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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission file number 1-5364
FRANK'S NURSERY & CRAFTS, INC.
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-1561374
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
1175 West Long Lake, Troy, MI 48098
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(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (248) 712-7000
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Number of voting shares of the registrant's Common Stock outstanding as
of April 22, 1999: 1,000 held by FNC Holdings Inc. There is no public trading
market for the outstanding shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
OVERVIEW
Frank's Nursery & Crafts, Inc. ("Frank's", the "Company" or the
"Registrant") 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 31,
1999, the Company operated 254 retail stores in 15 states primarily in the East
and Midwest regions of the United States under the name Frank's Nursery &
Crafts(R). References to "Holdings" refer to the sole shareholder of Frank's,
FNC Holdings Inc. (formerly known as General Host Corporation), a New York
Corporation. In December 1997 Holdings was acquired by The Cypress Group LLC
("Cypress"), a New York based private equity group. Unless otherwise stated, all
statistics in this Item were compiled as of January 31, 1999.
Frank's was incorporated under the laws of the State of Michigan in
1957. The Company operates entirely in one industry segment, the lawn and garden
retail industry as defined below. The Company's principal executive offices are
located at 1175 West Long Lake, 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 Trim-a-Tree merchandise and snow removal, power and
watering equipment, was approximately $79.1 billion in 1998 and grew at 3.4%
over the $76.5 billion estimated for 1997. The Company also believes that, for
the 10 years covering the period 1988 through 1998, the lawn and garden industry
grew at a compound annual growth rate of approximately 7.4%. Among other
factors, the Company believes that the principal reasons for this sustained
growth were the positive effects of household formations and housing starts, the
increasing popularity of gardening as a leisure activity and favorable
demographic trends such as the aging of the baby-boomer population. Highlighting
the widespread popularity of gardening, the Company believes that 64% of U.S.
households participated in some form of gardening activity in 1997.
The lawn and garden market is highly seasonal with the spring season
accounting for the majority of annual product sales while the fall season
represents a much lesser portion. The market for
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green goods is generally non-branded and highly differentiated by both specimen
and quality while the market for hard goods, fertilizers and chemicals is
composed of both national and private label brands. At the retail level, the
lawn and garden market is highly fragmented and consists of national and
regional chains of specialty retailers, mass merchants and home centers as well
as thousands of local, independent garden centers and nurseries. With the
exception of the garden center and nursery segment, few retailers operate their
lawn and garden centers on a year round basis or as full line lawn and garden
retailers. The Company believes that the top ten retailing companies represented
approximately 16% of industry sales in 1997. The Company believes that the
primary competitive factors in lawn and garden retailing include breadth of
product assortment, product quality, price and knowledgeable service. The
Company believes that it competes effectively on the above factors, as well as
others, and that its competence in the retailing of lawn and garden products
will enable it to gain market share in the future from increased penetration of
its existing markets as well as from geographic expansion to new ones.
COMPANY STRATEGY
The Company plans to continue to build on its core competencies in the
retailing of plants and lawn and garden products and enhance its current market
position as the leading specialty retailer in this category. Management intends,
in part, to achieve its objective of continued market leadership by: (i)
completing its store refurbishment program started in 1998 to cover all existing
254 stores, (ii) further focusing its merchandising and operating strategies on
the lawn and garden segment and product categories complimentary to it and,
(iii) expansion in its existing markets as well as new ones through store
openings and selected acquisitions.
(i) Implement Store Refurbishment Program. Management
expects to refurbish all of the Company's 254 existing
locations by 2000. The program, begun in 1998, calls
for selective refurbishment, on a store-by-store basis,
of merchandising areas to include new fixturing for the
yards and stores, new signage, and overall improvements
in presentation and layout. While not all stores will
require the same level of refurbishment, the Company
expects to spend approximately $85,000 on average per
existing location.
(ii) Focus Merchandising Strategy on Core Competencies. The
Company's merchandising strategy is to continue to build on
Frank's core competencies in the retailing of green goods and
lawn and garden products and to enhance product categories
which are complimentary to them.
In the lawn and garden category, management intends (i) to
enhance and enlarge its assortments of indoor and outdoor
plants and introduce more specialized varieties,
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(ii) to increase both the breadth and quality of its
assortment of tools, gardening aids and accessories, (iii) to
expand Frank's own private label program in fertilizers,
chemicals, additives and specialty soils, as well as those of
the leading national brands (iv) to expand its presentation of
decorative planters, garden and patio accessories from
domestic and international sources and, (v) to develop and
provide proprietary customer services to support the lawn and
garden enthusiast.
The Company also intends to enhance its merchandising
assortment and presentation of dried and artificial flowers
and floral assortments, decorative home accessories and accent
pieces and to unify portions of its existing crafts product
range into a cohesive floral and home decor merchandising
presentation. The Company intends to complete the
discontinuance of certain craft categories which are no longer
consistent with its floral and home decor direction in 1999.
The Pet Category consisting of pet foods and accessories has
already been fully discontinued. Wild bird food, feeders and
bird houses, which were a part of Pet Foods will now be a part
of the Company's lawn and garden sector.
The Company enjoys a significant position in the Christmas
Trim-a-Tree segment of the lawn and garden market and intends
on developing that position further by improved and expanded
merchandise assortments. The Company also plans to continue
the program begun in 1998 calling for major in-store
presentational changes for Trim-a-Tree during the Christmas
season.
(iii) Store Expansion. The Company expects to open up to ten new
stores in 1999 and will increase the number of new stores to
be opened in successive years. The Company does not plan to
enter new markets until 2000 at which point it expects to open
stores in existing as well as new markets. Management believes
that new store expansion will result in significant sales
growth for the Company as well as help realize overall
economies in distribution, operations, purchasing, advertising
and brand recognition. Management is also committed to review
selective acquisition opportunities of independent operators
and regional chains of lawn and garden or nursery retailers.
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PRODUCT CATEGORIES
The principal products sold at the Company's retail garden and crafts
stores are as follows:
<TABLE>
<CAPTION>
Percentage of
Sales In
Product Line Fiscal Year 1998 Description
- ------------ ---------------- -----------
<S> <C> <C>
Lawn and garden 59.0% Roses, potted plants, annual and
perennial flowering plants, trees
(including live Christmas trees),
shrubs, fertilizers, seeds and bulbs,
mulches, plant accessories, hoses and
garden tools and equipment
Floral Decor 11.2 Dried, silk and acrylic flowers and
arrangements
Christmas 13.8 Artificial Christmas trees,
decorations and trimmings
Crafts 13.2 Candles, paint and paint accessories,
frames, art supplies, and wood crafts
Pet Supplies 2.8 Bird houses, feeders, seeds and
---- accessories
100.0%
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</TABLE>
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.
The Company intends to build on its reputation in the live plant
category and introduce more specialized and differentiated assortments on a
year-round basis. Similarly, the assortment of gardening tools, aids and
accessories will be increased. The Company continues to grow the Frank's private
label business in gardening tools, potting soil, fertilizers and related
merchandise.
Lawn and garden sales are highest in the spring with the largest impact
being in the first fiscal quarter and the early part of the second fiscal
quarter, then declining during middle and late
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summer. There is an early fall sales season in these products that is less
significant than the spring sales season. In the winter months, sales of such
products are limited essentially to indoor plants.
FLORAL DECOR. The Company's floral products include dried and
artificial flowers and arrangements. Such floral products exhibit high inventory
turnover, strong operating margins and low seasonality. Importantly, the floral
category ties closely to the Company's emphasis on the lawn and garden market
and related home decor merchandise.
