As filed with the Securities and Exchange Commission on July 16, 1998
Registration No. 333-50815
=========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________________
Frank's Nursery & Crafts, Inc.
(Exact name of Registrant as specified in its charter)
Michigan 5200
(State or other (Primary Standard
jurisdiction of Industrial 38-1561374
incorporation or Classification Code (I.R.S. Employer
organization) Number) Identification No.)
_________________________
1175 West Long Lake Road
Troy, Michigan 48098
(248) 712-7000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
_________________________
Larry T. Lakin
Chief Financial Officer
Frank's Nursery & Crafts, Inc.
1175 West Long Lake Road
Troy, Michigan 48098
(248) 712-7000
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
_________________________
Copy to:
Vincent Pagano, Jr.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
(212) 455-2000
_________________________
Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable after the effective
date of this Registration Statement.
If any of the securities being registered on this Form are being
offered in connection with the formation of a holding company and there
is compliance with General Instruction G, check the following box /_/.
<PAGE>
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
__________________________________________________________________________
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any state in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities laws of any such State.
__________________________________________________________________________
<PAGE>
Subject to completion, dated July 16, 1998
PROSPECTUS
____________, 1998
Frank's Nursery & Crafts, Inc.
Offer to Exchange up to $115,000,000 of its
10 1/4% Series B Senior Subordinated Notes due 2008
which have been Registered under the
Securities Act for any of its outstanding
10 1/4% Senior Subordinated Notes due 2008
_________________________
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
AUGUST 19, 1998, UNLESS EXTENDED.
_________________________
Frank's Nursery & Crafts, Inc., a Michigan corporation (the
"Company"), hereby offers (the "Exchange Offer"), upon the terms and
subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (the "Letter of Transmittal"), to
exchange an aggregate of up to $115,000,000 principal amount of its
10 1/4% Series B Senior Subordinated Notes due 2008 (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), for an identical principal amount of its
outstanding 10 1/4% Senior Subordinated Notes due 2008 (the "Old Notes";
collectively with the Exchange Notes, the "Notes") of the Company from the
holders thereof. As of the date of this Prospectus, $115,000,000 aggregate
principal amount of the Old Notes is outstanding. The Old Notes were
issued and sold on February 26, 1998 in a transaction not registered under
the Securities Act in reliance upon an exemption from the registration
requirements thereof (the "Offering"). In general, the Old Notes may not be
offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act. The Exchange Notes are being offered hereby in order to
satisfy certain obligations of the Company contained in the Registration
Rights Agreement (as defined herein).
The Exchange Notes will be obligations of the Company entitled to
the benefits of the Indenture (as defined herein) relating to the Old
Notes. The form and terms of the Exchange Notes are identical in all
material respects to the form and terms of the Old Notes except that the
Exchange Notes have been registered under the Securities Act and therefore
will not bear legends restricting their transfer and will not contain
certain provisions providing for registration rights and liquidated
damages relating to the Old Notes under certain circumstances described in
<PAGE>
the Registration Rights Agreement, which provisions will terminate as to
all the Notes upon the consummation of the Exchange Offer. See "The
Exchange Offer".
Interest on the Exchange Notes will be payable semi-annually in
arrears on March 1 and September 1 of each year, commencing on September
1, 1998 (each, an "Interest Payment Date"). The Exchange Notes will be
redeemable at the option of the Company, in whole or in part, at any time
on or after March 1, 2003 at the redemption prices set forth herein, plus
accrued and unpaid interest, if any, thereon to the applicable redemption
date. Prior to March 1, 2001, up to 35% of the aggregate principal amount
of Exchange Notes originally issued will be redeemable at the option of
the Company, in whole or in part, at any time, on one or more occasions,
from the net proceeds of one or more public offerings of Capital Stock (as
defined herein) of (i) the Company or (ii) FNC Holdings, Inc.
("Holdings"), the sole shareholder of the Company, to the extent the net
cash proceeds thereof are (a) contributed to the Company as a capital
contribution to the common equity of the Company or (b) used to purchase
Equity Interests (as defined herein) of the Company (in either case, other
than Disqualified Stock (as defined herein)), at a price of 110.25% of the
principal amount of the Exchange Notes, together with accrued and unpaid
interest, if any, to the date of redemption; provided that at least 65% of
the aggregate principal amount of Exchange Notes remains outstanding
immediately after the occurrence of each such redemption. See "Description
of Exchange Notes". Upon the occurrence of a Change of Control (as defined
herein), each holder of Exchange Notes may require the Company to
repurchase all or a portion of such holder's Exchange Notes at a
redemption price of 101% of the principal amount of the Exchange Notes,
together with accrued and unpaid interest, if any, to the date of
repurchase. There can be no assurance that upon the occurrence of a Change
of Control the Company will have, or will have access to, sufficient funds
to repurchase the Exchange Notes in the manner contemplated herein. See
"Description of Exchange Notes--Repurchase at the Option of Holders--
Change of Control" and "--Certain Definitions".
The Exchange Notes will be general, unsecured obligations of the
Company, subordinated in right of payment to all existing and future
Senior Debt (as defined herein) of the Company including all of the
Company's obligations under the Senior Credit Facility (as defined
herein), will rank pari passu with all future senior subordinated debt of
the Company and will rank senior in right of payment to all of the
Company's future subordinated debt. As of May 17, 1998, the aggregate
amount of Senior Debt to which the Exchange Notes are subordinated is
approximately $64.3 million. The Indenture will permit the Company to
incur additional Indebtedness, subject to certain limitations. See
"Description of Exchange Notes".
The Old Notes are designated for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. There
is no established trading market for the Exchange Notes. The Company does
not currently intend to list the Exchange Notes on any securities exchange
or to seek approval for quotation through any automated quotation system.
Accordingly, there can be no assurance as to the liquidity or development
of any market for the Exchange Notes.
<PAGE>
Exchange Notes initially will be represented by one or more
Exchange Notes in registered, global form without interest coupons
(collectively, the "Global Exchange Notes"). The Global Exchange Notes
will be deposited with the Trustee (as defined herein) as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee, in each case, for credit to
an account of a direct or indirect participant in DTC. Ownership of
beneficial interests in the Global Exchange Note will be shown on, and the
transfer of that ownership will be effected only through, records
maintained by DTC or its nominee or participants therein.
The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered for exchange. The
Exchange Offer will expire at 5:00 p.m., New York City time, on August 19,
1998 (the "Expiration Date"). The Company does not currently intend to
extend the Expiration Date. Old Notes tendered pursuant to the Exchange
Offer may be withdrawn at any time prior to the Expiration Date. The
Company will not receive any cash proceeds from the Exchange Offer and
will pay all expenses incident to the Exchange Offer.
_________________________
See "Risk Factors" beginning on page 14 for a discussion of
certain factors that should be considered in connection with the Exchange
Offer and an investment in the Exchange Notes.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Based on no-action letters issued by the staff of the Securities
and Exchange Commission (the "Commission") to third parties, the Company
believes the Exchange Notes issued pursuant to the Exchange Offer in
exchange for the Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than (i) a broker-dealer who
purchased such Old Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or
(ii) a person that is an "affiliate" of the Company within the meaning of
Rule 405 promulgated under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the holder is acquiring the Exchange Notes in its ordinary
course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. Holders of Old Notes wishing to accept the Exchange Offer
must represent to the Company that such conditions have been met. In the
event that the Company's belief is inaccurate, holders of Exchange Notes
who transfer Exchange Notes in violation of the prospectus delivery
provisions of the Securities Act and without an exemption from
registration thereunder may incur liability under the Securities Act. The
Company does not assume or indemnify holders against such liability. The
Company has not sought, and does not intend to seek, its own no-action
letter, and there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer.
Notwithstanding the foregoing, each broker-dealer that receives Exchange
Notes in exchange for Old Notes held for its own account, as a result of
market-making or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so acknowledging and by delivering
a prospectus, such broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by such
broker-dealer in connection with resales of Exchange Notes where such
Exchange Notes were acquired by such broker-dealer as a result of market-
making or other trading activities. The Company has agreed that, for a period
of 120 days after the consummation of the Exchange Offer, it will make this
Prospectus and any amendment or supplement to this Prospectus available to any
such broker-dealer for use in connection with any such resale. See "Plan of
Distribution".
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included
in this Prospectus, including without limitation, the discussions of the
Company's business strategy and expectations concerning the Company's
position in the industry and market share, future operations, margins,
profitability, liquidity and capital resources, as well as statements
concerning increased market penetration, geographic expansion and
achievement of cost savings, may constitute forward-looking statements.
Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give
no assurance that such plans, intentions or expectations will be achieved.
Important factors that could cause actual results to differ materially
from the Company's forward-looking statements are set forth below and
elsewhere in this Prospectus. All forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in
their entirety by the cautionary statements set forth below. See "Risk
Factors".
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement
on Form S-4 (herein referred to, together with all exhibits and schedules
and supplements thereto and any amendments thereto, as the "Exchange Offer
Registration Statement") under the Securities Act with respect to the
Exchange Notes offered hereby. This Prospectus, which forms a part of the
Exchange Offer Registration Statement, does not contain all of the
information set forth in the Exchange Offer Registration Statement, as
certain parts of the Exchange Offer Registration Statement are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Exchange Notes offered
hereby, reference is hereby made to the Exchange Offer Registration
Statement. Statements contained in this Prospectus as to the contents of
certain documents are not necessarily complete and, in each instance,
reference is hereby made to the copy of such document filed as an exhibit
to the Exchange Offer Registration Statement.
The Company is not currently subject to the periodic reporting and
other informational requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Upon consummation of the Exchange Offer,
the Company will be subject to the information requirements of the
Exchange Act and, in accordance therewith, will file periodic reports and
other information with the Commission. In addition, pursuant to the
Indenture, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any
of the Notes remain outstanding, the Company will furnish to the holders
of the Notes and file with the Commission, if permitted, (i) all quarterly
and annual financial information that would be required to be contained in
a filing with the Commission on Forms 10-Q and 10-K if the Company was
required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that describes
the financial condition and results of operations of the Company and its
consolidated subsidiaries and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants
and (ii) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company was required to file such reports.
In addition, for so long as any of the Old Notes remain outstanding, the
Company has agreed to furnish to any prospective purchaser of the Old
Notes or beneficial owner of the Old Notes, upon their request, the
information required by Rule 144A(d)(4) under the Securities Act.
Any reports or documents filed by the Company with the Commission
(including the Exchange Offer Registration Statement) may be inspected and
copied at the Public Reference Section of the Commission's office at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices in New York at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Chicago at Citicorp
Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such reports or other documents may be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a Web site that contains reports and other information that is
filed through the Commission's Electronic Data Gathering Analysis and
Retrieval System. The Web site can be accessed at http://www.sec.gov.
<PAGE>
UNTIL _____________, 1998, (90 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless the context
otherwise requires, references in this Prospectus to the "Issuer",
"Frank's" or the "Company" refer to Frank's Nursery & Crafts, Inc., a
Michigan corporation, and references to "Holdings" refer to the sole
shareholder of Frank's, FNC Holdings Inc. (formerly known as General Host
Corporation), a New York corporation. References in this Prospectus to
"Cypress" refer to The Cypress Group L.L.C. and its affiliates. All
references in this Prospectus to a fiscal year refer to the 52 or 53 weeks
ended on the last Sunday in January (e.g., fiscal 1997 refers to the
fiscal year ended January 25, 1998).
The Company
The Company operates the largest chain (as measured by sales) in
the United States of specialty retail stores devoted to the sale of lawn
and garden products. In addition, the Company sells dried and artificial
flowers and arrangements, Christmas merchandise, crafts and pet supplies.
As of January 25, 1998, the Company operated 258 retail stores located in
15 states primarily in the East and Midwest regions of the country under
the name Frank's Nursery & Crafts (Registered Trademark). The Company
derives approximately 80% of its sales from its core business lines, which
include lawn and garden products, related home decor merchandise such as
dried and artificial flowers and Christmas merchandise. For fiscal 1997,
the Company generated sales of $530.0 million and incurred a net loss of
$31.4 million.
The Company was organized in 1957. Holdings acquired the Company
in 1983 with the objective of developing the first national chain of lawn
and garden stores. At the time of the acquisition, Frank's had 95 stores
principally located in the Midwest. Since 1983, the Company has built,
leased or acquired a net of 163 stores in existing and new markets to
become the largest retail chain in the national lawn and garden industry.
On December 24, 1997, Holdings was acquired by Cypress and new senior
management with the strategic objective of positioning Frank's as the
leading specialty retailer in the lawn and garden arena. Frank's
represents Holdings' sole operating subsidiary.
The Company's principal executive offices are located at 1175 West
Long Lake Road, Troy, Michigan 48098 and its telephone number is
(248) 712-7000.
The Lawn and Garden Industry
The Company believes that the overall retail market for lawn and
garden products, defined to include green goods, fertilizers, gardening
accessories, lawn furniture, Christmas merchandise and snow removal, power and
<PAGE>
watering equipment, was approximately $71.2 billion in 1996 and approximately
$76.5 billion in 1997, representing a 7.4% growth over 1996. The Company also
believes that between 1987 and 1997 the industry experienced an 8.6% compound
annual growth rate. Such industry-wide growth has been driven by several key
factors, including the increasing popularity of gardening as a leisure
activity and positive demographic trends. Highlighting such widespread
popularity, the Company believes that 64% of the approximately 101
million U.S. households participated in some form of gardening activity
in 1996.
The national lawn and garden market is seasonal, highly fragmented
and generally non-branded, consisting of thousands of local garden centers
and mass merchandisers who sell lawn and garden products as part of their
overall product lines. The Company believes that the top ten competitors
accounted for approximately 10% of 1996 industry-wide sales. The Company
also believes that the industry's popularity, steady and consistent overall
growth and fragmented nature represent a significant opportunity for a
well-established specialty retailer such as Frank's to capture significant
market share in the future through both increased market penetration and
geographic expansion.
Company Strengths
The Company believes that its main competitive strengths include
its experienced new management team, its well-positioned specialty
retailing concept, its strong competitive position and the increased
liquidity provided by its new capital structure.
New Management Team with Proven Track Record. The Company's new
management team is led by its new Chairman, Chief Executive Officer and
President, Joseph R. Baczko, who was formerly President and Chief
Operating Officer at Blockbuster Entertainment Corp. ("Blockbuster")
(1991-1992) and the initial President of the International Division of
Toys "R" Us, Inc. ("Toys "R" Us International") (1983-1991). At
Blockbuster, Mr. Baczko oversaw system-wide revenue growth from
approximately $1.1 billion to approximately $2.0 billion, and during his
eight years with Toys "R" Us International, system-wide sales expanded to
approximately $800 million. To assist him in leading the Company,
Mr. Baczko has re-assembled his senior management team from Toys "R" Us
International, including Adam Szopinski as Chief Operating Officer and
Larry T. Lakin as Chief Financial Officer, both of whom served in their
respective functions under Mr. Baczko while at Toys "R" Us International.
This new management team has worked successfully together in the past and
possesses, on average, 29 years of specialty retailing and general
management experience.
Well-Positioned to Capitalize on Favorable Industry Fundamentals.
The Company believes it has a strong existing operating base in a popular
and growing market segment. The Company believes that nearly two-thirds of
all U.S. households participate in one or more types of lawn and garden
activities, ranking such leisure activities among the most popular in the
U.S. The Company also believes that adults between the ages of 45 and 64
<PAGE>
are the most frequent participants in the lawn and garden market, and the
U.S. Census Bureau expects the percentage of Americans in this age bracket to
increase from 19.9% in 1995 to 25.3% in 2005. In addition, management
believes that Frank's merchandise selection is characterized by relatively
"high-maintenance" and low cost products with the capacity to generate a
significant level of ancillary purchases and a relatively low exposure to
fashion risk. As the country's largest specialty retailer dedicated to
this category, the Company is well-positioned to capitalize on these
trends and characteristics.
Well-Established Competitive Position. New management believes
that the Company is well-positioned within the lawn and garden industry.
Competition in the lawn and garden retailing industry is comprised of
nationwide mass merchandisers and home centers (often called "big box"
retailing chains because of the construction of their stores), which sell
lawn and garden products as a portion of their overall product offering,
on the one hand, and local, often family-run, garden centers on the other.
Unlike the price-driven competitive model of the "big box" retailers, the
Company's business model focuses on a broad product offering, high quality
merchandise, value-added customer service and the convenience of shopping
in a smaller format store specializing in the sale of lawn and garden
products. The Company believes that such differentiating factors create a
basis for successful competition with "big box" home centers. In addition,
as the nation's largest specialty lawn and garden retailer, the Company
believes it successfully takes advantage of the economies of scale
associated with purchasing, advertising, distribution and brand name to
compete with locally-owned garden centers.
Increased Liquidity. New management believes that the Company
has been subject to capital constraints that have significantly hindered
its growth and operating performance. As a result of the Transactions, the
Company's prior $20 million revolving credit facility was replaced with a
new $110 million revolving credit facility which provides significant
added liquidity to support the new management team's strategic objectives.
Additionally, Holdings was acquired with a cash equity investment of $166
million which represents approximately 45% of the sources of funds used in
the Transactions and the Offering.
Company Strategy
The Company plans to build on its core competencies in plants and
gardening and its current market position to become the leading national
specialty retailer of lawn and garden products. Management intends to
systematically accomplish this objective by: (i) rationalizing the
Company's current cost structure, (ii) implementing a store refurbishment
program covering all existing 258 stores, (iii) increasing overall
inventory levels, (iv) further focusing its merchandising strategy on its
core lawn and garden theme and (v) increasing market penetration and
expanding geographically through the selective opening and/or acquisition
of new store locations.
Rationalize Cost Structure. Since closing the acquisition of
Holdings by Cypress on December 24, 1997, the Company's new management
team has identified and principally effected annual cost savings of
<PAGE>
approximately $13.1 million through: (i) reduction of corporate overhead
related to the closing of Holdings' headquarters in Stamford, Connecticut,
(ii) streamlining and reduction of field supervision and store-level
management, (iii) replacement of the Company's insurance policies with new
lower premium plans providing for substantially similar coverages,
(iv) elimination of expenditures incurred by prior management to build and
promote a new store concept, (v) termination of the temporary mall-based
Christmas stores and realization of savings from several previous and two
additional store closings and (vi) expense reductions associated with the
consolidation of its distribution facilities implemented in late fiscal
1996 and early fiscal 1997.
Implement Store Refurbishment Program. Management expects to
refurbish all of Frank's existing 258 store locations. This refurbishment
is expected to occur over a three-year period by investing an average of
$75,000 per store to improve overall store presentation, layout, signage
and fixturing. Management expects to implement this refurbishment program
by initially focusing on markets where the Company enjoys high market
penetration and brand awareness as well as stores where demographic
characteristics, traffic conditions and the competitive environment are
especially attractive.
Increase Overall Inventory Levels. Largely due to capital
constraints beginning in late fiscal 1995, the Company's purchases of new
inventory dropped by approximately 15.6% in fiscal 1996. Management believes
that this decrease contributed to the Company's significant decline in fiscal
1996 comparable store sales. During fiscal 1997, the Company's purchases of
inventory increased approximately 4.6% over fiscal 1996. New management
intends to raise overall inventory levels through a one-time increase of
approximately $50,000 per store, representing an increase of 14.5% versus
average inventory levels during the latest twelve months.
Focus Merchandising Strategy on Lawn and Garden Theme. The
Company's new merchandising strategy will build upon Frank's core lawn
and garden competencies. Management expects to (i) enhance and enlarge both
indoor and outdoor live plant categories and introduce more specialized
assortments, (ii) increase the variety of gardening tools, aids and
accessories, (iii) expand Frank's own private label program, (iv) provide
ancillary services such as in-store consultation and educational programs
geared towards the gardening enthusiast and (v) broaden and enhance the
presentation of the Company's dried and artificial flowers and
arrangements and Christmas trim-a-tree businesses. In addition, new
management expects to re-merchandise portions of the crafts and pet
supplies product categories to make them more complementary to the
Company's core lawn and garden theme.
Pursue Increased Market Penetration and Geographic Expansion. The
Company intends to focus solely on improving the operations of its
existing store base in fiscal 1998. Management currently expects to
selectively pursue a new store opening program beginning in fiscal 1999.
The Company believes that increased penetration and expansion will result
in significant sales growth and allow the Company to further realize
economies of scale associated with advertising, distribution, operations
and brand name recognition. Additionally, management will selectively
review acquisition opportunities of local and regional operators to
complement its store expansion strategy.
<PAGE>
The Sponsor
As a result of the transactions described in the section entitled
"The Transactions," Holdings is controlled by Cypress. Cypress manages a
$1.05 billion private equity fund which seeks to invest alongside proven
and successful management teams to achieve long-term capital appreciation.
Since its founding, Cypress has made investments in Cinemark USA, Inc.,
AMTROL Inc., Williams Scotsman, Inc., Genesis ElderCare Corp. and WESCO
International, Inc. Prior to founding Cypress, the Cypress professionals
managed the 1989 merchant banking fund (the "1989 Fund") of Lehman Brothers
Inc. Selected investments of the 1989 Fund included Infinity Broadcasting
Corporation, Lear Corporation, Parisian, Inc. and Illinois Central Corporation.
The Transactions
Cypress acquired the Company through a series of transactions
summarized as follows:
o On November 25, 1997, affiliates of Cypress and Joseph R.
Baczko, the current Chairman, President and Chief
Executive Officer of Holdings and the Company, formed and
invested $166 million in an acquisition corporation.
o On December 24, 1997, the acquisition corporation
acquired over 90% of Holdings' common stock through a
tender offer for Holdings' common stock (the "Tender
Offer") and the purchase of additional treasury shares of
Holdings' common stock.
o Contemporaneous with the Tender Offer, Holdings acquired
$52.8 million of the $78 million then-outstanding
aggregate principal amount of its 11 1/2% Senior Notes
due 2002 pursuant to a tender offer for such indebtedness
(the "Debt Tender").
o On December 24, 1997, Holdings and the Company entered
into a senior secured credit facility providing the
Company with up to $195 million in immediate borrowings, and
the Company made an initial draw under the senior secured
credit facility of $47.5 million.
o On January 7, 1998, the acquisition corporation was
merged into Holdings with Holdings designated as the
surviving corporation.
<PAGE>
o The proceeds of the Company's $47.5 million initial
borrowing under the senior secured credit facility, together
with the proceeds of the $166 million investment in the
acquisition corporation were used, among other things, to
fund the Tender Offer and Debt Tender, to purchase the
remaining shares of Holdings' common stock not tendered
in the Tender Offer, to refinance certain indebtedness of
the Company and to pay fees and expenses relating to the
transactions discussed above.
For a more complete description of the transactions summarized
above, see the section entitled "The Transactions" on page 21.
The following table sets forth the sources and uses of funds in
connection with the Transactions and the Offering:
<TABLE>
Amount
-------------
(in millions)
<S> <C>
Sources:
Senior Credit Facility<F1> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50.2
Assumption of existing indebtedness<F2> . . . . . . . . . . . . . . . . . . . . . . . . . . 41.3
Offering of the Old Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115.0
Equity contribution by the Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . 166.0
------
Total Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $372.5
======
Uses:
Purchase of equity<F3> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $136.7
Assumption of existing indebtedness<F2> . . . . . . . . . . . . . . . . . . . . . . . . . . 41.3
Retirement of existing indebtedness<F4> . . . . . . . . . . . . . . . . . . . . . . . . . . 162.4
Estimated fees and expenses<F5> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.1
------
Total Uses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $372.5
======
<FN>
<F1> The Senior Credit Facility originally consisted
of a $110 million Revolving Credit Facility (as
defined herein) and an $85 million Term Loan
Facility (as defined herein). In connection
with the Transactions, the Company borrowed
$37.5 million under the Term Loan Facility and
$10 million under the Revolving Credit
Facility. Approximately $17.2 million of the
proceeds of the Offering were used to pay down
indebtedness under the Term Loan Facility. In
connection with the Offering, the Company
borrowed $19.9 million under the Revolving
Credit Facility. Additionally, in connection
with the Offering, the Company permanently
<PAGE>
reduced the commitments under the Term Loan
Facility to $25 million from $85 million. Loans
obtained under the Revolving Credit Facility
mature in December 2003 and loans obtained
under the Term Loan Facility mature in December
2004, subject to amortization and mandatory
prepayment. See "Other Indebtedness--Senior
Credit Facility".
<F2> Includes assumption of existing mortgages in
the amount of $29.7 million and assumption of
existing capital leases in the amount of $11.6
million. See "Other Indebtedness".
<F3> Includes purchases made pursuant to the Tender
Offer and in connection with the Merger
totalling $134.3 million and retirement of
stock options totalling $2.4 million. See "The
Transactions".
<F4> Includes $10.9 million used in the repayment of
certain mortgages; $58.0 million used to
purchase a portion of the Senior Notes tendered
pursuant to the Debt Tender; $26.5 million of
proceeds of the Offering were used to redeem
the remaining Senior Notes; and $67.0 million
of proceeds of the Offering were used to redeem
the Convertible Notes (as defined herein). All
payments include premium and accrued interest.
<F5> Includes amounts paid pursuant to the former
Chairman of Holdings' employment agreement,
financial advisory, consulting and other
professional fees and financing costs. See
"Certain Relationships and Related
Transactions".
/TABLE
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $115,000,000
aggregate principal amount of Old Notes for an equal aggregate principal
amount of Exchange Notes. The Exchange Notes are obligations of the
Company entitled to the benefits of the Indenture relating to the Old
Notes. The form and terms of the Exchange Notes are the same as the form
and terms of the Old Notes except that the Exchange Notes have been
registered under the Securities Act, and therefore will not bear legends
restricting their transfer and will not contain certain provisions
providing for registration rights and liquidated damages relating to the
Old Notes under certain circumstances described in the Registration Rights
Agreement (the "Registration Rights Agreement"), which provisions will
terminate as to all the Notes upon the consummation of the Exchange Offer.
The Exchange Offer . . . . . . . The Company is offering to exchange
pursuant to the Exchange Offer up to
$115,000,000 aggregate principal
amount of its Exchange Notes for a
like aggregate principal amount of
its Old Notes validly tendered
pursuant to the Exchange Offer. As
of the date hereof, $115,000,000
in aggregate principal amount of Old
Notes is outstanding. The Company
will issue the Exchange Notes to
tendering holders of Old Notes on
or promptly after the Expiration Date.
Old Notes may be tendered only in
integral multiples of $1,000.
Interest Payments . . . . . . . . Interest on the Exchange Notes shall
accrue from the last Interest Payment
Date on which interest was paid on the
Old Notes so surrendered or, if no
interest have been paid on such Old
Notes, from February 26, 1998, the
date of issuance of the Old Notes,
payable semi-annually in arrears on
March 1 and September 1 of each year,
commencing on September 1, 1998 at a
rate of 10 1/4% per annum.
Resale of the Exchange Notes . . Based on interpretations by the staff
of the Commission set forth in
no-action letters issued to third
parties, the Company believes that
Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old
Notes may be offered for resale,
resold and otherwise transferred by
any holder thereof (other than (i) a
broker-dealer who purchased such Old
Notes directly from the Company for
resale pursuant to Rule 144A or any
other available exemption under the
Securities Act or (ii) a person that
is an "affiliate" of the Company
<PAGE>
within the meaning of Rule 405
promulgated under the Securities Act)
without compliance with the
registration and prospectus delivery
provisions of the Securities Act,
provided that the holder is acquiring
the Exchange Notes in its ordinary
course of business and is not
participating, and has no arrangement
or understanding with any person to
participate, in the distribution of
the Exchange Notes. In the event that
the Company's belief is inaccurate,
holders of Exchange Notes who transfer
Exchange Notes in violation of the
prospectus delivery provisions of the
Securities Act and without an
exemption from registration thereunder
may incur liability under the
Securities Act. The Company does not
assume or indemnify holders against
such liability. The Company has not
sought, and does not intend to seek,
its own no-action letter, and there
can be no assurance that the staff of
the Commission would make a similar
determination with respect to the
Exchange Offer. Notwithstanding the
foregoing, each broker-dealer that
receives Exchange Notes in exchange
for Old Notes held for its own
account, as a result of market-making
activities or other trading
activities, must acknowledge that it
will deliver a prospectus in
connection with any resale of such
Exchange Notes. The Letter of
Transmittal states that by so
acknowledging and by delivering a
prospectus, such broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning of
the Securities Act. This Prospectus,
as it may be amended or supplemented
from time to time, may be used by such
broker-dealer in connection with
resales of Exchange Notes received in
exchange for Old Notes. The Company
has agreed that for a period of 120
days after the consummation of the
Exchange Offer it will make this
Prospectus and any amendment or
supplement to this Prospectus
available to any such broker-dealer
for use in connection with any such
resales. See "Plan of Distribution".
<PAGE>
This Exchange Offer is not being made
to, nor will the Company accept
surrenders for exchange from, holders
of Old Notes in any jurisdiction in
which this Exchange Offer or the
acceptance thereof would not be in
compliance with the securities or blue
sky laws of such jurisdiction.
Expiration of Exchange Offer . . The Exchange Offer will expire at 5:00
p.m., New York City time, on August 19,
1998, unless the Exchange Offer is
extended, in which case the Expiration
Date will be the latest date and time
to which the Exchange Offer is
extended. The Company does not
currently intend to extend the
Expiration Date. See "The Exchange
Offer--Expiration Date; Extensions;
Amendments".
Exchange Date . . . . . . . . . . The date of acceptance and exchange of
the Old Notes will be the third
business day following the Expiration
Date.
Conditions to the Exchange
Offer . . . . . . . . . . . . . The Exchange Offer is subject to
certain customary conditions, which
may be waived by the Company. The
Company may terminate or amend the
Exchange Offer at any time prior to
the Expiration Date upon the failure
to satisfy any such conditions. The
Exchange Offer is not conditioned upon
any minimum aggregate principal amount
of Old Notes being tendered for
exchange. Holders of Old Notes will
have certain rights against the
Company under the Registration Rights
Agreement should the Company fail to
consummate the Exchange Offer. See
"The Exchange Offer--General" and "--
Termination".
Procedures for Tendering Old
Notes . . . . . . . . . . . . . Each holder of Old Notes wishing to
accept the Exchange Offer must
complete, sign and date the Letter of
Transmittal, or a facsimile thereof,
in accordance with the instructions
contained herein and therein, and mail
or otherwise deliver such Letter of
Transmittal, or such facsimile,
together with any other required
documentation, to the Exchange Agent
(as defined herein) at the address set
forth herein and therein. See "The
<PAGE>
Exchange Offer--Procedures for
Tendering".
By executing the Letter of
Transmittal, each holder will
represent to the Company that, among
other things, (i) the Exchange Notes
acquired pursuant to the Exchange
Offer are being obtained in the
ordinary course of business of the
person receiving such Exchange Notes,
whether or not such person is the
holder, (ii) neither the holder nor
any such other person has an
arrangement or understanding with any
person to participate in the
distribution of such Exchange Notes
and (iii) neither the holder nor any
such other person is an "affiliate,"
as defined in Rule 405 under the
Securities Act, of the Company or, if
an affiliate, such holder will comply
with the registration and prospectus
delivery requirements of the
Securities Act to the extent
applicable.
Special Procedures for
Beneficial Holders . . . . . . Any beneficial holder whose Old Notes
are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee and who
wishes to tender in the Exchange Offer
should contact such registered holder
promptly and instruct such registered
holder to tender on such beneficial
holder's behalf. If such beneficial
holder wishes to tender on such
beneficial holder's own behalf, such
beneficial holder must, prior to
completing and executing the Letter of
Transmittal and delivering its Old
Notes, either make appropriate
arrangements to register ownership of
the Old Notes in such beneficial
holder's name or obtain a properly
competed bond power from the
registered holder. The transfer of
record ownership may take considerable
time. See "The Exchange Offer--
Procedures for Tendering".
Guaranteed Delivery
Procedures . . . . . . . . . . Holders of Old Notes who wish to
tender their Old Notes and whose Old
Notes are not immediately available or
who cannot deliver their Old Notes (or
who cannot complete the procedure for
<PAGE>
book-entry transfer on a timely basis)
and a properly completed Letter of
Transmittal or any other documents
required by the Letter of Transmittal
to the Exchange Agent prior to the
Expiration Date must tender their Old
Notes according to the guaranteed
delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery
Procedures".
Withdrawal Rights . . . . . . . . Tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New
York City time, on the Expiration
Date. See "The Exchange Offer--
Withdrawal of Tenders".
Acceptance of Old Notes and
Delivery of Exchange Notes . . Subject to certain conditions (as
described under "The Exchange Offer--
Termination"), the Company will accept
for exchange any and all Old Notes
which are properly tendered in the
Exchange Offer and not validly
withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The
Exchange Notes issued pursuant to the
Exchange Offer will be delivered
promptly following the Expiration
Date. See "The Exchange Offer--
General".
Effect on Holders of Old
Notes . . . . . . . . . . . . . Holders of the Old Notes who do not
tender their Old Notes in the Exchange
Offer will continue to hold such Old
Notes and will be entitled to all the
rights and limitations applicable
thereto under the Indenture dated as
of February 26, 1998 between the
Company and Bankers Trust Company
relating to the Old Notes and the
Exchange Notes (the "Indenture"),
except for any such rights under the
Registration Rights Agreement that by
their terms terminate or cease to have
further effectiveness as a result of
the making of, and the acceptance for
exchange of all validly tendered Old
Notes pursuant to, the Exchange Offer.
All untendered Old Notes will continue
to be subject to the restrictions on
transfer provided for in the Old Notes
and in the Indenture and will have no
further registration rights under the
Registration Rights Agreement. To the
extent that Old Notes are tendered and
accepted in the Exchange Offer, the
<PAGE>
trading market for untendered Old
Notes could be adversely affected.
Consequences of Failure to
Exchange . . . . . . . . . . . Holders of Old Notes who do not
exchange their Old Notes for Exchange
Notes pursuant to the Exchange Offer
will continue to be subject to the
restrictions on transfer of such Old
Notes as set forth in the legend
thereon. In general, the Old Notes may
not be offered or sold, unless
registered under the Securities Act,
except pursuant to an exemption from,
or in a transaction not subject to,
the Securities Act and applicable
state securities laws. The Company
does not currently anticipate that it
will register the Old Notes under the
Securities Act.
Certain Tax Considerations . . . The exchange pursuant to the Exchange
Offer will not be a taxable event for
federal income tax purposes. See
"Certain United States Federal Income
Tax Consequences of the Exchange".
Exchange Agent . . . . . . . . . Bankers Trust Company, the Trustee
under the Indenture, is serving as
exchange agent (the "Exchange Agent")
in connection with the Exchange Offer.
The address of the Exchange Agent is:
Bankers Trust Company, Four Albany
Street, Fourth Floor, New York, New
York 10006, Attention: Corporate Trust
& Agency Group. For information with
respect to the Exchange Offer, the
telephone number for the Exchange
Agent is (800) 735-7777 and the
facsimile number for the Exchange
Agent is (615) 835-3701.
Use of Proceeds . . . . . . . . . There will be no cash proceeds payable
to the Company from issuance of the
Exchange Notes pursuant to the
Exchange Offer.
THE EXCHANGE NOTES
Issuer . . . . . . . . . . . . . . Frank's Nursery & Crafts, Inc.
Securities Offered . . . . . . . . $115,000,000 in aggregate principal
amount of 10 1/4% Series B Senior
Subordinated Notes due 2008.
Maturity Date . . . . . . . . . . . March 1, 2008.
Interest Payment Dates . . . . . . March 1 and September 1 of each year,
<PAGE>
commencing on September 1, 1998.
Optional Redemption . . . . . . . . Except as described below, the Exchange
Notes are not redeemable at the
Company's option prior to March 1,
2003. From and after March 1, 2003, the
Exchange Notes will be subject to
redemption at the option of the
Company, in whole or in part, at the
redemption prices set forth herein,
plus accrued and unpaid interest, if
any, thereon to the applicable
redemption date. In addition, prior to
March 1, 2001, up to 35% of the
aggregate principal amount of Exchange
Notes will be redeemable at the option
of the Company, in whole or in part, on
one or more occasions, from the net
proceeds of one or more public
offerings of Capital Stock of (i) the
Company or (ii) Holdings to the extent
the net cash proceeds thereof are (a)
contributed to the Company as a capital
contribution to the common equity of
the Company or (b) used to purchase
Equity Interests of the Company (in
either case, other than Disqualified
Stock), at a price of 110.25% of the
principal amount of the Exchange Notes,
together with accrued and unpaid
interest, if any, to the date of the
redemption; provided that at least 65%
of the aggregate principal amount of
Exchange Notes remains outstanding
immediately after the occurrence of
each such redemption. See "Description
of Exchange Notes--Optional
Redemption".
