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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(MARK ONE) FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 23, 1999
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5364
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FRANK'S NURSERY & CRAFTS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-1561374
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1175 West Long Lake Road, Troy, Michigan 48098
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number:(248) 712-7000
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Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court. Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: Common Stock, $1.00
par value, 1,000 shares outstanding as of July 7, 1999 held by FNC Holdings Inc.
There is no public trading market for the outstanding shares.
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FRANK'S NURSERY & CRAFTS, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying financial
statements reflect all adjustments necessary for a fair
statement of the results for the interim periods presented
herein. In the opinion of management such adjustments
consisted of normal recurring items. Financial results of the
interim period are not necessarily indicative of results that
may be expected for any other interim period or for the fiscal
year. For further information, refer to the financial
statements and footnotes thereto included in the Company's
report on Form 10-K for the fiscal year ended January 31, 1999
dated April 22, 1999.
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FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
-------------------------
MAY 23, May 17,
1999 1998
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<S> <C> <C>
NET SALES $ 186,342 $ 176,273
OPERATING COSTS AND EXPENSES:
Cost of sales, including buying and occupancy 119,806 114,078
Selling, general and administrative 44,611 42,110
Amortization of goodwill 750 757
Other income (224) (562)
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Total operating costs and expenses 164,943 156,383
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INCOME FROM OPERATIONS 21,399 19,890
INTEREST AND DEBT EXPENSE 6,825 6,792
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INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM 14,574 13,098
INCOME TAXES
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INCOME BEFORE EXTRAORDINARY ITEM 14,574 13,098
EXTRAORDINARY ITEM (5,148)
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NET INCOME $ 14,574 $ 7,950
========= =========
</TABLE>
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FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 23, May 17, January 31,
1999 1998 1999
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(UNAUDITED) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 39,410 $ 55,171 $ 5,156
Notes receivable 569
Accounts receivable 2,003 3,056 2,294
Merchandise inventory 140,975 116,427 97,931
Prepaid expenses and other
current assets 5,150 5,828 6,152
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Total current assets 187,538 180,482 112,102
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PROPERTY, PLANT AND EQUIPMENT,NET 208,933 212,727 210,575
GOODWILL, LESS ACCUMULATED
AMORTIZATION OF $3,325,
$930 AND $2,575 94,317 94,564 95,067
OTHER ASSETS AND DEFERRED CHARGES 15,256 15,336 15,519
--------- --------- ---------
$ 506,044 $ 503,109 $ 433,263
========= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 109,437 $ 102,486 $ 33,782
Accrued expenses 44,193 46,247 41,036
Notes payable to banks 20,000
Current portion of long-term debt 4,308 1,823 3,726
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Total current liabilities 157,938 150,556 98,544
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LONG-TERM DEBT:
Senior debt 54,847 59,155 55,969
Subordinated debt 115,000 115,000 115,000
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Total long-term debt 169,847 174,155 170,969
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OTHER LIABILITIES AND DEFERRED CREDITS 12,685 18,096 12,687
SHAREHOLDER'S EQUITY:
Common stock $1.00 par value,
1,000 shares authorized,
1,000 shares issued 1 1 1
Capital in excess of par value 165,999 165,999 165,999
Net parent investment (4,470) (744) (4,407)
Retained earnings (deficit) 4,044 (4,954) (10,530)
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Total shareholder's equity 165,574 160,302 151,063
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$ 506,044 $ 503,109 $ 433,263
========= ========= =========
</TABLE>
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FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
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MAY 23, May 17,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,574 $ 7,950
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item 5,148
Depreciation 5,150 4,525
Amortization 1,138 1,086
Other (127) 164
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20,735 18,873
Changes in operating assets and liabilities:
Accounts and notes receivable 860 1,447
Inventory (43,044) (35,376)
Prepaid expenses 1,002 390
Accounts payable 75,655 71,634
Accrued expenses 4,477 (7,429)
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Net cash provided by operating activities 59,685 49,539
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,828) (3,199)
Other 3,931
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Net cash provided by (used in)
investing activities (4,828) 732
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 115,000
Debt issue costs (5,205)
Decrease in net parent investment (63) (51)
Decrease in notes payable to banks (20,000) (10,000)
Other (2,953)
Payment of long-term debt and capital lease
obligations (540) (107,991)
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Net cash used in financing activities (20,603) (11,200)
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Increase in cash and cash equivalents 34,254 39,071
Cash and cash equivalents at beginning of period 5,156 16,100
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Cash and cash equivalents at end of period $ 39,410 $ 55,171
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 8,267 $ 2,571
TAXES ========= =========
$ -0- $ -0-
========= =========
</TABLE>
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<PAGE> 6
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of operations
Net Sales
NET SALES were $186.3 million for the sixteen week 1999 first quarter
which ended May 23, 1999 compared with $176.3 million for the sixteen week 1998
first quarter which ended on May 17, 1998. Due to the 53-week 1998 fiscal year
which ended on January 31, 1999, the first quarter of fiscal 1999 ended one week
later than the prior year first quarter. Total net sales increased 5.7% and
same-store sales (stores open for a full year in both years) increased 6.4% for
the 1999 first quarter. Comparative net sales were negatively impacted by the
continued phasing out of certain craft categories, the reduction of price off
promotional activities and unfavorable weather patterns in certain key markets,
and were favorably impacted by the shift in the calendar during this quarter as
explained above.