The Company is focusing on improving its current in-store floral
presentation. Additionally, the Company is enhancing its current service level
to assist customers in developing their own unique floral arrangements. The
Company expects the floral decor category to be a growth area.
Floral sells steadily throughout the year, and is stimulated by early
spring, fall and late winter promotions. During the winter months (outside of
the Christmas season) floral constitutes a large portion of the Company's sales.
CHRISTMAS. During the Christmas holiday season, the Company's second
most important selling season after spring, the Company transforms substantial
portions of its stores into Christmas trim-a-tree layouts and offers a broad
selection of seasonal merchandise and Christmas decoration for the holiday
season. The Company believes that it is the largest retailer of live Christmas
trees in the United States, selling in excess of 160,000 trees in 1998. 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. Christmas
merchandise is sold almost entirely in November and December.
CRAFTS. The Company's craft business provides a steady stream of
revenues throughout the year. The Company is re- merchandising the craft product
category by discontinuing certain classes of merchandise such as knitting and
juvenile crafts and re-focusing the assortment range of merchandise to better
complement its lawn and garden theme. During 1999 this category will be merged
with floral decor products to form a new category called floral and home decor.
PET SUPPLIES. The Company has discontinued basic (dog and cat) pet
foods and refocused its pet product line to wild-bird related products, such as
feeders, seeds and bird houses which are more complementary to its lawn and
garden theme. This category will be merged into the lawn and garden merchandise
category during 1999.
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SEASONALITY
The Company's business is highly seasonal and subject to the impact of
weather conditions, which may affect consumer purchasing patterns. In fiscal
1998, 41% of the Company's sales occurred during the spring season (late March
to mid-June) and 24% occurred during the Christmas season (November to late
December). Normally, spring is the most profitable season, and Christmas is the
next most profitable season. Operating losses usually are experienced during the
other periods of the year. The Company's slowest selling seasons are typically
the period from the beginning of the calendar year until the start of the spring
selling season, and from mid-July to October.
VENDORS
Substantially all of the plants and products the Company sells are
purchased from approximately 970 outside vendors. Alternative sources of supply
are generally available for all products sold by the Company.
STORE OPERATIONS AND MANAGEMENT
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
specialists responsible for the various product lines. The in-store staff is
generally supplemented at seasonal peaks by temporary employees.
EMPLOYEES
At January 31, 1999 the Company's employee base was 5,323 including
seasonal employees. The Company's entire employee base is non-unionized and
management considers its employee relations to be good.
DISTRIBUTION
The Company operates distribution centers in Harrisburg, Pennsylvania
and Howe, Indiana. In addition the Company leases temporary third party
distribution centers for the Christmas season.
These centers delivered approximately 57% of all merchandise to the
stores in 1998, primarily using contract carriers. The balance of the products
are delivered directly to stores by vendors.
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ITEM 2. 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 November 2007. The Company leases additional
space in Troy, Michigan measuring approximately 28,000 square feet which is
subject to a lease which expires in December 2005.
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 31, 1999, the Company operated 254 Frank's stores, 115 of
which were leased and 139 were owned (41 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........................................45
Illinois........................................32
Ohio............................................24
Indiana.........................................18
Pennsylvania....................................18
Maryland........................................17
New York........................................17
Minnesota.......................................16
New Jersey......................................15
Florida.........................................13
Connecticut.....................................12
Missouri.........................................9
Massachusetts....................................7
Virginia.........................................6
Kentucky.........................................5
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Total..........................................254
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The Company owns two and leases eight 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. In fiscal 1998 the
Company closed four stores.
The Company's existing stores are generally located on three-acre
sites. A typical store in which the overhang area leading to the yard has been
enclosed includes 18,500 square feet of indoor space (16,000 square feet of
sales area and 2,500 square feet of
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storage area), 17,000 square feet of outdoor selling area and ample offstreet
parking. The stores are designed in a "supermarket" format familiar to
customers, and shopping is done with carts in wide aisles with attractive
displays. Traffic design is intended to enhance the opportunity for impulse
purchases. Most stores are free-standing and located adjacent to or near
shopping centers; some stores are part of strip centers.
In 1999 the Company plans to open up to ten new stores. The aggregate
cost of any future expansion is dependent upon the method of financing new
stores. Such methods include build-to-suit leases, conversion of existing
buildings, and land purchases with Company-funded construction. The cost of
these methods ranges from approximately $500,000 per store for build-to-suit
leases to $3 to $3.5 million per store for land purchases with Company-funded
construction. The new prototype stores will be located on four-acre sites. The
stores will be designed with 23,000 square feet of indoor selling space and
32,000 of outdoor selling area. The Company intends to open new stores via
build-to-suit operating leases whenever possible.
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. 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.
ITEM 3. LEGAL PROCEEDINGS
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 financial position of the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in
conjunction with the Financial Statements included in Item 14 and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7.
<TABLE>
<CAPTION>
Four Weeks Forty-Eight
Ended Weeks Ended
January 25, December 28,
For the fiscal year: 1998 1998 1997 1996 1995 1994
- -------------------- -------- ---------- ----------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales $512,101 $ 14,814 $515,204 $530,752 $593,270 $567,987
Income (loss) before
extraordinary item $ 7,522 $(12,904) $(18,465) $(11,791) $ (7,751) $ 2,113
Extraordinary item $ (5,148) $ -0- $ -0- $ -0- $ -0- $ -0-
Net income (loss) $ 2,374 $(12,904) $(18,465) $(11,791) $ (7,751) $ 2,113
Balance Sheet Data:
Total assets $433,263 $433,679 $469,998 $344,023 $368,806 $384,628
Total debt, including
current portion $194,695 $178,969 $169,067 $195,015 $191,872 $234,005
Shareholder's equity $151,063 $152,403 $166,441 $ 75,681 $106,258 $ 54,117
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
FISCAL 1998 COMPARED TO FISCAL 1997
The discussion and analysis below compares fiscal 1998 with a combined fiscal
1997 that is comprised of the forty-eight weeks ended December 28, 1997 and the
four weeks ended January 25, 1998. Management believes that the combined fiscal
1997 period represents a fair and comparable presentation versus fiscal 1998.
Net Sales. Net sales were $512 million for the 1998 fiscal year compared to $530
million for the 1997 fiscal year, a decrease of 3.4%. Comparable store sales
(stores open for a full year in both years) declined 1.5%, in line with the
Company's strategy to phase out of non-core businesses such as pet food and
selected craft categories. The core business including lawn and garden, home
decor and Christmas trim-a-tree increased 3.5% on a comparable store basis for
the 1998 fiscal year.
Cost of Sales Including Buying and Occupancy. Cost of sales, including buying
and occupancy expenses, was $347.5 million in fiscal 1998 compared to $384.5
million in fiscal 1997. This reduction of $37 million amounted to a 9.6%
decrease. Cost of sales, as a percentage of net sales, improved by 4.7% points
to 67.9% in 1998 compared to 72.6% in 1997. This improvement was due primarily
to a 4.6 percentage point increase in merchandise margins and a decrease of 0.1
of a percentage point in buying and occupancy costs due principally to lower
expenses in the distribution centers. The 4.6 percentage point improvement in
merchandise margins was primarily the result of the Company's strategy to reduce
deep discount promotional activities in 1998 compared to 1997 as the Company
reduced its reliance on broad category markdowns.
