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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 30, 2000
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.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1561374
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
1175 West Long Lake, Troy, MI 48098
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (248) 712-7000
Securities registered pursuant to Section 12(b) of the Act:
None
[Cover page 1 of 2 pages]
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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
----------- ------------
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]
Aggregate market value of the registrant's Common Stock, $1.00 par
value, held by non-affiliates as of April 28, 2000: -0-.
Number of voting shares of the registrant's Common Stock outstanding as
of April 28, 2000: 1,000 held by FNC Holdings Inc.
DOCUMENTS INCORPORATED BY REFERENCE
None
[Cover page 2 of 2 pages]
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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, and home decor. As of January 30, 2000, the
Company operated 257 retail stores in 15 states primarily in the East and
Midwest regions of the country 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 30, 2000.
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 for both outdoor and indoor usage,
fertilizers, gardening accessories, lawn and patio furniture, Christmas
Trim-a-Tree merchandise and snow removal, power equipment, barbecues and
watering accessories, was approximately $81.7 billion in 1999 and grew at 3.3%
over the $79.1 billion estimated for 1998. The Company also believes that, for
the 10 years covering the period 1989 through 1999, the lawn and garden industry
grew at a compound annual growth rate of approximately 7%. Among other factors,
the Company believes that the principal reasons for this sustained growth were
the popularity of gardening as a leisure activity, new home construction and
favorable demographic trends such as the aging of the baby-boomer population.
The industry growth in 1999 was lower than the ten year annual growth rate due
largely to unusual weather patterns throughout the country including drought in
the eastern portion of the United States.
The lawn and garden market is highly seasonal with the spring season
accounting for the majority of annual product sales. The market for 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
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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 1998. 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
After the acquisition of General Host by Cypress, Frank's management
set out to reposition the Company's merchandising strategy and concentrate on
three major sectors: lawn and garden, floral and home decor and Christmas
Trim-a-Tree. Merchandising lines such as pet foods and general and juvenile
crafts, among others, which had been a part of Frank's range prior to the
acquisition were deemed no longer appropriate to these new directions and a
phased discontinuation plan was put into effect. This plan will be essentially
completed by the end of the current fiscal year.
The Company's core strategy centers on the lawn and garden market where
it intends to enhance its leadership position within the specialty retailing
segment of that market. The Company's objective is to provide the gardening
enthusiast with the broadest assortment of quality plants, growing products,
specialty tools and gardening accessories at competitive prices backed by
knowledgeable service.
The Company also aims to provide the leading assortment of premium
artificial flowers and arrangements for indoor decoration. The Company's product
offerings are aimed at the do-it-yourself decorator as well as to those
preferring finished arrangements.
The Company's Christmas Trim-a-Tree selection is aimed at providing its
customers with the broadest assortment of quality artificial trees, wreaths,
tree decorations, lights and holiday decor and to serve as a one-stop shopping
destination for these holiday related purchases.
The Company utilizes extensive marketing and advertising efforts to
communicate with its customers through newspaper advertising, weekly inserts,
and radio and television. The Company also makes extensive use of public
relations, local sponsorships and promotions to enhance the branding of its
stores.
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During fiscal year 1999, the Company accomplished most of its store
refurbishment objectives aimed at repositioning the lawn and garden, floral and
home decor and Christmas Trim-a-Tree businesses. New fixtures to support outdoor
nursery product presentations and indoor floral decor assortments were installed
in approximately 216 of the 257 stores. The Company intends to complete the
program by the end of the current fiscal year.
During the first quarter of fiscal year 2000, the Company expects to
achieve substantial completion of the design phase for a new IBM based
point-of-sale system aimed at substantially enhancing transaction processes and
improving customer service flows at its store check-out areas. It is the
Company's intention to install the new system chain-wide during the current
fiscal year.
During fiscal 1999, the Company opened six new stores, of which three
were in a new market, Pittsburgh, Pennsylvania. All the stores opened in fiscal
1999 incorporated the new prototype store designs. The Company intends to open
seven new prototype stores in fiscal 2000 of which at least four will be in a
new market in the Tidewater area of Virginia.
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PRODUCT CATEGORIES
The Company operates a chain of specialty retail stores devoted to the
sale of lawn and garden, Christmas and floral and home decor. The principal
products sold at the Company's retail stores are as follows:
<TABLE>
<CAPTION>
Percentage of
Sales In
Product Line Fiscal Year 1999 Description
- ------------ ---------------- ------------
<S> <C> <C>
Lawn and garden 64% 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, bird houses, feeders,
seed and accessories
Floral and Home Decor 21 Dried, silk and acrylic flowers,
arrangements, candles, paint and
paint accessories, picture frames,
frame art and decorative home
accessories
Christmas 15 Artificial Christmas trees, indoor
and outdoor lights, decorations and
trimmings
100%
===
</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.
The Company believes that its reputation for a broad selection and high
quality of live goods is the principal reason that draws customers to its
stores. This strength allows the Company to offer a wide assortment of other
lawn and garden products including fertilizers, mulches, garden tools, planting
accessories, decorative planters and other related merchandise. In addition the
Company markets its own line of private label lawn and garden
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products under the Frank's name. The lawn and garden business is also
characterized by strong gross margins.
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 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 minimal and limited
essentially to indoor plants.
FLORAL AND HOME DECOR. The Company's floral and home decor products
include a varied assortment of dried, silk and acrylic flowers for the
do-it-yourself decorator as well as complete floral arrangements. The Company
also offers a broad assortment of decorative candles, picture frames, framed art
and accent pieces for the home or patio. These products exhibit high inventory
turns, strong gross margins and low seasonality. The floral and home decor
assortment is positioned to tie closely with the Company's lawn and garden
emphasis.
The Company has improved its presentation of floral and home decor
products by installing new fixtures in the majority of its stores. The Company
intends to support this business category with significant advertising in order
to familiarize the consumer with the new store look resulting from the new
presentation mentioned above, coupled with the phase out of certain basic craft
categories which is now substantially completed.
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 provides one of the largest selections of artificial trees,
indoor and outdoor lights, wreaths and holiday plants as well as a wide array of
trim-a-tree items. Christmas merchandise is sold almost entirely in November and
December.
SEASONALITY
The Company's business is highly seasonal and subject to the impact of
weather conditions, which may affect consumer purchasing patterns. In fiscal
1999, 43% of the Company's sales occurred during the spring season (late March
to mid-June) and 25% occurred during the Christmas season (November to late
December). Normally,
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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 87 hours per week, with the average
store opening at 8 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 permanent store staff
is generally supplemented at seasonal peaks by temporary employees.
EMPLOYEES
At January 30, 2000 the Company's employee base was 5,100 including
seasonal employees. The Company's entire employee base is non-union 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 51% of all merchandise to the stores in
1999, primarily using contract carriers. The balance of the products are
delivered directly to stores by vendors.
ITEM 2. PROPERTIES
The Company is headquartered in two facilities located in Troy,
Michigan. One building is 27,000 square feet and is subject to a lease which
expires in November 2007. The second building measures approximately 28,000
square feet and is subject to a lease which expires in December 2005.
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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 30, 2000, the Company operated 257 Frank's stores, 118 of
which were leased and 139 were owned (40 of which are subject to ground leases).
The following is a summary of store properties by state:
<TABLE>
<CAPTION>
NUMBER OF FRANK'S STORES PER STATE
----------------------------------
<S> <C>
Michigan........................................44
Illinois........................................34
Ohio............................................24
Pennsylvania....................................21
Indiana.........................................18
New York........................................17
Maryland........................................16
Minnesota.......................................16
New Jersey......................................15
Florida.........................................13
Connecticut.....................................12
Missouri.........................................9
Massachusetts....................................7
Virginia.........................................6
Kentucky...................................... 5
Total......................................... 257
</TABLE>
The Company owns one 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 1999 the
Company closed three stores and opened six new locations.
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 storage area), 17,000 square feet of outdoor
selling area and ample onsite 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 fiscal 2000 the Company plans to open up to seven new
stores. The aggregate cost of any future expansion is dependent
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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 Company-owned
stores including the purchase of land. The new prototype stores are located on
four-acre sites. The stores are 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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: 1999 1998 1998 | 1997 1996 1995
- -------------------- -------- ---------- ----------- ----------- --------- --------
(In thousands) |
|
<S> <C> <C> <C> <C> <C> <C>
Net Sales $487,332 $512,101 $ 14,814 | $515,204 $530,752 $593,270
|
Income (loss) before |
extraordinary item $ (9,296) $ 7,522 $(12,904)| $(18,465) $(11,791) $ (7,751)
Extraordinary item $ -0- $ (5,148) $ -0- | $ -0- $ -0- $ -0-
Net income (loss) $ (9,296) $ 2,374 $(12,904)| $(18,465) $(11,791) $ (7,751)
|
Balance Sheet Data: |
Total Assets $449,633 $433,263 $433,679 | $469,998 $344,023 $368,806
Total debt, including |
current portion $233,416 $194,695 $178,969 | $169,067 $195,015 $191,872
Shareholder's equity $147,826 $151,063 $152,403 | $166,441 $ 75,681 $106,258
|
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales. Sales were $487.3 million for the 1999 fiscal year compared to $512.1
million for the 1998 fiscal year, a decrease of 4.8%. Comparable store sales
declined 5.1%. Comparative net sales were negatively impacted by the phasing out
of certain craft categories and unfavorable weather patterns in certain key
markets including heavy rainfall in early spring in the midwest and extreme
drought conditions and water restrictions in major markets in the east this
summer. The core lawn and garden business was flat on a same-store basis despite
the unfavorable weather patterns.