Earnings
COST OF SALES, INCLUDING BUYING AND OCCUPANCY EXPENSES, were $119.8
million in the 1999 first quarter compared to $114.1 million in the 1998 first
quarter. Cost of sales, as a percentage of net sales, declined to 64.3% in the
1999 first quarter compared to 64.7% in the 1998 first quarter due primarily to
planned changes in product mix and decreased price off promotional activities.
In addition buying and occupancy costs, as a percentage of net sales, declined
0.2 of a percentage point.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in the 1999 first quarter
were $44.6 million compared to $42.1 million in the 1998 first quarter. The
increase of $2.5 million was principally due to an increase in volume related
store expenses and to the Company's focus on improving store operations and
customer service by implementing new training programs. As a percentage of net
sales, selling general and administrative expenses remained constant at 23.9%
for the first quarter of 1999 and 1998.
OPERATING INCOME (DEFINED AS "NET SALES LESS COST OF SALES, INCLUDING
BUYING AND OCCUPANCY COSTS, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES")
for the 1999 first quarter was $21.9 million, an increase of $1.8 million or 9%,
compared to $20.1 million for the 1998 quarter. The improvement in operating
income was primarily the result of increased sales levels and improved
merchandise margins offset in part by increased selling, general and
administrative expenses, as explained above. Operating income, as a percentage
of net sales, improved to 11.8% of net sales for
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the 1999 first quarter, an increase of 0.4 of a percentage point over the 11.4%
for the 1998 quarter.
INTEREST AND DEBT EXPENSE was $6.8 million for the 1999 first quarter
compared with $6.8 million for the 1998 first quarter.
OTHER INCOME was $224,000 for the 1999 first quarter compared with
$562,000 for the 1998 first quarter. This decrease of $338,000 is due primarily
to a lower level of interest income resulting from lower levels of short-term
investments and cash equivalents in 1999 compared to 1998.
Due to previously unrecognized tax benefits no income tax provision has
been provided for in the first quarter of 1999 and 1998.
INCOME BEFORE EXTRAORDINARY ITEM for the 1999 first quarter was $14.6
million, an improvement of $1.5 million over the 1998 first quarter results of
$13.1 million. This improvement is the result of increased operating income
offset by the decrease in other income, as explained above.
In the 1998 first quarter the Company recorded an extraordinary charge
of $5.1 million as a result of early extinguishment of debt and major
modifications to existing credit lines. The early extinguishment of debt
resulted in an extraordinary charge of $3.5 million representing the premium of
$2.2 million and other costs associated with the retirement of the 11.5% Senior
Notes and the 8% Convertible Notes. In addition, costs were incurred for early
payment of a term loan and overall credit line refinancing.
NET INCOME for the 1999 first quarter was $14.6 million compared with
$8 million in 1998, an increase of $6.6 million, or 83%. The net income
improvement reflects improved operating income and the extraordinary charge as
explained above.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Net cash provided by operations in the 1999 first
quarter was $59.7 million compared to $49.5 million in the 1998 first quarter.