Change of Control . . . . . . . . . In the event of a Change of Control,
holders of the Exchange Notes will have
the right to require the Company to
repurchase their Exchange Notes, in
whole or in part, at a price equal to
101% of the aggregate principal amount
thereof, plus accrued and unpaid
interest, if any, to the date of
repurchase. The Indenture will require
that prior to such a repurchase, the
Company must either repay all
outstanding indebtedness under the
Senior Credit Facility or obtain any
required consent to such repurchase.
See "Description of Exchange Notes--
Repurchase at Option of Holders--Change
of Control" and "--Certain
Definitions".
<PAGE>
Ranking . . . . . . . . . . . . . . The Exchange Notes will be general,
unsecured obligations of the Company
and will be subordinated in right of
payment to all existing and future
Senior Debt of the Company, will rank
pari passu with all future senior
subordinated indebtedness of the
Company and will rank senior in right
of payment to all future subordinated
indebtedness of the Company. As of May
17, 1998, the aggregate amount of
Senior Debt to which the Exchange Notes
are subordinated is approximately $64.3
million. See "Description of Exchange
Notes--Subordination".
Restrictive Covenants . . . . . . . The Indenture contains certain
covenants that, among other things,
limit the ability of the Company and
its Restricted Subsidiaries (as defined
herein) to incur additional
indebtedness and issue preferred stock,
pay dividends or distributions or make
investments or make certain other
Restricted Payments (as defined
herein), enter into certain
transactions with affiliates, dispose
of certain assets, incur liens and
engage in mergers and consolidations.
See "Description of Exchange Notes".
Use of Proceeds . . . . . . . . . . There will be no cash proceeds to the
Company from the exchange pursuant to
the Exchange Offer.
Absence Of Public Market
There is no public market for the Exchange Notes, and the Exchange
Notes will not be listed on any securities exchange. If an active public
market does not develop, the market price and liquidity of the Exchange
Notes may be adversely affected.
Risk Factors
See "Risk Factors" for a discussion of certain factors that should
be considered by holders of Old Notes prior to tendering Old Notes in the
Exchange Offer.
Additional Information
For additional information regarding the Exchange Notes, see
"Description of Exchange Notes" and "Certain United States Federal Income
Tax Consequences of the Exchange".
<PAGE>
Summary Historical and Unaudited Pro Forma Financial Information
Set forth below is summary historical financial information of the
Company for the forty-eight week period ending December 28, 1997, the
four-week period ending January 25, 1998 and for each of the two fiscal
years in the period ended January 26, 1997 which are derived from the
audited financial statements included elsewhere herein; such data for the
sixteen weeks ended May 17, 1998 and May 18, 1997 are derived from the
Company's unaudited interim financial statements included elsewhere
herein. The fiscal year is normally comprised of 52 or 53 weeks, ending on
the last Sunday in January. The 1997, 1996 and 1995 fiscal years each
reflect a 52 week period ended January 25, 1998, January 26, 1997 and
January 28, 1996, respectively. Because of the acquisition of Holdings by
Cypress on December 24, 1997, as described under the section entitled "The
Transactions," the summary financial data for fiscal 1997 represents the
results of operations for the forty-eight week period prior to the
acquisitions and the four-week period subsequent to the acquisition. The
post-acquisition period has been presented on the purchase basis of
accounting, and is therefore not comparable to the historical financial
information presented for the forty-eight week pre-acquisition period.
The unaudited pro forma financial information has been derived from the
Unaudited Pro Forma Financial Data and the related notes thereto included
elsewhere herein. The unaudited pro forma financial information does not
purport to represent what the Company's results actually would have been
if the Transactions and the Offering and the application of the proceeds
therefrom had occurred on the dates indicated, nor does such information
purport to project the results of the Company for future periods. The
summary financial information below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results
of Operations", "Unaudited Pro Forma Financial Data", "Selected Historical
Financial and Other Data" and the financial statements and notes thereto
included elsewhere herein.
<TABLE>
<CAPTION> Pre-
Acquisition Post-
Period Acquisition
(Pre- Period
decessor (Successor-
basis) basis) Unaudited
Fiscal Year Ended Forty-Eight Four-Weeks Unaudited Sixteen Weeks Ended
----------------- Weeks Ended Ended Pro Forma --------------------------------
January 28, January 26, December 28, January 25, January 25, May 18, May 17, Pro Forma
1996 1997 1997 1998 1998 1997 1998 1998
----------- ----------- ----------- ----------- ----------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net sales . . . . . . . $593,270 $530,752 $ 515,204 $ 14,814 $530,018 $178,243 $176,273 $176,273
Cost of sales, including
buying and
occupancy . . . . . . 429,181 383,099 367,008 17,532 384,540 121,946 114,078 114,078
-------- -------- --------- -------- -------- -------- -------- --------
Gross profit . . . . . 164,089 147,653 148,196 (2,718) 145,478 56,297 62,195 62,195
Selling, general and
administrative
expenses . . . . 148,502 138,355 136,622 8,568 143,895 44,106 42,867 42,867
Other income
(expense). . . . . . 507 (226) (2,010) (17) (2,027) 35 562 562
Impairment loss . . . . -- -- 1,720 -- 1,720 -- -- --
<PAGE>
Provision for store
closings and other
cost. . . . . . . . -- -- 6,677 -- 6,677 -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating income
(loss) 16,094 9,072 1,167 (11,303) (8,841) 12,226 19,890 19,890
Interest expense . . 23,845 20,863 19,632 1,601 20,490 6,624 6,792 6,416
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary loss. . (7,751) (11,791) (18,465) (12,904) (29,331) 5,602 13,098 13,474
Extraordinary loss . . -- -- -- -- -- -- 5,148 --
Income (loss) before
income taxes. . . . . (7,751) (11,791) (18,465) (12,904) (29,331) 5,602 7,950 13,474
Income tax expense
(credit). . . . . . . -- -- -- -- -- -- -- --
Net income (loss). . . $ (7,751) $(11,791) $ (18,465) $(12,904) $(29,331) $5,602 $7,950 $13,474
======== ======== ========= ======== ======== ======== ======== ========
Other Data:
Merchandise margin . . 40.8% 42.2% 42.2% 13.7% 41.4% 44.0% 47.1% 47.1%
Depreciation and
amortization<F1> . . . $ 22,888 $ 22,377 $ 21,835 $ 1,500 $22,071 $ 6,429 $ 5,611 $ 5,631
Capital expenditures . 5,497 4,371 12,472 (34) 12,438 951 3,199 3,199
Number of stores at
the end of period . . 264 262 258 258 258 261 257 257
<CAPTION>
Fiscal Year Ended Unaudited
January 25, May 17,
1998 1998
----------------- ---------
<S> <C> <C>
Balance Sheet Data (at end of period):
Cash and cash equivalents . . . . . . . . . . . $16,100 $ 55,171
Working capital<F2> . . . . . . . . . . . . . . 7,347 (23,422)
Property, plant and equipment, net . . . . . . 217,880 212,727
Total debt, including current maturities . . . 178,969 175,978
Shareholder's equity . . . . . . . . . . . . . 152,403 160,302
____________________
<FN>
<F1> Includes amortization of debt issuance cost of, $1,671 for fiscal
1995; $889 for fiscal 1996; $676 for the forty-eight weeks ended
December 28, 1997; $56 for the four weeks ended January 25, 1998;
$627 for pro forma fiscal 1997 and includes $1,720 for the write-
down to fair value of property, plant and equipment in accordance
with FAS-121 "Impairment of Long-Lived Assets" for the forty-eight
weeks ended December 28, 1997 and pro forma 1997; $330 for the
sixteen weeks ended May 17, 1998; $231 for the sixteen weeks ended
May 18, 1997; and $327 for pro forma 1998.
<F2> Reflects total current assets (excluding cash) less total current
liabilities (excluding current maturities of long-term debt, notes
payable to banks and the Revolving Credit Facility).
</TABLE>
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following
factors, as well as the other information and data included in this
Prospectus, before tendering Old Notes in exchange for the Exchange Notes
offered hereby. The risk factors set forth below are generally applicable
to the Old Notes as well as the Exchange Notes.
Consequences of Failure to Exchange
Holders of Old Notes who do not exchange their Old Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject
to the restrictions on transfer of such Old Notes as set forth in the
legend thereon as a consequence of the offer or sale of the Old Notes
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state
securities laws. In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently
anticipate that it will register the Old Notes under the Securities Act or
any state securities laws. Based on interpretations by the staff of the
Commission, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes may be offered for resale,
resold or otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement with any person to
participate in the distribution of such Exchange Notes. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Old
Notes, where such Exchange Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes. The interpretations by the staff of the
Commission on which the Company has relied were based on no-action letters
issued by the staff of the Commission to third parties. The Company has
not sought, and does not intend to seek, its own no-action letter and
there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Exchange Offer. See "Plan of
Distribution".
Substantial Leverage
As a result of the Transactions and the Offering and the
application of the proceeds therefrom, the Company is highly leveraged. At
May 17, 1998, the Company had outstanding indebtedness of $176 million and
its shareholder's equity was $161.6 million. In addition, the Company had
available borrowings of up to $106.7 million under the Revolving Credit
Facility. In addition, subject to restrictions in the Senior Credit Facility
and the Indenture, the Company may incur additional indebtedness.
For fiscal 1997, after giving pro forma effect to the Transactions and the
Offering and the application of the proceeds therefrom, the Company's
<PAGE>
ratio of earnings to fixed charges would have been (0.1) to 1.0. Pro forma
earnings would have been insufficient to cover pro forma fixed charges by
$29.3 million for fiscal year ended January 25, 1998.
The Company's ability to make scheduled payments of principal of,
or to pay the interest, if any, on, or to refinance, its indebtedness
(including the Notes), or to fund planned capital expenditures will depend
on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and
other factors that are beyond its control. Based upon the current level of
operations and anticipated revenue growth and operating improvements,
management believes that cash flow from operations and available cash,
together with available borrowings under the Senior Credit Facility, will
be adequate to meet the Company's future liquidity needs for at least the
next several years. The Company, however, may need to refinance all or a
portion of the principal of the Notes on or prior to maturity. There can
be no assurance that the Company will be able to effect any such
refinancing on commercially reasonable terms or at all. In addition, there
can be no assurance that the Company's business will generate sufficient
cash flow from operations, that anticipated revenue growth and operating
improvements will be realized or that future borrowings will be available
under the Senior Credit Facility in an amount sufficient to enable the
Company to service its indebtedness, including the Notes, or to fund its
other liquidity needs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
The Company's high degree of leverage could have important
consequences to holders of the Notes, including, but not limited to:
(i) making it more difficult for the Company to satisfy its obligations
with respect to the Notes; (ii) increasing the Company's vulnerability to
general adverse economic and industry conditions; (iii) limiting the
Company's ability to obtain additional financing to fund future working
capital, capital expenditures and other general corporate requirements;
(iv) requiring the dedication of a substantial portion of the Company's
cash flow from operations to the payment of principal of, and interest on,
its indebtedness, thereby reducing the availability of such cash flow to
fund working capital, capital expenditures or other general corporate
purposes; (v) limiting the Company's flexibility in planning for, or
reacting to, changes in its business and the industry; and (vi) placing
the Company at a competitive disadvantage relative to less leveraged
competitors. In addition, the Indenture and the Senior Credit Facility
contain financial and other restrictive covenants that limit the ability
of the Company to, among other things, borrow additional funds. Failure by
the Company to comply with such covenants could result in an event of
default which, if not cured or waived, could have a material adverse
effect on the Company's financial condition or results of operations. In
addition, the degree to which the Company is leveraged could prevent it
from repurchasing all of the Notes tendered to it upon the occurrence of a
Change of Control. See "Description of Exchange Notes--Repurchase at
Option of Holders--Change of Control" and "Other Indebtedness".
<PAGE>
Subordination of Notes
The Notes are contractually subordinated to all Senior Debt
including all obligations under the Senior Credit Facility. Upon any
distribution to creditors of the Company in a liquidation or dissolution
of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its
property, the holders of Senior Debt will be entitled to be paid in full
in cash before any payment may be made with respect to the Notes. In
addition, the subordination provisions of the Indenture provide that
payments with respect to the Notes will be blocked in the event of a
payment default on Senior Debt. In the event of a bankruptcy, liquidation
or reorganization of the Company, holders of the Notes will participate
ratably in the remaining assets of the Company with all holders of
subordinated indebtedness of the Company that is deemed to be of the same
class as the Notes, and potentially with all other general creditors of
the Company, based upon the respective amounts owed to each holder or
creditor. In any of the foregoing events, there can be no assurance that
there would be sufficient assets to pay amounts due on the Notes. As a
result, holders of Notes may receive less, ratably, than the holders of
Senior Debt. At May 17, 1998, the aggregate amount of Senior Debt to which
the Notes are subordinated is approximately $64.3 million, consisting of
secured borrowings under the Senior Credit Facility, the Company's
mortgages and the capital leases. In addition, the Company would have had
available additional borrowings of up to $106.7 million under the
Revolving Credit Facility, all of which would constitute Senior Debt.
Subject to certain limitations, the Indenture permits the Company to incur
additional indebtedness, including Senior Debt. See "The Transactions" and
"Description of Exchange Notes". Substantially all of the assets of the
Company have been pledged to secure other indebtedness of the Company.
See "Other Indebtedness".
Restrictions Imposed by the Senior Credit Facility and the Indenture
Among other obligations, the Senior Credit Facility requires the
Company to satisfy certain tests and maintain specified financial ratios,
including a minimum interest coverage ratio and a maximum leverage ratio.
In addition, the Senior Credit Facility restricts, among other things, the
Company's ability to incur additional indebtedness and to make
acquisitions, investments and capital expenditures beyond a certain level.
A failure to comply with the restrictions contained in the Senior Credit
Facility could lead to an event of default thereunder which could result
in an acceleration of such indebtedness. Such an acceleration would
constitute an event of default under the Indenture relating to the Notes.
In addition, the Indenture restricts, among other things, the Company's
ability to incur additional indebtedness, make investments, sell assets,
make certain payments and dividends or merge or consolidate. A failure to
comply with the restrictions in the Indenture could result in an event of
default under the Indenture. If, as a result thereof, a default occurs
with respect to Senior Debt, the subordination provisions of the Indenture
would likely restrict payments to holders of the Notes. See "Other
Indebtedness" and "Description of Exchange Notes--Subordination".
Encumbrances on Assets to Secure Credit Facilities and Mortgages
In addition to being subordinated to all existing and future
Senior Debt of the Company, the Notes are not secured by any of the
<PAGE>
Company's assets. The Company's obligations under the Senior Credit
Facility are secured by a first priority pledge of and security interest
in the common stock of the Company and the Company's subsidiaries and in
substantially all of the Company's personal property (including inventory)
and real property (other than real property encumbered by certain existing
mortgages). If the Company becomes insolvent or is liquidated, or if
payment under the Senior Credit Facility is accelerated, the lenders under
the Senior Credit Facility will be entitled to exercise the remedies
available to a secured lender under applicable law. In addition, the
Company's obligations under its mortgage loans are secured by the
respective store properties subject to such mortgage loans. See "Other
Indebtedness--Senior Credit Facility" and "Description of Exchange Notes".
Competition; Business Factors; History of Net Losses
The national lawn and garden market is highly fragmented and
competitive, consisting of thousands of local garden centers and mass
merchandisers who sell lawn and garden products as part of their overall
product lines. The Company encounters competition from many retailers and
mass merchandisers with respect to certain of the Company's lines of
business. Certain of the Company's principal competitors are less
highly-leveraged than the Company and may be better able to withstand
market conditions. Additionally, there can be no assurance that the
Company will not encounter increased future competition, which could have
a material adverse effect on the Company's financial condition or results
of operations. See "Business--Industry Overview--Competition".
The success of the Company's operations depends upon a number of
factors relating to consumer spending, including future economic
conditions affecting disposable consumer income such as employment,
business conditions, interest rates and taxation. If existing economic
conditions deteriorate, consumer spending may decline. There can be no
assurance that any prolonged economic downturn would not have a material
adverse affect on the Company.
More specifically, growth in the lawn and garden industry is
driven by several key factors including the increasing popularity of
gardening as a leisure activity and positive demographic trends. No
assurance can be made that the absence of any of these key factors would
not have a material adverse effect on the Company.
The financial results of the Company in recent years have been
significantly affected by management turnover, capital constraints and
general economic conditions. For fiscal years 1995, 1996 and 1997, the
Company had net losses of $7.8 million, $11.8 million and $31.4 million,
respectively. There can be no assurance that the Company will not incur
additional losses in the future.
<PAGE>
Seasonal Earnings; Effect of Weather Conditions
The Company's business is highly seasonal and subject to the
impact of weather conditions, which may affect consumer purchasing
patterns. Historically, the spring season, which runs from late March to
mid-June, is the Company's most profitable and has accounted for
approximately 40% of the Company's sales and the Christmas season, which
runs from November to late December, is the Company's second most
profitable and has accounted for approximately 25% of the Company's sales.
Losses are usually experienced during the other periods of the year.
A significant portion of the Company's products consists of live
nursery goods which have limited shelf lives in some cases. Adverse
weather conditions may cause delays in the purchase of live nursery goods
by customers and may result in such goods remaining unsold past their
shelf life and require markdowns or disposal. See "Management's
Discussions and Analysis of Financial Condition and Results of
Operations".
Year 2000 Issue; Computer System Upgrade
The Company has begun installing a new Management Information
System ("MIS") to address the widely-known dating flaw inherent in most
operating systems (the "Year 2000 Issue"). While the new MIS being
installed is expected to be operational by the end of fiscal 1998, there
can be no assurance that the new MIS will be installed in time to remedy
the Year 2000 Issue or that the Company's computer operating systems will
not be disrupted in the year 2000. Any such disruption, whether caused by
the Company's systems or those of any of its vendors, could have a
material adverse effect on the Company's financial condition or results of
operations. In addition, there can be no assurance that the Company will
not experience significant cost overruns or delays in connection with the
upgrade of its existing computer system. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Business--Management Information System".
Dependence on Key Personnel
The Company is dependent on the continued services of its new
senior management team. Although the Company intends to enter into
employment agreements with its new Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer, it currently has no
employment agreement with any members of its new senior management team.
There can be no assurance that these and other key personnel will continue
to be employed by the Company or that the Company will be able to attract
and retain qualified personnel in the future. Although the Company
believes that it could replace key employees in an orderly fashion should
the need arise, the loss of such key personnel could have a material
adverse effect on the Company's financial condition or results of
operations. The Company does not currently maintain key-man life insurance
policies on any of its executive officers or any other key personnel. See
"Management--Executive Officers and Directors".
<PAGE>
Anticipated Cost Savings
Since closing the acquisition on December 24, 1997, the Company's
new management team has identified and principally effected annual cost
savings of approximately $13.1 million through: (i) reduction of corporate
overhead related to the closing of Holdings' headquarters in Stamford,
Connecticut, (ii) streamlining and reduction of field supervision and
store-level management, (iii) replacement of the Company's insurance
policies with new lower premium plans providing for substantially similar
coverages, (iv) elimination of expenditures incurred by prior management
to build and promote a new store concept, (v) termination of the temporary
mall-based Christmas stores and realization of savings from several
previous and two additional store closings and (vi) expense reductions
associated with the consolidation of its distribution facilities
implemented in late fiscal 1996 and early fiscal 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General", "Business--Overview" and "Business--Company Strategy".
These cost savings estimates were prepared solely by members of
the management of the Company. All of these statements are based on
estimates and assumptions made by management of the Company, which
although believed to be reasonable, are inherently uncertain and difficult
to predict. There can be no assurance that the savings anticipated in
these statements will be achieved. In addition, there can be no assurance
that unforeseen costs and expenses or other factors will not offset the
estimated cost savings or other components of the Company's operating plan
in whole or in part.
Ability to Implement the Company's Operating Strategy
The growth and success of the Company is dependent, in large part,
upon the Company's ability to successfully execute its focused operating
strategy aimed at substantially improving the Company's cost structure,
refurbishing existing stores, improving inventory levels, re-merchandising
its stores and enhancing its geographic footprint through the pursuit of
new store growth. The success of the Company's new store opening plan will
depend on, among other things, the identification of suitable markets and
sites for new stores, the ability to penetrate such markets and the
negotiation of leases on acceptable terms. In addition, the Company must
be able to hire, train and retain competent managers and personnel and
manage the operational components of its growth. The failure of the
Company to open new stores on a timely basis, obtain acceptance in markets
in which it currently has limited or no presence, attract qualified
management and personnel and appropriately adjust operational systems and
procedures could adversely affect the Company's future operating results.
There can be no assurance that the Company will be able to locate suitable
store sites or enter into suitable lease agreements. In addition, no
assurances can be given that the Company or its management team will be
able to implement successfully the other aspects of the operating strategy
described herein. The ability of the Company to implement its operating
strategy may require significant additional debt and/or equity capital,
and no assurance can be given as to whether, and on what terms, such
additional debt and/or equity capital will be available. See "Business--
Company Strategy".
<PAGE>
Calculation of Goodwill
At May 17, 1998, included in Intangibles in the Company's balance
sheet is an amount designated as "goodwill" that represents 19% of assets
and 59% of stockholder's equity. Goodwill arises when an acquirer pays
more for a business than the fair value of the tangible and separately
measurable intangible net assets of such business. Generally accepted
accounting principles require that this and all other intangible assets be
amortized over the period benefited. Management of the Company has
determined that period to be no less than 40 years.
If management were not to give effect to shorter benefit periods
of factors giving rise to a material portion of the goodwill, earnings
reported in periods immediately following the Transactions would be
higher. In later years, the Company would be burdened by a continuing
charge against earnings without the associated benefit to income valued by
management in arriving at the consideration paid for the business.
Earnings in later years also could be significantly affected if management
determined then that the remaining balance of goodwill was impaired.
Management of the Company has reviewed all of the factors and
related future cash flows which were considered in arriving at the amount
incurred in connection with the acquisition of Holdings. Management
concluded that the anticipated future cash flows associated with
intangible assets recognized in the acquisition of Holdings will
continue indefinitely, and there is no persuasive evidence that any
material portion will dissipate over a period shorter than 40 years.
Controlling Shareholders
The Cypress Funds beneficially own approximately 99% of the
outstanding common stock of Holdings, the sole shareholder of the Company,
and can effectively control the affairs and policies of the Company.
Circumstances may occur in which the interests of these shareholders
conflict with the interests of the holders of the Notes. In addition,
these shareholders may have an interest in pursuing acquisitions,
divestitures or other transactions that, in their judgment, enhance their
equity investment, even though such transactions might involve risks to
the holders of the Notes. See "Security Ownership of Certain Beneficial
Owners and Management".
Limitations on Change of Control
In the event of a Change of Control, the Company will be required
to make an offer for cash to repurchase the Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, thereon to the
repurchase date. A Change of Control will result in an event of default
under the Senior Credit Facility and may result in a default under other
indebtedness of the Company that may be incurred in the future. The Senior
Credit Facility prohibits the purchase of outstanding Notes prior to
repayment of the borrowings under the Senior Credit Facility and any
exercise by the holders of the Notes of their right to require the Company
to repurchase the Notes will cause an event of default under the Senior
Credit Facility. Finally, there can be no assurance that the Company will
<PAGE>
have the financial resources necessary to repurchase the Notes upon a
Change of Control. See "Description of Exchange Notes--Repurchase at the
Option of Holders--Change of Control".
Risk of Fraudulent Transfer
A significant portion of the net proceeds of the Offering were
paid as a dividend to Holdings and used to redeem the outstanding Holdings
Notes (as defined herein). Under applicable provisions of the U.S.
Bankruptcy Code or comparable provisions of state fraudulent transfer or
conveyance laws, if the Company, at the time it issued the Notes
(i) incurred such indebtedness with the intent to hinder, delay or defraud
creditors, or (ii) (a) received less than reasonably equivalent value or
fair consideration for incurring such indebtedness and (b) (1) was
insolvent at the time of incurrence, (2) was rendered insolvent by reason
of such incurrence (and the application of the proceeds thereof), (3) was
engaged or was about to engage in a business or transaction for which the
assets remaining with the Company constituted unreasonably small capital
to carry on its businesses, or (4) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they mature,
then, in each case, a court of competent jurisdiction could void, in whole
or in part, the Notes, or, in the alternative, subordinate the Notes to
existing and future indebtedness of the Company. The measure of insolvency
for purposes of the foregoing will vary depending upon the law applied in
such case. Generally, however, the Company would be considered insolvent
if the sum of its debts, including contingent liabilities, was greater
than all of its assets at fair valuation or if the present fair saleable
value of its assets was less than the amount that would be required to pay
the probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature. Management believes that,
for purposes of all such insolvency, bankruptcy and fraudulent transfer or
conveyance laws, the Notes were issued without the intent to hinder, delay
or defraud creditors and for proper purposes and in good faith and that
the Company, after the issuance of the Notes and the application of the
proceeds thereof, was solvent, had sufficient capital for carrying on its
business and was able to pay its debts as they mature. There can be no
assurance, however, that a court passing on such questions would agree
with management's view.
Environmental Matters
National, state and/or local laws and regulations relating to
pollution and environmental protection impose limitations and prohibitions
on the discharge and emission of, and establish standards for the use,
disposal, and management of, certain materials and waste, and impose
liability for the costs of investigating and cleaning up, and certain
damages resulting from, present and past spills, disposals, or other
releases of hazardous substances or materials (collectively,
"Environmental Laws"). As an owner/lessor or former owner/lessor of
numerous properties, as well as a seller of certain environmentally
sensitive products such as herbicides and pesticides, the Company has an
inherent risk of liability under Environmental Laws, including, for
example, contamination that may have occurred in the past on its current
or formerly owned/leased properties or as a result of its operations.
There can be no assurance that the costs of complying with Environmental
<PAGE>
Laws, any claims concerning noncompliance, or liability with respect to
contamination will not have a material adverse effect on the Company's
operations in the future.
The Company may also be affected by Holdings' liabilities and
potential liabilities with respect to Environmental Laws. Holdings'
subsidiaries in the past have included corporations involved in
manufacturing, such as food processing, salt-mining and refining, tanning
and retail operations such as convenience stores that sell gasoline, as
well as retail operations such as those of the Company. Such manufacturing
and other retail operations have in some instances resulted in
contamination at facilities currently or formerly owned or leased by
Holdings or its subsidiaries and/or at sites where wastes have allegedly
been disposed of by a subsidiary. Holdings has incurred substantial
liabilities under the Environmental Laws for such contamination, and has
also from time to time contracted to indemnify purchasers of subsidiaries
or properties for environmental liabilities. There can be no assurance
that Holdings will not be called upon to discharge additional liabilities
with respect to the Environmental Laws that may arise from its
operations/properties or those of its present or former subsidiaries, or
that such liabilities will not be significant. Holdings' ability to
satisfy any obligations under the Environmental Laws (and any other
obligations) it may have will depend upon dividends from the Company,
which will be limited by certain covenants in the Indenture and the Senior
Credit Facility. Additionally, there can be no assurance that parties will
not attempt to impose upon the Company liabilities arising or allegedly
arising out of the operations or properties of Holdings and/or its present
or former subsidiaries, or that such attempts if undertaken would not
adversely affect the Company in a manner that could be material. See
"Business--Environmental Matters".
Government Regulation
The Company's stores and products are subject to regulation by
numerous governmental authorities, including, without limitation, federal,
state and local laws and regulations governing health, sanitation, safety
and hiring and employment practices, including laws, such as the Fair
Labor Standards Act, governing such matters as minimum wages, overtime and
other working conditions. The failure to obtain or retain the required
licenses or to be in compliance with applicable governmental regulations,
or any increase in the minimum wage, rate, employee benefit costs or other
costs associated with employees, could adversely affect the business,
financial condition or results of operations of the Company. Even if such
regulatory approval is obtained, the stores are subject to periodic
inspection and discovery of problems or regulatory noncompliance may have
a material adverse effect on the Company's operations.
Lack of Public Market for the Exchange Notes
The Exchange Notes are being offered to holders of the Old Notes.
The Old Notes were offered and sold in February 1998 to a small number of
institutional investors and are eligible for trading in the PORTAL market.
The Exchange Notes are a new issue of securities for which there is
currently no trading market. If the Exchange Notes are traded after their
<PAGE>
initial issuance, they may trade at a discount from their initial offering
price depending upon prevailing interest rates, the market for similar
securities and other factors, including general economic conditions and
the financial condition and performance of, and prospects for, the
Company. The Company does not intend to apply for a listing of the
Exchange Notes on any securities exchange. See "Description of Exchange
Notes".
<PAGE>
THE TRANSACTIONS
On November 25, 1997, pursuant to an Agreement and Plan of Merger
(the "Merger Agreement"), dated as of November 22, 1997, between Holdings
and Cyrus Acquisition Corp., a New York corporation ("Acquisition Corp.")
formed by Cypress, Acquisition Corp. commenced the Tender Offer to
purchase all of the then-outstanding shares (the "Former Shares") of
common stock of Holdings, $1.00 par value per share ("Holdings Common
Stock"). Also pursuant to the Merger Agreement, contemporaneously with the
Tender Offer, Holdings began the Debt Tender and consent solicitation for
at least a majority in principal amount of Holdings' Senior Notes.
On December 23, 1997, Cypress Merchant Banking Partners L.P.
("CMBP") and Cypress Offshore Partners L.P. ("Cypress Offshore" and,
together with CMBP, the "Cypress Funds"), invested $165 million in
Acquisition Corp. and Joseph R. Baczko, the new Chairman, President and
Chief Executive Officer of Holdings and the Company (together with the
Cypress Funds, the "Investors"), invested $1 million in Acquisition Corp.
The total investment made in Acquisition Corp. by the Investors is
referred to herein as the "Investment".
On December 24, 1997, following the acquisition of 22.0 million
Former Shares tendered in the Tender Offer and the purchase of
approximately 4.8 million treasury shares of Holdings Common Stock
pursuant to the Merger Agreement, in each case at a price of $5.50 in cash
per share, Acquisition Corp. owned approximately 91.6% of the outstanding
Former Shares. In addition, Holdings acquired $52.8 million of the $78
million then-outstanding aggregate principal amount of the Senior Notes
pursuant to the Debt Tender.
Also on December 24, 1997, Holdings and the Company entered into a
senior secured credit facility (the "Senior Credit Facility") for the
Company with various banks and financial institutions including The Chase
Manhattan Bank and Goldman Sachs Credit Partners L.P. providing for (i) a
term loan facility of up to $85 million (the "Term Loan Facility") and
(ii) a revolving credit facility of up to $110 million (the "Revolving
Credit Facility"). The Company's initial borrowing under the Senior Credit
Facility consisted of $37.5 million in term loans and $10 million of
revolving credit loans.
On January 7, 1998, pursuant to the Merger Agreement, Acquisition
Corp. was merged (the "Merger") with and into Holdings with Holdings as
the surviving corporation of the Merger. In the Merger, each Former Share
not purchased in the Tender Offer (other than Former Shares held by
Acquisition Corp., Holdings or its subsidiaries or dissenting
shareholders) was converted into the right to receive $5.50 in cash (the
"Merger Consideration"), and each share of Acquisition Corp. common stock
was converted into one share of Holdings Common Stock; accordingly,
Holdings became wholly owned by the Investors.
The proceeds of the initial $47.5 million borrowing under the
Senior Credit Facility, together with the proceeds of the Investment were
<PAGE>
used, among other things, to fund the Debt Tender and the Tender Offer, to
pay Merger Consideration, to refinance certain indebtedness of Frank's and
to pay fees and expenses relating to the transactions discussed above.
In connection with the Transactions, Holdings contributed its
available cash on-hand to Frank's and converted all intercompany
borrowings with Frank's to equity of Frank's.
The Tender Offer, the Debt Tender, the Investment, the Merger, the
consummation of the Senior Credit Facility and the other transactions
described or referred to above are collectively referred to herein as the
"Transactions".
The following table sets forth the sources and uses of funds in
connection with the Transactions and the Offering:
<TABLE>
<CAPTION>
Amount
-------------
(in millions)
<S> <C>
Sources:
Senior Credit Facility<F1>:
Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29.9
Term Loan Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3
Assumption of existing mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.7
Assumption of existing capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.6
Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115.0
Equity contribution by the Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166.0
-----
Total Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $372.5
======
Uses:
Purchase of equity<F2> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $136.7
Assumption of existing mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.7
Assumption of existing capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.6
Repayment of certain mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.9
11 1/2% Senior Notes due 2002:
Purchased pursuant to Debt Tender<F3> . . . . . . . . . . . . . . . . . . . . . . . . . 58.0
To be redeemed<F4> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.5
Redemption of 8% Convertible Subordinated Notes due 2002<F4> . . . . . . . . . . . . . . . . . . 67.0
Estimated fees and expenses<F5> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.1
------
Total Uses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $372.5
======
<FN>
<F1> The Senior Credit Facility originally consisted
of a $110 million Revolving Credit Facility and
an $85 million Term Loan Facility. In connection
with the Transactions, the Company borrowed
$37.5 million under the Term Loan Facility and
$10 million under the Revolving Credit Facility.
Approximately $17.2 million of the proceeds of
the Offering were used to pay down indebtedness
under the Term Loan Facility. In connection with
the Offering, the Company borrowed $19.9 million
<PAGE>
under the Revolving Credit Facility.
Additionally, in connection with the Offering,
the Company permanently reduced the commitments
under the Term Loan Facility to $25 million from
$85 million. Loans obtained under the Revolving
Credit Facility mature in December 2003 and
loans obtained under the Term Loan Facility
mature in December 2004, subject to amortization
and mandatory prepayment. See "Other
Indebtedness--Senior Credit Facility".
<F2> Includes purchases made pursuant to the Tender
Offer and in connection with the Merger
totalling $134.3 million and retirement of stock
options totalling $2.4 million. See "The
Transactions".
<F3> Includes tender premium and accrued interest.
<F4> Includes call premium and accrued interest.
<F5> Includes amounts paid pursuant to the former
Chairman of Holdings' employment agreement,
financial advisory, consulting and other
professional fees and financing costs. See
"Certain Relationships and Related
Transactions".
</TABLE>
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds to the Company from the Exchange
Offer.
The net proceeds of the Offering were used to (i) pay a dividend
to Holdings to enable Holdings to redeem (A) approximately $67.0 million
of its outstanding 8% Convertible Subordinated Notes due 2002 (including
the redemption premium and accrued interest) (the "Convertible Notes") and
(B) approximately $26.5 million of its outstanding 11 1/2% Senior Notes
due 2002 (including the redemption premium and accrued interest) (the
"Senior Notes" and, together with the Convertible Notes, the "Holdings
Notes") and (ii) prepay approximately $17.2 million of the Company's
indebtedness under the Term Loan Facility.
The Convertible Notes were originally issued pursuant to an
indenture dated February 28, 1992 among Holdings, the subsidiary
guarantors and Bankers Trust Company. The Convertible Notes had a maturity
date of February 15, 2002 and an interest rate of 8%. The Senior Notes
were originally issued pursuant to an indenture dated February 28, 1992
between Holdings and United States Trust Company of New York. The Senior
Notes had a maturity date of February 15, 2002 and an interest rate of
11 1/2%. For a description of the Term Loan Facility, see "Other
Indebtedness--Senior Credit Facility".
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company
as of May 17, 1998. See "Use of Proceeds" and the financial statements and
related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of May 17, 1998
------------------
(in thousands)
<S> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,171
Debt:
Senior Credit Facility<F1>:
Term Loan Facility . . . . . . . . . . . . . . . . . . . . . . . . . . 20,281
Capitalized lease obligations<F2> . . . . . . . . . . . . . . . . . . . . . 11,250
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,447
Old Notes offered in the Offering . . . . . . . . . . . . . . . . . . . . . 115,000
-------
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,978
-------
Total shareholder's equity . . . . . . . . . . . . . . . . . . . . . . . . 160,302
-------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . $336,280
========
<FN>
<F1> The Senior Credit Facility originally consisted
of a $110 million Revolving Credit Facility and
an $85 million Term Loan Facility. In connection
with the Transactions, the Company borrowed
$37.5 million under the Term Loan Facility and
$10 million under the Revolving Credit Facility.
Approximately $17.2 million of the proceeds of
the Offering were used to pay down indebtedness
under the Term Loan Facility. In connection with
the Offering, the Company reduced commitments
available under the Term Loan Facility to $25
million from $85 million. Loans obtained under
the Revolving Credit Facility mature in
December 2003 and loans obtained under the Term
Loan Facility mature in December 2004, subject
to amortization and mandatory prepayment. See
"Other Indebtedness--Senior Credit Facility".
<F2> Capitalized lease obligations are primarily
related to the Company's financing of its retail
stores. The implicit interest rates under the
leases range from approximately 9.3% to 18.2%.
