<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
(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 August 15, 1999
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)
MICHIGAN 38-1561374
-------------------------- ----------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1175 West Long Lake Road, Troy, Michigan 48098
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (248) 712-7000
---------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: Common Stock, $1.00
par value, 1,000 shares outstanding as of September 29, 1999 held by FNC
Holdings Inc. There is no public trading market for the outstanding shares.
<PAGE> 2
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.
-1-
<PAGE> 3
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Eight Weeks Ended
---------------------- --------------------------
August 15, August 9, August 15, August 9,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 103,794 $ 126,463 $ 290,136 $ 302,736
OPERATING COSTS AND EXPENSES:
Cost of sales, including
buying and occupancy 75,548 90,292 195,354 204,370
Selling, general and
administrative 28,658 31,381 73,269 73,491
Amortization of goodwill 563 533 1,313 1,290
Other income (280) (2,073) (504) (2,635)
--------- --------- --------- ---------
104,489 120,133 269,432 276,516
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (695) 6,330 20,704 26,220
INTEREST AND DEBT EXPENSE 4,771 4,611 11,596 11,403
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY
ITEM (5,466) 1,719 9,108 14,817
INCOME TAXES
--------- --------- --------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (5,466) 1,719 9,108 14,817
EXTRAORDINARY ITEM (5,148)
--------- --------- --------- ---------
NET INCOME (LOSS) $ (5,466) $ 1,719 $ 9,108 $ 9,669
========= ========= ========= =========
</TABLE>
-2-
<PAGE> 4
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 15, August 9, January 31,
1999 1998 1999
----------- --------- -----------
(UNAUDITED) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,330 $ 13,388 $ 5,156
Marketable securities 2,805
Notes receivable 569
Accounts receivable 2,189 1,955 2,294
Merchandise inventory 137,563 108,575 97,931
Prepaid expenses and other
current assets 5,529 5,796 6,152
--------- --------- ---------
Total current assets 167,416 129,714 112,102
--------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT,NET 214,404 211,888 210,575
GOODWILL, LESS ACCUMULATED
AMORTIZATION OF $3,888,
$1,997 AND $2,575 93,754 97,446 95,067
OTHER ASSETS AND DEFERRED CHARGES 15,040 15,256 15,519
--------- --------- ---------
$ 490,614 $ 454,304 $ 433,263
========= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 45,981 $ 49,197 $ 33,782
Accrued expenses 40,626 43,997 41,036
Notes payable to banks 48,000 10,000 20,000
Current portion of long-term debt 4,437 1,857 3,726
--------- --------- ---------
Total current liabilities 139,044 105,051 98,544
--------- --------- ---------
LONG-TERM DEBT:
Senior debt 53,810 58,694 55,969
Subordinated debt 115,000 115,000 115,000
--------- --------- ---------
Total long-term debt 168,810 173,694 170,969
--------- --------- ---------
OTHER LIABILITIES AND DEFERRED CREDITS 11,984 13,588 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 6,198 (794) (4,407)
Retained deficit (1,422) (3,235) (10,530)
--------- --------- ---------
Total shareholder's equity 170,776 161,971 151,063
--------- --------- ---------
$ 490,614 $ 454,304 $ 433,263
========= ========= =========
</TABLE>
-3-
<PAGE> 5
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Twenty-eight Weeks Ended
------------------------
AUGUST 15, August 9,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,108 $ 9,669
Adjustments to reconcile net income to net
cash provided by operations:
Extraordinary item 5,148
Depreciation 9,258 7,872
Amortization 1,994 1,979
Other (204) (1,788)
--------- ---------
20,156 22,880
Changes in current assets and current liabilities:
Accounts and notes receivable 674 2,548
Marketable securities (2,805)
Inventory (39,632) (27,826)
Prepaid expenses 623 422
Accounts payable 12,199 17,252
Accrued expenses 209 (15,128)
--------- ---------
Net cash provided by (used in) operations (8,576) 148
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (14,407) (5,834)
Other 3,931
--------- ---------
Net cash used in investing activities (14,407) (1,903)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 115,000
Debt issue costs (5,230)
Increase (decrease) in net parent investment 10,605 (101)
Increase in notes payable to banks 28,000
Payment of long-term debt and capital lease
obligations (1,448) (110,626)
--------- ---------
Net cash provided by (used in) financing
activities 37,157 (957)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,174 (2,712)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,156 16,100
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,330 $ 13,388
========= =========
</TABLE>
-4-
<PAGE> 6
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second quarter of 1999 compared with second quarter of 1998
Results of operations
Net Sales
NET SALES were $103.8 million for the twelve week 1999 second quarter
which ended August 15, 1999 compared with $126.5 million in the 1998 second
quarter which ended August 9, 1998. Total net sales decreased 17.9% and
same-store sales (stores open for a full year in both years) decreased 17.6%.