Selling, General & Administrative Expenses. Selling, general and administrative
expenses for fiscal 1998 were $135.8 million compared to $144.9 million in
fiscal 1997. The decrease of $9.1 million was principally the result of the
elimination of the Holdings corporate expenses of $4.5 million, lower store
operating expenses and lower administrative expenses. As a percentage of net
sales, selling, general and administrative expenses decreased by 0.8% points to
26.5% in 1998 compared to 27.3% in 1997 in accordance with a planned cost
reduction program.
Operating Income (defined as "net sales less cost of sales, including buying and
occupancy costs, and selling, general and administrative expenses"). Operating
income for fiscal 1998 was $28.8 million compared to $534,000 in fiscal 1997.
The improvement in operating income was primarily the result of improved
merchandise margins, lower distribution center costs and lower selling, general
and administrative expenses.
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Operating income as a percentage of net sales improved to 5.6% in 1998 compared
to breakeven in 1997. The principal contributor to this improvement was the 4.6
percentage point gain in merchandise margins.
Interest and Debt Expense. Interest and debt expense was $21.8 million in fiscal
1998 compared with $21.2 million in fiscal 1997.
Other Income (Expense). Other income for fiscal 1998 was $2.9 million compared
with expense of $1.7 million in fiscal 1997. The increase over 1997 was
principally the result of the $4.6 million of costs in 1997 related to the
acquisition.
Due to previously unrecognized tax benefits no income tax provision has been
provided for in 1998 and 1997.
Income (Loss) Before Extraordinary Item. Income before extraordinary items for
1998 was $7.5 million compared to a loss of $31.4 million for 1997. This
improvement of $38.9 million reflected improved operating income of $28.3
million as well as changes in other income (expense) as discussed above. In
addition 1997 included a provision for store closings of $6.7 million and an
impairment loss of $1.7 million described in Note 1 of the Notes to Financial
Statements.
In the 1998 first quarter the Company recorded an extraordinary charge of $5.1
million as a result of early extinguishment of debt and major modifications to
existing credit lines. The early extinguishment of debt resulted in an
extraordinary charge of $3.5 million representing the premium of $2.2 million
and other costs associated with the retirement of the 11.5% Senior Notes and the
8% Convertible Notes. In addition, costs were incurred for early payment of a
term loan and overall credit line refinancing.
Net Income (Loss). Net income for 1998 was $2.4 million compared with a loss of
$31.4 million for 1997. The net income improvement reflects improved income
before the extraordinary item partially offset by the extraordinary charge as
discussed above.
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 period represents a fair and comparable presentation versus
fiscal 1996.
Net Sales. Net sales for fiscal 1997 were $530 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 expenses, was $384.5 million for fiscal 1997 compared
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to $383.1 million for fiscal 1996, an increase of 0.4%. Cost of sales as a
percentage of net sales increased 0.4% points to 72.6%. Merchandise gross
margins, as a percentage of net sales, declined 0.8 of a percentage point 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. Buying and occupancy costs for fiscal 1997 decreased by $2.1 million,
and as a percentage of net sales decreased 0.3% points compared to fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1997 were $144.9 million compared to $138.1
million for fiscal 1996, an increase of 5.0% 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
expenses increased 1.3% points to 27.3%.
Operating Income. Operating income for fiscal 1997 was $534,000 compared with
$9.6 million for fiscal 1996. The decrease in operating income was caused by the
decline in merchandise gross margins and selling, general and administrative
factors as discussed above.
Interest and Debt Expense. Interest expense for fiscal 1997 was $21.2 million
compared to $20.9 million for fiscal 1996.
Other Income (Expense). Other expense was $1.7 million in fiscal 1997 compared
to $72,000 in fiscal 1996 due primarily to $4.6 million for legal and advisory
fees in connection with the acquisition and losses of $0.9 million associated
with the sale of the Company's prior headquarters and $0.5 million associated
with the closing of stores. The expense increase was offset in part by a gain of
$2.8 million associated with the termination of a leased store and higher levels
of interest income.
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 $9.1 million, the provision
for store closings in 1997 of $6.7 million, the impairment loss in 1997 of $1.7
million and increased interest and other expense as discussed above.
Liquidity and Capital Resources
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Operating Activities. Net cash used in operating activities for fiscal 1998 was
$6.1 million compared to $27 million for fiscal 1997. The decrease in net cash
used is primarily attributable to higher earnings in 1998 slightly offset by the
higher level of inventory increase and the lower decrease in accrued expenses.
The increased inventory level is primarily attributable to the Company's
strategy to increase overall inventories to ensure adequate stock levels in all
stores. The decrease in accrued expenses during 1998 of $16.8 million includes
payments of approximately $12 million to former shareholders of Holdings as they
exercised conversion rights for their untendered shares.
Investing Activities. Net cash provided by (used in) investing activities for
fiscal 1998 was $(11.9) million compared to $0.2 million in fiscal 1997. Capital
spending in 1998 was $15.8 million in 1998 compared with $12.4 million in 1997.
The 1998 expenditures relate to the Company's investment in new systems,
refurbished stores and store fixtures. Both fiscal years included net proceeds
from the sale and leaseback of Company owned stores. Net proceeds were $4
million in 1998 and $12.6 million in 1997.
Financing Activities. Net cash provided by financing activities for fiscal 1998
was $7 million compared to $39.4 million for fiscal 1997. The $7 million
provided in 1998 was the net of $115 million in gross proceeds from the Offering
of 10 1/4% Senior Subordinated Notes (the "Notes") offset by the redemption of
the remaining 11 1/2% Senior Notes and the 8% Convertible Notes and related
costs of Holdings. The $39.4 million provided in 1997 was primarily due to the
equity contribution from the purchase and a net increase in bank debt offset by
intercompany transactions with Holdings.
At January 31, 1999 the Company had a Senior Secured Credit Facility (the
"facility") with various banks and financial institutions providing for total
borrowings of up to $130.3 million. The Company had borrowings outstanding of
$40.3 million at January 31, 1999. In addition the Company had outstanding
letters of credit of $5 million. The facility requires the Company to maintain
certain financial ratios. The Company was in compliance with all of its
covenants under the facility and other restrictions under all other debt
agreements at January 31, 1999. Total debt at January 31, 1999 was $194.7
million including borrowings under the facility, mortgages, capital leases,
Subordinated Notes and the associated current portion of the aforementioned
debt. Cash and cash equivalents was $5.2 million at the end of fiscal 1998.
The Company's most significant cash requirements are for seasonal buildup of
merchandise inventories and capital expenditures.
Capital expenditures of the Company totalled $15.8 million in fiscal 1998.
Expenditures for fiscal 1998 included approximately $6.5 million for new systems
and approximately $4.5 million for store refurbishments and new fixtures. The
Company anticipates spending approximately $30 million for capital expenditures
in fiscal 1999 including $10 million for up to ten
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new stores and $15 million for refurbishments and new fixtures for existing
stores.
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
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.
Year 2000 Issue
The Year 2000 issue ("Y2K") is the result of computer programs using a two-digit
format, as opposed to a four-digit format to define the applicable year. Certain
computer systems will be unable to properly recognize dates beyond the year
1999. This could result in system failures or miscalculations causing
disruptions in operations. The Y2K issue may also affect the systems and
applications of the Company's vendors.
