As filed with the Securities and Exchange Commission on May 27, 2003
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
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
- --------------------------------------------------------------------------------------------------------------------
Page
Number
- --------------------------------------------------------------------------------------------------------------------
Item 1. Business 1
Item 2. Financial Information 9
Item 2A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 3. Properties 24
Item 4. Security Ownership of Certain Beneficial Owners and 25
Management
Item 5. Directors and Executive Officers 27
Item 6. Executive Compensation 29
Item 7. Certain Relationships and Related Transactions 34
Item 8. Legal Proceedings 36
Item 9. Market Price of and Dividends on the Registrant's 36
Common Equity and Related Stockholder Matters
Item 10. Recent Sales of Unregistered Securities 38
Item 11. Description of Registrant's Securities to be Registered 40
Item 12. Indemnification of Directors and Officers 43
Item 13. Financial Statements and Supplementary Data 44
Item 14. Changes in and Disagreements with Accountants on 44
Accounting and Financial Disclosure
Item 15. Financial Statements and Exhibits 44
INDEX TO FINANCIAL STATEMENTS F-1
EXHIBIT INDEX X-1
- --------------------------------------------------------------------------------------------------------------------
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 "2002" is a reference to the
fiscal year ended January 26, 2003).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This filing contains certain forward-looking statements, which reflect
management's current views of future events and financial performance. These
forward-looking statements are based on many assumptions and factors detailed in
the Company's filings with the Securities and Exchange Commission, including the
ability of the Company to maintain normal trade terms with vendors, the ability
of the Company to comply with the various covenant requirements contained in its
financing agreements, customer demand, fashion trends, competitive market
forces, the effect of competitive products and pricing, customer acceptance of
the Company's merchandise mix and retail locations, weather, risks associated
with foreign global sourcing, including political instability and changes in
import regulations, the effects of currency fluctuations, economic conditions
worldwide, and the ability of the Company to execute its business plans
effectively. Any changes in such assumptions or factors could produce
significantly different results. The Company undertakes no obligation to update
forward-looking statements, whether as a result of new information, future
events, or otherwise.
ITEM 1. BUSINESS
OVERVIEW
Frank's operates the nation's largest chain of lawn and garden
specialty retail stores (as measured by sales). 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 218
stores.
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 all 33 of the 44 closed stores that were
owned by the Company. One additional store was closed in 2000 upon the
expiration of the related lease. 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.
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, Frank's Nursery & Crafts, Inc. and FNC
Holdings, Inc. (collectively, the "Debtors") filed voluntary petitions under
Chapter 11 of the U.S. Bankruptcy Code in U.S. Bankruptcy Court which were
jointly administered.
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
Debtors emerged from the bankruptcy proceedings. As a result of the plan of
reorganization, the following actions occurred as of May 20, 2002:
- all of the issued and outstanding common stock of the Debtors was
cancelled;
- Frank's Nursery & Crafts, Inc. merged with and into FNC Holdings, Inc.,
and then changed its name to Frank's Nursery & Crafts, Inc., which was
reincorporated in Delaware;
- certain indebtedness of the Debtors was cancelled in exchange for cash
and/or common stock, par value $.001 per share, of the Company;
- executory contracts or unexpired leases to which any Debtor was a party
were assumed or rejected;
2
- members of the board of directors and officers of the Company were
elected or appointed and began serving their respective terms; and
- the overall corporate structure was simplified through the dissolution
or merger with Frank's Nursery & Crafts, Inc. of all of the
subsidiaries of the Debtors.
In addition, the Debtors' mortgage lenders determined, and the bankruptcy court
found, that there was sufficient security to support the Company's refinanced
mortgages.
On May 20, 2002, 50,000,000 shares of the Company's common stock
("Common Stock") were authorized and (a) 20,000,000 shares of the Company's
common stock were reserved for distribution in respect of claims against the
Debtors, (b) 913,044 shares of the Company's common stock were reserved for
issuance of warrants to purchase shares of common stock at an exercise price of
$1.38 for the old equity holders of FNC Holdings, Inc., (c) 3,652,174 shares of
the Company's common stock were reserved for a new stock option plan, which was
implemented in accordance with the plan of reorganization and (d) 5,869,565
shares of the Company's common stock were reserved for the conversion rights of
Kimco Realty Services Inc., an affiliate of Kimco Realty Corporation, as part of
the exit financing.
In addition, on May 20, 2002, Frank's entered into a three-year $50
million secured revolving credit facility, that includes $25 million for letters
of credit, with Congress Financial Corporation as agent for a syndicate of
lenders and a $30 million term and revolving loan with Kimco Capital Corp. The
Company's debtor-in-possession credit facility expired by its terms on May 20,
2002, and a portion of proceeds the Company's term loan with Kimco Capital Corp.
was utilized to retire outstanding borrowings of $13.6 million under the
debtor-in-possession credit facility on May 20, 2002.
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, December 19, 2002 and March 17, 2003. 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 13,691,197 shares have been distributed to date to
creditors whose claims have been resolved. The remaining 6,308,803 shares will
be distributed to creditors whose claims are yet to be resolved if such claims
are allowed or, once such claims are resolved, if some of such claims are
disallowed, any remaining shares will be distributed to creditors who have
already been issued shares, as all of the 20,000,000 shares of the Company's
common stock are to be distributed to holders of allowed claims. As of April 18,
2003, 418 claims remaining outstanding against the Company, for an aggregate
amount of $20.6 million.
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,
3
Christmas trim-a-tree merchandise and snow removal, power equipment, barbecues
and watering accessories, was estimated at $94.9 billion in 2002 and grew 7.3%
from an estimated $88.4 billion in 2001, according to Nursery Retailer magazine.
During the period from 1992 through 2002, the lawn and garden industry grew from
$53.6 billion to $94.9 billion, according to Nursery Retailer magazine. Among
other factors, the Company believes that the principal reasons for this
sustained growth were the popularity of gardening as a leisure activity, new
home construction and favorable demographic trends such as the aging of the
baby-boomer population.
The lawn and garden market is highly seasonal, with the spring season
accounting for the majority of annual product sales. The market for green 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. The Company continues to focus on
improvements in store and product presentation, merchandise mix 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. In addition, the Company intends to experiment with new
product offerings that will complement its core businesses and increase sales
during the Company's slower selling periods (mid-July to October and January
till late March).
The Company's merchandising efforts are focused on maintaining an
appropriate in-stock position for high sales volume items and maximizing
inventory turns by decreasing the time required to replenish inventory levels.
The Company is implementing new management reporting tools to aid in this
effort. In addition, the Company plans to enhance store signage and "curb
appeal".
The Company utilizes extensive marketing and advertising efforts to
communicate with its customers. The Company's marketing efforts are intended to
build customer traffic at its stores and extend the peak selling seasons of its
core businesses by implementing multi-media advertising, including radio ads,
aggressive pricing to match competitors on similar items, and promotional events
and discount programs.
4
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. During the 2003 spring
selling, the Company intends to offer new lawn and garden products such as gas
grills, propane exchange, solar lighting, pools and accessories, patio furniture
and swing sets. The Company is also fine tuning its live goods pricing
strategies and quality levels to compete against local nurseries and discount
and home improvement chains 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 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.
5
PRODUCT CATEGORIES
The principal products sold at the Company's retail stores are as
follows:
Percentage of Total Sales
-----------------------------------
Product Line 2002 2001 2000 Description
- ------------ ---- ---- ---- -----------
Lawn and garden 68% 70% 67% 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 18 17 19 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 14 13 14 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 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.
6
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.
Unusually wet or cold weather reduces consumer purchases during the spring
selling season. In 2001, 46% of the Company's sales occurred during the spring
selling 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.
Like most seasonal retailers, the Company increases inventory levels
significantly leading up to its two peak selling seasons. In the months leading
up to those seasons, the Company orders product for delivery prior to and during
the selling seasons. Frank's negotiates payment terms with suppliers on a
case-by-case basis. Historically, the majority of payments are made during or
shortly after the selling season, and a small percentage is paid prior to the
selling season.
Working capital for pre-seasonal inventory buildup comes from the
Company's two revolving credit facilities and/or cash generated by operations.
The Company's revolving credit facility with Congress Financial Corporation is
asset-based and allows for borrowing at a percentage of inventories on hand, net
of amounts reserved under the credit agreement. The amounts reserved are based
on a number of variables, including inventory levels, merchandise purchases and
sales levels, and the types of reserves include inventory shrinkage, letters of
credit outstanding, sales taxes and other liabilities of the Company. The total
amount of these reserves varies by season but typically ranges from 15% to 35%
of the cost of eligible inventory. The Company's revolving credit facility with
Kimco Capital Corp. is secured by real estate and a second lien on the Company's
inventory. Availability under the facility does not fluctuate from month to
month as it is not tied to a borrowing base. Hence, the Company uses the Kimco
revolver to fund most of its pre-seasonal inventory buildup, and it uses the
Congress facility when inventory levels rise.
VENDORS
Substantially all of the plants and products the Company sells are
purchased from approximately 800 outside vendors. Alternative sources of supply
are generally available for each of the products sold by the Company.
7
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.
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.
The following table sets forth the number of stores opened and closed
during the periods indicated.
Fiscal Year
------------------------------------------------
2002 2001 2000 1999
---- ---- ---- ----
Stores open at beginning of period 170 218 257 252
Stores opened during period 0 1 6 6
Stores closed during period 0 3 45 1
Stores closed as a result of bankruptcy 0 46 0 0
--- --- --- ---
Stores open at the end of the period 170 170 218 257
=== === === ===
STORE OPERATIONS
The Company's stores are normally open 84 hours per week during the
spring and Christmas season, with the average store opening at 8 a.m. and
closing at 9 p.m. During other times of the year, the average store is open from
10:00 a.m. until 8:00 p.m.
The average store has approximately 15 to 20 part and full-time
employees, including a store manager, an assistant manager and up to four
department specialists responsible for the various product lines. During
seasonal peak selling periods, the permanent store staff is generally
supplemented with temporary employees.
EMPLOYEES
At April 6, 2003, the Company's employee base was approximately 3,600
including seasonal employees. The Company's entire employee base is non-union,
and management
8
considers its employee relations to be good.
DISTRIBUTION
The Company operates distribution centers in Harrisburg, Pennsylvania
and Howe, Indiana. These centers delivered approximately 55% of all merchandise
to the Company's stores in 2002, 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 should be read in conjunction with the
Company's audited financial statements included herein. 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 thirty-six weeks ended
January 26, 2003 (Successor) are not prepared on a basis comparable to the prior
periods presented.
Thirty-Six
Weeks Ended Sixteen Fiscal Years
January 26, Weeks Ended -------------------------------------------------------
2003 May 19, 2002 2001 2000 1999 1998
(Successor) (Predecessor) (Predecessor) (Predecessor) (Predecessor) (Predecessor)
----------- ------------- ------------- ------------- ------------- -------------
Net Sales $204,156 $110,992 $371,417 $436,947 $487,332 $512,101
Restructuring and other
related charges 1,127 21,839 40,887 127,047 0 0
Net income (loss) (17,631) 158,281 (91,996) (168,290) (9,296) 2,374
Balance Sheet Data:
Total assets 107,481 187,081 165,313 286,021 449,633 433,263
Total debt, including
current portion 57,988 155,084 166,832 214,310 233,416 194,695
Shareholder's equity
(deficiency in assets) 9,846 (123,553) (97,995) (5,939) 147,826 151,063
9
PRO FORMA OPERATING RESULTS
The following unaudited pro forma statement of operations reflects the
financial results of the Company for the thirty-six weeks ended January 26,
2003, and the sixteen weeks ended May 19, 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 2002. All amounts are stated in thousands,
except for per share data.
For the fiscal year ended January 26, 2003
-----------------------------------------------------------------------------------------
Thirty-six Sixteen
Ended Weeks Ended
January 26, May 19,
2003 2002 Restructuring Closed Fresh-start Financing
(Successor) (Predecessor) Items Stores Adjustments Agreements Proforma
----------- ------------- ------------- ------- ----------- ---------- --------
Net Sales $204,156 $110,992 $315,148 (1)
Operating costs and expenses:
Cost of sales, including 153,953 80,756 (829) (3,151) 230,729 (1),(2)
buying and Occupancy
Selling, general and 61,873 31,490 (410) (780) 92,173 (1),(2)
administrative
Restructuring and other 1,127 21,839 (22,966) 0 (1)
related Charges
Other income (200) (118) (318)
----------- ------------- ------------- ------- ----------- ---------- --------
216,753 133,967 (22,966) (1,239) (3,931) 0 322,584
----------- ------------- ------------- ------- ----------- ---------- --------
Income (loss) from operations (12,597) (22,975) 22,966 1,239 3,931 0 (7,436)
Interest expense 5,034 2,583 (310) 7,307 (3)
----------- ------------- ------------- ------- ----------- ---------- --------
Loss before reorganization (17,631) (25,558) 22,966 1,239 3,931 310 (14,743)
items and income taxes
----------- ------------- ------------- ------- ----------- ---------- --------
Reorganization items:
Gain on cancellation of 184,954 (184,954) 0 (1)
prepetition liabilities
Fresh start adjustments 324 (324) 0 (1)
Extinguishment of debt (1,439) 1,439 0 (1)
----------- ------------- ------------- ------- ----------- ---------- --------
Total reorganization items 183,839 (183,839)
----------- ------------- ------------- ------- ----------- ---------- --------
Income tax expense
----------- ------------- ------------- ------- ----------- ---------- --------
Net income (loss) $(17,631) $158,281 ($160,873) $1,239 $3,931 $310 ($14,743)
=========== ============= ============= ======= =========== ========== ========
Basic and diluted loss per share ($0.74) (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.
