10-K 1 k84641e10vk.txt ANNUAL REPORT FOR FISCAL YEAR ENDED 01/25/04 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 FOR THE FISCAL YEAR ENDED JANUARY 25, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______ COMMISSION FILE NUMBER: 1-5364 FRANK'S NURSERY & CRAFTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 47-0863558 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 580 KIRTS BLVD., SUITE 300, TROY, MICHIGAN 48084 (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 Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.001 PER SHARE (TITLE OF CLASS) All of the Company's SEC filings can be found at the Company's website: www.franks.com. 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [ ] NO [X] 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $13,748,495. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] As of April 23, 2004, the registrant had 17,807,162 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive proxy statement for its 2004 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K. FRANK'S NURSERY & CRAFTS, INC. FORM 10-K FISCAL YEAR END JANUARY 25, 2004 Table of Contents PART I ITEM 1. BUSINESS............................................................................................. 1 ITEM 2. PROPERTIES........................................................................................... 6 ITEM 3. LEGAL PROCEEDINGS.................................................................................... 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................ 7 ITEM 6. SELECTED FINANCIAL DATA.............................................................................. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS............... 10 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................... 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................... 23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 23 ITEM 9A. CONTROLS AND PROCEDURES.............................................................................. 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................... 24 ITEM 11. EXECUTIVE COMPENSATION............................................................................... 24 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................... 24 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................... 24 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES............................................................... 24 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................................... 25 SIGNATURES.................................................................................................... 26 FINANCIAL SECTION INDEX TO FINANCIAL STATEMENTS................................................................................. F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS............................................................ F-2 REPORT OF INDEPENDENT AUDITORS................................................................................ F-3 BALANCE SHEETS................................................................................................ F-4 STATEMENTS OF OPERATIONS...................................................................................... F-5 STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT).................................................................. F-6 STATEMENTS OF CASH FLOWS...................................................................................... F-7 NOTES TO FINANCIAL STATEMENTS................................................................................. F-8 SCHEDULE II - VALUATION OF QUALIFYING ACCOUNTS................................................................ S-1 EXHIBIT INDEX................................................................................................. E-1

In conjunction with its plan of reorganization (as discussed in Note 1 of the audited financial statements), on May 20, 2002, Frank's Nursery & Crafts, Inc., a Michigan corporation, merged into its parent, FNC Holdings Inc., a New York corporation. On the merger date, the surviving corporation changed its name to Frank's Nursery & Crafts, Inc. and was reincorporated in Delaware. Depending upon the context and the period being referenced, references to the "Company" or "Frank's" in this Form 10-K refer to Frank's Nursery & Crafts, Inc., a Delaware corporation, and/or its predecessors. References in this Form 10-K to a particular year are to the Company's fiscal year, which is the 52- or 53-week period ending on the last Sunday in January of the following year (e.g., a reference to "2003" is a reference to the fiscal year ended January 25, 2004). CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This filing contains certain forward-looking statements, which reflect management's current views of future events and financial performance. These forward-looking statements are based on many assumptions and factors detailed in the Company's filings with the Securities and Exchange Commission, including the ability of the Company to maintain normal trade terms with vendors, the ability of the Company to comply with the various covenant requirements contained in its financing agreements, customer demand, fashion trends, competitive market forces, the effect of competitive products and pricing, customer acceptance of the Company's merchandise mix and retail locations, weather, risks associated with foreign global sourcing, including political instability and changes in import regulations, the effects of currency fluctuations, economic conditions worldwide, and the ability of the Company to execute its business plans effectively. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise. PART I ITEM 1. BUSINESS OVERVIEW Frank's operates the largest chain (as measured by sales ) in the United States of specialty retail stores devoted to the sales of lawn and garden products. Frank's also is a leading retailer of Christmas trim-a-tree merchandise, artificial flowers and arrangements, garden and floral crafts, and home decorative products. The Company operates 169 retail stores in 14 states, primarily in the eastern, middle-Atlantic, and mid-western regions of the United States, under the name Franks Nursery. Frank's was incorporated under the laws of the State of Delaware in April 2002 and is the successor of Frank's Nursery & Crafts, Inc., a Michigan corporation which was incorporated 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 580 Kirts Boulevard, Suite 300, Troy, Michigan 48084, and its telephone number is (248) 712-7000. 