The Company has conducted an evaluation of its Information Technology ("IT") and
non-IT computer systems with respect to the Y2K issue. The Company purchased new
software in fiscal 1997 and began implementation in fiscal 1998 that brought the
majority of the Company's systems into compliance including telecommunications
and networking systems as well as the financial systems. The new systems have
been in operation since October 1998. The Company incurred approximately $8
million to purchase these systems. There are several additional systems which
require conversion, the cost of which are expected to be immaterial and
implementation is expected before September 1999. In addition, the Company uses
an independent service bureau to process payroll and payroll tax related
operations and has been notified by the service bureau that its payroll
application is Y2K compliant.
The Company has begun the process of making inquiries regarding Y2K compliance
exposures faced by its vendors. Management has insufficient information at this
time to assess the degree to which such vendors have addressed or are addressing
Y2K compliance issues. However, management believes that no major product line
of the Company's business is reliant on a single source for merchandise.
Nonetheless, there can be no assurance that the Company will be able to identify
all Y2K compliance risks, or, that all contingency plans will assure
uninterrupted business operations.
Readers are cautioned that forward-looking statements contained in this Year
2000 discussion should be read in conjunction with the Company's disclosures
under the cautionary statement for the purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995, included elsewhere in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
14
<PAGE> 16
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, since virtually all retailers would be similarly affected.
- --------------------------------------------------------
SAFE HARBOR STATEMENT under the Private Securities Litigation Reform Act of
1995: Except for the historical information contained herein, the matters
discussed in this Annual Report are forward-looking statements that involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Borrowings under the Company's Senior Secured Credit Facility are at
variable interest rates and therefore related interest expense is sensitive to
changes in the general level of U.S. interest rates and the LIBO Rate (London
Interbank Offering Rate). The Company had borrowings outstanding under this
facility of $40.3 million at January 31, 1999 with a weighted average interest
rate of approximately 7.5%. A significant portion of the Company's interest
expense has been fixed through issuance of the Company's $115 million Senior
Subordinated Notes due March 2008. The fixed interest rates on the Senior
Subordinated Notes is 10 1/4%.
15
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
The Company's financial statements and supplementary data are listed in
Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 31, 1998, The Company dismissed PricewaterhouseCoopers LLP as its
independent accountants. The decision to change accountants was approved by
the Board of Directors of the Company. PricewaterhouseCoopers LLP's reports
on the financial statements for the two fiscal years prior to fiscal 1998
contained no adverse opinion or disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope or accounting principles. In
connection with its audits for the two fiscal years prior to fiscal 1998
and through May 17, 1998, there have been no disagreements with
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers
would have caused them to make reference thereto in their report on the
financial statements for such years.
16
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the persons serving as the
directors and executive officers 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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ------------------------------
<S> <C> <C>
Joseph R. Baczko 53 Chairman of the Board of
Directors and Chief Executive
Officer
Adam Szopinski 53 President, Chief Operating
Officer and Director
Larry T. Lakin 59 Vice Chairman, Chief Financial
Officer, Treasurer and Director
William C. Boyd 69 Executive Vice President
David P. Spalding 44 Director
James A. Stern 48 Director
Bahram Shirazi 35 Director
</TABLE>
Joseph R. Baczko is Chairman of the Board and Chief Executive Officer
and has been in these positions since December 1997 after having been a private
investor and consultant since 1993. He was also President from December 1997 to
April 1999. 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.
Adam Szopinski is President, Chief Operating Officer and director since
April 1999. Prior thereto he was Executive Vice President, Chief Operating
Officer and director since December 1997 after having served as the Vice
President of Operations of Toys "R" Us International since 1989.
Larry T. Lakin is Vice Chairman, Chief Financial Officer and director
since April 1999. In June 1998 Mr. Lakin was named Treasurer. Prior thereto he
was Executive Vice President, Chief Financial Officer and director since
December 1997. Mr. Lakin previously served as the Chief Financial Officer and a
principal of Shiara, Inc. ("Shiara"), a private fragrance company and cosmetic
venture, from April 1994 to December 1997.
17
<PAGE> 19
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.
Mr. 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 in December 1997 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. Mr. Spalding is also a director of Lear Corporation, AMTROL Inc.
and Williams Scotsman, Inc.
James A. Stern became a director in December 1997 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., Genesis ElderCare Corp.,
WESCO International, Inc., and a trustee of Tufts University.
Bahram Shirazi became a director in December 1997. Mr. Shirazi has been
a managing director of Cypress since 1998. Prior to 1998 he was 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.
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.
18
<PAGE> 20
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
for services rendered in all capacities to the Company for the fiscal years
ended January 26, 1997 (fiscal year 1996), January 25, 1998 (fiscal year 1997)
and January 31, 1999 (fiscal year 1998) for those persons who were at January
31, 1999, the Chief Executive Officer and the only other executive officers of
the Company. The Chief Executive Officer and the other three executive officers
will be referred to collectively as the "Named Officers".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------
Other All Other
Fiscal Annual Compensation
Name and Principal Position Year Salary($) Bonus ($)(1) Compensation(2) ($)(3)
- --------------------------- ------ --------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Joseph R. Baczko
Chairman of the Board, 1997 $ 28,846 $ -0- $ -0- $ 83
Chief Executive Officer 1998 $ 500,000 $ 250,000 $ 53,300 $ 992
Adam Szopinski
President, 1997 $ 14,423 $ -0- $ -0- $ 42
Chief Operating Officer 1998 $ 250,000 $ 125,000 $ 38,193 $ 497
Larry T. Lakin
Vice Chairman, 1997 $ 14,423 $ -0- $ -0- $ 59
Chief Financial Officer 1998 $ 250,000 $ 125,000 $ 38,402 $ 702
William C. Boyd 1996 $ 163,000 $ -0- $ -0- $ 543
Executive Vice President 1997 $ 163,000 $ -0- $ -0- $ 67
1998 $ 163,000 $ 48,000 $ -0- $ 67
(1) Amounts earned under the Executive Officer Incentive Program of the Company for services rendered in the respective
fiscal years.
(2) Represents living expenses paid by the Company.
(3) Includes the portion of the insurance premiums paid by the Company on behalf of the Named Officers for term and
supplemental life insurance.
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the Company's 1998 fiscal year, Mr. Spalding, Mr. Stern
and Mr. Shirazi were the members of the Company's Compensation
Committee.
19
<PAGE> 21
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICIES
The Compensation Committee (the "Committee"), which is comprised of
three non-employee directors, is responsible for establishing the Company's
executive compensation policies, reviewing the compensation of officers and key
employees, recommending and approving changes in compensation and reviewing and
recommending changes in the Company's employee benefit programs and management
succession plans.
In connection with its responsibility to guide the Company's policies,
plans and programs, the Committee approves the annual compensation of the
Company's executive officers and other key employees, which consists primarily
of base salary and bonus.
ELEMENTS OF EXECUTIVE OFFICER COMPENSATION
Base Salaries
The Company maintains salary ranges for its executive officers based on
the practices of other companies with revenues and operating characteristics
similar to those of the Company, geographic criteria and responsibility level.
Using the ranges as a guideline, the Company establishes salaries at levels
necessary to attract and retain talented executive officers and other key
employees.
The Committee's approval of salary increases for executive officers
depends on the Company's performance in the prior fiscal year, achievement of
non-financial objectives and overall personal performance.
Bonuses
The program provides that the executive officers of the Company are
eligible to receive bonus payments based on the achievement of profit levels
that are determinable at the discretion of the Committee and personal
performance. The Committee has the authority to waive performance or
profitability criteria under the program when awarding salary increases or when
granting bonuses.
STOCK OPTION GRANTS
On February 6, 1998, the Company terminated the Holdings stock option
plans and cancelled all remaining options issued thereunder. The Company and
Holdings intend to implement a new stock option plan.