Cost of Sales Including Buying and Occupancy. Cost of sales including buying and
occupancy expenses were $337.2 million in fiscal 1999 compared to $347.5 million
in fiscal 1998. This reduction of $10.3 million amounted to a 3% decrease. Cost
of sales, as a percentage of net sales, increased by 1.3 percentage points to
69.2% in 1999 compared to 67.9% in 1998. This increase was due primarily to a .3
of a percentage point decrease in merchandise margins and an increase of 1
percentage point in buying and occupancy costs due principally to occupancy
costs for new stores and increased depreciation expense. The .3 percentage point
decline in merchandise margins resulted primarily from clearance activities in
craft classes that had previously been identified by management as
noncomplementary to the new floral and home decor category.
Selling, General & Administrative Expense. Selling, general and administrative
expense for fiscal 1999 was $137.7 million compared to $135.8 million in fiscal
1998. The increase of $1.9 million was principally due to store related training
expense and other costs for new stores. As a percentage of net sales selling,
general and administrative expenses increased by 1.7 percentage points to 28.2%
in 1999 compared to 26.5% in 1998.
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 1999 was $12.5 million compared to $28.8 million in fiscal
1998. The decline in operating income was primarily the result of decreased
sales levels and increased selling, general and administrative expenses, as
explained above. Operating income, as a percentage of net sales, was 2.6% of net
sales for 1999, a decrease of 3 percentage points from 5.6% for 1998.
Other Income. Other income for fiscal 1999 was $3.5 million compared with
$2.9 million in fiscal 1998. The increase over 1998 was principally the
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result of a $2.1 million gain from the reversion of a noncontributory, defined
benefit pension plan which covered former employees of several discontinued
operations of Holdings. The reversion occurred in the 1999 second quarter and
was originally included in the change in the net parent investment in the
balance sheet. In the 1999 fourth quarter the gain was reclassified to other
income. The 1999 increase was partially offset by a higher level of gains from
sales of properties during 1998 and a lower level of interest income related to
cash equivalents in 1999 of $.6 million compared to $1.1 million in 1998.
Interest and Debt Expense. Interest and debt expense was $22.8 million in fiscal
1999 compared with $21.8 million in fiscal 1998. The increase is the result of a
higher level of outstanding borrowings under the credit facility during 1999.
Income (Loss) Before Extraordinary Item and Income Taxes. The loss before
extraordinary items for 1999 was $9.3 million compared to income of $7.5 million
for 1998. This decline of $16.8 million is directly related to the decline in
operating income of $16.3 million as well as changes in other income as
explained above.
Income Taxes. Due to the previously unrecognized tax benefits no income
tax provision has been provided for in 1999 and 1998.
Extraordinary Item. 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.
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. 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
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 were $347.5 million in fiscal 1998 compared
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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
percentage 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 Expense. Selling, general and administrative
expense for fiscal 1998 was $135.8 million compared to $153.3 million in fiscal
1997. The decrease of $17.5 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. In addition, fiscal 1997
included a store closing provision of $6.7 million and an impairment loss of
$1.7 million. As a percentage of net sales, selling, general and administrative
expenses decreased by 2.4% points to 26.5% in 1998 compared to 28.9% in 1997.
Operating Income (Loss) (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 an operating loss
of $7.9 million 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. Operating income
(loss) as a percentage of net sales improved to 5.6% in 1998 compared with
(1.5)% in 1997. The principal contributor to this improvement was the 4.6
percentage point gain in merchandise margins.
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.
Interest and Debt Expense. Interest and debt expense was $21.8 million in fiscal
1998 compared with $21.2 million in fiscal 1997.
Income (Loss) Before Extraordinary Item and Income Taxes. 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.
Income tax. Due to the previously unrecognized tax benefits no income tax
provision has been provided for in 1998 and 1997.
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Extraordinary Item. 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.
Liquidity and Capital Resources
Operating Activities. Net cash used in operating activities for fiscal 1999 was
$15.1 million compared to $6.1 million for fiscal 1998. Lower earnings in 1999
were offset by the higher level of inventory increase in 1998 when the Company
increased overall inventories to ensure adequate stock levels in all stores. The
change in accounts payable is due to timing of payments and a lower level of
purchases in the 1999 fourth quarter.
Investing Activities. Net cash used in investing activities for fiscal 1999 was
$28.8 million compared to $11.9 million in fiscal 1998. Capital expenditures in
1999 were $29.7 million and included approximately $14.8 million for new stores,
$12 million for store refurbishments and new fixtures and $2.3 million for new
information technology systems. The net proceeds of $.9 million in 1999 were
primarily from the sale of excess land.
Financing Activities. Net cash provided by financing activities for fiscal 1999
was $47.6 million compared to $7 million for fiscal 1998. The $47.6 million
provided in 1999 was due primarily to a net increase in short-term borrowings
under the Senior Secured Credit Facility of $42 million. In addition, Holdings
completed the reversion of a noncontributory, defined benefit pension plan which
covered former employees of several discontinued operations. The net surplus
after the purchase of annuities reverted back to Holdings which in turn
transferred the funds to the Company. The gross cash proceeds were $11.2 million
which were used to fund a $2.8 million investment in the Company's 401(k)
program for future company match contributions, payment of $1.7 million in
excise taxes and $6.7 million used for general corporate purposes.
At January 30, 2000 the Company had a Senior Secured Credit Facility (the
"credit facility") with various banks and financial institutions providing for
total borrowings of up to $128.9 million. The Company had borrowings outstanding
of $80.9 million and outstanding letters of credit of $4.6 million at January
30, 2000. The credit facility requires the Company to maintain certain financial
ratios. At November 7, 1999 the Company did not comply with two of the covenants
under the credit facility, the cash interest expense coverage ratio and the
leverage ratio. The Company obtained an amendment and waiver dated December 20,
1999 which waived the noncompliance and amended the credit agreement through
December 24, 2003
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by revising the interest coverage and leverage ratios and adding a new financial
coverage ratio of inventory to revolver usage and a limitation on capital
expenditures for the fiscal year 2000. In addition the interest rate spread on
outstanding borrowings was increased by 50 basis points. At January 30, 2000 the
Company was in compliance with all of its covenants under the credit facility.
Total debt at January 30, 2000 was $233.4 million including borrowings under the
credit facility, mortgages, capital leases, Subordinated Notes and the
associated current portion of the aforementioned debt. Cash and cash equivalents
were $8.9 million at the end of fiscal 1999.
The credit facility amendment described above limited the capital expenditures
to $17.5 million for fiscal 2000. Cypress, the majority shareholder of Holdings,
approved a capital contribution intended to fund the capital expenditure program
for a new point-of-sale system (the "POS") and to provide $2.5 million for
general corporate purposes. The Company received $15 million on April 27, 2000
and Cypress received 2,801,204 shares of Holdings common stock. As a result of
the capital contribution by Cypress, the credit facility was amended on April
20, 2000 to raise the capital expenditure covenant from $17.5 million to $30
million to allow for the anticipated POS expenditure.
The Company's most significant cash requirements are for seasonal buildup of
merchandise inventories and capital expenditures. In fiscal 2000 the Company
anticipates spending $30 million for capital expenditures, including $9 million
for the opening of seven new stores, $12.5 million for the implementation of the
POS system and $8.5 million for general refurbishments and 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,
available cash, together with available borrowings under the credit facility and
the capital contribution from Cypress in April 2000, will be adequate to meet
the Company's ongoing liquidity needs.
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.
14
<PAGE> 17
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 compliant. In late 1999, the Company completed its plans and
testing of systems.
As a result of those planning and implementation efforts, the Company
experienced no significant disruptions in its systems and the systems
successfully responded to the Year 2000 date change. The Company is not aware of
any material problems resulting from Year 2000 issues that would result in
additional expenditures.
- --------------------------------------------------------
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.