(2) To eliminate historical depreciation expense and record pro forma
depreciation using the "fresh start" cost basis for property, equipment and
leasehold improvements.
(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) Pro forma weighted average common shares outstanding represents the shares
of new common stock issued under the reorganization plan.
10
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 audited
financial statements included herein for a discussion of the fresh start
adjustments. For financial reporting purposes, references to "Predecessor" refer
to the Company's predecessors on and prior to May 20, 2002, and references to
"Successor" refer to the Company on and after May 20, 2002, after giving effect
to the implementation of fresh start reporting. Successor financial statements
are not comparable to Predecessor financial statements. However, for discussion
of results of operations, the thirty-six weeks ended January 26, 2003
(Successor) has been combined with the sixteen weeks ended May 19, 2002
(Predecessor) and compared with the fiscal year ended January 27, 2002
(Predecessor).
RESULTS OF OPERATIONS
2002 COMPARED TO 2001
The following table shows the combined 2002 periods in comparison to the
corresponding 2001 period (dollars in thousands):
Thirty-six
Weeks Ended Sixteen Weeks Fifty-two Fifty-two
January 26, Ended May 19, Weeks Ended Weeks Ended
January 26, January 27,
2003 2002 2003 2002
(Successor) (Predecessor) (Combined) (Predecessor)
--------------- ---------------- --------------- ---------------
Net sales $ 204,156 $ 110,992 $ 315,148 $ 371,417
Operating costs and expenses:
Cost of sales, including buying and 153,953 80,756 234,709 297,850
occupancy
Selling general and administrative 61,873 31,490 93,363 109,404
Restructuring and other related charges 1,127 21,839 22,966 40,887
Early extinguishment of debt 4,230
Amortization of goodwill 1,631
Other income (200) (118) (318) (1,221)
Total operating costs and expenses 216,753 133,967 350,720 452,781
Loss from operations (12,597) (22,975) (35,572) (81,364)
Interest expense 5,034 2,583 7,617 10,632
Reorganization income 183,839 183,839
--------------- ---------------- --------------- ---------------
Net income (loss) $ 7,631) $ 158,281 $ 140,650 $ (91,996)
=============== ================ =============== ===============
NET SALES. Net sales were $315.1 million for 2002, a decrease of $56.3
million or 15.2% compared with 2001 net sales of $371.4 million for 2001.
Comparative store sales (stores open for the full time for the periods
presented) decreased 5.3% for 2002. Factors contributing to the net sales
decrease resulted from unfavorable weather patterns in virtually all markets
where the
11
Company operates which negatively impacted the lawn and garden sales for the
first quarter of 2002 and a general weakness in economic conditions during 2002.
In addition net sales for 2001 included sales related to the store closure
programs of $35.8 million.
COST OF SALES, INCLUDING BUYING AND OCCUPANCY. Cost of sales were
$234.7 million for 2002 compared with $297.9 million for 2001. As a result of
the reorganization efforts of the Company during bankruptcy, a charge of $8.1
million for a lower of cost or market reserve for inventory was recorded in
2001 (an "inventory clearance reserve"). The categories of inventory included
specific classes within the floral, home decor, Christmas Trim-a-Tree and basic
craft (such as paints yarn, and stitchery) product lines that would no longer
be purchased or that were determined to be obsolete for the business upon
emergence. In 2002 the Company adjusted its inventory valuation reserve
resulting in a $2 million lower of cost or market charge in accordance with its
accounting policy. Cost of sales, as a percentage of net sales, was 74.5% in
2002 compared with 80.2% in 2001. Excluding cost of sales for the stores that
were part of the store closing programs in 2001, cost of sales for 2002 would
have been 73.6% of net sales compared with 74.3% for 2001. The 2002 merchandise
profit margin (defined as net sales less cost of sales, excluding buying and
occupancy costs) declined due to the 2002 competitive Christmas trim-a-tree
discounts. In addition sales of inventory clearance merchandise (categories
described above) produced a lower margin in 2002 (net of items sold below cost)
compared to the prior year when the items sold at full or slightly discounted
retail prior to the start of the program in the fourth quarter. Also included
in 2001 were costs of $4.1 million for the loss on inventory liquidated under
the store closure programs and the $8.1 million inventory clearance reserve.
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses
for 2002 were $93.4 million compared with $109.4 million for 2001. This decline
was due primarily to lower store expenses resulting from the lower store base
and lower corporate expenses. As a percentage of net sales, SG&A expenses were
29.6% for 2002 compared with 29.5% for 2001. Excluding expenses for the stores
that were part of the store closing programs in 2001, SG&A expenses for 2001,
as a percentage of net sales, would have been 31.0%.
RESTRUCTURING AND OTHER RELATED CHARGES. The charge for 2002 was $23
million compared with $40.9 million for 2001. The charge for 2002 included the
following: $15.5 million for costs of lease rejections; $2 million for
additional pre-petition claim payments; $2.8 million for professional fees;
$1.8 million for severance and employee retention plans approved by the
bankruptcy court while under Chapter 11 bankruptcy; $1.1 million for costs of
mortgage debt; and miscellaneous expenses of $0.8 million offset by a $1
million adjustment to the net selling price of the properties classified as
assets to be disposed of that were sold during 2002. The $15.5 million
liability for the costs of rejected store leases represented an estimate of the
maximum claim allowed under bankruptcy law. In accordance with the plan of
reorganization, these claims were treated as general unsecured claims and
resulted in a cancellation of debt and recognized as a reorganization item. The
$1.1 million liability for costs of mortgage debt represented an estimate to
properly state the pre-petition long-term debt in accordance with the plan of
reorganization. The charge for 2001 includes $14.4 million for the write-down
of goodwill and $15.2 million for the write-down of fixed assets as a result of
the bankruptcy and asset impairment analysis. Charges related to the store
closings included $0.3 million for
12
termination and severance payments for the store closure programs and $3.2
million for the write-off of the remaining assets, related goodwill, and capital
lease debt related to the store closure programs, offset by $0.9 million of
leasehold interest sales. Also included are professional fees of $4.6 million
and $3.2 million for severance and employee retention plans and $0.9 million of
miscellaneous.
EARLY EXTINGUISHMENT OF DEBT. The early extinguishment of debt for 2001
primarily represented the write-off of debt issue costs in connection with the
retirement of an outstanding credit facility with various banks and financial
institutions utilizing proceeds from the debtor-in-possession credit facility at
the petition date. The total debt retired and associated fees totaled $62.1
million, resulting in the early extinguishment of debt of $4.2 million primarily
for the write-off of debt issue costs.
OTHER INCOME. Other income, primarily related to gains from the sale of
property and leases was $0.3 million for 2002 compared to $1.2 million for 2001.
The decrease was due primarily to gains from the sale of property and leases
that was $0.2 million for 2002 compared to $0.9 million for 2001.
INTEREST EXPENSE. Interest expense for 2002 was $7.6 million compared
with $10.6 million for 2001. Lower interest for 2002 related to the new exit
financing arrangements and refinancing of existing mortgage debt.
REORGANIZATION ITEMS. A gain of $183.8 million was recognized for 2002.
The gain was due to the cancellation of pre-petition liabilities upon emergence
($184.9 million), the fresh start accounting adjustments ($0.3 million), offset
by a loss from the extinguishment of debt ($1.4 million).
INCOME TAXES. No income tax benefit was recognized for the net loss
before reorganization items for 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%. The decrease was due primarily to closing of stores
in 2001. Sales for these closed stores were $35.8 million in 2001 and $99.7
million in 2000, a decrease of $63.9 million. 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 170 comparable store base represents the remaining 170 stores
operated by the Company at the end of 2001, following the closing of 46 stores
under the 2001 store
13
closing programs and three other stores closed during 2001 upon the expiration
of the applicable leases.
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. The reduction of $19.2 million amounted to a 6% decrease. Cost
of sales, as a percentage of net sales, increased by 7 % 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, craft and
Christmas trim-a-tree product lines to net realizable value. Merchandise profit
margins (defined as net sales less cost of sales, excluding buying and occupancy
costs), excluding charges for inventory liquidation losses and the inventory
clearance reserve, declined by 5% 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% of margin loss related to the 22 stores liquidated by
the Company. Buying and occupancy costs were $65 million in 2001 compared with
$75.2 million in 2000, a decrease of 14% that was due principally to reduced
occupancy costs from the 2001 store closing program.
SELLING, GENERAL & ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses for
2001 were $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, SG&A
expenses decreased by 1% 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 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 programs 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% 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.
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:
14
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.
OTHER INCOME. Other income for 2001 was $1.2 million compared to $1
million for 2000. Other income for both 2001 and 2000 related primarily to
interest on cash equivalents and marketable securities and gains from the sale
of property and leases.
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.
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 inventory and certain other assets, subject to
certain reserves. The amounts reserved are based on a number of variables,
including inventory levels, merchandise purchases and sales levels, and the
types of reserves include inventory shrinkage, letters of credit outstanding,
sales taxes and other liabilities of the Company. The total amount of these
reserves varies by season but typically ranges from 15% to
15
35% of the cost of eligible inventory. As of January 26, 2003, there were no
amounts outstanding under the facility, and outstanding letters of credit
aggregated $7.3 million. Availability as of January 26, 2003 was $9.4 million.
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 0.75% or
a Eurodollar rate plus 2.75%, 3.25% or 3.5%. These rates were increased by an
amendment to the credit facility on February 10, 2003 (as further described
below), and prior to such amendment, the interest rates under the facility were
either the prime rate plus 0.25% or 0.5% 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 or make other
restricted payments, grant liens, make loans, advances, and investments, engage
in transactions with affiliates, dispose of assets, prepay and refinance debt,
and make certain changes in its business. The credit facility also prohibits the
declaration or payment by the Company of dividends on shares of its capital
stock. For certain days during the third and fourth quarters of 2002, the
Company was not in compliance with a covenant in the facility that required a
minimum ratio of inventory to accounts payable. On December 17, 2002, Congress
Financial retroactively waived the non-compliance with the inventory to accounts
payable covenant which occurred during certain accounting periods during the
2002 third and fourth quarters. On January 26, 2003, the Company was not in
compliance with the inventory to accounts payable covenant and a covenant in the
facility which required a minimum level of EBITDA. The required inventory to
accounts payable ratio for January 26, 2003 was 6.00, and the actual ratio as
such date was 2.32. The required minimum level of EBITDA for the period from May
20, 2002 through January 26, 2003 was $(4.4) million, and the actual level for
such period was $(7.3) million.
Under the credit facility, "EBITDA" is defined as the net earnings of
the Company on a consolidated basis for the applicable fiscal period, minus
extraordinary gains included in such net earnings for such fiscal period, plus
interest expense, income taxes, depreciation and amortization, other non-cash
charges (other than to the extent requiring an accrual or reserve for future
cash expenses) and non-cash extraordinary losses deducted from such net earnings
for such fiscal period, plus, for the fifth, sixth and seventh accounting
periods of the Company's 2002 fiscal year, restructuring charges of up to
$500,000 in the aggregate for such accounting periods deducted from such net
earnings for such fiscal period, all as determined in accordance with generally
accepted accounting principles ("GAAP"). A summary of the calculation of the
Company's EBITDA for the period from May 20, 2002 through January 26, 2003 is
set forth below.
16
(in 000s)
Net loss $(17,631)
Plus:
Depreciation 2,259
Amortization 1,080
Interest 5,034
Non-cash extraordinary losses:
Inventory reserve 1,994
-----
EBITDA $(7,264)
========
EBITDA should not be considered an alternative to GAAP net income as an
indication of the Company's performance. The computation of EBITDA required by
the Company's credit facility with Congress Financial may differ from the
methodology for calculating EBITDA utilized by other companies, and therefore,
may not provide an appropriate comparison to the results of other companies.
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 inventory to accounts
payable financial covenant for the facility had changed. On February 10, 2003,
the Company and Congress Financial entered into an amendment to the facility
which waived the non-compliance with the financial covenants which occurred
during the last two accounting periods of fiscal year 2002, revised the
measurement of minimum levels of inventory from a daily to a weekly basis,
lowered the minimum quarterly EBITDA levels, revised the minimum ratio of
inventory to accounts payable to be a ratio of accounts payable to inventory,
and increased the interest rates for the facility as described above. The
amended financial covenants are measured only if (1) the Company's excess
availability, plus the amount of cash equivalents maintained by the Company in
an account under the control of Congress Financial, falls below $4 million at
any time or (2) the Company's average excess availability, plus the average
amount of cash equivalents maintained in such account, for any four-week period
falls below $9 million. In such event, the minimum EBITDA covenant is measured
quarterly and the minimum accounts payable to inventory ratio covenant is
measured for each accounting period, and the minimum levels required by each
covenant varies from period to period as set forth in the tables below.
Management believes that the amended covenants are less restrictive and provide
the Company with more flexibility than the original covenants. As of the end of
the fiscal quarter ended May 18, 2003, the Company had sufficient excess
availability such that the financial covenants were not measured.
The following table summarizes the minimum EBITDA levels required by
the Congress Financial credit facility for each applicable period. As used in
the table, "Accounting Period" refers to the 13 four-week calendar periods
within the Company's fiscal year; provided, however, that the last Accounting
Period in each fiscal year may consist of five weeks.