1 THE LAWN AND GARDEN INDUSTRY The overall retail market for lawn and garden products, defined to include green goods for both outdoor and indoor usage, fertilizers and chemicals, gardening accessories, lawn and patio furniture, Christmas trim-a-tree merchandise, power equipment and tools, barbecue grills, and watering equipment, was estimated at $98.7 billion in calendar 2003 and grew 4.0% from an estimated $94.9 billion in calendar 2002, according to Nursery Retailer magazine. During the period from calendar 1992 through calendar 2003, the lawn and garden industry grew from $53.6 billion to $98.7 billion, according to Nursery Retailer magazine. 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 lawn and garden market is highly seasonal, with the spring season accounting for the majority of annual product sales. The market for green (live) goods is generally non-branded and highly differentiated by both specimen and quality, while the market for hard goods, fertilizers, and chemicals is composed of both national and private label brands. At the retail level, the lawn and garden market is highly fragmented and consists of national and regional chains of specialty retailers, mass merchants and home centers, as well as thousands of local, independent garden centers and nurseries. With the exception of the garden center and nursery segment, few retailers operate their lawn and garden centers on a year round basis or as full line lawn and garden retailers. The Company believes that the primary competitive factors in lawn and garden retailing include breadth of product assortment, product quality, price, knowledgeable service, and effective advertising. The Company believes that it competes effectively in these areas, as well as others, and that its competence level in the retailing of lawn and garden products will enable it to gain market share in the future by increased penetration of its existing markets. COMPANY STRATEGY The Company's objective is to position itself as a convenience nursery, garden center, and seasonal retailer, from a merchandising and marketing perspective. The Company's green goods business has shown consistent growth versus prior years. Focus will continue to be targeted on improvements in the merchandise mix and overall operations of hardlines, life-like (silk) floral and custom arrangements, and other products. Ongoing cost reductions, improvements in inventory management, and vendor quality programs will continue to be a high priority for the Company and will be critical to its success. The Company will introduce new product offerings, on a chain-wide basis in 2004, including patio furniture and grills, which were tested in 2003. These offerings are intended to complement the Company's core business and increase sales during its slower selling periods. The Company's merchandising efforts are focused on maintaining an appropriate in-stock position for high sales volume items and closely monitoring product sell-through to minimize markdowns. Utilizing inventory management tools, the Company has also implemented processes intended to deliver seasonal product in a manner to prevent overstocks. 2 The Company utilizes marketing and advertising efforts to communicate with its customers. The Company's marketing and advertising efforts are intended to build customer traffic at its stores and extend the peak selling seasons of its core business by implementing multi-media advertising, including radio ads, aggressive pricing to match competitors on similar items, and promotional events and discount programs. The Company's core strategy centers on the lawn and garden market, where the Company intends to enhance its leadership position within the specialty retailing segment of that market. The Company's strategic market position is to provide better quality product, service and convenience than the home center and mass merchandise competition, at prices that are a better value proposition than the local nurseries. In the live goods area, the Company deals with a number of different vendors for the same product in different areas of the country. In order to be able to provide live product of consistently high quality, the Company has instituted a quality assurance program with its vendors and carefully monitors compliance with the program. The Company's Christmas trim-a-tree selection is aimed at providing its customers with a broad and unique assortment of quality artificial trees, wreaths, tree decorations, and holiday decor. PRODUCT CATEGORIES The principal products sold at the Company's retail stores are as follows:

LAWN AND GARDEN. 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 customers are drawn 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 3 merchandise. In addition, the Company markets its own line of private label lawn and garden products. 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 which is less significant than the spring sales season. In the winter months, sales of lawn and garden products are minimal and limited essentially to live Christmas trees, poinsettias, and indoor plants. In 2004, the Company is adding a year-round business in patio furniture and grills to this category. As well, the Company promotes a wild bird business, including feed and accessories in the winter months. FLORAL, GARDEN DECOR, AND HOME DECOR. The Company's floral and garden decor products include a varied assortment of dried, silk and life-like flowers for the do-it-yourself decorator, as well as pre-made and custom floral arrangements. The Company also offers a broad assortment of decorative candles, planters, garden statuary, and accent pieces for the home or patio. The Company intends to enhance the quality of products selected for this category and expand the quantity of products in the garden decor area in response to consumer demand. The Company also intends to support this product category with advertising in order to make consumers aware of Frank's improved product selection and presentation. Floral sales are steady throughout the year and are stimulated by early spring, fall, and late winter promotions. The garden decor business is concentrated mainly in the spring, summer, and fall months. 