15
<PAGE> 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company perceives its only market interest rate risk to be limited
to borrowings under the credit facility. These borrowings 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 credit
facility of $80.9 million at January 30, 2000 with a weighted average interest
rate of approximately 7.7% compared with $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 rate
on the Senior Subordinated Notes is 10 1/4%.
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
Not applicable.
16
<PAGE> 19
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 54 Chairman of the Board of
Directors and Chief Executive
Officer
Adam Szopinski 54 President, Chief Operating
Officer and Director
Larry T. Lakin 60 Vice Chairman, Chief Financial
Officer, Treasurer and Director
William C. Boyd 70 Executive Vice President
David P. Spalding 45 Director
James A. Stern 49 Director
Bahram Shirazi 36 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
17
<PAGE> 20
fragrance company and cosmetic venture, from April 1994 to December 1997.
Prior to Shiara, Mr. Lakin served as Vice President of Finance and
principal of River Road Distributors, Inc. from November 1992 to March
1994. Previously, Mr. Lakin served as Chief Financial Officer and/or Vice
President of Finance of the international operations of Faberge Inc., LJN
Toys Ltd., Toys "R" Us International and Max Factor & Co.'s international
operations and Controller of Chrysler Corporation - France.
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. Mr. Stern is also a director of AMTROL Inc.,
Cinemark USA, Inc., Lear Corporation, 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. Mr. Shirazi is also a director of
Clubcorp, Inc. and Homeruns.com, Inc.
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> 21
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 25, 1998 (fiscal year 1997), January 31, 1999 (fiscal year 1998)
and January 30, 2000 (fiscal year 1999) for those persons who were at January
30, 2000, the Chief Executive Officer and the other three most highly
compensated executive officers of the Company. The Chief Executive Officer and
the three most highly compensated 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 ($)(1) Compensation(2) ($)(4)
- --------------------------- ------ --------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Joseph R. Baczko 1997 $ 28,846 $ -0- $ -0- $ 83
Chairman of the Board 1998 $ 500,000 $ 250,000 $ 53,300 $ 992
Chief Executive Officer 1999 $ 566,360 $ -0- $ 357,385 (3) $6,632
Adam Szopinski 1997 $ 14,423 $ -0- $ -0- $ 42
President 1998 $ 250,000 $ 125,000 $ 38,193 $ 497
Chief Operating Officer 1999 $ 294,222 $ -0- $ 44,113 $9,232 (5)
Larry T. Lakin 1997 $ 14,423 $ -0- $ -0- $ 59
Vice Chairman 1998 $ 250,000 $ 125,000 $ 38,402 $ 702
Chief Financial Officer 1999 $ 294,222 $ -0- $ 46,973 $7,002
William C. Boyd 1997 $ 163,000 $ -0- $ -0- $ 67
Executive Vice President 1998 $ 163,000 $ 48,000 $ -0- $ 67
1999 $ 163,000 $ -0- $ -0- $ 67
</TABLE>
(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) Of this amount, $294,770 represents relocation paid to Mr. Baczko
including the tax effect.
(4) Includes insurance premiums paid by the Company on behalf of the Named
Officers for term and supplemental life insurance for 1997 and 1998.
For 1999 also includes short-term disability and medical insurance.
(5) Includes the Company match of $5,000 under the Company's 401(k) plan on
behalf of Mr. Szopinski.
19
<PAGE> 22
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the Company's 1999 fiscal year, Mr. Spalding, Mr. Stern
and Mr. Shirazi were the members of the Company's Compensation
Committee.
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.
Committee Members: David P. Spalding
James A. Stern
Bahram Shirazi
20
<PAGE> 23
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 28, 2000, 33,801,204 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 28, 2000 by (i) owners of more
than 5% of the outstanding shares of Holdings Common Stock, (ii) each executive
officer and director of Holdings, and (iii) all executive officers and directors
of Holdings, as a group. Except as indicated in the footnotes to this table, the
Company believes that the persons named in the table have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
21
<PAGE> 24
<TABLE>
<CAPTION>
Shares of Holdings Common Stock
---------------------------------
Amount Percentage
Beneficially of
Owned Class
------------- ----------
Beneficial Owners
- -----------------
<S> <C> <C>
PRINCIPAL SHAREHOLDERS:
Cypress Merchant Banking Partners L.P.(a) 31,959,182 94.6%
Cypress Offshore Partners L.P. (a)(b) 1,655,275 4.9%
EXECUTIVE OFFICERS AND DIRECTORS:
Joseph R. Baczko 186,747 *
Adam Szopinski --- ---
Larry T. Lakin --- ---
William C. Boyd --- ---
David P. Spalding(b) --- ---
James A. Stern(b) --- ---
Bahram Shirazi --- ---
All executive officers and directors as a group 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> 25
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> 26
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
A. List of documents filed as part of this report:
1. FINANCIAL STATEMENTS
--------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
- Report of Independent Auditors F-1
- Report of Independent Accountants F-2
- Balance Sheets - as of January 30, 2000 F-3
and January 31, 1999.
- Statements of Operations - for the F-4
years ended January 30, 2000 and January
31, 1999 and for the four-week period and
forty-eight week period ended January 25, 1998 and December
28, 1997, respectively.
- Statements of Changes in F-5
Shareholder's Equity - for the years
ended January 30, 2000 and January 31, 1999, and for
the four-week period and forty-eight week period ended January
25, 1998 and December 28, 1997, respectively.
- Statements of Cash Flows - for F-6
the years ended January 30, 2000 and
January 31, 1999 and for the four-week period and forty-eight
week period ended January 25, 1998 and December 28, 1997,
respectively.
- Notes to Financial Statements F-7 to F-18
</TABLE>
24
<PAGE> 27
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-19 to F-21
years ended January 30, 2000, January
31, 1999 and January 25, 1998.
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. Material Contracts
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.)
10.2 Amendment No. 2 and Waiver, dated as of December 20,
1999, to the Credit Agreement dated as of December 24,
1997, as amended by Amendment No. 1, dated as of April
15, 1998, among Frank's Nursery & Crafts, Inc., FNC
Holdings Inc., the lenders party thereto, The Chase
Manhattan Bank and Goldman Sachs Credit Partners L.P.
(Incorporated by reference to the 1999 Form 10-Q filed
December 22, 1999 Exhibit 10.2., File No. 1-5364)
25
<PAGE> 28
10.3 Amendment No. 3, dated as of April 20, 2000, to the
Credit Agreement dated as of December 24, 1997, as
amended by Amendment No. 2, dated as of December 25, 1999
and Amendement No. 1, dated as of April 15, 1998, among
Frank's Nursery & Crafts, Inc., FNC Holdings Inc., the
lenders party thereto, The Chase Manhattan Bank and
Goldman Sachs Credit Partners L.P. (Filed herewith)
10.4 Stock Purchase Agreement dated as of April 27, 2000,
between FNC Holdings Inc., Cypress Merchant Banking
Partners, L.P. and Cypress Gardens Ltd. (Filed herewith)
27.1 Financial Data Schedules (Filed herewith)
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> 29
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 28, 2000 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 28, 2000 /s/Joseph R. Baczko
------------------------------
Joseph R. Baczko
Chairman of the Board of
Directors and Chief Executive
Officer
(Principal Executive Officer)
Date: April 28, 2000 /s/Adam Szopinski
------------------------------
Adam Szopinski
President,
Chief Operating Officer
and Director
Date: April 28, 2000 /s/ Larry T. Lakin
------------------------------
Larry T. Lakin
Vice Chairman, Chief
Financial Officer, Treasurer
and Director
(Principal Financial and
Accounting Officer)
Date: April 28, 2000 /s/ David P. Spalding
----------------------------
David P. Spalding
Director
27
<PAGE> 30
Date: April 28, 2000 /s/James A. Stern
----------------------------
James A. Stern
Director
Date: April 28, 2000 /s/Bahram Shirazi
------------------------------
Bahram Shirazi
Director
28
<PAGE> 31
Report of Independent Auditors
The Board of Directors and Shareholder
Frank's Nursery & Crafts, Inc.
We have audited the balance sheets of Frank's Nursery & Crafts, Inc. as of
January 30, 2000 and January 31, 1999, and the related statements of operations,
changes in shareholder's equity, and cash flows for the two years then ended
(the fiscal 1999 and 1998 financial statements). Our audit also included the
financial statement schedule listed in the Index at Item 14(A) for fiscal year
1999 and 1998. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Frank's Nursery & Crafts, Inc.
at January 30, 2000 and January 31, 1999, and the results of its operations and
its cash flows for the two years then ended (the fiscal 1999 and 1998 financial
statements), in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule
for fiscal 1999 and 1998, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
March 15, 2000, except for Note 15,
as to which the date is April 27, 2000
F-1
<PAGE> 32
Report of Independent Accountants
The Board of Directors and Shareholder of
Frank's Nursery & Crafts, Inc.
