining owned properties and all of the leased properties is
pledged as collateral for the Company's credit facility with Kimco Capital
Corp., as described above under "Item 2. Financial Information - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Term Loan and Revolving Credit Facility with
Kimco Capital Corp."
21
ITEM 4. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as to the beneficial
ownership of Common Stock as of January 23, 2003 by (1) any person or entity
which is known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (2) each director and each executive officer
named in the Summary Compensation Table below and (3) all directors and
executive officers as a group. Except as indicated in the footnotes to this
table, the Company believes that the persons or entities named in the table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them.
PERCENTAGE OF
NUMBER OF SHARES SHARES OF
NAME OF BENEFICIAL OWNER OF COMMON STOCK COMMON STOCK
- ------------------------ --------------- ------------
GREATER THAN 5% STOCKHOLDERS:
Kimco Realty Services, Inc. (1) 13,713,921 60.3
3333 New Hyde Park Road
New Hyde Park, New York 11042
Third Avenue Management LLC (2) 3,368,652 22.7
767 Third Avenue, 5th Floor
New York, New York 10017
RCG Carpathia Master Fund, Ltd. 1,733,891 13.0
666 Third Avenue, 26th Floor
New York, New York 10028
Cypress Merchant Banking Partners L.P. and 908,000 6.4
Cypress Garden Ltd. (3)
c/o The Cypress Group LLC
65 East 55th Street, 19th Floor
New York, New York 10022
J. P. Morgan 821,461 6.2
14201 Dallas Parkway
Dallas, Texas 75254
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Steven S. Fishman (4) 913,058 6.4
Adam F. Szopinski 0 0
Larry T. Lakin (5) 0 0
Joseph R. Baczko (6) 5,044 *
William C. Boyd (7) 0 0
Aaron J. Fleishaker (8) 0 0
Gerald Hellerman 0 0
Joseph Nusim (9) 25,000 *
David M. Samber (10) 0 0
All executive officers and directors as a group 25,000 *
(9 persons) (11)
22
- ------------------
* Less than 1%
(1) Includes warrants to acquire 9,402,174 shares of the Company's common
stock.
(2) Includes 1,794,506 shares of the Company's common stock held by Third
Avenue Value Fund, 106,755 shares of the Company's common stock held by
Third Avenue Real Estate Value Fund and warrants to acquire 1,467,391
shares of the Company's common stock issued to Third Avenue Trust.
(3) Includes warrants to acquire 908,000 shares of the Company's common
stock.
(4) Includes options to acquire 913,058 shares of the Company's common
stock. Mr. Fishman resigned from the Company effective November 27,
2002.
(5) Mr. Lakin resigned from the Company effective June 2002.
(6) Includes warrants to acquire 5,044 shares of the Company's common
stock. Mr. Baczko resigned from the Company effective June 30, 2001.
(7) Mr. Boyd resigned from the Company effective June 2000.
(8) Does not include any shares beneficially owned by Kimco Realty
Services, Inc. or its affiliates. Mr. Fleishaker is an Executive Vice
President of Kimco Realty Corporation, the parent company of Kimco
Realty Services, Inc.
(9) Includes options to acquire 25,000 shares of the Company's common
stock.
(10) Does not include any shares beneficially owned by Kimco Realty
Services, Inc. or its affiliates. Mr. Samber is the Chief Executive
Officer of Kimco Select Investments, an affiliate of Kimco Realty
Services, Inc.
(11) Does not include any shares held by former executive officers of the
Company.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the persons
serving as the directors and executive officers of the Company. Each director
holds office until the next annual meeting of the Company's stockholders and
until his successor is elected and qualified, or until the earlier of the
director's death, resignation or removal.
NAME AGE POSITION
- ---- --- --------
Adam F. Szopinski 57 President and Chief Operating Officer
Kim Horner 40 Senior Vice President, Merchandising and Marketing
John A. Heidt 43 Vice President, Store Operations
Alan J. Minker 43 Senior Vice President, Chief Financial Officer and
Treasurer
Keith A. Oreson 46 Vice President, Human Resources
Aaron J. Fleishaker 42 Director
Gerald Hellerman 65 Director
Joseph Nusim 69 Director
David M. Samber 53 Director
ADAM F. SZOPINSKI is the President and Chief Operating Officer of the
Company and has served in such position since April 1999. Mr. Szopinski was
Executive Vice President, Chief Operating Officer and a director of the Company
from December 1997 to April 1999. Prior to joining the Company, Mr. Szopinski
was Vice President of Operations of Toys "R" Us International from 1989 until
1997.
23
KIM HORNER is the Senior Vice President, Merchandising and Marketing of
the Company and has served in such position since March 2002. Prior to joining
the Company, Ms. Horner was Senior Vice President, General Merchandise Manager
of Zany Brainy from February 1999 to March 2002 and Vice President, Divisional
Merchandise Manager and Assistant to the Chief Executive Officer of Pamida Inc.
from 1994 to 1996.
JOHN A. HEIDT is the Vice President, Store Operations of the Company
and has served in such position since January 1999. Prior to joining the
Company, Mr. Heidt was Regional Vice President of Lechters Housewares, Inc. from
1995 to 1999, after serving as Regional Manager and District Manager from 1992
to 1995.
ALAN J. MINKER is the Senior Vice President, Chief Financial Officer
and Treasurer of the Company and has served in such position since August 2002.
Prior to joining the Company, Mr. Minker was Chief Financial Officer and Vice
President of Finance and Human Resources of The Body Shop, Inc. - North America
from 1997 to 2002.
KEITH A. ORESON is the Vice President, Human Resources of the Company
and has served in such position since May 1998. Prior to joining the Company,
Mr. Oreson was Senior Vice President of Aramark Corporation from 1993 to 1997.
AARON J. FLEISHAKER has been a director of the Company since May 2002.
Mr. Fleishaker is Executive Vice President of Kimco Realty Corporation, an
affiliate of Kimco Realty Services, Inc. and Kimco Capital Corp., and has served
in such position since February 2002. From July 1991 to February 2002, Mr.
Fleishaker was Senior Vice President and General Counsel for Modell's Sporting
Goods.
GERALD HELLERMAN has been a director of the Company since May 2002. Mr.
Hellerman is the owner of Hellerman Associates, a financial and corporate
consulting firm he established in 1993. Mr. Hellerman is also a director of The
Mexico Equity and Income Fund, Inc. and Innovative Clinical Solutions, Ltd.
JOSEPH NUSIM has been a director of the Company since May 2002. Mr.
Nusim is the Chairman of the Nusim Group, a retail consulting firm, and has
served in such position since 1995. Mr. Nusim is Co-Chairman of the Board of
Directors of Loehmann's Holdings, Inc., Co-Chairman of the Board of Directors of
Woodworkers Warehouse, Inc. and a director of Odd Job Stores, Inc.
DAVID M. SAMBER has been a director of the Company since May 2002. Mr.
Samber is the Chief Executive Officer of Kimco Select Investments, an affiliate
of Kimco Realty Services, Inc. and Kimco Capital Corp., and has served in such
position since 1997.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE: Gerald Hellerman, Chairman
Aaron J. Fleishaker
David M. Samber
24
COMPENSATION COMMITTEE: David M. Samber, Chairman
Aaron J. Fleishaker
Joseph Nusim
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company pays its "outside" directors (i.e., directors who are not
employees of the Company or any firm that holds more than 1% of the total value
of the Company's securities and who themselves own less than 1% of the total
value of the Company's securities) an annual retainer of $12,000, plus $1,000
for each board meeting attended and $1,500 for each committee meeting attended.
Each outside director also received an initial grant of options to acquire
25,000 shares of the Company's common stock and will receive an additional grant
of options to acquire 5,000 shares in each subsequent year of service as a
director.
The Company reimburses each of its directors for normal and customary
expenses incurred as a result of travel to and from board meetings.
COMPENSATION OF EXECUTIVE OFFICERS
The following table summarizes, for the fiscal years indicated, the
compensation paid by the Company to two former Chief Executive Officers of the
Company, the three other highest compensated executive officers in 2001 and one
former executive officer in 1999 who, if he had been employed with the Company
on January 27, 2002, would have been included among the Company's highest paid
executive officers for 2001.
25
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OTHER ANNUAL ALL OTHER
- --------------------------- ----------- ------ ----- COMPENSATION (1) COMPENSATION (2)
------------- ------------
Steven S. Fishman
Former Chairman and 2001 $207,693 $200,000 (4) $ 18,775 $ 5,844
Chief Executive Officer (3)
Adam F. Szopinski 2001 350,766 (5) 0 56,535 29,414
President and 2000 300,000 0 49,328 11,254 (6)
Chief Operating Officer 1999 294,222 0 44,113 9,232 (6)
Larry T. Lakin 2001 350,766 (5) 0 45,877 27,713
Former Vice Chairman and 2000 300,000 0 46,933 12,165
Chief Financial Officer (7) 1999 294,222 0 46,973 7,702
Joseph R. Baczko 2001 276,450 666,370 (9) 37,139 20,440
Former Chairman and Chief 2000 575,000 0 52,714 11,710
Executive Officer (8) 1999 566,360 0 357,385 (10) 6,632
William C. Boyd
Former Executive Vice 1999 163,000 0 0 67
President(11)
- -----------
(1) Represents living expenses paid by the Company including the tax
effect.
(2) Amounts reflect premiums and claims paid by the Company for health and
life insurance coverage.
(3) Mr. Fishman resigned from the Company effective November 27, 2002.
(4) Reflects a sign-on bonus.
(5) Includes $50,000 as Co-Chief Executive Officer of the Company during
2001.
(6) Includes the Company match under the Company's 401(k) plan on behalf of
Mr. Szopinski of $3,461 for 2000 and $5,000 for 1999.
(7) Mr. Lakin resigned from the Company effective June 2002.
(8) Mr. Baczko resigned from the Company effective June 30, 2001.
(9) Amount shown reflects a prorated Key Employee Retention Program bonus
of $91,370 and $575,000 pursuant to the Company's Severance Plan.
(10) Of this amount, $294,770 represents relocation costs paid to Mr. Baczko
including the tax effect.
(11) Mr. Boyd resigned from the Company effective June 2000.
2002 STOCK OPTION PLAN
Pursuant to the plan of reorganization, the Company adopted its 2002
Stock Option Plan. The plan, which is administered by the Compensation Committee
of the Company's Board of Directors, allows for the issuance of stock options to
the Company's key employees and non-employee directors representing the right to
acquire up to an aggregate of 3,652,174 shares of the Company's common stock.
The committee has the discretion to determine which key employees and
non-employee directors receive options under the plan, the number of options
granted to such participants and the grant date, vesting schedule and the
expiration date of the options granted. The exercise price of the options
granted under the plan also will be determined by the committee but will be
26
not less than the fair market value of the underlying stock on the date of
grant, if the option is intended to qualify as performance-based compensation
under Section 162(m) of the Internal Revenue Code. In addition, any incentive
options granted to an owner of more than 10% of the Company's voting capital
stock will have an exercise price of not less than 110% of the fair market value
of the underlying stock on the date of the grant.
Options to acquire an aggregate of 2,476,117 shares of the Company's
common stock have been granted to date under the Company's 2002 Stock Option
Plan. See "Stock Option Grants" under Item 7 below.
EMPLOYMENT AGREEMENTS
On November 20, 2002, the Company entered into a Resignation and
Release with Steven S. Fishman, the Company's former Chairman and Chief
Executive Officer, providing for Mr. Fishman's resignation from his employment
with the Company and his membership on the Board of Directors of the Company.
Pursuant to the agreement, Mr. Fishman received a payment of $300,000 and will
continue to receive his base salary of $50,000 per month through December 2003,
and Mr. Fishman waived any rights under his employment agreement with the
Company dated September 25, 2001. The agreement also provides that any
unexercised stock options held by Mr. Fishman, to the extent vested on April 30,
2003, are exercisable only through July 29, 2003, and the remaining portion of
his options which would otherwise have vested on May 20, 2003 will not vest. In
addition, the Company will reimburse Mr. Fishman for relocation costs and
attorneys fees incurred by him in connection with his resignation, in each case
up to a maximum of $5,000.
The Company has entered into employment agreements with each of Adam F.
Szopinski, Alan J. Minker, Kim Horner and Keith A. Oreson. Each agreement has a
two-year term ending November 30, 2004. Under the agreements, the officers
receive a base salary and other benefits as generally provided to other
executive employees of the Company and are eligible to receive an annual bonus
and annual stock option grant to be determined by the Company. Upon termination
by the Company without cause, each officer is entitled under such agreements to
continue to receive his or her base salary during a severance period of the
longer of the remaining portion of the employment period (i.e., through November
30, 2004) or one year. In the agreements, each officer has agreed not to compete
with the Company during the period of his or her employment with the Company and
any severance period.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICIES
The Compensation Committee (the "Committee"), which is comprised of
three non-employee directors, is responsible for establishing the Company's
executive compensation policies, reviewing the compensation of officers and key
employees, recommending and approving changes in compensation and reviewing and
recommending changes in the Company's employee benefit programs.
