SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 26, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _______________
COMMISSION FILE NUMBER: 1-5364
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 registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
YES NO X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates was approximately $3,877,533, based upon the average of
the closing bid and asked price of the registrant's common stock of $0.875, as
quoted on the Over-the-Counter Bulletin Board on April 22, 2003.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
--- ---
As of April 25, 2003, the registrant had 13,691,197 shares of common
stock outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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) $ (17,631) $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
2
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
3
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
4
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:
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
=====
5
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 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.
6
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 adjusted 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 adjusted
EBITDA for the period from May 20, 2002 through January 26, 2003 was $(4.4)
million, and the actual level for such period was $(8.3) million.
Adjusted EBITDA, as measured under the credit facility, equals 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 adjusted EBITDA for the period from May 20, 2002 through
January 26, 2003 is set forth below.
(in 000s)
Net loss $(17,631)
Plus:
Depreciation 2,259
Interest expense 5,034
Non-cash extraordinary losses:
Inventory reserve 1,994
--------
Adjusted EBITDA $ (8,344)
========
7
Adjusted EBITDA should not be considered an alternative to GAAP net income as an
indication of the Company's performance. The computation of adjusted EBITDA
required by the Company's credit facility with Congress Financial may differ
from the methodology for calculating adjusted EBITDA utilized by other
companies, and therefore, may not provide an appropriate comparison to the
results of other companies.
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 adjusted 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 adjusted 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 adjusted 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.
8
MINIMUM AMOUNT
PERIOD OF ADJUSTED EBITDA
------ ------------------
The period of 13 Accounting Periods ending on $(4,550,000)
the last day of the fourth Accounting Period
of the fiscal year of Company ending in 2004
The period of 13 Accounting Periods ending on $(5,620,000)
the last day of the seventh Accounting Period
of the fiscal year of Company ending in 2004
The period of 13 Accounting Periods ending on $(7,610,000)
the last day of the tenth Accounting Period of
the fiscal year of Company ending in 2004
The period of 13 Accounting Periods ending on $ 1,090,000
the last day of the fiscal year of Company
ending in 2004
The period of 13 Accounting Periods ending on $ 5,070,000
the last day of the fourth Accounting Period
of the fiscal year of Company ending in 2005
The period of 13 Accounting Periods ending on $ 7,800,000
the last day of the seventh Accounting Period
of the fiscal year of Company ending in 2005
The period of 13 Accounting Periods ending on $ 9,060,000
the last day of the tenth Accounting Period of
the fiscal year of Company ending in 2005
The period of 13 Accounting Periods ending on $11,800,000
the last day of the fiscal year of Company
ending in 2005
The period of 13 Accounting Periods ending on $11,800,000
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 39.5%
year of Company ending in 2004
The third Accounting Period of the fiscal year 43.9%
of Company ending in 2004
The fourth Accounting Period of the fiscal 53.6%
year of Company ending in 2004
9
MINIMUM
ACCOUNTS PAYABLE TO
ACCOUNTING PERIOD INVENTORY RATIO
----------------- ---------------
The fifth Accounting Period of the fiscal year 46.8%
of Company ending in 2004
The sixth Accounting Period of the fiscal year 35.8%
of Company ending in 2004
The seventh Accounting Period of the fiscal 32.0%
year of Company ending in 2004
The eighth Accounting Period of the fiscal 39.8%
year of Company ending in 2004
The ninth Accounting Period of the fiscal year 41.3%
of Company ending in 2004
The tenth Accounting Period of the fiscal year 36.1%
of Company ending in 2004
The eleventh Accounting Period of the fiscal 36.0%
year of Company ending in 2004
The twelfth Accounting Period of the fiscal 35.3%
year of Company ending in 2004
The thirteenth Accounting Period of the fiscal 30.1%
year of Company ending in 2004
The first Accounting Period of the fiscal year 43.9%
of Company ending in 2005
The second Accounting Period of the fiscal 45.6%
year of Company ending in 2005
The third Accounting Period of the fiscal year 48.8%
of Company ending in 2005
The fourth Accounting Period of the fiscal 58.8%
year of Company ending in 2005
The fifth Accounting Period of the fiscal year 54.9%
of Company ending in 2005
The sixth Accounting Period of the fiscal year 46.0%
of Company ending in 2005
The seventh Accounting Period of the fiscal 42.8%
year of Company ending in 2005
The eighth Accounting Period of the fiscal 49.0%
year of Company ending in 2005
10
MINIMUM
ACCOUNTS PAYABLE TO
ACCOUNTING PERIOD INVENTORY RATIO
----------------- ---------------
The ninth Accounting Period of the fiscal year 49.5%
of Company ending in 2005
The tenth Accounting Period of the fiscal year 44.1%
of Company ending in 2005
The eleventh Accounting Period of the fiscal 45.0%
year of Company ending in 2005
The twelfth Accounting Period of the fiscal 49.3%
year of Company ending in 2005
The thirteenth Accounting Period of the fiscal 43.5%
year of Company ending in 2005
The first Accounting Period of the fiscal year 43.9%
of Company ending in 2006
The second Accounting Period of the fiscal 45.6%
year of Company ending in 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.
11
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
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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.
13
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.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 16, 2003 FRANK'S NURSERY & CRAFTS, INC.
By: /s/ Alan Minker
-------------------------------------
Alan Minker
Senior Vice President,
Chief Financial Officer and Treasurer
15
CERTIFICATIONS
I, Bruce Dale, certify that:
1. I have reviewed this annual report on Form 10-K of Frank's Nursery &
Crafts, Inc.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
16
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: September 16, 2003 /s/ Bruce Dale
--------------------------------------------
Bruce Dale
Chief Executive Officer
(Principal Executive Officer)
17
CERTIFICATIONS
I, Alan Minker, certify that:
1. I have reviewed this annual report on Form 10-K of Frank's Nursery &
Crafts, Inc.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
18
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: September 16, 2003 /s/ Alan Minker
---------------------------------------
Alan Minker
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
19