In our opinion, the statements of operations, of cash flows, and of changes in
shareholder's equity, listed in the index appearing under Item 14(A)(1) and (2)
on pages 24 and 25, present fairly, in all material respects, the results of
operations and cash flows of Frank's Nursery & Crafts, Inc. (a wholly-owned
subsidiary of FNC Holdings Inc., formerly "General Host Corporation") for the
four-week period and the forty-eight-week period ended January 25, 1998 and
December 28, 1997, respectively, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States 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
audit provides a reasonable basis for the opinion expressed above. We have not
audited the financial statements of Frank's Nursery & Crafts, Inc. for any
period subsequent to January 25, 1998.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
March 13, 1998
F-2
<PAGE> 33
FRANK'S NURSERY & CRAFTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,855 $ 5,156
Marketable securities 2,522 --
Notes receivable -- 569
Accounts receivable 1,941 2,294
Merchandise inventory 100,823 97,931
Prepaid expenses and other current assets 7,260 6,152
---------- ----------
Total current assets 121,401 112,102
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 220,450 210,575
GOODWILL, LESS ACCUMULATED AMORTIZATION
OF $5,013 AND $2,575 92,629 95,067
OTHER ASSETS AND DEFERRED CHARGES 15,153 15,519
---------- ----------
$ 449,633 $ 433,263
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,998 $ 33,782
Accrued expenses 41,172 41,036
Notes payable to banks 62,000 20,000
Current portion of long-term debt 4,675 3,726
---------- ----------
Total current liabilities 122,845 98,544
---------- ----------
LONG-TERM DEBT:
Senior debt 51,741 55,969
Subordinated debt 115,000 115,000
---------- ----------
Total long-term debt 166,741 170,969
---------- ----------
OTHER LIABILITIES AND DEFERRED CREDITS 12,221 12,687
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 1,652 (4,407)
Retained deficit (19,826) (10,530)
---------- ----------
Total shareholder's equity 147,826 151,063
---------- ----------
$ 449,633 $ 433,263
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 34
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Post- | Pre-
acquisition | acquisition
Period | Period
(Successor- |(Predessor-
basis) | basis)
Fiscal Year Ended Four Weeks | Forty-Eight
----------------------- Ended | Weeks Ended
JANUARY 30, January 31, January 25, | December 28,
2000 1999 1998 | 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 487,332 $ 512,101 $ 14,814 | $ 515,204
|
OPERATING COSTS AND EXPENSES: |
COST OF SALES, INCLUDING |
BUYING AND OCCUPANCY 337,212 347,477 17,532 | 367,008
SELLING, GENERAL AND |
ADMINISTRATIVE 137,657 135,821 8,394 | 144,947
AMORTIZATION OF GOODWILL 2,438 2,401 174 | 381
OTHER (INCOME) EXPENSE (3,506) (2,929) 17 | 1,701
---------- --------- ---------- ---------
TOTAL OPERATING COSTS AND |
EXPENSES 473,801 482,770 26,117 | 514,037
---------- --------- ---------- ---------
INCOME (LOSS) FROM OPERATIONS 13,531 29,331 (11,303)| 1,167
INTEREST AND DEBT EXPENSE 22,827 21,809 1,601 | 19,632
---------- --------- ---------- ---------
INCOME (LOSS) BEFORE INCOME |
TAXES AND EXTRAORDINARY ITEM (9,296) 7,522 (12,904)| (18,465)
INCOME TAXES -- -- -- | --
---------- --------- ---------- ---------
INCOME (LOSS) BEFORE |
EXTRAORDINARY ITEM (9,296) 7,522 (12,904)| (18,465)
EXTRAORDINARY ITEM -- (5,148) -- | --
---------- --------- ---------- ---------
NET INCOME (LOSS) $ (9,296) $ 2,374 $ (12,904)| $ (18,465)
========== ========= ========== =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 35
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 30, 2000 AND JANUARY 31, 1999, AND FOR
THE FOUR-WEEK PERIOD AND FORTY-EIGHT WEEK PERIOD ENDED JANUARY 25, 1998 AND
DECEMBER 28, 1997, RESPECTIVELY
(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 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
Decrease in net parent investment (3,714) (3,714)
------ -------- --------- -------- --------
Balance at January 31, 1999 1 165,999 (4,407) (10,530) 151,063
Net loss (9,296) (9,296)
Increase in net parent investment 6,059 6,059
------ -------- --------- -------- --------
Balance at January 30, 2000 $ 1 $165,999 $ 1,652 $(19,826) $147,826
====== ======== ========= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 36
FRANK'S NURSERY & CRAFTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Post- | Pre-
acquisition | acquisition
Period | Period
(Sucessor- |(Predessor-
basis) | basis)
Fiscal Year Ended Four Weeks | Forty-Eight
----------------------- Ended | Weeks Ended
JANUARY 30, January 31, January 25, | December 28,
2000 1999 1998 | 1997
---------- ---------- ----------- ----------
|
|
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income (loss) $ (9,296) $ 2,374 $ (12,904)| $ (18,465)
Adjustments to reconcile net income (loss) |
to net cash provided by (used in) |
operating activities: |
Depreciation 17,590 15,731 1,257 | 18,661
Amortization 3,714 3,624 243 | 1,454
Extraordinary item 5,148 |
Provision for store closings and other costs 1,360 | 6,677
Impairment loss | 1,720
Gain from pension plan reversion (2,094) |
Gains from sales of property, plant |
and equipment | (2,981)
Other (954) (2,589) (1,343)| (3,188)
---------- --------- --------- ---------
10,320 24,288 (12,747)| 3,878
Changes in operating assets and liabilities: |
Marketable securities (2,877) |
Notes receivable 483 1,026 | (95)
Accounts receivable 227 1,177 129 | 337
Merchandise inventory (2,892) (17,444) (2,892)| (757)
Prepaid expenses (976) 55 1,473 | (167)
Accounts payable (18,784) 1,622 (10,981)| 13,963
Accrued expenses (634) (16,830) (11,040)| (8,061)
---------- --------- -------- ---------
Net cash provided by (used in) |
operating activities (15,133) (6,106) (36,058)| 9,098
---------- --------- -------- ---------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Additions to property, plant and equipment (29,695) (15,823) 34 | (12,472)
Proceeds from sales of property, |
plant and equipment 910 3,972 | 12,597
---------- --------- --------- ---------
Net cash provided by (used in) |
investing activities (28,785) (11,851) 34 | 125
---------- --------- --------- ---------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
Issuance of long-term debt 115,000 | 1,625
Deferred financing costs (6,291) | (3,745)
Decrease in net parent investment (2,326) (214) (1,134)| (114,706)
Payment of long-term debt and capital lease |
obligations (3,279) (111,482) (98)| (65,073)
Equity contribution, net | 166,000
Proceeds from pension plan reversion 11,222 |
Increase in notes payable to banks, net 42,000 10,000 | 47,500
Other 13,945 | ( 4,939)
---------- --------- --------- ---------
Net cash provided by |
financing activities 47,617 7,013 12,713 | 26,662
---------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents 3,699 (10,944) (23,311)| 35,885
Cash and cash equivalents at beginning of |
period 5,156 16,100 39,411 | 3,526
---------- --------- --------- ---------
Cash and cash equivalents at end of period $ 8,855 $ 5,156 $ 16,100 | $ 39,411
========== ========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 37
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 and floral and home decor in the United States. As of
January 30, 2000 the Company operated 257 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 1999 fiscal year reflects a 52- week period ended January
30, 2000. The 1998 fiscal year reflects a 53-week period ended January 31, 1999
and the 1997 fiscal year reflects a 52-week period ended January 25, 1998.
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 1999 presentation.
REVENUE RECOGNITION
The Company recognizes revenue when the customer takes possession of the
merchandise.
F-7
<PAGE> 38
FAIR VALUE OF BALANCE SHEET FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, marketable securities, 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 and estimated fair
value of long-term debt, including the current portion, was $171,416 and
$103,566 at January 30, 2000, respectively.
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.
MARKETABLE SECURITIES
Marketable securities represent an investment in a guaranteed fund
restricted for the funding of the Company's 401(k) match program
(Note 12). The securities are classified as held-to-maturity in
accordance with Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities."
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 $22,300 for 1999, $23,847 for 1998, $24,006 for
the forty-eight weeks ended December 28, 1997 and $753 for the four weeks ended
January 25, 1998.
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.
F-8
<PAGE> 39
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.
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 long-term debt, accrued interest and executory costs. All other
leases are accounted for as operating leases and rent payments are charged to
expense as incurred.
INCOME TAXES
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.
F-9
<PAGE> 40
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.
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
component of selling, general and administrative expense.