See "Other Indebtedness--Capital Leases".
</TABLE>
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data (the "Unaudited
Pro Forma Financial Data") for the sixteen weeks ended May 17, 1998 and
for the fiscal year ended January 25, 1998 have been derived by the
application of pro forma adjustments to the financial statements of the
Company included elsewhere in this Prospectus. The unaudited pro forma
results of operations data for the fiscal year ended January 25, 1998 give
effect to: (i) the Tender Offer, (ii) the Debt Tender, (iii) borrowings
under the Senior Credit Facility, (iv) the Merger and (v) the consummation
of the Offering and application of the proceeds therefrom, as if each had
occurred on January 27, 1997. The unaudited pro forma results of
operations data for the sixteen weeks ended May 17, 1998 give effect to
the consummation of the Offering and application of the proceeds
therefrom, as if each had occurred on January 26, 1998. Because (i), (ii),
(iii) and (iv) occurred prior to January 26, 1998, the effects of each
are included in the Company Historical column in the results of operations
data for the sixteen weeks ended May 17, 1998. The adjustments
are described in the accompanying notes. The Unaudited Pro Forma Financial
Data (a) do not purport to represent what the Company's results of
operations actually would have been if those transactions had been
consummated on the date or for the periods indicated, or what such results
will be for any future date or for any future period or (b) give effect to
certain non-recurring charges expected to result from the Transactions.
The final allocation of the purchase price in connection with the
Transactions, in accordance with the purchase method of accounting, may
differ from the preliminary estimates due to the final allocation being
based on completion of fixed asset appraisals and valuations of certain
other acquired assets and assumed liabilities and management's evaluation
of such items. The Unaudited Pro Forma Financial Data should be read in
conjunction with "Selected Historical Financial and Other Data",
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements included elsewhere in this
Prospectus.
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
Fiscal Year Ended January 25, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Company Historical
--------------------------
Pre- Post-
acquisition acquisition
Period Period
(Predecessor (Successor
basis) basis)
Forty-Eight Four-Weeks
Weeks Ended Ended Adjusted
December 28, January 25, Transaction Unaudited Offering Unaudited
1997 1998 Adjustments Pro Forma Adjustments Pro Forma
------------- ------------ ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales . . . . . . . . . . . $ 515,204 $ 14,814 $ 530,018 $ 530,018
Cost of sales, including
buying and occupancy
expense . . . . . . . . . 367,008 17,532 384,540 384,540
------- ------- ------- ------- -------
Gross profit . . . . 148,196 (2,718) 145,478 145,478
Selling, general and
administrative expense . 136,622 8,568 (1,295)<F1> 143,895 143,895
Other income (expense) . . (2,010) (17) (2,027) (2,027)
Impairment loss . . . . . . 1,720 1,720 1,720
Provision for store
closings and other cost . 6,677 6,677 6,677
------- ------- ------- ------- ------- -------
Operating income . . . . . 1,167 (11,303) 1,295 (8,841) 0 (8,841)
Interest and debt expense . 19,632 1,601 (4,509)<F2> 16,724 3,766<F3> 20,490
Income (loss) before income ------- ------- ------- ------- ------- -------
taxes . . . . . . . . . . . $ (18,465) $ (12,904) $ 5,804 $ (25,565) (3,766) $ (29,331)
======= ======= ======= ======= ======= =======
Ratio of earnings to
fixed charges<F4> . . . . .
See Notes to Unaudited Pro Forma Statements of Operations
</TABLE>
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
Sixteen Weeks Ended May 17, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Adjusted
Company Offering Unaudited
Historical Adjustments Pro forma
---------- ----------- ---------
<S> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . $ 176,273 $ 176,273
Cost of sales, including buying and occupancy
expense . . . . . . . . . . . . . . . . . . . . 114,078 114,078
---------- -------- ---------
Gross profit . . . . . . . . . . . . . . . . 62,195 -- 62,195
Selling, general and administrative expense . . . 42,867 42,867
Other income . . . . . . . . . . . . . . . . . . 562 -- 562
---------- -------- ---------
Operating income . . . . . . . . . . . . . . . . 19,890 -- 19,890
Interest and debt expense . . . . . . . . . . . . 6,792 (376)<F3> 6,416
---------- -------- ---------
Income before income taxes and extraordinary loss $ 13,098 $ 376 $ 13,474
========== ======== =========
Ratio of earnings to fixed charges<F4> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5x
See Notes to Unaudited Pro Forma Statements of Operations
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(dollars in thousands)
<FN>
<F1> Pro forma adjustments to reflect the effects of
the Transactions on property, plant and
equipment and intangibles: Increase in amortization
of goodwill(a) . . . . . . . . . . . . . . . . . $ 2,010
Reduction in depreciation for valuation of
property, plant and equipment(b) . . . . . . . . (3,305)
------
$ (1,295)
======
(a) The increase in amortization of goodwill is a result
of the increase in goodwill of $80,404 (due to
purchase accounting), amortized over 40 years.
(b) The reduction in depreciation expense is due to
the write-down of buildings, fixtures and other
fixed assets as a result of the allocation of
purchase price based on appraisals amortized over the
estimated useful lives of the related assets.
<F2> Reflects interest and debt expense adjustments as
a result of the Transaction as follows:
Interest expense for the Senior Notes at 11.5% $ (5,518)
Interest expense for certain mortgages repaid at
8.75% (average interest) . . . . . . . . . . (810)
Interest expense for the Previous Bank Facility
at 8% (average interest) . . . . . . . . . . (1,290)
Change in commitment fees, net . . . . . . . . 381
Amortization of Holdings' Senior Notes issuance
cost redeemed over 10 years . . . . . . . . . (185)
Amortization of issuance cost on Senior Credit
Facility over 7 years . . . . . . . . . . . . 476
Interest expense on borrowings under the Senior
Credit Facility (a) . . . . . . . . . . . . . 2,437
------
$ (4,509)
=======
(a) Reflects the following:
Revolving Credit Facility at 7.875% . . . . . $ 788
Term Loan Facility at 8.125% . . . . . . . . . 1,649
------
$ 2,437
======
A 1/8 increase in the interest rate under the Senior Credit
Facility would increase interest expense and reduce income
(loss) before income taxes by $37 for the fiscal year ended
January 25, 1998.
<PAGE>
Sixteen
Fiscal Year Weeks
Ended Ended
January 25, May 17,
1998 1998
------------- ---------
<F3> Reflects interest and debt expense adjustments
as a result of the Offering as follows:
Interest expense for the Senior
Notes at 11.5% . . . . . . . . . . $(2,902) $(498)
Interest expense for the Convertible
Subordinated Notes at 8% . . . . . (5,200) (934)
Amortization of Holdings Notes issuance
cost over 10 years . . . . . . . . . (353) --
Interest expense for the Notes offered
hereby at a rate of 10.25% . . . . . 11,788 1,007
Amortization of issuance cost on Notes
offered hereby over 10 years . . . . 433 49
------- -------
$3,766 $(376)
======= =======
<F4> For purposes of determining the ratio of earnings of fixed charges,
earnings are defined as income before income taxes, plus fixed charges.
Fixed charges consist of interest expense on all indebtedness (including
amortization of deferred debt issuance costs) and a portion of operating
lease rental expense that is representative of the interest factor. The
Company's earnings would have been insufficient to cover pro forma fixed
charges by $29.3 million for the fiscal year ended January 25, 1998.
</TABLE>
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
Set forth below are selected historical financial data of the
Company for the forty-eight week period ending December 28, 1997, the
four-week period ending January 25, 1998 and for each of the two fiscal
years in the period ended January 26, 1997, which are derived from the
audited financial statements included elsewhere herein; such data for the
sixteen weeks ended May 17, 1998 and May 18, 1997 are derived from the
Company's unaudited interim financial statements included elsewhere
herein. The fiscal year is normally comprised of 52 or 53 weeks, ending on
the last Sunday in January. The 1997, 1996 and 1995 fiscal years each
reflect a 52 week period ended January 25, 1998, January 26, 1997 and
January 28, 1996, respectively. Because of the acquisition of Holdings by
Cypress on December 24, 1997, as described under the section entitled "The
Transactions," the summary financial data for fiscal 1997 represents the
operations data for the forty-eight week period prior to the acquisition
and the four-week period subsequent to the acquisition. The post-acquisition
period has been presented on the purchase basis of accounting,
and is therefore not comparable to the historical financial information
presented for the forty-eight week pre-acquisition period. The selected
historical financial data set forth below for the Company as of
January 30, 1994 and January 29, 1995 and for each of the two fiscal years
in the period ended January 29, 1995 are derived from the unaudited
financial statements for those periods and, in the opinion of management,
include all adjustments necessary for a fair presentation of said
information. The selected historical financial data below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Pre-
acquisition
Period Post-
(Predecessor- acquisition
basis) Period
Forty-Eight (Successor- Unaudited
Fiscal Year Ended Weeks Four Weeks Sixteen Weeks Ended
------------------------------------------------ Ended Ended -------------------
January 30, January 29, January 28, January 26, December 28, January 25, May 18, May 17,
1994 1995 1996 1997 1997 1998 1997 1998
--------- ---------- ---------- ---------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net sales . . . . . . . $568,602 $567,987 $593,270 $530,752 $515,204 $14,814 $178,243 $176,273
Cost of sales,
including buying
and occupancy . . . 425,724 402,839 429,181 383,099 367,008 17,532 121,946 114,078
------- ------- ------- ------- ------- ------- ------- -------
Gross profit . . . . . 142,878 165,148 164,089 147,653 148,196 (2,718) 56,297 62,195
Selling, general and
administrative
expense . . . . . . 151,995 140,171 148,502 138,355 136,622 8,568 44,106 42,867
<PAGE>
Other income (expense) (216) 47 507 (226) (2,010) (17) 35 562
Impairment loss . . . . -- -- -- -- 1,720 -- -- --
Provision for store
closings
and other costs . . 22,876 -- -- -- 6,677 -- -- --
Operating income (loss) (32,209) 25,024 16,094 9,072 1,167 (11,302) 12,226 19,890
Interest expense . . . 23,251 22,911 23,845 20,863 19,632 1,601 6,624 6,792
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary
loss . . . . . . . (55,460) 2,113 (7,751) (11,791) (18,465) (12,904) 5,602 13,098
Extraordinary loss . . -- -- -- -- -- -- -- 5,148
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes . . . (55,460) 2,113 (7,751) (11,791) (18,465) (12,904) 5,602 7,950
Income tax expense
(credit) . . . . . -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) . . $(55,460) $ 2,113 $ (7,751) $(11,791) $(18,465) $(12,904) $ 5,602 $ 7,950
======= ======= ======= ======= ======= ======= ======= =======
Ratio of earnings to
fixed charges<F1> -- 1.08x -- -- -- -- 1.64x 2.44x
Other Data:
Merchandise gross
margin . . . . . . 39.6% 42.3% 40.8% 42.2% 42.2% 13.7% 44.0% 47.1%
------- ------- ------- ------- ------- ------- ------- -------
Depreciation and
amortization<F2> . . $24,610 23,836 22,888 22,377 21,835 1,500 6,429 5,611
Capital expenditures . 29,946 5,391 5,497 4,371 12,472 (34) 951 3,199
Increase (decrease)
in comparable
store sales . . . . (1.0)% 5.2% 4.5% (9.4)% 0.8% (5.2)% 3.7% (0.1)%
Number of stores at
end of period . . . 265 265 264 262 258 258 261 257
<PAGE>
Balance Sheet Data
(at end of period):
Cash and cash
equivalents<F3> . . $ 5,204 $ 5,619 $ 4,871 $ 3,526 $ 39,411 $ 16,100 $ 20,759 $ 55,171
Working capital<F4> . . 27,127 9,631 36,926 27,005 (4,708) 7,347 (7,983) (23,422)
Property, plant and
equipment, net . . 280,210 253,331 237,803 220,626 219,171 217,880 213,983 212,727
Total assets . . . . . . 414,262 384,628 368,806 344,023 469,998 433,679 380,110 503,109
Total debt,
including current
maturities . . . . 256,875 234,005 191,872 195,015 169,067 178,969 194,338 175,978
Shareholder's equity . 71,587 54,117 106,258 75,681 166,441 153,653 152,403 160,302
____________________
<FN>
<F1> The ratio of earnings to fixed charges has been calculated by
dividing income before income taxes and fixed charges (excluding
capitalized interest) by fixed charges. Fixed charges consist of
interest expense, capitalized interest and the portion of operating
rental expense which management believes is representative of the
interest component of rent expense. For fiscal 1993, fiscal 1995,
fiscal 1996, for the forty-eight weeks ended December 28, 1997 and
for the four weeks ended January 25, 1998, the Company's earnings
were insufficient to cover its fixed charges by $55,820, $7,610,
$11,803, $18,393 and $12,900, respectively.
<F2> Includes amortization of debt issuance cost of $1,485 for fiscal
1993, $1,218 for fiscal 1994, $1,671 for fiscal 1995, $899 for
fiscal 1996, $676 for the forty-eight weeks ended December 28,
1997, $56 for the four weeks ended January 25, 1998 and includes
$1,720 for the write-down to fair value of property, plant and
equipment in accordance with FAS-121 "Impairment of Long-Lived
Assets" for the forty-eight weeks ended December 28, 1997, $330 for
the sixteen weeks ended May 17, 1998 and $231 for the sixteen weeks
ended May 18, 1997.
<F3> Excludes Holdings cash of $32,653 for fiscal 1993, $62,745 for
fiscal 1994, $5,033 for fiscal 1995, $23,796 for fiscal 1996 and
$75,937 for the sixteen weeks ended May 18, 1997.
<F4> Reflects total current assets (excluding cash) less total current
liabilities (excluding current maturities of long-term debt and
notes payable to banks).
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
financial condition and results of operations ("MD&A") of the Company for
the fiscal years ended January 25, 1998, January 26, 1997 and January 28,
1996. This discussion and analysis should be read in conjunction with, and
is qualified in its entirety by, the sections entitled (i) "Summary
Historical and Unaudited Pro Forma Financial Information", (ii) "Selected
Historical Financial and Other Data" and (iii) the financial statements of
the Company and the notes thereto included elsewhere in this Prospectus.
General
Overview. The Company operates the largest national chain of
specialty retail stores devoted to the sale of lawn and garden products.
In addition, the Company sells dried and artificial flowers and
arrangements, Christmas merchandise, crafts and pet supplies. The
Company's parent, Holdings, was acquired by Cypress and new management on
December 24, 1997 in a series of related transactions. See "The
Transactions". Following the Transactions, the Company announced the
appointment of Joseph R. Baczko as Chairman, President and Chief Executive
Officer, Adam Szopinski as Executive Vice President and Chief Operating
Officer and Larry T. Lakin as Executive Vice President and Chief Financial
Officer. The new management team possesses considerable expertise in
specialty retailing and has developed an operating strategy which is
designed to position the Company as the nation's leading lawn and garden
specialty retailer.
Factors Affecting Historical Operating Performance. New management
believes that the Company's financial performance during the past several
years has been affected by senior management turnover and significant
capital constraints.
During the past several years, the operations of Frank's have been
under the leadership of three different senior executives: Ernest Townsend
(Frank's President and Chief Operating Officer from February 1997 to
December 1997), Scott Hessler (Frank's President and Chief Operating
Officer from May 1994 to January 1997) and Harris J. Ashton, former
Chairman of Holdings (acting president of Frank's from March 1991 to May
1994). New management believes that lack of continuity and frequent change
of strategic direction adversely affected the Company's operations and
financial performance.
Furthermore, in recent years, the Company's ability to effect a
long-term strategic plan has been adversely affected by capital
constraints. Since fiscal 1994, the Company's revolving line of credit has
had a maturity of no longer than a single year, prohibiting the Company
from implementing a strategy and merchandising plan beyond a one-year time
horizon. In fiscal 1995 and early fiscal 1996, Frank's refinanced $76
million of mortgages with approximately $39 million of new mortgages and
available Holdings and Frank's cash on hand. As a consequence, in fiscal
<PAGE>
1996, the Company's overall liquidity significantly deteriorated. The
Company reduced its purchases of inventory during fiscal 1996 by 15.6%
versus the prior year, which contributed to a significant decline in
fiscal 1996 comparable store sales. In addition, during 1997, the
Company's revolving line of credit was extended only through December 31,
1997, further eroding long-term liquidity. New management believes that
the new $110 million Revolving Credit Facility, which will solely finance
working capital and must have no borrowings outstanding for a consecutive
30-day period during each fiscal year, will substantially increase the
Company's liquidity and will allow for the successful implementation of
the new operating plan.
Anticipated Cost Savings
Since closing the acquisition on December 24, 1997, the Company's
new management team has identified and principally effected annual cost
savings of approximately $13.1 million through: (i) reduction of corporate
overhead related to the closing of Holdings' headquarters in Stamford,
Connecticut, (ii) streamlining and reduction of field supervision and
store-level management, (iii) replacement of the Company's insurance
policies with new lower premium plans providing for substantially similar
coverages, (iv) elimination of expenditures incurred by prior management
to build and promote a new store concept, (v) termination of the temporary
mall-based Christmas stores and realization of savings from several
previous and two additional store closings and (vi) expense reductions
associated with the consolidation of its distribution facilities
implemented in late fiscal 1996 and early fiscal 1997. This approximately
$13.1 million in annual cost savings is net of revenues new management
expects the Company will forego as a result of the identified closure of
unprofitable stores. See "Risk Factors--Anticipated Cost Savings",
"Business--Overview" and "Business--Company Strategy".
These cost savings estimates were prepared solely by members of
the management of the Company. All of these statements are based on
estimates and assumptions made by management of the Company, which
although believed to be reasonable, are inherently uncertain and difficult
to predict. There can be no assurance that the savings anticipated in
these statements will be achieved. In addition, there can be no assurance
that unforeseen costs and expenses or other factors will not offset the
estimated cost savings or other components of the Company's operating plan
in whole or in part.
Results of Operations
Because the acquisition occurred on December 24, 1997, only four
weeks prior to the Company's fiscal year end on January 25, 1998,
management considers the impact of reduced depreciation expense and
changes in interest expense to have an immaterial impact on the results of
operations for the four-week period subsequent to the acquisition (see
Unaudited Pro Forma Statements of Operations in "Unaudited Pro Forma
Financial Data"); therefore, for purposes of the analysis of the results
of operations, the four-week period and forty-eight week period ending
January 25, 1998 and December 28, 1997, respectively, have been aggregated
for comparative purposes. The following table sets forth the Company's
<PAGE>
results of operations for the periods indicated expressed as a percentage
of net sales:
<TABLE>
<CAPTION>
Fiscal Year Sixteen Weeks Ended
-------------------------- -------------------
May 18, May 17,
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales, including
buying and occupancy . . . . 72.3 72.2 72.6 68.4 64.7
-------- -------- -------- ------- --------
Gross profit . . . . . . . . . 27.7 27.8 27.4 31.6 35.3
Selling, general and administrative
expense . . . . . . . . . . . 25.1 26.1 28.9 24.8 24.3
Other income (expense) . . . . . 0.1 0.0 (0.4) 0.0 0.3
-------- -------- -------- ------- --------
Operating income (loss) . . . . 2.7 1.7 (1.9) 6.8 11.3
Interest expense . . . . . . . . 4.0 3.9 4.0 3.7 3.9
-------- -------- -------- ------- --------
Income (loss) before income
taxes and extraordinary loss . (1.3) (2.2) (5.9) 3.1 7.4
Extraordinary loss . . . . . . . 0.0 0.0 0.0 0.0 2.9
-------- -------- -------- ------- --------
Income (loss) before taxes . . . (1.3) (2.2) (5.9) 3.1 4.5
Income tax expense (credit) . . -- -- -- -- --
-------- -------- -------- ------- --------
Net income (loss) . . . . . . . . (1.3)% (2.2)% (5.9)% 3.1% 4.5%
======== ======== ======== ======= ========
</TABLE>
First Quarter Fiscal 1998 Compared to First Quarter Fiscal 1997
Net Sales. Net sales for the first quarter of fiscal 1998 were
$176.3 million compared with $178.2 million for the first quarter of
fiscal 1997, a decrease of 1.1%. Same store sales (stores open for a full
year in both years) decreased 0.1% for the first quarter of fiscal 1998.
Cost of Sales Including Buying & Occupancy. Cost of sales
including buying and occupancy expenses were $114.1 million in the first
quarter of 1998 compared to $121.9 million for the first quarter of 1997.
This reduction of $7.8 million amounts to a 6.5% decrease. Cost of sales
as a percentage of net sales improved by 3.7 percentage points during the
1998 first quarter compared to the same period last year. This improvement
was due primarily to a 3.1 percentage point increase in merchandise
margins and a decrease of 0.6 of a percentage point in buying and
occupancy costs due principally to lower expenses in the distribution
centers. The 3.1 percentage point improvement in merchandise margins was
primarily the result of decreased markdowns in the first quarter of 1998
compared to 1997 as the Company reduced its reliance on broad category
markdowns.
<PAGE>
Selling, General & Administrative Expense. Selling, general and
administrative expense for the first quarter of fiscal 1998 was $42.9
million compared to $44.1 million for the first quarter of 1997. The
decrease of $1.2 million was principally the result of the elimination of
the Holdings corporate expenses. As a percentage of net sales selling,
general and administrative expenses decreased by 0.5 of a percentage point
to 24.3% in the first quarter of 1998 compared to 24.8% in the same period
of 1997.
Other Income (Expense). Other income for the first quarter of 1998
was $562,000 compared with $35,000 for the first quarter of 1997. This
increase of $527,000 is due primarily to a higher level of interest income
resulting from a higher level in 1998 of short-term investments and cash
equivalents. In addition, the first quarter of 1997 included a charge of
$250,000 associated with the closing of a leased store.
Operating Income (Loss). Operating income for the first quarter
of fiscal 1998 was $19.9 million, an increase of $7.7 million or 63%,
compared to $12.2 million for the first quarter of fiscal 1997. The
improvement in operating income was primarily the result of improved
merchandise margins, lower distribution center expenses and lower selling,
general and administrative expenses and increased other income as explained
above. Operating income as a percentage of sales improved to 11.3% of net
sales for the first quarter of 1998, an increase of 4.5 percentage points
over the 6.8% for the first quarter of 1997. The principal contributor to
this improvement was the 3.1 percentage point gain in merchandise margins.
Interest and Debt Expense. Interest and debt expense was $6.8
million for the first quarter of 1998 compared with $6.6 million for the
first quarter of 1997.
Due to previously unrecognized tax benefits no income tax
provision has been provided for in the first quarters of 1998 and 1997.
In the 1998 first quarter the Company recorded an extraordinary
loss of $5.1 million as a result of early extinguishment of debt and major
modification 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
reduction from $195 million to $135 million.
Income Before Extraordinary Loss. Income before extraordinary loss
for the first quarter of 1998 was $13.1 million, an improvement of $7.5
million over the first quarter 1997 results of $5.6 million. This
improvement is the result of increases in the operating income and other
income as explained above.
Net Income. Net income for the first quarter of 1998 was $8.0
million compared with $5.6 million in 1997, an increase of $2.4 million or
43%. The net income improvement reflects improved operating income
partially offset by the extraordinary loss as explained above.
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
The discussion and analysis below combines the results for the
forty-eight weeks ended December 28, 1997 and the four weeks ended January
25, 1998 and compares this combined fiscal 1997 with fiscal 1996.
Management believes that the combined fiscal 1997 periods represent a fair
and comparable presentation versus fiscal 1996.
Net Sales. Net sales for fiscal 1997 were $530.0 million compared
to $530.8 million for fiscal 1996, a decrease of 0.2%. Comparable store
sales (stores open for a full year in both years) for fiscal 1997
increased 0.6% compared to fiscal 1996.
Cost of Sales, Including Buying and Occupancy. Cost of sales,
including buying and occupancy, was $384.5 million for fiscal 1997
compared to $383.1 million for fiscal 1996, an increase of 0.4%. Cost of
sales as a percentage of net sales increased 0.4% to 72.6%. Merchandise
gross margins, as a percentage of net sales, declined 0.8% to 41.4% due
primarily to the 1997 third quarter strategy under prior management that
increased promotions in the fall lawn and garden business and increased
markdowns to clear some seasonal and aged merchandise. Additionally, in
the 1997 fourth quarter the Company experienced a lower merchandise gross
margin rate on Christmas products, as a result of markdowns taken to
minimize its inventory carryover. The merchandise gross margin for the
four-weeks ended January 25, 1998 was 13.7%. Margins are traditionally
lower during this four-week period for which sales are the lowest of the
fiscal year and the most heavily discounted. Buying and occupancy costs
for fiscal 1997 decreased by $2.1 million, and as a percentage of net
sales decreased 0.3% compared to fiscal 1996. As a result, gross profit
for fiscal 1997 was $145.5 million compared to $147.7 million for fiscal
1996, a decrease of 1.5%. As a percentage of net sales, gross profit
declined 0.4% to 27.4%.
Selling, General and Administrative Expense. Selling, general and
administrative expense for fiscal 1997 was $145.2 million compared to
$138.4 million for fiscal 1996, an increase of 4.9% resulting from higher
store labor and advertising costs. In addition, fiscal 1997 included
expenses of $1.2 million in additional compensation granted by the former
Board of Directors to the former Chairman prior to the acquisition of
Holdings in the form of the forgiveness of indebtedness owed the Company
by the Chairman and $2.5 million associated with the development of a new
store concept implemented by prior management. As a percentage of net
sales, selling, general and administrative expense increased 1.3% to
27.4%.
Other Income (Expense). Other expense was $2.0 million in fiscal
1997 compared to $0.2 million in fiscal 1996 due primarily to a gain of $2.8
million associated with the termination of a leased store, higher levels
of interest income and $4.6 million for legal and advisory fees in
connection with the acquisition. The increase was offset in part by a
loss of $0.9 million associated with the sale of the Company's prior
headquarters and $0.5 million associated with the closing of stores.
Operating Income (Loss). The operating loss for fiscal 1997 was
$10.1 million compared with operating income of $9.1 million for fiscal
1996. The decrease in operating income was caused by the gross profit and
selling, general and administrative factors as explained above and the
recording of an asset impairment loss of $1.7 million and a provision for
store closings of $6.7 million during fiscal 1997.
<PAGE>
Interest Expense. Interest expense for fiscal 1997 was $21.2
million compared to $20.9 million for fiscal 1996.
Net Income (Loss). The net loss for fiscal 1997 was $31.4 million
compared with a net loss of $11.8 million for fiscal 1996. The increase
in net loss of $19.6 million is due to the increased operating loss of
$19.2 million and increased interest and other expense as explained above.
Fiscal 1996 Compared to Fiscal 1995
Net Sales. Net sales for fiscal 1996 were $530.8 million compared
to $593.3 million for fiscal 1995, a decrease of 10.5%. Comparable store
sales for fiscal 1996 decreased 9.4% due primarily to a significant
reduction in inventory purchases from $332.5 million for fiscal 1995 to
$280.7 million for fiscal 1996, representing a decrease of 15.6%.
Cost of Sales, Including Buying and Occupancy. Consistent with
the reduction of sales discussed above, cost of sales, including buying
and occupancy was $383.1 million for fiscal 1996 compared to $429.2
million for fiscal 1995, a decrease of 10.7%. Cost of sales as a
percentage of net sales decreased 0.1% to 72.2%. Merchandise gross
margins, as a percentage of net sales, improved 1.4% due to fewer
promotions and tighter inventory management during fiscal 1996. Buying and
occupancy costs for fiscal 1996 decreased $1.8 million, but as a
percentage of net sales, increased 1.2% compared to fiscal 1995. As a
result, gross profit for fiscal 1996 was $147.7 million compared to $164.1
million for fiscal 1995, a decrease of 10.0%. As a percentage of net
sales, gross profit improved 0.1% to 27.8%.
Selling, General and Administrative Expense. Selling, general and
administrative expense for fiscal 1996 was $138.4 million compared to
$148.5 million for fiscal 1995, a decrease of 6.8%. This decrease resulted
from expense reductions initiated during 1996 particularly in the areas of
advertising, store payroll and administrative expenses. As a percentage of
net sales, selling, general and administrative expense increased 1.0% to
26.1%.
Other Income (Expense). Other income for fiscal 1995 was $0.5
million compared to other expense of $0.2 million in fiscal 1996. During
fiscal 1995 the Company had a gain on the sale of land, while in fiscal
1996 the Company incurred a loss on the sale of a store.
Operating Income. Operating income for fiscal 1996 was $9.1
million compared to $16.1 million for fiscal 1995. The decline of $7.0
million was the result of a decrease in gross profit of $16.4 million,
primarily due to reduced sales and a change in other income as
explained above, offset by reduced selling, general and administrative
expenses of $10.1 million.
<PAGE>
Interest Expense. Interest expense for fiscal 1996 was $20.9
million compared to $23.8 million for fiscal 1995, a decrease of 12.2%.
The decrease was primarily due to the Company's repayment in full of
certain mortgages at the end of fiscal 1995. The Company replaced this
financing, in part, with new mortgage financings that totalled $39.0
million as of January 26, 1997.
Net Income. The net loss for fiscal 1996 was $11.8 million
compared to $7.7 million in fiscal 1995. The increased net loss of $4.1
million was a result of the $7.0 million operating profit decrease,
offset by a $2.9 million lower interest expense as a result of the
reduced financing explained above.
Liquidity and Capital Resources
First Quarter 1998 Compared to First Quarter 1997
Net cash provided by operations in the 1998 first quarter was
$49.5 million compared to $47.2 million in the 1997 first quarter.
Inventory increased $35.4 million in 1998 compared to an increase of $27.4
million in 1997, while accounts payable increased $71.6 million in 1998
compared to an increase of $60.3 million in 1997. Both the higher level of
inventory and accounts payable increases during the first quarter of 1998
are primarily attributable to the Company's strategy to increase overall
inventory levels to assure adequate inventory levels in all stores. The
accounts payable increases for 1998 and 1997 exceed the inventory
increases for the same periods due to the fact that the inventory
decreases during the peak spring selling season before the payables
become due. The decrease in accrued expenses during the first quarter
of 1998 is due primarily to payments of approximately $12.0 million in
1998 to former shareholders of Holdings as they exercised conversion
rights for their untendered shares, and to timing differences.
Net cash provided by investing activities in the 1998 first
quarter was $0.7 million compared to $2.1 million in the 1997 first
quarter. Capital spending in the first quarter of 1998 was $3.2 million
compared with $1.0 million in the first quarter of 1997 as the Company
invested in new systems, refurbished stores and invested in store
fixtures. The first quarters of both fiscal years included net proceeds
from the sale and leaseback of Company owned stores. Net proceeds were
$4.0 million in the 1998 first quarter and $2.7 million in the 1997 first
quarter.
Net cash used for financing activities in the 1998 first quarter
was $11.2 million compared to $32.1 million in the 1997 first quarter. The
$32.1 million used in the first quarter of 1997 was primarily for the
intercompany transactions with Holdings. The $11.2 million used in the
first quarter of 1998 was the net of $115.0 million in proceeds from the
10.25% Senior Subordinated Notes offset by the redemption of the
<PAGE>
remaining 11.5% Senior Notes and the 8% Convertible Notes and related
costs as well as the pay-down of the bank debt.
Historical
The Company has historically financed its operations with funds
generated from operating activities, available cash (both at Frank's and
Holdings) and borrowing under its revolving credit facility with Comerica
Bank (the "Previous Bank Facility").
Operating Activities. Net cash provided by (used for) operating
activities for fiscal 1997 was $(27.0) million compared to $18.2 million
for fiscal 1996. The decrease is primarily attributable to lower earnings
and a decrease in accrued expenses due to timing of payments. At January
25, 1998 the remaining store closing reserve was $11.6 million. As a
result of the acquisition, new management accelerated its plan for the
disposal of unprofitable stores identified by former management resulting
in an additional liability of $5.4 million when allocating the purchase
price. The reserve primarily represents lease termination costs for the
remaining four store locations, net lease costs on subleased locations,
estimated legal fees and estimated losses associated with the sale and/or
sublease of real estate. During 1997 the Company utilized net cash of $2.6
million in connection with the store closing reserve. As a result of the
Merger on January 7, 1998 a liability of $13.4 million, from the
acquisition corporation that represented the conversion rights for the
untendered shares of Holdings Common Stock, was recorded by the Company.
Net cash provided by (used for) operating activities for fiscal
years 1996 and 1995 was $18.2 million and $(11.7) million, respectively.
The improvement in cash flow from operations in fiscal 1996 compared to
fiscal 1995 was attributable to significantly reduced inventory purchases
in fiscal 1996 and an increase in accrued expenses in fiscal 1996 compared
to a decrease in fiscal 1995. Furthermore, in fiscal 1995 the early
receipt of Christmas merchandise and reduced spring purchases in the 1995
fourth quarter resulted in a decrease in accounts payable for fiscal 1995
of $13.9 million compared to an increase of $0.1 million in fiscal 1996.
Investing Activities. Net cash provided by (used for) investing
activities for fiscal 1997 was $0.2 million compared to $(3.4) million for
fiscal 1996. The expenditures in fiscal 1997 included $12.4 million for
the addition of property, plant and equipment which was offset by $12.6
million of proceeds from the sale of property, plant and equipment, which
includes $6.0 million from the sale/leaseback of three owned stores, the
sale of the Company's headquarters facility and the termination of a
leased location.
Net cash used for investing activities for the fiscal years 1996
and 1995 was $3.4 million and $5.2 million, respectively. The majority of
such expenditures was generally for refurbishment of existing stores.
Financing Activities. Net cash provided by (used for) financing
activities for fiscal 1997 was $39.4 million compared to $(16.1) million
for fiscal 1996. The increase was primarily attributable to the
<PAGE>
Transactions, which provided $146.3 million. Available cash in excess of
the Company's working capital requirements was used to pay down
intercompany borrowings with Holdings of $114.7 million.
Net cash provided by (used for) financing activities for the
fiscal years 1996 and 1995 was $(16.1) million and $16.1 million,
respectively. The greater net cash used in fiscal 1996 compared to fiscal
1995 was primarily due to decreased intercompany borrowings with Holdings.
Net cash provided in fiscal 1995 included the payment of long-term debt
and capital lease obligations of $77.1 million (principally the repayment
of $76 million of mortgages), offset by $35.0 million of new mortgage
financing and $59.9 million in increased intercompany borrowings with
Holdings.
After the Transactions and the Exchange Offer
Following the Exchange Offer, the Company's primary sources of
liquidity will be cash flow from operations and borrowings under its
Revolving Credit Facility. The primary uses of cash will be working
capital, capital expenditures and debt service requirements.
As a result of the Transactions and the Offering, the Company's
capital structure has changed substantially. As of January 25, 1998, after
giving pro forma effect to the Transactions and the Offering and the
application of the proceeds therefrom, the Company would have had total
outstanding indebtedness of $186.5 million, including $20.3 million under
the Company's Term Loan Facility and $10.0 million under the Revolving
Credit Facility. The Company would have had $98.3 million of remaining
availability under its $110 million Revolving Credit Facility. In
connection with the Offering, the Company reduced commitments available
under the Term Loan Facility to $25 million from $85 million. The unused
portion of the Term Loan Facility of $4.7 million is reserved for
potential refinancing of certain mortgages. See "Other Indebtedness--
Mortgage Loans". The Term Loan and Revolving Credit Facilities will mature
on the seventh and sixth anniversary, respectively, of the Credit Facility
Closing Date (as defined herein). The principal balance under the Term
Loan Facility will begin amortizing at the end of the first quarter of
fiscal 1999. In addition, beginning with fiscal 1998, for a consecutive
30-day period during each fiscal year there must be no outstanding
borrowings under the Revolving Credit Facility. See "Other Indebtedness--
Senior Credit Facility".
The Company experiences seasonal fluctuations in its net sales and
profitability, with generally lower net sales and gross profit during the
winter and late summer months. The Company believes that the seasonality
of net sales and profitability is a factor that affects the lawn and
garden industry generally and is primarily due to fluctuating gardening
activity during any given year. As a result, the Company's working capital
requirements also fluctuate throughout the year, ranging from a deficit of
$7.3 million in May to a high of $62.1 million in November during the
twelve months ended January 25, 1998.
<PAGE>
Subject to restrictions in the Senior Credit Facility and the
Indenture, the Company may incur additional indebtedness from time to time
to finance working capital, capital expenditures or acquisitions. For
fiscal 1997, after giving pro forma effect to the Transactions and the
Offering and the proceeds therefrom, the Company's ratio of earnings to
fixed charges would have been insufficient to cover pro forma fixed
charges by $29.3 million for the fiscal year ended January 25, 1998. See
"Risk Factors--Substantial Leverage".