27
In connection with its responsibility to guide the Company's policies,
plans and programs, the Committee approves the annual compensation of the
Company's executive officers and other key employees, which consists primarily
of base salaries, bonuses and stock options.
ELEMENTS OF EXECUTIVE OFFICER COMPENSATION
BASE SALARIES
The Company maintains salary ranges for its executive officers based on
the practices of other companies with revenues and operating characteristics
similar to those of the Company, geographic criteria and responsibility level.
Using the ranges as a guideline, the Company establishes salaries at levels
necessary to attract and retain talented executive officers and other key
employees.
The Committee's approval of salary increases for executive officers
depends on the Company's performance in the prior fiscal year, achievement of
non-financial objectives and overall personal performance.
BONUSES
The executive officers of the Company are eligible to receive bonus
payments based on the achievement of profit levels that are determinable at the
discretion of the Committee and personal performance. The Committee has the
authority to waive performance or profitability criteria under the program when
awarding salary increases or when granting bonuses.
STOCK OPTIONS
On an annual basis, the Committee reviews the performance of the senior
staff members and makes recommendations to the Company's Board of Directors
regarding the granting of stock options to the Company's executive officers.
Committee Members: David M. Samber, Chairman
Aaron J. Fleishaker
Joseph Nusim
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING AGREEMENT
The Company entered into a consulting agreement, dated December 1,
2002, with Joseph Nusim, a director of the Company, pursuant to which Mr. Nusim
provides consulting services to the Company with regard to the Company's
business strategies. The agreement provides for the consulting fee of $20,000
per month to be paid to Mr. Nusim for an initial period of one year or until the
Company hires a new Chief Executive Officer, whichever is sooner, and then for a
payment of a consulting fee of $8,000 per month for an additional one year
period. Pursuant to the agreement, Mr. Nusim also received an option to acquire
25,000 shares of the Company's
28
common stock at an exercise price of $1.65 per share. The option is exercisable
from the date of grant through December 5, 2012.
KIMCO/THIRD AVENUE CREDIT FACILITY
On May 20, 2002, pursuant to the plan of reorganization, the Company
entered into a $30 million, three year credit facility arranged by Kimco Capital
Corp. which provides the Company with a revolving loan of $10 million and a term
loan of $20 million. The Company and Kimco Capital Corp. amended the facility on
January 23, 2003, providing for an increase in the amount of revolving loans
available under the facility to $20 million. Borrowings under the credit
facility are secured by certain of the Company's owned and leased real
properties and a second lien on the Company's inventory and bear interest at a
rate of 10.25%. Kimco Capital Corp. is an affiliate of (i) Kimco Realty
Services, Inc. which, as of January 23, 2003, is the beneficial owner of 60.3%
of the Company's common stock, (ii) Kimco Select Investments, of which David M.
Samber, one of the Company's directors, is the Chief Executive Officer, and
(iii) Kimco Realty Corporation, of which Aaron J. Fleishaker, one of the
Company's directors, is an Executive Vice President. A portion of the credit
facility has been participated by Kimco Capital Corp. to Third Avenue Trust
and/or its designees, which, collectively with its affiliates, is the beneficial
owner of 22.7% of the Company's common stock as of January 23, 2003.
In connection with the credit facility and pursuant to the plan of
reorganization, the Company issued warrants to the participating lenders and
their affiliates to acquire an aggregate of 5,869,565 shares of the Company's
common stock at an exercise price of $1.15 per share. In connection with the
amendment of the credit facility on January 23, 2003, the Company issued
warrants to the lenders and their affiliates to acquire an additional 5,000,000
shares of common stock at an exercise price of $2.00 per share. The warrants may
be exercised in whole or in part at any time until the later of May 20, 2005 or
the repayment or termination of the credit facility. The exercise price of the
warrants is subject to certain adjustments in the event that the Company issues
any shares of its common stock or securities convertible into such shares at
below fair market value. The lenders may, at their option, apply any amounts due
by the Company under the credit facility to satisfy the exercise price for the
warrants or may require the Company to apply any amounts received from the
exercise of the warrants to repay any amounts due under the credit facility.
INVESTOR RIGHTS AGREEMENT
On May 20, 2002, the Company entered into an Investor Rights Agreement
with Kimco Realty Services, Inc., Third Avenue Trust and the other holders of
warrants to acquire common stock in the Company providing such warrant holders
with certain rights with regard to the registration of shares of the Company's
common stock held by them and with the rights to purchase their pro rata portion
(based on their ownership of the Company's common stock, determined on a fully
diluted basis) of shares of Common Stock or securities convertible into the
Company's common stock issued by the Company, subject to certain limited
exceptions. The Investor Rights Agreement terminates upon the sale of the
Company's assets or the acquisition of a majority of the voting securities of
the Company by a person or persons acting as a group.
29
KIMCO PURCHASE OF CREDITOR CLAIMS
In connection with the plan of reorganization, Kimco Capital Corp.
offered to purchase claims of the general unsecured creditors of the Company, at
a price of $0.10 per $1.00 of allowed claim, up to a total purchase price of $5
million, which had the effect of providing such creditors with an option to
receive a lump sum cash payment in consideration of their claims against the
Company. As a result, parties with claims against the Company elected to receive
an aggregate of approximately $2.3 million in lump such cash payments; however,
a number of these claims remain in the process of being resolved. As of December
31, 2002, Kimco Realty Services, Inc. has been issued an aggregate of 1,813,862
shares of the Company's common stock in return for funding of approximately $2.2
million in lump sum cash payments to the Company's creditors.
LEASE ARRANGEMENTS
Kimco Realty Corporation and its affiliates are the lessors of five of
the Company's retail stores and a common area relating to another of the
Company's retail stores. At December 31, 2002, leases between the Company and
Kimco Realty Corporation and its affiliates provided for aggregate monthly
rental payments by the Company of approximately $60,000.
STOCK OPTION GRANTS
On September 12, 2002, under the Company's 2002 Stock Option Plan, the
following executive officers and outside directors of the Company were granted
options to purchase shares of the Company's common stock, as follows:
NAME NUMBER OF SHARES
---- ----------------
Adam F. Szopinski 150,000
John Heidt 125,000
Keith A. Oreson 125,000
Kim Horner 100,000
Alan J. Minker 100,000
Gerald Hellerman 25,000
Joseph Nusim 25,000
These options have an exercise price of $1.15 per share and vest in three equal
annual installments beginning on May 20, 2003. These options expire on September
12, 2012.
In addition, on September 12, 2002, the Company granted Steven S.
Fishman, the Company's then-current Chairman and Chief Executive Officer,
options to purchase 1,826,117 shares of the Company's common stock under the
Company's 2002 Stock Option Plan. The options have an exercise price of $1.15
per share. These options were to have vested over two years, with 50% vested at
September 12, 2002 and the remaining 50% on May 20, 2003. Pursuant to the terms
of an agreement entered into on November 20, 2002 between the Company and Mr.
Fishman, the options that vested on September 12, 2002 are exercisable only
through July 29, 2003 and the remaining 50% will not vest.
30
ITEM 8. LEGAL PROCEEDINGS
See Items 1 and 2 above for information regarding the proceedings under
Chapter 11 of the U.S. Bankruptcy Code relating to the Company.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
While the Company's stock is currently being quoted on the
Over-the-Counter Bulletin Board under the symbol "FNCN", trading is sporadic and
there is no established public trading market for the Company's common stock.
The following table sets forth the high and low bid prices of the common stock
for the periods indicated, as reported on the Over-the-Counter Bulletin Board
beginning on September 9, 2002, the first day when shares of the Company's
common stock were quoted, through December 31, 2002. These quotations represent
prices between dealers and do not include retail mark-ups, mark-downs or other
fees or commissions and may not represent actual transactions.
BID PRICES
----------
FISCAL QUARTER HIGH LOW
- -------------- ---- ---
Third Fiscal Quarter - 2002
(September 9 through November 3, 2002) $2.95 $0.50
Fourth Fiscal Quarter - 2002
(November 4, 2002 through December 31, 2002) $1.45 $1.15
HOLDERS
As of January 23, 2003, 13,346,642 shares of the Company's common stock
were outstanding and held by 285 holders of record.
DIVIDENDS
The Company has not declared or paid any cash dividends on its common
stock and does not expect to pay cash dividends in the foreseeable future. The
Company anticipates that, for the foreseeable future, the Company's earnings
will be reinvested in the business and used to service indebtedness. The
declaration and payment of dividends by the Company are subject to the
discretion of the Company's Board of Directors. Absent waiver by the required
lenders, so long as any advance or obligation of the Company under its credit
facility with Congress Financial Corporation remains unpaid, the Company cannot
declare or pay any dividends.
31
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On May 20, 2002, under the plan of reorganization, the Company issued
warrants to acquire an aggregate of 913,044 shares of the Company's common stock
to the Company's former stockholders. The warrants may be exercised in whole or
in part at any time until May 20, 2006 at a price of $1.38 per share, subject to
certain adjustments in the event that the Company issues any shares of its
common stock or securities convertible into such shares at below fair market
value.
Also on May 20, 2002, under the plan, the Company issued warrants to
acquire an aggregate of 5,869,565 shares of the Company's common stock to
certain of the Company's lenders and their affiliates. These warrants may be
exercised in whole or in part at any time until the later of May 20, 2005 or the
repayment or termination of the related credit facility. The warrants can be
exercised at a price of $1.15 per share, subject to certain adjustments in the
event that the Company issues any shares of its common stock or securities
convertible into such shares at below fair market value.
On September 12, 2002, under the plan, the Company issued an aggregate
of 10,962,759 shares of its common stock to former creditors (including 894,615
shares of its common stock to Kimco Realty Services, Inc. with regard to claims
purchased by it from the Company's former creditors). On September 30, 2002,
under the plan, the Company issued an aggregate of 919,247 shares of its common
stock to Kimco Realty Services, Inc. with regard to claims purchased by it from
the Company's former creditors. On December 19, 2002, under the plan, the
Company issued an aggregate of 1,485,557 shares of its common stock to former
creditors.
The Company believes the offer and sale of the common stock and
warrants under the plan of reorganization satisfies the requirements under
Section 1145(a)(1) of the U.S. Bankruptcy Code and, therefore, are exempt from
registration under the Securities Act of 1933 and state securities laws.
On September 12, 2002, the Company granted options to purchase an
aggregate of 2,476,117 shares of the Company's common stock to executive
officers and outside directors of the Company pursuant to the Company's 2002
Stock Option Plan. The options have an exercise price of $1.15 per share and
were granted in two groupings. Of the first group of options for an aggregate of
1,826,117 shares, 50% vested on September 12, 2002 and the remaining 50% on May
20, 2003. Due to recent management changes, the options that vested on September
12, 2002 are exercisable through July 29, 2003, and the remaining 50% will not
vest. The second group of options for an aggregate of 650,000 shares vests in
three equal annual installments, beginning on May 20, 2003, and expires on
September 12, 2012.
On December 5, 2002, the Company granted an option to purchase 25,000
shares of its common stock at a price of $1.65 per share to a director pursuant
to a consulting arrangement. This option is exercisable from the date of grant
through December 5, 2012.
On January 23, 2003, the Company issued warrants to acquire an
aggregate of 5,000,000 shares of the Company's common stock to certain of the
Company's lenders and their affiliates.
32
These warrants may be exercised in whole or in part at any time until the later
of May 20, 2005 or the repayment or termination of the related credit facility.
The warrants can be exercised at a price of $2.00 per share, subject to certain
adjustments in the event that the Company issues any shares of its common stock
or securities convertible into such shares at below fair market value.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The Company is authorized to issue 50,000,000 shares of common stock,
par value $0.001 per share. As of January 23, 2003, 13,346,642 shares of common
stock were outstanding and 6,653,358 shares remained subject to issuance upon
resolutions of claims of unsecured creditors under the plan of reorganization.
The holders of the Company's common stock are entitled to one vote per
share upon each matter submitted to a vote at a meeting of stockholders. A
majority of the outstanding shares of common stock of the Company, represented
in person or by proxy, constitutes a quorum at a meeting of the stockholders.
When a quorum is present, action on a matter is approved by the affirmative vote
of a majority of the outstanding shares of common stock of the Company,
represented in person or by proxy.