Committee Members: David P. Spalding
James A. Stern
Bahram Shirazi
20
<PAGE> 22
EMPLOYMENT CONTRACTS
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
executive's ability to compete with the Company.
ITEM 12. 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 April 22, 1999, 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 22, 1999 by (i) owners of more
than 5% of the outstanding shares of Holdings Common Stock, (ii) each director
and executive officer of Holdings, and (iii) all directors and executive
officers 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.
21
<PAGE> 23
<TABLE>
<CAPTION>
Shares of Holdings Common Stock
---------------------------------
Amount Percentage
Beneficially of
Owned Class
-------------- -------------
<S> <C> <C>
Beneficial Owners
PRINCIPAL SHAREHOLDERS:
Cypress Merchant Banking Partners L.P.(a) 29,295,900 94.5%
Cypress Offshore Partners L.P. (a)(b) 1,517,353 4.9%
EXECUTIVE OFFICERS AND DIRECTORS:
Joseph R. Baczko 186,747 *
Adam Szopinski --- ---
Larry T. Lakin --- ---
William C. Boyd --- ---
David P. Spalding(a) --- ---
James A. Stern(a) --- ---
Bahram Shirazi --- ---
All executive officers and directors as a group 186,747 *
- -------------------
</TABLE>
* Represents holding of less than 1%.
(a) 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.
(b) Cypress Offshore owns its interest in Holdings through its wholly owned
subsidiary Cypress Garden Ltd.
22
<PAGE> 24
ITEM 13. 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.
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 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 in a stockholders agreement (the
"Stockholders Agreement") with Mr. Baczko, the Company's Chairman and Chief
Executive Officer 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.
23
<PAGE> 25
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 share of Holdings Common Stock in sales of Holdings Common Stock by
the Cypress Entities.
LOANS TO OFFICERS
The Company made an interest-free bridge loan to Mr. Baczko on January
27, 1999 for $420,000. The loan was repaid on April 12, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
A. List of documents filed as part of this report:
<TABLE>
<CAPTION>
1. FINANCIAL STATEMENTS
-------------------- Page No.
--------
<S> <C>
- Report of Independent Auditors F-1
- Report of Independent Accountants F-1.1
- Balance Sheets - as of F-2
January 31, 1999 and January 25, 1998.
- Statements of Operations - for the F-3
year ended January 31, 1999, for the
four-week period and forty-eight week
period ended January 25, 1998 and
December 28, 1997, respectively, and for the year
ended January 26, 1997.
- Statements of Changes in F-4
Shareholder's Equity - for the year
ended January 31, 1999, for the four-week period and
forty-eight week period ended January 25, 1998 and
December 28, 1997, respectively, and for the year
ended January 26, 1997.
- Statements of Cash Flows - for F-5
</TABLE>
24
<PAGE> 26
the year ended January 31, 1999, for the
four-week period and forty-eight week
period ended January 25, 1998 and
December 28, 1997, respectively, and for the year
ended January 26, 1997.
- Notes to Financial Statements F-6 to F-16
2. FINANCIAL STATEMENT SCHEDULES
Schedules not included have been omitted because
they are not applicable or the required information
is shown in the financial statements or notes
thereto.
II - Valuation and qualifying accounts- F-17 to F-19
years ended January 31, 1999, January 25, 1998
and January 26, 1997.
25
<PAGE> 27
3. EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
2.1 Agreement and Plan of Merger dated as of November 22, 1997,
between FNC Holdings Inc. (formerly General Host Corporation)
and Cyrus Acquisition Corp. (Incorporated by reference to the
Company's Registration Statement (Form S-4), Registration No.
333-50815 ("the Form S- 4"), Exhibit 2.1.)
3.1 Restated Articles of Incorporation of the Company
(Incorporated by reference to the Form S-4, Exhibit 3.1.)
3.2 Bylaws of the Company (Incorporated by reference to the Form
S-4, Exhibit 3.2.)
4.1 Indenture dated as of February 26, 1998 between the Company
and Bankers Trust Company (Incorporated by reference to the
Form S-4, Exhibit 4.1.)
10.1 Credit Agreement dated as of December 24, 1997 among the
Company, Cyrus Acquisition Corp., General Host Corporation,
the lenders party thereto, The Chase Manhattan Bank and
Goldman Sachs Credit Partners LLP (Incorporated by reference
to the Form S-4, Exhibit 10.1.)
27.1 Financial Data Schedules
B. Reports on Form 8-K
During the last quarter of the period covered by this report,
the Company did not file a report on Form 8-K.
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FRANK'S NURSERY & CRAFTS, INC.
Date: April 22, 1999 By /s/ Joseph R. Baczko
-----------------------------
Joseph R. Baczko
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: April 22, 1999 /s/ Joseph R. Baczko
-------------------------------
Joseph R. Baczko
Chairman of the Board of
Directors and Chief Executive
Officer
(Principal Executive Officer)
Date: April 22, 1999 /s/ Adam Szopinski
-------------------------------
Adam Szopinski
President,
Chief Operating Officer
and Director
Date: April 22, 1999 /s/ Larry T. Lakin
-------------------------------
Larry T. Lakin
Vice Chairman, Chief
Financial Officer, Treasurer
and Director
(Principal Financial and
Accounting Officer)
Date: April 22, 1999 /s/ David P. Spalding
-------------------------------
David P. Spalding
Director
27
<PAGE> 29
Date: April 22, 1999 /s/ James A. Stern
-------------------------------
James A. Stern
Director
Date: April 22, 1999 /s/ Bahram Shirazi
-------------------------------
Bahram Shirazi
Director
28
<PAGE> 30
Report of Independent Auditors
The Board of Directors and Shareholder
Frank's Nursery & Crafts, Inc.
We have audited the balance sheet of Frank's Nursery & Crafts, Inc. as of
January 31, 1999, and the related statement of operations, changes in
shareholder's equity, and cash flows for the year then ended (the fiscal 1998
financial statements). Our audit also included the financial statement schedule
listed in the Index at Item 14(A). 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the fiscal 1998 financial statements referred to above present
fairly, in all material respects, the financial position of Frank's Nursery &
Crafts, Inc. at January 31, 1999, and the results of its operations and its cash
flows for the fiscal year then ended, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Detroit, Michigan
March 19, 1999
F-1
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Frank's Nursery & Crafts, Inc.