17
MINIMUM AMOUNT
PERIOD OF EBITDA
------ --------------
The period of 13 Accounting Periods ending on the last day of the
($4,550,000) fourth Accounting Period of the fiscal year of Company
ending in 2004
The period of 13 Accounting Periods ending on the last day of the
($5,620,000) seventh Accounting Period of the fiscal year of Company
ending in 2004
The period of 13 Accounting Periods ending on the last day of the
($7,610,000) tenth Accounting Period of the fiscal year of Company
ending in 2004
The period of 13 Accounting Periods ending on the last day of the $1,090,000
fiscal year of Company ending in 2004
The period of 13 Accounting Periods ending on the last day of the
$5,070,000 fourth Accounting Period of the fiscal year of Company ending
in 2005
The period of 13 Accounting Periods ending on the last day of the $7,800,000
seventh Accounting Period of the fiscal year of Company ending in 2005
The period of 13 Accounting Periods ending on the last day of the
$9,060,000 tenth Accounting Period of the fiscal year of Company ending
in 2005
The period of 13 Accounting Periods ending on the last day of the $11,800,000
fiscal year of Company ending in 2005
The period of 13 Accounting Periods ending on the last day of each
$11,800,000 fourth, seventh, tenth and thirteenth Accounting Period
thereafter
The following table summarizes the minimum accounts payable to
inventory ratio required by the Congress Financial credit facility for each
applicable period.
MINIMUM
ACCOUNTS PAYABLE TO
ACCOUNTING PERIOD INVENTORY RATIO
----------------- -------------------
The second Accounting Period of the fiscal year of Company ending in 39.5%
2004
The third Accounting Period of the fiscal year of Company ending in 43.9%
2004
The fourth Accounting Period of the fiscal year of Company ending in 53.6%
2004
18
MINIMUM
ACCOUNTS PAYABLE TO
ACCOUNTING PERIOD INVENTORY RATIO
----------------- -------------------
The fifth Accounting Period of the fiscal year of Company ending in 46.8%
2004
The sixth Accounting Period of the fiscal year of Company ending in 35.8%
2004
The seventh Accounting Period of the fiscal year of Company ending in 32.0%
2004
The eighth Accounting Period of the fiscal year of Company ending in 39.8%
2004
The ninth Accounting Period of the fiscal year of Company ending in 41.3%
2004
The tenth Accounting Period of the fiscal year of Company ending in 36.1%
2004
The eleventh Accounting Period of the fiscal year of Company ending 36.0%
in 2004
The twelfth Accounting Period of the fiscal year of Company ending in 35.3%
2004
The thirteenth Accounting Period of the fiscal year of Company ending 30.1%
in 2004
The first Accounting Period of the fiscal year of Company ending in 43.9%
2005
The second Accounting Period of the fiscal year of Company ending in 45.6%
2005
The third Accounting Period of the fiscal year of Company ending in 48.8%
2005
The fourth Accounting Period of the fiscal year of Company ending in 58.8%
2005
The fifth Accounting Period of the fiscal year of Company ending in 54.9%
2005
The sixth Accounting Period of the fiscal year of Company ending in 46.0%
2005
The seventh Accounting Period of the fiscal year of Company ending in 42.8%
2005
The eighth Accounting Period of the fiscal year of Company ending in 49.0%
2005
19
MINIMUM
ACCOUNTS PAYABLE TO
ACCOUNTING PERIOD INVENTORY RATIO
------------------ -------------------
The ninth Accounting Period of the fiscal year of Company ending in 49.5%
2005
The tenth Accounting Period of the fiscal year of Company ending in 44.1%
2005
The eleventh Accounting Period of the fiscal year of Company ending 45.0%
in 2005
The twelfth Accounting Period of the fiscal year of Company ending in 49.3%
2005
The thirteenth Accounting Period of the fiscal year of Company ending 43.5%
in 2005
The first Accounting Period of the fiscal year of Company ending in 43.9%
2006
The second Accounting Period of the fiscal year of Company ending in 45.6%
2006 and each Accounting Period thereafter
TERM LOAN AND REVOLVING CREDIT FACILITY ARRANGED BY KIMCO CAPITAL CORP.
On May 20, 2002, the Company 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 a first priority lien on 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 January 26, 2003 amounts outstanding under the credit facility
included the $20 million term loan and $15.3 million of revolving loans.
In connection with the facility, the Company issued warrants to the
participating lenders and their affiliates to purchase up to an aggregate of
5,869,565 shares of common stock at an exercise price of $1.15 per share,
subject to certain anti-dilution adjustments. In connection with the amendment
of the credit facility on January 23, 2003, the Company issued warrants to the
lenders and their affiliates to acquire an additional 5,000,000 shares of common
stock at an exercise price of $2.00 per share, subject to certain anti-dilution
adjustments. The warrants may be exercised in whole or in part at any time until
the later or May 20, 2005 or the repayment or termination of the credit
facility.
20
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. The Kimco credit facility does not contain any financial
covenants, but a default by the Company under its credit facility with Congress
Financial would trigger a default under the Kimco credit facility.
ADEQUACY OF CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from
operations and borrowings under the two credit facilities. Based on current and
anticipated levels of operations, the Company's management believes that cash
flows from operations, together with amounts available under the Company's
credit facilities, will be adequate to meet the Company's anticipated cash
requirements, including debt service requirements and planned capital
expenditures.
The Company's most significant cash requirements are for merchandise
inventory, and these requirements fluctuate throughout the year due to the
seasonality of the business. Cash requirements increase substantially in August
and September in anticipation of the Christmas season and in March and April for
the lawn and garden business. Additionally, the Company's business depends, in
part, on normal weather patterns across its markets. Any unusual weather
patterns can have a material and adverse impact on the Company's revenues,
particularly on the lawn and garden sector.
In the months leading up to the Company's peak selling seasons, the
Company orders product for delivery prior to and during the selling seasons.
Frank's negotiates payment terms with suppliers on a case-by-case basis.
Historically, the majority of payments are made during or shortly after the
selling season, and a small percentage is paid prior to the influx of sales
receipts. Working capital for pre-seasonal inventory buildup comes from the
Company's two revolving credit facilities and/or cash generated by operations.
The Company's revolving credit facility with Congress Financial Corporation is
asset-based and allows for borrowing at a percentage of inventories on hand, net
of amounts reserved under the credit agreement. The amounts reserved are based
on a number of variables, including inventory levels, merchandise purchases and
sales levels, and the types of reserves include inventory shrinkage, letters of
credit outstanding, sales taxes and other liabilities of the Company. The total
amount of these reserves varies by season but typically ranges from 15% to 35%
of the cost of eligible inventory. The Company's revolving credit facility with
Kimco Capital Corp. is secured by real estate and a second lien on the Company's
inventory. Availability under the facility does not fluctuate from month to
month as it is not tied to a borrowing base. Hence, the Company uses the Kimco
revolver to fund most of the pre-seasonal inventory buildup, and the Congress
facility when inventory levels and advance rates rise.
The Company believes that its existing credit facilities will be
adequate to cover its working capital needs until the facilities expire in May
2005. At that time, the Company plans to
21
either renew the facilities or seek alternative outside financing. In the event
that cash flows from operations, together with available borrowings under the
Company's credit facilities are not sufficient to meet the Company's cash
requirements, the Company would be required to obtain alternative financing
and/or reduce planned capital expenditures. The Company can provide no assurance
that alternative financing would be available on acceptable terms, especially in
light of the fact that, except for miscellaneous real property and equipment,
substantially all of the Company's existing assets are pledged as collateral for
the existing credit facilities or that reductions in planned capital
expenditures would be sufficient to cover any cash shortfalls.
The Company anticipates spending approximately $3.2 million for capital
expenditures for 2003, primarily for store remodeling. No store openings are
planned for the remainder of 2003.
The following table sets forth a summary of the Company's contractual
commitments as of January 26, 2003 (revolving portion of the Company's credit
facilities is assumed to be repaid in 2003):
Payments due by Fiscal Year
---------------------------
2008
----
Total 2003 2004 2005 2006 2007 and after
------- ------ ------ ------ ------ ------ ---------
Long-term debt $22,600 $565 $601 $642 $684 $725 $19,383
Capital lease obligations 5,135 1,393 791 820 705 541 885
(including interest)
Operating leases 91,312 13,188 12,651 11,536 10,477 8,747 34,713
Kimco Revolving Loans 15,250 15,250
Kimco Term Loan 20,000 20,000
-------- ------- ------- ------- ------- ------- -------
Total Contractual Obligations $154,297 $30,396 $14,043 $32,998 $11,866 $10,013 $54,981
======== ======= ======= ======= ======= ======= =======
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 estimates for restructuring costs are discussed in notes 2 and 4 of the
notes to the audited financial statements included herein. Our critical
accounting policies are subject to judgments and uncertainties that affect the
application of these policies. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. On an on-going basis, the Company evaluates its
estimates, including those related to revenue recognition, valuation of
inventory, deferred tax assets, impairment of long-lived assets and
restructuring costs. In the event estimates or assumptions prove to be different
from actual amounts, adjustments are made in the subsequent period to reflect
more current information. The material accounting policies that the Company
believes are most critical to the understanding of the Company's financial
position and results of operation are discussed below.
22
REVENUE RECOGNITION. The Company recognizes revenue when the customer
takes possession of the merchandise at the point of sale. The Company has a
formal right of return policy that requires original receipt. The Company
annually reviews sales returns to determine the length of time between the date
of sale and the return date. Based upon its annual review and the applicable
rules guiding revenue recognition, the Company has not deemed a reserve for
sales returns necessary. If the sales return patterns were to change, the
Company would record a reserve based upon projected sales returns utilizing
current patterns.
INVENTORY VALUATION. Inventories are valued at the lower of cost or
market; cost being determined under weighted average method which approximates
the first in, first out method. Calculations of the carrying value of inventory
are made on an item-by-item basis. The Company annually reviews its inventory
levels in order to identify obsolete, slow-moving merchandise and uses
merchandise markdowns to clear such merchandise throughout the year. Where the
markdown may result in an item being sold for less than its cost the Company
provides a reserve for the difference between the cost and the expected selling
price of all inventory items expected to be sold below cost. Additionally, the
Company reduces the ending inventory value for estimated losses related to
shrink. This estimate is determined based upon analysis of historical shrink
losses as well as the results of interim cycle counts of seasonal inventory and
its annual physical inventory. If there are items in inventory that do not sell
as expected or there is an increase or decrease in inventory shrink as compared
to historical norms, then the recorded reserves would be subject to change.
DEFERRED INCOME TAXES AND VALUATION ALLOWANCE. Deferred income tax
assets and liabilities represent the future income tax effect of temporary
differences between the book and tax bases of the Company's assets and
liabilities, assuming they will be realized and settled at the amounts reported
in the Company's financial statements. The Company records a valuation allowance
to reduce its deferred tax assets to the amount that it believes is more likely
than not to be realized. This assessment includes consideration for the
scheduled reversal of temporary taxable differences, projected future taxable
income and tax planning strategies. Until the Company returns to profitability
and generates taxable income, it is unlikely that there will be significant
reductions to the valuation allowance.
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.
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.
23
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company perceives its market risk is related to interest rate risk
and foreign currency exchange rate risk for its borrowings under the credit
facility with Congress Financial, which is a variable rate financing agreement.
Borrowings under the credit facility may be based upon the U.S. prime interest
rate or the Eurodollar rate. The Company does not use swaps or other interest
rate protection agreements to hedge this risk. During the period beginning May
20, 2002 (the date on which the Company entered into the credit facility with
Congress Financial) through January 26, 2003, the Company's average outstanding
balance under the credit facility was $4.2 million. At such level, a 200 basis
point change in the interest rate on the credit facility would result in an
increase in interest expense of $84,000 per year. The Company had no borrowings
outstanding under the Congress facility at January 26, 2003. Interest under the
credit facility with Kimco Capital of $40 million is fixed at 10 1/4% per annum
and $35.3 million was outstanding at January 26, 2003. The Company does not
enter into derivative or interest rate transactions for speculative purposes.
ITEM 3. PROPERTIES
The Company's corporate headquarters are located in a 48,500 square
foot office space leased by the Company in Troy, Michigan. The lease expires in
March 2007, and the Company has two five-year options to extend the term of the
lease.
The Company currently leases a 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
2004 with three one-year renewal options, and the lease on the Howe facility
expires in June 2010 with one five-year renewal option.
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:
24
<Table>
<Caption>
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
===
</Table>
Of the 62 properties owned by the Company, 22 are mortgaged pursuant to
mortgage notes having an aggregate balance of $22.6 million at January 26, 2003.
See note 7 to the audited financial statements included herein. The Company's
interest in the remaining owned properties and all of the leased properties is
pledged as collateral for the Company's credit facility with Kimco Capital
Corp., as described under "Item 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."
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the beneficial
ownership of Common Stock as of May 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 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 59.4
3333 New Hyde Park Road
New Hyde Park, New York 11042
25
PERCENTAGE OF
NUMBER OF SHARES SHARES OF
NAME OF BENEFICIAL OWNER OF COMMON STOCK COMMON STOCK
- ------------------------ ---------------- -------------
Third Avenue Management LLC (2) 3,368,652 22.2
767 Third Avenue, 5th Floor
New York, New York 10017
Ramius Capital Group, LLC (3) 2,254,963 16.5
666 Third Avenue, 26th Floor
New York, New York 10028
Cypress Merchant Banking Partners L.P. and 908,000 6.2
Cypress Garden Ltd. (4)
c/o The Cypress Group LLC
65 East 55th Street, 19th Floor
New York, New York 10022
J. P. Morgan 821,461 6.0
14201 Dallas Parkway
Dallas, Texas 75254
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Bruce Dale 0 0
Steven S. Fishman (5) 913,058 6.3
Adam F. Szopinski (6) 50,000 *
Larry T. Lakin (7) 0 0
Aaron J. Fleishaker (8) 0 0
Gerald Hellerman (9) 8,333 *
Joseph Nusim (10) 33,333 *
David M. Samber (11) 0 0
All executive officers and directors as a group 241,664 1.7
(10 persons) (12)
- ---------
* 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 32,687 shares of the Company's common stock held by SphinX
Distressed (RCG Carpathia), Segregated Portfolio and 2,222,276 shares
of the Company's common stock held by RCG Carpathia Master Fund, Ltd.