Holders of the Company's common stock are entitled to receive ratable
dividends, if any, as may be declared from time to time by the Company's board
of directors out of funds legally available. In the event of liquidation,
dissolution or winding up of the Company, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of the holders of preferred stock, if any,
then outstanding. There are no redemption or sinking funds provisions applicable
to the common stock. Holders of shares of the Company's common stock do not have
any preemptive rights or conversion rights other than the preemptive rights
granted to certain holders of the Company's common stock and warrants as
discussed in Item 7 above. All outstanding shares of the Company's common stock
are fully paid and nonassessable.
The Company is authorized to issue 10,000,000 shares of preferred
stock, which shares may be issued from time to time in one or more classes which
shall have voting powers, preferences, rights, qualifications, limitations or
restrictions as designated by resolution of the Company's board of directors.
The issuance of preferred stock could have the effect of decreasing the market
price of the common stock and could adversely affect the voting and other rights
of the holders of common stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS AND
PROVISIONS OF DELAWARE LAW
A number of provisions in the Company's certificate of incorporation
and by-laws and Delaware law may make it more difficult to acquire control of
the Company by various means. These provisions could deprive the Company's
stockholders of opportunities to realize a premium on the shares of common stock
owned by them. In addition, these provisions may
33
adversely affect the prevailing market price of the common stock. These
provisions are intended to:
- enhance the likelihood of continuity and stability in the
composition of the Company's board and in the policies formulated
by the Company's board;
- discourage certain types of transactions which may involve an
actual or threatened change in control of the Company;
- discourage certain tactics that may be used in proxy fights;
- encourage persons seeking to acquire control of the Company to
consult first with the Company's board of directors to negotiate
the terms of any proposed business combination or offer; and
- reduce the Company's vulnerability to an unsolicited proposal for
a takeover that does not contemplate the acquisition of all of
its outstanding shares or that is otherwise unfair to its
stockholders.
SPECIAL MEETINGS OF STOCKHOLDERS. The Company's bylaws provides that
special meetings of its stockholders may be called only by the chairman of the
board or the president or by two members of the board of directors. This
limitation on the right of stockholders to call a special meeting could make it
more difficult for stockholders to initiate actions that are opposed by the
board of directors, the chairman of the board or the president. These actions
could include the removal of an incumbent director or the election of a
stockholder nominee as a director. They could also include the implementation of
a rule requiring stockholder ratification of specific defensive strategies that
have been adopted by the board of directors with respect to unsolicited takeover
bids. In addition, the limited ability of the stockholders to call a special
meeting of stockholders may make it more difficult to change the existing board
and management.
ISSUANCE OF PREFERRED STOCK. The ability of the Company's board of
directors to establish the rights and issue substantial amounts of preferred
stock without the need for stockholder approval, while providing desirable
flexibility in connection with possible acquisitions, financings and other
corporate transactions, may among other things, discourage, delay, defer or
prevent a change in control of the Company.
AUTHORIZED BUT UNISSUED SHARES OF COMMON STOCK. The authorized but
unissued shares of common stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a proxy
contest, tender offer, merger or otherwise.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. The Company must
comply with the provisions of Section 203 of the Delaware General Corporation
Law. In general, Section
34
203 prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes a merger, consolidation, sale or
other disposition of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation and some transactions that would increase
the interested stockholder's proportionate share ownership in the corporation.
An "interested stockholder" is a person who, together with affiliates and
associates, owns, or, in some cases, within three years prior, did own, 15% or
more of the corporation's voting stock. Under Section 203, a business
combination between the Company and an interested stockholder is prohibited
unless it satisfies one of the following three conditions:
- the Company's board of directors must have previously approved
either the business combination or the transaction that
resulted in the stockholder becoming an interested
stockholder;
- upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the Company's voting stock
outstanding at the time the transaction commenced, excluding,
for purposes of determining the number of shares outstanding,
shares owned by (1) persons who are directors and also
officers and (2) employee stock plans, in some instances; and
- the business combination is approved by a majority of the
Company's board of directors and authorized at an annual or
special meeting of the stockholders by the affirmative vote of
the holders of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Company
may indemnify its directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933. The
Company's certificate of incorporation requires it to indemnify its directors
and officers to the fullest extent permitted by law and require the Company to
advance litigation expenses upon its receipt of an undertaking by the director
or officer to repay such advances if it is ultimately determined that the
director or officer is not entitled to indemnification. The Company's
certificate of incorporation further provide that rights conferred under such
certificate do not exclude any other right such persons may have or acquire
under applicable law, the certificate or any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
The Company's certificate of incorporation, as amended, provides that,
pursuant to Delaware law, the Company's directors shall not be liable for
monetary damages for breach of
35
the directors' fiduciary duty of care to the Company and its stockholders. This
provision in the certificate of incorporation does not eliminate the duty of
care, and, in appropriate circumstances, equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company or its stockholders, for acts
or omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
Under the Company's director's and officer's liability insurance
policy, the Company's directors and officers are insured against the cost of
defense, settlement or payment of a judgment under circumstances stated in the
policy.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Financial Statements and Schedules" included on page F-1.
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited financial data for
each fiscal quarter of 2002, 2001 and 2000. No earnings (loss) per share is
shown for the Predecessor quarters as there was no common stock issued and
outstanding. All dollar amounts are stated in thousands, except per share data.
FIRST SECOND THIRD
2002: QUARTER QUARTER QUARTER
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
------------- ----------- -----------
Net sales $110,992 $89,070 $39,612
Cost of sales, including buying and occupancy 80,756 64,646 34,575
Restructuring and other related charges 1,397
Income (loss) from operations (25,558) 2,771 (15,939)
Reorganization income 183,839
Net income (loss) 158,281 2,771 (15,939)
Earnings (loss) per share - basic and diluted 0.14 (0.80)
Weighted average shares outstanding - basic and diluted (1) 20,000 20,000
(1) Basic earnings per share is computed by dividing earnings on common shares
by the weighted average number of common shares outstanding during each
quarter. Diluted earnings per share reflect per share amounts that would
have resulted if dilutive potential common stock had been converted to
common stock.
36
FIRST SECOND THIRD FOURTH
2001: QUARTER QUARTER QUARTER QUARTER
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
------------- ------------- ------------- -------------
Net sales $153,138 $86,701 $45,704 $85,874
Cost of sales, including buying and occupancy 111,590 71,050 50,503 64,707
Restructuring and other related charges 1,702 5,279 5,112 28,794
Loss from operations (7,157) (18,391) (33,117) (33,331)
Net loss (7,157) (18,391) (33,117) (33,331)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
2000: (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
------------- ------------- ------------- -------------
Net sales $166,956 $102,964 $58,506 $108,521
Cost of sales, including buying and occupancy 111,341 75,001 50,266 80,482
Restructuring and other related charges 127,047
Income (loss) from operations 2,385 (6,318) (24,207) (141,099)
Net income (loss) 3,334 (6,318) (24,207) (141,099)
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
After a competitive bid process and review of qualifications, on June
18, 2002, the board of directors of the Company approved the engagement of Grant
Thornton LLP as the Company's independent auditors for the fiscal year ending
January 26, 2003, to replace Ernst and Young LLP, whose engagement as the
Company's auditors ended immediately.
Ernst and Young's audit reports on the Company's financial statements
as of and for the two most recent fiscal years ended January 28, 2001 and
January 27, 2002, did not contain an adverse opinion or a disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or accounting
principles.
During the Company's two most recent fiscal years ended January 28,
2001 and January 27, 2002, and through the date hereof, there were no
disagreements between the Company and Ernst & Young on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to Ernst & Young's satisfaction,
would have caused Ernst & Young to make reference to the subject matter of the
disagreement in connection with its reports.
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within the Company's two most recent fiscal years ended
January 28, 2001 and January 27, 2002 or, through the date hereof.
37
The Company provided Ernst & Young with a copy of the foregoing
disclosures. A letter from Ernst & Young, dated June 25, 2002, stating its
agreement with such statements is attached hereto as Exhibit 16.1.
During the Company's two most recent fiscal years ended January 28,
2001 and January 27, 2002, and through the date hereof, the Company did not
consult with Grant Thornton regarding any of the matters or events described in
Item 304(a)(2)(i) and (ii) of Regulation S-K.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements - See "Index to Financial Statements" included on
page F-1.
(b) Exhibits - See "Exhibit Index" at page X-1.
38
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
FRANK'S NURSERY & CRAFTS, INC.
Date: January 24, 2003 By: /s/ Alan Minker
-------------------------------------
Alan Minker
Senior Vice President,
Chief Financial Officer and Treasurer
39
INDEX TO FINANCIAL STATEMENTS
Page Number
-----------
Audited Financial Statements:
- -----------------------------
Report of Independent Auditors..........................................................................................F-2
Balance Sheets as of January 27, 2002 and January 28, 2001..............................................................F-4
Statements of Operations for the Fiscal Years Ended January 27, 2002,
January 28, 2001 and January 30, 2000..........................................................................F-5
Statements of Changes in Shareholder's Equity (Deficiency in Assets)
for the Fiscal Years Ended January 27, 2002, January 28, 2001,
and January 30, 2000...........................................................................................F-6
Statements of Cash Flows for the Fiscal Years Ended January 27, 2002,
January 28, 2001 and January 30, 2000..........................................................................F-7
Notes to Financial Statements...........................................................................................F-8
Unaudited Financial Statements:
- -------------------------------
Balance Sheets as of November 3, 2002 and November 4, 2001.............................................................F-24
Statements of Operations for the Twenty-Four Weeks Ended November 3, 2002,
the Sixteen Weeks Ended May 19, 2002 and the Forty Weeks Ended
November 4, 2001..............................................................................................F-25
Statements of Shareholders' Equity (Deficit) for the Twenty-Four Weeks Ended
November 3, 2002 and the Sixteen Weeks Ended May 19, 2002.....................................................F-26
Statements of Cash Flows for the Twenty-Four Weeks Ended November 3, 2002,
the Sixteen Weeks Ended May 19, 2002 and Forty Weeks Ended
November 4, 2001..............................................................................................F-27
Notes to Financial Statements..........................................................................................F-28
F-1
Report of Independent Auditors
The Board of Directors and Shareholder
Frank's Nursery & Crafts, Inc.
We have audited the accompanying balance sheets of Frank's Nursery & Crafts,
Inc. (the "Company") as of January 27, 2002 and January 28, 2001, and the
related statements of operations, changes in shareholder's equity (deficiency in
assets), and cash flows for each of the three years in the period ended January
27, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Frank's Nursery & Crafts, Inc.
at January 27, 2002 and January 28, 2001, and the results of its operations and
its cash flows for each of the three years in the period ended January 27, 2002,
in conformity with accounting principles generally accepted in the United
States.
F-2
The accompanying financial statements have been prepared assuming that Frank's
Nursery & Crafts, Inc. will continue as a going concern. As more fully described
in Notes 1 and 8, the Company has incurred recurring operating losses, has a
working capital deficiency and is in default of certain covenants under the
terms of the agreement for its senior subordinated notes and its
debtor-in-possession financing agreement. The Company also filed for
reorganization under Chapter 11 of the United States Bankruptcy Code on February
19, 2001. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to these matters
are also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Detroit, Michigan
March 29, 2002, except for note 13,
as to which the date is January 24, 2003
F-3
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
JANUARY 27, JANUARY 28,
2002 2001
----------- -----------
(DEBTOR-IN-
POSSESSION)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,870 $ 10,607
Marketable securities 1,061 1,812
Accounts receivable 2,405 1,712
Notes receivable 1,631
Merchandise inventory 37,629 73,125
Assets to be disposed of 9,051 33,500
Prepaid expenses and other current assets 7,058 4,551
---------- ----------
Total current assets 60,705 125,307
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, NET 96,055 129,863
GOODWILL, LESS ACCUMULATED AMORTIZATION OF
$7,451 FOR 2000 16,600
OTHER ASSETS AND DEFERRED CHARGES 8,553 14,251
---------- ----------
$ 165,313 $ 286,021
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY
IN ASSETS)
CURRENT LIABILITIES:
Accounts payable $ 8,437 $ 32,606
Accounts payable prepetition 32,487
Accrued expenses 25,350 39,417
Accrued expenses prepetition 26,677
Notes payable to banks 24,297 47,352
Prepetition long-term debt 139,315
Current portion of long-term debt 161,575
---------- ----------
Total current liabilities 256,563 280,950
---------- ----------
OBLIGATIONS UNDER CAPITAL LEASES 3,220 5,383
OTHER LIABILITIES 3,525 5,627
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY (DEFICIENCY IN ASSETS):
Common stock, $1.00 par value, 1,000
shares authorized, 1,000 shares issued
and outstanding 1 1
Capital in excess of par value 165,999 165,999
Net parent investment 16,117 16,177
Retained deficit (280,112) (188,116)
---------- ----------
Total shareholder's equity (deficiency in
assets) (97,995) (5,939)
---------- ----------
$ 165,313 $ 286,021
========== ==========
See accompanying notes.