Inventory increased $43 million in 1999 compared to an increase of $35.4 million
in 1998, while accounts payable increased $75.7 million in 1999 compared to an
increase of $71.6 million in 1998. Both the higher level of inventory and
accounts payable increases during the 1999 first quarter are primarily
attributable to the Company's decision to increase overall inventory levels to
assure adequate merchandise levels in all stores. The decrease in accrued
expenses during the 1998 first quarter is due primarily to payments of
approximately $12 million in 1998 to former shareholders of Holdings as they
exercised conversion rights for their untendered shares, and to payment timing
differences.
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INVESTING ACTIVITIES. Net cash used in investing activities in the 1999
first quarter was $4.8 million for capital expenditures primarily for
refurbished stores and store fixtures. Net cash provided by investing activities
in the 1998 first quarter was $0.7 million which consisted of $3.2 million in
capital investment for new systems, refurbished stores and store fixtures. The
first quarter of 1998 included net proceeds of $4 million from the sale and
leaseback of Company owned stores.
FINANCING ACTIVITIES. Net cash used in financing activities in the 1999
first quarter was $20.6 million which related primarily to the pay-down of bank
debt. The $11.2 million used in the 1998 first quarter was the net of $115
million in gross proceeds from the Offering of the new Subordinated Notes offset
by the redemption of the remaining 11.5% Senior Notes and the 8% Convertible
Notes and related costs as well as the pay-down of the bank debt.
At May 23, 1999 the Company had a Senior Secured Credit Facility (the
"facility") with various banks and financial institutions providing for total
borrowings of up to $130.3 million. The Company had borrowings outstanding of
$20.3 million and outstanding letters of credit of $3.8 million at May 23, 1999.
The facility requires the Company to maintain certain financial ratios. The
Company was in compliance with all of its covenants under the facility and other
restrictions under all other debt agreements at May 23, 1999. Total long-term
debt at May 23, 1999 was $174.2 million including borrowings under the facility,
mortgages, capital leases, Subordinated Notes and the associated current portion
of the aforementioned debt. Cash and cash equivalents were $39.4 million at the
end of the 1999 first quarter.
The Company believes its cash flow from operations and utilization of
available borrowings under its facility are sufficient to meet its seasonal
working capital needs. Management anticipates that total capital expenditures
for fiscal 1999 will be approximately $30 million for the refurbishment of
existing stores and a new store opening program in which the Company anticipates
opening up to ten new stores in fiscal 1999, of which two were opened as of June
17, 1999.
YEAR 2000 ISSUE
The Company has conducted an evaluation of its Information Technology ("IT") and
non-IT systems with respect to the Year 2000 Issue. The Company completed the
implementation of new software in October 1998 that brought the majority of the
Company's systems into compliance including telecommunications, networking and
financial systems. The Company incurred approximately $8 million to purchase
these systems. There are several additional systems which require conversion,
the cost of which are expected to be
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<PAGE> 9
immaterial and implementation is expected before September 1999. In addition,
the Company uses an independent service bureau to process payroll and payroll
tax related operations and has been notified by the service bureau that its
payroll application is Year 2000 compliant.
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Part II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter and through the date of this
Report, the Registrant filed no reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANK'S NURSERY & CRAFTS, INC.
By: /s/ Joseph R. Baczko
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Joseph R. Baczko
Chairman, Chief Executive
Officer
By: /s/ Larry T. Lakin
-----------------------------
Larry T. Lakin
Vice Chairman,
Chief Financial Officer
Dated: July 7, 1999
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<PAGE> 12
EXHIBIT INDEX
Exhibit Number Description of Exhibit
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(27) Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> MAY-23-1999
<CASH> 39,410
<SECURITIES> 0
<RECEIVABLES> 2,003
<ALLOWANCES> 0
<INVENTORY> 140,975
<CURRENT-ASSETS> 187,538
<PP&E> 392,860
<DEPRECIATION> 183,927
<TOTAL-ASSETS> 506,044
<CURRENT-LIABILITIES> 157,938
<BONDS> 169,847
0
0
<COMMON> 1
<OTHER-SE> 165,573
<TOTAL-LIABILITY-AND-EQUITY> 506,044
<SALES> 186,342
<TOTAL-REVENUES> 186,342
<CGS> 119,806
<TOTAL-COSTS> 119,806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,825
<INCOME-PRETAX> 14,574
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,574
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