(4) Includes warrants to acquire 908,000 shares of the Company's common
stock.
(5) Includes options to acquire 913,058 shares of the Company's common
stock. Mr. Fishman resigned from the Company effective November 27,
2002.
(6) Includes options to acquire 50,000 shares of the Company's common
stock.
(7) Mr. Lakin resigned from the Company effective June 2002.
26
(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 8,333 shares of the Company's common stock.
(10) Includes options to acquire 33,333 shares of the Company's common
stock.
(11) 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. Mr. Samber has a 10% interest in the shares owned by
Kimco Realty Services, Inc., but Mr. Samber does not have or share the
power to vote or dispose of such shares.
(12) Does not include any shares held by former executive officers of the
Company. Includes options to acquire 241,664 shares of the Company's
common stock.
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
- ---- --- --------
Bruce Dale 55 Chief Executive Officer and Director
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
Adam F. Szopinski 57 President and Chief Operating
Officer
Aaron J. Fleishaker 42 Director
Gerald Hellerman 65 Director
Joseph Nusim 69 Director
David M. Samber 53 Chairman of the Board
BRUCE DALE is the Chief Executive Officer and Director of the Company
and has served in such position since April 2003. Prior to joining the Company,
Mr. Dale was President of Aaron Brothers, a division of Michaels Stores, Inc.
from 1995 to 2003.
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 1999.
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
27
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.
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.
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., Innovative Clinical Solutions, Ltd., and
Brantley Capital Corporation and is the Chairman of the Board of MEVC Draper
Fisher Jurveston Fund I, Inc.
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 and
Chairman of the Board since December 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.
28
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE: Gerald Hellerman, Chairman
Aaron J. Fleishaker
David M. Samber
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 on September 12, 2002, and will
receive an additional grant of options to acquire 5,000 shares in each
subsequent year of service as a director. The options granted on September 12,
2002 have an exercise price of $1.15 per share, vest in three equal annual
installments beginning on May 20, 2003, and expire on September 12, 2012. The
Company reimburses each of its directors for normal and customary expenses
incurred as a result of travel to and from board meetings.
Mr. Hellerman and Mr. Nusim are considered outside directors, and Mr.
Dale, Mr. Fleishaker and Mr. Samber are not considered outside directors, due to
their employment by the Company, Kimco Realty Corporation and Kimco Select
Investments, respectively. The only compensation received by Mr. Fleishaker and
Mr. Samber from the Company is the reimbursement of 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 the former Chief Executive Officer of the
Company, the four other highest compensated executive officers in 2002 and one
former executive officer who, if he had been employed with the Company on
January 26, 2003, would have been included among the Company's highest paid
executive officers for 2002.
29
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------- LONG TERM
COMPENSATION
FISCAL OTHER ANNUAL ------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) SECURITIES
- --------------------------- ---- ------ ----- ------------ UNDERLYING ALL OTHER
OPTIONS COMPENSATION (2)
------- ------------
Steven S. Fishman (3) 2002 $507,692 $200,000 (4) $44,053
Former Chairman and 2001 $207,693 $200,000 (5) $18,775
Chief Executive Officer 1,826,117 (6) $411,837 (7)
-- $ 5,844
Adam F. Szopinski 2002 $300,000 $150,000 (4) $67,938
President and Chief Operating 2001 $350,766 (8) -- $56,375
Officer 2000 $300,000 -- $49,328 150,000 $ 24,797
-- $ 29,414
Kim Horner 2002 $199,038 $ 25,000 (5) $89,219 -- $ 11,254 (9)
Senior Vice President,
Merchandising and Marketing 100,000 --
John Heidt 2002 $175,000 $ 28,000 (4) $ 1,690
Vice President, Store Operations 2001 $175,000 $ 42,000 (4)
2000 $169,231 -- 125,000 --
Keith Oreson 2002 $162,500 $ 26,000 (4) --
Vice President, Human Resources 2001 $162,500 $ 39,000 (4)
2000 $160,729 -- 125,000 --
Larry T. Lakin (10) 2002 $134,142 $180,000 (4) $34,188
Former Vice Chairman and 2001 $350,766 (11) -- $45,877
Chief Financial Officer 2000 $300,000 -- $46,933 -- $315,222 (12)
-- $ 27,713
-- $ 12,165
- ---------
(1) Represents living, moving and vehicle expenses paid by the Company
including the tax effect.
(2) Except as otherwise noted, 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) Amount shown reflects a prorated Key Employee Retention Program bonus.
(5) Reflects a sign-on bonus.
(6) Includes options to acquire 913,059 shares of common stock which were
terminated pursuant to the terms of a Resignation and Release between
the Company and Mr. Fishman.
(7) Includes $392,308 paid pursuant to the Resignation and Release between
the Company and Mr. Fishman dated November 20, 2002.
(8) Includes $50,000 as Co-Chief Executive Officer of the Company during
2001.
(9) Includes the Company match under the Company's 401(k) plan on behalf of
Mr. Szopinski of $3,461 for 2000.
(10) Mr. Lakin resigned from the Company effective June 2002.
(11) Includes $50,000 as Co-Chief Executive Officer of the Company during
2001.
(12) Includes $300,000 paid pursuant to the Company's Severance Plan.
OPTION GRANTS IN FISCAL YEAR 2002
The following table provides details regarding stock options granted to
the executive officers named in the above Summary Compensation Table in the last
fiscal year.
30
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK APPRECIATION
FOR OPTION TERM
---------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ----------- ----------- ------ ---- ------ -------
Steven Fishman (1) 1,826,117 75% $1.15 7/29/03 $ 43,750 $ 87,500
Adam Szopinski (2) 150,000 6% $1.15 9/12/12 $108,480 $274,920
Alan Minker (2) 100,000 4% $1.15 9/12/12 $ 72,320 $183,280
Kim Horner (2) 100,000 4% $1.15 9/12/12 $ 72,320 $183,280
John Heidt (2) 125,000 5% $1.15 9/12/12 $ 90,400 $229,100
Keith Oreson (2) 125,000 5% $1.15 9/12/12 $ 90,400 $229,100
(1) 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 to acquire 913,058 shares that
vested on September 12, 2002 are exercisable only through July 29, 2003
and the remaining options to acquire 913,059 shares of common stock
terminated. See "Employment Agreements" below. The potential realizable
value shown above reflects only the options which have not terminated
and only for the term remaining through July 29, 2003.
(2) These options vest in three equal annual installments beginning on May
20, 2003.
As of April 1, 2003, the Company granted Bruce Dale, the Company's
Chief Executive Officer, a stock option under the Company's 2002 Stock Option
Plan to purchase 1,000,000 shares of the Company's common stock at a price of
$0.80 per share, which option vests in three equal annual installments beginning
on April 1, 2004.
AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning stock options
exercised during the last fiscal year by the executive officers named in the
above Summary Compensation Table, as well as the value of unexercised options
held by such persons on January 26, 2003, as measured in terms of the bid price
for the Common Stock for the most recent trading day prior to that date, as
quoted on the Over-the-Counter Bulletin Board ($1.15 per share).
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED ON VALUE UNEXERCISED OPTIONS/SARS AT FY-END IN-THE-MONEY OPTIONS/SARS AT FY-END ($)
NAME EXERCISE (#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ----------- ------------------------- -------------------------
Steven Fishman 0 - 913,058 / 0 0/0
Adam Szopinski 0 - 0 / 150,000 0/0
Alan Minker 0 - 0 / 100,000 0/0
Kim Horner 0 - 0 / 100,000 0/0
John Heidt 0 - 0 / 125,000 0/0
Keith Oreson 0 - 0 / 125,000 0/0
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
31
the grant date, vesting schedule and the expiration date of the options granted.
The exercise price of the options granted under the plan also will be determined
by the committee but will be not less than the fair 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 3,990,617 shares of the Company's
common stock have been granted to date under the Company's 2002 Stock Option
Plan, 928,059 of such options have terminated without being exercised and
3,062,558 of such options remain outstanding.
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 provided 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 agreement provided that the Company would 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, John Heidt, 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.
The Company entered into an employment agreement with Bruce Dale as of
April 1, 2003, which agreement has a three year term. Under the agreement, Mr.
Dale receives a base salary of $450,000 for the first year of the agreement,
$475,000 for the second year of the agreement and $500,000 for the third year of
the agreement. Mr. Dale is also eligible to receive an annual bonus equal to 50%
of his base salary in the event that the Company's consolidated earnings before
interest, taxes, depreciation and amortization ("EBITDA") equals or exceeds a
target level, plus 5% of the amount by which the Company's EBITDA exceeds such
target. The agreement also provides for Mr. Dale to receive other benefits
generally provided to other
32
executive employees of the Company. Upon termination by the Company without
cause, Mr. Dale is entitled to continue to receive his base salary during a
severance period of the longer of the remaining portion of the employment period
(i.e., through March 31, 2006) or one year, and Mr. Dale has agreed not to
compete with the Company during the period of his employment with the Company
and any severance period. In connection with the agreement, Mr. Dale was granted
a stock option to purchase 1,000,000 shares of the Company's common stock at a
price of $0.80 per share, which option vests in three equal annual installments
beginning on April 1, 2004.
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.
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
33
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 which ended on April 14,
2003, and for a payment of a consulting fee of $8,000 per month, for a one year
period thereafter. Pursuant to the agreement, Mr. Nusim also received an option
to acquire 25,000 shares of the Company's 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 May 23, 2003, is the beneficial owner of 59.4% 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 22.2% of the Company's common stock as of May 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 lenders may, at their
option, apply any amounts due by the Company under the credit facility
34
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.
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 exercise
price of the warrants will be adjusted in order to prevent dilution of the
warrants by multiplying the exercise price by a fraction, the numerator of which
is the sum of (a) the number of shares of common stock outstanding prior to such
issuance, multiplied by the fair market value per share of the common stock,
plus (b) the consideration, if any, received by the Company for such issuance,
and the denominator of which is the fair market value per share of the common
stock multiplied by the number of shares of common stock outstanding immediately
after such issuance. In connection with such adjustment to the exercise price,
the number of shares issuable upon exercise of the warrants will also be
adjusted to equal the result of multiplying the number of shares issuable upon
exercise of the warrant prior to such adjustment by the exercise price per share
prior to such adjustment, divided by the exercise price per share after such
adjustment.
INVESTOR RIGHTS AGREEMENT
In connection with the issuance of warrants to Kimco Realty Services,
Inc. and Third Avenue Trust in connection with the credit facility described
above and the issuance of warrants to the former holders of equity interests in
FNC Holdings, on May 20, 2002, the Company entered into an Investor Rights
Agreement with such warrant holders. Pursuant to the Investor Rights Agreement,
the warrant holders have certain rights to demand registration under the
Securities Act of 1933, as amended (the "Securities Act"), of shares of the
Company's common stock held by them, as well as certain rights to have their
shares of Common Stock registered in connection with a Securities Act
registration statement otherwise filed by the Company, either for its own
account or for the account of a stockholder. The warrant holders' rights to
demand registration of their shares are limited to a total of five demand
requests (plus an additional five demand requests for registration on a Form S-3
registration statement), which requests cannot be made within 150 days following
the effective date for the registration statement relating to a previous demand
request, and demand requests may only be made with regard to shares representing
a minimum of three percent of the shares of the Company's common stock,
determined on a fully diluted basis. The Company also may delay acting upon a
demand request if the Board of Directors believes that the filing of a
registration statement would be seriously detrimental to the Company or would
otherwise materially adversely affect a material transaction.
The agreement also provides the warrant holders with preemptive 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,
other than (1) shares issued upon exercise of convertible securities which were
either outstanding as of the date of the agreement or issued in accordance with
the provisions of the agreement, (2) shares issued in a stock split or stock
dividend or issued or sold to all holders of the Company's common stock on pro
rata basis, (3) shares issued or sold pursuant to acquisitions or corporate
partnership transactions, (4) shares issued as compensation
35
to the Company's officers, employees, directors or consultants or (5) shares
issued under the Company's plan of reorganization.
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.
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 May 23,
2003, 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 six of
the Company's retail stores and a common area relating to another of the
Company's retail stores. At January 26, 2003, leases between the Company and
Kimco Realty Corporation and its affiliates provided for aggregate monthly
rental payments by the Company of approximately $63,000.
ITEM 8. LEGAL PROCEEDINGS
See Item 1 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 January 26, 2003. These quotations represent
prices
36
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 January 26, 2003) $1.45 $1.15
As of May 23, 2003, 14,870,167 shares of the Company's common stock
are subject to outstanding options or warrants to purchase shares of common
stock. All of the issued and outstanding shares of the Company's common stock
were acquired in connection with the Company's plan of reorganization in
exchange for claims (i.e. debt) that creditors had against Frank's Nursery &
Crafts, Inc. or FNC Holdings, Inc., and therefore, could be sold pursuant to,
and subject to the requirements of, Rule 144 under the Securities Act, so long
as one year has elapsed from the date of acquisition of the original claim
against the Debtors. As of May 23, 2003, 6,213,008 shares of the Company's
common stock (and 11,782,609 shares subject to issuance upon exercise of
outstanding warrants) are held by stockholders who have the right to require the
Company to register their shares pursuant to the terms of an Investor Rights
Agreement dated as of May 20, 2002. See "Certain Relationships and Related
Transactions - Investor Rights Agreement."