Based upon the current level of operations and anticipated revenue
growth and operating improvements, management believes that cash flow from
operations and available cash, together with available borrowings under
the Senior Credit Facility, will be adequate to meet the Company's future
liquidity needs for at least the next several years, although no assurance
can be given in this regard. In addition, there can be no assurance that
the Company's business will generate sufficient cash flow from operations,
that anticipated revenue growth and operating improvements will be
realized or that future borrowings will be available under the Senior
Credit Facility in an amount sufficient to enable the Company to service
its indebtedness, including the Notes, or to fund its other liquidity
needs. The Company's future operating performance and ability to service
or refinance the Notes and to extend or refinance the Senior Credit
Facility will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond the Company's
control. See "Risk Factors".
Usage of Net Operating Losses
In preparing its financial statements included elsewhere herein,
Frank's has determined its available net operating losses ("NOLs") on a
stand-alone basis from Holdings. As of the close of the Transactions, the
Company had NOLs of approximately $68 million which expire from fiscal
2008 through fiscal 2013. The Company's income tax liability is calculated
as part of the consolidated U.S. federal income tax returns of Holdings.
As of January 25, 1998, Holdings had additional NOLs of approximately $24
million which expire from fiscal 2008 through fiscal 2013 and will also be
available to offset income generated by the Company provided that the
Company files its tax returns as part of the consolidated U.S. federal
income tax returns of Holdings.
As a result of the Transactions, the tax status of such NOLs is
subject to limitations imposed by Section 382 of the Internal Revenue Code
of 1986, as amended (the "Code"), and as such their usage by Holdings is
currently estimated to be limited to $7.2 million per year. New management
expects to utilize such NOLs as the Company regains its profitability.
The Company projects future tax deductions, not subject to Section
382 of the Code, which are expected to result from the Transactions and
the use of the proceeds of the Offering of $16 million.
Capital Expenditures
The Company's capital expenditures were $4.4 million, $5.5 million
and $5.4 million in the fiscal years 1996, 1995 and 1994, respectively.
<PAGE>
The majority of such capital expenditures in each of such fiscal years has
been for the refurbishment of the stores. The Company incurred
approximately $12.4 million of expenditures in fiscal 1997 for various
capital projects, including investments in the new MIS, refurbishment of
existing stores and implementation of the new store concept by prior
management.
Management anticipates that total capital expenditures for fiscal
1998 will be approximately $22 million, of which $3.2 million was incurred
in the 1998 first quarter. Such capital expenditures will be made in
connection with the implementation of the new MIS, refurbishment of the
existing stores and the new store opening program which is expected to
begin early in fiscal 1999. The Company expects to spend $6.5 million in
connection with the implementation of the new MIS which the Company
believes will, among other things, solve all known Year 2000 issues.
Inflation
Inflation has been modest in recent years and has not had a
significant effect on the Company. If merchandise costs were to increase
because of inflation, management believes such increases could be
recovered through higher selling prices, as virtually all retailers would
be similarly affected.
<PAGE>
BUSINESS
Overview
The Company operates the largest chain (as measured by sales) in
the United States of specialty retail stores devoted to the sale of lawn
and garden products. In addition, the Company sells dried and artificial
flowers and arrangements, Christmas merchandise, crafts and pet supplies.
As of January 25, 1998, the Company operated 258 retail stores located in
15 states primarily in the East and Midwest regions of the country under
the name Frank's Nursery & Crafts (Registered Trademark). The Company
derives approximately 80% of its sales from its core business lines, which
include lawn and garden products, related home decor merchandise such as
dried and artificial flowers and Christmas merchandise. For fiscal 1997,
the Company generated sales of $530.0 million and incurred a net loss of
$31.4 million.
The Company was organized in 1957. Holdings acquired the Company
in 1983 with the objective of developing the first national chain of lawn
and garden stores. At the time of the acquisition, Frank's had 95 stores
principally located in the Midwest. Since 1983, the Company has built,
leased or acquired a net of 163 stores in existing and new markets to
become the largest retail chain in the national lawn and garden industry.
On December 24, 1997, Holdings was acquired by Cypress and new senior
management with the strategic objective of positioning Frank's as the
leading specialty retailer in the lawn and garden arena. Frank's
represents Holdings' sole operating subsidiary.
The Company's principal executive offices are located at 1175 West
Long Lake Road, Troy, Michigan 48098 and its telephone number is (248)
712-7000.
Company Strengths
The Company believes that its main competitive strengths include
its experienced new management team, its well-positioned specialty
retailing concept, its strong competitive position and the increased
liquidity provided by its new capital structure.
New Management Team with Proven Track Record. The Company's new
management team is led by its new Chairman, Chief Executive Officer and
President, Joseph R. Baczko, who was formerly President and Chief
Operating Officer at Blockbuster Entertainment Corp. ("Blockbuster")
(1991-1992) and the initial President of the International Division of
Toys "R" Us, Inc. ("Toys "R" Us International") (1983-1991). At
Blockbuster, Mr. Baczko oversaw system-wide revenue growth from
approximately $1.1 billion to approximately $2.0 billion, and during his
eight years with Toys "R" Us International, system-wide sales expanded to
approximately $800 million. To assist him in leading the Company,
Mr. Baczko has re-assembled his senior management team from Toys "R" Us
International, including Adam Szopinski as Chief Operating Officer and
Larry T. Lakin as Chief Financial Officer, both of whom served in their
respective functions under Mr. Baczko while at Toys "R" Us International.
This new management team has worked successfully together in the past and
possesses, on average, 29 years of specialty retailing and general
management experience.
<PAGE>
Well-Positioned to Capitalize on Favorable Industry Fundamentals.
The Company believes it has a strong existing operating base in a popular
and growing market segment. The Company believes that nearly two-thirds of
all U.S. households participate in one or more types of lawn and garden
activities, ranking such leisure activities among the most popular in the
U.S. The Company also believes that adults between the ages of 45 and 64
are the most frequent participants in the lawn and garden market, and the
U.S. Census Bureau expects the percentage of Americans in this age bracket to
increase from 19.9% in 1995 to 25.3% in 2005. In addition, management
believes that Frank's merchandise selection is characterized by relatively
"high-maintenance" and low cost products with the capacity to generate a
significant level of ancillary purchases and a relatively low exposure to
fashion risk. As the country's largest specialty retailer dedicated to
this category, the Company is well-positioned to capitalize on these
trends and characteristics.
Well-Established Competitive Position. New management believes
that the Company is well-positioned within the lawn and garden industry.
Competition in the lawn and garden retailing industry is comprised of
nationwide "big box" retailing chains which sell lawn and garden products as
a portion of their overall product offering, on the one hand, and local,
often family-run, garden centers on the other. Unlike the price-driven
competitive model of the "big box" retailers, the Company's business model
focuses on a broad product offering, high quality merchandise, value-added
customer service and the convenience of shopping in a smaller format store
specializing in the sale of lawn and garden products. The Company believes
that such differentiating factors create a basis for successful
competition with "big box" home centers. In addition, as the nation's
largest specialty lawn and garden retailer, the Company believes it
successfully takes advantage of the economies of scale associated with
purchasing, advertising, distribution and brand name to compete with
locally-owned garden centers.
Increased Liquidity. New management believes that the Company
has been subject to capital constraints that have significantly hindered
its growth and operating performance. As a result of the Transactions, the
Company's prior $20 million revolving credit facility was replaced with a
new $110 million revolving credit facility which provides significant
added liquidity to support the new management team's strategic objectives.
Additionally, Holdings was acquired with a cash equity investment of $166
million which represents approximately 45% of the sources of funds used in
the Transactions and the Offering.
<PAGE>
Company Strategy
The Company plans to build on its core competencies in plants and
gardening and its current market position to become the leading national
specialty retailer of lawn and garden products. Management intends to
systematically accomplish this objective by: (i) rationalizing the
Company's current cost structure, (ii) implementing a store refurbishment
program covering all existing 258 stores, (iii) increasing overall
inventory levels, (iv) further focusing its merchandising strategy on its
core lawn and garden theme and (v) increasing market penetration and
expanding geographically through the selective opening and/or acquisition
of new store locations.
Rationalize Cost Structure. Since closing the acquisition on
December 24, 1997, the Company's new management team has identified and
principally affected annual cost savings of approximately $13.1 million
through: (i) reduction of corporate overhead related to the closing of
Holdings' headquarters in Stamford, Connecticut, (ii) streamlining and
reduction of field supervision and store-level management,
(iii) replacement of the Company's insurance policies with new lower
premium plans providing for substantially similar coverages,
(iv) elimination of expenditures incurred by prior management to build and
promote a new store concept, (v) termination of the temporary mall-based
Christmas stores and realization of savings from several previous and two
additional store closings and (vi) expense reductions associated with the
consolidation of its distribution facilities implemented in late fiscal
1996 and early fiscal 1997.
Implement Store Refurbishment Program. Management expects to
refurbish all of Frank's existing 258 store locations. This refurbishment
is expected to occur over a three-year period by investing an average of
$75,000 per store to improve overall store presentation, layout, signage
and fixturing. Management expects to implement this refurbishment program
by initially focusing on markets where the Company enjoys high market
penetration and brand awareness as well as stores where demographic
characteristics, traffic conditions and the competitive environment are
especially attractive.
Increase Overall Inventory Levels. Largely due to capital
constraints beginning in late fiscal 1995, the Company's purchases of new
inventory dropped by approximately 15.6% in fiscal 1996. Management
believes that this decrease contributed to the Company's significant
decline in fiscal 1996 comparable store sales. During fiscal 1997, the
Company's purchases of inventory increased approximately 4.6% over fiscal
1996. New management intends to raise overall inventory levels through a
one-time increase of approximately $50,000 per store, representing an
increase of 14.5% versus average inventory levels during the latest twelve
months.
Focus Merchandising Strategy on Lawn and Garden Theme. The
Company's new merchandising strategy will build upon Frank's core lawn and
garden competencies. Management expects to (i) enhance and enlarge both
indoor and outdoor live plant categories and introduce more specialized
assortments, (ii) increase the variety of gardening tools, aids and
accessories, (iii) expand Frank's own private label program, (iv) provide
ancillary services such as in-store consultation and educational programs
geared towards the gardening enthusiast and (v) broaden and enhance the
<PAGE>
presentation of the Company's dried and artificial flowers and
arrangements and Christmas trim-a-tree businesses. In addition, new
management expects to re-merchandise portions of the crafts and pet
supplies product categories to make them more complementary to the
Company's core lawn and garden theme.
Pursue Increased Market Penetration and Geographic Expansion. The
Company intends to focus solely on improving the operations of its
existing store base in fiscal 1998. Management currently expects to
selectively pursue a new store opening program beginning in fiscal 1999.
The Company believes that increased penetration and expansion will result
in significant sales growth and allow the Company to further realize
economies of scale associated with advertising, distribution, operations
and brand name recognition. Additionally, management will selectively
review acquisition opportunities of local and regional operators to
complement its store expansion strategy.
Industry Overview
Summary. The national lawn and garden market is seasonal, highly
fragmented and generally non-branded, consisting of thousands of local
garden centers and mass merchandisers who sell lawn and garden products as
part of their overall product lines. The Company believes that the overall
retail market for lawn and garden products, defined to include green goods,
fertilizers, gardening accessories, lawn furniture, Christmas merchandise
and snow removal, power and watering equipment, was approximately $71.2
billion in 1996 and approximately $76.5 billion in 1997, representing a
7.4% growth over 1996. The Company also believes that between 1987 and
1997 the industry experienced an 8.6% compound annual growth rate.
Competition. The United States lawn and garden retail market is
highly fragmented, and the Company believes that the top ten competitors
accounted for approximately 10% of 1996 industry-wide sales. During the
past several years, hardware warehouses and home centers have entered
the lawn and garden market due to the attractive margins and growth
rates. The Company believes that hardware warehouses and home centers
are taking market share primarily at the expense of mass merchandisers,
local hardware stores and supermarkets. Additionally, because consumers
are increasingly demanding greater service, selection, variety and
material sizes, the Company believes that retailers best positioned to
offer such amenities should gain market share.
Marketing Channels / Distribution. The Company believes that
approximately 36% of all 1996 lawn and garden market sales were generated
in the warehouse club / chain store / mass market channel, 32% in the
hardware store / home center / hardware warehouse channel and 32% in the
lawn and garden center / nursery / farm store channel. The Company also
believes that approximately 60% of all lawn and garden products sold in
1996 were distributed through a direct (one-step) method of distribution
to the retailer from the manufacturer or grower, and approximately 40%
arrived at retail through distributors (two-step distribution).
<PAGE>
Widespread Popularity and Favorable Demographics. Gardening enjoys a
highly favorable demographic profile in that it is one of the most popular
leisure activities in the United States. The Company believes that 64% of
the approximately 101 million U.S. households participated in some form of
gardening activity in 1996. The Company also believes that adults between
the ages of 45 and 64 are the most frequent participants in the lawn and
garden market, and the U.S. Census Bureau expects the percentage of Americans
in this age bracket to increase from 19.9% in 1995 to 25.3% in 2005.
Product Categories and Strategic Enhancements
The following chart illustrates the Company's fiscal 1997 sales by
product category:
Sales by Product Category
(dollars in millions)
Product Category Sales % of Sales Description
- ---------------- ------ ---------- --------------------------------
Lawn and Garden . . . $294.0 55.5% Roses, potted plants, annual and
perennial flowering plants, trees,
shrubs, fertilizers, seeds and
bulbs, mulches, plant accessories,
hoses and gardening tools and
equipment
Floral . . . . . . . 59.8 11.3 Dried, silk and acrylic flowers
and arrangements
Christmas . . . . . . 70.1 13.1 Artificial Christmas trees,
decorations and trimmings
Crafts . . . . . . . 85.6 16.2 Yarns, macrame, art supplies,
needlework, candles and wood crafts
Pet Supplies . . . . 20.5 3.9 Bird houses, feeders, seeds and
accessories
------ ------
Total $530.0 100.0%
====== ======
Management intends to execute specific strategic enhancements to
the Company's current product categories designed to build upon its
existing strengths.
Lawn and Garden. As the nation's largest specialty retailer of lawn
and garden products, the Company enjoys a strong franchise in the lawn and
garden business. The Company offers customers one of the widest selections
of live plants in the industry. In addition, the Company markets its own
line of private label lawn and garden products under the Frank's name.
<PAGE>
The Company intends to build on the live plant category and
introduce deeper and more specialized and differentiated assortments on a
year-round basis. Similarly, the assortment of gardening tools, aids and
accessories will be increased. The Company also intends to grow Frank's
private label products in gardening tools, potting soil, fertilizers and
related merchandise. Finally, management intends to upgrade its service
level to cater more to the gardening enthusiast, with the added intention
of tying sales of ancillary lawn and garden products to the purchase of
live plants by offering in-store demonstrations and take-home
instructions.
Floral. The Company's floral products include dried and artificial
flowers and arrangements. Such floral products exhibit high inventory
turnover, excellent sales productivity, strong operating margins and low
seasonality. Importantly, the floral category ties in closely with the
Company's emphasis on the lawn and garden market and related home decor
merchandise.
The Company plans to improve its current in-store floral
presentation. Additionally, the Company will enhance its current service
level to assist customers more closely in developing their own unique
floral arrangements. Management expects the floral category to be a growth
area for the Company.
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 layouts and offers a
broad selection of seasonal merchandise for the holiday season and
Christmas decoration. The Company believes that it is the largest retailer
of live Christmas trees in the United States, selling in excess of 200,000
trees in 1997. In addition, the Company provides a large selection of
artificial trees, wreathes, and holiday plants as well as a wide array of
trim-a-tree items.
The Company plans to discontinue the operation of its temporary
mall-based Christmas boutiques under the name "Christmas by Frank's" in
order to concentrate on in-store Christmas presentations. Management will
also upgrade and expand the trim-a-tree business by offering a more
diverse and richer assortment of products to be displayed using an
enhanced presentation layout.
Crafts. The Company's crafts business provides a steady stream of
revenues throughout the year. The Company intends to re-merchandise the
crafts product category by narrowing the assortment range and re-focusing
the merchandise to better complement its lawn and garden theme.
Pet Supplies. Management believes the sale of pet supplies is a
natural complement to the Company's lawn and garden product offerings. The
<PAGE>
Company intends to eliminate basic (dog and cat) pet foods and re-focus
its pet product line to focus on wild-bird related products, such as
feeders, seeds and bird houses which are more complementary to its lawn
and garden theme.
Store Operations and Management
The Company's 258 stores average approximately 15,000 square feet
of indoor selling space and on average an equal amount of outdoor selling
space which is primarily closed during the winter months. The stores are
primarily free-standing and/or located adjacent to or near strip shopping
centers. The Company's stores are open 80 hours per week, with the average
store opening at 9 a.m. and closing at 9 p.m.
The average store has approximately 20-25 part- and full-time
employees, including a store manager, an assistant manager and up to six
department managers responsible for the various product lines. The
in-store staff is generally supplemented at seasonal peaks by temporary
employees.
Advertising and Marketing
For fiscal 1997, the Company spent $25.5 million, or 4.8% of
sales, on advertising and marketing. New management expects to increase
its advertising budget modestly for fiscal 1998.
Distribution
During fiscal years 1996 and 1997, the Company consolidated its
distribution centers by closing its facilities in Detroit and Chicago and
opening a new facility in Howe, Indiana. The Company also operates a
distribution center in Harrisburg, Pennsylvania.
In fiscal 1997, the Company's distribution facilities delivered
approximately 50% of all merchandise, principally bulk, crafts and
Christmas items, to the stores primarily using contract carriers. The
balance of the Company's products, primarily live goods, are delivered
directly to the stores by regional and local outside vendors.
Properties
In March 1998, the Company moved its headquarters to Troy,
Michigan. The Company's headquarters measure approximately 27,000 square
feet and are subject to a lease which expires in September 2007.
<PAGE>
The Company currently leases a 292,300 square foot distribution
facility in Harrisburg, Pennsylvania as well as a 346,515 square foot
facility in Howe, Indiana. The lease on the Harrisburg facility expires in
March 2002, with one five-year renewal option. The Howe property carries a
lease expiring in June 2002 with two five-year renewal options.
As of January 25, 1998, the Company operated 258 Frank's stores,
119 of which were leased and 139 were owned (40 of which are subject to
ground leases). The following is a summary of store properties by state:
Number of Frank's Stores Per State
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
New York . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . 18
Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . 16
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . 15
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Connecticut . . . . . . . . . . . . . . . . . . . . . . . . . 12
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . 7
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . . 5
---
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258
===
The Company owns three and leases eleven additional store
locations which were previously operated as Frank's stores. The Company is
actively engaged in the leasing, sub-leasing and releasing of these
properties.
Vendors
The Company purchases its merchandise from approximately 1,200
outside vendors. Of the Company's total vendor purchases in fiscal 1997,
approximately $126 million, or 43.8%, came from its top 50 vendors, with
no single vendor representing more than 2.1% of overall purchases.
Alternative sources of supply are generally available for all products
sold by the Company. The Company intends to increase its product
purchases, particularly in the floral, Christmas and crafts product
categories, from overseas vendors.
Seasonality
The Company benefits from two distinct selling seasons--Spring and
the Christmas holiday season. The lawn and garden market is fundamentally
seasonal, with the low point arriving during the winter months and the
high point being the spring planting season of April through June, during
which nearly 40% of the Company's annual sales occur.
<PAGE>
Employees
In fiscal 1997, the Company's employee base (excluding employees
at the Company's temporary mall-based Christmas stores which are being
discontinued) ranged from a low of 6,500 employees in February to a high
of 8,100 employees in May. The Company's entire employee base is
non-unionized and management considers its employee relations to be good.
Management Information System
To address the Year 2000 Issue, the Company is currently in the
process of implementing a new MIS at its headquarters. The Company has
hired outside consultants specializing in retailing MIS to implement the
new system. The implementation process entails transferring the
headquarters from a mainframe-based system to an IBM AS/400 computer
system. The project is already in process and is expected to be completed
by the end of fiscal 1998. The Company's in-store MIS capabilities are
adequate and are not directly impacted by the implementation of the new
home office system. These capabilities include POS data capture, laser
scanning and price look-up. The Company believes it has adequately
addressed the Year 2000 Issue as it relates to its in-store systems. See
"Risk Factors--Year 2000 Issue; Computer System Upgrade".
Environmental Matters
The Company and its operations are subject to Environmental Laws.
As an owner/lessor or former owner/lessor of numerous properties, as well
as a seller of certain environmentally sensitive products such as
herbicides and pesticides, the Company has an inherent risk of liability
under Environmental Laws, including, for example, contamination that may
have occurred in the past on its current or former properties or as a
result of its operations. For example, prior to the Company's ownership/
occupancy, some of the Company's store locations were the site
of uses such as car dealerships, gasoline stations, or lumber yards. In
addition, several of the Company's stores are known to use (and others to
have formerly used) underground tanks for heating oil storage, and a
facility in Detroit formerly used by the Company as its headquarters has
been, in connection with its sale by the Company, the subject of
investigation and remediation relating to underground storage tanks
formerly present and other environmental conditions. The Company believes
it complies in all material respects with applicable Environmental Laws
and does not anticipate any obligations with respect to Environmental Laws
that would have a material adverse effect on its operations.
The Company may also be affected by Holdings' or Holdings' present
or former subsidiaries' liabilities and potential liabilities with respect
to Environmental Laws, which have been and may continue to be significant
to Holdings. Such liabilities could adversely affect the Company insofar
as the Company declares dividends to Holdings (subject to certain
covenants in the Indenture and the Senior Credit Facility) to discharge
any such liability. The Company believes, however, that it is unlikely to
be held liable in any claim that may be asserted against it for the
<PAGE>
liabilities or potential liabilities of Holdings or Holdings' present or
former subsidiaries under any Environmental Law. See "Risk Factors--
Environmental Matters".
Litigation
In the normal course of business the Company is subject to various
claims. In the opinion of the Company, 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.
<PAGE>
MANAGEMENT
Executive Officers and Directors
Set forth below are the names, ages and positions of the persons
serving as the executive officers and directors of the Company. Each
director will hold office until the next annual meeting of shareholders
and until the director's successor is elected and qualified or until the
earlier of the director's death, resignation or removal.
Name Age Position
- ----- --- --------
Joseph R. Baczko . . . 53 Chairman of the Board of Directors,
Chief Executive Officer and President
Adam Szopinski . . . . 52 Executive Vice President
Larry T. Lakin . . . . 58 Chief Operating Officer and Director
Executive Vice President
William C. Boyd . . . . 69 Chief Financial Officer and Director
Executive Vice President
David P. Spalding . . . 44 Director
James A. Stern . . . . 47 Director
Bahram Shirazi . . . . 34 Director
Joseph R. Baczko became Chairman of the Board, Chief Executive
Officer and President of the Company following consummation of the Tender
Offer after having been a private investor and consultant since 1993. From
1991 to 1992, Mr. Baczko served as President, Chief Operating Officer and
director of Blockbuster. Prior to joining Blockbuster, he was the initial
President of Toys "R" Us International from 1983 to 1991. At Blockbuster,
Mr. Baczko oversaw system-wide revenue growth from approximately $1.1
billion to approximately $2.0 billion, and during his eight years with
Toys "R" Us International system-wide sales expanded to approximately $800
million.
Adam Szopinski became Executive Vice President, Chief Operating
Officer and director of the Company upon consummation of the Merger after
having served as the Vice President of Operations of Toys "R" Us
International since 1989. During his service as Vice President of
Operations for Toys "R" Us International, Mr. Szopinski was responsible
for directing the operational development of that company's $2.7 billion
international business extending across 27 countries and a total of 394
superstores. Mr. Szopinski had been employed by Toys "R" Us in various
positions of increasing responsibility during the 22 years prior to
assuming his role as that company's Vice President of Operations in 1989.
<PAGE>
Larry T. Lakin became the Company's Chief Financial Officer
following consummation of the Tender Offer, and was elected Executive Vice
President and director of the Company following consummation of the
Merger. Mr. Lakin previously served as the Chief Financial Officer and a
principal of Shiara, Inc. ("Shiara"), a private fragrance company and
cosmetics venture, from April 1994 to December 1997. Prior to Shiara, Mr.
Lakin served as Vice President of Finance and principal of River Road
Distributors, Inc. from November 1992 to March 1994. Previously, Mr. Lakin
served as Chief Financial Officer and/or Vice President of Finance of the
international operations of Faberge Inc., LJN Toys Ltd., Toys "R" Us
International and Max Factor & Co.'s international operations and
Controller of Chrysler Corporation--France.
William C. Boyd has served as Executive Vice President of the
Company since June 1987 and prior thereto was employed by the Company in
various capacities since 1949.
David P. Spalding became a director of the Company upon
consummation of the Tender Offer, and has served as Vice Chairman of
Cypress since its formation in April 1994. Prior to joining Cypress, he
was a Managing Director in the Merchant Banking Group at Lehman Brothers
Inc. from February 1991 to April 1994. Prior to 1991 he was a Senior Vice
President in the Merchant Banking Group at Lehman Brothers Inc.
Mr. Spalding is also a director of Lear Corporation, AMTROL Inc. and
Williams Scotsman, Inc.
James A. Stern became a director of the Company upon consummation
of the Tender Offer, and has been Chairman of Cypress since its formation
in April 1994. Prior to joining Cypress, Mr. Stern spent his entire career
with Lehman Brothers Inc., most recently as head of the Merchant Banking
Group. During his twenty years with Lehman Brothers, he also served as
head of Lehman's High Yield and Primary Capital Markets Groups, and was
co-head of Investment Banking. In addition, Mr. Stern was a member of
Lehman's Operating Committee. Mr. Stern is also a director of AMTROL Inc.,
Cinemark USA, Inc., Lear Corporation, Noel Group, Inc., R.P. Scherer
Corporation, Genesis ElderCare Corp., WESCO International, Inc., and a
trustee of Tufts University.
Bahram Shirazi became a director of the Company upon consummation
of the Tender Offer, and has been a principal of Cypress since its
formation in April 1994. Prior to joining Cypress, he was a Vice President
in the Merchant Banking Group at Lehman Brothers Inc. from 1992 to 1994.
<PAGE>
Compensation of Directors
The Company currently pays no compensation to its non-employee
directors, nor does it pay any additional remuneration to employees or
executive officers of the Company for serving as directors.
Compensation Committee Interlocks and Insider Participation; Compensation
of Executive Officers
The Company's newly formed compensation committee (the
"Compensation Committee") is comprised of three non-employee directors and
will be 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 and
management succession plans. The Compensation Committee currently consists
of Messrs. Spalding, Stern and Shirazi.
The annual base salaries of the Company's executive officers for
fiscal 1998 are as follows: Mr. Baczko, $500,000; Mr. Szopinski, $250,000;
Mr. Lakin, $250,000; and Mr. Boyd, $163,000.
Stock Option Grants
In connection with the Transactions, all options to acquire
Holdings Common Stock issued under Holdings' Amended and Restated 1986
Stock Incentive Plan and its 1996 Stock Incentive Plan (collectively, the
"Previous Stock Option Plans") were modified to be exercisable solely for
a cash amount equal to the difference between each option's exercise price
and the price paid for each Former Share in the Merger. All modified
options that were exercisable for value have been exercised and paid. On
February 6, 1998, the Company terminated the Previous Stock Option Plans
and cancelled all remaining options issued thereunder. The Company and
Holdings intend to implement a new stock option plan.
Employment Agreements
The Company intends to enter into employment agreements with
Messrs. Baczko, Szopinski and Lakin. It is expected that these agreements
will address typical employment issues including compensation, termination
and the executives' ability to compete with the Company.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
All of the outstanding capital stock of the Company is owned by
Holdings. The authorized capital stock of Holdings consists of 100,000,000
shares of Holdings Common Stock and 1,000,000 shares of preferred stock,
par value $1.00 per share. As of June 1, 1998, 31,000,000 shares of
Holdings Common Stock and no shares of preferred stock were issued and
outstanding on a fully diluted basis.
The following table sets forth certain information as to the
beneficial ownership of Holdings Common Stock as of April 1, 1998 by (i)
owners of more than 5% of the outstanding shares of Holdings Common Stock,
(ii) each executive officer and director of Holdings, and (iii) all
executive officers and directors of Holdings, as a group. Except as
indicated in the footnotes to this table, the Company believes that the
persons named in the table have sole voting and investment power with
respect to all shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
Shares Of Holdings Common Stock
------------------------------------
Amount Percentage
Beneficially of
Owned<F1> Class
------------- ------------
<S> <C> <C>
Beneficial Owners
- ------------------
Principal Shareholders:
Cypress Merchant Banking Partners L.P.<F2> . . . . . . . 29,295,900 94.5%
c/o The Cypress Group L.L.C.
65 East 55th Street
New York, New York 10022
Cypress Offshore Partners L.P.<F2><F3> . . . . . . . . . 1,517,353 4.9%
c/o The Cypress Group L.L.C.
65 East 55th Street
New York, New York 10022
Executive Officers and Directors:
Joseph R. Baczko . . . . . . . . . . . . . . . . . . . . 186,747 <F4>
Adam Szopinski . . . . . . . . . . . . . . . . . . . . . -- --
Larry T. Lakin . . . . . . . . . . . . . . . . . . . . . -- --
William C. Boyd . . . . . . . . . . . . . . . . . . . . -- --
David P. Spalding(b) . . . . . . . . . . . . . . . . . . -- --
James A. Stern(b) . . . . . . . . . . . . . . . . . . . -- --
Bahram Shirazi . . . . . . . . . . . . . . . . . . . . . -- --
All executive officers and directors as a group (8 persons) 186,747 <F4>
____________________
<FN>
<F1> The amounts and percentage of Holdings Common Stock beneficially
owned are reported on the basis of rules and regulations of the
Commission governing the determination of beneficial ownership of
securities. Under such rules and regulations, a person is deemed to
<PAGE>
be a "beneficial owner" of a security if that person has or shares
"voting power," which includes the power to vote or to direct the
voting of such security, or "investment power," which includes the
power to dispose of or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities
which that person has a right to acquire beneficial ownership of
within 60 days. Under these rules and regulations, more than one
person may be deemed a beneficial owner of the same securities and
a person may be deemed to be a beneficial owner of securities in
which he has no economic interest.
<F2> Cypress Offshore and CMBP are affiliates of Cypress.
Messrs. Spalding and Stern are members of Cypress and may be deemed
to share beneficial ownership of the shares of Holdings Common
Stock shown as beneficially owned by the Cypress Funds. Both of
such individuals disclaim beneficial ownership of such shares.
<F3> Cypress Offshore owns its interest in Holdings through its wholly
owned subsidiary, Cypress Garden Ltd.
<F4> Represents holdings of less than 1%.
</TABLE>
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The summaries of the following agreements do not purport to be
complete and, while the Company believes that the summaries of the
material provisions of such agreements are accurate and complete summaries
of all material terms, such summaries are subject to, and qualified in
their entirety by reference to, the agreements summarized below, including
the definitions therein of certain terms.
Certain Fees Relating to the Transactions
Pursuant to an agreement entered into on January 6, 1998 between
Acquisition Corp. and Cypress Advisors Inc., an affiliate of Cypress,
Holdings (as successor by merger to Acquisition Corp.) has paid Cypress
Advisors Inc. $4.5 million in fees for providing services relating to the
consummation of the Tender Offer, Merger, Senior Credit Facility, certain
related transactions and the Offering. Cypress Advisors Inc. is also
entitled to receive reimbursement for all expenses reasonably incurred by
it in connection with the Transactions and the Offering. The Company
believes that its agreement with Cypress is on terms no less favorable to
Holdings than those which could have been achieved with unrelated third
parties.
Preceding his election as an executive officer of the Company,
Mr. Baczko served as a consultant to Cypress and Acquisition Corp. in
connection with the Transactions. In consideration thereof, Acquisition
Corp. paid approximately $0.5 million to Mr. Baczko. Additionally, in
connection with the Transactions, Mr. Szopinski received a signing bonus
of approximately $0.2 million from Acquisition Corp.
Indemnification Agreement
Pursuant to a letter agreement dated December 19, 1997,
Acquisition Corp. agreed to indemnify the Cypress Funds and their
directors, officers and limited partners against any losses or liabilities
incurred by them which arise out of or are based upon the Tender Offer,
the Schedule 14D-1 filed with the Commission in connection with the Tender
Offer and any other transactions contemplated by the Schedule 14D-1. As
successor by merger to Acquisition Corp., Holdings is bound by the terms
of the indemnification agreement.
Registration Rights Agreement
Pursuant to a registration rights agreement dated as of
December 23, 1997 (the "Investor Registration Rights Agreement"), CMBP and
Cypress Garden Ltd. (collectively, the "Cypress Entities") and any of
their direct or indirect transferees have the right, under certain
circumstances and subject to certain conditions, to request that Holdings
(as successor by merger to Acquisition Corp.) register under the
<PAGE>
Securities Act shares of Holdings Common Stock held by them. Subject to
certain conditions and exceptions, the Cypress Entities and their
transferees also have the right to require that the shares of Holdings
Common Stock held by them be included in any registration under the
Securities Act commenced by Holdings. The Investor Registration Rights
Agreement provides that Holdings will pay all expenses in connection with
the first six registrations requested by the Cypress Entities and in
connection with any unrequested registration undertaken by Holdings. The
agreement also provides that Holdings will indemnify sellers of Holdings
Common Stock and their affiliates for any liability they might incur under
the securities laws based on a material untrue statement or omission
contained in the registration statement or prospectus unless such
misstatement or omission was made in reliance on written information
provided by the seller to Holdings specifically for use in the
registration statement or prospectus.
Management Stockholders Agreement
Holdings intends to enter into a stockholders agreement (the
"Stockholders Agreement") with Mr. Baczko, the Company's new Chairman, CEO
and President, in connection with his ownership of Holdings Common Stock.
Among other things, the Stockholders Agreement is expected to provide for
purchase and sale rights in the event that Mr. Baczko is no longer
employed by the Company and Holdings and to place restrictions on the
transfer of shares of Holdings Common Stock held by Mr. Baczko. The
Stockholders Agreement will also grant Mr. Baczko certain registration
rights under, and bind Mr. Baczko to certain of the conditions and
obligations of, the Investor Registration Rights Agreement, provided that
Mr. Baczko will not have demand registration rights.
Sale Participation Agreement
The Cypress Entities intend to enter into a sale participation
agreement (the "Sale Participation Agreement") with Mr. Baczko in
connection with his ownership of Holdings Common Stock. Among other
things, the Sale Participation Agreement is expected to contain customary
tag-along and drag-along rights relating to the rights and obligations of
Mr. Baczko to include his shares of Holdings Common Stock in sales of
Holdings Common Stock by the Cypress Entities.
<PAGE>
OTHER INDEBTEDNESS
The following summaries of the material terms and conditions of
the Senior Credit Facility and certain other indebtedness do not purport
to be complete and, while the Company believes that they are accurate and
complete summaries of all material terms, such summaries are qualified in
their entirety by reference to the Senior Credit Facility and the other
agreements summarized below.
Senior Credit Facility
General. The Company has entered into a Senior Credit Facility dated
as of December 24, 1997 (the "Credit Facility Closing Date") with various
banks and financial institutions, including The Chase Manhattan Bank
("Chase"), as bank lender and administrative agent for the bank lenders
party thereto, and Goldman Sachs Credit Partners L.P., as bank lender and
documentation agent. The agreement provides for (i) a Term Loan Facility
for up to $85 million in term loans available during the period ending 120
days after the Credit Facility Closing Date and (ii) a Revolving Credit
Facility for up to an aggregate of $110 million in revolving credit loans
and letters of credit, with outstanding letters of credit not to exceed
$25 million. In connection with the Offering, the Company reduced
commitments available under the Term Loan Facility to $25 million from $85
million.
Use of Facility. The Term Loan Facility may be used, in general and
subject to specified limitations on amounts: (i) to refinance a portion of
the Holdings Notes, (ii) to refinance a portion of the Company's existing
mortgages as necessary, (iii) to satisfy certain financial obligations
under the former Chairman's employment agreement, (iv) to cover costs
relating to the exercise of appraisal rights and options in connection
with the Transactions, (v) to cover other transaction costs associated
with the Transactions and (vi) for general corporate purposes. The
Revolving Credit Facility may be used to repay a portion of the Company's
existing indebtedness and for general corporate purposes. Letters of
credit may be issued only for general corporate purposes.
Security, Guarantees. The Company's obligations under the Senior
Credit Facility are unconditionally guaranteed by Holdings and certain
existing and subsequently acquired direct and indirect subsidiaries of
Holdings. The Senior Credit Facility and guarantees are secured by
substantially all of the assets of Holdings, the Company and certain
existing and subsequently acquired direct and indirect subsidiaries of
Holdings; such assets include real property not subject to other
mortgages, personal property (including inventory) and the capital stock
of the Company and Holdings' other direct and indirect subsidiaries.