As a result of the acquisition, new management revised the Company's exit
strategy with respect to unprofitable 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 30, January 31,
2000 1999
---------- ----------
<S> <C> <C>
Accrued expenses $ 2,502 $ 2,547
Other liabilities 6,205 6,565
---------- ----------
$ 8,707 $ 9,112
========== ==========
</TABLE>
F-10
<PAGE> 41
As of January 30, 2000 there were nine remaining locations of which four were
vacant and five were subleased. During fiscal 1999 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 $1.5 million in
expenditures related to net lease payments and legal costs and increased the
reserve by $1.4 million which was included in selling, general and
administrative expense for fiscal 1999. During fiscal 1998 the Company sold one
property.
NOTE 3: INTERCOMPANY TRANSACTIONS AND ALLOCATIONS
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 for the forty-eight weeks ended December 28,
1997 and $10 for the four weeks ended January 25, 1998. After fiscal 1997 there
were no more intercompany allocations.
NOTE 4: OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Fiscal Year Ended Four Weeks | Forty-Eight
----------------------- Ended | Weeks Ended
JANUARY 30, January 31, January 25,| December 28,
2000 1999 1998 | 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest on cash |
equivalents and |
marketable securities $ 644 $ 1,088 | $ 1,035
Gain (loss) on the sale of |
property and the termination |
or sale of leases 556 1,622 $ (29) | 1,445
Gain on reversion of pension |
plan 2,094 |
Holdings' costs associated |
with the tender offer | (4,594)
Other 212 219 12 | 413
-------- -------- --------- ----------
$ 3,506 $ 2,929 $ (17) | $ (1,701)
======== ======== ========= ==========
</TABLE>
The gain of $2,094 resulted from the reversion of a noncontributory, defined
benefit pension plan which covered former employees of several discontinued
operations of Holdings. The reversion occurred in the 1999 second quarter and
was originally included in the net parent investment account on the balance
sheet. In the 1999 fourth quarter the gain was reclassified to other income. If
the gain had been recognized in other income in the 1999 second quarter, net
income for the first half of 1999 would have increased from $9,108 to
$11,202.
F-11
<PAGE> 42
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>
Fiscal Year Ended Four-Weeks | Forty-Eight
----------------------- Ended | Weeks Ended
JANUARY 30, January 31, January 25,| December 28,
2000 1999 1998 | 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Federal income taxes based on |
statutory rates $ (3,161) $ 2,557 $ (3,962) | $ (6,703)
Increases (decreases) in rates |
resulting from: |
Limitation (utilization) |
of tax loss carryforwards 2,306 (3,400) 3,946 | 6,508
Amortization of intangibles |
and other acquisition costs 829 817 15 | 183
Other 26 26 1 | 12
--------- -------- -------- ----------
$ --- $ --- $ --- | $ ---
========= ======== ======== ==========
</TABLE>
Deferred tax assets and liabilities are composed of the following:
<TABLE>
<CAPTION>
JANUARY 30, January 31,
2000 1999
---------- ----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Inventory $ 627 $ 1,478
Accrued expenses 1,668 2,081
Other 6,235 3,419
Store closing reserve 2,960 2,212
Credit carryforwards 1,327 --
NOL carryforward 25,944 22,300
--------- ---------
Total deferred tax assets 38,761 31,490
--------- ---------
DEFERRED TAX LIABILITIES:
Property, plant & equipment (13,811) (14,913)
--------- ---------
Total deferred tax liabilities (13,811) (14,913)
--------- ---------
Net deferred tax assets 24,950 16,577
Valuation allowance (24,950) (16,577)
--------- ---------
$ -- $ --
========= =========
</TABLE>
Due to the Company's historical operating results, a valuation allowance for the
net deferred tax asset balance is recorded at January 30, 2000 and January 31,
1999.
F-12
<PAGE> 43
As discussed in Note 1, Frank's files a consolidated tax return with Holdings.
At January 30, 2000 the federal tax NOL carryforwards, for Holdings, on a
consolidated basis, approximated $101,000.
As of January 30, 2000 the federal tax NOL carryforwards attributable to Frank's
on a separate return basis approximated $76,000. As a result of the valuation
allowance these NOL carryforwards have not been benefitted. The net operating
loss will expire as follows: in January 2009 - $30,000, January 2010 - $2,000,
January 2011 - $4,000, January 2012 - $8,000, January 2013 - $29,000 and January
2020 - $3,000.
Holdings 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 Holdings total net
operating loss carryforward of $101,000, approximately $16,000 are not subject
to these limitations. Approximately $7,200 of the NOL subject to limitations may
be utilized each tax year.
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JANUARY 30, January 31,
2000 1999
----------- -----------
<S> <C> <C>
Land $ 69,432 $ 69,016
Buildings:
Owned 158,964 156,713
Capital leases (Note 11) 16,063 16,063
Equipment 95,518 98,623
Leasehold improvements 54,877 47,751
Construction in progress 10,686 1,710
-------- --------
405,540 389,876
Less accumulated depreciation,
including capital lease amounts
of $11,827 and $11,074 185,090 179,301
-------- --------
$220,450 $210,575
======== ========
</TABLE>
F-13
<PAGE> 44
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 in to 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, $97,642 of goodwill was recorded. Pursuant to an
agreement between Holding 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.
NOTE 8: ACCRUED EXPENSES
<TABLE>
<CAPTION>
JANUARY 30, January 31,
2000 1999
----------- -----------
<S> <C> <C>
Taxes, other than income taxes $ 5,921 $ 6,259
Payroll and other compensation 4,817 7,041
Insurance 2,418 3,989
Interest 5,552 5,396
Other 22,464 18,351
----------- ----------
$ 41,172 $ 41,036
=========== ==========
</TABLE>
F-14
<PAGE> 45
NOTE 9: LONG-TERM DEBT
<TABLE>
<CAPTION>
JANUARY 30, January 31,
2000 1999
----------- -----------
<S> <C> <C>
SENIOR DEBT:
Mortgage notes due on varying
dates from February 1, 2001
to September 1, 2007 $ 27,973 28,845
Notes payable to banks 18,939 20,281
Capital leases (Note 11) 9,504 10,569
-------- --------
56,416 59,695
Less current portion 4,675 3,726
-------- --------
51,741 55,969
-------- --------
SUBORDINATED DEBT:
10 1/4% Senior Subordinated Notes
due March 1, 2008 115,000 115,000
-------- --------
Total long-term debt $166,741 $170,969
======== ========
</TABLE>
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 30, 2000 the Company has a Senior Secured Credit facility (the
"credit 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")
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
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 $18.9 million under the Term
Loan Facility of which $2.6 million is current and $62 million under the
Revolving Credit Facility at January 30, 2000. In addition the Company had
outstanding letters of credit of $4.6 million.
F-15
<PAGE> 46
Term loans provided pursuant to the Term Loan Facility bear interest, at the
Company's election, at an annual rate equal to the Adjusted LIBO Rate (London
Interbank Offering Rate) plus 3% or Alternative Base Rate (as defined therein)
plus 2%, 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 2.75% or Alternative Base Rate plus
1.75%, 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. At November 7, 1999 the Company obtained a waiver for
the interest coverage ratio and the leverage ratio and an amendment which
revised the interest coverage and leverage ratios and added a new covenant for
inventory to revolver usage and limited the fiscal year 2000 capital
expenditures to $17.5 million. The amendment also increased interest rate
spreads as reflected above.
The Company was in compliance with all of the bank agreement covenants and other
restrictions under all other debt agreements at January 30, 2000.
In March 1998 the Company issued $115 million of 10 1/4% Senior Subordinated
Notes due March 21, 2008 (the "Offering") and utilized approximately $110.7
million to pay down $17.2 million of indebtedness under the Term Loan Facility
and to repay the remaining outstanding 11 1/2% Senior Notes of $25.2 million and
the $65 million of 8% Convertible Subordinated Notes. This resulted in an
extraordinary charge of $5,418 which included premium of $2,208, debt issue
costs of $1,317 and $1,623 incurred for early payment of the Term Loan Facility
and overall credit line refinancing.
Aggregate maturities of long-term debt for the five years subsequent to 1999,
excluding capital lease obligations (Note 11), are $3,089 in 2000, $7,293 in
2001, $3,814 in 2002, $5,082 in 2003 and $7,551 in 2004.
F-16
<PAGE> 47
NOTE 10: NET PARENT INVESTMENT
As a result of the acquisition (Note 7), Frank's became responsible for certain
liabilities of discontinued operations for businesses that Holdings had sold in
prior years. These liabilities are included in the net parent investment
account. The remaining liability was $1,585 at January 30, 2000.