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 products offered include artificial trees, indoor and outdoor lights, wreaths, holiday plants, and 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 very susceptible to the impact of weather conditions which may affect consumer purchasing patterns. Unusually wet or cold weather reduces consumer purchases during the spring selling season. In 2003, 47% of the Company's sales occurred during the spring selling season (late March to mid-June) and 20% occurred during the Christmas season (November to late December). Normally, spring is the most profitable season, and Christmas is the next most profitable season. Operating losses usually are experienced during the other periods of the year. The Company's slowest selling seasons are typically the period from January until late March and from mid-July to October. Like most seasonal retailers, the Company significantly increases inventory levels leading up to its two peak selling seasons. In the months leading up to those seasons, the Company orders product for delivery prior to and during the selling seasons. Frank's negotiates payment terms with suppliers on a case-by-case basis. Historically, the majority of payments are made during or shortly 4 after the selling season, and a small percentage is paid prior to the selling season. Working capital for pre-seasonal inventory buildup comes from the Company's two revolving credit facilities and/or cash generated by operations. The Company's revolving credit facility with Congress Financial Corporation is asset-based and allows for borrowing at a percentage of inventories on hand, at cost, net of amounts reserved under the credit agreement. The amounts reserved are based on a number of variables, including inventory levels, merchandise purchases and sales levels, and the types of reserves include inventory shrinkage, letters of credit outstanding, sales taxes and other liabilities of the Company. The total amount of these reserves varies by season but typically ranges from 10% to 25% of the cost of eligible inventory. The Company's revolving credit facility with Kimco Capital Corp. is secured by real estate and a second lien on the Company's inventory and other assets. Availability under the facility does not fluctuate from month to month as it is not tied to a borrowing base. Hence, the Company uses the Kimco revolver to fund most of its pre-seasonal inventory buildup, and it uses the Congress facility when inventory levels rise. VENDORS Substantially all of the plants and products the Company sells are purchased from approximately 800 outside vendors. Alternative sources of supply are generally available for each of the products sold by the Company. STORES The Company currently operates 169 stores in 14 states, primarily in the eastern, middle-Atlantic and midwestern regions of the United States. The Company's stores are generally located on three-acre sites. A typical store 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 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, while some stores are part of strip shopping centers. The real estate cost of opening new stores varies by location and is dependent upon the method of financing. Such financing methods include build-to-suit leases, conversion of existing buildings and land purchases with construction funded by the Company. These costs range from approximately $500,000 per store for build-to-suit leases to a range of $3.0 to $3.5 million, including the purchase of land, per store for stores owned by the Company. New stores are financed via build-to-suit operating leases whenever possible. The Company does not anticipate opening any new stores in 2004, other than relocations. The following table sets forth the number of stores opened and closed during the periods indicated. 5

* On March 15, 2004, the Company closed its East Windsor, NJ store. STORE OPERATIONS The Company's stores are normally open 84 hours per week during the spring and Christmas season, with the average store opening at 8 a.m. and closing at 9 p.m. During other times of the year, the average store is open from 10:00 a.m. until 8:00 p.m. The average store has approximately 15 to 20 part and full-time employees, including a store manager, an assistant manager and up to four department specialists responsible for the various product lines. During seasonal peak selling periods, the permanent store staff is generally supplemented with temporary employees. EMPLOYEES At April 19, 2004, the Company's employee base was approximately 3,900 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 a distribution center in Howe, Indiana. In 2003, approximately 52% of all merchandise was delivered to the Company's stores via warehouse, primarily using contract carriers. The balance of the products was delivered directly to stores by vendors. ITEM 2. PROPERTIES The Company's corporate headquarters are located in a 48,500 square foot office space leased by the Company in Troy, Michigan. The lease expires in March 2007, and the Company has two five-year options to extend the term of the lease. The Company currently leases a 346,515 square foot distribution facility in Howe, Indiana. The lease on the Howe facility expires in June 2010 with one five-year renewal option. The Company currently operates 169 stores, 107 of which are leased and 62 of which are owned. The stores are located in 14 states, as follows: 6

Of the 62 properties owned by the Company, 22 are mortgaged pursuant to mortgage notes having an aggregate balance of $22.1 million at January 25, 2004. See Note 7 to the audited financial statements included herein. The Company's interest in the remaining owned properties and all of the leased properties is pledged as collateral for the Company's credit facility with Kimco Capital Corp., as described under "Item 7. Financial Information - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Term Loan and Revolving Credit Facility with Kimco Capital Corp." ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than routine litigation incidental to the Company's business, against or involving the Company or its properties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of fiscal year 2003, no matters were submitted to a vote of the Company's shareholders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION While the Company's stock is currently being quoted on the Over-the-Counter Bulletin Board under the symbol "FNCN", trading is sporadic and there is no established public trading market for the Company's common stock. The following table sets forth the high and low bid prices of the common stock for the periods indicated, as reported on the Over-the-Counter Bulletin Board 7 beginning on September 9, 2002, the first day when shares of the Company's common stock were quoted, through January 25, 2004. These quotations represent prices between dealers and do not include retail mark-ups, mark-downs, or other fees or commissions and may not represent actual transactions.