Maturity. Term loans provided pursuant to the Term Loan Facility
mature seven years after the Credit Facility Closing Date. The Term Loan
Facility will amortize in equal quarterly installments beginning in fiscal
1999 in an aggregate amount equal to 8.8% of the aggregate Term Loan
Facility amount and increasing at each anniversary. Subsequent annual
<PAGE>
amortization will be 10.6%, 12.9%, 14.7%, 20.6% and 32.4% for fiscal years
2000, 2001, 2002, 2003 and 2004, respectively, subject to prepayment as
described below. Revolving credit loans obtained pursuant to the Revolving
Credit Facility mature six years after the Credit Facility Closing Date.
Interest. Term loans provided pursuant to the Term Loan Facility will
bear interest, at the Company's election, at an annual rate equal to the
Adjusted LIBO Rate (as defined therein) plus 2.50% or Alternative Base
Rate (as defined therein) plus 1.50%, provided that such margins may be
reduced if the Company meets certain senior leverage ratio tests.
Revolving credit loans obtained pursuant to the Revolving Credit Facility
bear interest, at the Company's election, at an annual rate equal to the
Adjusted LIBO Rate (as defined therein) plus 2.25% or Alternative Base
Rate (as defined therein) plus 1.25%, provided that such margins may be
reduced if the Company meets certain senior leverage ratio tests. The
Alternate Base Rate is the highest of Chase's Prime Rate (as defined
therein), the Federal Funds Effective Rate (as defined therein) plus 0.50%
and the Base CD Rate (as defined therein) plus 1.00%. Adjusted LIBO Rate
and the Base CD Rate will at all times include statutory reserves (and, in
the case of the Base CD Rate, FDIC assessment rates).
Fees. The Company is required to pay the lenders a commitment fee
equal to 0.50% per annum on the undrawn portion of the commitments in
respect to the Term Loan Facility and the Revolving Credit Facility, with
such fee commencing to accrue on the Credit Facility Closing Date and
payable quarterly in arrears after the Credit Facility Closing Date. The
Company also is required to pay a letter of credit fee on the face amount
of all outstanding letters of credit at an annual rate up to the
applicable margin on Eurodollar Loans under the Revolving Credit Facility
then in effect plus a fronting fee equal to 0.25% per annum, payable
quarterly, on the face amount of each letter of credit. All commitment
fees, letter of credit fees and fronting fees are computed on the basis of
a year of 360 days and are payable for the actual number of days elapsed.
Prepayments. Borrowings under the Term Loan Facility, in general,
must be prepaid with (i) 75% of excess cash flow, subject to reduction
based on the senior leverage ratio of the Company, (ii) 100% of the net
cash proceeds of certain non-ordinary-course asset sales or other
dispositions of property (including by casualty) by Holdings, the
Company's or Holdings' existing and subsequently acquired direct and
indirect subsidiaries not reinvested in the Company's business (subject to
limited exceptions) and (iii) 100% of the net cash proceeds of certain
issuances of equity and debt obligations of Holdings or the Company or
their subsidiaries. In addition, the Company must repay all borrowings
under the Revolving Credit Facility and refrain from taking additional
revolving credit loans to the extent necessary in order that there be a
period of at least 30 consecutive days in each fiscal year of Holdings
during which no borrowings under the Revolving Credit Facility are
outstanding. Subject to these provisions, term loans and revolving credit
loans may be prepaid at any time at the option of the Company.
Covenants. The Senior Credit Facility includes customary types of
affirmative covenants including those that require the Company to
(i) provide certain financial information to the lenders, (ii) maintain
all rights, privileges and permits material to the conduct of its
<PAGE>
business, (iii) give notice of the occurrence of certain material events,
(iv) maintain its material property and adequate insurance, (v) keep
proper account of all transactions material to its business, (vi) allow
the lenders to inspect its records and properties and (vii) comply with
laws.
The Senior Credit Facility also includes customary types of
negative covenants applicable to the Company Holdings and their
subsidiaries including limitations on certain types of indebtedness,
liens, guarantees, loans, dividends, redemptions of debt and capital
stock, mergers, asset sales, investments, capital expenditures, amendments
to or waivers of the terms of other material indebtedness (including the
Notes) and transactions with affiliates.
Ratios. The Senior Credit Facility requires that the Company and
Holdings comply with certain financial tests, including a maximum
consolidated debt to consolidated EBITDA ratio and a minimum consolidated
EBITDA to consolidated net cash interest expense ratio.
Events of Default. The Senior Credit Facility contains customary
types of events of default including defaults relating to material breach
of a representation, warranty or covenant contained therein, non-payment
of principal or interest, cross default and acceleration, bankruptcy,
material judgments, certain ERISA events, actual or asserted invalidity of
any guaranty or security document and change in control.
Mortgage Loans
As of May 17, 1998, an aggregate of approximately $19.0 million
was outstanding under 20 mortgage loans executed by the Company during
1995 and 1996 in favor of Midland Commercial Financing Corp. ("Midland")
and Midland Loan Services, L.P. Amounts outstanding under the Midland
mortgage loans bear interest at rates of either 8.31%, 8.70% or 9.28% per
annum and will mature in the years 2005 and 2006. The Midland mortgage
loans are secured by a total of 20 of the Company's store properties.
On April 22, 1996, the Company executed six mortgage loans in
favor of First Union National Bank of North Carolina ("First Union"). As
of May 17, 1998, approximately $4.3 million was outstanding under the
loans which are secured by six of the Company's store properties. Amounts
outstanding under the First Union mortgages bear interest at rates of
either 9.375% or 9.625% per annum and mature in April 2006.
On January 25, 1996, the Company executed six mortgage loans in
favor of People's Bank ("People's"). As of May 17, 1998, approximately
$4.5 million was outstanding under the loans which are secured by six of
the Company's store properties. Amounts outstanding under the People's
mortgages bear interest at 7.80% per annum and mature in February 2001.
<PAGE>
On August 19, 1997, the Company executed a mortgage loan in favor
of National Realty Funding L.C. ("National Realty"). As of May 17, 1998,
approximately $1.6 million was outstanding under the loan which is secured
by a Company property located in Huntington, New York. Amounts outstanding
under the mortgage with National Realty bear interest at 9.10% per annum
and mature in September 2007.
Capital Leases
The Company has entered into capital leases covering approximately
40 real properties. The implicit interest rates under the leases vary
between 9.3% and 18.2% and the leases expire between the years 1998 and
2011. As of May 17, 1998, the capitalized obligations outstanding under
the leases totalled approximately $11.2 million.
<PAGE>
THE EXCHANGE OFFER
General
The Company hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal (which together constitute the Exchange Offer), to exchange up
to $115,000,000 aggregate principal amount of Exchange Notes for a like
aggregate principal amount of Old Notes properly tendered on or prior to
the Expiration Date and not withdrawn as permitted pursuant to the
procedures described below. The Exchange Offer is being made with respect
to all of the Old Notes.
As of the date of this Prospectus, $115,000,000 aggregate
principal amount of the Old Notes is outstanding. This Prospectus,
together with the Letter of Transmittal, is first being sent on or about
July 20, 1998, to all holders of Old Notes known to the Company. The
Company's obligation to accept Old Notes for exchange pursuant to the
Exchange Offer is subject to certain conditions set forth under "--
Termination" below. The Company currently expects that each of the
conditions will be satisfied and that no waivers will be necessary.
Purpose of the Exchange Offer
In connection with the Offering, the purchasers of the Old Notes
became entitled to the benefits of certain registration rights. Pursuant
to the Registration Rights Agreement, the Company agreed to use its best
efforts to cause the Exchange Offer Registration Statement, of which this
Prospectus is a part, to become effective with respect to the Exchange
Offer for the Exchange Notes not later than 150 days after the date of the
issuance of the Old Notes and to consummate the Exchange Offer within 30
business days of the Exchange Offer Registration Statement being declared
effective. Subject to the terms and conditions stated herein, all Old
Notes validly tendered and not withdrawn will be accepted for exchange
upon consummation of the Exchange Offer. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus is a part.
If (i) the Exchange Offer is not permitted by applicable law or
(ii) any holder of Old Notes notifies the Company within 20 business days
following the consummation of the Exchange Offer that (A) it is prohibited
by law or Commission policy from participating in the Exchange Offer, (B)
it may not resell the Exchange Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus and the Prospectus contained
in the Exchange Offer Registration Statement is not appropriate or
available for such resales or (C) it is a broker-dealer and owns Old Notes
acquired directly from the Company or an affiliate of the Company, the
Company will be required to file a Shelf Registration Statement to cover
resales of the Notes by the holders thereof.
<PAGE>
If (i) the Company fails to file within 60 days of the closing of
the Offering, or cause to become effective within 150 days of the closing
of the Offering, the Exchange Offer Registration Statement, or (ii) the
Company is obligated to provide a Shelf Registration Statement and such
Shelf Registration Statement is not filed within 30 days, or declared
effective within 150 days, of the date on which the Company became so
obligated, or (iii) the Company fails to consummate the Exchange Offer
within 30 business days of the date on which the Exchange Offer
Registration Statement was required to be declared effective by the
Commission or (iv) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but shall thereafter cease to
be effective or usable in connection with resales of the Notes for the
periods specified in the Registration Rights Agreement (each such event
referred to in clauses (i) through (iv) above a "Registration Default"),
then the Company shall pay to each holder of Transfer Restricted
Securities (as defined herein), with respect to the first 90-day period
following such Registration Default, liquidated damages in an amount equal
to $0.05 per week per $1,000 in principal amount of Transfer Restricted
Securities held by such holder. The amount of such liquidated damages
will increase by an additional $0.05 per week per $1,000 in principal
amount of Transfer Restricted Securities held by such holders for each
subsequent 90-day period until such Registration Default has been cured,
up to a maximum of $0.50 per week. Following the cure of all Registration
Defaults, the accrual of all liquidated damages will cease.
The Exchange Offer shall be deemed consummated for purposes of the
Registration Rights Agreement upon the occurrence of (i) the filing and
effectiveness under the Securities Act of the Exchange Offer Registration
Statement relating to the Exchange Notes, (ii) the maintenance of the
Exchange Offer Registration Statement continuously effective and the
keeping of the Exchange Offer open for a period not less than 20 business
days and (iii) the delivery by the Company to the Registrar under the
Indenture of Exchange Notes in the same aggregate principal amount as the
aggregate principal amount of Old Notes tendered by holders thereof
pursuant to the Exchange Offer.
Terms of the Exchange
Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal, the Company will
accept all Old Notes properly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue
$1,000 principal amount of Exchange Notes in exchange for each $1,000
principal amount of outstanding Old Notes accepted in the Exchange Offer.
Holders may tender some or all of their Old Notes pursuant to the Exchange
Offer in denominations of $1,000 and integral multiples thereof. The
Exchange Notes have terms identical in all material respects to the terms
of the Old Notes except that the Exchange Notes have been registered under
the Securities Act, and therefore will not bear legends restricting their
transfer and will not contain certain provisions providing for
registration rights and liquidated damages relating to the Old Notes under
certain circumstances described in the Registration Rights Agreement,
which provisions will terminate as to all the Notes upon consummation of
the Exchange Offer.
<PAGE>
The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the
Old Notes may be offered for sale, resold or otherwise transferred by any
holder without compliance with the registration and prospectus delivery
provisions of the Securities Act. Instead, based on no-action letters
issued by the staff of the Commission to third parties, the Company
believes that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than (i) a broker-dealer who
purchased such Old Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or
(ii) a person that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery requirements of the Securities Act
provided that the holder is acquiring the Exchange Notes in its ordinary
course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. Holders of Old Notes wishing to accept the Exchange Offer
must represent to the Company that such conditions have been met.
Each broker-dealer that receives Exchange Notes in exchange for
Old Notes held for its own account, as a result of market-making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a
prospectus, such broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by
such broker-dealer in connection with resales of Exchange Notes where such
Exchange Notes were acquired by such broker-dealer as a result of
market-making or trading activities. The Company has agreed that for a
period of 120 days after the consummation of the Exchange Offer it will
make this Prospectus and any amendment or supplement to this Prospectus
available to any such broker-dealer for use in connection with any such
resale. See "Plan of Distribution".
In connection with the issuance of the Old Notes, the Company
arranged for the Old Notes initially purchased by qualified institutional
buyers or in offshore transactions in reliance on Regulation S under the
Securities Act to be issued and transferable in book-entry form through
the facilities of DTC, acting as depositary. The Exchange Notes are also
issuable and transferable in book-entry form through DTC. See "Description
of Exchange Notes--Book-Entry, Delivery and Form".
The Company shall be deemed to have accepted validly tendered Old
Notes when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. See "--Exchange Agent." The Exchange Agent will act
as agent for the tendering holders of Old Notes for the purpose of
receiving Exchange Notes from the Company and delivering Exchange Notes to
such holders.
<PAGE>
If any tendered Old Notes are not accepted for exchange because of
an invalid tender or the occurrence of certain other events set forth
herein, any such unaccepted Old Notes will be returned without expenses to
the tendering holder thereof as promptly as is practicable after the
Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to
the exchange of Old Notes pursuant to the Exchange Offer. The Company will
pay all reasonable charges and expenses, other than certain applicable
taxes and counsel fees, incurred in connection with the Exchange Offer.
See "--Fees and Expenses".
Expiration Date; Extensions; Amendments
The Exchange Offer will expire at 5:00 p.m., New York City time,
on the Expiration Date. The term "Expiration Date" shall mean
August 19, 1998 unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall
mean the latest date to which the Exchange Offer is extended. The
Expiration Date will be at least 20 business days after the commencement
of the Exchange Offer in accordance with Rule 14e-1(a) under the Exchange
Act. In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Such notice may state that the Company is
extending the Exchange Offer for a specified period of time. During any
such extension, all Old Notes previously tendered will remain subject to
the Exchange Offer unless properly withdrawn. The Company does not
anticipate extending the Expiration Date.
The Company expressly reserves the right (i) to delay acceptance
of the Old Notes, to extend the Exchange Offer or terminate the Exchange
Offer and refuse to accept Old Notes not previously accepted, if any of
the conditions set forth herein under "--Termination" shall have occurred
and shall not have been waived by the Company (if permitted to be waived
by the Company), by giving oral or written notice of such delay, extension
or termination to the Exchange Agent, and (ii) to amend the terms of the
Exchange Offer in any manner deemed by it to be advantageous to the
holders of the Old Notes. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as is practicable by
oral or written notice thereof. If the Exchange Offer is amended in a
manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the Old Notes of such amendment.
Without limiting the manner to which the Company may choose to
make public announcements of any delay in acceptance, extension,
termination or amendment of the Exchange Offer, the Company shall have no
obligation to publish, advertise, or otherwise communicate any such public
announcement, other than by making a timely release to the Dow Jones News
Service.
<PAGE>
Interest on the Exchange Notes
The Exchange Notes will bear interest from the last Interest
Payment Date on which interest was paid on the Old Notes so surrendered
or, if no interest has been paid on such Notes, from February 26, 1998,
the date of issuance of the Old Notes, payable semi-annually in arrears on
March 1 and September 1 of each year, commencing on September 1, 1998, at
the rate of 10 1/4% per annum. Holders of Old Notes accepted for exchange
will be deemed to have waived the right to receive any payment in respect
of interest on the Old Notes accrued from February 26, 1998 until the date
of the issuance of the Exchange Notes. Consequently holders who exchange
their Old Notes for Exchange Notes will receive the same interest payment
on September 1, 1998 (the first interest payment date with respect to the
Old Notes and the Exchange Notes) that they would have received had they
not accepted the Exchange Offer.
Procedures for Tendering
To tender in the Exchange Offer, a holder must properly complete,
sign and date the Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such
facsimile, together with the Old Notes (unless such tender is being
effected pursuant to the procedure for book-entry transfer described
below) and any other required documents, to the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's
Book-Entry Transfer Facility system may make book-entry delivery of the
Old Notes by causing DTC to transfer such Old Notes into the Exchange
Agent's account in accordance with DTC's procedure for such transfer.
Although delivery of Old Notes may be effected through book-entry transfer
into the Exchange Agent's account at DTC, the Letter of Transmittal (or
facsimile thereof), with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received or
confirmed by the Exchange Agent at its address set forth herein under "--
Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder of Old Notes will constitute an agreement
between such holder and the Company in accordance with the terms and
subject to the conditions set forth herein and in the Letter of
Transmittal.
Delivery of all documents must be made to the Exchange Agent at
its address set forth herein. Holders may also request that their
respective brokers, dealers, commercial banks, trust companies or nominees
effect such tender for the holders.
<PAGE>
The method of delivery of Old Notes and the Letters of Transmittal
and all other required documents to the Exchange Agent is at the election
and risk of the holders. Instead of delivery by mail, it is recommended
that holders use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure timely delivery. NO LETTER OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
Only a holder of Old Notes may tender such Old Notes in the
Exchange Offer. The term "holder" with respect to the Exchange Offer means
any person in whose name Old Notes are registered on the books of the
Company or any other person who has obtained a properly completed bond
power from the registered holder, or any person whose Old Notes are held
of record by DTC who desires to deliver such Old Notes by book-entry
transfer at DTC.
Any beneficial holder whose Old Notes are registered in the name
of his broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact such registered holder and properly
instruct such registered holder to tender on his behalf. If such
beneficial holder wishes to tender on his own behalf, such beneficial
holder must, prior to completing and executing the Letter of Transmittal
and delivering his Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such holder's name or obtain a
properly completed bond power from the registered holder. The transfer of
record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, must be guaranteed by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office of
correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution") unless the Old Notes tendered pursuant thereto are tendered
(i) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by appropriate bond powers which authorize such
person to tender the Old Notes on behalf of the registered holder, in
either case signed as the name of the registered holder or holders appears
on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-
in-fact, officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when
signing, and unless waived by the Company, evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
<PAGE>
All questions as to the validity, form, eligibility (including
time of receipt), acceptance and withdrawal of the tendered Old Notes will
be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to
reject any and all Old Notes not properly tendered or any Old Notes the
Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the absolute right to
waive any irregularities or conditions of tender as to particular Old
Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Neither the Company, the
Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Old
Notes nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made
until such irregularities have been cured or waived. Any Old Notes
received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost by the Exchange Agent to the tendering holder of
such Old Notes unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company expressly reserves the right in its sole
discretion to (a) purchase or make offers for any Old Notes that remain
outstanding subsequent to the Expiration Date, or, as set forth under "--
Termination," to terminate the Exchange Offer and (b) to the extent
permitted by applicable law, purchase Old Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such
purchases or offers may differ from the terms of the Exchange Offer.
By tendering, each holder of Old Notes will represent to the
Company that, among other things, the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business
of the person receiving such Exchange Notes, whether or not such person is
the holder, that neither the holder nor any other person has an
arrangement or understanding with any person to participate in the
distribution of the Exchange Notes and that neither the holder nor any
such other person is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act or, if an affiliate, such holder or such
other person will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old Notes
are not immediately available, or (ii) who cannot deliver their Old Notes,
the Letter of Transmittal, or any other required documents to the Exchange
Agent prior to the Expiration Date, or if such holder cannot complete the
procedure for book-entry transfer on a timely basis, may effect a tender
if:
(a) The tender is made through an Eligible Institution;
<PAGE>
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount
of Old Notes tendered, stating that the tender is being made thereby, and
guaranteeing that, within five business days after the Expiration Date,
the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Old Notes to be tendered in proper form
for transfer and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Old Notes in proper form for transfer (or confirmation of a
book-entry transfer into the Exchange Agent's account at DTC of Old Notes
delivered electronically) and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five business
days after the Expiration Date.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a
facsimile transmission or letter notice of withdrawal must be received by
the Exchange Agent at its address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. Any such notice of withdrawal must
(i) specify the name of the person having deposited the Old Notes to be
withdrawn (the "Depositor"), (ii) include a statement that the Depositor
is withdrawing its election to have Old Notes exchanged, and identify the
Old Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Old Notes), (iii) be signed by the Depositor in
the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer
of such Old Notes into the name of the Depositor withdrawing the tender
and (iv) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. All questions as to
the validity, form and eligibility (including time of receipt) for such
withdrawal notices will be determined solely by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly retendered. Any Old
Notes which have been tendered but which are not accepted for exchange
will be returned to the holder thereof without cost to such holder as soon
as is practicable after withdrawal, rejection of tender or termination of
the Exchange Offer. Properly withdrawn Old Notes may be re-tendered by
following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the Expiration Date.
<PAGE>
Termination
The Exchange Offer shall not be subject to any conditions, other
than (i) that the Exchange Offer does not violate applicable law or any
applicable interpretation of the staff of the Commission, (ii) that no
action or proceeding shall have been instituted or threatened in any court
or by or before any governmental agency or body with respect to the
Exchange Offer and (iii) that there shall not have been adopted or enacted
any law, statute, rule or regulation that would render the Exchange Offer
illegal. There can be no assurance that any such condition will not occur.
If the Company determines that it may terminate the Exchange
Offer, as set forth above, the Company may (i) refuse to accept any Old
Notes and return any Old Notes that have been tendered to the holders
thereof, (ii) extend the Exchange Offer and retain all Old Notes tendered
prior to the Expiration Date, subject to the rights of such holders of
tendered Old Notes to withdraw their tendered Old Notes, or (iii) waive
such termination event with respect to the Exchange Offer and accept all
properly tendered Old Notes that have not been withdrawn. If such waiver
constitutes a material change in the Exchange Offer, the Company will
disclose such change by means of a supplement to this Prospectus that will
be distributed to each registered holder of Old Notes, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure
to the registered holders of the Old Notes, if the Exchange Offer would
otherwise expire during such period.
Consequences of Failure to Exchange
Holders of Old Notes who do not exchange their Old Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject
to the restrictions on transfer of such Old Notes as set forth in the
legend thereon. Old Notes not exchanged pursuant to the Exchange Offer
will continue to remain outstanding in accordance with their terms. In
general, the Old Notes may not be offered or sold unless registered under
the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state
securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of
Old Notes should carefully consider whether to participate. Holders of Old
Notes are urged to consult their financial and tax advisors in making
their own decision on what action to take.
As a result of the making of, and upon acceptance for exchange of
all validly tendered Old Notes pursuant to the terms of, this Exchange
Offer, the Company will have fulfilled a covenant contained in the
Registration Rights Agreement. Holders of Old Notes who do not tender
their Old Notes in the Exchange Offer will continue to hold such Old Notes
and will be entitled to all the rights and limitations applicable thereto
<PAGE>
under the Indenture, except for any such rights under the Registration
Rights Agreement that by their terms terminate or cease to have further
effectiveness as a result of the making of this Exchange Offer. All
untendered Old Notes will continue to be subject to the restrictions on
transfer set forth in the Indenture. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for
untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire, subject to the
terms of the Indenture, untendered Old Notes in open market or privately
negotiated transactions, through subsequent exchange offers or otherwise.
The Company has no present plan to acquire any Old Notes which are not
tendered in the Exchange Offer.
Exchange Agent
Bankers Trust Company, the Trustee under the Indenture, has been
appointed as Exchange Agent for the Exchange Offer. Questions and requests
for assistance and inquiries for additional copies of this Prospectus or
of the Letter of Transmittal should be directed to the Exchange Agent
addressed as follows:
By Mail:
BT Services Tennessee, Inc.
Corporate Trust and Agency Group
Securities Payment Unit
PO Box 291207
Nashville, TN 37229-1207
By Overnight Courier:
BT Services Tennessee, Inc.
Corporate Trust and Agency Group
Securities Payment Unit
648 Grassmere Park Road
Nashville, TN 37211
By Hand Delivery:
BT Services Tennessee, Inc.
Corporate Trust and Agency Group
Securities Payment Unit
123 Washington Street
1st Floor
New York, NY 10006
Facsimile Transmission:
(615) 835-3701
For Information Telephone:
(800) 735-7777
<PAGE>
Fees and Expenses
The expenses of soliciting tenders pursuant to the Exchange Offer
will be borne by the Company. The principal solicitation for tenders
pursuant to the Exchange Offer is being made by mail. Additional
solicitations may be made by officers and regular employees of the Company
and its affiliates in person, by telegraph or telephone.
The Company will not make any payments to brokers, dealers or
other persons soliciting acceptances of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse the Exchange Agent for its reasonable
out-of-pocket expenses in connection therewith. The Company may also pay
brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of
this Prospectus, Letters of Transmittal and related documents to the
beneficial owners of the Old Notes and in handling or forwarding tenders
for exchange.
Reasonable expenses incurred in connection with the Exchange
Offer, including expenses of the Exchange Agent and Trustee and accounting
and legal fees, other than certain applicable taxes and counsel fees, will
be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however,
certificates representing Exchange Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or
are to be registered or issued in the name of, any person other than the
person signing the Letter of Transmittal, and if a transfer tax is imposed
for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other person) will be payable by
the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such tendering
holder.
<PAGE>
DESCRIPTION OF EXCHANGE NOTES
General
The Old Notes were, and the Exchange Notes will be, issued
pursuant to the Indenture, dated as of February 26, 1998, between the
Issuer and Bankers Trust Company, as trustee (the "Trustee"). The terms of
the Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Notes are subject to all such terms, and
Holders of Notes are referred to the Indenture (which is filed as an
exhibit to the Exchange Offer Registration Statement and of which this
Prospectus forms a part) and the Trust Indenture Act for a statement
thereof. The following summary of the material provisions of the Indenture
does not purport to be complete and, while the Company believes that the
summary of the material provisions of the Indenture contained herein
constitutes a complete and accurate summary of such material terms, such
summary is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of
the Indenture will be made available as set forth under the caption "--
Additional Information". The definitions of certain terms used in the
following summary are set forth below under the caption "--Certain
Definitions". For purposes of this "Description of Exchange Notes", the
term "Issuer" refers only to Frank's Nursery & Crafts, Inc. and not to any
of its Subsidiaries.
The Notes will be general unsecured obligations of the Issuer and
will be subordinated in right of payment to all existing and future Senior
Debt of the Issuer. See "--Subordination". As of May 17, 1998, the Issuer
had approximately $64.3 million of Senior Debt outstanding, including
$20.3 million of outstanding borrowings under the Senior Credit Facility.
In addition, the Issuer had $106.7 million of additional borrowings
available under the Senior Credit Facility. The Indenture permits the
incurrence of additional indebtedness, including additional Senior Debt,
subject to certain restrictions. See "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock".
As of the date of the Indenture, none of the Issuer's Subsidiaries
were Restricted Subsidiaries. Under certain circumstances, the Issuer will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
Principal, Maturity and Interest
The Notes are limited in aggregate principal amount to $250.0
million and mature on March 1, 2008. An aggregate of $115,000,000 in
principal amount of Notes was issued pursuant to the Offering, and an
aggregate of $135,000,000 in principal amount of Notes may be issued in
the future (subject to the covenant described under the caption "--Certain
Covenants-- Incurrence of Indebtedness and Issuance of Preferred Stock").
Interest on the Notes will accrue at the rate of 10 1/4% per annum and
<PAGE>
will be payable semi-annually in arrears on March 1 and September 1 of
each year, commencing on September 1, 1998, to Holders of record on the
immediately preceding February 15 and August 15. Interest on the Notes
will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of original issuance. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. Principal of and premium and interest, if any, on the Notes will
be payable at the office or agency of the Issuer maintained for such
purpose within the City and State of New York or, at the option of the
Issuer, payment of interest, if any, may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the
register of Holders of Notes; provided that all payments of principal,
premium and interest, if any, with respect to Notes the Holders of which
have given wire transfer instructions to the Issuer will be required to be
made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the
Issuer, the Issuer's office or agency in New York will be the office of
the Trustee maintained for such purpose. The Notes will be issued in
denominations of $1,000 and integral multiples thereof.
Subordination
The payment of principal of and premium and interest, if any, on
the Notes will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full in cash or Cash Equivalents of all
Senior Debt of the Issuer, whether outstanding on the date of the
Indenture or thereafter incurred.
Upon any distribution to creditors of the Issuer in a liquidation
or dissolution of the Issuer or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Issuer or
its property, an assignment for the benefit of creditors or any marshaling
of the Issuer's assets and liabilities, the holders of Senior Debt of the
Issuer will be entitled to receive payment in full in cash or Cash
Equivalents of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the
rate specified in the applicable Senior Debt, regardless of whether such
interest is an allowed claim in such proceeding) before the Holders of
Notes will be entitled to receive any payment with respect to the Notes,
and until all Obligations with respect to Senior Debt are paid in full,
any distribution to which the Holders of Notes would be entitled shall be
made to the holders of Senior Debt (except that Holders of Notes may
receive Permitted Junior Securities and payments made from the trust
described under the caption "--Legal Defeasance and Covenant Defeasance").
The Issuer also may not make any payment upon or in respect of the
Notes (except in Permitted Junior Securities or from the trust described
under the caption "--Legal Defeasance and Covenant Defeasance") if (i) a
default in the payment of the principal of or premium or interest, if any,
on any Designated Senior Debt occurs and is continuing or (ii) any other
default occurs and is continuing with respect to any Designated Senior
Debt that permits holders of the Designated Senior Debt as to which such
default relates to accelerate its maturity and the Trustee receives a
notice of such default (a "Payment Blockage Notice") from the Issuer or
<PAGE>
the holders of such Designated Senior Debt. Payments on the Notes may and
shall be resumed (a) in the case of a payment default, upon the date on
which such default is cured or waived and (b) in case of a nonpayment
default, the earlier of the date on which such nonpayment default is cured
or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Debt has been accelerated. No new period of payment blockage may be
commenced unless and until 360 days have elapsed since the effectiveness
of the immediately prior Payment Blockage Notice. No nonpayment default
that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice unless such default shall have been
cured or waived for a period of not less than 180 consecutive days.
The Indenture further requires that the Issuer promptly notify
holders of Senior Debt if payment of the Notes is accelerated because of
an Event of Default.
As a result of the subordination provisions described above, in
the event of a liquidation or insolvency, Holders of Notes may recover
less ratably than creditors of the Issuer who are holders of Senior Debt.
As of May 17, 1998, the Issuer had approximately $64.3 million of Senior
Debt outstanding. The Issuer will be able to incur additional Senior Debt
in the future, subject to certain limitations. See "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock".
"Designated Senior Debt" means (i) so long as the Senior Bank Debt
is outstanding, any Indebtedness outstanding under the Senior Bank Debt
and (ii) at any time thereafter, any other Senior Debt or Guarantor Senior
Debt permitted under the Indenture the principal amount of which is $15.0
million or more and that has been designated by the Issuer as "Designated
Senior Debt".
"Guarantor Senior Debt" means with respect to any Guarantor
(i) all Indebtedness of such Guarantor outstanding under Credit Facilities
and all Hedging Obligations with respect thereto, (ii) any other
Indebtedness of such Guarantor permitted to be incurred under the terms of
the Indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is subordinated in right of payment to
the Subsidiary Guarantee of such Guarantor and (iii) all Obligations of
such Guarantor with respect to the foregoing. Notwithstanding anything to
the contrary in the foregoing, Guarantor Senior Debt will not include
(a) any liability for federal, state, local or other taxes owed or owing
by such Guarantor, (b) any Indebtedness of such Guarantor to any of its
Subsidiaries or other Affiliates, (c) any trade payables or (d) any
Indebtedness that is incurred in violation of the Indenture.
"Permitted Junior Securities" means Equity Interests in the Issuer
or debt securities of the Issuer or the relevant Guarantor that are
subordinated to all Senior Debt (and any debt securities issued in
exchange for Senior Debt) or Guarantor Senior Debt (and any debt
securities issued in exchange for Guarantor Senior Debt), as applicable,
to substantially the same extent as, or to a greater extent than, the
Notes are subordinated to Senior Debt or the Subsidiary Guarantees are
<PAGE>
subordinated to Guarantor Senior Debt, as applicable, pursuant to the
Indenture.
"Senior Bank Debt" means all Obligations under or in respect of
the Senior Credit Facility, together with any refunding, refinancing or
replacement, in whole or in part, of such Indebtedness.
"Senior Debt" of the Issuer means (i) all Indebtedness of the
Issuer outstanding under Credit Facilities and all Hedging Obligations
with respect thereto, (ii) any other Indebtedness of the Issuer permitted
to be incurred under the terms of the Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is
subordinated in right of payment to the Notes and (iii) all Obligations of
the Issuer with respect to the foregoing. Notwithstanding anything to the
contrary in the foregoing, Senior Debt of the Issuer will not include (a)
any liability for federal, state, local or other taxes owed or owing by
the Issuer, (b) any Indebtedness of the Issuer to any of its Subsidiaries
or other Affiliates, (c) any trade payables or (d) any Indebtedness that
is incurred in violation of the Indenture.
Optional Redemption
Except as set forth in the following paragraph, the Notes will not
be redeemable at the Issuer's option prior to March 1, 2003. Thereafter,
the Notes will be subject to redemption at any time or from time to time
at the option of the Issuer, in whole or in part, upon not less than 30
nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest, if any, thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on March 1 of the years indicated
below:
Percentage of
Principal
Year Amount
---- -------------
2003 . . . . . . . . . . . . . . . . . 105.125%
2004 . . . . . . . . . . . . . . . . . 102.562%
2005 and thereafter . . . . . . . . . . 100.000%
Notwithstanding the foregoing, prior to March 1, 2001, the Issuer
may redeem up to 35% of the aggregate principal amount of Notes originally
issued under the Indenture at a redemption price of 110.25% of the
principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the redemption date, with the net cash proceeds of one or more
public offerings of Capital Stock of (i) the Issuer or (ii) Holdings to
the extent the net cash proceeds thereof are (a) contributed to the Issuer
as a capital contribution to the common equity of the Issuer or (b) used
to purchase Equity Interests of the Issuer (in either case, other than
Disqualified Stock); provided that (i) at least 65% of the aggregate
principal amount of the Notes remain outstanding immediately after the
occurrence of such redemption (excluding Notes held by the Issuer and its
<PAGE>
Subsidiaries) and (ii) each such redemption shall occur within 90 days
after the date of the closing of any such offering of Capital Stock of the
Issuer.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection
of Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on
which the Notes are listed, or, if the Notes are not so listed, on a pro
rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided that no Notes of $1,000 or less shall be redeemed in
part. Notices of redemption shall be mailed by first class mail at least
30 but not more than 60 days before the redemption date to each Holder of
Notes to be redeemed at its registered address. Notices of redemption may
not be conditional. If any Note is to be redeemed in part only, the notice
of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Note. Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them
called for redemption.
Mandatory Redemption
Except as set forth below under the caption "--Repurchase at the
Option of Holders", the Issuer is not required to make mandatory
redemption or sinking fund payments with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, the Issuer will be
obligated to make an offer (a "Change of Control Offer") to each Holder of
Notes to repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of such Holder's Notes pursuant to the offer described
below (the "Change of Control Offer") at an offer price in cash equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the date of purchase (the "Change of Control
Payment"). Within 30 days following any Change of Control, the Issuer will
mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase Notes on
the date specified in such notice, which date shall be no earlier than 30
days and no later than 75 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by
the Indenture and described in such notice. The Issuer will comply with
the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
<PAGE>
regulations are applicable in connection with the repurchase of the Notes
as a result of a Change of Control.
On the Change of Control Payment Date, the Issuer will, to the
extent lawful, (i) accept for payment all Notes or portions thereof
properly tendered pursuant to the Change of Control Offer, (ii) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all Notes or portions thereof so tendered and (iii) deliver or
cause to be delivered to the Trustee the Notes so accepted together with
an Officers' Certificate stating the aggregate principal amount of Notes
or portions thereof being purchased by the Issuer. The Paying Agent will
promptly mail to each Holder of Notes so tendered the Change of Control
Payment for such Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Note
equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture
provides that, prior to complying with the provisions of this covenant,
but in any event within 90 days following a Change of Control, the Issuer
will either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt
to permit the repurchase of Notes required by this covenant. The Issuer
will publicly announce the results of the Change of Control Offer on or as
soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be
applicable whether or not any other provisions of the Indenture are
applicable. Except as described above with respect to a Change of Control,
the Indenture does not contain provisions that permit the Holders of the
Notes to require the Issuer to repurchase or redeem the Notes in the event
of a takeover, recapitalization or similar transaction.
The Senior Credit Facility prohibits, and future credit agreements
or other agreements relating to Senior Debt to which the Issuer becomes a
party may prohibit, the Issuer from purchasing any Notes following a
Change of Control and provide that certain change of control events with
respect to the Issuer would constitute a default thereunder. In the event
a Change of Control occurs at a time when the Issuer is prohibited from
purchasing Notes, the Issuer could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Issuer does not obtain such a consent or
repay such borrowings, the Issuer will remain prohibited from purchasing
Notes. The Issuer's failure to purchase tendered Notes following a Change
of Control would constitute an Event of Default under the Indenture which
would, in turn, constitute a default under the Senior Credit Facility. In
such circumstances, the subordination provisions in the Indenture would
likely restrict payments to the Holders of Notes. See "--Subordination".