In our opinion, the financial statements in the index appearing under
Item 14(A)(1) and (2) on pages 23 and 24 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 the results of their operations and their
cash flows for the four-week period and forty-eight week period ended January
25, 1998 and December 28, 1997, respectively, and the year ended January 26,
1997, 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/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
March 13, 1998
F-1.1
<PAGE> 32
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 25,
1999 1998
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,156 $ 16,100
Notes receivable 569 1,595
Accounts receivable 2,294 3,012
Merchandise inventory 97,931 81,051
Prepaid expenses and other current assets 6,152 6,218
---------- ----------
Total current assets 112,102 107,976
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 210,575 217,880
GOODWILL, LESS ACCUMULATED AMORTIZATION
OF $2,575 AND $174 95,067 94,575
OTHER ASSETS AND DEFERRED CHARGES 15,519 13,248
---------- ----------
$ 433,263 $ 433,679
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 33,782 $ 30,852
Accrued expenses 41,036 53,677
Notes payable to banks 20,000 10,000
Current portion of long-term debt 3,726 1,780
---------- ----------
Total current liabilities 98,544 96,309
---------- ----------
LONG-TERM DEBT:
Senior debt 55,969 102,189
Subordinated debt 115,000 65,000
---------- ----------
Total long-term debt 170,969 167,189
---------- ----------
OTHER LIABILITIES AND DEFERRED CREDITS 12,687 17,778
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, $1.00 par value, 1,000
shares authorized, 1,000 shares issued 1 1
Capital in excess of par value 165,999 165,999
Net parent investment (4,407) (693)
Retained deficit (10,530) (12,904)
---------- ----------
Total shareholder's equity 151,063 152,403
---------- ----------
$ 433,263 $ 433,679
========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE> 33
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Post- | Pre-
acquisition | acquisition
Period | Period
(Successor- | (Predecessor-
basis) | basis)
Four Weeks | Forty-Eight
Ended | Weeks Ended
JANUARY 31, January 25, | December 28, January 26,
1999 1998 | 1997 1997
---------- ---------- | ----------- -----------
|
<S> <C> <C> | <C> <C>
NET SALES $ 512,101 $ 14,814 | $ 515,204 $ 530,752
|
OPERATING COSTS AND EXPENSES: |
COST OF SALES, INCLUDING |
BUYING AND OCCUPANCY 347,477 17,532 | 367,008 383,099
SELLING, GENERAL AND |
ADMINISTRATIVE 135,821 8,394 | 136,550 138,099
PROVISION FOR STORE CLOSINGS | 6,677
IMPAIRMENT LOSS | 1,720
AMORTIZATION OF GOODWILL 2,401 174 | 381 410
OTHER (INCOME) EXPENSE (2,929) 17 | 1,701 72
---------- --------- | ---------- ---------
TOTAL OPERATING COSTS AND |
EXPENSES 482,770 26,117 | 514,037 521,680
---------- --------- | ---------- ---------
INCOME (LOSS) FROM OPERATIONS 29,331 (11,303) | 1,167 9,072
INTEREST AND DEBT EXPENSE 21,809 1,601 | 19,632 20,863
---------- --------- | ---------- ---------
INCOME (LOSS) BEFORE INCOME |
TAXES AND EXTRAORDINARY ITEM 7,522 (12,904) | (18,465) (11,791)
INCOME TAXES |
---------- --------- | ---------- ---------
INCOME (LOSS) BEFORE |
EXTRAORDINARY ITEM 7,522 (12,904) | (18,465) (11,791)
EXTRAORDINARY ITEM (5,148) |
---------- --------- | ---------- ---------
NET INCOME (LOSS) $ 2,374 $ (12,904) | $ (18,465) $ (11,791)
========== ========= | ========== =========
</TABLE>
See accompanying notes.
F-3
|
<PAGE> 34
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999,
FOR THE FOUR-WEEK PERIOD AND FORTY-EIGHT
PERIOD ENDED JANUARY 25, 1998 AND DECEMBER 28, 1997, RESPECTIVELY,
AND FOR THE YEAR ENDED JANUARY 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Capital in Total
Common Excess of Net Parent Retained Shareholder's
Stock Par Value Investment Deficit Equity
------ --------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 28, 1996 $ 1 $48,391 $ 133,933 $(76,067) $106,258
Net loss (11,791) (11,791)
Decrease in net parent investment (18,786) (18,786)
------ ------- --------- -------- --------
BALANCE AT JANUARY 26, 1997 1 48,391 115,147 (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 net parent investment (114,706) (114,706)
------ ------- -------- -------- --------
BALANCE AT DECEMBER 28, 1997 1 165,999 441 -0- 166,441
Net loss for the four week
(post-acquisition) period ended
January 25, 1998 (12,904) (12,904)
Decrease in net parent investment (1,134) (1,134)
------ ------- -------- -------- --------
BALANCE AT JANUARY 25, 1998 1 165,999 (693) (12,904) 152,403
Net income 2,374 2,374
Increase in net parent investment (3,714) (3,714)
------ -------- --------- -------- --------
BALANCE AT JANUARY 31, 1999 $ 1 $165,999 $ (4,407) $(10,530) $151,063
====== ======== ========= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 35
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Post- | Pre-
acquisition | acquisition
Period | Period
(Successor- | (Predecessor-
basis) | basis)
Four Weeks | Forty-Eight
Ended | Weeks Ended
JANUARY 31, January 25, | December 28, January 26,
1999 1998 | 1997 1997
---------- ---------- | ----------- -----------
<S> <C> <C> | <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income (loss) $ 2,374 $ (12,904) | $ (18,465) $ (11,791)
Adjustments to reconcile net income (loss) |
to net cash provided by (used in) |
operating activities: |
Depreciation 15,731 1,257 | 18,661 20,618
Amortization 3,624 243 | 1,454 1,759
Extraordinary item 5,148 |
Provision for store closings | 6,677
Impairment loss | 1,720
Gains from sales of property, plant |
and equipment | (2,981)
Other (2,589) (1,343) | (3,188) 860
---------- --------- | --------- ---------
24,288 (12,747) | 3,878 11,446
Changes in operating assets and liabilities: |
Notes receivable 1,026 | (95)
Accounts receivable 1,177 129 | 337 (530)
Inventory (17,444) (2,892) | (757) 6,587
Prepaid expenses 55 1,473 | (167) (665)
Accounts payable 1,622 (10,981) | 13,963 91
Accrued expenses (16,830) (11,040) | (8,061) 1,249
---------- --------- | -------- ---------
Net cash provided by (used in) |
operating activities (6,106) (36,058) | 9,098 18,178
---------- --------- | -------- ---------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Additions to property, plant and equipment (15,823) 34 | (12,472) (4,371)
Proceeds from sales of property, |
plant and equipment 3,972 | 12,597 930
---------- --------- | --------- ---------
Net cash provided by (used in) |
investing activities (11,851) 34 | 125 (3,441)
---------- --------- | --------- ---------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
Issuance of long-term debt 115,000 | 1,625 5,137
Deferred financing costs (6,291) | (3,745) (439)
Decrease in net parent investment (214) (1,134) | (114,706) (18,786)
Payment of long-term debt and capital lease |
obligations (111,482) (98) | (65,073) (1,994)
Equity contribution, net | 166,000
Increase in notes payable to banks, net 10,000 | 47,500
Other 13,945 | (4,939)
---------- --------- | --------- ---------
Net cash provided by (used in) |
financing activities 7,013 12,713 | 26,662 (16,082)
---------- --------- | --------- ---------
Increase (decrease) in cash and cash equivalents (10,944) (23,311) | 35,885 (1,345)
Cash and cash equivalents at beginning of |
period 16,100 39,411 | 3,526 4,871
---------- --------- | --------- ---------
Cash and cash equivalents at end of period $ 5,156 $ 16,100 | $ 39,411 $ 3,526
========== ========= | ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Frank's Nursery & Crafts, Inc. ("Frank's" or the "Company") is a
wholly-owned subsidiary of FNC Holdings Inc. ("Holdings").
Holdings is principally owned by The Cypress Group LLC
("Cypress").
The Company operates a chain of specialty retail stores devoted to the sale of
lawn and garden, Christmas, home decor, crafts and pet supplies in the United
States. As of January 31, 1999 the Company operated 254 retail stores located in
15 states primarily in the East and Midwest regions of the country.