NOTE 11: 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 30, 2000, are as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Capital Operating
Leases Leases
-----------------------------------------------------------------
<S> <C> <C>
2000 $ 2,259 $ 19,726
2001 2,252 19,675
2002 2,123 17,724
2003 1,976 16,786
2004 1,809 15,951
Thereafter 4,362 78,795
-------- --------
Total minimum lease obligations 14,781 $168,657
========
Amount representing future interest (5,277)
--------
Present value of net minimum lease
obligations $ 9,504
========
Future sublease rental income $ 3,922
========
</TABLE>
Rent expense was $22,399 in 1999, $22,684 in 1998, $20,876 for the forty-eight
weeks ended December 28, 1997 and $1,343 for the four weeks ended January 25,
1998. Rent expense includes additional rentals based on retail store sales (in
excess of the minimums specified in leases) of $322 in 1999, $446 in 1998, $707
for the forty-eight weeks ended December 28, 1997, and $(186) for the four
weeks ended January 25, 1998 and is reduced by sublease rental income of $547,
in 1999, $679 in 1998 and $603 in 1997.
F-17
<PAGE> 48
NOTE 12: 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 13: LITIGATION AND OTHER CONTINGENCIES
In the normal course of business the Company is subject to various claims. In
the opinion of management, any ultimate liability arising from or related to
these claims should not have a material adverse effect on future results of
operations or the consolidated financial position of the Company.
NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments were $20,436 in 1999, $18,841 for 1998, $21,523 for the
forty-eight weeks ended December 28, 1997 and $301 for the four weeks ended
January 25, 1998. Income tax payments were $47,000 for the forty-eight weeks
ended December 28, 1997.
NOTE 15: SUBSEQUENT EVENT
Cypress contributed $15 million on April 27, 2000 and received 2,801,204 shares
of Holdings common stock. The capital contribution is intended for the funding
of the Company's new store point-of-sale system for $12.5 million and $2.5
million for general corporate purposes. As a result of the capital contribution
by Cypress, the credit facility was amended on April 20, 2000 to raise the
capital expenditure covenant from $17.5 million to $30 million (Note 9).
F-18
<PAGE> 49
Schedule II
FRANK'S NURSERY & CRAFTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEAR ENDED JANUARY 30, 2000
(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: $ 2,855 $ 1,299 (1) $ 1,556
Provision for store closing reserve:
Current 2,547 $ 1,720(3) 1,765 (2) 2,502
Noncurrent 6,565 $1,360 1,720 (4) 6,205
</TABLE>
(1) Represents reduction against cost of goods sold.
(2) Represents payments of liabilities and loss on sale of property.
(3) Reclassification from noncurrent portion of reserve.
(4) Reclassification to current portion of reserve.
F-19
<PAGE> 50
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>
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-20
<PAGE> 51
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-21
<PAGE> 52
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- -----------
<S> <C>
10.3 Amendment No. 3, dated as of April 20, 2000, to the Credit Agreement dated
as of December 24, 1997, as amended by Amendment No. 2, dated as of December
25, 1999 and Amendment No. 1, dated as of April 15, 1998, among Frank's Nursery
& Crafts, Inc., FNC Holdings Inc., the lenders party thereto, The Chase
Manhattan Bank and Goldman Sachs Credit Partners L.P.
10.4 Stock Purchase Agreement dated as of April 27, 2000, between FNC Holdings Inc.,
Cypress Merchant Banking Partners, L.P. and Cypress Gardens Ltd.
27.1 Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT 10.3
AMENDMENT No. 3, dated as of April 20, 2000
(this "Amendment"), to the Credit Agreement
dated as of December 24, 1997 (the "Credit
Agreement"), as amended by Amendment No. 1,
dated as of April 15, 1998 and Amendment No. 2
and Waiver dated as of December 20, 1999,
among Frank's Nursery & Crafts, Inc. (the
"Borrower"), FNC Holdings Inc. ("Holdings"),
formerly known as General Host Corporation,
the Lenders (as defined in the Credit
Agreement), The Chase Manhattan Bank, as
administrative agent (in such capacity, the
"Administrative Agent") and collateral agent
(in such capacity, the "Collateral Agent") for
the Lenders, as swingline lender (in such
capacity, the "Swingline Lender") and as an
Issuing Bank (as defined in the Credit
Agreement), and Goldman Sachs Credit Partners,
L.P., as documentation agent.
A. Pursuant to the Credit Agreement, the Lenders, the
Swingline Lender and the Issuing Banks have extended credit to the
Borrower and have agreed to extend credit to the Borrower, in each case
pursuant to the terms and subject to the conditions set forth therein.
B. The Borrower and Holdings have requested that the
Administrative Agent and the Required Lenders amend certain provisions of
the Credit Agreement as set forth herein.
C. The Administrative Agent and the Required Lenders are
willing to amend the Credit Agreement, in each case, pursuant to the terms
and subject to the conditions set forth herein.
D. Capitalized terms used and not otherwise defined herein
shall have the meanings assigned to them in the Credit Agreement.
Accordingly, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency and
receipt of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. Amendments to Section 6.04 of the Credit Agreement
(Investments, Loans, Advance, Guarantees and Acquisitions). Section 6.04(p)
of the Credit Agreement is hereby amended by deleting the amount
"$1,000,000" appearing therein and substituting in lieu thereof the amount
"3,500,000".
<PAGE> 2
2
SECTION 2. Amendment to Section 6.13 (Capital Expenditures).
Section 6.13 of the Credit Agreement is hereby amended by (a) deleting the
table set forth therein and substituting therefor the following:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
February 2, 1998--January 31, 1999 $22,000,000
February 1, 1999--January 30, 2000 $27,000,000
January 31, 2000--January 28, 2001 $30,000,000
January 29, 2001--January 27, 2002 $26,500,000
January 28, 2002--January 26, 2003 $28,000,000
January 27, 2003--January 25, 2004 $29,500,000
January 26, 2005--January 30, 2005 $31,000,000
</TABLE>
and (b) by deleting the last two sentences thereof and substituting
therefor the following:
Capital Expenditures set forth above in respect of the fiscal year
ending on or about January 28, 2001 in an amount not less than
$11,500,000 (the "POS Capital Expenditures") shall be used solely to
purchase a point of sale system during such fiscal year only.
The amount of permitted Capital Expenditures set forth above in respect
of any fiscal year other than the fiscal year ending on or about
January 28, 2001 shall be increased by the lesser of (a)(i) the unused
permitted Capital Expenditures for the immediately preceding fiscal
year (other than unused POS Capital Expenditures in the case of the
fiscal year ending on or about January 28, 2001) less (ii) an amount
equal to unused Capital Expenditures carried forward to such preceding
fiscal year and (b) $12,000,000. No increase from the amount set forth
in the table above shall be permitted for the fiscal year ending on or
about January 28, 2001.
SECTION 3. Representations and Warranties. Each of Holdings
and the Borrower represents and warrants to the Administrative Agent and to
each of the Lenders that:
(a) This Amendment has been duly authorized, executed and
delivered by it and constitutes its legal, valid and binding
obligation, enforceable in accordance with its terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights generally and subject to
general principles of equity, regardless of whether considered in a
proceeding in equity or at law, and an implied covenant of good faith
and fair dealing.
(b) Before and after giving effect to this Amendment, the
representations and warranties set forth in Article III of the
Credit Agreement are true and correct in all material respects
on and as of the date hereof, except to the extent suchrepresentations
and warranties expressly relate to an earlier date, in which case such
representations and warranties are, to such extent, true and correct in
all material respects as of such earlier date.
<PAGE> 3
3
(c) After giving effect to this Amendment, no Default has
occurred and is continuing.
SECTION 4. Conditions to Effectiveness. This Amendment shall
become effective as of the date first above written when (a) the
representations and warranties set forth in Section 3 hereof are true and
correct, (b) the Administrative Agent shall have received (i) counterparts
of this Amendment that, when taken together, bear the signatures of
Holdings, the Borrower and the Required Lenders and (ii) evidence
satisfactory to it that (A) Cypress and its Affiliates shall have
contributed at least $15,000,000 to Holdings in exchange for common stock
of Holdings and (B) Holdings shall have contributed at least $15,000,000 to
the Borrower in exchange for common stock of the Borrower.
SECTION 5. Effect of this Amendment. Except as expressly set
forth herein, this Amendment shall not by implication or otherwise limit,
impair, constitute a waiver of, or otherwise affect the rights and remedies
of the Lenders, the Swingline Lender, any Issuing Bank, the Collateral
Agent or the Administrative Agent under the Credit Agreement or any other
Loan Document and shall not alter, modify, amend or in any way affect any
of the terms, conditions, obligations, covenants or agreements contained in
the Credit Agreement or any other Loan Document, all of which are ratified
and affirmed in all respects and shall continue in full force and effect.
Nothing herein shall be deemed to entitle the Borrower or Holdings to a
consent to, or a waiver, amendment, modification or other change of, any of
the terms, conditions, obligations, covenants or agreements contained in
the Credit Agreement or any other Loan Document in similar or different
circumstances. After the date hereof, any reference to the Credit Agreement
shall mean the Credit Agreement as amended hereby. This Amendment shall
constitute a Loan Document for all purposes under the Credit Agreement and
the other Loan Documents.