The Issuer will not be required to make a Change of Control Offer
following a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control
Offer made by the Issuer and purchases all Notes validly tendered and not
withdrawn under such Change of Control Offer.
<PAGE>
Asset Sales
The Indenture provides that the Issuer will not, and will not
permit any of its Restricted Subsidiaries to, consummate an Asset Sale
unless (i) the Issuer or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to
the fair market value (evidenced by a resolution of the Board of Directors
set forth in an Officers' Certificate delivered to the Trustee) of the
assets or Equity Interests issued or sold or otherwise disposed of and
(ii) at least 75% of the consideration therefor received by the Issuer or
such Restricted Subsidiary is in the form of cash; provided that the
amount of (a) any liabilities (as shown on the Issuer's or such Restricted
Subsidiary's most recent balance sheet) of the Issuer or such Restricted
Subsidiary (other than contingent liabilities and liabilities that are by
their terms subordinated to the Notes or any guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases the Issuer or such Restricted Subsidiary
from further liability and (b) any securities, notes or other obligations
received by the Issuer or such Restricted Subsidiary from such transferee
that are contemporaneously (subject to ordinary settlement periods)
converted by the Issuer or such Restricted Subsidiary into cash (to the
extent of the cash received) shall be deemed to be cash for purposes of
this provision.
Notwithstanding the immediately preceding paragraph, the Issuer
and its Restricted Subsidiaries will be permitted to consummate an Asset
Sale without complying with such paragraph if (i) the Issuer or the
applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or other property sold, issued or otherwise
disposed of (as evidenced by a resolution of the Issuer's Board of
Directors set forth in an Officers' Certificate delivered to the Trustee),
and (ii) at least 75% of the consideration for such Asset Sale constitutes
assets or other property of a kind usable by the Issuer and its Restricted
Subsidiaries in a Permitted Business; provided that any consideration not
constituting assets or property of a kind usable by the Issuer and its
Restricted Subsidiaries in a Permitted Business on the date of such Asset
Sale received by the Issuer or any of its Restricted Subsidiaries in
connection with any Asset Sale permitted to be consummated under this
paragraph shall constitute Net Proceeds subject to the provisions of the
immediately succeeding paragraph.
Within 270 days of the receipt of any Net Proceeds from an Asset
Sale, the Issuer may apply such Net Proceeds, at its option, (i) to repay
Senior Debt (and to correspondingly reduce commitments with respect
thereto in the case of revolving borrowings) or (ii) to the acquisition of
a controlling interest in a Permitted Business, the making of a capital
expenditure or the acquisition of other long-term assets, in each case,
used or useful in a Permitted Business. Pending the final application of
any such Net Proceeds, the Issuer may temporarily reduce Senior Debt or
otherwise invest such Net Proceeds in any manner that is not prohibited by
the Indenture. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $10.0 million, the Issuer will be required to make
an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Notes that may be purchased out of the Excess
<PAGE>
Proceeds at an offer price in cash in an amount equal to 100% of the
principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the date of purchase, in accordance with the procedures set
forth in the Indenture. To the extent that the aggregate amount of Notes
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds,
the Issuer may use any remaining Excess Proceeds for any purpose not
otherwise prohibited by the Indenture. If the aggregate principal amount
of Notes surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes to be purchased on a pro rata
basis. Upon completion of an Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
Certain Covenants
Restricted Payments
The Indenture provides that the Issuer will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any other payment or distribution
on account of the Issuer's or any of its Restricted Subsidiary's Equity
Interests (including, without limitation, any payment in connection with
any merger or consolidation involving the Issuer or any Restricted
Subsidiary) or to any direct or indirect holders of the Issuer's Equity
Interests in their capacity as such (other than dividends or distributions
(a) payable in Equity Interests (other than Disqualified Stock) of the
Issuer or (b) to the Issuer or any Wholly Owned Restricted Subsidiary of
the Issuer); (ii) purchase, redeem or otherwise acquire or retire for
value (including, without limitation, in connection with any merger or
consolidation involving the Issuer) any Equity Interests of the Issuer or
any direct or indirect parent of the Issuer (other than any such Equity
Interests owned by the Issuer or any Wholly Owned Restricted Subsidiary of
the Issuer); (iii) make any payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness
of the Issuer or any Restricted Subsidiary that is subordinated to the
Notes, except a payment of interest or principal at Stated Maturity; or
(iv) make any Restricted Investment (all such payments and other actions
set forth in clauses (i) through (iv) above being collectively referred to
as "Restricted Payments"), unless, at the time of and after giving effect
to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Issuer would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have
been permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the first paragraph
of the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount
of all other Restricted Payments made by the Issuer and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted
<PAGE>
Payments permitted by clauses (ii), (iii) and (iv) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Issuer for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Issuer's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Issuer as a
contribution to its common equity capital or from the issue or sale since
the date of the Indenture of Equity Interests of the Issuer (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or
debt securities of the Issuer that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Issuer and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus (iii) 50% of any dividends
received by the Issuer or a Wholly Owned Restricted Subsidiary after the
date of the Indenture from an Unrestricted Subsidiary of the Issuer, to
the extent that such dividends were not otherwise included in Consolidated
Net Income of the Issuer for such period, plus (iv) to the extent that any
Restricted Investment that was made after the date of the Indenture is
sold for cash or otherwise liquidated or repaid for cash, the lesser of
(A) the cash return of capital with respect to such Restricted Investment
(less the cost of disposition, if any) and (B) the initial amount of such
Restricted Investment, plus (v) to the extent that any Unrestricted
Subsidiary is redesignated as a Restricted Subsidiary after the date of
the Indenture, the fair market value of the Issuer's Investment in such
Subsidiary as of the date of such redesignation.
The foregoing provisions will not prohibit (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would have complied with the provisions
of the Indenture; (ii) the redemption, repurchase, retirement, defeasance
or other acquisition of any Equity Interests of the Issuer or subordinated
Indebtedness of the Issuer or any Guarantor in exchange for, or out of the
net cash proceeds of the substantially concurrent sale (other than to a
Subsidiary of the Issuer) of, other Equity Interests of the Issuer (other
than any Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from clause
(c)(ii) of the preceding paragraph; (iii) the defeasance, redemption,
repurchase or other acquisition of subordinated Indebtedness with the net
cash proceeds from an incurrence of Permitted Refinancing Indebtedness;
(iv) the payment of any dividend by a Restricted Subsidiary of the Issuer
to the holders of its Equity Interests on a pro rata basis; (v) (a) the
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Issuer or any Restricted Subsidiary of the Issuer
held by any member of the Issuer's (or any of its Restricted
Subsidiaries') management or Board of Directors pursuant to any management
equity subscription agreement, stock option agreement or other similar
agreement and (b) the payment of dividends to Holdings to permit Holdings
to repurchase, redeem, or otherwise acquire or retire for value any Equity
Interests of Holdings or any Restricted Subsidiary of Holdings held by any
member of Holdings' (or any of its Restricted Subsidiaries') management or
Board of Directors pursuant to any management equity subscription
agreement, stock option agreement or other similar agreement; provided
<PAGE>
that the aggregate price paid for all such repurchased, redeemed, acquired
or retired Equity Interests shall not exceed $1.0 million in any
twelve-month period and no Default or Event of Default shall have occurred
and be continuing immediately after such transaction; (vi) following the
initial public offering of common stock of the Issuer or Holdings, the
payment of dividends by the Issuer in an aggregate amount in any year not
to exceed 6% of the aggregate net cash proceeds received by the Issuer in
connection with such initial public offering and any subsequent public
offering of common stock of the Issuer or Holdings; provided, however,
that no Default or Event of Default shall have occurred and be continuing
immediately after such transaction; (vii) repurchases of Capital Stock
deemed to occur upon exercise of stock options if such Capital Stock
represents a portion of the exercise price of such options; (viii) any
payment by the Issuer to Holdings to permit Holdings to pay any federal,
state, local or other taxes that are then actually due and owing by
Holdings; (ix) the payment of dividends to Holdings to the extent required
to pay general corporate and overhead expenses incurred by Holdings;
provided that such amounts shall not exceed $1.0 million in any
twelve-month period; (x) the payment of dividends to Holdings to permit
Holdings to redeem its Senior Notes and Convertible Notes; (xi) the
payment of dividends to Holdings to permit Holdings to pay any Merger
Consideration and any transaction costs in connection with the
Transactions; provided that such amounts shall not exceed $5.0 million in
the aggregate; (xii) the payment of dividends to Holdings to permit
Holdings to pay financial advisory, financing, underwriting or placement
fees to Cypress and its Affiliates; (xiii) the payment of dividends to
Holdings to permit Holdings to pay any employment, noncompetition,
compensation or confidentiality arrangements entered into with its
employees in the ordinary course of business; (xiv) the payment of
dividends to Holdings to permit Holdings to pay fees and indemnities to
directors and officers of Holdings; and (xv) other Restricted Payments in
an aggregate amount not to exceed $10.0 million.
The Board of Directors may designate any Restricted Subsidiary to
be an Unrestricted Subsidiary if such designation would not cause a
Default. For purposes of making such determination, all outstanding
Investments by the Issuer and its Restricted Subsidiaries (except to the
extent repaid in cash) in the Subsidiary so designated will be deemed to
be Restricted Payments at the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant. All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the fair market value of such
Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and
if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
Any such designation by the Board of Directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
If, at any time, any Unrestricted Subsidiary would fail to meet the
definition of an Unrestricted Subsidiary, it shall thereafter cease to be
an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Issuer as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "--Incurrence of Indebtedness and
<PAGE>
Issuance of Preferred Stock", the Issuer shall be in default of such
covenant). The Board of Directors of the Issuer may at any time designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that
such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Issuer of any outstanding Indebtedness of
such Unrestricted Subsidiary and such designation shall only be permitted
if (i) such Indebtedness is permitted under the covenant described under
the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock", calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period and (ii) no
Default or Event of Default would be in existence immediately following
such designation.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Issuer will not, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt) or
issue any shares of Disqualified Stock and will not permit any of its
Subsidiaries to incur Indebtedness or issue shares of preferred stock;
provided, however, that, so long as no Default or Event of Default has
occurred and is continuing, the Issuer may incur Indebtedness (including
Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge
Coverage Ratio for the Issuer's most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or
such Disqualified Stock is issued would have been at least 2.0 to 1.0,
determined on a pro forma basis (including a pro forma application of the
net proceeds therefrom), as if the additional Indebtedness had been
incurred or the Disqualified Stock had been issued at the beginning of
such four-quarter period.
The provisions of the first paragraph of this covenant will not
apply to the incurrence of any of the following (collectively, "Permitted
Debt"):
(i) the incurrence by the Issuer and the Guarantors of
Indebtedness under one or more Credit Facilities in an aggregate
principal amount at any time outstanding not to exceed $195.0
million (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of the Issuer and
the Guarantors thereunder), less the aggregate amount of all Net
Proceeds of Asset Sales applied to repay any such Indebtedness
pursuant to clause (i) of the second paragraph of the covenant
described above under the caption "--Repurchase at the Option of
Holders--Asset Sales";
(ii) the incurrence by the Issuer and the Guarantors of
Indebtedness represented by the Notes, the Exchange Notes and any
Subsidiary Guarantees;
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(iii) the incurrence by the Issuer and its Restricted
Subsidiaries of the Existing Indebtedness;
(iv) the incurrence by the Issuer or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange
for, or the net proceeds of which are used to refund, refinance or
replace Indebtedness (other than intercompany Indebtedness) that
was permitted by the Indenture to be incurred by the first
paragraph of this covenant, or by clauses (ii), (iii), (iv), (vi),
(vii), (viii), (ix), (x) and (xii);
(v) the incurrence of Indebtedness between or among the
Issuer and any of its Wholly Owned Restricted Subsidiaries;
provided, however, that (a) if the Issuer is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the
prior payment in full of all Obligations with respect to the Notes
and (b) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other
than the Issuer or a Wholly Owned Restricted Subsidiary, and any
sale or other transfer of any such Indebtedness to a Person that
is not either the Issuer or a Wholly Owned Restricted Subsidiary,
shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Issuer or such Restricted Subsidiary, as the
case may be;
(vi) the incurrence by the Issuer or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the
purpose of fixing or hedging interest rate risk with respect to
any floating rate Indebtedness that is permitted by the terms of
this Indenture to be outstanding;
(vii) the incurrence by any of the Issuer's Restricted
Subsidiaries of Indebtedness or Preferred Stock incurred and
outstanding on or prior to the date on which such Restricted
Subsidiary was acquired by the Issuer (other than Indebtedness or
preferred stock incurred in connection with, or to provide all or
any portion of the funds or credit support utilized to consummate,
the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Issuer); provided that the principal amount
(or accreted value, as applicable) or aggregate liquidation
preference, as applicable, of such Indebtedness or Preferred
Stock, as the case may be, together with any other outstanding
Indebtedness and Preferred Stock incurred pursuant to this clause
(vii) does not exceed $5.0 million;
(viii) the incurrence by the Issuer or any Restricted Subsidiary
of Indebtedness (including Capital Lease Obligations) financing
the purchase, lease or improvement of property (real or personal)
or equipment (whether through the direct purchase of assets or the
Capital Stock of any Person owning such assets), in each case,
incurred no more than 180 days after such purchase, lease or
improvement of such property in respect of such Indebtedness;
provided, however, at the time of the incurrence of such
<PAGE>
Indebtedness and after giving effect thereto, the aggregate
principal amount of all Indebtedness incurred pursuant to this
clause (viii) and then outstanding shall not exceed the greater of
$10.0 million and 10% of Adjusted Consolidated Assets;
(ix) the incurrence by the Issuer of Indebtedness in
connection with the acquisition of a Permitted Business in respect
of such Indebtedness; provided, however, that the aggregate amount
of Indebtedness incurred pursuant to this clause (ix) and then
outstanding shall not exceed $20.0 million;
(x) the guarantee by the Issuer or any of the Guarantors of
Indebtedness that was permitted to be incurred by another
provision of this covenant;
(xi) the incurrence by the Issuer's Unrestricted Subsidiaries
of Non-Recourse Debt, provided, however, that if any such
Indebtedness ceases to be Non-Recourse Debt of an Unrestricted
Subsidiary, such event shall be deemed to constitute an incurrence
of Indebtedness by a Restricted Subsidiary of the Issuer that was
not permitted by this clause (xi); and
(xii) the incurrence by the Issuer or its Restricted
Subsidiaries of Indebtedness in an aggregate principal amount
which, together with all other Indebtedness of the Issuer
outstanding on the date of such incurrence (other than
Indebtedness permitted by clauses (i) through (xi) above or the
first paragraph of this covenant) does not exceed $30.0 million;
provided that the aggregate principal amount of Indebtedness
incurred by Restricted Subsidiaries of the Company pursuant to
this clause (xii) and then outstanding shall not exceed $2.0
million.
For purposes of determining compliance with this covenant, in the
event that an item of Indebtedness meets the criteria of more than one of
the categories of Permitted Debt described in clauses (i) through (xii)
above or is entitled to be incurred pursuant to the first paragraph of
this covenant, the Issuer shall, in its sole discretion, classify such
item of Indebtedness in any manner that complies with this covenant and
such item of Indebtedness will be treated as having been incurred pursuant
to only one of such clauses or pursuant to the first paragraph hereof.
Accrual of interest, the accretion of accreted value, the payment of
interest on any Indebtedness in the form of additional Indebtedness with
the same terms and the payment of dividends on preferred stock in the form
of additional shares of the same class of preferred stock will not be
deemed to be an incurrence of Indebtedness or an issuance of preferred
stock for purposes of this covenant; provided, in each such case, that the
amount thereof is included in the Fixed Charges of the Issuer as accrued.
<PAGE>
Limitation on Other Senior Subordinated Debt
The Indenture provides that (i) the Issuer will not directly or
indirectly incur any Indebtedness that is subordinate or junior in right
of payment to any Senior Debt and senior in any respect in right of
payment to the Notes and (ii) no Guarantor will incur any Indebtedness
that is subordinate or junior in right of payment to its Guarantor Senior
Debt and senior in any respect in right of payment to such Guarantor's
Subsidiary Guarantee.
Liens
The Indenture provides that the Issuer will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien securing Indebtedness or
trade payables on any asset now owned or hereafter acquired, or any income
or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
Sale and Leaseback Transactions
The Indenture provides that the Issuer will not, and will not
permit any of its Restricted Subsidiaries to, enter into any sale and
leaseback transaction; provided that the Issuer and the Guarantors may
enter into a sale and leaseback transaction if (i) the Issuer or such
Guarantor could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant
to the Fixed Charge Coverage Ratio test set forth in the first paragraph
of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to
secure such Indebtedness pursuant to the covenant described above under
the caption "--Liens", (ii) the gross cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as
determined in good faith by the Board of Directors and set forth in an
Officers' Certificate delivered to the Trustee) of the property that is
the subject of such sale and leaseback transaction and (iii) the transfer
of assets in such sale and leaseback transaction is permitted by, and the
proceeds of such transaction are applied in compliance with, the covenant
described above under the caption "--Repurchase at the Option of Holders--
Asset Sales".
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Issuer will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i)(a) pay dividends or make any other distributions to the
Issuer or any of its Restricted Subsidiaries (1) on its Capital Stock or
(2) with respect to any other interest or participation in, or measured
by, its profits, or (b) pay any indebtedness owed to the Issuer or any of
its Restricted Subsidiaries, (ii) make loans or advances to the Issuer or
any of its Restricted Subsidiaries or (iii) transfer any of its properties
or assets to the Issuer or any of its Restricted Subsidiaries, except for
<PAGE>
such encumbrances or restrictions existing under or by reason of
(a) Existing Indebtedness as in effect on the date of the Indenture,
(b) the Senior Credit Facility as in effect as of the date of the
Indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof;
provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacement or refinancings are no
more restrictive with respect to such dividend and other payment
restrictions than those contained in the Senior Credit Facility as in
effect on the date of the Indenture, (c) the Indenture, the Notes, the
Exchange Notes and the Subsidiary Guarantees, (d) applicable law, (e) any
instrument governing Indebtedness or Capital Stock of a Person acquired by
the Issuer or any of its Restricted Subsidiaries as in effect at the time
of such acquisition (except to the extent such Indebtedness was incurred
in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired; provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred, (f) by reason of customary non-assignment or
subletting provisions in leases entered into in the ordinary course of
business and consistent with past practices, (g) purchase money
obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (h) in the case of clause (iii) above, restrictions
contained in security agreements or mortgages securing Indebtedness of a
Restricted Subsidiary to the extent such restrictions restrict the
transfer of the property subject to such security agreements or mortgages,
(i) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all
or substantially all of the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition, or (j)
Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Issuances and Sales of Equity Interests in Wholly Owned Restricted
Subsidiaries
The Indenture provides that the Issuer (i) will not, and will not
permit any Wholly Owned Restricted Subsidiary of the Issuer to, transfer,
convey, sell, lease or otherwise dispose of any Equity Interests in any
Wholly Owned Restricted Subsidiary of the Issuer to any Person (other than
the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer), unless
(a) such transfer, conveyance, sale, lease or other disposition is of all
the Equity Interests in such Wholly Owned Restricted Subsidiary and
(b) the cash Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described
above under the caption "--Repurchase at the Option of Holders Asset
Sales", and (ii) will not permit any Wholly Owned Restricted Subsidiary of
the Issuer to issue any of its Equity Interests (other than, if necessary,
shares of its Capital Stock constituting directors' qualifying shares) to
any Person other than to the Issuer or a Wholly Owned Restricted
Subsidiary of the Issuer.
<PAGE>
Merger, Consolidation or Sale of Assets
The Indenture provides that the Issuer may not consolidate or
merge with or into (whether or not the Issuer is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or
more related transactions, to another corporation, Person or entity unless
(i) the Issuer is the surviving corporation or the entity or the Person
formed by or surviving any such consolidation or merger (if other than the
Issuer) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia; (ii) the entity or Person formed by or surviving any
such consolidation or merger (if other than the Issuer) or the entity or
Person to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made assumes all the obligations of the
Issuer under the Notes, the Indenture and the Registration Rights
Agreement pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a
merger of the Issuer with or into a Wholly Owned Restricted Subsidiary of
the Issuer, the Issuer or the entity or Person formed by or surviving any
such consolidation or merger (if other than the Issuer), or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall
have been made (a) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the
Issuer immediately preceding the transaction and (b) will, at the time of
such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Incurrence
of Indebtedness and Issuance of Preferred Stock". Notwithstanding clause
(iv) above, the Issuer may consolidate with or merge with or into
(A) another Person if such Person is a single purpose corporation that has
not conducted any business or incurred any Indebtedness or other
liabilities and such transaction is being consummated solely to change the
state of incorporation of the Issuer or (B) Holdings; provided, however,
that, in the case of clause (B), (x) Holdings shall not have owned any
assets other than assets owned by Holdings on the date of the Indenture,
including the Capital Stock of the Issuer (and other immaterial assets
incidental to its ownership of such Capital Stock) or conducted any
business other than owning the Capital Stock of the Issuer, (y) Holdings
shall not have any Indebtedness or other liabilities (other than ordinary
course liabilities incidental to its ownership of the Capital Stock of the
Issuer) and (z) immediately after giving effect to such consolidation or
merger, the Issuer, Holdings or the Person formed by or surviving such
consolidation or merger (if other than the Issuer or Holdings) shall have
a pro forma Fixed Charge Coverage Ratio that is not less than the Fixed
Charge Coverage Ratio of the Issuer immediately prior to such consolidation
or merger.
Transactions with Affiliates
(a) The Indenture provides that the Issuer will not, and will not
permit any of its Restricted Subsidiaries to, make any payment to, or
sell, lease, transfer or otherwise dispose of any of its properties or
<PAGE>
assets to, or purchase any property or assets from, or enter into or make
or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of
the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate
Transaction is on terms that are no less favorable to the Issuer or such
Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Issuer or such Restricted Subsidiary with an
unrelated Person and (ii) the Issuer delivers to the Trustee (a) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $2.0 million,
a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by
a majority of the disinterested members of the Board of Directors and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to the Issuer of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
(b) The provisions of the foregoing paragraph (a) shall not
prohibit (i) any Restricted Payment permitted to be paid pursuant to the
covenant described under the caption "--Restricted Payments", (ii) any
issuance of securities, or other payments, benefits, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the
Board of Directors of the Issuer, (iii) the grant of stock options or
similar rights to employees and directors of the Issuer pursuant to plans
approved by the Board of Directors, (iv) loans or advances to employees in
the ordinary course of business in accordance with the past practices of
the Issuer or its Restricted Subsidiaries, but in any event not to exceed
$2.0 million in the aggregate outstanding at any one time, (v) the payment
of reasonable fees to directors of the Issuer and its Restricted
Subsidiaries who are not employees of the Issuer or its Restricted
Subsidiaries, (vi) any payment by the Issuer to Holdings to permit
Holdings to pay any federal, state, local or other taxes that are then
actually due and owing by Holdings, (vii) indemnification agreements with,
and the payment of fees and indemnities to, directors, officers and
employees of the Issuer and its Restricted Subsidiaries, in each case, in
the ordinary course of business, (viii) any employment, compensation,
noncompetition or confidentiality agreement entered into by the Issuer and
its Restricted Subsidiaries with its employees in the ordinary course of
business, (ix) the payment by the Issuer of fees, expenses and other
amounts to Cypress and its Affiliates in connection with the Merger;
provided that the aggregate amount paid under this clause (ix) shall not
exceed $5.0 million, (x) payments by the Issuer or any of its Restricted
Subsidiaries to Cypress and its Affiliates made pursuant to any financial
advisory, financing, underwriting or placement agreement, or in respect of
other investment banking activities, in each case, as determined by the
Board of Directors in good faith, (xi) any agreement as in effect as of
the date of the Indenture or any amendment or replacement thereto or any
transaction contemplated thereby so long as any such amendment or
replacement agreement is not more disadvantageous to the Holders of the
Notes in any material respect than the original agreement as in effect on
the date of the Indenture, and (xii) any Affiliate Transaction between the
Issuer and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries
of the Issuer.
<PAGE>
Subsidiary Guarantees
(a) The Indenture provides that the Issuer will not permit any
Restricted Subsidiary to guarantee the payment of any Indebtedness of the
Issuer or any Indebtedness of any other Restricted Subsidiary (in each
case, the "Guaranteed Debt") unless (i) if such Restricted Subsidiary is
not a Guarantor, such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for a
Subsidiary Guarantee of payment of the Notes by such Restricted
Subsidiary, (ii) if the Notes or the Subsidiary Guarantee (if any) of such
Restricted Subsidiary are subordinated in right of payment to the
Guaranteed Debt, the Subsidiary Guarantee under the supplemental indenture
shall be subordinated to such Restricted Subsidiary's guarantee with
respect to the Guaranteed Debt substantially to the same extent as the
Notes or the Subsidiary Guarantee are subordinated to the Guaranteed Debt
under the Indenture, (iii) if the Guaranteed Debt is by its express terms
subordinated in right of payment to the Notes or the Subsidiary Guarantee
(if any) of such Restricted Subsidiary, any such guarantee of such
Restricted Subsidiary with respect to the Guaranteed Debt shall be
subordinated in right of payment to such Restricted Subsidiary's
Subsidiary Guarantee with respect to the Notes substantially to the same
extent as the Guaranteed Debt is subordinated to the Notes or the
Subsidiary Guarantee (if any) of such Restricted Subsidiary, (iv) such
Restricted Subsidiary waives and will not in any manner whatsoever claim
or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Issuer or any
other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee, and (v) such Restricted
Subsidiary shall deliver to the Trustee an opinion of counsel to the
effect that (A) such Subsidiary Guarantee of the Notes has been duly
executed and authorized and (B) such Subsidiary Guarantee of the Notes
constitutes a valid, binding and enforceable obligation of such Restricted
Subsidiary, except insofar as enforcement thereof may be limited by
bankruptcy, insolvency or similar laws (including, without limitation, all
laws relating to fraudulent transfers) and except insofar as enforcement
thereof is subject to general principles of equity.
(b) Notwithstanding the foregoing and the other provisions of the
Indenture, any Subsidiary Guarantee by a Restricted Subsidiary of the
Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Issuer, of all of the
Issuer's Capital Stock in, or all or substantially all the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is not prohibited
by the Indenture) or (ii) the release or discharge of the guarantee which
resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such guarantee.
Reports
The Indenture provides that, whether or not required by the
rules and regulations of the Commission, so long as any Notes are
outstanding, the Issuer will furnish to the Holders of Notes (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Issuer was required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
<PAGE>
that describes the financial condition and results of operations of the
Issuer and its consolidated Subsidiaries (showing in reasonable detail,
either on the face of the financial statements or in the footnotes thereto
and in Management's Discussion and Analysis of Financial Condition and
Results of Operations, the financial condition and results of operations
of the Issuer and its Restricted Subsidiaries separate from the financial
information and results of operations of the Unrestricted Subsidiaries of
the Issuer) and, with respect to the annual information only, a report
thereon by the Issuer's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on
Form 8-K if the Issuer was required to file such reports, in each case,
within the time periods specified in the Commission's rules and
regulations. In addition, following the consummation of the exchange offer
contemplated by the Registration Rights Agreement, whether or not required
by the rules and regulations of the Commission, the Issuer will file a
copy of all such information and reports with the Commission for public
availability within the time periods specified in the Commission's rules
and regulations (unless the Commission will not accept such a filing) and
make such information available to securities analysts and prospective
investors upon request. In addition, the Issuer has agreed that, for so
long as any Notes remain outstanding, it will furnish to the Holders and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an
Event of Default: (i) default for 30 days in the payment when due of
interest on, if any, with respect to, the Notes (whether or not prohibited
by the subordination provisions of the Indenture), (ii) default in payment
when due of the principal of or premium, if any, on the Notes (whether or
not prohibited by the subordination provisions of the Indenture); (iii)
failure by the Issuer or any Restricted Subsidiary for 30 days to comply
with the provisions described under the captions "--Repurchase at the
Option of Holders--Change of Control", "--Repurchase at the Option of
Holders--Asset Sales", "--Certain Covenants--Restricted Payments", "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock" or "--Certain Covenants--Merger, Consolidation or Sale of Assets";
(iv) failure by the Issuer or any Restricted Subsidiary for 60 days after
written notice by the Trustee or the Holders of at least 25% in principal
amount of the then outstanding Notes to comply with any of its other
agreements in the Indenture or the Notes; (v) default under any mortgage,
indenture or instrument under which there may be issued or by which there
may be secured or evidenced any Indebtedness for money borrowed by the
Issuer or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Issuer or any of its Restricted Subsidiaries), whether
such Indebtedness or guarantee now exists or is created after the date of
the Indenture, which default (a) is caused by a failure to pay principal
of or premium, if any, or interest on such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on the date
of such default (a "Payment Default") or (b) results in the acceleration
of such Indebtedness prior to its express maturity and, in each case, the
principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates $25.0
<PAGE>
million or more; (vi) failure by the Issuer or any of its Significant
Subsidiaries to pay final judgments aggregating in excess of $25.0
million, which judgments are not paid, discharged or stayed for a period
of 60 days; (vii) except as permitted by the Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or
any Guarantor, or any Person acing on behalf of any Guarantor, shall deny
or disaffirm its obligations under its Subsidiary Guarantee; and (viii)
certain events of bankruptcy or insolvency with respect to the Issuer or
any of the Issuer's Restricted Subsidiaries that constitutes a Significant
Subsidiary or any group of Restricted Subsidiaries of the Issuer that,
taken together, would constitute a Significant Subsidiary. However, a
default under clauses (iii), (iv) and (vi) will not constitute an Event of
Default until the Trustee or the holders of 25% in aggregate principal
amount of the outstanding Notes notify the Issuer of the default and the
Issuer does not cure such default within the time specified after receipt
of such notice.
If any Event of Default occurs and is continuing, the Trustee or
the Holders of at least 25% in principal amount of the then outstanding
Notes may declare all the Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising
from certain events of bankruptcy or insolvency, with respect to the
Issuer, any Restricted Subsidiary of the Issuer that constitutes a
Significant Subsidiary or any group of Restricted Subsidiaries of the
Issuer that, taken together, would constitute a Significant Subsidiary,
all outstanding Notes will become due and payable without further action
or notice. Holders of the Notes may not enforce the Indenture or the Notes
except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes
may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the
payment of principal or interest) if it determines that withholding notice
is in their interest.
The Holders of a majority in aggregate principal amount of the
Notes then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Notes waive any existing Default or Event of Default
and its consequences under the Indenture except a continuing Default or
Event of Default in the payment of interest on, or the principal of, the
Notes.
The Issuer is required to deliver to the Trustee annually a
statement regarding compliance with the Indenture, and the Issuer are
required upon becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement specifying such Default or Event of
Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee or stockholder of the Issuer or any
Guarantor, as such, shall have any liability for any obligations of the
Issuer or any Guarantor under the Notes, the Subsidiary Guarantees, the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the Notes. Such waiver may not be
<PAGE>
effective to waive liabilities under the federal securities laws and it is
the view of the Commission that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Issuer may, at its option and at any time, elect to have all
of its obligations discharged with respect to the outstanding Notes and to
have each Guarantor's obligation discharged with respect to its Subsidiary
Guarantee ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Notes to receive payments in respect of the principal of and
premium and interest, if any, on the Notes when such payments are due from
the trust referred to below, (ii) the Issuer's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in
trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Issuer's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Issuer may,
at its option and at any time, elect to have the obligations of the Issuer
and each Guarantor released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under the
caption "--Events of Default and Remedies" will no longer constitute an
Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant
Defeasance, (i) the Issuer must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders of the Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of and
premium and interest, if any, on the outstanding Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Issuer must specify whether the Notes are being defeased to maturity or to
a particular redemption date; (ii) in the case of Legal Defeasance, the
Issuer shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that (a) the
Issuer has received from, or there has been published by, the Internal
Revenue Service a ruling or (b) since the date of the Indenture, there has
been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm
that, the Holders of the outstanding Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Issuer shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred; (iv) no Default or
Event of Default shall have occurred and be continuing on the date of such
<PAGE>
deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in
the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or
instrument (other than the Indenture) to which the Issuer or any of its
Subsidiaries is a party or by which the Issuer or any of its Subsidiaries
is bound; (vi) the Issuer shall have delivered to the Trustee an opinion
of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Issuer shall have delivered to the
Trustee an Officers' Certificate stating that the deposit was not made by
the Issuer with the intent of preferring the Holders of Notes over the
other creditors of the Issuer with the intent of defeating, hindering,
delaying or defrauding creditors of the Issuer or others; and (viii) the
Issuer shall have delivered to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided
for relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Issuer may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Issuer is not required to transfer or
exchange any Note selected for redemption. Also, the Issuer is not
required to transfer or exchange any Note for a period of 15 days before a
selection of Notes to be redeemed. The registered Holder of a Note will be
treated as the owner of it for all purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the
Indenture, the Notes and the Subsidiary Guarantees may be amended or
supplemented with the consent of the Holders of at least a majority in
principal amount of the Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender
offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture, the Notes or the
Subsidiary Guarantees may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including,
without limitation, consents obtained in connection with a purchase of or
tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or
waiver may not (with respect to any Notes held by a non-consenting
Holder): (i) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver, (ii) reduce the principal
of or change the fixed maturity of any Note or alter the provisions with
respect to the redemption of the Notes (other than provisions relating to
<PAGE>
the covenants described above under the caption "--Repurchase at the
Option of Holders"), (iii) reduce the rate of or change the time for
payment of interest on any Note, (iv) waive a Default or Event of Default
in the payment of principal of or premium or interest, if any, on the
Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and a
waiver of the payment default that resulted from such acceleration), (v)
make any Note payable in money other than that stated in the Notes,
(vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or premium or interest, if any, on the Notes,
(vii) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the caption
"--Repurchase at the Option of Holders"), (viii) release any Guarantor
from its Subsidiary Guarantee or (ix) make any change in the foregoing
amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination)
will require the consent of the Holders of at least 662/3% in aggregate
principal amount of the Notes then outstanding if such amendment would
adversely affect the rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder
of Notes, the Issuer, a Guarantor (with respect to a Subsidiary Guarantee
or the Indenture to which it is a party) and the Trustee may amend or
supplement the Indenture, the Notes or any Subsidiary Guarantee to cure
any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Issuer's or any Guarantor's obligations to Holders of
Notes in the case of a merger or consolidation or sale of substantially
all of the Issuer's assets, to make any change that would provide any
additional rights or benefits to the Holders of Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder
or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Issuer, to obtain payment of
claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply
to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then
outstanding Notes will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The Indenture provides that in
case an Event of Default shall occur (which shall not be cured), the
Trustee will be required, in the exercise of its power, to use the degree
of care of a prudent man in the conduct of his own affairs. Subject to
such provisions, the Trustee will be under no obligation to exercise any
of its rights or powers under the Indenture at the request of any Holder
<PAGE>
of Notes, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
Additional Information
Anyone who receives this Prospectus may obtain a copy of the
Indenture without charge by writing to Frank's Nursery & Crafts, Inc.,
1175 West Long Lake Road, Troy, Michigan 48098, Attention: Chief Financial
Officer.
Book-Entry, Delivery and Form
Except as set forth below, Exchange Notes will be issued in
registered, global form in minimum denominations of $1,000 and integral
multiples of $1,000 in excess thereof. Exchange Notes initially will be
represented by one or more Exchange Notes in registered, global form
without interest coupons (collectively, the "Global Exchange Notes"). The
Global Exchange Notes will be deposited with the Trustee as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee, in each case, for credit to
an account of a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Exchange Notes may be
transferred, in whole and not in part, only to another nominee of DTC or
to a successor of DTC or its nominee. Beneficial interests in the Global
Exchange Notes may not be exchanged for Exchange Notes in certificated
form except in the limited circumstances described below. See "--Exchange
of Book-Entry Exchange Notes for Certificated Exchange Notes". Except in
the limited circumstances described below, owners of beneficial interests
in the Global Exchange Notes will not be entitled to receive physical
delivery of Certificated Exchange Notes (as defined below).
Initially, the Trustee will act as Paying Agent and Registrar. The
Notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
Depository Procedures
The following description of the operations and procedures of DTC,
Euroclear and Cedel are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them from time to time.
The Issuer takes no responsibility for these operations and procedures and
urges investors to contact the system or their participants directly to
discuss these matters.