HOLDERS As of April 23, 2004, 17,807,162 shares of the Company's common stock were outstanding and held by approximately 364 holders of record. DIVIDENDS The Company has not declared or paid any cash dividends on its common stock and does not expect to pay cash dividends in the foreseeable future. The Company anticipates that, for the foreseeable future, the Company's earnings will be reinvested in the business and used to service indebtedness. The declaration and payment of dividends by the Company are subject to the discretion of the Company's Board of Directors. Absent waiver by the lenders, so long as any advance or obligation of the Company under its credit facility with Congress Financial Corporation remains unpaid, the Company cannot declare or pay any dividends. RECENT SALES OF UNREGISTERED SECURITIES On March 17, 2003, under the Company's plan of reorganization, the Company issued an aggregate of 382,092 shares of its common stock to former creditors in exchange for the claims that such creditors had against the Company. On June 17, 2003, under the plan, the Company issued an aggregate of 228,262 shares of its common stock to former creditors in exchange for the claims that such creditors had against the Company. On October 31, 2003, under the plan, the Company issued an aggregate of 3,007,498 shares of its common stock to former creditors in exchange for the claims that such creditors had against the Company. On November 7, 2003, under the plan, the Company 8 issued an aggregate of 290,284 shares of its common stock to former creditors in exchange for the claims that such creditors had against the Company. The Company believes the offer and sale of the common stock under the plan of reorganization satisfies the requirements under Section 1145(a)(1) of the U.S. Bankruptcy Code and, therefore, are exempt from registration under the Securities Act and state securities laws. On January 29, 2003, the Company granted an option to purchase 100,000 shares of its common stock at a price of $1.19 per share to an employee of the Company pursuant to the Company's 2002 Stock Option Plan in consideration of such employee's services to the Company. These options were only offered to such employee and were granted in reliance on the exemption from registration contained in Section 4(2) of the Securities Act as the grant did not involve a public offering. On February 11, 2003, the Company granted options to purchase an aggregate of 412,500 shares of its common stock at a price of $1.10 per share to employees of the Company pursuant to the Company's 2002 Stock Option Plan in consideration of such employees' services to the Company. The options were offered only to such employees and were granted in reliance on the exemption from registration contained in Section 4(2) of the Securities Act as the grants did not involve a public offering. On April 1, 2003, the Company granted options to purchase an aggregate of 1,000,000 shares of its common stock at a price of $0.80 per share to Mr. Bruce Dale, the Company's former Chief Executive Officer, pursuant to the Company's 2002 Stock Option Plan, as amended, in consideration of his services to the Company. The option was offered only to such employee and was granted in reliance on the exemption from registration contained in Section 4(2) of the Securities Act as the grant did not involve a public offering. On January 21, 2004, the Company granted options to purchase an aggregate of 1,000,000 shares of its common stock at a price of $0.75 per share to Abacus Advisors, LLC as part of an agreement with the Company to provide strategic and operational advisory and consulting services. The option was offered only to such entity and was granted in reliance on the exemption from registration contained in Section 4(2) of the Securities Act as the grant did not involve a public offering. For all of the transactions described above involving options to acquire the Company's common stock, no general solicitation or advertising was involved. The securities were not offered to any other parties and no monetary consideration was paid by any of such parties for the receipt of such securities. Each of the recipients of the options has access to information regarding the Company (including Forms 10-K and 10-Qs filed by the Company) which the Company believes is comparable to the information that would be included in a registration statement. ITEM 6. SELECTED FINANCIAL DATA 9 The following sets forth selected financial data for the periods indicated. The selected financial data should be read in conjunction with the Company's audited financial statements included herein. All dollar amounts are stated in thousands. The Company's predecessors filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in February 2001. Their plan of reorganization was confirmed by the bankruptcy court on May 7, 2002 and was consummated on May 20, 2002. With the change in ownership resulting from the plan of reorganization, the Company has adopted fresh-start reporting in accordance with the recommended accounting principles for entities emerging from Chapter 11 bankruptcy set forth in the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). The adjustments to reflect the consummation of the plan of reorganization, including the gain on discharge of pre-petition liabilities and the adjustments to record assets and liabilities at their fair values, have been reflected in the accompanying financial data for the sixteen weeks ended May 19, 2002. For financial reporting purposes, references to "Predecessor" refer to the Company's predecessors on and prior to May 20, 2002, and references to "Successor" refer to the Company on and after May 20, 2002, after giving effect to the implementation of fresh start reporting. Accordingly, the financial data for the sixteen weeks ended May 19, 2002 (Predecessor), the thirty-six weeks ended January 26, 2003 (Successor), and the year ended January 25, 2004 (Successor) are not prepared on a basis comparable to the prior periods presented. Amounts are in $1,000's.