F-4
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Fiscal Year Ended
------------------------------------------
JANUARY 27, January 28, January 30,
2002 2001 2000
------------ ----------- -----------
(DEBTOR-IN-
POSSESSION)
NET SALES $ 371,417 $ 436,947 $ 487,332
OPERATING COSTS AND EXPENSES:
COST OF SALES, INCLUDING
BUYING AND OCCUPANCY 297,850 317,090 337,212
SELLING, GENERAL AND
ADMINISTRATIVE 109,404 136,730 137,657
REORGANIZATION, RESTRUCTURING
AND OTHER RELATED CHARGES 40,887 127,047
EARLY EXTINGUISHMENT OF DEBT 4,230
AMORTIZATION OF GOODWILL 1,631 2,438 2,438
OTHER INCOME (1,221) (1,017) (3,506)
---------- ---------- ----------
TOTAL OPERATING COSTS AND
EXPENSES 452,781 582,288 473,801
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (81,364) (145,341) 13,531
INTEREST AND DEBT EXPENSE 10,632 23,898 22,827
---------- ---------- ----------
LOSS BEFORE INCOME TAX BENEFIT
AND EXTRAORDINARY LOSS (91,996) (169,239) (9,296)
INCOME TAX BENEFIT (949)
---------- ---------- ----------
NET LOSS $ (91,996) $ (168,290) $ (9,296)
========== ========== ==========
See accompanying notes.
F-5
FRANK'S NURSERY & CRAFTS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
FISCAL YEARS ENDED JANUARY 27, 2002, JANUARY 28, 2001, AND JANUARY 30, 2000
(IN THOUSANDS)
Capital in Total
Common Excess of Net Parent Retained Shareholder's
Stock Par Value Investment Deficit Equity
-------- ---------- ---------- --------- -------------
Balance at January 31, 1999 $ 1 $165,999 $ (4,407) $ (10,530) $151,063
Net loss (9,296) (9,296)
Increase in net parent investment 6,059 6,059
------- -------- -------- --------- --------
Balance at January 30, 2000 1 165,999 1,652 (19,826) 147,826
Net loss (168,290) (168,290)
Capital contribution 15,000 15,000
Decrease in net parent investment (475) (475)
------- -------- -------- --------- --------
Balance at January 28, 2001 1 165,999 16,177 (188,116) (5,939)
Net loss (91,996) (91,996)
Decrease in net parent investment (60) (60)
------- -------- -------- --------- --------
Balance at January 27, 2002 $ 1 $165,999 $ 16,117 $(280,112) $(97,995)
======= ======== ======== ========= ========
See accompanying notes.
F-6
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Fiscal Year Ended
------------------------------------
JANUARY 27, January 28, January 30,
2002 2001 2000
----------- ----------- -----------
(DEBTOR-IN
POSSESSION)
OPERATING ACTIVITIES:
Net loss $ (91,996) $ (168,290) $ (9,296)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation 16,515 18,361 17,590
Amortization 3,600 3,874 3,714
Debt issue costs 3,458
Provision for store closings and other costs 1,360
Inventory clearance reserve 8,076
Noncash portion of reorganization,
restructuring and other related charges 34,309 125,891
Gain from pension plan reversion (2,094)
Other, net (2,082) 773 (954)
---------- --------- ---------
(28,120) (19,391) 10,320
Changes in operating assets and liabilities:
Marketable securities (102) (117) (2,877)
Notes receivable 483
Accounts receivable (1,093) 262 227
Merchandise inventory 27,420 27,698 (2,892)
Prepaid expenses and other current assets (2,686) 2,709 (976)
Accounts payable 8,318 17,608 (18,784)
Accrued expenses 14,868 (2,349) (634)
---------- --------- --------
Net cash provided by (used in)
operating activities 18,605 26,420 (15,133)
---------- --------- --------
INVESTING ACTIVITIES:
Additions to property, equipment and
leasehold improvements (2,794) (17,572) (29,695)
Net proceeds from asset sales 20,019 1,032 910
---------- --------- ---------
Net cash provided by (used in) investing
activities 17,225 (16,540) (28,785)
---------- --------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in net parent investment (60) 14,525 (2,326)
Payment of long-term debt and capital lease
obligations (21,452) (8,005) (3,279)
Proceeds from pension plan reversion 11,222
Increase (decrease) in notes payable to
banks, net (23,055) (14,648) 42,000
---------- --------- ---------
Net cash provided by (used in)
financing activities (44,567) (8,128) 47,617
---------- --------- ---------
Increase (decrease) in cash and cash equivalents (8,737) 1,752 3,699
Cash and cash equivalents at beginning of
period 10,607 8,855 5,156
---------- --------- ---------
Cash and cash equivalents at end of period $ 1,870 $ 10,607 $ 8,855
========== ========= =========
See accompanying notes.
F-7
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT WHERE INDICATED)
NOTE 1: REORGANIZATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
On February 19, 2001 (the "Petition Date"), the Company and Holdings (the
"Debtors") each filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11 Reorganization") in the United States Bankruptcy
Court for the District of Maryland, Baltimore Division (the "Court").
The Company's decision to seek Chapter 11 Reorganization was, in part, the
consequence of several developments during fiscal year 2000 relating to sales,
asset disposition and funding.
During the first half of 2000, weather patterns negatively impacted lawn and
garden product sales across the Company's principal markets. During the third
quarter of 2000, the Company decided to close 44 under-performing stores,
liquidate their inventories, and sell 33 of the 44 closed stores that were owned
by the Company. Later in 2000, it became apparent that the Company's Trim-a-Tree
holiday season sales were below expectations, which was consistent with the
general softness in sales at retailers during this period. During January of
2001, notwithstanding excess borrowing availability under its existing bank
credit facilities, the Company was unable to draw down sufficient funding to
meet its working capital needs because its banks asserted that various
conditions to borrowing had not been met. In the relatively short period between
the time that its credit facilities were curtailed and the necessity of securing
alternative financing, it became apparent that the most appropriate method to
secure financing, ensure product availability for the spring season, and achieve
restructuring objectives was through the Chapter 11 filings.
During the Chapter 11 Reorganization the Company has continued to manage and
operate its assets and business as a debtor-in-possession. Additionally, an
unsecured creditors' committee was appointed and has the right to review and
object to any proposed non-ordinary course of business transactions and
otherwise participate in the Chapter 11 Reorganization.
As of the Petition Date, actions to collect prepetition indebtedness of the
Debtors were stayed and other contractual obligations of the Debtors could not
be enforced against the Debtors. In addition the Debtors may reject prepetition
executory contracts and lease obligations, and parties affected by these
rejections may file claims with the Court in accordance with the
F-8
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 (CONTINUED)
Bankruptcy Code. Substantially all liabilities as of the Petition Date are
subject to settlement under a plan of reorganization, which is to be voted upon
by impaired classes of creditors and equity security holders and is subject to
approval by the Court.
On February 11, 2002, the Company filed a "Disclosure Statement" pursuant to
Section 1125 of the Bankruptcy Code, and a Joint Plan of Reorganization with the
Court. A First Amended Joint Plan of Reorganization (the "Plan") was filed on
March 13, 2002. The Court has approved the Disclosure Statement as containing
adequate information thus allowing the Company to solicit votes from creditors
and equity holders for approval of the Plan. The Court has scheduled a hearing
on May 1, 2002 for consideration of confirmation of the Plan. Upon confirmation
of the Plan, all claims against and interest in the Debtors will be discharged.
The type and amount of distributions that each creditor would receive under the
Plan will depend upon the class in which the claim is placed. The largest class
consists of general unsecured claims. They will receive on a pro rata basis,
100% of the new common stock to be outstanding on the effective date of the
Plan. The Plan, as filed, provides for the distribution of warrants to purchase
up to 3% of the new common stock to the Company's prepetition common stock
holders. The Plan calls for the cancellation of the currently outstanding Common
Stock on the effective date of the Plan.
Management's plans in regard to the recurring operating losses, working capital
deficiency, and defaults of certain covenants under the terms of the agreement
for its senior subordinated notes and its debtor-in-possession financing
agreement are more fully described in the Plan.
The accompanying financial statements have been presented in accordance with the
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" and have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
Pending the outcome of the May 1, 2002 hearing on confirmation of the Plan,
circumstances related to this event, and future financing, such realization of
assets and liquidation of liabilities is subject to uncertainty. Further, the
Plan would materially change the amounts reported in the financial statements,
which do not give effect to
F-9
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 (CONTINUED)
any adjustments to the carrying value of assets or amounts of liabilities that
will be necessary under fresh start accounting upon the effective date of the
Plan. The ability of the Company to continue as a going concern will depend
upon, among other things, confirmation of the Plan, future profitable
operations, the Company's ability to comply with requirements of a new financing
agreement upon emergence from the Chapter 11 Reorganization and the ability to
generate sufficient cash from operations and financing sources to meet the
Company's obligations. Additionally, the accompanying financial statements do
not include any adjustments that would be required if the Company were in
liquidation.
Substantially all of the Company's prepetition liabilities are subject to
compromise under the Chapter 11 Reorganization. The Company's senior
subordinated notes and mortgage debt are in default with the terms of the
applicable debenture and loan agreements, respectively. For financial reporting
purposes subsequent to the Petition date, those liabilities and obligations have
been segregated and reclassified as prepetition debt on the Balance Sheet. The
Company discontinued accruing interest on the senior subordinated notes. The
ultimate adequacy of security for any secured debt obligations and settlement of
all liabilities and obligations cannot be determined until the Plan is
confirmed.
NOTE 2: DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
Frank's Nursery & Crafts, Inc. ("Frank's" or the "Company") is a wholly-owned
subsidiary of FNC Holdings Inc. ("Holdings"). Holdings is principally owned by
The Cypress Group LLC ("Cypress").
The Company operates the largest chain of specialty retail stores in the United
States devoted to the sale of lawn and garden products, Christmas trim-a-tree
merchandise, artificial flowers and arrangements, garden and floral crafts, and
home decorative products. As of January 27, 2002 the Company operated 170 retail
stores located in 14 states primarily in the East, Middle Atlantic and Midwest
regions of the United States.
F-10
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 (CONTINUED)
FISCAL YEAR
The fiscal year is comprised of 52 or 53 weeks, ending on the last Sunday in
January. The 2001 fiscal year reflects a 52-week period ended January 27, 2002
("2001"). The 2000 fiscal year reflects a 52-week period ended January 28, 2001
("2000") and the 1999 fiscal year reflects a 52-week period ended January 30,
2000 ("1999").
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements. Estimates also affect reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when the customer takes possession of the
merchandise.
FAIR VALUE OF BALANCE SHEET FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, marketable securities, notes receivable, accounts receivable and
accounts payable approximate fair value because of the immediate or short-term
maturity of these financial instruments. Due to the Chapter 11 Reorganization
and its potential impact on final settlement of all prepetition liabilities, it
is not practicable to measure the fair value of the Company's debt at January
27, 2002.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments, such as U.S. government
securities and bank certificates of deposit having original maturities of three
months or less, and are carried at cost plus accrued interest.
MARKETABLE SECURITIES
Marketable securities represent an investment in a guaranteed fund restricted
for the funding of the Company's 401(k) match program (Note 11). The securities
are classified as held-to-maturity in accordance with Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" and are reported at amortized cost. The fair value of these
securities approximate their costs at January 27, 2002.
F-11
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 (CONTINUED)
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost or market, with cost
being determined under the first-in, first-out method.
PRE-OPENING COSTS
Pre-opening costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed when the advertising first takes place.
Advertising expenditures were $15,969 for 2001, $22,707 for 2000 and $22,300 for
1999.
STORE CLOSING COSTS
Provisions for store closing costs are charged to operations in the period when
the decision is made to close a retail unit.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, including significant
improvements thereto, are recorded at cost and depreciated over the estimated
useful lives of the related assets using the straight-line method. Expenditures
for repairs and maintenance are charged to expense as incurred. Estimated useful
lives, including capital leases, are: buildings, 10-40 years or, if shorter, the
terms of the lease; equipment, 3-20 years. Leasehold improvements are
depreciated over the lease terms of the respective leases or the estimated
useful lives. Upon sale or other disposition of assets, the cost and related
accumulated depreciation are removed from the accounts and the resulting gain or
loss, if any, is recognized in the statement of operations.