SECTION 6. APPLICABLE LAW. THIS AMIENDMIENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. Counterparts, This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed
an original, but all such counterparts together shall constitute but one
and the same instrument. Delivery of any executed counterpart of a
signature page of this Amendment by facsimile transmission shall be as
effective as delivery of a manually executed counterpart hereof.
SECTION 8. Expenses. The Borrower agrees to reimburse the
Administrative Agent for its out-of-pocket expenses in connection with this
Amendment, including the reasonable fees, charges and disbursements of
Cravath, Swaine & Moore, counsel for the Administrative Agent.
<PAGE> 4
4
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of
the day and year first above written.
FRANKS NURSERY & CRAFTS, INC., as
Borrower,
by /s/ Larry T. Lakin
----------------------------------
Name: Larry T. Lakin
Title: Vice Chairman and Chief
Financial Officer
FNC HOLDINGS INC.,
by /s/ Larry T. Lakin
----------------------------------
Name: Larry T. Lakin
Title: Vice Chairman and Chief
Financial Officer
THE CHASE MANHATTAN BANK, individually
and as Administrative Agent,
by
----------------------------------
Name:
Title:
GOLDMAN SACHS CREDIT PARTNERS, L.P.,
by
----------------------------------
Name:
Title:
<PAGE> 5
4
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of
the day and year first above written.
FRANK'S NURSERY & CRAFTS, INC., as
Borrower,
by
----------------------------------
Name:
Title:
FNC HOLDINGS INC.,
by
----------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, individually
and as Administrative Agent,
by /s/ Neil R. Boylan
----------------------------------
Name Neil R. Boylan
Title: Managing Director
GOLDMAN SACHS CREDIT PARTNERS, L.P.,
by
----------------------------------
Name:
Title:
<PAGE> 6
5
SIGNATURE PAGE TO AMENDMENT NO. 3 DATED AS OF
APRIL 20,2000, TO THE CREDIT AGREEMENT DATED AS
OF DECEMBER 24,1997, AMONG FRANKS NURSERY &
CRAFTS, INC., FNC HOLDINGS INC. (F/K/A GENERAL
HOST CORPORATION), THE LENDERS PARTY THERETO,
THE CHASE MANHATTAN BANK, AS ADMINISTRATIVE
AGENT, COLLATERAL AGENT, SWINGLINE LENDER, and
ISSUING BANK, and GOLDMAN SACHS CREDIT
PARTNERS, L.P., AS DOCUMENTATION AGENT
Name of Institution GOLDMAN SACHS CREDIT PARTNERS, L.P.
---------------------------------------------
by /s/ ELIZABETH FISCHER
------------------------------------------
Name: ELIZABETH FISCHER
Title: AUTHORIZED SIGNATURE
<PAGE> 7
5
SIGNATURE PAGE TO AMENDMENT NO. 3 DATED AS OF
APRIL 20, 2000, TO THE CREDIT AGREEMENT DATED
AS OF DECEMBER 24, 1997. AMONG FRANK'S NURSERY
& CRAFTS, INC., FNC HOLDINGS INC. (F/K/A
GENERAL HOST CORPORATION), THE LENDERS PARTY
THERETO, THE CHASE MANHATTAN BANK, AS
ADMINISTRATIVE AGENT, COLLATERAL AGENT,
SWINGLINE LENDER and ISSUING BANK, and GOLDMAN
SACHS CREDIT PARTNERS, L.P., AS DOCUMENTATION
AGENT
Name of Institution IBJ Whitehall Bank & Trust Co.
---------------------------------------------
by /s/ Patricia G. McCormack
------------------------------------------
Name: PATRICIA G. McCORMACK
Title: MANAGING DIRECTOR
<PAGE> 8
5
SIGNATURE PAGE TO AMENDMENT NO. 3 DATED AS OF
APRIL 20, 2000, TO THE CREDIT AGREEMENT DATED
AS OF DECEMBER 24, 1997, AMONG FRANK'S
NURSERY & CRAFTS, INC., FNC HOLDINGS INC.
(F/K/A GENERAL HOST CORPORATION), THE LENDERS
PARTY THERETO, THE CHASE MANHATTAN BANK,
AS ADMINISTRATIVE AGENT, COLLATERAL AGENT,
SWINGLINE LENDER, and ISSUING BANK, and
GOLDMAN SACHS CREDIT PARTNERS, L.P., AS
DOCUMENTATION AGENT
Name of Institution KZH HIGHLAND-Z LLC
---------------------------------------------
by /s/ Susan Lee
------------------------------------------
Name: Susan Lee
Title: Authorized Agent
<PAGE> 9
5
SIGNATURE PAGE TO AMENDMENT NO. 3 DATED AS OF
APRIL 20, 2000, TO THE CREDIT AGREEMENT DATED
AS OF DECEMBER 24, 1997, AMONG FRANK'S
NURSERY & CRAFTS, INC., FNC HOLDINGS INC.
(F/K/A GENERAL HOST CORPORATION), THE LENDERS
PARTY THERETO, THE CHASE MANHATTAN BANK,
AS ADMINISTRATIVE AGENT, COLLATERAL AGENT,
SWINGLINE LENDER, and ISSUING BANK, and
GOLDMAN SACHS CREDIT PARTNERS, L.P., AS
DOCUMENTATION AGENT
Name of Institution KZH PAMCO LLC
---------------------------------------------
by /s/ Susan Lee
------------------------------------------
Name: Susan Lee
Title: Authorized Agent
<PAGE> 10
5
SIGNATURE PAGE TO AMENDMENT NO. 3 DATED AS OF
APRIL 20, 2000, TO THE CREDIT AGREEMENT DATED
AS OF DECEMBER 24, 1997, AMONG FRANK'S NURSERY
& CRAFTS, INC., FNC HOLDINGS INC. (F/K/A
GENERAL HOST CORPORATION), THE LENDERS PARTY
THERETO, THE CHASE MANHATTAN BANK, AS
ADMINISTRATIVE AGENT, COLLATERAL AGENT,
SWINGLINE LENDER, and ISSUING BANK, and GOLDMAN
SACHS CREDIT PARTNERS, L.P., AS DOCUMENTATION
AGENT
Name of Institution Transamerica Business Credit Corporation
---------------------------------------------
by /s/ Perry Vavoules
----------------------------------------
Name: Perry Vavoules
Title: Senior Vice President
<PAGE> 1
EXHIBIT 10.4
STOCK PURCHASE AGREEMENT
Stock Purchase Agreement, dated as of April 27, 2000 (this
"Agreement"), among FNC Holdings Inc., a New York Corporation (the "Seller"),
Cypress Merchant Banking Partners, L.P., a Delaware limited partnership
("CMBP"), and Cypress Garden Ltd., a Cayman Islands exempted company with
limited liability ("Cypress Garden"; together with CMBP, the "Cypress
Entities").
WITNESSETH:
WHEREAS, on the Closing Date (defined below), the Cypress Entities
desire to make an additional investment in the Seller, through the purchase from
the Seller of 2,801,204 shares of its common stock, par value $1.00 per share
(the "Stock"); and
WHEREAS, the Seller has agreed to sell to the Cypress Entities, and the
Cypress Entities have agreed to purchase from the Seller, such shares of Stock,
all pursuant to the terms and conditions of this Agreement; and
WHEREAS, the Seller and the Cypress Entities desire to set forth herein
certain representations, warranties and covenants made by each to the other as
an inducement to the consummation of the transactions contemplated hereby; and
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto
hereby agree as follows:
SECTION 1. Defined Terms. For purposes of this Agreement, the term:
"Closing" is defined in Section 3.
"Closing Date" is defined in Section 3.
"Governmental Entity" means any court or tribunal in any jurisdiction
or any public, governmental or regulatory body, agency, department, commission,
board, bureau or other authority or instrumentality.
"Lien" means any mortgage, chattel mortgage, deed of trust, pledge,
claim, charge, attachment, security interest, financing statement, encumbrance,
lien, easement, restriction, judgment, segregation, charge, deposit arrangement,
conditional sales contract or other contractual restriction of any nature
whatsoever upon any of the assets of any Person.
<PAGE> 2
2
"Person" means an individual, corporation, partnership,
limited liability company, joint venture, association, trust,
governmental authority or body, unincorporated organization, other
entity or group.
SECTION 2. Purchase of Stock. (a) On the terms and subject to the
conditions of this Agreement, the Seller shall, at the Closing and on the
Closing Date, sell, transfer, convey and deliver to CMBP, and CMBP shall
purchase from the Seller, 2,663,282 shares of Stock (the "CMBP Purchased Stock")
for the cash purchase price of $14,261,449.85 (the "CMBP Purchase Price").