* only Successor earnings (loss) per share is shown above **see Note 1 of the accompanying audited financial statements for description of prior year ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FRESH START REPORTING AND FACTORS AFFECTING COMPARABILITY OF FINANCIAL INFORMATION The Company emerged from Chapter 11 bankruptcy proceedings on May 20, 2002, which for financial reporting purposes, the Company deemed the effective date of the plan of 10 reorganization. Fresh start reporting has been implemented as of May 20, 2002, and accordingly, at such date all assets and liabilities were restated to reflect their respective fair values. See note 1 to the audited financial statements included herein for a discussion of the fresh start adjustments. For financial reporting purposes, references to "Predecessor" refer to the Company's predecessors on and prior to May 20, 2002, and references to "Successor" refer to the Company on and after May 20, 2002, after giving effect to the implementation of fresh start reporting. Successor financial statements are not comparable to Predecessor financial statements. However, for discussion of results of operations, the thirty-six weeks ended January 26, 2003 (Successor) has been combined with the sixteen weeks ended May 19, 2002 (Predecessor) and compared with the fiscal year ended January 25, 2004. OVERVIEW During the critical spring selling season of 2003, the Company implemented new marketing initiatives intended to drive additional weekend customer traffic into stores. These initiatives utilized radio advertisements in addition to ongoing print media and focused on a "Get up and garden!" theme. The company also offered greater promotional discounts, partly to drive incremental sales and partly to sell-through slower moving home decor product. The initiatives resulted in higher sales and income from operations for the first half of 2003 versus the prior year. In the fourth quarter of 2003, the Christmas trim-a-tree business fell well below expectations believed to be due to early inclement weather patterns that may have curtailed outdoor decorating in many markets, a general declining trend in the traditional live Christmas tree business, and an extremely promotional competitive marketplace. Profits were further eroded by the Company's decision to heavily discount holiday goods in an effort to meet competition, improve sales trends, minimize inventory levels of holiday goods, and generate cash. Throughout the year, management undertook various actions to improve the Company's future operations, including: - Workforce reduction initiatives at the Company's headquarters. - Closure of the Harrisburg, PA distribution center in the fourth quarter. - Decision to close one under-performing store effective March 2004. - Other expense reduction initiatives including renegotiation of various leases and vendor agreements. Net loss for the 52 weeks ended January 25, 2004 was $164.4 million worse than the same period in 2002. However, included in 2002 was reorganization income of $183.8 million recorded in accordance with Fresh Start Accounting (see Note 1 of the accompanying audited financial statements). The loss before reorganization items in 2003 was $19.5 million better than the prior year, mainly due to restructuring charges in 2002. As of January 25, 2004, the Company's debt under its revolving credit facilities was approximately $20.5 million higher than at January 26, 2003. This additional debt was largely due to increased cash requirements resulting from operating losses incurred in 2003. 11 The higher total inventory and related higher trade accounts payable at the end of 2003 versus 2002 reflects management's initiative to carry a complete selection of lawn and garden products on a year-round basis. The Company believes this sends an important message to the consumer and reinforces Frank's presence as a lawn and garden destination in the markets served. RESULTS OF OPERATIONS 2003 COMPARED TO 2002 The following table shows the 2003 period in comparison to the corresponding combined 2002 periods (dollars in thousands):

NET SALES. Net sales were $316.9 million for the fifty-two weeks ended January 25, 2004 ("2003"), an increase of $1.8 million, or 0.5%, compared with nets sales of $315.1 million for the fifty-two weeks ended January 26, 2003 ("2002"). Green (live) goods sales in 2003 were 8.1% higher than in 2002, while all other merchandise categories declined by 3.8%. There were 170 stores open for all periods presented. COST OF SALES, INCLUDING BUYING AND OCCUPANCY. Cost of sales was $238.6 million for 2003 compared with $234.7 million for 2002, an increase of $3.9 million, or 1.7%. In 2002, the Company adjusted its inventory valuation reserve resulting in a $2.0 million lower of cost or market charge in accordance with its accounting policy. Cost of sales, as a percentage of net sales, was 75.3% in 2003 compared with 74.5% in 2002. The merchandise gross profit margin (defined as net sales less cost of sales, excluding 12 buying and occupancy costs) declined in 2003 compared to 2002 due to special promotional discounts designed to drive customer traffic, higher markdowns taken to exit certain home decor categories, and earlier discounts on Christmas merchandise. This decline was partly offset by reductions in buying and occupancy costs in 2003 compared to 2002. At the end of 2003, as a result of the exit from certain home decor categories and earlier discounts on Christmas merchandise, the Company carried significantly less discontinued and Christmas product than at the end of 2002. SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses were $90.0 million for 2003, a decrease of $3.4 million, or 3.6%, compared with $93.4 million for 