GOODWILL
Goodwill represented the costs in excess of the fair value of identifiable
assets for acquired businesses and was amortized on a straight-line basis over
the estimated future periods benefitted, not to exceed forty years. Due to
recent events and circumstances, including the Chapter 11 Reorganization and
recurring operating losses, the Company reevaluated the useful lives and
recoverability of its remaining goodwill . As a result the Company wrote-off the
remaining balance of goodwill of $14,382 during 2001. This impairment loss was
reflected in the reorganization, restructuring and other related charges in the
statements of operations.
F-12
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment of long-lived assets, including goodwill, is reviewed annually or
when events and circumstances warrant such a review by the Company in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
(FAS 121). If indicators are present, estimated future undiscounted cash flows
associated with the asset are compared to the asset's carrying value to
determine if an impairment exists. If the expected future cash flows and
eventual disposition are less than the carrying amount of such assets, the
Company recognizes an impairment loss for the difference between the carrying
amount and the estimated fair value. Fair value is estimated using discounted
future cash flows.
LEASES
Leases that meet the accounting criteria for capital leases are recorded as
property, plant and equipment, and the related capital lease obligations (the
aggregate present value of minimum future lease payments, excluding executory
costs such as taxes, maintenance and insurance) are included in debt.
Depreciation and interest are charged to expense, and rent payments are treated
as payments of long-term debt, accrued interest and executory costs. All other
leases are accounted for as operating leases and rent payments are charged to
expense as incurred.
INCOME TAXES
Income taxes for Frank's are included in the consolidated U.S. federal income
tax return of Holdings. In preparing its financial statements, Frank's has
determined its tax provision on a separate return basis. Deferred tax assets and
liabilities are determined based on differences between the financial reporting
and income tax bases of assets and liabilities using enacted tax rates and laws
in effect when the differences are expected to reverse.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS 141,
"Business Combinations", and FAS 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
F-13
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 (CONTINUED)
continue to be amortized over their useful lives. As a result of the Chapter 11
Reorganization and the write-off of goodwill in fiscal 2001, the adoption of FAS
141 and FAS 142 will not have a significant impact on the Company's earnings and
financial position.
In October 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" effective for fiscal years beginning after
December 15, 2001. This standard superseded FAS 121 and provides a single
accounting model for long-lived assets to be disposed. FAS 144 provides guidance
on differentiating between assets held and used and assets to be disposed.
Assets to be disposed would be classified as held for sale (and depreciation
would cease) when management, having the authority to approve the action,
commits to a plan to sell the assets meeting all required criteria. The Company
plans to adopt this statement on January 28, 2001, but has not yet determined
what effect, if any, FAS 144 will have on its earnings and financial position.
NOTE 3: STORE CLOSURE PROGRAMS
During fiscal 2001, as part of the restructuring process, the Court approved the
Company's plan to close 46 stores the ("2001 Program"). The last 12 were closed
as of March 2002. As a result, the Company recorded charges of $6.7 million in
2001, of which $4.1 million, included in cost of goods sold, represents a loss
for the inventory that was liquidated. The remaining $2.6 million is included in
the reorganization/restructuring charge of $40.9 million (Note 4), which
represents fixed asset write-downs to fair value.
During the fourth quarter of 2000 the Company implemented a store closure
program under which the Company closed 44 underperforming stores (the "2000
Program"). All the stores were closed as of the end of March 2001. The 2000
Program resulted in a $17.2 million charge in fiscal 2000, of which $3.2 million
represented a loss for the inventory that was liquidated and was included in
cost of goods sold. The remaining $14 million was included in the
reorganization/restructuring charge of $127 million (Note 4) and was comprised
of $.8 million for termination benefits and severance costs, and $13.2 million
related to the write-down of fixed assets to fair value. Fair value was measured
by using the estimated net
F-14
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 (CONTINUED)
selling price based upon actual bids and appraisals. The estimated fair value of
the 33 owned stores was $33.5 million at January 28, 2001 and was classified in
the caption of "Assets to be disposed of" on the Balance Sheet. During 2001 the
Company sold 21 of the 33 properties and added three locations from the 2001
Program. In addition the Company reevaluated the estimated fair value for these
stores based upon the current retail market and actual bids which resulted in an
additional write-down in 2001 of $6.2 million that is included in the
reorganization/restructuring charge (Note 4). The estimated fair value of
"Assets to be disposed of" for the 15 remaining stores at January 27, 2002 is
$9.1 million.
NOTE 4: REORGANIZATION, RESTRUCTURING AND OTHER RELATED CHARGES
As a result of the Company's operating losses for 2001 and 2000, and the Chapter
11 Reorganization (Note 1), the Company performed an impairment analysis as
required under FAS 121 for both 2001 and 2000. The estimated fair value of the
impaired assets was determined by comparing expected future cash flows for each
store to the combined net property, plant and equipment and allocated goodwill.
In 2000 the Company rejected store leases and reversed the store closing
provision that originated in fiscal 1993. Additionally, the Company recorded a
fixed asset impairment charge related to 22 leased stores that were approved for
closure by the Court subsequent to 2000.
Bankruptcy related costs for 2001 include $4.6 million for professional fees,
$3.2 million for severance and employee retention plans approved by the Court
under the Chapter 11 Reorganization and $.9 million for miscellaneous items.
The impairment analysis and the Chapter 11 Reorganization resulted in the
following charges:
2001 2000
------- -------
Write-down of goodwill $14,382 $73,591
Write-down of fixed assets 15,197 42,771
Store closure program (Note 3) 2,600 14,031
Write-off of fixed assets
related to 22 store leases 3,423
Write-off of 1993 store
closing related liabilities (7,583)
Bankruptcy related costs 8,708 814
------ -------
Total $40,887 $127,047
====== =======
F-15
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: OTHER INCOME
2001 2000 1999
------ ------ ------
Interest on cash
equivalents and
marketable securities $ 128 $ 430 $ 644
Gain on the sale of
property and the termination
or sale of leases 856 559 556
Gain on reversion of pension
plan 2,094
Other 237 28 212
------ ------ ------
$1,221 $1,017 $3,506
====== ====== ======
The gain of $2,094 in 1999 resulted from the reversion of a noncontributory,
defined benefit pension plan which covered former employees of several
discontinued operations of Holdings.
F-16
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INCOME TAXES
The reconciliation of income taxes computed at the federal statutory tax rate to
income tax benefit is:
2001 2000 1999
---------- ---------- ----------
Federal income tax (benefit) based
on statutory rates $ (29,840) $ (57,541) $ (3,161)
State and local income tax (benefit) (1,755) (3,385) (186)
Increases (decreases) in rates
resulting from:
Limitation (utilization)
of tax loss carryforwards 26,815 27,467 2,492
Nondeductible expenses including
goodwill amortization and
write-off 6,000 33,347 829
Other (1,220) 112 26
Federal income tax refund from
net operating loss carrybacks --- 949 ---
--------- ---------- ---------
$ --- $ 949 $ ---
========= ========== =========
Deferred tax assets and liabilities are composed of the following:
2001 2000
---------- ----------
DEFERRED TAX ASSETS:
Inventory $ 2,792 $ 490
Accrued expenses 1,853 1,478
Other 4,455 5,487
Store closing reserve 6 225
Property, plant & equipment 12,530 19,848
Credit carryforwards 1,337 1,337
NOL carryforward 65,685 41,744
--------- ---------
Total deferred tax assets 88,658 70,609
--------- ---------
DEFERRED TAX LIABILITIES:
Assets to be disposed of (3,259) (12,060)
Other (382) (652)
--------- ---------
Total deferred tax liabilities (3,641) (12,712)
--------- ---------
Net deferred tax assets 85,017 57,897
Valuation allowance (85,017) (57,897)
--------- ---------
$ --- $ ---
========= =========
F-17
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 (CONTINUED)
Income taxes for fiscal 2000 represent a benefit resulting from the realization
of certain net operating losses for which a full valuation allowance has 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.
Due to the Company's historical operating results, a valuation allowance for the
net deferred tax asset balance is recorded at January 27, 2002 and January 28,
2001.
As discussed in Note 2, Frank's files a consolidated tax return with Holdings.
At January 27, 2002 the federal tax NOL carryforwards, for Holdings, on a
consolidated basis, approximated $208,000, the federal tax NOL carryforwards
attributable to Frank's on a separate return basis approximated $182,000. The
net operating loss will expire as follows: in January 2009 - $30,000, January
2010 - $2,000, January 2011 - $4,000, January 2012 - $8,000, January 2013 -
$27,000, January 2020 - $3,000, January 2021 - $42,000 and January 2022 -
$66,000.
Holdings underwent an ownership change on December 24, 1997. Net operating
losses incurred prior to the ownership change will be subject to usage
limitations imposed by Internal Revenue Code Section 382. Of Holdings total net
operating loss carryforward of $208,000, approximately $130,000 is not subject
to these limitations. Approximately $7,200 of the NOL subject to limitations may
be utilized each tax year.
As a result of the proposed bankruptcy plan of reorganization, Frank's will
undergo an additional ownership change and losses incurred prior to the
effective date of the reorganization will also be subject to an additional
Section 382 limitation. In addition, Frank's will recognize cancellation of
indebtedness income which will be exempt from tax, thus reducing its net
operating losses and tax credits as well as other tax attributes.
F-18
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
2001 2000
--------- ---------
Land $ 18,862 $ 22,596
Buildings:
Owned 101,544 110,963
Capital leases (Note 10) 7,855 14,415
Equipment 83,917 76,782
Leasehold improvements 42,483 48,050
Construction in progress 721 9,024
-------- --------
255,382 281,830
Less accumulated depreciation,
including capital lease amounts
of $6,985 and $11,079 159,327 151,967
-------- --------
$ 96,055 $129,863
======== ========
NOTE 8: FINANCING AND LONG-TERM DEBT
2001 2000
---------- ----------
SENIOR DEBT:
Mortgage notes originally due
on varying dates from
February 1, 2001
to September 1, 2007 $ 22,045 $ 27,096
Notes payable to banks 24,297 14,957
Capital leases (Note 10) 5,490 9,905
-------- --------
51,832 51,958
SUBORDINATED DEBT:
10 1/4% Senior Subordinated Notes
originally due March 1, 2008 115,000 115,000
-------- --------
166,832 166,958
Less debt classified as prepetition
debt 163,612
Less debt classified as current 161,575
-------- --------
Obligations under capital leases $ 3,220 $ 5,383
======== ========
F-19
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 (CONTINUED)
On February 19, 2001, the Company entered into 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. 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 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%. At January 27, 2002, availability
under the DIP Financing Agreement approximated $19.3 million with borrowings
outstanding of $24.3 million.
The initial borrowings under the DIP Financing Agreement were used to retire the
Company's outstanding obligations under a credit facility that existed at
January 28, 2001. The total debt retired and associated fees totaled $62.1
million, resulting 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.
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 January 27, 2002. The lender did not provide
a waiver for noncompliance of the default.
In accordance with AICPA Statement of Position 90-7 no interest is being accrued
post-petition for the subordinated notes. Contractual interest for fiscal 2001
was $21.5 million.
At January 28, 2001 the senior subordinated notes and mortgage debt were
classified as current due to cross defaults when the covenants were violated
under the previously held credit facility as well nonpayment of interest under
the subordinated notes and nonpayment of monthly principal and interest under
the mortgage notes as a result of the bankruptcy filing.
The mortgage notes have interest rates varying from 7.8% to 9.625%, and the
notes mature with balloon payments on varying dates from February 1, 2001 to
September 1, 2007. The mortgage notes are secured by retail properties owned by
the Company.
F-20
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 (CONTINUED)
As discussed in Note 2, the current market value of the Company's long-term debt
would be substantially below the recorded amounts and is not readily estimable.
Cash interest paid was $4.8 million in 2001, $21,281 in 2000 and $20,436 in
1999.
NOTE 9: NET PARENT INVESTMENT
Cypress contributed $15 million in 2000 and received 2,801,204 shares of
Holdings common stock. The capital, used primarily to fund the company's POS
system, resulted in an increase to the company's net parent investment by $15
million.
In addition the Company is responsible for certain liabilities of discontinued
operations for businesses that Holdings had sold in prior years. These
liabilities are included in the net parent investment account. The remaining
liability was $1.1 million at January 27, 2002.
F-21
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: LEASES
The Company's capital leases are principally for retail store locations, for
periods ranging up to 25 years. The Company's operating leases are principally
for retail store locations, some of which include renewal, purchase or
escalation clauses.
Under the Chapter 11 Reorganization (Note 1), the Company has the right, subject
to Court approval, to assume or reject executory contracts and unexpired leased
as disclosed in the Disclosure Statement. Therefore, the commitments shown below
may not reflect the actual cash outlay in the future.