HOLDERS
As of May 23, 2003, 13,691,197 shares of the Company's common stock
were outstanding and held by approximately 300 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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides details as of the end of the last fiscal
year regarding compensation plans under which equity securities of the Company
are authorized for issuance.
37
(c)
NUMBER OF SECURITIES
(a) REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE (b) FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
- ------------- ------------------- ------------------- ------------------------
Equity compensation plans
approved by security holders 1,563,058 $1.15 2,089,116
Equity compensation plans not
approved by security holders* 25,000 $1.65 0
--------- ----- ---------
Total 1,588,058 $1.16 2,089,116
- ---------------
* Reflects a stock option granted pursuant to a consulting agreement with
Joseph Nusim. See Item 7. Certain Relationships and Related Transactions,
"Consulting Agreement."
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 in exchange for such stockholders' equity
interests in FNC Holdings, Inc. 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. 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 exercise price of the warrants
will be adjusted in order to prevent dilution of the warrants by multiplying the
exercise price by a fraction, the numerator of which is the sum of (a) the
number of shares of common stock outstanding prior to such issuance, multiplied
by the fair market value per share of the common stock, plus (b) the
consideration, if any, received by the Company for such issuance, and the
denominator of which is the fair market value per share of the common stock
multiplied by the number of shares of common stock outstanding immediately after
such issuance. In connection with such adjustment to the exercise price, the
number of shares issuable upon exercise of the warrants will also be adjusted to
equal the result of multiplying the number of shares issuable upon exercise of
the warrant prior to such adjustment by the exercise price per share prior to
such adjustment, divided by the exercise price per share after such adjustment.
On September 12, 2002, under the plan, the Company issued an aggregate
of 10,962,759 shares of its common stock to former creditors in exchange for the
claims that such creditors had against the Company, 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 with regard to their claims against the Company. On
December 19, 2002, under the plan, the Company issued an aggregate of 1,485,557
shares of its common stock to former creditors in exchange for the claims that
such creditors had against the Company. On March 17, 2003, under the plan, the
Company issued an aggregate of 382,092 shares of its common stock to former
creditors in exchange for the claims that such creditors had against the
Company.
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.
38
Bankruptcy Code and, therefore, are exempt from registration under the
Securities Act and state securities laws.
On May 20, 2002, 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. See "Certain Relationships and Related Transactions
- - Kimco/Third Avenue Credit Facility." These warrants were offered only to the
lenders under the related credit facility and were granted in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act as
the warrant grants did not involve a public offering.
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. The first group of options which were granted to
Steven Fishman 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, due to the terms of the Resignation
and Release between the Company and Mr. Fishman. 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. See "Certain
Relationships and Related Transactions - Stock Option Grants." These options
were offered only to the Company's executive officers and directors in
consideration of their services to the Company and were granted in reliance on
the exemption from registration contained in Section 4(2) of the Securities Act
as the option grants did not involve a public offering.
On December 5, 2002, the Company granted an option to purchase 25,000
shares of its common stock at a price of $1.65 per share to Mr. Joseph Nusim,
one of the Company's directors, pursuant to, and in consideration for, a
consulting arrangement with Mr. Nusim. This option is exercisable from the date
of grant through December 5, 2012. This option was offered only to Mr. Nusim and
was granted in reliance on the exemption from registration contained in Section
4(2) of the Securities Act as the grant did not involve a public offering.
On January 23, 2003, the Company issued warrants to acquire an
aggregate of 5,000,000 shares of the Company's common stock to Kimco Realty
Services, Inc., an affiliate of Kimco Capital Corp., in connection with, and in
consideration for, an amendment to the Company's credit facility with Kimco
Capital Corp that provided for an increase in the amount of revolving loans
available under the credit facility from $10 million to $20 million. 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. See
"Certain
39
Relationships and Related Transactions - Kimco/Third Avenue Credit Facility."
These warrants were offered for grant only to the parties participating in the
additional credit granted pursuant to the amendment and were granted in reliance
on the exemption from registration contained in Section 4(2) of the Securities
Act as the grant did not involve a public offering.
On January 29, 2003, the Company granted an option to purchase 100,000
shares of its common stock at a price of $1.19 per share to an employee of the
Company pursuant to the Company's 2002 Stock Option Plan in consideration of
such employee's services to the Company. These options were only offered to such
employee and were granted in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act as the grant did not involve a
public offering.
On February 11, 2003, the Company granted options to purchase an
aggregate of 414,500 shares of its common stock at a price of $1.10 per share to
employees of the Company pursuant to the Company's 2002 Stock Option Plan in
consideration of such employees' services to the Company. The options were
offered only to such employees and were granted in reliance on the exemption
from registration contained in Section 4(2) of the Securities Act as the grants
did not involve a public offering.
On April 1, 2003, the Company granted options to purchase an aggregate
of 1,000,000 shares of its common stock at a price of $0.80 per share, to Mr.
Bruce Dale, the Company's Chief Executive Officer, pursuant to the Company's
2002 Stock Option Plan, as amended, in consideration of his services to the
Company. The option was offered only to such employee and were granted in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act as the grant did not involve a public offering.
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 April 25, 2003, 13,691,197 shares of common
stock were outstanding and 6,308,803 shares remained subject to issuance upon
resolutions of claims of unsecured creditors under the plan of reorganization.
As of May 23, 2003, 14,870,167 shares of the Company's common stock are
subject to outstanding options or warrants to purchase shares of common stock. A
total of 10,869,565 shares of the Company's common stock are subject to
outstanding warrants held by certain of the Company's lenders and their
affiliates. See "Certain Relationships and Related Transactions - Kimco/Third
Avenue Credit Facility." An additional 913,044 shares of the Company's common
stock are subject to outstanding warrants held by the former holders of equity
interests in FNC Holdings, Inc. See "Recent Sales of Unregistered Securities." A
total of 3,087,558 shares of the Company's common stock are subject to
outstanding options granted to current and former employees of the Company and a
consultant to the Company. See "Executive Compensation - 2002 Stock Option Plan"
and "Certain Relationships and Related Transactions - Consulting Agreement."
40
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, which are summarized below,
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
adversely affect the prevailing market price of the common stock. These
provisions are intended to:
o 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;
o discourage certain types of transactions which may involve an
actual or threatened change in control of the Company;
o discourage certain tactics that may be used in proxy fights;
o 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
41
o 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 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:
42
o 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;
o 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
o 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. 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
the Company's directors shall not be liable for monetary damages for breach of
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 Section 174 of the Delaware General
Corporation 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.
43
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Financial Statements" included on page F-1.
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.
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.
44
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the registrant has duly caused this Amendment No. 3 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
FRANK'S NURSERY & CRAFTS, INC.
Date: May 27, 2003 By: /s/ Alan Minker
--------------------------------------
Alan Minker
Senior Vice President,
Chief Financial Officer and Treasurer
45
INDEX TO FINANCIAL STATEMENTS
Page Number
Report of Independent Certified Public Accountants..............................................................F-2
Report of Independent Auditors..................................................................................F-3
Balance Sheets as of January 26, 2003 and January 27, 2002......................................................F-4
Statements of Operations for the thirty-six weeks ended January 26, 2003, the
sixteen weeks ended May 19, 2002 and the fiscal years ended January 27,
2002 and January 28, 2001..............................................................................F-5
Statements of Changes in Shareholder's Equity (Deficit) for the thirty-six weeks
ended January 26, 2003, the sixteen weeks ended May 19, 2002 and the
fiscal years ended January 27, 2002 and January 28, 2001...............................................F-6
Statements of Cash Flows for the thirty-six weeks ended January 26, 2003, the
sixteen weeks ended May 19, 2002 and the fiscal years ended January 27,
2002 and January 28, 2001..............................................................................F-7
Notes to Financial Statements...................................................................................F-8
F-1
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Frank's Nursery & Crafts, Inc.
We have audited the accompanying balance sheet of Frank's Nursery & Crafts, Inc.
as of January 26, 2003 and the related statement of operations, stockholders'
equity and cash flows for the period from January 28, 2002 to May 19, 2002
(predecessor operations) and the period from May 20, 2002 to January 26, 2003
(successor operations). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Frank's Nursery & Crafts, Inc.
as of January 26, 2003 and the results of their operations and their cash flows
for the period from January 28, 2002 to May 19, 2002, and the period from May
20, 2002 to January 26, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Grant Thornton LLP
Southfield, Michigan
April 11, 2003
F-2
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 the related statements of
operations, changes in shareholder's equity (deficiency in assets), and cash
flows for each of the two 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 the results of its operations and its cash flows for
each of the two years in the period ended January 27, 2002, in conformity with
accounting principles generally accepted in the United States.
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 7, the Company has incurred recurring operating losses, has a
working capital deficiency and is in default of certain covenants under the
terms of the agreement for its senior subordinated notes and its
debtor-in-possession financing agreement. The Company also filed for
reorganization under Chapter 11 of the United States Bankruptcy Code on February
19, 2001. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to these matters
are also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Detroit, Michigan
March 29,2002
F-3
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR PAR VALUE)
January 26, January 27,
2003 2002
--------------- ----------------
(Successor) (Predecessor)
ASSETS
Current assets:
Cash and cash equivalents $ 3,068 $ 1,870
Marketable securities 1,030 1,061
Notes receivable, net 1,231
Accounts receivable 1,218 2,805
Merchandise inventory 39,050 37,629
Assets to be disposed of 200 9,051
Prepaid expenses and other current assets 4,076 7,058
--------------- ----------------
Total current assets 48,642 60,705
--------------- ----------------
Property, equipment and leasehold improvements, net 55,126 96,055
Other assets and deferred charges 3,713 8,553
--------------- ----------------
Total assets $ 107,481 $ 165,313
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 16,781 $ 8,437
Accounts payable pre-petition 32,487
Accrued expenses 17,630 31,244
Accrued expenses payable pre-petition 1,902 20,783
Notes payable to banks 24,297
Notes payable 15,250
Current portion of long-term debt 1,685
Pre-petition long-term debt (including subordinated debt of $115,000) 139,315
--------------- ----------------
Total current liabilities 53,248 256,563
--------------- ----------------
Long-term debt:
Senior debt, less current portion 24,730 3,220
Term Loan, net of unamortized discount 16,323
--------------- ----------------
Total long-term debt 41,053 3,220
--------------- ----------------
Other liabilities 3,334 3,525
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, 13,346,642 shares issued and 20
outstanding and 6,653,358 shares to be issued
Additional paid-in-capital 27,457 165,999
Net parent investment 16,117
Retained deficit (17,631) (280,112)
--------------- ----------------
Total shareholders' equity (deficit) 9,846 (97,995)
--------------- ----------------
Total liabilities and shareholders' equity (deficit) $ 107,481 $ 165,313
=============== ================
See accompanying notes to financial statements.
F-4
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS
THIRTY-SIX WEEKS ENDED JANUARY 26, 2003, THE SIXTEEN WEEKS ENDED MAY 19, 2002,
AND FISCAL YEARS ENDED JANUARY 27, 2002 ("2001") AND JANUARY 28, 2001
("2000") (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Thirty-six Sixteen
Weeks Weeks 2001 2000
Ended Ended
January 26, 2003 May 19, 2002
---------------- ----------------- ----------------- -----------------
(Successor) (Predecessor) (Predecessor) (Predecessor)
(Restated)(1)
NET SALES $ 204,156 $ 110,992 $ 371,417 $ 436,947
OPERATING COSTS AND EXPENSES:
Cost of sales, including buying and occupancy 153,953 80,756 297,850 317,090
Selling, general and administrative 61,873 31,490 109,404 136,730
Restructuring and other related charges 1,127 21,839 40,887 127,047
Early extinguishment of debt 4,230
Amortization of goodwill 1,631 2,438
Other income (200) (118) (1,221) (1,017)
--------------- ----------------- ----------------- -----------------
Total operating costs and expenses 216,753 133,967 452,781 582,288
--------------- ----------------- ----------------- -----------------
LOSS FROM OPERATIONS (12,597) (22,975) (81,364) (145,341)
INTEREST EXPENSE (CONTRACTUAL INTEREST OF
$6,210 FOR THE SIXTEEN WEEKS ENDED MAY
19, 2002, $21,513 FOR 2001, AND $-0- FOR 2000) 5,034 2,583 10,632 23,898
--------------- ----------------- ----------------- -----------------
LOSS BEFORE REORGANIZATION ITEMS AND INCOME TAXES (17,631) (25,558) (91,996) (169,239)
--------------- ----------------- ----------------- -----------------
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 BENEFIT (949)
--------------- ----------------- ----------------- -----------------
NET (LOSS) INCOME $ (17,631) $ 158,281 $ (91,996) $ (168,290)
=============== ================= ================= =================
LOSS PER SHARE - BASIC AND DILUTED $ (0.88)
===============
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-5
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
THIRTY-SIX WEEKS ENDED JANUARY 26, 2003, THE SIXTEEN WEEKS ENDED
MAY 19, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
Common Stock Additional Retained Net Total
Number Par Paid-in Deficit Parent Shareholders'
of Shares Value Capital Investment Equity
(Deficit)
----------- ------------ ------------ ------------ ------------ ---------------
Predecessor:
Balance at January 30, 2000 1,000 $ 1 $ 165,999 $ (19,826) $ 1,652 $ 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 1,000 1 165,999 (188,116) 16,177 (5,939)
Net loss (91,996) (91,996)
Decrease in net parent investment (60) (60)
----------- ------------ ------------ ------------ ------------ ---------------
Balance at January 27, 2002 1,000 1 165,999 (280,112) 16,117 (97,995)
Net loss excluding plan of
reorganization and fresh
start adjustments (25,558) (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 10,869,565 warrants in
connection with Term Loan debt 4,436 4,436
Expense for stock options issued 41 41
Net loss (17,631) (17,631)
----------- ------------ ------------ ------------ ------------ ---------------
Balance at January 26, 2003 20,000,000 $ 20 $ 27,457 $ (17,631) $ 0 $ 9,846
=========== ============ ============ ============ ============ ===============
(1) 13,346,642 shares issued and 6,653,358 to be issued.