2002. This decline was due primarily to headcount reductions and headquarters cost savings initiatives in the second quarter. As a percentage of net sales, SG&A expenses were 28.4% for 2003 compared with 29.6% for 2002. RESTRUCTURING AND OTHER RELATED CHARGES. The charge for 2003 was $2.9 million compared with $23.0 million for 2002. The charge for 2003 included the following: $2.0 million for employee severance due to headcount reductions and $0.9 million for asset impairment related to the closings of the Harrisburg, PA distribution center and the East Windsor, NJ store. The charge for 2002 included the following: $15.5 million for costs of lease rejections; $2 million for additional pre-petition claim payments; $2.8 million for professional fees; $1.8 million for severance and employee retention plans approved by the bankruptcy court while under Chapter 11 bankruptcy; $1.1 million for costs of mortgage debt; and miscellaneous expenses of $0.8 million offset by a $1.0 million adjustment to the net selling price of the properties classified as assets to be disposed of that were sold during 2002. The $15.5 million liability for the costs of rejected store leases represented an estimate of the maximum claim allowed under bankruptcy law. In accordance with the plan of reorganization, these claims were treated as general unsecured claims and resulted in a cancellation of debt and recognized as a reorganization item. The $1.1 million liability for costs of mortgage debt represented an estimate to properly state the pre-petition long-term debt in accordance with the plan of reorganization. OTHER (EXPENSE) INCOME. Other income, primarily related to gains from the sale of property, interest income, and miscellaneous income. Other (expense) income was $(19) thousand for 2003, a decrease of $0.3 million, or 106.8%, compared with $0.3 million for 2002. The decrease was due primarily to $1.5 million of costs associated with a partial roof collapse at the Company's leased Harrisburg, PA warehouse facility. The $0.3 million of other income for 2002 was due primarily to gains from the sale of property and leases of $0.2 million. INTEREST EXPENSE AND AMORTIZATION OF DEBT COSTS AND WARRANTS. Interest expense and amortization of debt costs and warrants ("interest expense") was $9.1 million for 2003, an increase of $1.5 million, or 19.5%, compared with $7.6 million for 2002. Higher interest expense for 2003 was due primarily to an increase in borrowings. REORGANIZATION ITEMS. A gain of $183.8 million was recognized for 2002. The gain was due to the cancellation of pre-petition liabilities upon emergence ($184.9 million), the fresh start accounting adjustments ($0.3 million), offset by a loss from the extinguishment of debt ($1.4 million). 13 INCOME TAXES. No income tax benefit was recognized for the net loss before reorganization items for 2003 and 2002. Instead, the increase in net deferred tax assets as a result of the loss was offset by an equal increase in the valuation allowance. In addition, no income tax expense was recognized on the reorganization items. The items of income and expense included in the reorganization income are non-taxable and non-deductible, respectively. 2002 COMPARED TO 2001 NET SALES. Net sales were $315.1 million for the fifty-two weeks ended January 26, 2003 ("2002"), a decrease of $56.3 million, or 15.2%, compared to $371.4 million for the fifty-two weeks ended January 27, 2002 ("2001"). Factors contributing to the net sales decrease were unfavorable weather patterns in virtually all markets where the Company operates which negatively impacted the lawn and garden sales for the first quarter of 2002 and a general weakness in economic conditions during 2002. In addition, net sales for 2001 included sales related to the store closure programs of $35.8 million. The comparable store base results from the 2001 store closing programs, as discussed in Note 3 of the audited financial statements included herein. In addition to the 46 stores closed under the 2001 store closing programs, the Company closed three additional stores as a result of lease expiration, bringing the operating store base to 170 stores. COST OF SALES INCLUDING BUYING AND OCCUPANCY. Cost of sales were $234.7 million for 2002, a decrease of $63.2 million, or 21.2%, compared with $297.9 million for 2001. As a result of the reorganization efforts of the Company during bankruptcy, a charge of $8.1 million for a lower of cost or market reserve for inventory was recorded in 2001 (an "inventory clearance reserve"). The categories of inventory included specific classes within the floral, home decor, Christmas Trim-a-Tree and basic craft (such as paints, yarn, and stitchery) product lines that would no longer be purchased or that were determined to be obsolete for the business upon emergence from bankruptcy. In 2002 the Company adjusted its inventory valuation reserve resulting in a $2.0 million lower of cost or market charge in accordance with its accounting policy. Cost of sales, as a percentage of net sales, was 74.5% in 2002 compared with 80.2% in 2001. Excluding cost of sales for the stores that were part of the store closing programs in 2001, cost of sales for 2002 would have been 73.6% of net sales compared with 74.3% for 2001. The 2002 merchandise gross profit margin declined due to the 2002 competitive Christmas trim-a-tree discounts. In addition sales of inventory clearance merchandise (categories described above) produced a lower margin in 2002 (net of items sold below cost) compared to the prior year when the items sold at full or slightly discounted retail prior to the start of the program in the fourth quarter. Also included in 2001 were costs of $4.1 million for the loss on inventory liquidated under the