Annual minimum lease payments under all capital and operating leases with lease
terms longer than one year at January 27, 2002, are as follows:
- -----------------------------------------------------------------
Capital Operating
Leases Leases
- -----------------------------------------------------------------
2002 $ 1,846 $ 12,100
2003 1,528 11,392
2004 812 10,598
2005 810 9,640
2006 690 8,232
Thereafter 1,426 39,476
-------- --------
Total minimum lease obligations 7,112 $ 91,438
========
Amount representing future interest (1,622)
--------
Present value of net minimum lease
obligations $ 5,490
========
Future sublease rental income $ 3,682
========
Rent expense was $20,410 in 2001, $23,031 in 2000 and $22,399 in 1999. Rent
expense includes additional rentals based on retail store sales (in excess of
the minimums specified in leases) of $133 in 2001, $170 in 2000 and $322 in 1999
and is reduced by sublease rental income of $673 in 2001, $581 in 2000 and $547,
in 1999.
F-22
FRANK'S NURSERY & CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: 401(k) PLAN
The Company provides a 401(k) Plan permitting employees to invest from 1% to 15%
of their salary in outside mutual funds. The plan provides an employer match of
50% of the employee contribution. The Company's contribution is limited to 3% of
salary and became effective November 1998. Subsequent to January 27, 2002 the
Company suspended the Company match.
NOTE 12: LITIGATION AND OTHER CONTINGENCIES
In the normal course of business the Company is subject to various claims. These
claims should be resolved in connection with the Company's Chapter 11
Reorganization. In the opinion of management, any ultimate liability arising
from or related to these claims should not have a material adverse effect on
future results of operations or the consolidated financial position of the
Company.
NOTE 13: RECLASSIFICATION OF EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF
DEBT (UNAUDITED)
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145, among other things, prohibits the classification of gains and
losses from extinguishment of debt as extraordinary unless they meet the
criteria defined in Opinion 30. Reclassification within previously issued
financial statements is required. The Company adopted the provisions of SFAS
No. 145 in the 2002 first quarter and in accordance with such provisions the
extraordinary loss from the extinguishment of debt for 2001 has been
reclassified to operating costs and expenses.
F-23
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PAR VALUE)
November 3, November 4,
2002 2001
--------------- ---------------
(Successor) (Predecessor)
ASSETS (Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 2,570 $ 3,580
Marketable securities 1,023 1,184
Notes receivable
Accounts receivable 2,199 1,144
Merchandise inventory 62,096 74,778
Assets to be disposed of 2,131 11,398
Prepaid expenses and other current assets 5,917 6,497
--------------- ---------------
Total current assets 75,936 98,581
--------------- ---------------
Property, equipment and leasehold improvements, net 53,576 110,216
Goodwill, less accumulated amortization of $1,229 at November 4, 2001 14,751
Other assets and deferred charges 4,225 11,219
--------------- ---------------
Total assets $ 133,737 $ 234,767
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 32,347 $ 17,678
Accounts payable pre-petition 32,560
Accrued expenses 20,613 31,157
Accrued expenses payable pre-petition 2,520 19,588
Notes payable to banks 16,298 51,592
Current portion of long-term debt 1,806
Pre-petition long-term debt (including subordinated debt of $115,000) 138,587
--------------- ---------------
Total current liabilities 73,584 291,162
--------------- ---------------
Long-term debt:
Senior debt, less current portion 26,389 4,113
Term Loan 17,360
--------------- ---------------
Total long-term debt 43,749 4,113
--------------- ---------------
Other liabilities 3,452 4,097
Shareholders' equity (deficit):
Predecessor common stock $1.00 par value, 1,000 shares authorized,
1,000 shares issued and outstanding 1
Successor preferred stock $.001 par value, 10,000,000 shares
authorized, none issued
Successor common stock $.001 par value, 50,000,000 shares authorized,
11,882,006 shares issued and outstanding and
8,117,994 shares to be issued 20
Additional paid-in-capital 26,100 165,999
Net parent investment 16,176
Retained deficit (13,168) (246,781)
--------------- ---------------
Total shareholders' equity (deficit) 12,952 (64,605)
--------------- ---------------
Total liabilities and shareholders' equity (deficit) $ 133,737 $ 234,767
=============== ===============
See accompanying notes to financial statements.
F-24
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
TWENTY-FOUR WEEKS ENDED NOVEMBER 3, 2002, THE SIXTEEN WEEKS ENDED MAY 19, 2002
AND THE FORTY WEEKS ENDED NOVEMBER 4, 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Twenty-four Sixteen Weeks Forty Weeks
Weeks Ended Ended Ended
November 3, May 19, 2002 November 4,
2002 2001
--------------- --------------- ---------------
(Successor) (Predecessor) (Predecessor)
(Restated)(1)
NET SALES $ 128,682 $ 110,992 $ 285,543
OPERATING COSTS AND EXPENSES:
Cost of sales, including buying and occupancy 99,221 80,756 233,143
Selling, general and administrative 38,015 31,490 85,189
Restructuring and other related charges 1,397 21,839 12,093
Early extinguishment of debt 4,230
Amortization of goodwill 1,263
Other income (180) (118) (411)
--------------- --------------- ---------------
Total operating costs and expenses 138,453 133,967 335,507
--------------- --------------- ---------------
LOSS FROM OPERATIONS (9,771) (22,975) (49,964)
INTEREST EXPENSE (CONTRACTUAL INTEREST OF $6,210 FOR THE SIXTEEN
WEEKS ENDED MAY 19, 2002 AND $16,862 FOR THE FORTY
WEEKS ENDED NOVEMBER 4, 2001) 3,397 2,583 8,701
--------------- --------------- ---------------
LOSS BEFORE REORGANIZATION ITEMS AND INCOME TAXES (13,168) (25,558) (58,665)
--------------- --------------- ---------------
REORGANIZATION ITEMS:
Gain on cancellation of pre-petition liabilities 184,954
Fresh start adjustments 324
Extinguishment of debt (1,439)
--------------- --------------- ---------------
Total reorganization items 183,839
--------------- --------------- ---------------
INCOME TAX EXPENSE
--------------- --------------- ---------------
NET (LOSS) INCOME $ (13,168) $ 158,281 $ (58,665)
=============== =============== ===============
Loss per share - basic and diluted $(0.66)
===============
Weighted average shares outstanding - basic and diluted 20,000
===============
(1) The sixteen weeks ended May 19, 2002 have been restated to reflect a
reorganization item for extinguishment of debt of $1,439 belonging to the
Predecessor.
See accompanying notes to financial statements.
F-25
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
TWENTY-FOUR WEEKS ENDED NOVEMBER 3, 2002 AND SIXTEEN WEEKS ENDED MAY 19, 2002
(DOLLARS IN THOUSANDS)
Total
Common Stock Additional Net Shareholders'
Number Par Paid-in Retained Parent Equity
of shares Value Capital Deficit Investment (deficit)
----------- --------- ------------ ------------- ---------- ------------
Predecessor:
Balance at January 27, 2002 1,000 $ 1 $ 165,999 $ (280,112) $ 16,117 $ (97,995)
Net loss excluding plan of
reorganization and fresh start
adjustments (25,558) (25,558)
Effect of plan of reorganization
and fresh start adjustments:
Cancellation of old common stock (1,000) (1) (165,999) (166,000)
New common stock 20,000,000 (1) 20 22,980 23,000
Cancellation of net parent
investment (16,117) (16,117)
Extinguishment of debt (1,439) (1,439)
Other fresh start adjustments 307,109 307,109
----------- --------- ------------ ------------- ---------- ------------
Successor:
Balance at May 20, 2002 20,000,000 20 22,980 -0- -0- 23,000
Issuance of 5,000,000 warrants
in connection with
Term Loan debt 3,120 3,120
Net loss (13,168) (13,168)
----------- --------- ------------ ------------- ---------- ------------
Balance at November 3, 2002 20,000,000 $ 20 $ 26,100 $ (13,168) $ -0- $ 12,952
=========== ========= ============ ============= ========== ============
(1) 11,882,006 shares issued and 8,117,994 to be issued.
See accompanying notes to financial statements.
F-26
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
TWENTY-FOUR WEEKS ENDED NOVEMBER 3, 2002, SIXTEEN WEEKS ENDED MAY 19, 2002 AND
FORTY WEEKS ENDED NOVEMBER 4, 2001
(DOLLARS IN THOUSANDS)
Twenty-four Sixteen Weeks Forty Weeks
Weeks Ended Ended Ended
November 3, May 19, November 4,
2002 2002 2001
--------------- --------------- ---------------
(Successor) (Predecessor) (Predecessor)
Restated (1)
OPERATING ACTIVITIES:
Net (loss) income $ (13,168) $ 158,281 $ (58,665)
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation 3,207 4,900 12,829
Amortization 683 632 2,758
Non cash portion of restructuring and other related charges 1,397 17,572 7,336
Inventory clearance reserve 9,545
Debt issue costs 1,079 3,458
Gain on cancellation of pre-petition liabilities (184,991)
Fresh start adjustments (324)
Other (78) (939) (22)
--------- --------- ---------
(7,959) (3,790) (22,761)
Changes in assets and liabilities, net of effects of fresh start
adjustments and gain on cancellation of pre-petition liabilities:
Marketable securities (22) (9) (88)
Notes receivable 1,631
Accounts receivable (279) 885 568
Inventory (471) (23,996) (11,198)
Prepaid expenses (264) 1,405 (2,006)
Other non current assets (2,046) (349) (2,014)
Accounts payable (11,398) 35,440 17,632
Accrued expenses (10,242) 8,284 13,432
--------- --------- ---------
Net cash provided by (used in) operating activities (32,681) 19,501 (6,435)
--------- --------- ---------
INVESTING ACTIVITIES:
Additions to property, equipment and leasehold improvements (2,118) (605) (1,850)
Net proceeds from asset sales 4,969 2,566 18,306
--------- --------- ---------
Net cash provided by investing activities 2,851 1,961 16,456
--------- --------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in notes payable to banks (net) 2,651 (10,650) 4,240
Payment of long-term debt and capital leases (750) (2,183) (21,287)
Borrowings under term loan 20,000
Decrease in net parent investment (1)
--------- --------- ---------
Net cash provided by (used in) financing activities 21,901 (12,833) (17,048)
--------- --------- ---------
Net change in cash and cash equivalents (7,929) 8,629 (7,027)
Cash and cash equivalents at beginning of period 10,499 1,870 10,607
--------- --------- ---------
Cash and cash equivalents at end of period $ 2,570 $ 10,499 $ 3,580
========= ========= =========
(1) The sixteen weeks ended May 19, 2002 have been restated to reflect a
reorganization item for extinguishment of debt of $1,439 belonging to the
Predecessor.
Supplemental disclosure of non cash financing information:
Fair valuing of assets due to fresh start accounting of $36,171 for the
sixteen weeks ended May 19, 2002.
See accompanying notes to financial statements.
F-27
FRANK'S NURSERY & CRAFTS, INC.
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(TABLES IN THOUSANDS)
(1) GENERAL
Frank's Nursery & Crafts, Inc., a Delaware corporation ("Frank's" or the
"Company"), operates the nation's largest chain of lawn and garden specialty
retail stores. Frank's is also a retailer of Christmas trim-a-tree merchandise,
artificial flowers and arrangements, garden decor and home decorative products.
CHAPTER 11 PROCEEDINGS AND REORGANIZATION
On February 19, 2001 (the "Petition Date"), Frank's Nursery & Crafts, Inc., a
Michigan corporation ("Old Frank's"), and FNC Holdings Inc. ("Holdings"), the
sole shareholder of Old Frank's, (collectively with Old Frank's, the "Debtors"),
filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Maryland (the "Bankruptcy Court"). The Chapter 11
cases for the Debtors (the "Chapter 11 Cases") were jointly administered for
procedural purposes. From the Petition Date until May 19, 2002, the Debtors
operated their businesses as debtors-in-possession pursuant to the Bankruptcy
Code. On May 7, 2002, the Bankruptcy Court confirmed the Debtors' Second Amended
Joint Plan of Reorganization, with certain modifications (as so modified, the
"Plan"). On May 20, 2002 (the "Effective Date"), the Plan became effective and
the Debtors successfully emerged from their Chapter 11 bankruptcy proceedings.