DTC has advised the Issuer that DTC is a limited-purpose trust
company created to hold securities for its participating organizations
<PAGE>
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants
through electronic book-entry changes in accounts of its Participants. The
Participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC
only through the Participants or the Indirect Participants. The ownership
interests in, and transfers of ownership interests in, each security held
by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Issuer that, pursuant to procedures
established by it, (i) upon deposit of the Global Exchange Notes, DTC will
credit the accounts of Participants with portions of the principal amount
of the Global Exchange Notes and (ii) ownership of such interests in the
Global Exchange Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with
respect to the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interest in the
Global Exchange Notes).
Investors in the Global Exchange Notes may hold their interests
therein directly through DTC, if they are Participants in such system, or
indirectly through organizations (including Euroclear and Cedel) which are
Participants in such system. All interests in a Global Exchange Note,
including those held through Euroclear or Cedel, may be subject to the
procedures and requirements of DTC. Those interests held through Euroclear
or Cedel may also be subject to the procedures and requirements of such
systems. The laws of some states require that certain persons take
physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global
Exchange Note to such persons will be limited to that extent. Because DTC
can act only on behalf of Participants, which in turn act on behalf of
Indirect Participants and certain banks, the ability of a person having
beneficial interests in a Global Exchange Note to pledge such interests to
persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by
the lack of a physical certificate evidencing such interests.
Except as described below, owners of interests in the Global
Exchange Notes will not have Exchange Notes registered in their names,
will not receive physical delivery of Exchange Notes in certificated form
and will not be considered the registered owners or "Holders" thereof
under the Indenture for any purpose.
Payments in respect of the principal of, and premium, if any, and
interest on a Global Exchange Note registered in the name of DTC or its
nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Issuer and the
Trustee will treat the persons in whose names the Exchange Notes,
including the Global Exchange Notes, are registered as the owners thereof
<PAGE>
for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, none of the Issuer, the Trustee or any
agent of the Issuer or the Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Participant's or
Indirect Participant's records relating to or payments made on account of
any beneficial ownership interest in the Global Exchange Notes, or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Exchange Notes or (ii) any other matter
relating to the actions and practices of DTC or any of its Participants or
Indirect Participants. DTC has advised the Issuer that its current
practice, upon receipt of any payment in respect of securities such as the
Exchange Notes (including principal and interest), is to credit the
accounts of the relevant Participants with the payment on the payment
date, in amounts proportionate to their respective holdings in the
principal amount of beneficial interest in the relevant security as shown
on the records of DTC unless DTC has reason to believe it will not receive
payment on such payment date. Payments by the Participants and the
Indirect Participants to the beneficial owners of Exchange Notes will be
governed by standing instructions and customary practices and will be the
responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the Trustee or the Issuer. Neither the
Issuer nor the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the Exchange Notes,
and the Issuer and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all
purposes.
Except for trades involving only Euroclear and Cedel participants,
interests in the Global Exchange Notes are expected to be eligible to
trade in DTC's Same-Day Funds Settlement System and secondary market
trading activity in such interests will, therefore, settle in immediately
available funds, subject in all cases to the rules and procedures of DTC
and its Participants. See "--Same Day Settlement and Payment".
Transfers between Participants in DTC will be effected in
accordance with DTC's procedures and will be settled in same day funds,
and transfers between participants in Euroclear and Cedel will be effected
in the ordinary way in accordance with their respective rules and
operating procedures. Cross-market transfers between the Participants in
DTC, on the one hand, and Euroclear or Cedel participants, on the other
hand, will be effected through DTC in accordance with DTC's rules on
behalf of Euroclear or Cedel, as the case may be, by its respective
depository; however, such cross-market transactions will require delivery
of instructions to Euroclear or Cedel, as the case may be, by the
counterparty in such system in accordance with the rules and procedures
and within the established deadlines (Brussels time) of such system.
Euroclear or Cedel, as the case may be, will, if the transaction meets its
settlement requirements, deliver instructions to its respective depository
to take action to effect final settlement on its behalf by delivering or
receiving interests in the relevant Global Exchange Note in DTC, and
making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Cedel participants may not deliver instructions directly to the
depositories for Euroclear or Cedel.
<PAGE>
DTC has advised the Issuer that it will take any action permitted
to be taken by a Holder of Exchange Notes only at the direction of one or
more Participants to whose account DTC has credited the interests in the
Global Exchange Notes and only in respect of such portion of the aggregate
principal amount of the Exchange Notes as to which such Participant or
Participants has or have given such direction. However if there is an
Event of Default under the Exchange Notes, DTC reserves the right to
exchange the Global Exchange Notes for legended Exchange Notes in
certificated form, and to distribute such Exchange Notes to its
Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Exchange
Notes among Participants in DTC, Euroclear and Cedel, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Issuer nor the
Trustee nor any of their respective agents will have any responsibility
for the performance by DTC, Euroclear or Cedel or their respective
participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
Exchange of Book-Entry Exchange Notes for Certificated Exchange
Notes
A Global Exchange Note is exchangeable for definitive Exchange
Notes in registered certificated form ("Certificated Exchange Notes") if
(i) DTC (x) notifies the Issuer that it is unwilling or unable to continue
as depositary for the Global Exchange Notes and the Issuer thereupon fails
to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Issuer, at its option,
notifies the Trustee in writing that it elects to cause the issuance of
the Certificated Exchange Notes or (iii) there shall have occurred and be
continuing a Default or Event of Default with respect to the Exchange
Notes. In addition, beneficial interests in a Global Exchange Note may be
exchanged for Certificated Exchange Notes upon request but only upon prior
written notice given to the Trustee by or on behalf of DTC in accordance
with the Indentures. In all cases, Certificated Exchange Notes delivered
in exchange for any Global Exchange Note or beneficial interests therein
will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its
customary procedures).
Same Day Settlement and Payment
The Indenture requires that payments in respect of the Exchange
Notes represented by the Global Exchange Notes (including principal,
premium and interest, if any,) be made by wire transfer of immediately
available funds to the accounts specified by the Global Exchange Note
Holder. With respect to Exchange Notes in certificated form, the Issuer
will make all payments of principal, premium and interest, if any, by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof or, if no such account is specified, by mailing a check to
each such Holder's registered address. The Exchange Notes represented by
the Global Exchange Notes are expected to be eligible to trade in the
<PAGE>
PORTAL market and to trade in the Depositary's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such
Exchange Notes will, therefore, be required by the Depositary to be
settled in immediately available funds. The Issuer expects that secondary
trading in any certificated Exchange Notes will also be settled in
immediately available funds.
Because of time zone differences, the securities account of a
Euroclear or Cedel participant purchasing an interest in a Global Exchange
Note from a Participant in DTC will be credited, and any such crediting
will be reported to the relevant Euroclear or Cedel participant, during
the securities settlement processing day (which must be a business day for
Euroclear and Cedel) immediately following the settlement date of DTC. DTC
has advised the Issuer that cash received in Euroclear or Cedel as a
result of sales of interests in a Global Exchange Note by or through a
Euroclear or Cedel participant to a Participant in DTC will be received
with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
Registration Rights; Liquidated Damages
Pursuant to the Registration Rights Agreement, the Issuer agreed
to file with the Commission the Exchange Offer Registration Statement with
respect to the Exchange Notes and, upon the effectiveness of the Exchange
Offer Registration Statement, to offer to the Holders of Transfer
Restricted Securities pursuant to the Exchange Offer who are able to make
certain representations the opportunity to exchange their Transfer
Restricted Securities for Exchange Notes. If (i) the Issuer is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted
by applicable law or Commission policy or (ii) any Holder of Transfer
Restricted Securities notifies the Issuer prior to the 20th day following
consummation of the Exchange Offer that (a) it is prohibited by law or
Commission policy from participating in the Exchange Offer or (b) that it
may not resell the Exchange Notes acquired by it in the Exchange Offer to
the public without delivering a prospectus and the prospectus contained in
the Exchange Offer Registration Statement is not appropriate or available
for such resales or (c) that it is a broker-dealer and owns Old Notes
acquired directly from the Issuer or an affiliate of the Issuer, the
Issuer will file with the Commission a Shelf Registration Statement to
cover resales of the Notes by the Holders thereof who satisfy certain
conditions relating to the provision of information in connection with the
Shelf Registration Statement. The Issuer will use its best efforts to
cause the applicable registration statement to be declared effective as
promptly as possible by the Commission. For purposes of the foregoing,
"Transfer Restricted Securities" means each Old Note until (i) the date on
which such Old Note has been exchanged by a person other than a
broker-dealer for an Exchange Note in the Exchange Offer, (ii) following
the exchange by a broker-dealer in the Exchange Offer of an Old Note for
an Exchange Note, the date on which such Exchange Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Old Note has been
effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which
<PAGE>
such Old Note is distributed to the public pursuant to Rule 144 under the
Act.
The Registration Rights Agreement provides that (i) the Issuer
will file an Exchange Offer Registration Statement with the Commission on
or prior to 60 days after the date of the Indenture, (ii) the Issuer will
use its best efforts to have the Exchange Offer Registration Statement
declared effective by the Commission on or prior to 150 days after the
date of the Indenture, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Issuer will commence
the Exchange Offer and use its best efforts to issue, on or prior to 30
business days after the date on which the Exchange Offer Registration
Statement was declared effective by the Commission, Exchange Notes in
exchange for all Old Notes tendered prior thereto in the Exchange Offer
and (iv) if obligated to file the Shelf Registration Statement, the Issuer
will use its best efforts to file the Shelf Registration Statement with
the Commission on or prior to 30 days after such filing obligation arises
and to cause the Shelf Registration to be declared effective by the
Commission on or prior to 150 days after such obligation arises. If
(a) the Issuer fails to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for
such filing, (b) any of such registration statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Issuer fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement or
(d) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during
the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration
Default"), then the Issuer will pay liquidated damages to each Holder of
Notes, with respect to the first 90-day period immediately following the
occurrence of the first Registration Default, in an amount equal to $.05
per week per $1,000 principal amount of Notes held by such Holder. The
amount of the liquidated damages will increase by an additional $.05 per
week per $1,000 principal amount of Notes with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a
maximum amount of liquidated damages for all Registration Defaults of $.50
per week per $1,000 principal amount of Notes. All accrued liquidated
damages will be paid by the Issuer on each Damages Payment Date to the
Global Note Holder by wire transfer of immediately available funds or by
federal funds check and to Holders of Certificated Securities by wire
transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. Following
the cure of all Registration Defaults, the accrual of liquidated damages
will cease.
Holders of Old Notes are required to make certain representations
to the Issuer (as described in the Registration Rights Agreement and
Letter of Transmittal) in order to participate in the Exchange Offer and
will be required to deliver certain information to be used in connection
with the Shelf Registration Statement and to provide comments on the Shelf
Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Notes included in the
Shelf Registration Statement and benefit from the provisions regarding
liquidated damages set forth above.
<PAGE>
Certain Definitions
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such
terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, or
assumed by such other Person, including, without limitation, Indebtedness
incurred in connection with, or in contemplation of, such other Person
merging with or into or becoming a Subsidiary of such specified Person and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Adjusted Consolidated Assets" means at any time the total amount
of assets of the Issuer and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), after deducting
therefrom all current liabilities of the Issuer and its Restricted
Subsidiaries (excluding intercompany items), all as set forth on the
consolidated balance sheet of the Issuer and its Restricted Subsidiaries
as of the end of the most recent fiscal quarter for which financial
statements are available prior to the date of determination.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling", "controlled by" and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the
management or policies of such Person, whether through the ownership of
voting securities, by agreement or otherwise; provided that beneficial
ownership of 10% or more of the Voting Stock of a Person shall be deemed
to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets or rights (including, without limitation, by way
of a sale and leaseback), excluding sales of services and products in the
ordinary course of business consistent with past practices (provided that
the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Issuer and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above
under the caption "--Repurchase at the Option of Holders--Change of
Control" and/or the provisions described above under the caption "--
Certain Covenants--Merger, Consolidation or Sale of Assets" and not by the
provisions of the Asset Sale covenant) and (ii) the issue or sale by the
Issuer or any of its Restricted Subsidiaries of Equity Interests of any of
the Issuer's Restricted Subsidiaries, in the case of either clause (i) or
(ii), whether in a single transaction or a series of related transactions
(a) that have a fair market value in excess of $1.0 million or (b) for net
proceeds in excess of $1.0 million. Notwithstanding the foregoing: (i) a
transfer of assets by the Issuer to a Wholly Owned Restricted Subsidiary
<PAGE>
or by a Wholly Owned Restricted Subsidiary to the Issuer or to another
Wholly Owned Restricted Subsidiary, (ii) an issuance of Equity Interests
by a Wholly Owned Restricted Subsidiary to the Issuer or to another Wholly
Owned Restricted Subsidiary, (iii) the transfer of used, surplus or
obsolete equipment in the ordinary course of business, (iv) the sale and
leaseback of any assets within 90 days of the acquisition of such assets
and (v) a Restricted Payment that is permitted by the covenant described
above under the caption "--Certain Covenants--Restricted Payments" will
not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the
rate of interest implicit in such transaction, determined in accordance
with GAAP) of the obligation of the lessee for net rental payments during
the remaining term of the lease included in such sale and leaseback
transaction (including any period for which such lease has been extended
or may, at the option of the lessor, be extended).
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital
lease that would at such time be required to be capitalized on a balance
sheet in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or
limited liability company, partnership or membership interests (whether
general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses
of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars,
(ii) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is pledged
in support thereof) having maturities of not more than one year from the
date of acquisition, (iii) certificates of deposit and eurodollar time
deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight
bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Thompson Bank Watch
Rating of "B" or better, (iv) repurchase obligations with a term of not
more than 30 days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution
meeting the qualifications specified in clause (iii) above and
(v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each case
maturing within one year after the date of acquisition and (vi) money
market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i) through (v) of this
definition.
<PAGE>
"Change of Control" means the occurrence of any of the following
events:
(i) prior to the first public equity offering, the Principals
cease to be the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, of a
majority in the aggregate of the total voting power of the Voting
Stock of the Issuer, whether as a result of issuance of securities
of the Issuer, any merger, consolidation, liquidation or
dissolution of the Issuer, any direct or indirect transfer of
securities or otherwise (for purposes of this clause (i) and
clause (ii) below, the Principals shall be deemed to beneficially
own any Voting Stock of a corporation (the "specified
corporation") held by any other corporation (the "parent
corporation") so long as the Principals beneficially own (as so
defined), directly or indirectly, in the aggregate a majority of
the voting power of the Voting Stock of the parent corporation);
(ii) on or after the first public equity offering, any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Principals, is or becomes
the beneficial owner (as defined in clause (i) above, except that
for purposes of this clause (ii) such person shall be deemed to
have "beneficial ownership" of all shares that any such person has
the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of the
Voting Stock of the Issuer; provided, however, that the Principals
beneficially own (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the total
voting power of the Voting Stock of the Issuer than such other
person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this
clause (ii), such other person shall be deemed to beneficially own
any Voting Stock of a specified corporation held by a parent
corporation, if such other person is the beneficial owner (as
defined in this clause (ii)), directly or indirectly, of more than
35% of the voting power of the Voting Stock of such parent
corporation and the Principals beneficially own (as defined in
clause (i) above), directly or indirectly, in the aggregate a
lesser percentage of the voting power of the Voting Stock of such
parent corporation and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a
majority of the Board of Directors of such parent corporation);
(iii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of
Directors of the Issuer (together with any new directors whose
election by such Board of Directors or whose nomination for
election by the shareholders of the Issuer was approved by a vote
of 66 2/3% of the directors of the Issuer then still in office who
were either directors at the beginning of such period or whose
election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of
Directors of the Issuer then in office; or
<PAGE>
(iv) the merger or consolidation of the Issuer with or into
another Person or the merger of another Person with or into the
Issuer, or the sale of all or substantially all the assets of the
Issuer to another Person (other than a Person that is controlled
by the Principals), and, in the case of any such merger or
consolidation, the securities of the Issuer that are outstanding
immediately prior to such transaction and which represent 100% of
the aggregate voting power of the Voting Stock of the Issuer are
changed into or exchanged for cash, securities or property, unless
pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities
of the surviving corporation that represent, immediately after
such transaction, at least a majority of the aggregate voting
power of the Voting Stock of the surviving corporation.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus,
to the extent deducted in computing such Consolidated Net Income, (i) an
amount equal to any extraordinary loss plus any net loss realized in
connection with an Asset Sale, (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period,
(iii) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts
and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to
Hedging Obligations), plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization
of prepaid cash expenses that were paid in a prior period) and other
non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period,
minus (v) non-cash items increasing such Consolidated Net Income for such
period, (other than accruals of income in the ordinary course of business
in respect of future cash payments) in each case, on a consolidated basis
and determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the
depreciation and amortization and other non-cash expenses of, a Restricted
Subsidiary of a Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent (and in the same
proportion) that the Net Income of such Restricted Subsidiary was included
in calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Issuer by such Restricted Subsidiary without prior
approval (that has not been obtained) and without direct or indirect
restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Restricted Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for
any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis,
<PAGE>
determined in accordance with GAAP; provided that (i) the Net Income (but
not loss) of any Person that is not a Restricted Subsidiary or that is
accounted for by the equity method of accounting shall be included only to
the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the
Net Income of any Restricted Subsidiary shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by
that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has
not been obtained) or, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders, (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the
date of such acquisition shall be excluded, (iv) the cumulative effect of
a change in accounting principles shall be excluded and (v) the Net Income
(but not loss) of any Unrestricted Subsidiary shall be excluded, whether
or not distributed to the Issuer or one of its Restricted Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of
any date, the sum of (a) the consolidated equity of the common
stockholders of such Person and its consolidated Subsidiaries as of such
date, plus (b) the respective amounts reported on such Person's balance
sheet as of such date with respect to any series of preferred stock (other
than Disqualified Stock) that by its terms is not entitled to the payment
of dividends unless such dividends may be declared and paid only out of
net earnings in respect of the year of such declaration and payment, but
only to the extent of any cash received by such Person upon issuance of
such preferred stock, less (i) all write-ups (other than write-ups
resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the
acquisition of such business) subsequent to the date of the Indenture in
the book value of any asset owned by such Person or a consolidated
Subsidiary of such Person, (ii) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries
(except, in each case, Permitted Investments) and (iii) all unamortized
debt discount and expense and unamortized deferred charges as of such
date, in each case, determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Issuer who (i) was a member of
such Board of Directors on the date of the Indenture or (ii) was nominated
for election or elected to such Board of Directors with the approval of a
majority of the Continuing Directors who were members of such Board at the
time of such nomination or election.
"Credit Facilities" means, with respect to the Issuer, one or more
debt facilities (including, without limitation, the Senior Credit
Facility) or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables
financing (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated,
modified, renewed, refunded, replaced or refinanced in whole or in part
from time to time. Indebtedness under Credit Facilities outstanding on the
date on which Notes are first issued and authenticated under the Indenture
<PAGE>
shall be deemed to have been incurred on such date in reliance on the
exception provided by clause (i) of the definition of Permitted Debt.
"Default" means any event that is or with the passage of time or
the giving of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms
(or by the terms of any security into which it is convertible or for which
it is exchangeable, at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to
a sinking fund obligation or otherwise, or is redeemable at the option of
the Holder thereof, in whole or in part, on or prior to the date that is
91 days after the date on which the Notes mature; provided, however, that
any Capital Stock that would constitute Disqualified Stock solely because
the holders thereof have the right to require the Issuer to repurchase
such Capital Stock upon the occurrence of a Change of Control or an Asset
Sale shall not constitute Disqualified Stock if the terms of such Capital
Stock provide that the Issuer may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with the covenant described above under the caption
"--Certain Covenants--Restricted Payments".
"Equity Interests" means Capital Stock and all warrants, options
or other rights to acquire Capital Stock (but excluding any debt security
that is convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness in existence on the
date of the Indenture (other than Indebtedness under Credit Facilities),
until such Indebtedness is repaid.
"Fixed Charges" means, with respect to any Person for any period,
the sum, without duplication, of (i) the consolidated interest expense of
such Person and its Restricted Subsidiaries for such period, whether paid
or accrued (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts
and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to
Hedging Obligations), (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such
period, (iii) any interest expense on Indebtedness of another Person that
is guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries (whether or not such guarantee or Lien is called upon) and
(iv) the product of (a) all dividend payments, whether or not in cash, on
any series of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable
solely in Equity Interests of the Issuer (other than Disqualified Stock)
or to the Issuer or a Restricted Subsidiary of the Issuer, times (b) a
fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
<PAGE>
"Fixed Charge Coverage Ratio" means with respect to any Person for
any period, the ratio of the Consolidated Cash Flow of such Person for
such period to the Fixed Charges of such Person and its Restricted
Subsidiaries for such period. In the event that the Issuer or any of its
Restricted Subsidiaries incurs, assumes, guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred
stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall
be calculated giving pro forma effect to such incurrence, assumption,
guarantee or redemption of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. In addition, for purposes of
making the computation referred to above, (i) acquisitions that have been
made by the Issuer or any of its Restricted Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to
such reference period and on or prior to the Calculation Date shall be
deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth
in the definition of Consolidated Net Income, (ii) the Consolidated Cash
Flow attributable to discontinued operations, as determined in accordance
with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of prior to the Calculation
Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent
Person or any of its Restricted Subsidiaries following the Calculation
Date.
"GAAP" means generally accepted accounting principles in the
United States of America set forth in the opinions and pronouncements of
the Accounting Principles Board of the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other
entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, by way
of a pledge of assets or through letters of credit and reimbursement
agreements in respect thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements and
(ii) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Holdings" means FNC Holdings Inc. (formerly known as General Host
Corporation) and its successors.
<PAGE>
"Indebtedness" means, with respect to any Person, (i) any
indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in respect
thereof) or banker's acceptances or representing Capital Lease Obligations
or the balance deferred and unpaid of the purchase price of any property
or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, (ii) all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person) and (iii) to the extent not
otherwise included, the guarantee by such Person of any indebtedness of
any other Person. The amount of any Indebtedness outstanding as of any
date shall be (i) the accreted value thereof, in the case of any
Indebtedness issued with original issue discount, and (ii) the principal
amount thereof, together with any interest thereon that is more than 30
days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments
by such Person in other Persons (including Affiliates) in the forms of
direct or indirect loans (including guarantees of Indebtedness or other
obligations), advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all
items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP. If the Issuer or any Subsidiary of the
Issuer sells or otherwise disposes of any Equity Interests of any direct
or indirect Subsidiary of the Issuer such that, after giving effect to any
such sale or disposition, such Person is no longer a Subsidiary of the
Issuer, the Issuer shall be deemed to have made an Investment on the date
of any such sale or disposition equal to the fair market value of the
Equity Interests of such Subsidiary not sold or disposed of in an amount
determined as provided in the third paragraph of the covenant described
above under the caption "--Certain Covenants--Restricted Payments".
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of
such asset, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement
to sell or give a security interest in and any filing of or agreement to
give any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however,
(i) any gain (but not loss), together with any related provision for taxes
on such gain (but not loss), realized in connection with (a) any Asset
Sale (including, without limitation, dispositions pursuant to sale and
leaseback transactions) or (b) the disposition of any securities by such
Person or any of its Restricted Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Restricted Subsidiaries and
(ii) any extraordinary or non-recurring gain (but not loss), together with
<PAGE>
any related provision for taxes on such extraordinary or non-recurring
gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the
Issuer or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net
of the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof,
taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements),
amounts required to be applied to the repayment of Indebtedness secured by
a Lien on the asset or assets that were the subject of such Asset Sale and
any reserve for adjustment in respect of the sale price of such asset or
assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness: (i) as to which neither
the Issuer nor any of its Restricted Subsidiaries (a) provides credit
support of any kind (including any undertaking, agreement or instrument
that would constitute Indebtedness), (b) is directly or indirectly liable
(as a guarantor or otherwise) or (c) constitutes the lender; (ii) no
default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder
of any other Indebtedness (other than the Notes being offered hereby) of
the Issuer or any of its Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and (iii) as to which the lenders
have been notified in writing that they will not have any recourse to the
stock or assets of the Issuer or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable
under the documentation governing any Indebtedness.
"Permitted Business" means any business which is the same as or
related, ancillary or complementary to the businesses of the Company on
the date of the Indenture.
"Permitted Investments" means (i) any Investment in the Issuer or
in a Wholly Owned Restricted Subsidiary of the Issuer; (ii) any Investment
in Cash Equivalents; (iii) any Investment by the Issuer or any Restricted
Subsidiary of the Issuer in a Person, if as a result of such Investment
(a) such Person becomes a Wholly Owned Restricted Subsidiary of the Issuer
or (b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer;
(iv) any Restricted Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales"; (v) any acquisition of
assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Issuer; (vi) any Investment existing on the
date of the Indenture; (vii) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be
<PAGE>
treated as expenses for accounting purposes and that are made in the
ordinary course of business; (viii) loans or advances to employees made in
the ordinary course of business consistent with past practices of the
Issuer or any Restricted Subsidiary, but in any event not to exceed $2.0
million in the aggregate outstanding at any one time; (ix) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Issuer or any Restricted
Subsidiary or in satisfaction of judgments; and (x) other Investments in
any Person (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with
all other Investments made pursuant to this clause (x) that are at the
time outstanding, not to exceed $10.0 million.
"Permitted Liens" means (i) Liens securing Senior Debt or
Guarantor Senior Debt of the Issuer and its Restricted Subsidiaries that
was permitted by the terms of the Indenture to be incurred; (ii) Liens in
favor of the Issuer or any of its Restricted Subsidiaries; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Issuer or any Restricted Subsidiary of the Issuer;
provided that such Liens were in existence prior to the contemplation of
such merger or consolidation and do not extend to any assets other than
those of the Person merged into or consolidated with the Issuer;
(iv) Liens on property existing at the time of acquisition thereof by the
Issuer or any Restricted Subsidiary of the Issuer, provided that such
Liens were in existence prior to the contemplation of such acquisition;
(v) Liens to secure the performance of statutory, regulatory, contractual
or warranty requirements, surety or appeal bonds, performance bonds or
other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens existing on the date of the Indenture; (vii) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that
any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefore; (viii) statutory
Liens of landlords and Liens of carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen and other Liens imposed by law incurred
in the ordinary course of business for sums not yet delinquent or being
contested in good faith, if such reserve or other appropriate provision,
if any, as shall be required by GAAP shall have been made in respect
thereof; (ix) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(x) judgment Liens not giving rise to an Event of Default; (xi) easements,
rights-of-way, zoning restrictions and other similar charges or
encumbrances in respect of real property not interfering in any material
respect with the ordinary conduct of the business of the Issuer or any of
its Restricted Subsidiaries; (xii) any interest or title of a lessor under
any Capital Lease Obligations; (xiii) purchase money Liens to finance
property or assets of the Issuer or any Restricted Subsidiary of the
Issuer acquired in the ordinary course of business; (xiv) Liens upon
specific items of inventory or other goods and proceeds of any Person
securing such Person's obligations in respect of bankers' acceptances
issued or created for the account of such Person to facilitate the
<PAGE>
purchase, shipment or storage of such inventory or other goods; (xv) Liens
securing reimbursement obligations with respect to commercial letters of
credit which encumber documents and other property relating to such
letters of credit and products and proceeds thereof; (xvi) Liens securing
Hedging Obligations that are otherwise permitted to be incurred under the
Indenture; (xvii) leases or subleases granted to others that do not
materially interfere with the ordinary course of business of the Issuer
and its Restricted Subsidiaries; (xviii) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; and (xix) Liens
incurred in the ordinary course of business of the Issuer or any
Restricted Subsidiary of the Issuer with respect to obligations that do
not exceed $2.0 million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of the
Issuer or any of its Restricted Subsidiaries issued in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness of the Issuer or any of its
Restricted Subsidiaries; provided that: (i) the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if
applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded;
(iii) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of and is subordinated in right of payment to
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Issuer or by the Restricted
Subsidiary that is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Principals" means Cypress Merchant Banking Partners L.P., Cypress
Offshore Partners L.P., Cypress Garden Ltd. and any Person who on the date
of the Indenture is an Affiliate of any of the foregoing.
"Related Party" with respect to any Principal means (i) any
controlling stockholder, 80% (or more) owned Subsidiary, or spouse or
immediate family member (in the case of an individual) of such Principal
or (ii) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of such
Principal and/or such other Persons referred to in the immediately
preceding clause (i).
"Restricted Investment" means an Investment other than a Permitted
Investment.
<PAGE>
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.
"Senior Credit Facility" means that certain credit agreement,
dated as of December 24, 1997, by and among the Issuer, Cyrus Acquisition
Corp., Holdings, the lenders party thereto, The Chase Manhattan Bank, as
Administrative Agent, Syndication Agent, Collateral Agent, Issuing Bank
and Swingline Lender and Goldman Sachs Credit Partners L.P., as
Documentation Agent, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
"Significant Subsidiary" means any Restricted Subsidiary that
would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Securities Act, as such
Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of
interest or principal on any series of Indebtedness, the date on which
such payment of interest or principal was scheduled to be paid in the
original documentation governing such Indebtedness, and shall not include
any contingent obligations to repay, redeem or repurchase any such
interest or principal prior to the date originally scheduled for the
payment thereof.
"Subsidiary" means, with respect to any Person, (i) any
corporation, association or other business entity of which more than 50%
of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof) and (ii) any
partnership (a) the sole general partner or the managing general partner
of which is such Person or a Subsidiary of such Person or (b) the only
general partners of which are such Person or of one or more Subsidiaries
of such Person (or any combination thereof).
"Unrestricted Subsidiary" means any Subsidiary that is designated
by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any
agreement, contract, arrangement or understanding with the Issuer or any
Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Issuer or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Issuer; (c) is a Person with respect
to which neither the Issuer nor any of its Restricted Subsidiaries has any
direct or indirect obligation (1) to subscribe for additional Equity
Interests or (2) to maintain or preserve such Person's financial condition
or to cause such Person to achieve any specified levels of operating
results; (d) has not guaranteed or otherwise directly or indirectly
provided credit support for any Indebtedness of the Issuer or any of its
Restricted Subsidiaries; and (e) has at least one director on its Board of
Directors that is not a director or executive officer of the Issuer any of
its Restricted Subsidiaries and has at least one executive officer that is
<PAGE>
not a director or executive officer of the Issuer or any of its Restricted
Subsidiaries.
"Voting Stock" of any Person as of any date means the Capital
Stock of such Person that is at the time entitled to vote in the election
of the Board of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment, by (ii) the then outstanding principal amount of such
Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock
or other ownership interests of which (other than directors' qualifying
shares) shall at the time be owned by such Person or by one or more Wholly
Owned Restricted Subsidiaries of such Person.
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
OF THE EXCHANGE
The discussion below is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations, rulings
and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked or modified so as to result in
federal income tax consequences different from those discussed below.
The exchange of Old Notes for Exchange Notes in the Exchange Offer
will not constitute a taxable event to holders for United States federal
income tax purposes. Consequently, no gain or loss will be recognized by a
holder upon receipt of an Exchange Note, the holding period of the
Exchange Note will include the holding period the Old Note and the basis
of the Exchange Note will be the same as the basis of the Old Note
immediately before the exchange.
In any event, persons considering the exchange of Old Notes for
Exchange Notes should consult their own tax advisors concerning the United
States federal income tax consequences in light of their particular
situations as well as any consequences arising under the laws of any other
taxing jurisdiction.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were
acquired as a result of market-making activities or other trading
activities. The Company has agreed that for a period of 120 days after the
consummation of the Exchange Offer it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in
connection with any such resales. In addition, until , 1998,
all dealers effecting transactions in the Exchange Notes may be required
to deliver a prospectus.
The Company will not receive any proceeds from any sale of
Exchange Notes by broker-dealers. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Exchange Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
<PAGE>
broker-dealer that resells Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
For a period of 120 days after the consummation of the Exchange
Offer, the Company will promptly send additional copies of this Prospectus
and any amendment or supplement to this Prospectus to any broker-dealer
that requests such documents in the Letter of Transmittal. The Company has
agreed to pay all expenses incident to the Exchange Offer other than
commissions or concessions of any brokers or dealers and will indemnify
the holders of the Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
By its acceptance of the Exchange Offer, any broker-dealer that
receives Exchange Notes pursuant to the Exchange Offer hereby agrees to
notify the Company prior to using the Prospectus in connection with the
sale or transfer of Exchange Notes, and acknowledges and agrees that, upon
receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or
which requires the making of any changes in the Prospectus in order to
make the statements therein not misleading or which may impose upon the
Company disclosure obligations that may have a material adverse effect on
the Company (which notice the Company agrees to deliver promptly to such
broker-dealer), such broker-dealer will suspend use of the Prospectus
until the Company has notified such broker-dealer that delivery of the
Prospectus may resume and has furnished copies of any amendment or
supplement to the Prospectus to such broker-dealer.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by
Simpson Thacher & Bartlett, New York, New York.
INDEPENDENT ACCOUNTANTS
The financial statements of Frank's Nursery & Crafts, Inc. as of
January 25, 1998 and January 26, 1997 and for each of the two years in the
period ended January 26, 1997 and for the four-week period and forty-eight
week period ended January 25, 1998 and December 28, 1997, respectively,
included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FRANK'S NURSERY & CRAFTS, INC.
Page No.
--------
Report of Independent Accountants . . . . . . . . . . . . . . F-2
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations . . . . . . . . . . . . . . . . . . F-4
Statements of Changes in Shareholder's Equity . . . . . . . . F-5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . F-8
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholder of
Frank's Nursery & Crafts, Inc.
In our opinion, the accompanying balance sheets and the related
statements of income, changes in shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of
Frank's Nursery & Crafts, Inc. (a wholly-owned subsidiary of FNC Holdings
Inc., formerly "General Host Corporation") at January 25, 1998 and January
26, 1997, and the results of their operations and their cash flows for the
four-week period and forty-eight week period ending January 25, 1998 and
December 28, 1997, respectively, and the two years ended January 26, 1997
and January 28, 1996, respectively, in conformity with generally accepted
accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- -------------------------------
Price Waterhouse LLP
Bloomfield Hills, Michigan
March 13, 1998
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
May 17, January 25, January 26,
1998 1998 1997
--------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . $ 55,171 $ 16,100 $ 3,526
Accounts and notes receivable . . . 3,056 4,607 3,028
Merchandise inventory . . . . . . . 116,427 81,051 81,575
Prepaid expenses and other current
assets . . . . . . . . . . . . . 5,828 6,218 9,458
-------- -------- ---------
Total current assets . . . . . . . 180,482 107,976 97,587
-------- -------- ---------
Property, plant and equipment, net 212,727 217,880 220,626
Intangibles, less accumulated amortization
of $930, $173 and $10,653 at May 17, 1998,
January 25, 1998 and January 26, 1997,
respectively . . . . . . . . . . . 94,564 94,575 15,266
Other assets and deferred charges . 15,336 13,248 10,544
-------- -------- ---------
$503,109 $433,679 $344,023
======== ======== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable . . . . . . . . . 102,486 30,852 27,870
Accrued expenses . . . . . . . . . 46,247 53,677 39,186
Notes payable to banks . . . . . . 10,000
Current portion of long-term debt . 1,823 1,780 2,254
------- ------ ------
Total current liabilities . . . . 150,556 96,309 69,310
------- ------ ------
Long-term debt:
Senior debt . . . . . . . . . . . . 59,155 102,189 127,761
Subordinated debt . . . . . . . . . 115,000 65,000 65,000
------- ------- -------
Total long-term debt . . . . . . 174,155 167,189 192,761
------- ------- -------
Other liabilities and deferred credits . 18,096 17,778 6,271
Commitments and contingencies
Shareholder's equity:
Common stock $1.00 par value,
5,000,000 shares authorized,
246,000 shares issued . . . . . . 246 246 246
Capital in excess of par value . . . 165,754 165,754 48,146
Intercompany payable (receivable) . (744) (693) 115,147
Retained earnings . . . . . . . . . (4,954) (12,904) (87,858)
-------- -------- ---------
Total shareholders' equity . . . 160,302 152,403 75,681
-------- -------- ---------
$503,109 $433,679 $344,023
======== ======== =========
See accompanying notes.