See accompanying notes to financial statements.
F-6
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS
THIRTY-SIX WEEKS ENDED JANUARY 26, 2003, THE SIXTEEN WEEKS ENDED
MAY 19, 2002, 2001, AND 2000
(DOLLARS IN THOUSANDS)
Thirty-six Sixteen
Weeks Weeks
Ended Ended 2001 2000
January 26,2003 May 19, 2002
----------------- -------------- ---------------- ----------------
(Successor) (Predecessor) (Predecessor) (Predecessor)
Restated (1)
OPERATING ACTIVITIES:
Net (loss) income $ (17,631) $ 158,281 $ (91,996) $ (168,290)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation 2,259 4,900 16,515 18,361
Amortization 1,080 632 3,600 3,874
Non cash portion of restructuring and
other related charges 1,247 17,572 34,309 125,891
Inventory clearance reserve 1,994 8,076
Debt issue costs 1,079 3,458
Gain on cancellation of pre-petition
liabilities (184,991)
Fresh start adjustments (324)
Other (91) (939) (25) 1,307
----------------- -------------- ---------------- ----------------
(11,142) (3,790) (26,063) (18,857)
Changes in assets and liabilities, net of effects
of fresh start adjustments and gain on cancellation
of pre-petition liabilities:
Marketable securities (29) (9) (102) (117)
Notes receivable 1,631
Accounts receivable 407 885 (1,093) 262
Inventory 20,581 (23,996) 27,420 27,698
Prepaid expenses 1,222 1,405 (2,686) 2,709
Other non current assets (1,521) (349) (2,057) (534)
Accounts payable (26,964) 35,440 8,318 17,608
Accrued expenses (13,245) 8,284 14,868 (2,349)
----------------- -------------- ---------------- ----------------
Net cash provided by (used in) operating activities (30,691) 19,501 18,605 26,420
----------------- -------------- ---------------- ----------------
INVESTING ACTIVITIES:
Additions to property, equipment and
leasehold improvements (2,726) (605) (2,794) (17,572)
Net proceeds from asset sales 7,269 2,566 20,019 1,032
----------------- -------------- ---------------- ----------------
Net cash provided by (used in) investing activities 4,543 1,961 17,225 (16,540)
----------------- -------------- ---------------- ----------------
FINANCING ACTIVITIES:
Decrease in notes payable to banks (net) (13,647) (10,650) (23,055) (14,648)
Borrowings under Kimco Revolving Loan 15,250
Payment of long-term debt and capital leases (2,886) (2,183) (21,452) (8,005)
Borrowings under Kimco Term Loan 20,000
Decrease in net parent investment (60) 14,525
----------------- -------------- ---------------- ----------------
Net cash provided by (used in) financing activities 18,717 (12,833) (44,567) (8,128)
----------------- -------------- ---------------- ----------------
Net change in cash and cash equivalents (7,431) 8,629 (8,737) 1,752
Cash and cash equivalents at beginning of period 10,499 1,870 10,607 8,855
----------------- -------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 3,068 $ 10,499 $ 1,870 $ 10,607
================= ============== ================ ================
(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 adjustments 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-7
FRANK'S NURSERY & CRAFTS, INC.
Notes to Financial Statements
January 26, 2003, January 27, 2002 and January 28, 2001
(Tables in thousands, except for per share data)
NOTE 1: REORGANIZATION AND BASIS OF PRESENTATION OF FINANCIAL
STATEMENTS
Frank's Nursery & Crafts, Inc., a Delaware corporation ("Frank's" or the
"Company"), operates the nation's largest chain of lawn and garden specialty
retail stores (as measured by sales). Frank's is also a retailer of Christmas
trim-a-tree merchandise, artificial flowers and arrangements, garden decor and
home decorative products.
CHAPTER 11 PROCEEDINGS AND REORGANIZATION
On February 19, 2001 (the "Petition Date"), Frank's Nursery & Crafts, Inc., a
Michigan corporation ("Old Frank's"), and FNC Holdings Inc. ("Holdings"), the
sole shareholder of Old Frank's, (collectively with Old Frank's, the "Debtors"),
filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Maryland (the "Bankruptcy Court"). The Chapter 11
cases for the Debtors (the "Chapter 11 Cases") were jointly administered for
procedural purposes. From the Petition Date until May 19, 2002, the Debtors
operated their businesses as debtors-in-possession pursuant to the Bankruptcy
Code. On May 7, 2002, the Bankruptcy Court confirmed the Debtors' Second Amended
Joint Plan of Reorganization, with certain modifications (as so modified, the
"Plan"). On May 20, 2002 (the "Effective Date"), the Plan became effective and
the Debtors successfully emerged from their chapter 11 bankruptcy proceedings.
Pursuant to the Plan, the following transactions were completed on or about the
Effective Date:
o all of Old Frank's and Holdings issued and outstanding common stock
was cancelled;
o Old Frank's merged with and into Holdings, and then changed its name
to Frank's, which was reincorporated in Delaware (the "Merger");
o 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");
o executory contracts or unexpired leases to which any Debtor was a
party were assumed or rejected;
o members of the board of directors and officers of Frank's were elected
or appointed and began serving their respective terms; and
F-8
o 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 Capital Corp.(the "Exit Term and Revolving Loan"). See Note 7 for a more
detailed description of the exit financing.
FRESH START ADJUSTMENTS
The Debtors emerged from their chapter 11 bankruptcy proceedings on May 20,
2002, which for financial reporting purposes was deemed the effective date of
the Plan. In accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Company adopted
fresh start reporting because holders of existing voting shares of Holdings
immediately before filing and confirmation of the Plan received less than 50% of
the Common stock distributed under the Plan and the Company's reorganization
value was less than the Debtors' post-petition liabilities and allowed claims in
the aggregate on a consolidated basis.
Fresh start reporting requires that the reorganization value of the Company be
allocated to its assets in conformity with Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations". The excess of the fair value
of the specific tangible or identifiable intangible net assets over
reorganization value, or negative goodwill, is to be allocated to non-current
non-monetary assets on a pro rata basis. Based on the consideration of many
factors and various valuation methods, including a discounted cash flow, a
comparable public company analysis, a comparable acquisitions analysis, and
other applicable analyses believed by the Company's management to be appropriate
for the Company's business and industry, the Company determined the
reorganization value of the Company to be approximately $90 million, which
served as the basis for the Plan approved by the Bankruptcy Court. Approximately
$67 million of the reorganization value related to debt and other obligations
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.
F-9
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, equipment and leasehold improvements.
The following table reflects the adjustments to Old Frank's balance sheet as of
May 20, 2002:
Plan of Fresh
Predecessor Reorganization Start Successor
Adjustments
----------- ----------------- --------------- ------------
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' $ 187,081 (5,211) $(36,544) $ 145,326
equity (deficit) ========= ========= ======== ========
(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.
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), the fiscal years ended January 27, 2002 and January 28, 2001 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 sheet as of January 27, 2002.
F-10
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 thirty-six weeks ended January 26,
2003 (Successor).
The accompanying 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.
NOTE 2: DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
The Company operates the nation's largest chain of lawn and garden specialty
retail stores (as measured by sales). Frank's is also a retailer of Christmas
trim-a-tree merchandise, artificial flowers and arrangements, garden decor and
home decorative products. As of January 26, 2003 the Company operated 170 retail
stores located in 14 states primarily in the eastern, middle-Atlantic and
mid-western regions of the United States.
FISCAL YEAR
The fiscal year is comprised of 52 or 53 weeks, ending on the last Sunday in
January. The 2002 fiscal year reflects a 52-week period ended January 26, 2003
("2002"). The 2001 fiscal year reflects a 52-week period ended January 27, 2002
("2001") and the 2000 fiscal year reflects a 52-week period ended January 28,
2001 ("2000").
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements. Estimates also affect reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when the customer takes possession of the
merchandise at the point of sale. The Company has a formal right of return
policy that requires original receipt. The Company annually reviews sales
returns to determine the length of time between the date of sale and the return
date. Based upon the annual review and the applicable rules guiding revenue
recognition, the Company has not provided a reserve for sales returns.
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. The fair value of other financial
instruments are included in Note 7.
F-11
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 10). 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 26, 2003.
ACCOUNTS RECEIVABLE
Management estimates the allowance for doubtful accounts based upon the
circumstances surrounding each individual receivables' collectibility. During
the fourth quarter of 2002 management determined that certain receivables were
uncollectible and a bad debt expense and allowance of $295 was recorded. At the
end of 2001 and 2000 no allowance for doubtful accounts was considered necessary
and there was no bad debt expense recognized.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost or market, with cost
being determined under the weighted average method which approximates the
first-in, first-out method.
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 $13.7 million for 2002, $16 million for 2001 and
$22.7 million for 2000.
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, 10 years. Leasehold improvements are depreciated
over the lease terms of the respective leases or the estimated useful lives.
Upon sale or other disposition of assets, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss, if
any, is recognized in the statement of operations.
F-12
GOODWILL
Goodwill represented the costs in excess of the fair value of identifiable
assets for acquired businesses and was amortized on a straight-line basis over
the estimated future periods benefited, not to exceed forty years. As a result
of the Chapter 11 Reorganization and recurring operating losses, the Company
reevaluated the useful lives and recoverability of its remaining goodwill and
wrote-off the remaining balance of goodwill of $14.4 million during 2001. This
impairment loss was reflected in the reorganization, restructuring and other
related charges in the statements of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets consist primarily of land, furniture and equipment and
leasehold improvements. It is the Company's policy to review the long-lived
assets for possible impairment annually or when events and circumstances warrant
such a review by the Company in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." If indicators are present, estimated future undiscounted
cash flows associated with the asset are compared to the asset's carrying value
to determine if an impairment exists. If the expected future cash flows and
eventual disposition are less than the carrying amount of such assets, the
Company recognizes an impairment loss for the difference between the carrying
amount and the estimated fair value. Fair value is estimated using discounted
future cash flows. Assets to be disposed of are reported at the amount of fair
value less costs to sell and classified as assets held for sale.
LEASES
Leases that meet the accounting criteria for capital leases are recorded as
property, equipment and leasehold improvements, and the related capital lease
obligations (the aggregate present value of minimum future lease payments,
excluding executory costs such as taxes, maintenance and insurance) are included
in debt. Depreciation and interest are charged to expense, and rent payments are
treated as payments of long-term debt, accrued interest and executory costs. All
other leases are accounted for as operating leases and rent payments are charged
to expense as incurred.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and income tax bases of assets and liabilities using
enacted tax rates and laws in effect when the differences are expected to
reverse.
STOCK OPTIONS
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Company applies the accounting provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations and provides pro forma
net income and earning per share disclosures for stock option grants as if the
fair-value based method defined in SFAS No. 123 had been applied.
The Company applies APB Opinion No. 25 and related interpretations and
accordingly, no compensation expense has been recognized for stock options
issued to employees and non-employee directors in the financial statements. Had
the Company determined compensation cost
F-13
based on the fair value at the grant date consistent with the method prescribed
in SFAS No. 123, the Company's pro forma net loss and loss per share for the
thirty-six weeks ended January 26, 2003 would have been as follows:
Net loss, as reported $ (17,631)
Total stock-based compensation expense determined
Under the fair value method for stock options
awarded during the thirty-six weeks ended
January 26, 2003 (742)
---------------
Pro forma net loss $ (18,373)
===============
Basic and diluted loss per share:
As reported - basic and diluted $ (0.88)
===============
Pro forma - basic and diluted $ (0.92)
===============
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 one of the Company's
directors, pursuant to, and in consideration for, a consulting arrangement.
This option is exercisable from the date of grant through December 5, 2012.
Accordingly, the Company recorded $41,000 of expense in 2002 for the option
grant.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing earnings on common
shares by the weighted average number of common shares outstanding during each
period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
For the thirty-six weeks ended January 26, 2003 the incremental shares that
would have been exercisable and outstanding under the 2002 Stock Option Plan
(189,000 shares) and warrant agreements (1,189,000 shares) were not included in
the computation of diluted earnings per share because the effect would be
anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin 51, "Consolidated Financial Statements," for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
F-14
interest that it acquired before February 1, 2003. FIN 46 is effective for the
Company in the fiscal year ending January 2004. The adoption of FIN 46 is being
evaluated to determine what impact, if any, the adoption of the provisions will
have on the Company's financial condition or results of operations.