Pursuant to the Plan, the following transactions were completed on or about the
Effective Date:
- all of Old Frank's and Holdings issued and outstanding common
stock was cancelled;
- Old Frank's merged with and into Holdings, and then changed
its name to Frank's, which was reincorporated in Delaware (the
"Merger");
- certain indebtedness of the Debtors was cancelled in exchange
for cash and/or common stock, par value $.001 per share, of
Frank's ("Common Stock");
- executory contracts or unexpired leases to which any Debtor
was a party were assumed, or rejected;
- members of the boards of directors and officers of Frank's
were elected and began serving their respective terms; and
- the overall corporate structure was simplified through the
restructuring and dissolution of certain Old Frank's and
Holdings subsidiaries.
On the Effective Date, 50,000,000 shares of Common Stock were authorized and (a)
20,000,000 shares of Common Stock were reserved for distribution in respect of
claims against the Debtors, (b) 913,044 shares of Common Stock were reserved for
issuance of warrants to purchase shares of Common Stock ("Warrants") at an
exercise price of $1.38 for the old equity holders of Holdings, (c) 3,652,174
shares of Common Stock were reserved for a new stock option plan, which was
implemented in accordance with the Plan and (d) 5,869,565 shares of Common Stock
were reserved for the conversion rights of Kimco Realty Services Inc., an
affiliate of Kimco Realty Corporation ("Kimco"), as part of the exit financing.
In addition, on the Effective Date, Frank's entered into a three-year $50
million secured revolving credit facility, that includes $25 million for letters
of credit (the "Exit Revolver Facility") with Congress Financial Corporation as
agent for a syndicate of lenders and a $30 million term and revolving loan with
Kimco (the "Exit Term and Revolving Loan"). See note 2 for a more detailed
description of the exit financing.
FRESH START ADJUSTMENTS
The Debtors emerged from their chapter 11 bankruptcy proceedings on May 20,
2002, which for financial reporting purposes was deemed the effective date of
the Plan. In accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Company adopted
fresh start reporting because holders of existing voting shares of Holdings
immediately before filing and confirmation of the Plan received less than 50% of
the Common stock distributed under the Plan and the Company's reorganization
value was less than the Debtors' post-petition liabilities and allowed claims in
the aggregate on a consolidated basis.
F-28
Fresh start reporting requires that the reorganization value of the Company be
allocated to its assets in conformity with Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations". The excess of the fair value
of the specific tangible or identifiable intangible net assets over
reorganization value, or negative goodwill, is to be allocated to non-current
non-monetary assets on a pro rata basis. Based on the consideration of many
factors and various valuation methods, including a discounted cash flow, a
comparable public company analysis, a comparable acquisitions analysis, and
other applicable analyses believed by the Company's management to be appropriate
for the Company's business and industry, the Company and its financial advisors
determined the reorganization value of the Company to be approximately $90
million, which served as the basis for the Plan approved by the Bankruptcy
Court. Approximately $67 million of the reorganization value related to debt and
other obligations was outstanding as of the Effective Date, and the remaining
reorganization value of approximately $23 million was assigned as the initial
equity of the Company. Due to the cyclical nature of the business and the timing
of emergence, the reorganization value related to debt was based upon average
historical levels and is not equal to the debt levels of the successor company
at May 20, 2002, thus resulting in a change to the original estimated negative
goodwill of $58 million in the Plan.
The fair value of the net assets exceeded the reorganization value by $36.2
million, resulting in negative goodwill. The negative goodwill has been
allocated to property, plant and equipment.
The following table reflects the adjustments to Old Frank's balance sheet as of
May 20, 2002:
Fresh
Plan of Start
Predecessor Reorganization Adjustments Successor
-------------- -------------- ------------- -------------
Assets:
Current assets $ 88,516 $ (360) (b) $ 88,156
Property, equipment and leasehold 90,836 $ (36,171) (f) 54,665
improvements, net
Other assets 7,729 (4,851) (a)(b) (373) (e) 2,505
-------------- -------------- ------------- -------------
Total assets $ 187,081 $ (5,211) $ (36,544) $ 145,326
============== ============== ============= =============
Liabilities and shareholders' equity (deficit):
Accounts payable $ 43,825 $ (80) (a) $ 959 (f) $ 44,704
Accounts payable pre-petition 32,539 (32,539) (a)
Accrued expenses 32,834 751 (a) (3,169) (e)(f) 30,416
Accrued expense - pre-petition 21,514 (20,514) (a) 1,000
Accrued interest - pre-petition 5,894 (5,894) (c)
Notes payable to banks 13,647 13,647
Liability for lease rejections 15,450 (15,450) (a)
Pre-petition long-term debt (including
subordinated debt of $115,000) 137,909 (115,000) (c) (22,909) (e)
Current portion of long-term debt 2,521 (e) 2,521
Senior mortgage debt 23,016 (e) 23,016
Obligations under capital lease 3,528 3,528
Other liabilities 3,494 3,494
-------------- -------------- ------------- -------------
Total liabilities 310,634 (188,726) 418 122,326
Shareholders' equity (deficit) (123,553) 183,515 (d) (36,962) (g) 23,000
-------------- -------------- ------------- -------------
Total liabilities and shareholders'
equity (deficit) $ 187,081 $ (5,211) $ (36,544) $ 145,326
============== ============== ============= =============
(a) To record elimination of pre-petition liabilities which were cancelled.
(b) To record extinguishment of debt.
(c) To record elimination of subordinated debt and related accrued interest.
(d) To record gain on cancellation of pre-petition liabilities ($184.9 million)
and loss on extinguishment of debt ($1.4 million).
(e) To record refinanced mortgages.
(f) To reflect assets and liabilities at fair value, resulting in negative
goodwill ($36.2 million).
(g) To record common stock to be issued and write-off of Old Frank's
accumulated deficit and net parent investment.
F-29
Basis of Presentation
References in these financial statements to "Predecessor" refer to Old Frank's
on and prior to May 20, 2002. References to "Successor" refer to Frank's on and
after May 20, 2002, after giving effect to the implementation of fresh start
reporting.
The accompanying financial statements for the sixteen weeks ended May 19, 2002
(Predecessor) and as of January 27, 2002 (Predecessor) have been presented in
accordance with SOP 90-7 and assumed that the Debtors would continue as a going
concern. In the Chapter 11 Cases, substantially all unsecured liabilities as of
the Petition Date were subject to compromise or other treatment under the Plan.
For financial reporting purposes, those liabilities and obligations whose
treatment and satisfaction were dependent on the outcome of the Chapter 11 Cases
have been segregated and classified as pre-petition liabilities in the
accompanying balance sheets as of November 4, 2001 and January 27, 2002.
Pursuant to SOP 90-7, professional fees and other costs associated with the
Chapter 11 Cases were expensed as incurred and reported as restructuring items.
Interest expense was reported only to the extent that it was expected to be paid
following the Chapter 11 Cases.
Certain reclassifications have been made to prior periods (Predecessor) to
conform to the financial statements for the twenty-four weeks ended November 3,
2002 (Successor).
The accompanying unaudited financial statements include all adjustments,
consisting only of normal, recurring adjustments and accruals, which are, in the
opinion of management, necessary for fair presentation of the results of
operations and financial position. Results of operations for interim periods may
not be indicative of future results. The unaudited financial statements should
be read in conjunction with the audited financial statements included in Old
Frank's Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission for the fiscal year ended January 27, 2002.
(2) LONG-TERM DEBT AND LIQUIDITY
Long-term debt consists of the following:
NOVEMBER 3, NOVEMBER 4, JANUARY 27,
2002 2001 2002
----------------- ---------------- ---------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
Exit Term Loan (see note 4) $ 17,360
Mortgages notes due 2012 with interest rates from 7% to 7.6% 24,092
Exit Revolver Facility 16,298
Pre-petition mortgage notes originally due on varying dates from
February 1, 2001 to September 1, 2007 $ 22,045 $ 22,045
DIP Financing Facility 51,592 24,297
10 1/4% Senior Subordinated Notes originally due March 1, 2008 115,000 115,000
Capital lease obligations 4,103 5,655 5,490
----------------- ---------------- ---------------
Total debt 61,853 194,292 166,832
Less:
Current portion of long-term debt 1,806
Exit Revolver Facility 16,298
DIP Financing Facility 51,592 24,297
Pre-petition long-term debt 138,587 139,315
----------------- ---------------- ---------------
Total long-term debt $ 43,749 $ 4,113 $ 3,220
================= ================ ===============
Exit Revolver Facility
As discussed in note 1, the Company entered into the Exit Revolver Facility on
the effective Date. The Exit Revolver Facility is a three-year $50 million
secured revolving loan facility, which includes $25 million of letters of
credit. The availability of borrowings under the Exit Revolver Facility
generally is based on a percentage of eligible accounts receivable, eligible
inventory and certain other assets, subject to certain reserves.
The Exit Revolver Facility allows the Company the option of prime rate loans or
Eurodollar loans. Depending upon the Company's excess availability under the
Exit Revolver Facility the loans bear interest at: (a) prime rate plus .25% or
..50%; or (b) Eurodollar rate plus 2.75%, 3% or 3.25% for an initial term of
three years, with annual renewal rights. The Exit Revolver Facility includes an
unused line fee of .25% per annum, a servicing fee of $10,000 per calendar
quarter, and an early termination fee in an amount equal to 2% of
F-30
the amount of the maximum credit if the Exit Revolver Facility is terminated in
whole during the first year, 1% during the second year, and 0.5% during the
third year.
The Exit Revolver Facility ("Facility") contains a number of covenants, which
restrict, among other things, Frank's ability to incur additional debt, pay
dividends or make other restricted payments, grant liens, make loans, advances,
and investments, engage in transactions with affiliates, dispose of assets,
prepay and refinance debt, and make certain changes in its business. As of
November 3, 2002, there was $16.3 million outstanding under the Facility and
outstanding letters of credit aggregated $11.4 million. Availability as of
November 3, 2002 was $13.5 million. For certain days during the 2002 third
quarter the Company was not in compliance with financial covenants in the
Facility that required minimum levels of inventory and financial ratios. The
lender under the Facility waived that noncompliance on December 17, 2002. As a
result of obtaining more favorable vendor terms than originally anticipated and
improved inventory management, the assumptions on which the financial
projections were based in determining the financial covenants for the Facility
have changed. The Company is presently in negotiations with the Lender to revise
certain financial ratios under the Facility. On November 3, 2002 the Company was
in compliance with the financial covenants.
Exit Term and Revolving Loan
On the Effective Date, Frank's also entered into an Exit Term and Revolving
Loan. The Exit Term and Revolving Loan is comprised of a $20 million term loan
(the "Exit Term Loan") and $10 million of revolving loans, both secured by the
Company's owned but unmortgaged and leased real property. These two loans bear
interest at 10.25% per annum for an initial term of three years, with renewal
rights for up to two years. The Exit Term and Revolving Loan has at the lender's
option purchase rights under a warrant agreement to purchase up to 5,869,565
shares of common stock at $1.15, subject to adjustment for anti-dilution (see
note 4). In addition Frank's is required to prepay the Exit Term and Revolving
Loans with the net cash proceeds from the sale of certain assets.
The Exit Term Loan also contains a number of covenants, which restrict, among
other things, Frank's ability to incur additional debt, pay dividends or make
other restricted payments, grant liens, make loans, advances and investments,
engage in transactions with affiliates, dispose of assets, enter into
sale-leaseback arrangements, effect mergers, consolidations, and dissolutions.
Upon emergence from bankruptcy, the $20 million Exit Term Loan was utilized to
retire the borrowings under the DIP Financing Facility. As of November 3, 2002,
$20 million was outstanding under the Exit Term Loan.
DIP FINANCING FACILITY
On February 19, 2001, the Debtors entered into a $100 million
debtor-in-possession financing facility (the "DIP Financing Facility") with
Wells Fargo, as administrative agent for a syndicate of financing institutions.
The DIP Financing Facility expired by its terms on the Effective Date. Frank's
had borrowings outstanding of $13.6 million on the expiration date. A portion of
the Exit Term Loan proceeds was utilized to retire the DIP Financing Facility on
the Effective Date. In conjunction with the retirement, a charge of $1.4 million
for extinguishment of debt primarily related to the write-off of debt issue
costs was recognized as a reorganization item.
SENIOR SUBORDINATED DEBT
Frank's had outstanding $115 million of 10 1/4% Senior Subordinated Notes
originally due March 1, 2008 (the "10 1/4% Notes"). The 10 1/4% Notes were
general unsecured obligations of Old Frank's, were subordinated in right of
payment to all existing and future senior indebtedness.
No interest payments were made on the 10 1/4% Notes during the pendency of the
Chapter 11 Cases.
On the Effective Date, pursuant to the Plan, indebtedness under the 10 1/4%
Notes of $115 million, was cancelled, and the holders became entitled to receive
Common Stock.