</TABLE>
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Statements of Operations
(dollars in thousands)
<TABLE>
<CAPTION>
Post- Pre-
acquisition acquisition
Period Period
(Successor- (Predecessor-
basis) basis)
Sixteen Weeks Ended Four-Weeks Forty-Eight
--------------------- Ended Weeks Ended
May 17, May 18, January 25, December 28, January 26, January 28,
1998 1997 1998 1997 1997 1996
------- -------- ----------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales . . . . . . . . . . . . . $176,273 $178,243 $ 14,814 $515,204 $530,752 $593,270
Other income (expense) . . . . . 562 35 (17) (2,010) (226) 507
-------- -------- -------- -------- -------- --------
176,835 178,278 14,797 513,194 530,526 593,777
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales, including buying
and occupancy . . . . . . . . 114,078 121,946 17,532 367,008 383,099 429,181
Selling, general and
administrative . . . . . . . . 42,867 44,106 8,568 136,622 138,355 148,502
Provision for store closings
and other costs . . . . . . . 6,677
Impairment loss . . . . . . . . 1,720
-------- -------- -------- -------- -------- --------
156,945 166,052 26,100 512,027 521,454 577,683
-------- -------- -------- -------- -------- --------
Operating income (loss) . . . . 19,890 12,226 (11,303) 1,167 9,072 16,094
Interest and debt expense . . . 6,792 6,624 1,601 19,632 20,863 23,845
-------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
loss . . . . . . . . . . . . . . 13,098 5,602 (12,904) (18,465) (11,791) (7,751)
Income taxes . . . . . . . . . . . -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary loss . . . . . . . 13,098 5,602 (12,904) (18,465) (11,791) (7,751)
Extraordinary loss . . . . . . . . (5,148) -- -- -- -- --
-------- -------- -------- -------- ------- -------
Net income (loss) . . . . . . . . . $ 7,950 $ 5,602 $(12,904) $(18,465) $(11,791) $(7,751)
======== ======== ======== ======== ======== =======
</TABLE>
See accompanying notes.
<PAGE>
Frank's Nursery & Crafts, Inc.
(A wholly-owned subsidiary of Holdings)
Statements of Changes in Shareholder's Equity
Fiscal Years Ended January 25, 1998, January 26, 1997
and January 28, 1996 and the Sixteen Weeks Ended May 17, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Common Capital in Total
Stock Excess of Intercompany Retained Shareholder's
Issued Par Value Payable Earnings Equity
------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 29, 1995 . . $ 246 $ 48,146 $ 74,041 $ (68,316) $ 54,117
Net loss . . . . . . . . . . . (7,751) (7,751)
Increase in intercompany
payable . . . . . . . . . . . 59,892 59,892
------- --------- --------- --------- --------
Balance at January 28, 1996 . . 246 48,146 133,933 (76,067) 106,258
Net loss . . . . . . . . . . . (11,791) (11,791)
Decrease in intercompany
payable . . . . . . . . . . . (18,786) (18,786)
------- --------- --------- --------- --------
Balance at January 26, 1997 . . 246 48,146 115,147 (87,858) 75,681
Net loss for the forty-eight
week (pre-acquisition) period
ended December 28, 1997 (18,465) (18,465)
- ------------------------------------------------------------------------------------------------------------------
Changes due to acquisition:
Equity contribution . . . . . 166,000 166,000
Purchase accounting
adjustments . . . . . . . (48,392) 106,323 57,931
Decrease in intercompany
liability . . . . . . . . . (114,706) (114,706)
------- --------- --------- --------- --------
Balance at December 28, 1997 . . 246 165,754 441 -0- 166,441
Net loss for the four-week
(post-acquisition) period
ended January 25, 1998 . . . . (12,904) (12,904)
Decrease in intercompany
liability . . . . . . . . . . . (1,134) (1,134)
------- --------- --------- --------- --------
Balance at January 25, 1998 . . 246 165,754 (693) (12,904) 152,403
Net income for the sixteen week
period ended May 17, 1998
(unaudited) . . . . . . . . . 7,950 7,950
Decrease in intercompany
liability (unaudited) . . . . (51) (51)
------- --------- --------- --------- --------
Balance at May 17, 1998
(unaudited) . . . . . . . . $ 246 $ 165,754 $ (744) $ (4,954) $160,302
======= ========= ========= ========= ========
See accompanying notes.
</TABLE>
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Post- Pre-
acquisition acquisition
Period Period
(Successor- (Predecessor-
basis) basis)
Sixteen Weeks Ended Four-Weeks Forty-Eight
--------------------- Ended Weeks Ended
May 17, May 18, January 25, December 28, January 26, January 28,
1998 1997 1998 1997 1997 1996
------- -------- ----------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income (loss) . . . . . . $ 7,950 $ 5,602 $ (12,904) $ (18,465) $(11,791) $ (7,751)
-------- -------- -------- -------- -------- --------
Adjustments to reconcile net
income (loss) to net cash
provided by (used for)
operations:
Extraordinary charge . . . . 5,148 5,148 0 0 0
Depreciation and
amortization . . . . . . . 5,611 6,429 1,500 20,115 22,377 22,888
Provision for store closings
and other costs . . . . . 6,677
Impairment loss . . . . . . 1,720
Gains from sales of property,
plant and equipment . . . (2,981)
Other . . . . . . . . . . . 164 (269) (1,343) (3,188) 860 487
-------- -------- -------- -------- -------- --------
18,873 11,762 (12,747) (3,878) 11,446 15,624
Changes in current assets and
current liabilities:
Decrease (increase) in accounts
and notes receivable . . . . 1,447 858 129 242 (530) 232
Decrease (increase) in
inventory . . . . . . . . . . (35,376) (27,361) (2,892) (757) 6,587 (924)
Decrease (increase) in
prepaid expense . . . . . . . 390 445 1,473 (167) (665) (672)
Increase (decrease) in
accounts payable . . . . . . . 71,634 60,350 (10,981) 13,963 91 (13,949)
Increase (decrease) in
accrued expenses . . . . . . . (7,429) 1,167 (11,040) (8,061) 1,249 (11,982)
-------- -------- -------- -------- -------- --------
Net cash provided by (used for)
operations . . . . . . . . . . 49,539 47,221 (36,058) 9,098 18,178 (11,671)
-------- -------- -------- -------- -------- --------
<PAGE>
<CAPTION>
Post- Pre-
acquisition acquisition
Period Period
(Successor- (Predecessor-
basis) basis)
Sixteen Weeks Ended Four-Weeks Forty-Eight
--------------------- Ended Weeks Ended
May 17, May 18, January 25, December 28, January 26, January 28,
1998 1997 1998 1997 1997 1996
------- -------- ----------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Addition to property, plant and
equipment . . . . . . . . . . . (3,199) (951) 34 (12,472) (4,371) (5,497)
Proceeds from sales of property,
plant and equipment . . . . . . . 3,931 3,077 12,597 930 342
-------- -------- -------- -------- -------- --------
Net cash provided by (used for)
investing activities . . . . . . 732 2,126 34 125 (3,441) (5,155)
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Issuance of long-term debt . . . . 115,000 1,625 5,137 34,984
Debt issue costs . . . . . . . . (5,205) (3,745) (439) (1,681)
Increase (decrease) in
in intercompany payable . . . . (51) (31,437) (1,134) (114,706) (18,786) 59,892
Payment of long-term debt and
capital lease obligations . . . (107,991) (677) (98) (65,073) (1,994) (77,117)
Equity contribution, net . . . . 166,000
Other . . . . . . . . . . . . . . (2,953) 13,945 (4,939)
Increase (decrease) in notes
payable to banks . . . . . (10,000) 47,500
-------- -------- -------- -------- -------- --------
Net cash provided by (used for)
financing activities . . . . (11,200) (32,114) 12,713 26,662 (16,082) 16,078
-------- -------- -------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents . . . . 39,071 17,233 (23,311) 35,885 (1,345) (748)
Cash and cash equivalents at
beginning of period . . . . . 16,100 3,526 39,411 3,526 4,871 5,619
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at
end of period . . . . . . $ 55,171 $ 20,759 $ 16,100 $ 39,411 $ 3,526 $ 4,871
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
NOTE 1: ACCOUNTING POLICIES
Frank's Nursery & Crafts, Inc. ("Frank's" or the "Company") is a wholly-
owned subsidiary of FNC Holdings Inc. (formerly "General Host
Corporation"). Frank's is a leading specialty retailer of lawn and garden
products, crafts and Christmas merchandise. Below are those accounting
policies considered to be significant.
The Company operates entirely in one industry segment, the lawn and garden
retail industry defined to include green goods, fertilizers, gardening
accessories, lawn furniture, Christmas merchandise and snow removal, power
and watering equipment.
The fiscal year is normally comprised of 52 or 53 weeks, ending on the
last Sunday in January. The 1997, 1996 and 1995 fiscal years each reflect
a 52-week period ended January 25, 1998, January 26, 1997 and January 28,
1996, respectively. Because of the acquisition (see Note 6), the
accompanying financial statements for fiscal 1997 represent the financial
position, results of operations and cash flows of Frank's for the forty-
eight week period prior to the acquisition and the four-week period
subsequent to the acquisition. The post-acquisition period has been
presented on the purchase basis of accounting, and is therefore not
comparable to the historical financial information presented for the
forty-eight week pre-acquisition period. In addition, as a result of the
cross guarantees on the debt, Holdings debt and related issue costs and
interest accruals have been included in the Frank's financial statements.
The financial statements have been prepared in accordance with generally
accepted accounting principles and, as such, include amounts based on
management's best estimates. Actual results could differ from those
estimates.
Cash equivalents are 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.
Merchandise inventories are stated at the lower of cost or market, with
cost being determined under the first-in, first-out method.
Pre-Opening costs are expensed as incurred.
Advertising costs are expensed when the advertising first takes place.
Advertising expenditures were $24,006,000 for the forty-eight weeks ended
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
December 28, 1997, $753,000 for the four weeks ended January 25, 1998,
$22,262,000 for 1996 and $24,373,000 for 1995.
Provisions for store closing costs are charged to operations in the period
when the decision is made to close a retail unit.
Property, plant and equipment, including significant improvements thereto,
are recorded at cost. Expenditures for repairs and maintenance are
charged to expense as incurred. The cost of plant and equipment is
depreciated over the estimated useful lives using the straight-line
method. Estimated useful lives, including capital leases, are: buildings,
10-40 years or, if shorter, the terms of the lease; equipment, 3-20 years.
Leasehold improvements are depreciated over the lease terms of the
respective leases or the estimated useful lives. Upon sale or other
disposition of assets, the cost and related accumulated depreciation are
removed from the accounts and the resulting gain or loss, if any, is
recognized in the statement of income.
Intangibles, including costs in excess of net assets of acquired
businesses, are amortized over 40 years using the straight-line method.
Impairment of long-lived assets, including goodwill, is reviewed on a
store by store basis annually or when events and circumstances warrant
such a review by the Company in accordance with Statement of Financial
Accounting Standards No. 121, "Impairment of Long-Lived Assets," (FAS 121)
by comparing estimated future undiscounted cash flows associated with the
asset to the asset's carrying value to determine if an impairment exists.
If the expected future cash flows are less than the carrying amount of
such assets, the Company recognizes an impairment loss for the difference
between the carrying amount and their estimated fair value. Fair value is
estimated using expected discounted future cash flows. During the forty-
eight weeks ended December 28, 1997 the Company recorded an impairment
loss of $1,720,000 primarily for leasehold improvements at nine stores
resulting principally from declining store traffic and declining gross
margins.
Other postretirement benefits are recognized in the financial statements
during the period in which service is provided.
Leases that meet the accounting criteria for capital leases are recorded
as property, plant and equipment, and the related capital lease
obligations (the aggregate present value of minimum future lease payments,
excluding executory costs such as taxes, maintenance and insurance) are
included in long-term 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 for Frank's are included in the consolidated U.S. federal
income tax return of Holdings. In preparing its financial statements,
Frank's has determined its tax provision on a separate return basis.
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
Deferred income tax assets and liabilities are determined based on the
difference between the financial carrying amounts and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
Interim financial data is unaudited; however, in the opinion of
management, the interim data include all adjustments, consisting only of
normal recurring items, necessary for a fair statement of the results for
the interim periods.
NOTE 2: PROVISION FOR STORE CLOSINGS
During 1993, previous management of the Company approved a plan to exit
twenty-six unprofitable Frank's stores primarily in the Nashville, South
Florida and Orlando markets and to dispose of certain other properties. At
that time a reserve was recorded for the provision of long-term lease
termination agreements, brokers fees and legal costs, the expected losses
on the sale of real estate and the write-off of leasehold improvements and
equipment of the closed stores. All of the stores were closed by March
1994. The Company terminated nine leased locations in fiscal 1994 and an
additional six locations in fiscal 1995 through 1997, the costs of which
approximated the original reserve for these locations. As a result, no
adjustments had been recorded to the store closing reserve during this
period.
Reserve for store closings, included in Accrued expenses and Other
liabilities and deferred credits, are as follows:
January 25, January 26,
1998 1997
----------- -----------
Lease termination, broker and
legal fees $ 9,629 $2,232
Losses on the sale of real
estate 1,980
------- ------
$11,609 $2,232
======= =======
Lease termination, broker and legal fees includes the anticipated future
minimum lease cost, net of estimated sublease income; early lease
termination costs on locations not subleased and; broker and legal
fees related to eight leased locations. The Company's policy is to record
such amounts on an undiscounted basis. Leases on these locations
expire from December 2002 through October 2011. Annual lease expense
approximates $1.7 million. Total lease commitments at January 25, 1998
approximates $16.1 million. Annual sublease income approximates $622,000.
Estimate future sublease income, related to current sublease agreements,
approximates $4.4 million.
Losses on the sale of real estate represents the difference between the
book value of three owned locations of $4.2 million and the anticipated
recovery value of these properties.
<PAGE>
As of January 26, 1997, there were eleven remaining locations of which
five were vacant and six were subleased. The Company actively pursued
tenants for the vacant locations and based on its periodic evaluation of
store closing costs, management was optimistic that such locations could
be sublet or terminated with minimal additional loss. During 1997, three
sub-tenants defaulted. As a result of these unanticipated defaults,
management reassessed recovery rates on the remaining locations and
determined that an additional loss provision of $6.7 million was required
to reflect the estimated future minimum lease payments and legal fees as
a result of the delay in exit strategy for those locations leased on a
long-term basis. This $6.7 million adjustment to the reserve was recorded
in the forty-eight week period ended December 28, 1997.
As a result of the acquisition, new management has revised the Company's
exit strategy with respect to unprofitable Frank's stores by accelerating
the timing for the disposal of those stores previously identified by
former management, resulting in a $5.4 million additional store closing
liability recorded under purchase accounting. This liability primarily
represents the reduction in estimated recovery value of owned properties
of approximately $2.0 million and estimated early lease termination
costs on five leased facilities of $3.4 million as a result of this
accelerated exit strategy.
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
NOTE 3: INTERCOMPANY TRANSACTIONS AND ALLOCATIONS
Allocated Corporate Services:
The results of the Company include 100% of Holdings' costs incurred for
certain corporate overhead, such as risk management, human resources,
corporate law, corporate finance and accounting, treasury and public
affairs. 100% of Holdings' costs incurred, aggregated $4,532,000,
$10,000, $4,705,000, and $4,508,000 for the forty-eight weeks ended
December 28, 1997, the four weeks ended January 25, 1998 and for the
fiscal years ended January 26, 1997 and January 28, 1996, respectively.
Cash Management:
Frank's utilized Holdings' centralized cash management services. Under
this arrangement Frank's accounts receivable are collected and cash
disbursements were funded by Holdings on a daily basis. Net activity
between Holdings and Frank's was reflected in the intercompany payable as
shown in the statements of cash flows.
NOTE 4: OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Forty-
Four Eight
Weeks Weeks
Ended Ended
January 25, December 28,
1998 1997 1996 1995
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Interest on cash and cash equivalents
and marketable securities $ 0 $ 1,035 $ 0 $ 0
Gain (loss) on the sale of property
and the termination or sale
of leases (29) 1,382 (264) 469
Cost associated with the disposition 0 (4,594) 0 0
Other 12 167 38 38
---- ------- ------ ------
Total $(17) $(2,010) $(226) $507
==== ======= ====== ======
</TABLE>
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
NOTE 5: INCOME TAXES
Differences between income taxes of continuing operations and income taxes
based on statutory federal income tax rates applied to income before taxes
are as follows:
<TABLE>
<CAPTION>
Forty-
Four Eight
Weeks Weeks
Ended Ended
January 25, December 28,
1998 1997 1996 1995
----------- ----------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Federal income taxes based
on statutory rates $(3,962) $(6,703) $(4,009) $(2,635)
Increases (decreases) in rates
resulting from:
Limitation (utilization) of
tax loss carryforwards 3,946 6,508 3,850 2,097
Amortization of intangibles
and other acquisition costs 15 183 136 136
Other 1 12 23 402
------- ------- ------- -------
$ -- $ -- $ -- $ --
======= ======= ======= =======
</TABLE>
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
The tax effects of the principal temporary deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
January 25, 1998 January 26, 1997
---------------- ----------------
(In thousands)
<S> <C> <C>
Liabilities:
Property, plant & equipment $(14,765) $(14,708)
-------- --------
Gross deferred tax liabilities (14,765) (14,708)
-------- --------
Assets:
Inventory 1,867 736
Accrued expenses 4,924 3,241
Other 1,520 606
Store closing reserve 3,061 796
NOL carryforward 23,028 14,866
-------- --------
Gross deferred tax assets 34,400 20,245
-------- --------
Net deferred tax asset 19,635 5,537
Valuation allowance (19,635) (5,537)
-------- --------
$ -- $ --
======== ========
</TABLE>
Due to the Company's historical operating results, a valuation
allowance for the net deferred tax asset balance is recorded at January
25, 1998 and January 26, 1997.
As discussed in Note 1, Frank's files a consolidated tax return with
Holdings. At January 25, 1998 the federal tax NOL carryforwards, for
Holdings, on a consolidated basis, approximated $92,000,000. As a result
of the valuation allowance, approximately $57,000,000 of these
carryforwards have not been benefitted and utilization will be recognized
against goodwill. The net operating loss will expire as follows: in
January 2009 -- $39,000,000, January 2010 -- $3,000,000, January 2011 --
$6,000,000, January 2012 -- $8,500,000 and January 2013 -- $35,500,000.
At January 25, 1998 the federal tax NOL carryforwards attributable to
Frank's on a separate return basis approximated $67,700,000. As a result
of the valuation allowance, approximately $57,400,000 of these
carryforwards have not been benefitted and utilization will be recognized
against goodwill. The net operating loss will expire as follows: in
January 2009 - $30,000,000, January 2010 - $2,000,000, January 2011
$4,000,000 and January 2012 - $7,700,000 and January 2013 - $24,000,000.
The Company 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 tax law. Of the Company's entire net
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
operating loss carryforward of $67,700,000, approximately $16,000,000 will
not be subject to the limitations imposed. The annual limitation is
expected to be approximately $7,200,000 per year.
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
January 25, 1998 January 26, 1997
---------------- ----------------
(In thousands)
<S> <C> <C>
Land $ 71,101 $ 45,328
Buildings:
Owned 160,170 169,141
Capital leases (Note 10) 17,445 17,445
Equipment 87,907 110,361
Leasehold improvements 48,183 48,328
Construction in progress 3,966 3,251
-------- --------
388,772 393,854
Less accumulated depreciation,
including capital lease amounts
of $11,691 and $10,889 170,892 173,228
-------- --------
$217,880 $220,626
======== ========
</TABLE>
NOTE 7: ACQUISITION
On December 24, 1997 FNC Holdings Inc. was acquired through an equity
tender offer and the purchase of treasury shares from Holdings, and
Holdings, redeemed a majority in principal amount of Holdings' outstanding
Senior Notes pursuant to a separate debt tender offer. In addition,
Holdings and Frank's entered into a Senior Credit Facility (See Note 9).
The total cash equity investment by the investors was $166 million.
The proceeds of the initial draw under the Senior Credit Facility,
together with the equity investment of $166 million by the investors,
were used, among other thing, to fund the equity and debt tender offers, to
pay merger consideration, to refinance certain indebtedness of Frank's and to
pay fees and expenses related to the Transactions described above. The
Transactions were accounted for in accordance with the purchase method of
accounting. As a result of the Transactions, $94,780,000 of goodwill was
recorded.
Pursuant to an agreement between Holding and Cypress Advisors, Inc.,
an affiliate of Cypress (the majority shareholder of Holdings), Holding
has paid Cypress Advisors, Inc. $4.5 million in fees for providing
services relating to the consummation of the Transactions described above.
Fees paid to Cypress Advisors, Inc. have been included in the purchase
price or debt acquisition costs as appropriate.
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
If FNC Holdings Inc. had been acquired and the Offering completed on
January 26, 1997, the pro forma net loss for the fiscal year ended January
25, 1998 would have decreased by $2,007,000.
NOTE 8: ACCRUED EXPENSES
Accrued expenses are as follows:
<TABLE>
<CAPTION>
May 17, 1998
(Unaudited) January 25, 1998 January 26, 1997
------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
Taxes, other than income taxes $11,040 $ 6,907 $ 6,072
Payroll and other compensation 6,837 6,626 5,689
Insurance 2,884 2,131 3,476
Interest 2,949 4,342 6,832
Liabilities related to acquisition 1,257 13,363
Other 20,742 20,308 17,117
------- ------- -------
$45,709 $53,677 $39,186
======= ======= =======
</TABLE>
As a result of the merger on January 7, 1998 a liability of $13.4
million, from the acquisition corporation that represented the conversion
rights for the untendered shares of Holdings common stock, was recorded by
the Company.
NOTE 9: LONG-TERM DEBT
<TABLE>
<CAPTION>
May 17, 1998
(Unaudited) January 25, 1998 January 26, 1997
------------ ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
Senior debt:
10 1/4$ Senior Subordinated Notes
due March 1, 2008 $115,000
Holdings 11 1/2% Senior Notes due
February 15, 2002 $ 25,235 $ 78,000
Mortgage notes due on varying dates
from February 1, 2001 to
September 1, 2007 29,447 29,680 38,979
Notes payable to banks 20,281 37,500
Capital leases (Note 10) 11,250 11,554 12,518
Other 518
-------- -------- --------
175,978 103,969 130,015
Less current portion 1,823 1,780 2,254
-------- -------- --------
174,155 102,189 127,761
-------- -------- --------
Subordinated debt:
Holdings 8% Convertible Subordinated
Notes due February 15, 2002 -- 65,000 65,000
--------- -------- --------
Total long-term debt $174,155 $167,189 $192,761
========= ======== ========
</TABLE>
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
The Holdings Senior Notes, issued at par, bear interest at
11 1/2%. The Holdings Convertible Subordinated Notes, issued at par, bear
interest at 8% and are convertible into common stock of the General Host
at a conversion price of $8.54 per share, subject to adjustments in
certain events.
The mortgage notes have interest rates varying from 7.8% to
9.625%, and the notes mature with balloon payments on varying dates from
February 1, 2001 to May 1, 2006. The mortgage notes are secured by retail
properties owned by the Company.
At January 25, 1998 the Company has a senior secured credit
facility with various banks and financial institutions which provides for
(i) a term loan facility of up to $85 million (the "Term Loan Facility")
and (ii) a revolving credit facility of up to $110 million (the "Revolving
Credit Facility"). Term loans will mature seven years after the closing
date of the facility - December 24, 1997, in equal quarterly installments
beginning in fiscal 1999 in an aggregate amount equal to 8.8% of the
aggregate Term Loan Facility amount and increasing at each anniversary to
10.6%, 12.9%, 14.7%, 20.6% and 32.4% for fiscal years 2000, 2001, 2002,
2003, and 2004, respectively. Revolving credit loans mature in December,
2003. The Company's initial borrowing under the Senior Credit Facility
consisted of $37.5 million in term loans and $10 million of revolving
credit loans which remained outstanding as of January 25, 1998.
Term loans provided pursuant to the Term Loan Facility will bear
interest, at the Company's election, at an annual rate equal to the
Adjusted LIBO Rate (London Interbank Offering Rate) plus 2.5% or
Alternative Base Rate (as defined therein) plus 1.5%, provided that such
margins may be reduced if the Company meets certain senior leverage ratio
tests. Revolving credit loans obtained pursuant to the Revolving Credit
Facility bear interest, at the Company's election, at an annual rate equal
to the Adjusted LIBO Rate plus 2.25% or Alternative Base Rate plus 1/25%,
provided that such margins may be reduced if the Company meets certain
senior leverage ratio tests. The Alternative Base Rate is the highest of
the bank's Prime Rate, the Federal Funds Effective Rate plus 0.50% and the
base CD Rate plus 1.00%. In addition, there is a commitment fee equal to
0.50% per annum on the total undrawn portion of the Term Loan Facility and
the Revolving Credit Facility.
Among other obligations, the Senior Credit Facility requires the
Company to satisfy certain tests and maintain specified financial ratios,
including a minimum interest coverage ratio and a maximum leverage ratio.
In addition, the Senior Credit Facility restricts, among other things, the
Company's ability to incur additional indebtedness and to make
acquisitions, investments and capital expenditures beyond a certain level.
In March 1998 the Company issued $115 million of 10 1/4% Senior
Subordinated Notes due March 1, 2008 (the "Offering") and utilized
approximately $110.7 million to pay down $17.2 million of indebtedness
under the Term Loan Facility and to repay the remaining outstanding
11 1/2% Senior Notes of $25.2 million and the $65 million of 8%
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
Convertible Subordinated Notes including premium of $2,208,000 and accrued
interest of $1,013,000 on March 30, 1998. In conjunction with the
Offering the Company wrote-off debt issue costs of $1,317,000 related to
the 11 1/2% Senior Notes and the 8% Convertible Subordinated Notes.
The Company was in compliance with all of the bank agreement
covenants and other restrictions under all other debt agreements at
January 25, 1998.
Under the most restrictive provisions of any of the Holdings or
Frank's debt agreements, total General Host shareholders' equity available
to pay cash dividends or purchase treasury stock was below the required
minimum level by $44,364,000 at January 25, 1998.
Aggregate maturities of long-term debt for the five years
subsequent to 1997, excluding capital lease obligations (Note 10), are
$793,000 in 1998, $865,000 in 1999, $941,000 in 2000, $4,651,000 in 2001
and $91,066,000 in 2002.
NOTE 10: LEASES
The Company's capital leases are principally for retail stores,
for periods ranging up to 25 years. The Company's operating leases are
principally for retail store locations.
At January 25, 1998 lease obligations under capital leases,
included in long-term debt (Note 9), and operating leases with lease terms
longer than one year, are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
---------------- ----------------
(In thousands)
<S> <C> <C>
Payable in 1998 $ 2,309 $ 12,046
1999 2,363 12,078
2000 2,322 11,378
2001 2,202 10,893
2002 2,078 10,313
Payable after 2003 8,353 64,705
------- --------
Total minimum lease obligations 19,627 $121,413
========
Executory costs (13)
Amount representing future interest (8,043)
-------
Present value of net minimum lease
obligations $11,571
=======
Future sublease rental income $ 3,152
========
</TABLE>
Rent expense was $20,876,000 for the forty-eight weeks ended
December 28, 1997, $1,343,000 for the four weeks ended January 25, 1998,
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
$21,915,000 in 1996 and $22,473,000 in 1995. Rent expense includes
additional rentals based on retail store sales (in excess of the minimums
specified in leases) of $707,000 for the forty-eight weeks ended
December 28, 1997, $(186,000) for the four weeks ended January 25, 1998,
$691,000 in 1996 and $815,000 in 1995 and is reduced by sublease rental
income of $603,000 in 1997, $859,000 in 1996 and $832,000 in 1995.
NOTE 11: PENSION PLAN
Retirement benefits for both salaried and hourly employees of the
Company are provided through a noncontributory, defined contribution plan
of Holdings. Contributions are determined by the Board of Directors of
Holdings based upon assessment of the Company's fiscal year's
profitability as related to pre-established financial objectives. There
were no contributions made to the plan for 1997, 1996 and 1995. The plan
also includes a 401(k) component, permitting employees to invest from 1%
to 10% of their salary in the employee's choice of an equity fund, a
balanced fund or a fixed income fund. The plan does not provide an
employer match.
NOTE 12: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and cash equivalents
The carrying value amount approximates fair value because of the short
maturity of those investments.
Long-term debt
The fair value of the Company's long-term debt is estimated based upon the
quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities.
The estimated fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
January 25, 1998 January 26, 1997
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $16,100 $16,100 $3,526 $3,526
Long-term debt $168,969 $169,978 $195,015 $178,180
</TABLE>
<PAGE>
Frank's Nursery & Crafts, Inc.
(a wholly-owned subsidiary of Holdings)
Notes to Financial Statements
NOTE 13: LITIGATION AND OTHER CONTINGENCIES
In the normal course of business the Company is subject to various
claims. In the opinion of management, any ultimate liability arising from
or related to these claims should not have a material adverse effect on
future results of operations or the consolidated financial position of the
Company.
NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments were $21,523,000 for the forty-eight weeks ended
December 28, 1997, $301,000 for the four weeks ended January 25, 1998,
$19,685,000 in 1996, and $23,286,000 in 1995. Income tax payments were
$47,000 for the forty-eight weeks ended December 28, 1997, $55,000 in 1996
and $449,000 in 1995.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if
given or made, such information or representations must not be relied
upon as having been authorized. This Prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any securities other
than the securities to which it relates or an offer to sell or the
solicitation of an offer to buy such securities in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is
correct as of any time subsequent to its date.
___________
TABLE OF CONTENTS
Page
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . 10
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
The Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 37
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 40
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Unaudited Pro Forma Financial Data . . . . . . . . . . . . . . . . 42
Selected Historical Financial and Other Data . . . . . . . . . . . 47
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . . . . . . 75
Certain Relationships and Related Transactions. . . . . . . . . . . 77
Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 79
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . 83
Description of Exchange Notes . . . . . . . . . . . . . . . . . . . 94
Certain United States Federal Income
Tax Consequences of the Exchange . . . . . . . . . . . . . . . . 136
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . 136
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Independent Accountants . . . . . . . . . . . . . . . . . . . . . . 137
Index to Financial Statements . . . . . . . . . . . . . . . . . . . 138
Until _______________, 1998 (90 days after the date of this Prospectus),
all dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
Frank's Nursery & Crafts, Inc.
_________________________
PROSPECTUS
_________________________
Offer to Exchange up to $115,000,000 of its 10 1/4% Series B Senior
Subordinated Notes due 2008 which have been Registered under the Securities
Act for any of its outstanding 10 1/4% Senior Subordinated Notes due 2008
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
Section 561 of the Michigan Business Corporation Act authorizes
indemnification of directors and officers of Michigan corporations. The
Registrant's Restated Articles of Incorporation provide that no director
of the corporation shall be personally liable to the corporation or its
shareholders for money damages for any action taken or any failure to take
any action as a director, except liability for any of the following: (i)
the amount of a financial benefit received by a director to which he or
she is not entitled, (ii) intentional infliction of harm on the
corporation or the shareholders, (iii) a violation of Section 551 of the
Michigan Business Corporation Act or (iv) an intentional criminal act.
The Registrant's By-laws permit it to indemnify directors and officers
against expenses, attorneys' fees, judgments, fines and settlements
reasonably incurred in connection with any threatened, pending or
completed action or proceeding brought by a third party so long as the
director or officer acted in good faith and in a manner reasonably
believed not to be opposed to the best interests of the Company. The By-
laws also allow the Registrant to indemnify directors and officers against
expenses and attorneys' fees related to any threatened, pending or
completed action brought by or in the right of the Company so long as the
director acted in good faith and in a manner reasonably believed not to be
opposed to the best interests of the Company. Where the action is brought
by or in the right of the Company, however, no indemnification is allowed
as to any claim where the director or officer is judged to be liable for
negligence or misconduct in the performance of his or her duties to the
Company unless such indemnification is specifically approved by the court
in which such action was brought.
Though the Registrant's By-laws permit indemnification in the
situations described above, each request for indemnification must be
individually authorized by (i) the board by a majority vote of a quorum
consisting of directors who were not parties to the action or proceeding,
(ii) by independent legal counsel in a written opinion if such quorum is
not obtainable or (iii) the Company's shareholders. To the extent that a
director or officer is successful on the merits or otherwise in defense of
any action, suit or proceeding, the Registrant's By-laws dictate that he
or she must be indemnified against expenses actually and reasonably
incurred.
The Registrant maintains insurance coverage for losses incurred by
its directors and officers as a result of any actual or alleged Wrongful
Act (as defined therein) performed by them during the Policy Period (as
defined therein) or Discovery Period (as defined therein) while acting in
their respective capacities as directors or officers of the Company. The
insurance policy also covers losses incurred by the Company arising from a
Securities Claim (as defined therein) raised against the Company or a
claim made against its directors or officers during the Policy Period or
Discovery Period where the Registrant has indemnified the directors and
officers for their personal losses.
<PAGE>
Item 21. Exhibits and Financial Statements
(a) Exhibits
See list of Exhibits.
(b) Financial Statement Schedules
Schedules other than those listed above are omitted
because the conditions requiring their filing do not exist, or
because the required information is provided in the Consolidated
Financial Statements, including the notes thereto.
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Exchange Offer
Registration Statement;
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Exchange Offer
Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Exchange Offer Registration
Statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in
the Registration Statement or any material change to such
information in the Exchange Offer Registration Statement.
<PAGE>
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to Item 4,
10(b), 11, or 13 of this Form, within one business day of receipt
of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the
effective date of the Exchange Offer Registration Statement
through the date of responding to the request.
(5) To supply by means of a post-effective amendment all
information concerning a transaction, and the Company being
acquired involved therein, that was not the subject of and
included in the Exchange Offer Registration Statement when it
became effective.
(6) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part
of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration Form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other Items of
the applicable form.
(7) That every prospectus: (i) that is filed pursuant to
paragraph (6) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Exchange Offer
Registration Statement and will not be used until such amendment
is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 3 to the Registration
Statement on Form S-4 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Troy, State of Michigan, on the
16th day of July, 1998.
Frank's Nursery & Crafts, Inc.
By: /s/Joseph R. Baczko
--------------------------
Name: Joseph R. Baczko
Title: Chief Executive Officer
and President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to the Registration Statement on Form S-4 has been signed
by the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ------- ------
/s/ Joseph R. Baczko Chairman of the Board of Directors, July 16, 1998
--------------------- Chief Executive Officer and
Joseph R. Baczko President (Principal Executive
Officer)
/s/ Adam Szopinski Executive Vice President, Chief July 16, 1998
--------------------- Operating Officer and Director
Adam Szopinski
/s/ Larry T. Lakin Executive Vice President, Chief July 16, 1998
--------------------- Financial Officer and Director
Larry T. Lakin (Principal Financial and Accounting
Officer)
/s/ David P. Spalding Director July 16, 1998
---------------------
David P. Spalding
/s/ James A. Stern Director July 16, 1998
--------------------
James A. Stern
/s/ Bahram Shirazi Director July 16, 1998
--------------------
Bahram Shirazi
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
Number Document Description
- ------- ---------------------
2.1 Agreement and Plan of Merger dated as of November 22, 1997,
between FNC Holdings Inc. (formerly known as General Host
Corporation) and Cyrus Acquisition Corp.*
3.1 Restated Articles of Incorporation of Frank's Nursery & Crafts,
Inc.*
3.2 By-laws of Frank's Nursery & Crafts, Inc.*
4.1 Indenture dated as of February 26, 1998 between Frank's Nursery
& Crafts, Inc. and Bankers Trust Company*
4.2 Registration Rights Agreement dated as of February 26, 1998 by
and among Frank's Nursery & Crafts, Inc. and Goldman, Sachs &
Co. and Chase Securities Inc.*
5.1 Opinion of Simpson Thacher & Bartlett*
10.1 Credit Agreement dated as of December 24, 1997 among Frank's
Nursery & Crafts, Inc., Cyrus Acquisition Corp., General Host
Corporation, the lenders party thereto, The Chase Manhattan
Bank and Goldman Sachs Credit Partners L.P.*
12.1 Amended statements regarding computation of ratios*
23.1 Consent of Simpson Thacher & Bartlett (included as part of its
opinion filed as Exhibit 5.1)*
23.2 Consent of Price Waterhouse LLP
25.1 Statement of Eligibility on Form T-1 of Bankers Trust Company
under the Trust Indenture Act of 1939*
99.1 Financial Data Schedules*
99.2 Form of Letter of Transmittal used in connection with the
Exchange Offer*
99.3 Form of Notice of Guaranteed Delivery used in connection with
the Exchange Offer*
99.4 Form of Exchange Agent Agreement*
*Previously filed.
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Frank's Nursery & Crafts, Inc. (File
No. 333-50815, Amendment No. 3) of our report dated March 13, 1998 relating
to the financial statements of Frank's Nursery & Crafts, Inc., which appears
in such Prospectus. We also consent to the references to us under the
headings "Independent Accountants" and "Selected Financial Data" in such
Prospectus. However, it should be noted that PricewaterhouseCoopers LLP
has not prepared or certified such "Selected Financial Data."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
July 16, 1998