The change in calendar due to the 53-week 1998 fiscal year which ended on
January 31, 1999, accounted for approximately 14.8% of the total net sales
decrease as a result of the current second quarter starting one week later than
the comparable quarter in 1998. In addition comparative net sales were
negatively impacted by unfavorable weather patterns in certain major markets
which experienced severe drought conditions and water restrictions during this
period. Comparative net sales were also impacted by the Company's planned
phasing out of selected merchandise categories such as crafts and pet foods
which were subject to high price-off promotional activities last year.
Earnings
COST OF SALES, INCLUDING BUYING AND OCCUPANCY EXPENSES, were $75.5
million in the 1999 second quarter compared to $90.3 million in the 1998 second
quarter. Cost of sales, as a percentage of net sales, was 72.7% in the 1999
second quarter compared to 71.4% in the 1998 second quarter, an increase of 1.3
percentage points. Merchandise margins increased 2.8 percentage points compared
to the prior year's quarter due primarily to improved merchandise margins in
livegood nursery products that includes trees, shrubs, annuals and perennials.
This improvement results from management's focus on enhancing its selection of
outdoor plants and introducing more specialized varieties to meet the high-end
market demand. Reductions in markouts resulting from improved product
maintenance and product flow also contributed to the margin improvement. Buying
and occupancy costs increased $1.6 million, representing a 4.1 percentage point
increase as a percentage of net sales. The increase is primarily related to
depreciation, repairs and maintenance and other occupancy related costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in the 1999 second quarter
were $28.7 million compared to $31.4 million in the 1998 second quarter. The
reduction in selling, general and administrative expense was largely accounted
for by changes in the timing of advertising placement compared to the
corresponding 1998
-5-
<PAGE> 7
quarter. As a percentage of net sales, selling general and administrative
expenses increased 2.8 percentage points to 27.6% in the 1999 second quarter
compared to 24.8% in the 1998 quarter.
OPERATING INCOME (DEFINED AS "NET SALES LESS COST OF SALES, INCLUDING
BUYING AND OCCUPANCY COSTS, AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES")
for the 1999 second quarter was a loss of $.4 million, a decrease of $5.2
million, compared to operating income of $4.8 million for the 1998 second
quarter. The decline in operating income was primarily the result of decreased
sales levels offset in part, by increased merchandise margins and decreased
selling, general and administrative expenses, as explained above. The operating
loss, as a percentage of net sales, was .4% for the 1999 second quarter, a
decrease of 4.2 percentage points compared to the operating income net sales
percentage of 3.8% for the 1998 second quarter.
INTEREST AND DEBT EXPENSE was $4.8 million for the 1999 second quarter
compared with $4.6 million for the 1998 quarter.
OTHER INCOME was $.3 million for the 1999 second quarter compared with
$2.1 million for the 1998 second quarter. This decrease of $1.8 million was due
primarily to gains from the sales of property of $1.5 million in 1998. Interest
income related to cash equivalents was $.2 million in the second quarter of 1999
compared with $.5 million in the 1998 second quarter.
Due to previously unrecognized tax benefits no income tax provision has
been provided for in the second quarter of 1999 and 1998.
NET LOSS for the 1999 second quarter was $5.5 million compared with net
income of $1.7 million in 1998, a decrease of $7.2 million. The net income
decline reflects decreased operating income and other income as explained above.
First half of 1999 compared with the first half of 1998
Results of operations
Net Sales
NET SALES were $290.1 million for the twenty-eight weeks ended August
15, 1999 compared with $302.7 million in the 1998 first half which ended August
9, 1998. Total net sales decreased 4.2% and same-store sales (stores open for a
full year in both years) decreased 3.6% for the 1999 first half. 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 including
-6-
<PAGE> 8
drought conditions in the East this summer and heavy rainfall in early spring in
the midwest. The core lawn and garden business was up 1% on a same-store sales
basis despite the unfavorable weather patterns.
Earnings
COST OF SALES, INCLUDING BUYING AND OCCUPANCY EXPENSES, were $195.4
million in the 1999 first half compared to $204.4 million in the 1998 first
half. Cost of sales, as a percentage of net sales, was 67.4% in the 1999 first
half compared to 67.5% in the 1998 first half. This improvement was due
primarily to a 1.5 percentage point increase in merchandise margins offset by an
increase of 1.4 percentage points in buying and occupancy costs due principally
to increased utilities and occupancy costs at the stores. The 1.5 percentage
point improvement in merchandise margins was primarily the result of margin
improvements in livegoods nursery products due to favorable product mix and
lower markouts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in the 1999 first half
were $73.3 million compared to $73.5 million in the 1998 first half. The
decrease of $.2 million was principally due to the second quarter advertising
expenditure decrease offset by 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 increased by 1.0 percentage point to 25.3%
in the 1999 first half compared to 24.3% in the 1998 first half.
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 half was $21.5 million, a decrease of $3.4 million or 13.7%,
compared to $24.9 million for the 1998 first half. The decline in operating
income was primarily the result of decreased sales levels offset in part by
decreased selling, general and administrative expenses, as explained above.
Operating income, as a percentage of net sales was 7.4% of net sales for the
1999 first half, a decrease of 0.8 of a percentage point from the 8.2% for the
1998 first half.