SENIOR DEBT
As part of the Plan, the pre-petition mortgage notes were renegotiated with
interest rates between 7% and 7.6% and ten-year terms. As of November 3, 2002
scheduled maturities of the renegotiated mortgage notes are $0.7 million for the
remainder of 2002; $0.6 million in 2003; $0.6in 2004; $0.6 in 2005; $0.7 million
in 2006 and $3.5 in 2007.
REJECTED CONTRACTS AND LEASES
During the pendency of the Chapter 11 Cases, the Debtors reviewed their
executory contracts and unexpired leases and received approval from the
Bankruptcy Court to reject certain contracts and leases. In this context,
"rejection" means that the Debtors were relieved from their obligations to
perform further under the contract or lease. Any claim for damages resulting
from the rejection of a
F-31
contract or lease was treated as a general unsecured claim in the Chapter 11
Cases and a $15.5 million charge for the estimated maximum allowed claim under
bankruptcy law was recognized as a reorganization item.
(3) INCOME TAXES
The Company's management, in assessing the realizability of deferred tax assets,
must consider whether it is more likely than not that part or all of the
deferred tax assets may not be realized. This assessment includes consideration
for the scheduled reversal of temporary taxable difference, projected future
taxable income, and tax planning strategies.
No income tax benefit was recognized for the loss from operations for the twelve
weeks ended November 3, 2002. Instead, the increase in net deferred tax assets
as a result of the loss was offset by an equal increase in the valuation
allowance.
PREDECESSOR PERIODS
No income tax benefit was recognized for the loss from operations before
reorganization items for the sixteen weeks ended May 19, 2002. Instead, the
increase in net deferred tax assets as a result of the loss was offset by an
equal increase in the valuation allowance. In addition, no income tax expense or
benefit was recognized on the reorganization items for the sixteen weeks ended
May 19, 2002. The items of income and expense included in the reorganization
income are non-taxable and non-deductible, respectively.
BANKRUPTCY IMPACT
In connection with the reorganization, a gain on cancellation of indebtedness
was realized. This gain will not be taxable since the gain resulted from
reorganization under the Bankruptcy Code. However, the Company will be required,
as of the beginning of its 2003 taxable year, to reduce certain attributes
including net operating loss carryforwards ("NOLs"), certain tax credits and tax
bases in assets in an amount equal to such gain on extinguishment.
The reorganization of the Company on the Effective Date constituted an ownership
change under Section 382 of the Internal Revenue Code. Consequently, the use of
any of the NOLs and tax credits generated prior to the ownership change, that
are not reduced pursuant to the provisions discussed above, will be subject to
an annual limitation.
(4) SHAREHOLDERS' EQUITY
The Exit Term and Revolving Loan incorporated stock purchase warrants
("Warrants"). The Warrants are exercisable to purchase the Company's Common
Stock, par value $.001 per share, at a price of $1.15 per share subject to
adjustments for anti-dilution. The Warrants are redeemable upon certain
conditions being met and will expire on May 20, 2005, subject to extension under
the Exit Term and Revolving Loan. Accounting Principles Board 14 "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants, Emerging Issues
Task Force (EITF) 00-27 "Application of EITF Issue No 98-5 to Certain
Convertible Instruments" requires the issuer to allocate the proceeds received
in a financing transaction that includes a convertible instrument to the
convertible instrument and any other detachable instruments included in the
exchange on a relative fair value basis. As of May 20, 2002 Warrants available
for exercise and included for valuation purposes were 5,000,000. The remaining
Warrants of 869,565 will be exercisable upon initial utilization of the
revolving portion of the Exit Term and Revolving Loan, at which time the fair
value of such Warrants will be determined. (see note 7). The independent
valuation of the $20 million proceeds under the Exit Term Loan resulted in an
allocation to the Warrants of $3.1 million as shown in the statement of
shareholders' equity and the remaining $16.9 million to the Exit Term Loan. The
$3.1 million is being amortized to interest expense over the initial term of the
debt. As of November 3, 2002, the un-amortized discount is $2.6 million.
Pursuant to the Plan, the Company has issued 11,882,006 shares of common stock
to creditors of record. The Company will issue the remaining 8,117,994 shares,
as disputed claims are resolved. The stock is traded on the OTC Bulletin Board.
The ticker symbol is FNCN.
Pursuant to the Plan, the Company established the 2002 Stock Option Plan for
which 3,652,174 shares of Common Stock are reserved for issuance under the Plan.
On September 12, 2002 the Company granted options to key executives and outside
directors for 2,476,117 in two groupings with a grant price of $1.15 per share.
The first group of options for 1,826,117 were to vest over two years, with 50%
vested at September 12, 2002 and the remaining 50% on May 20, 2003. Due to
recent management changes, the options that vested at September 12, 2002 will
expire July 31, 2003 if not exercised and the remaining 50% will not vest. The
second group of options for 650,000 will vest over three years, with 33 1/3%
vesting at the end of each of the first three years beginning May 20, 2003 and
will expire ten years from grant date if not exercised.
The Company applied APB Opinion No. 25 and related interpretations in accounting
for these stock option grants; accordingly, no compensation cost has been
recognized.
F-32
(5) EARNINGS PER SHARE
Basic earnings per share is computed by dividing earnings on common shares by
the weighted average number of common shares outstanding during each period.
Diluted earnings per share reflect per share amounts that would have resulted if
dilutive potential common stock had been converted to common stock. For the
twenty-four weeks ended November 3, 2002 the incremental shares that would have
been exercisable and outstanding under the 2002 Stock Option Plan and Warrant
agreements were not included in the computation of diluted earnings per share
because the effect would be antidilutive.
(6) RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001, and specifies criteria for the recognition and reporting of
intangible assets apart from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. Intangible assets with definite
useful lives will be amortized over such lives to their estimated residual
values. SFAS No. 142 was adopted as of May 19, 2002. As a result of the chapter
11 bankruptcy proceedings and the write-off of goodwill in the fiscal year ended
January 27, 2002, the adoption of SFAS No. 141 and SFAS No. 142 by Old Frank's
in the sixteen weeks ended May 19, 2002 had no impact on the Company's earnings
or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145, among other things, prohibits the classification of gains and
losses from extinguishment of debt as extraordinary unless they meet the
criteria defined in Opinion 30. The provisions of SFAS No. 145 were adopted in
the 2002 first quarter, and as such, the loss recognized by Old Frank's on the
extinguishment of debt resulting from the emergence from the chapter 11
bankruptcy proceedings has been classified as a reorganization item.
Reclassification within previously issued financial statements is required, and
as such, the loss recognized by Old Frank's on the extinguishment of debt for
the 2001 first three quarters has been reclassified as part of the loss from
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 applies to costs associated with
an exit activity (including a restructuring) or with a disposal of long-lived
assets. Under SFAS No. 146, a company will record a liability for a cost
associated with an exit or disposal activity when that liability is incurred and
can be measured at fair value. A liability is incurred when an event obligates
the entity to transfer or use assets. Under current accounting guidance, a
liability can be recorded when management has committed to an exit plan. The
requirements under SFAS No. 146 are effective prospectively for exit or disposal
activities initiated after December 31, 2002. Restatement of previously issued
financial statements is not permitted.
(7) SUBSEQUENT EVENTS
On November 4, 2002 the Company borrowed $5 million at an annual interest rate
of 10 1/4% under the revolving loan portion of the Exit Term and Revolving Loan
Agreement triggering the exercise clause for the remaining stock purchase
warrants (see note 4). In accordance with EITF No. 98-5, the fair value of the
869,565 Warrants is $0.4 million. The $5 million revolving loan was repaid on
December 12, 2002.
On December 10, 2002, the Company made an election to be treated as a taxable
REIT subsidiary for federal income tax purposes due to the significant ownership
of stock in the Company by an affiliate of Kimco. As a result of this election,
certain expenses of the Company paid to Kimco or its affiliates, which are
primarily rent and interest could be subject to limitations as to their
deductibility. The Company does not believe that this election will have a
material effect on its results of operations.
On December 19, 2002, pursuant to the Plan, the Company issued an additional
1,485,557 shares of common stock to creditors of record. On December 20, 2002,
20,921 shares of the Company's common stock which were previously issued to
creditors of record were cancelled. Following such issuance and cancellation,
there are remaining an aggregate of 6,653,358 shares of common stock to be
issued to creditors as disputed claims are resolved.
On January 23, 2003, the Company and Kimco Capital Corp. entered into an
amendment to the Exit Term and Revolving Loan Agreement, increasing the amount
of revolving loans available under the agreement to $20 million and pledging
additional collateral to secure borrowings under the agreement. In connection
with the amendment, the Company granted Kimco Capital Corp. warrants to purchase
an additional 5,000,000 shares of the Company's common stock, which warrants
were immediately exercisable at an exercise price of $2.00 per share subject to
adjustments for anti-dilution. The warrants are redeemable upon certain
conditions being met and will expire on May 20, 2005, subject to extension under
the Exit Term and Revolving Loan Agreement. The fair value of the warrants is
$2.2 million. On January 24, 2003, the Company borrowed $5.25 million at an
annual interest rate of 10 1/4% under the revolving loan portion of the Exit
Term and Revolving Loan Agreement.
F-33
EXHIBIT INDEX
EXHIBIT NO DESCRIPTION
2.1 Second Amended Joint Plan of Reorganization of Frank's Nursery
and Crafts, Inc and FNC Holding, Inc. (filed as Exhibit 2.1 to
the Registrant's Current Report on Form 8-K dated May 7, 2002)
3.1 Certificate of Incorporation (filed as Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended August 11, 2002)
3.2 Bylaws (filed as Exhibit 3.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended August 11,
2002)
4.1 Investor Rights Agreement, dated as of May 20, 2002, by and
between the Registrant and certain holders of warrants to
acquire common stock of the Registrant (filed as Exhibit 4.1
to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended August 11, 2002)
4.2 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Kimco Realty Services, Inc. (filed as Exhibit 4.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended August 11, 2002)
4.3 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Third Avenue Trust (filed as Exhibit 4.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
August 11, 2002)
4.4 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Cypress Merchant Banking Partners, L.P. (filed as Exhibit 4.4
to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended August 11, 2002)
4.5 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Cypress Garden Ltd. (filed as Exhibit 4.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
August 11, 2002)
4.6 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Joseph Baczko (filed as Exhibit 4.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
August 11, 2002)
4.7 Stock Purchase Warrant, dated as of January 23, 2003, granted
to Kimco Realty Services, Inc.
10.1 Loan and Security Agreement, dated May 20, 2002, by and among
the Registrant and Congress Financial Corporation, as agent
for the lenders (filed as Exhibit 10.14 to the Registrant's
Current Report on Form 8-K dated July 25, 2002)
X-1
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. DESCRIPTION
10.2 First Amendment to Loan and Security Agreement, dated as of
May 20, 2002, among the Registrant, Congress Financial
Corporation, as Administrative Agent, and the Lenders party
thereto (filed as Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended August 11,
2002)
10.3 Credit and Security Agreement, dated as of May 20, 2002,
between the Registrant and Kimco Capital Corp. (filed as
Exhibit 10.13 to the Registrant's Current Report on Form 8-K
dated July 25, 2002)
10.4 First Amendment and Waiver to Credit and Security Agreement,
dated as of January 23, 2003, among the Registrant and Kimco
Capital Corp.
10.5 2002 Stock Option Plan (filed as Schedule 1.52 to Exhibit 2.1
to the Registrant's Current Report on Form 8-K dated May 7,
2002)
10.6 Stock Option Agreement, dated September 12, 2002, between the
Registrant and Steven S. Fishman (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended August 11, 2002)
10.7 Stock Option Agreement, dated September 12, 2002, between the
Registrant and Alan J. Minker (filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended August 11, 2002)
10.8 Stock Option Agreement, dated September 12, 2002, between the
Registrant and Adam Szopinski (filed as Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended August 11, 2002)
10.9 Employment Agreement, dated as of December 1, 2002, between
the Registrant and Adam Szopinski
10.10 Employment Agreement, dated as of December 1, 2002, between
the Registrant and Alan J. Minker
10.11 Employment Agreement, dated as of December 1, 2002, between
the Registrant and Kim Horner
10.12 Employment Agreement, dated as of December 1, 2002, between
the Registrant and Keith Oreson
10.13 Agreement, dated as of December 1, 2002, between the
Registrant and Joseph Nusim, with regard to consulting
services
X-2
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. DESCRIPTION
16.1 Letter of Ernst & Young LLP regarding change in certifying
accountant (filed as Exhibit 16.1 to the Registrant's Current
Report on Form 8-K dated June 18, 2002)
23.1 Consent of Ernst & Young LLP
X-3