FISCAL YEAR
The fiscal year is normally comprised of 52 or 53 weeks, ending on the last
Sunday in January. The 1998 fiscal year reflects a 53-week period ended January
31, 1999. The 1997 and 1996 fiscal years each reflect a 52-week period ended
January 25, 1998 and January 26, 1997, respectively. Because of the acquisition
(see Note 7), the accompanying financial statements for fiscal 1997 represent
the financial position as of January 25, 1998, and the 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements. Estimates also affect reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's financial statements to
conform to the 1998 presentation.
REVENUE RECOGNITION
The Company recognizes revenue when the customer takes possession of the
merchandise.
F-6
<PAGE> 37
FAIR VALUE OF BALANCE SHEET FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, notes receivable, accounts receivable and accounts payable
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amount of debt approximates fair value
because the interest rates for these instruments approximate the current market
rates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments, such as U.S. government
securities and bank certificates of deposit having original maturities of three
months or less, and are carried at cost plus accrued interest.
MERCHANDISE INVENTORIES
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
Pre-opening costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed when the advertising first takes place.
Advertising expenditures were $23,847 for 1998, $24,006 for the forty-eight
weeks ended December 28, 1997, $753 for the four weeks ended January 25, 1998
and $22,262 for 1996.
STORE CLOSING COSTS
Provisions for store closing costs are charged to operations in the period when
the decision is made to close a retail unit.
PROPERTY, PLANT AND EQUIPMENT
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 of the related assets 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 operations.
GOODWILL
Goodwill, represents the costs in excess of the fair value of identifiable
assets for acquired businesses. Goodwill is amortized over 40 years using the
straight-line method.
F-7
<PAGE> 38
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment of long-lived assets, including goodwill, is reviewed 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 the estimated fair value. Fair value
is estimated using discounted future cash flows. During the forty-eight weeks
ended December 28, 1997 the Company recorded an impairment loss of $1,720
primarily for leasehold improvements at nine stores resulting principally from
declining store traffic and declining gross margins.
LEASES
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 debt.
Depreciation and interest are charged to expense, and rent payments are treated
as payments of 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
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. Deferred tax assets and
liabilities are determined based on differences between the financial reporting
and income tax bases of assets and liabilities using enacted tax rates and laws
in effect when the differences are expected to reverse.
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 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.
F-8
<PAGE> 39
As a result, no adjustments had been recorded to the store closing reserve
during this period. The Company's policy is to record such amounts on an
undiscounted basis. 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 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.
Reserve for store closings, included in accrued expenses and other liabilities
are as follows:
<TABLE>
<CAPTION>
January 31, January 25,
1999 1998
---------- -----------
<S> <C> <C>
Accrued expenses $ 2,547 $ 1,044
Other labilities 6,565 10,565
---------- ----------
$ 9,112 $ 11,609
========== ==========
</TABLE>
As of January 31, 1999 there were ten remaining locations of which five were
vacant and five were subleased. During fiscal 1998 the Company sold one property
which reduced the reserve for the loss on the sale of $.3 million and subleased
two additional properties. In addition the Company incurred $2.2 million in
expenditures related to lease payments and legal costs.
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, $10 and $4,705 for the forty-eight weeks
ended December 28, 1997, the four weeks ended January 25, 1998 and for the
fiscal year ended January 26, 1997, respectively.
F-9
<PAGE> 40
NOTE 4: OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Four Weeks | Forty-Eight
Ended | Weeks Ended
JANUARY 31, January 25,| December 28, January 26,
1999 1998 | 1997 1997
---------- ---------- | ----------- ----------
<S> <C> <C> | <C> <C>
Interest on cash |
equivalents $ 1,088 | $ 1,035
Gain (loss) on the sale of |
property and the termination |
or sale of leases 1,622 $ (29) | 1,445 $ (160)
Holdings' costs associated |
with the tender offer | (4,594)
Other 219 12 | 413 88
-------- -------- | -------- ----------
$ 2,929 $ (17) | $ (1,701) $ (72)
======== ======== | ======== ==========
</TABLE>
NOTE 5: INCOME TAXES
Differences between income taxes on income (loss) before extraordinary
item and income taxes based on statutory federal income tax rates are as
follows:
<TABLE>
<CAPTION>
Four-Weeks | Forty-Eight
Ended | Weeks Ended
JANUARY 31, January 25, | December 28, January 26,
1999 1998 | 1997 1997
---------- ---------- | ----------- -----------
<S> <C> <C> | <C> <C>
Federal income taxes based on |
statutory rates $ 2,557 $ (3,962) | $ (6,703) $ (4,009)
Increases (decreases) in rates |
resulting from: |
Limitation (utilization) |
of tax loss carryforwards (3,400) 3,946 | 6,508 3,850
Amortization of intangibles |
and other acquisition costs 817 15 | 183 136
Other 26 1 | 12 23
--------- -------- | -------- ---------
$ --- $ --- | $ --- $ ---
========= ======== | ======== =========
</TABLE>
F-10
<PAGE> 41
Deferred tax assets and liabilities are composed of the following:
<TABLE>
<CAPTION>
JANUARY 31, January 25,
1999 1998
---------- ----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Inventory 1,478 1,867
Accrued expenses 2,081 4,924
Other 3,419 1,520
Store closing reserve 2,212 3,061
NOL carryforward 22,300 23,028
-------- --------
Total deferred tax assets 31,490 34,400
-------- --------
DEFERRED TAX LIABILITIES:
Property, plant & equipment $(14,913) $(14,765)
-------- --------
Total deferred tax liabilities (14,913) (14,765)
-------- --------
Net deferred tax assets 16,577 19,635
Valuation allowance (16,577) (19,635)
-------- --------
$ -- $ --
======== ========
</TABLE>
Due to the Company's historical operating results, a valuation allowance
for the net deferred tax asset balance is recorded at January 31, 1999
and January 25, 1998.
As discussed in Note 1, Frank's files a consolidated tax return with
Holdings. As of January 31, 1999 the federal tax NOL carryforwards, for
Holdings, on a consolidated basis, approximated $93,000.
As of January 31, 1999 the federal tax NOL carryforwards attributable to
Frank's on a separate return basis approximated $58,000. As a result of
the valuation allowance, approximately $57,000 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
- $23,000, January 2010 - $2,000, January 2011 - $4,000, January 2012 -
$7,000 and January 2013 - $22,000.
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 Internal Revenue Code Section 382. Of the
Company's total net operating loss carryforward of $93,000, approximately
$16,000 are not subject to these limitations. Approximately $7,200 of the
NOL subject to limitations may be utilized each tax year.
F-11
<PAGE> 42
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JANUARY 31, January 25,
1999 1998
----------- -----------
<S> <C> <C>
Land $ 69,016 $ 71,101
Buildings:
Owned 156,713 160,170
Capital leases (Note 10) 16,063 17,445
Equipment 98,623 87,907
Leasehold improvements 47,751 48,183
Construction in progress 1,710 3,966
-------- --------
389,876 388,772
Less accumulated depreciation,
including capital lease amounts
of $11,074 and $11,691 179,301 170,892
-------- --------
$210,575 $217,880
======== ========
</TABLE>
NOTE 7: ACQUISITION
On December 24, 1997 Holdings 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 things, 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 of goodwill was recorded. Pursuant to an
agreement between Holdings and Cypress Advisors, Inc., an affiliate of Cypress
(the majority shareholder of Holdings), Holdings 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.