In 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 in the sixteen
weeks ended May 19, 2002 had no impact on the Company's earnings or financial
position.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS 143 requires companies to recognize the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made. The identified
asset retirement costs are capitalized as part of the carrying amount of the
asset and depreciated over the remaining useful life. SFAS No. 143 is effective
for the Company in the fiscal year ending January 2004. The adoption of SFAS No.
143 is being evaluated and is not expected to have a significant impact on the
Company's financial position or results of operations.
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 on the extinguishment
of debt resulting from the emergence from the chapter 11 bankruptcy proceedings
was classified as a reorganization item in the Predecessor Company.
Reclassification within previously issued financial statements is required, and
as such, the loss recognized on the extinguishment of debt for 2001 was
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.
F-15
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which is effective for fiscal years
ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123, "Accounting
for Stock-Based Compensation", to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements. The Company plans to adopt SFAS No. 148 in the
first quarter of fiscal 2003. The adoption will have no effect on the financial
position or results of operations. The Company plans to continue to account for
its stock-based compensation plans under APB Opinion No. 25.
NOTE 3: STORE CLOSURE PROGRAMS
During fiscal 2001, as part of the restructuring process, the Court approved the
Company's plan to close 46 stores the ("2001 Program"). The last 12 were closed
as of March 2002. As a result, the Company recorded charges of $6.7 million in
2001, of which $4.1 million, included in cost of goods sold, represented a loss
for the inventory that was liquidated. The remaining $2.6 million included in
the reorganization/restructuring charge of $40.9 million (Note 4), represented
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 under-performing 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 $0.8 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 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 one remaining store
at January 26, 2003 is $0.2 million.
NOTE 4: RESTRUCTURING AND OTHER RELATED CHARGES
As a result of the Company's operating losses for 2001 and 2000, and the Chapter
11 Reorganization (Note 1), the Company performed an impairment analysis as
required under FAS 121 for both 2001 and 2000. The estimated fair value of the
impaired assets was determined by comparing expected future cash flows for each
store to the combined net property, equipment and leasehold improvements and
allocated goodwill. In 2000 the Company rejected store leases and reversed a
store closing provision for remaining lease obligations from 1993. Additionally,
F-16
the Company recorded a fixed asset impairment charge related to 22 leased stores
that were approved for closure by the Court subsequent to 2000.
Bankruptcy related costs for the thirty-six weeks ended January 26, 2003
included $2 million for additional pre-petition claim payments and $0.2 million
for professional fees offset by a $1 million adjustment for the net selling
price of the properties classified as assets to be disposed of that were sold
during 2002. Bankruptcy costs for the sixteen weeks ended May 19, 2002 included
$15.5 million for costs of lease rejections, $2.6 million for professional fees,
$1.8 million for severance and employee retention plans, $1.1 million for costs
of mortgage debt and $0.8 million of miscellaneous. Bankruptcy related costs for
2001 included $4.6 million for professional fees, $3.2 million for severance and
employee retention plans approved by the Court under the Chapter 11
Reorganization and $0.9 million for miscellaneous items.
The impairment analysis and the Chapter 11 Reorganization resulted in the
following charges:
Thirty-six Sixteen
Weeks Weeks
Ended Ended 2001 2000
January 26,2003 May 19, 2002
----------------- ------------------- --------------------- -------------------
(Successor) (Predecessor) (Predecessor) (Predecessor)
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 remaining store lease obligations
from 1993 (7,583)
Bankruptcy related costs 1,127 21,839 8,708 814
----------------- ------------------ ------------------- -------------------
Total $ 1,127 $ 21,839 $ 40,887 $ 127,047
================= =================== =================== ===================
NOTE 5: INCOME TAXES
In connection with the reorganization, a gain on cancellation of indebtedness
was realized by the Predecessor in the amount of approximately $185 million.
This gain 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 fiscal 2003 tax year, to reduce certain attributes including net
operating loss carryforwards ("NOLs"), certain tax credits and tax basis in
assets in an amount equal to such gain on extinguishment.
F-17
The reconciliation of income taxes computed at the federal statutory tax rate to
income tax benefit is:
Thirty-six Sixteen
Weeks Ended Weeks Ended
January 26, 2003 May 19, 2002 2001 2000
----------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor) (Predecessor)
----------------------------------------------------------------------
Federal income tax (benefit) based
on statutory rates $ (5,995) $ 53,816 $ (29,840) $ (57,541)
State and local income tax (benefit) (353) 3,165 (1,755) (3,385)
Increases (decreases) in rates
resulting from:
Reorganization adjustments - (58,941) - -
Limitation (utilization) of tax loss
carryforwards 6,332 1,956 26,815 27,467
Nondeductible expenses including
goodwill amortization and write-off 16 4 6,000 33,347
Other - - (1,220) 112
Federal income tax refund from net
operating loss carrybacks - - - 949
----------------------------------------------------------------------
$ - $ - $ - $ 949
======================================================================
Deferred tax assets and liabilities are composed of the following:
2002 2001
------------------------------------
(Successor) (Predecessor)
------------------------------------
DEFERRED TAX ASSETS:
Inventory $ 1,214 $ 2,792
Accrued expenses 651 1,853
Other 2,834 4,455
Store closing reserve - 6
Property, plant & equipment 12,362 12,530
Credit carryforwards 1,337 1,337
NOL carryforward 82,440 65,685
------------------------------------
Total deferred tax assets 100,838 88,658
------------------------------------
DEFERRED TAX LIABILITIES:
Assets to be disposed of (72) (3,259)
Other (371) (382)
------------------------------------
Total deferred tax liabilities (443) (3,641)
------------------------------------
Net deferred tax assets 100,395 85,017
Valuation allowance (100,395) (85,017)
------------------------------------
$ - $ -
------------------------------------
F-18
Due to the Company's historical operating results, a valuation allowance for the
net deferred tax asset balance is recorded at January 26, 2003 and January 27,
2002.
At January 26, 2003 the federal tax NOL carryforwards, on a consolidated basis,
approximated $229 million, and will expire over various dates from 2009-2023.
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 $229 million, approximately $130 million is not
subject to these limitations. Approximately $7.2 million of the NOL subject to
limitations may be utilized each tax year.
The reorganization of the Company as it emerged from bankruptcy constituted an
additional ownership change under Internal Revenue Code Section 382.
Consequently, the use of any of the NOLs and tax credits generated prior to this
change that are not reduced pursuant to the provisions discussed above, may be
subject to an additional annual limitation.
NOTE 6: PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Upon emergence from bankruptcy, the Company revalued its property, equipment and
leasehold improvements in accordance with SOP 90-7 as discussed in Note 1.
Major categories of property, equipment and leasehold improvements are as
follows:
2002 2001
------------------------ ------------------------
(Successor) (Predecessor)
Land $ 20,598 $ 18,862
Buildings:
Owned 17,807 101,544
Capital leases (Note 8) 10,576 7,855
Equipment 9,157 83,917
Leasehold improvements 4,983 42,483
Construction in progress 884 721
------------------------ ------------------------
64,005 255,382
Less accumulated depreciation, including
capital lease amounts of $7,207 and $6,985
8,879 159,327
------------------------ ------------------------
$ 55,126 $ 96,055
======================== ========================
F-19
NOTE 7: FINANCING AND LONG-TERM DEBT
Long-term debt consists of the following:
2002 2001
------------------------- -----------------------------
(SUCCESSOR) (PREDECESSOR)
$20 million Term Loan - Kimco due May 20, 2005 (net of $ 16,323 $ --
unamortized discount of $3,677)
Revolving Credit Facility - Kimco 15,250 --
Mortgages notes due 2012 with interest rates from 7% to 7.6% 22,600 --
Pre-petition mortgage notes originally due on varying dates from -- 22,045
February 1, 2001 to September 1, 2007
DIP Financing Facility -- 24,297
10 1/4% Senior Subordinated Notes originally due March 1, 2008 -- 115,000
Capital lease obligations 3,815 5,490
------------------------- -----------------------------
Total debt 57,988 166,832
Less:
Current portion of long-term debt 1,685 --
Revolving Credit Facility - Kimco 15,250 --
DIP Financing Facility -- 24,297
Pre-petition long-term debt -- 139,315
------------------------- -----------------------------
Total long-term debt $ 41,053 $ 3,220
========================= =============================
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 three-year $50 million secured
revolving loan facility, which includes $25 million of availability for letters
of credit and is secured by a first lien on the Company's inventory. The
availability of borrowings under this facility generally is based on a
percentage of eligible inventory and certain other assets, subject to certain
reserves. The amounts reserved are based on a number of variables, including
inventory levels, merchandise purchases and sales levels, and the types of
reserves include inventory shrinkage, letters of credit outstanding, sales taxes
and other liabilities of the Company. As of January 26, 2003 there were no
amounts outstanding under the facility and $7.3 million of outstanding letters
of credit. Availability as of January 26, 2003 was $9.4 million.
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 interest rates were increased by an
amendment to the credit facility on February 10, 2003 (Note 13). The facility
has an initial term of three years and renews for successive one-year terms
F-20
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 annum, 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% during the second year, and 0.5% during the third year.
The 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. For certain days during the third and
fourth quarters of 2002 the Company was not in compliance with a covenant in the
facility that required a minimum ratio of inventory to accounts payable. On
December 17, 2002, Congress Financial retroactively waived the non-compliance
with the inventory to accounts payable covenant which occurred during certain
accounting periods during the 2002 third and fourth quarters. On January 26,
2003, the Company was not in compliance with the inventory to accounts payable
covenant and a covenant in the facility which required a minimum level of
EBITDA. The required inventory to accounts payable ratio for January 26, 2003
was 6.00, and the actual ratio as such date was 2.32. The required minimum level
of EBITDA for the period from May 20, 2002 through January 26, 2003 was $(4.4)
million, and the actual level for such period was $(7.3) million.
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
had changed. On February 10, 2003, the Company and Congress Financial entered
into an amendment to the facility which waived the non-compliance with the
financial covenants which occurred during the last two accounting periods of
2002 and the EBITDA covenant and revised the future measurements for these
covenants (Note 13).
Term Loan and Revolving Credit Facility - Kimco Capital Corp.
On May 20, 2002, the Company also entered into a credit facility arranged by
Kimco Capital Corp., providing for a $20 million term loan and $10 million of
revolving loans. 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 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 January 26, 2003,
outstanding amounts under the credit facility included the $20 million term loan
and $15.3 million of revolving loans.
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
F-21
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.
In accordance with Accounting Principles Board 14 "Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants" the issuer is required to
allocate the proceeds received in a financing transaction that includes
detachable warrants to the debt instrument and detachable warrants included in
the exchange on a relative fair value basis. For 2002 all warrants became
available for exercise and were included for valuation purposes. The independent
valuation issued in connection with the Term Loan and Revolving Credit Facility
$20 million proceeds resulted in an allocation to the warrants of $4.4 million
as shown in the statement of shareholders' equity and the remaining $15.6
million to the Term Loan. The fair value of the warrants was based upon the
Black-Scholes option pricing model. The following assumptions were used in the
Black-Scholes option pricing model for warrants issued: risk-free interest rate
of approximately 3.95%; an expected life of 3 years from the vest date based
upon the warrant expiration date; 50% expected volatility; and no payments of
dividends. The stock price volatility during the life of the warrants was
estimated by reviewing the historical price volatility of other publicly traded
specialty retailers. This was done due to the limited historical time period
that Frank's common stock has been publicly traded (since September 2002). The
$4.4 million is being amortized to interest expense over the initial term of the
debt. As of January 26, 2003, the un-amortized discount is $3.7 million.
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. The
Kimco credit facility does not contain any financial covenants, but a default by
the Company under its credit facility with Congress Financial would trigger a
default under the Kimco credit facility.
DIP Financing Facility
On February 19, 2001, the Company entered into a two-year, $100 million
debtor-in-possession financing agreement (the "DIP Financing Facility") with a
lender to finance, among other things, the Company's working capital
requirements during Chapter 11 Reorganization. Borrowings under the DIP
Financing Facility were limited to the availability under a borrowing base which
included eligible inventory and certain real estate interests. Borrowings were
adjusted daily based upon cash availability and availability under the borrowing
base. The interest rates were based upon a Base rate or Eurodollar rate plus an
applicable margin based on availability as set forth in the DIP Financing
Facility. The minimum interest rate was 7%. At January 27, 2002, availability
under the DIP Financing Facility approximated $19.3 million with borrowings
outstanding of $24.3 million.
The initial borrowings under the DIP Financing Facility were used to retire the
Company's outstanding obligations under a credit facility that existed at
January 28, 2001. The total debt
F-22
retired and associated fees totaled $62.1 million, resulting in 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 Facility expired by its terms on the Effective Date (May 20,
2002). Frank's had borrowings outstanding of $13.6 million on the expiration
date. A portion of the 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. In
accordance with AICPA Statement of Position 90-7 no interest was accrued
post-petition for the subordinated notes. 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. Contractual interest for
2002 and 2001 was $6.2 million and $21.5 million, respectively.
Senior Debt
As part of the Plan, the pre-petition mortgage notes were renegotiated with
interest rates between 7.0% and 7.6% and ten-year terms.
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 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.
Cash interest paid was $3.8 million in 2002, $4.8 million in 2001, and $21.3
million in 2000.
The carrying and fair values of these financial instruments for 2002 and 2001
are presented below. The fair values for 2002 approximate market. The fair
values for 2001 were based upon estimates and cancellation of debt pursuant to
the plan of reorganization.