(b) On the terms and subject to the conditions of this Agreement, the
Seller shall, at the Closing and on the Closing Date, sell, transfer, convey and
deliver to Cypress Garden, and Cypress Garden shall purchase from the Seller,
137,922 shares of Stock (the "Cypress Garden Purchased Stock") for the cash
purchase price of $738,550.15 (the "Cypress Garden Purchase Price").
(c) On the terms and subject to the conditions of this Agreement, at
the Closing and on the Closing Date, (i) Cypress Garden shall pay, or cause to
be paid, to the Seller by wire transfer in immediately available funds to one
or more bank accounts designated by the Seller an aggregate amount equal to the
Cypress Garden Purchase Price; (ii) CMBP shall pay, or cause to be paid, to the
Seller by wire transfer in immediately available funds to one or more bank
accounts designated by the Seller, an aggregate amount equal to the CMBP
Purchase Price and (iii) the Seller shall deliver to the Cypress Entities (A) a
certificate, registered in CMBP's name, representing the CMBP Purchased Stock
and (B) a certificate, registered in Cypress Garden's name, representing the
Cypress Garden Purchased Stock.
SECTION 3. Closing Date. The closing (the "Closing") of the purchase
and sale of the Stock provided for in Section 2 shall take place at the offices
of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York at 10:00
a.m., New York City time, on April 27, 2000, or at such other place and time or
on such other date as the parties may agree. The date on which the Closing
occurs is herein called the "Closing Date".
SECTION 4. Representations and Warranties of the Seller. (a) The Seller
hereby represents and warrants to each of the Cypress Entities as of the date
hereof and as of the Closing on the Closing Date that:
(i) Execution and Validity of Agreement. The Seller is a
corporation duly organized, validly existing and in good standing under
the laws of the state of its organization. The Seller has all requisite
power and authority to execute and deliver this Agreement and to
perform its respective obligations hereunder and consummate the
transactions contemplated hereby. The execution, delivery and
performance of this Agreement by the Seller and the consummation by the
Seller of the transactions contemplated hereby have been duly
authorized by the Seller. This Agreement has been duly executed and
delivered by the Seller and, assuming due authorization, execution and
delivery by Cypress Entities, will constitute a legal, valid and
binding agreement of the
<PAGE> 3
3
Seller, enforceable against the Seller in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium
or other laws relating to or limiting creditors' rights generally or by
equitable principles relating to enforceability.
(ii) No Conflict. The execution and delivery of this Agreement and the
performance by the Seller of the transactions contemplated hereby will not (A)
violate or conflict with any provision of the Seller's articles of
incorporation, (B) result in the violation or breach of, or constitute (with or
without the giving of notice or the lapse of time or both) a default (or give
rise to any right of termination, cancellation or acceleration) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture, deed
of trust, lease, contract, agreement, license or other instrument or obligation
to which the Seller is a party or by which any of its properties or assets may
be bound, (C) result in the creation of any Lien or the loss of any license or
other contractual right with respect thereto, or (D) violate any provision of
any law, order, writ, injunction, decree, statute, rule, judgment, decree,
restriction or ruling of any Governmental Entity applicable to either of the
Cypress Entities or their properties or assets.
(iii) Consents and Approvals. No registration, filing, application,
notice, consent, approval, order, qualification or waiver is required to be
made, filed, given or obtained by the Seller with, to or from any Persons or
Governmental Entity or private agencies in connection with the execution,
delivery or performance by the Seller of this Agreement or the consummation of
the transactions contemplated hereby.
(iv) Share Capital. The authorized capital stock of the Seller consists
of 100,000,000 shares of common stock, of which 31,000,000 shares are
outstanding (excluding shares to be purchased under this Agreement) and
69,000,000 shares are reserved for issuance. The CMBP Purchased Stock and the
Cypress Garden Purchased Stock are duly authorized, validly issued, fully paid
and non-assessable shares of the Seller.
(b) The representations and warranties made by the Seller shall survive
the closing of the transactions contemplated hereby.
SECTION 5. Registration Rights. Seller hereby grants to each of CMBP
and Cypress Garden the rights to have the Stock registered under the Securities
Act of 1933 as provided in the Registration Rights Agreement entered into among
Seller and the Cypress Entities as of December 23, 1997.
SECTION 6. Further Actions. Subject to the terms and conditions hereof,
each of the parties hereto agrees to use its reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective the transactions
contemplated by this Agreement.
<PAGE> 4
4
SECTION 7. Execution in Counterparts. This Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same
agreement, and shall become a binding agreement when one or more counterparts
have been signed by each party and delivered to the other parties.
SECTION 8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 9. Miscellaneous. (a) Seller agrees that, whether or not the
transactions contemplated by this Agreement are consummated, Seller will pay or
cause to be paid all costs and expenses arising in connection with the
preparation, execution, administration and enforcement of, and the preservation
of rights under, this Agreement, and all taxes (other than taxes based on
income), fees or other charges that may be payable in connection with the
transactions contemplated hereby.
(b) Whether or not the transactions contemplated hereby are
consummated, Seller agrees to indemnify and hold harmless each Cypress Entity
and all limited and general partners or shareholders of each Cypress Entity from
and against any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of
any kind which may be imposed upon, incurred by or asserted against each Cypress
Entity (or any partner or shareholder thereof) in any manner relating to or
arising out of (i) such Cypress Entity's purchase and/or ownership of the Stock
or (ii) any litigation to which such Cypress Entity (or any of its partners or
shareholders) is made a party in its capacity as a shareholder or owner of
securities (or a partner or shareholder of a shareholder or owner of securities)
of Seller.
(c) Notwithstanding any other provision of this Agreement, neither the
general partner nor the limited partners nor the shareholders nor any future
general or limited partner or shareholder of a Cypress Entity shall have any
liability for performance of any obligation of a Cypress Entity under this
Agreement in excess of the respective capital contribution of such general
partner, limited partners or shareholders to such Cypress Entity.
SECTION 10. Titles and Headings. Titles and headings to Sections herein
are inserted for convenience of reference only and are not intended to be a part
of or to affect the meaning or interpretation of this Agreement.
SECTION 11. Successors and Assigns. This Agreement may be assigned by
either Cypress Entity without the prior written consent of the Seller. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors in interest and assigns.
SECTION 12. Severability. If any provision of this Agreement shall be
declared by any court of competent jurisdiction to be illegal, void or
unenforceable, all other provisions of this Agreement shall not be affected and
shall remain in full force and effect.
<PAGE> 5
5
SECTION 13. Submission To Jurisdiction. Each party hereto expressly
waives its own jurisdiction or any other jurisdiction that would be available to
it, and hereby expressly, irrevocably unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement, or for recognition and enforcement of any
judgment in respect thereof, to the non-exclusive general jurisdiction of the
courts of the State of New York, the courts of the United States of America for
the Southern District of New York, and appellate courts from any thereof,
(b) consents that any such action or proceeding may be brought in such
courts and waives any objection that it may now or hereafter have to the venue
of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or
claim the same;
(c) agrees that service of process in any such action or proceeding may
be effected by mailing a copy thereof by courier (or any substantially similar
form of delivery) to its address; and
(d) agrees that nothing herein shall affect the right to effect service
of process in any other manner permitted by law or shall limit the right to sue
in any other jurisdiction.
[Rest of page left blank intentionally.]
<PAGE> 6
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed and delivered on the date first set forth above.
FNC HOLDINGS, INC.
By: /s/ Joseph Baczko
---------------------------------------------------
Name: Joseph Baczko
Title: Chief Executive Officer
CYPRESS MERCHANT BANKING PARTNER,
L.P.
By: Cypress Associates, L.P., as
General Partner
By: The Cypress Group, L.L.C, as
General Partner
By: /s/ David P. Spalding
---------------------------------------------------
Name: David P. Spalding
Title: Member
CYPRESS GARDEN LTD.
By: /s/ David P. Spalding
---------------------------------------------------
Name: David P. Spalding
Title: Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-30-2000
<CASH> 8,855
<SECURITIES> 2,522
<RECEIVABLES> 1,941
<ALLOWANCES> 0
<INVENTORY> 100,823
<CURRENT-ASSETS> 121,401
<PP&E> 405,540
<DEPRECIATION> 185,090
<TOTAL-ASSETS> 449,633
<CURRENT-LIABILITIES> 122,845
<BONDS> 166,741
0
0
<COMMON> 1
<OTHER-SE> 147,825
<TOTAL-LIABILITY-AND-EQUITY> 449,633
<SALES> 487,332
<TOTAL-REVENUES> 487,332
<CGS> 337,212
<TOTAL-COSTS> 337,212
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,827
<INCOME-PRETAX> (9,296)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,296)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,296)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