store closure programs and the $8.1 million inventory clearance reserve. SELLING, GENERAL & ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses were $93.4 million for 2002, a decrease of $16.0 million, or 14.6%, compared with $109.4 million for 2001. This decline was due primarily to lower store expenses resulting from the lower store base and lower corporate expenses. As a percentage of net sales, SG&A expenses were 29.6% for 2002 compared with 29.5% for 2001. Excluding expenses for the stores that were part of the store closing programs in 2001, SG&A expenses for 2001, as a percentage of net sales, would have been 14 31.0%. RESTRUCTURING AND OTHER RELATED CHARGES. The charge for 2002 was $23 million compared with $40.9 million for 2001. The charge for 2002 included the following: $15.5 million for costs of lease rejections; $2 million for additional pre-petition claim payments; $2.8 million for professional fees; $1.8 million for severance and employee retention plans approved by the bankruptcy court while under Chapter 11 bankruptcy; $1.1 million for costs of mortgage debt; and miscellaneous expenses of $0.8 million offset by a $1 million adjustment to the net selling price of the properties classified as assets to be disposed of that were sold during 2002. The $15.5 million liability for the costs of rejected store leases represented an estimate of the maximum claim allowed under bankruptcy law. In accordance with the plan of reorganization, these claims were treated as general unsecured claims and resulted in a cancellation of debt and recognized as a reorganization item. The $1.1 million liability for costs of mortgage debt represented an estimate to properly state the pre-petition long-term debt in accordance with the plan of reorganization. The charge for 2001 includes $14.4 million for the write-down of goodwill and $15.2 million for the write-down of fixed assets as a result of the bankruptcy and asset impairment analysis. Charges related to the store closings included $0.3 million for termination and severance payments for the store closure programs and $3.2 million for the write-off of the remaining assets, related goodwill, and capital lease debt related to the store closure programs, offset by $0.9 million of leasehold interest sales. Also included are professional fees of $4.6 million and $3.2 million for severance and employee retention plans and $0.9 million of miscellaneous. OTHER INCOME. Other income, primarily related to gains from the sale of property and leases was $0.3 million for 2002 compared to $1.2 million for 2001. The decrease was due primarily to gains from the sale of property and leases that was $0.2 million for 2002 compared to $0.9 million for 2001. INTEREST EXPENSE AND AMORTIZATION OF DEBT COSTS AND WARRANTS. Interest expense for 2002 was $7.6 million, a decrease of $3.0 million, or 28.3%, compared with $10.6 million for 2001. Lower interest for 2002 related to the new exit financing arrangements and refinancing of existing mortgage debt. EARLY EXTINGUISHMENT OF DEBT. The early extinguishment of debt for 2001 primarily represented the write-off of debt issue costs in connection with the retirement of an outstanding credit facility with various banks and financial institutions utilizing proceeds from the debtor-in-possession credit facility at the petition date. The total debt retired and associated fees totaled $62.1 million, resulting in the early extinguishment of debt of $4.2 million primarily for the write-off of debt issue costs. REORGANIZATION ITEMS. A gain of $183.8 million was recognized for 2002. The gain was due to the cancellation of pre-petition liabilities upon emergence ($184.9 million), the fresh start accounting adjustments ($0.3 million), offset by a loss from the extinguishment of debt ($1.4 million). 15 INCOME TAXES. No income tax benefit was recognized for the net loss before reorganization items for 2002 and 2001. Instead, the increase in net deferred tax assets as a result of the loss was offset by an equal increase in the valuation allowance. In addition, no income tax expense was recognized on the reorganization items. The items of income and expense included in the reorganization income are non-taxable and non-deductible, respectively. LIQUIDITY AND CAPITAL RESOURCES REVOLVING CREDIT FACILITY WITH CONGRESS FINANCIAL CORPORATION The Company entered into a revolving credit facility with Congress Financial Corporation on May 20, 2002 ("the Congress facility"). The Congress facility is a $50 million, secured revolving loan facility, which includes $25 million of availability for letters of credit. On November 25, 2003, Congress and the Company executed an amendment to the credit facility which, among other things, limited borrowings under the facility to $42 million until additional lenders become parties to the credit facility and provide aggregate commitments of at least $8 million. The availability of borrowings under this facility generally is based on a percentage of eligible inventory and certain other assets, subject to certain reserves. The amounts reserved are based on a number of variables, including inventory levels, merchandise purchases and sales levels, and the types of reserves include inventory shrinkage, letters of credit outstanding, sales taxes and other liabilities of the Company. The total amount of these reserves varies by season but typically ranges from 10% to 25% of the cost of eligible inventory. As of January 25, 2004, there were $7.7 million in borrowings outstanding under the Congress facility and outstanding letters of credit aggregated $4.9 million. Excess availability as of January 25, 2004 was $5.3 million. The Congress facility allows the Company the option of prime rate loans or Eurodollar