F-23
SUCCESSOR PREDECESSOR
--------------------------- --------------------------
2002 2001
--------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ---------- ---------- -----------
Kimco Revolving Facility $ 15,250 $ 15,250 $ - $ -
Kimco Term Loan 16,323 20,000 - -
Mortgage notes 22,600 22,600 - -
Pre-petition mortgage notes - - 22,045 22,045
Capital lease obligations 3,815 3,815 5,490 5,490
DIP financing - - 24,297 24,297
10 1/4% Senior Subordinated notes due 2008 - - 115,000 -
----------- ---------- ---------- -----------
Total $ 57,988 $ 61,665 $ 166,832 $ 51,832
=========== ========== ========== ===========
Scheduled Maturities
Aggregate maturities of long-term debt for each of the five years following
January 26, 2003 and thereafter, assuming the unpaid balance at January 26, 2003
under the revolving credit facility remains unchanged and excluding capital
lease obligations, are as follows:
YEAR AMOUNT
- ----------- -----------
2003 $ 15,815
2004 601
2005 20,642
2006 684
2007 725
Thereafter 19,383
-----------
Total $ 57,850
===========
The scheduled maturities reflect the expiration of the Kimco Revolving Loans in
2003 and the payment of the Kimco Term Loan for $20 million in 2005. The
scheduled maturities are based on contractual payment terms.
F-24
NOTE 8: LEASES
The Company's capital leases are principally for retail store locations, for
periods ranging up to 25 years. The Company's operating leases are principally
for retail store locations, some of which include renewal, purchase or
escalation clauses.
Annual minimum lease payments under all capital and operating leases with lease
terms longer than one year at January 26, 2003 are as follows:
CAPITAL OPERATING
LEASES LEASES
------------ ------------
2003 $ 1,393 $ 13,188
2004 791 12,651
2005 820 11,536
2006 705 10,477
2007 541 8,747
Thereafter 885 34,713
------------ ------------
Total debt $ 5,135 $ 91,312
============ ============
Amount representing future interest (1,320)
------------
Present value of net minimum lease obligations $ 3,815
============
Future sublease rental income $ 2,775
============
Rent expense was $9.7 million for the thirty-six weeks ended January 26, 2003,
$5.0 million for the sixteen weeks ended May 19, 2002, $15.4 million in 2002,
$20.4 million in 2001 and $23.0 million in 2000. Rent expense includes
additional rentals based on retail store sales (in excess of the minimums
specified in leases) of $69,000 for the thirty-six weeks ended January 26, 2003,
$42,000 for the sixteen weeks ended May 19, 2002, $133,000 in 2001 and $170,000
in 2000 and is reduced by sublease rental income of $560,000 for the thirty-six
weeks ended January 26, 2003, $211,000 for the sixteen weeks ended May 19, 2002,
$673,000 in 2001 and $581,000 in 2000.
NOTE 9: SHAREHOLDERS' EQUITY
The Company's authorized capital stock consists of 50,000,000 shares of common
stock, par value $.001 per share and 10,000,000 shares of preferred stock, par
value $.001 per share. On May 20, 2002, pursuant to the Plan 20,000,000 shares
of common stock were reserved and will be distributed to the Company's former
creditors of which 13,346,642 shares have been distributed as of January 26,
2003.
The holders of the Company's common stock are entitled to one vote per share
upon each matter submitted to a vote at a meeting of stockholders. Holders of
common stock are entitled to receive ratable dividends, if any, as may be
declared by the Company's board of directors out of funds legally available.
F-25
On May 20, 2002 the Company issued warrants to acquire an aggregate of 913,044
shares of the Company's common stock at an exercise price of $1.38 per share for
the old equity holders of FNC Holdings, Inc. These warrants may be exercised in
whole or in part at any time until the later of May 20, 2006. In addition the
Company issued warrants to acquire an aggregate of 5,869,565 shares of the
Company's common stock to certain of the Company's lenders and their affiliates.
These warrants may be exercised in whole or in part at any time until the later
of May 20, 2005 or the repayment or termination of the related credit facility.
The warrant can be exercised at a price of $1.15 per share, subject to certain
adjustments in the event that the Company issues any shares of its common stock
or securities convertible into such shares at below fair market value. On
January 23, 2003, the Company issued warrants to acquire an aggregate of
5,000,000 shares of the Company's common stock to Kimco Realty Services, Inc.,
an affiliate of Kimco Capital Corp., in connection with, and in consideration
for, an amendment to the Company's credit facility with Kimco Capital Corp.
These warrants may be exercised in whole or in part at any time until the later
of May 20, 2005 or the repayment or termination of the related credit facility.
These warrants can be exercised at a price of $2.00 per share, subject to
certain adjustments.
On May 20, 2002 pursuant to the plan of reorganization, the Company adopted its
2002 Stock Option Plan. The plan, which is administered by the Compensation
Committee of the Company's Board of Directors, allows for the issuance of stock
options to the Company's key employees and non-employee directors representing
the right to acquire up to an aggregate of 3,652,174 shares of the Company's
common stock. The Committee has the discretion to determine which key employees
and non-employee directors receive options under the Plan, the number of options
granted to such participants, and the grant date, vesting schedule, and the
expiration date of the options granted. The exercise price of the options
granted under the Plan also will be determined by the Committee but will be not
less than the fair value of the underlying stock on the date of grant, if the
option is intended to qualify as performance-based compensation under Section
162 (m) of the Internal Revenue Code. In addition, any incentive options granted
to an owner of more than 10% of the Company's voting capital stock will have an
exercise price of not less than 110% of the fair market value of the underlying
stock on the date of grant. Options issued to date under this plan generally
vest over a three-year period and expire ten years from the grant date.
On September 12, 2002 the Company granted options to key executives and outside
directors for 2,476,117 in two groupings with a grant price of $1.15 per share.
The first group of options for 1,826,117 were to vest over two years, with 50%
vested at September 12, 2002 and the remaining 50% on May 20, 2003. 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 (33 1/3% per year) 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 (Note 2).
F-26
A summary of changes in stock options are as follows:
Shares Option Price
--------------------- ------------------------
Outstanding at January 27, 2002 0
Options Granted 2,476,117 $1.15
Option cancelled (913,059) $1.15
---------------------
Outstanding at January 26, 2003 1,563,058
=====================
The following table summarizes information about options outstanding as of
January 26, 2003:
Exercise Price $1.15
Options outstanding:
Number outstanding 1,563,058
Weighted average remaining
contractual life 4.3
Weighted average exercise price $1.15
Options exercisable:
Number exercisable 913,058
Weighted average exercise price $1.15
The per share weighted-average fair value of stock options granted in the
thirty-six weeks ended January 26, 2003 was $.54 on the grant date using the
Black Scholes option-pricing model with weighted average assumptions as follows:
expected dividend yield of 0%; stock price volatility of 50%; a risk free
interest rate of 3.07%; and an expected option term of 5 years.
In addition, the Company had 2,089,116 additional shares available for future
grants under the 2002 Stock Option Plan at January 26, 2003.
NOTE 10: 401(k) PLAN
The Company provides a 401(k) Plan permitting employees to invest from 1% to 15%
of their salary in outside mutual funds. The plan 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 11: LITIGATION AND OTHER CONTINGENCIES
In the normal course of business the Company is subject to various claims. These
claims should be resolved in connection with the Company's Chapter 11
Reorganization. In the opinion of management, any ultimate liability arising
from or related to these claims should not have a material adverse effect on
future results of operations or the consolidated financial position of the
Company.
F-27
NOTE 12: RELATED PARTY TRANSACTIONS
Included in cost of sales and interest expense for 2002 is approximately $0.8
million and $1.3 million for lease payments and interest respectively, to Kimco
Capital Corp. and its affiliates, a majority shareholder of the Company.
NOTE 13: SUBSEQUENT EVENT
On February 10, 2003, the Company and Congress Financial entered into an
amendment to the revolving credit facility which waived the non-compliance with
the financial covenants which occurred during the last two accounting periods of
2002, revised the measurement of minimum levels of inventory from a daily to a
weekly basis, lowered the minimum quarterly EBITDA levels, revised the minimum
ratio of inventory to accounts payable to be a ratio of accounts payable to
inventory and increased the interest rates for the facility. The interest rates
under the facility were increased to prime rate plus 0.25% or 0.75% or a
Eurodollar rate plus 2.75%, 3.25% or 3.5%. The amended financial covenants are
measured only if the Company's average excess availability under the credit
facility over a four-week period falls below $9 million. In such event, the
minimum EBITDA covenant is measured quarterly and the minimum accounts payable
to inventory ratio covenant is measured for each accounting period, and the
minimum levels required by each covenant vary period to period.
F-28
NOTE 14: Selected Quarterly Financial Data (Unaudited)
The following tables present unaudited financial data of the Company
for each fiscal quarter of 2002 and 2001. All dollar amounts are stated in
thousands, except per share data.
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
2002 (PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
------------- ----------- ----------- -----------
Net sales $ 110,992 $ 89,070 $ 39,612 $ 75,474
Gross profit 30,236 24,424 5,037 20,742
Restructuring and other related charges 21,839 - 1,397 (270)
Reorganization income 183,839 - - -
Net income (loss) 158,281 2,771 (15,939) (4,463)
Earnings (loss) per share - basic and diluted (2) 0.14 (0.80) (0.22)
Weighted average shares outstanding - basic and diluted (1) (2) 20,000 20,000 20,000
(1) Basic earnings per share for the second, third and fourth quarter
is computed by dividing earnings on common shares by the weighted
average number of common shares outstanding during each quarter.
Diluted earnings per share reflect per share amounts that would
have resulted if dilutive potential common stock had been converted
to common stock.
(2) No earnings (loss) per share is shown for the Predecessor quarter.
The outstanding common stock of 1,000 shares was held by FNC
Holdings, Inc., the sole shareholder of the Predecessor company.
There was no public trading market for the outstanding shares.
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
2001 (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
------------- ------------- ------------- -------------
Net sales $ 153,138 $ 86,701 45,704 $ 85,874
Gross profit 41,548 15,651 (4,799) 21,167
Restructuring and other related charges 1,702 5,279 5,112 28,794
Net loss (7,157) (18,391) (33,117) (33,331)
F-29
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Second Amended Joint Plan of Reorganization of Frank's Nursery
and Crafts, Inc. and FNC Holding, Inc. (filed as Exhibit 2.1
to the Registrant's Current Report on Form 8-K dated May 7,
2002) (File No. 033-43504-01)
3.1 Certificate of Incorporation (filed as Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended August 11, 2002) (File No. 033-43504-01)
3.2 Bylaws (filed as Exhibit 3.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended August 11,
2002) (File No. 033-43504-01)
3.3* Certificate of Merger of FNC Holdings, Inc. and New Frank's
Delaware, Inc.
4.1 Investor Rights Agreement, dated as of May 20, 2002, by and
between the Registrant and certain holders of warrants to
acquire common stock of the Registrant (filed as Exhibit 4.1
to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended August 11, 2002) (File No.
033-43504-01)
4.2 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Kimco Realty Services, Inc. (filed as Exhibit 4.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended August 11, 2002) (File No. 033-43504-01)
4.3 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Third Avenue Trust (filed as Exhibit 4.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
August 11, 2002) (File No. 033-43504-01)
4.4 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Cypress Merchant Banking Partners, L.P. (filed as Exhibit 4.4
to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended August 11, 2002) (File No.
033-43504-01)
4.5 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Cypress Garden Ltd. (filed as Exhibit 4.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
August 11, 2002) (File No. 033-43504-01)
4.6 Stock Purchase Warrant, dated as of May 20, 2002, granted to
Joseph Baczko (filed as Exhibit 4.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
August 11, 2002) (File No. 033-43504-01)
4.7* Stock Purchase Warrant, dated as of January 23, 2003, granted
to Kimco Realty Services, Inc.
X-1
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. DESCRIPTION
10.1 Loan and Security Agreement, dated May 20, 2002, by and among
the Registrant and Congress Financial Corporation, as agent
for the lenders (filed as Exhibit 10.14 to the Registrant's
Current Report on Form 8-K dated July 25, 2002) (File No.
033-43504-01)
10.2 First Amendment to Loan and Security Agreement, dated as of
May 20, 2002, among the Registrant, Congress Financial
Corporation, as Administrative Agent, and the Lenders party
thereto (filed as Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended August 11,
2002) (File No. 033-43504-01)
10.3 Credit and Security Agreement, dated as of May 20, 2002,
between the Registrant and Kimco Capital Corp. (filed as
Exhibit 10.13 to the Registrant's Current Report on Form 8-K
dated July 25, 2002) (File No. 033-43504-01)
10.4* First Amendment and Waiver to Credit and Security Agreement,
dated as of January 23, 2003, among the Registrant and Kimco
Capital Corp.
10.5 Frank's Nursery & Crafts, Inc. 2002 Stock Option Plan, as
amended (filed as Exhibit 10.5 to the Registrant's Annual
Report on Form 8-K for the fiscal year ended January 26, 2003)
(File No. 000-50158)
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) (File No. 033-43504-01)
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) (File No. 033-43504-01)
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) (File No. 033-43504-01)
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
X-2
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. DESCRIPTION
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
10.14* Employment Agreement, dated as of December 1, 2002, between
the Registrant and John Heidt
10.15* Waiver and Amendment No. 2 to Loan and Security Agreement,
dated as of February 10, 2003, among the Registrant, Congress
Financial Corporation, as Administrative Agent, and the
Lenders party thereto
10.16 Employment Agreement, dated as of April 1, 2003, between the
Registrant and Bruce Dale (filed as Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended January 26, 2003) (File No. 000-50158)
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) (File No.
033-43504-01)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Grant Thornton LLP
___________
* Previously filed
X-3