INTEREST AND DEBT EXPENSE was $11.6 million for the 1999 first half
compared with $11.4 million for the 1998 first half.
OTHER INCOME was $504,000 for the 1999 first half compared with
$2,635,000 for the 1998 first half. This decrease of $2,131,000 was due
primarily to gains from sales of properties during the 1998 first half of
$1,493,000. Interest income related to cash equivalents was approximately $.3
million in the 1999 first half compared with $.9 million in the 1998 first half.
-7-
<PAGE> 9
Due to previously unrecognized tax benefits no income tax provision has
been provided for in the first half of 1999 and 1998.
INCOME BEFORE EXTRAORDINARY ITEM for the 1999 first half was $9.1
million, a decline of $5.7 million over the 1998 first half results of $14.8
million. This decline is the result of decreased operating income and a decrease
in other income, as explained above.
THE EXTRAORDINARY ITEM in the 1998 first half of $5.1 million was the
result of early extinguishment of debt and major modifications to existing
credit lines recorded by the Company in the 1998 first quarter. 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 half was $9.1 million compared with $9.7
million in 1998, a decrease of $.6 million. The net income decline reflects
reduced operating income, other income and the extraordinary charge as explained
above.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Net cash used in operations in the 1999 first
half was $8.6 million compared to net cash provided in the 1998 first half of
$.1 million. Inventory increased $39.6 million in 1999 compared to an increase
of $27.8 million in 1998, while accounts payable increased $12.2 million in 1999
compared to an increase of $17.3 million in 1998. The total increase in
inventory levels for both 1999 and 1998 include the normal seasonal build-up of
Christmas inventory. The higher level of inventory increase for 1999 results
from management's decision to increase overall inventory levels to assure
adequate merchandise levels in all stores earlier in the first half. Although
this increase is somewhat higher than planned in the basic hardline lawn and
garden items, the second quarter weather-related factors that negatively
impacted sales also negatively impacted the hardline inventory levels. The
decrease in accrued expenses during the 1998 first half is due primarily to
payments of approximately $12 million to former shareholders of FNC Holdings
Inc. as they exercised conversion rights for their untendered shares, and to
payment timing differences.
INVESTING ACTIVITIES. Net cash used in investing activities in the 1999
first half was $14.4 million for capital expenditures primarily for refurbished
stores and store fixtures. Net cash used in the 1998 first half was $1.9 million
which consisted of $5.8 million in capital investment for new systems,
refurbished stores
-8-
<PAGE> 10
and store fixtures. The first half of 1998 included net proceeds of $4 million
from the sale and leaseback of Company owned stores.
FINANCING ACTIVITIES. Net cash provided by financing activities in the
1999 first half was $37.2 million which was due primarily to an increase in
short-term borrowings under the Senior Credit Facility of $28 million. In
addition, during the second quarter of 1999, FNC Holdings Inc. ("Holdings")
completed the termination of a noncontributory, defined benefit pension plan
which covered former employees of several discontinued operations. The net
surplus after the purchase of annuities reverted back to Holdings who in turn
transferred the funds to Franks resulting in a increase in the net parent
investment of $11.2 million. Frank's invested $2.8 million in a guaranteed
income fund restricted for the future company match contributions to the
company's 401(k) program which represented the increase in marketable
securities. The remaining net cash of $6.7 million (net of $1.7 million in
excise taxes) will be used for general corporate purposes. The $1 million used
in the 1998 first half 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 August 15, 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 $67.8 million and outstanding letters of credit of $19.1 million at August
15, 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 August 15,
1999. Total long-term debt at August 15, 1999 was $173.2 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 $19.3 million at the end of the 1999 first half.
The Company believes its cash flow from operations, cash on hand 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 $26 million for the
refurbishment of existing stores and a new store opening program in which the
Company anticipates opening up six new stores in fiscal 1999, of which four were
opened as of September 3, 1999.
-9-
<PAGE> 11
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 immaterial and implementation
is expected before October 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.
-10-
<PAGE> 12
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.
-11-
<PAGE> 13
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
-------------------------------------
Joseph R. Baczko
Chairman, Chief Executive
Officer
By: /s/ Larry T. Lakin
-------------------------------------
Larry T. Lakin
Vice Chairman,
Chief Financial Officer
Dated: September 29, 1999
-12-
<PAGE> 14
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
(27) Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> AUG-15-1999
<CASH> 19,330
<SECURITIES> 2,805
<RECEIVABLES> 2,189
<ALLOWANCES> 0
<INVENTORY> 137,563
<CURRENT-ASSETS> 167,416
<PP&E> 402,439
<DEPRECIATION> 188,035
<TOTAL-ASSETS> 490,614
<CURRENT-LIABILITIES> 139,044
<BONDS> 168,810
0
0
<COMMON> 1
<OTHER-SE> 170,775
<TOTAL-LIABILITY-AND-EQUITY> 490,614
<SALES> 290,136
<TOTAL-REVENUES> 290,136
<CGS> 195,354
<TOTAL-COSTS> 195,354
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,596
<INCOME-PRETAX> 9,108
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,108
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