F-12
<PAGE> 43
NOTE 8: ACCRUED EXPENSES
<TABLE>
<CAPTION>
JANUARY 31, January 25,
1999 1998
----------- -----------
<S> <C> <C>
Taxes, other than income taxes $ 6,259 $ 6,907
Payroll and other compensation 7,041 6,626
Insurance 3,989 2,131
Interest 5,396 4,342
Liabilities related to acquisition 856 13,363
Other 17,495 20,308
----------- ----------
$ 41,036 $ 53,677
=========== ==========
</TABLE>
As a result of the merger on January 7, 1998 a liability of $13.4 million,
representing the conversion rights for the untendered shares of Holdings common
stock, was recorded by the Company.
NOTE 9: LONG-TERM DEBT
<TABLE>
<CAPTION>
JANUARY 31, January 25,
1999 1998
----------- -----------
<S> <C> <C>
SENIOR DEBT:
Holdings 11 1/2% Senior Notes due
February 15, 2002 $ 25,235
Mortgage notes due on varying
dates from February 1, 2001
to September 1, 2007 $ 28,845 29,680
Notes payable to banks 20,281 37,500
Capital leases (Note 10) 10,569 11,554
-------- --------
59,695 103,969
Less current portion 3,726 1,780
-------- --------
55,969 102,189
-------- --------
SUBORDINATED DEBT:
10 1/4% Senior Subordinated Notes
due March 1, 2008 115,000
Holdings 8% Convertible Subordinated
Notes due February 15, 2002 65,000
-------- --------
Total long-term debt $170,969 $167,189
======== ========
</TABLE>
F-13
<PAGE> 44
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
September 1, 2007. The mortgage notes are secured by retail properties owned by
the Company.
At January 31, 1999 the Company has a Senior Secured Credit Facility (the
"facility") with various banks and financial institutions which provides for (i)
a term loan facility of up to $20.3 million (the "Term Loan Facility") in term
loans and (ii) a revolving credit facility of up to $110 million (the "Revolving
Credit Facility") in revolving credit loans and letters of credit. 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. In addition, the Company must repay all borrowings under the
Revolving Credit Facility for a period of at least 30 consecutive days in each
fiscal year. The Company had borrowings outstanding of $20.3 million under the
Term Loan Facility of which $1.8 million is current and $20 million under the
Revolving Credit Facility at January 31, 1999. In addition the Company had
outstanding letters of credit of $5 million.
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 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 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
F-14
<PAGE> 45
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% Convertible Subordinated
Notes including premium of $2,208 and accrued interest of $1,013 on March 30,
1998. In conjunction with the Offering the Company wrote-off debt issue costs of
$1,317 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 31, 1999.
Aggregate maturities of long-term debt for the five years subsequent to 1998,
excluding capital lease obligations (Note 10), are $2,731 in 1999, $7,023 in
2000, $3,456 in 2001, $3,889 in 2002 and $5,166 in 2003.
NOTE 10: LEASES
The Company's capital leases are principally for retail store locations, for
periods ranging up to 25 years. The Company's operating leases are principally
for retail store locations.
Annual minimum lease payments under all capital and operating
leases with lease terms longer than one year at January 31, 1999, are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Capital Operating
Leases Leases
- -----------------------------------------------------------------
<S> <C> <C>
1999 $ 2,250 $ 13,530
2000 2,322 13,468
2001 2,202 13,026
2002 2,078 12,471
2003 1,930 12,419
Thereafter 6,423 74,617
-------- --------
Total minimum lease obligations 17,205 $139,531
========
Amount representing future interest (6,636)
--------
Present value of net minimum lease
obligations $ 10,569
========
Future sublease rental income $ 3,881
========
</TABLE>
Rent expense was $22,684 in 1998, $20,876 for the forty-eight weeks ended
December 28, 1997, $1,343 for the four weeks ended January 25, 1998, and $21,915
in 1996. Rent expense includes additional rentals based on retail store sales
(in excess of the
F-15
<PAGE> 46
minimums specified in leases) of $446 in 1998, $707 for the forty-eight weeks
ended December 28, 1997, $(186) for the four weeks ended January 25, 1998 and
$691 in 1996 and is reduced by sublease rental income of $679 in 1998, $603 in
1997 and $859 in 1996.
NOTE 11: 401(K) PLAN
The Company provides a 401(k) Plan permitting employees to invest from 1% to 15%
of their salary in outside mutual funds. The plan provides an employer match of
50% of the employee contribution. The Company's contribution is limited to 3% of
salary and became effective November 1998.
NOTE 12: 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 13: SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments were $18,841 for 1998, $21,523 for the forty-eight weeks ended
December 28, 1997, $301 for the four weeks ended January 25, 1998 and $19,685 in
1996. Income tax payments were $47 for the forty-eight weeks ended December 28,
1997 and $55 in 1996.
F-16
<PAGE> 47
Schedule II
FRANK'S NURSERY & CRAFTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEAR ENDED JANUARY 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance, Charged Charged Balance,
Beginning to Costs to Other End
of Year and Expenses Accounts Deductions of Year
--------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C>
Inventory valuation reserve: $ 4,171 $ 269 (1) $ 1,585 (2) $ 2,855
Provision for store closing reserve:
Current 1,044 4,000 (5) $ 2,497 (3) 2,547
Noncurrent 10,565 4,000 (4) 6,565
</TABLE>
(1) Additions to Goodwill resulting from the Acquisition.
(2) Represents reduction against cost of goods sold.
(3) Represents payments of liabilities.
(4) Reclassification to current portion of reserve.
(5) Reclassification from noncurrent portion of reserve.
F-17
<PAGE> 48
Schedule II
FRANK'S NURSERY & CRAFTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEAR ENDED JANUARY 25, 1998
(In thousands)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance, Charged Charged Balance,
Beginning to Costs to Other End
of Year and Expenses Accounts Deductions of Year
--------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Inventory valuation reserve: $ -0- $ 4,171 (1) $ 4,171
Provision for store closing reserve:
Current 1,132 $ 1,500 1,000 (4) $ 2,588 (2) 1,044
Noncurrent 1,000 5,177 5,388 (1) 1,000 (3) 10,565
</TABLE>
(1) Additions to Goodwill resulting from the Acquisition.
(2) Represents payments of liabilities.
(3) Reclassification to current portion of reserve.
(4) Reclassification from noncurrent portion of reserve.
F-18
<PAGE> 49
Schedule II
FRANK'S NURSERY & CRAFTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEAR ENDED JANUARY 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance, Charged Charged Balance,
Beginning to Costs to Other End
of Year and Expenses Accounts Deductions of Year
--------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Provision for store closing reserve:
Current $ 3,347 $ 2,215 $ 1,132
Noncurrent 1,000 1,000
</TABLE>
F-19
<PAGE> 50
INDEX OF EXHIBITS FILED HEREWITH
--------------------------------
Exhibit No. Description of Exhibit
----------- ----------------------
27.01 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> JAN-26-1998
<PERIOD-END> JAN-31-1999
<CASH> 5,156
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 97,931
<CURRENT-ASSETS> 112,102
<PP&E> 389,876
<DEPRECIATION> 179,301
<TOTAL-ASSETS> 433,263
<CURRENT-LIABILITIES> 98,544
<BONDS> 170,969
0
0
<COMMON> 1
<OTHER-SE> 151,062
<TOTAL-LIABILITY-AND-EQUITY> 433,263
<SALES> 512,101
<TOTAL-REVENUES> 512,101
<CGS> 347,477
<TOTAL-COSTS> 347,477
<OTHER-EXPENSES> (2,929)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,809
<INCOME-PRETAX> 7,522
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,522
<DISCONTINUED> 0
<EXTRAORDINARY> (5,148)
<CHANGES> 0
<NET-INCOME> 2,374
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