loans. Depending upon the Company's excess availability, loans under the facility bear interest either at the prime rate plus 0.50% or 1.00% or a Eurodollar rate plus 2.75%, 3.25%, or 3.50%. These rates were increased by an amendment to the Congress facility on January 27, 2004, and prior to such amendment, the interest rates under the Congress facility either were the prime rate plus 0.25% or 0.75% or a Eurodollar rate plus 2.75%, 3.25%, or 3.50%. The interest rate at January 25, 2004 is 4.75%. The Congress facility has an initial term of three years and renews for successive one-year terms thereafter, unless the lender or the Company elects to terminate the Congress facility as of the end of the initial term or any renewal term. The Congress facility includes an unused line fee of 0.25% per year, a servicing fee of $10,000 per calendar quarter, and an early termination fee in an amount equal to 1.00% of the amount of the maximum credit if the Congress facility is terminated in whole during the second year and 0.50% if terminated during the third year. The Congress facility contains a number of covenants, which restrict, among other things, Frank's ability to incur additional debt or make other restricted payments, grant liens, make loans, advances, and investments, engage in transactions with affiliates, dispose of assets, prepay and refinance debt, and make certain changes in its business. The Congress facility also prohibits the declaration or payment by the Company of dividends on shares of its capital stock. The Congress facility, as amended, contains two financial covenants: a minimum quarterly level of adjusted EBITDA (as described below) and a minimum ratio of accounts payable 16 to inventory. The financial covenants are measured only if (1) the Company's excess availability, plus the amount of cash equivalents maintained by the Company in an account under the control of Congress Financial, falls below $4.0 million at any time or (2) the Company's average excess availability, plus the average amount of cash equivalents maintained in such account, for any four-week period falls below $9.0 million. In such event, the minimum adjusted EBITDA covenant and the minimum accounts payable to inventory ratio covenant are measured quarterly, and the minimum levels required by each covenant varies from quarter to quarter. On January 27, 2004, the parties entered into an amendment to the credit facility which eliminated the minimum accounts payable to inventory ratio covenant and the adjusted EBITDA covenant with respect to accounting periods in the fiscal year ending January 25, 2004 and reset the accounts payable to inventory ratio covenant and adjusted EBITDA covenant for the accounting periods in the fiscal year ended January 30, 2005 and thereafter, as set forth in the tables below. The Company's accounts payable to inventory ratio was 47.2% at January 25, 2004. Adjusted EBITDA for the period from January 27, 2003 through January 25, 2004, was $(11.3) million, as shown below. Adjusted EBITDA, as measured under the Congress facility, equals the net income of the Company for the applicable fiscal period, minus extraordinary gains included in such net income for such fiscal period, plus interest expense, income taxes, depreciation and amortization, other non-cash charges (other than to the extent requiring an accrual or reserve for future cash expenses) and non-cash extraordinary losses deducted from such net income for such fiscal period, all as determined in accordance with generally accepted accounting principles ("GAAP"). A summary of the calculation of the Company's adjusted EBITDA for the period from January 27, 2003 through January 25, 2004 is set forth below.

The following table summarizes the minimum accounts payable to inventory ratio required by the Congress Financial credit facility for each applicable period.

TERM LOAN AND REVOLVING CREDIT FACILITY ARRANGED BY KIMCO CAPITAL CORP. The Company has a three-year, $65 million credit facility, expiring May, 2005, arranged by Kimco Capital Corp. ("the Kimco facility"). Originally, the Kimco facility provided for a $20 million term loan and $10 million of revolving loans. Frank's and Kimco Capital Corp. amended the Kimco facility on January 23, 2003, providing for an increase in the amount of revolving loans available under the Kimco facility to $20 million. The Company and Kimco Capital Corp. entered into an amendment to the Kimco facility as of October 30, 2003 to allow for overline revolving loan advances of up to $7 million during the period from January 1, 2004 to April 1, 2004. On January 16, 2004, the Company and Kimco Capital Corp. entered into an amendment to the Kimco facility to allow for overline revolving loan advances of up to $8 million. On January 21, 2004, the Company and Kimco Capital Corp. entered into an amendment to the Kimco facility to allow for overline revolving loan advances of up to $25 million until May, 2005. The last $3 million of borrowings are available only under certain circumstances. The Kimco facility is secured by a first priority lien on certain of the Company's owned real property and a second lien on the Company's inventory and other assets. These loans bear interest at 10.25% per year for an initial term of three years, with the option for the Company to renew the loans for up to an additional two years, provided that the Company is not then in default. A portion of the Kimco facility has been participated by Kimco Capital Corp. to Third Avenue Trust and/or its designees. As of January 25, 2004 total debt outstanding under the Kimco facility was $48.0 million. The Kimco facility contains a number of covenants, which restrict, among other things, Frank's ability to incur additional debt, pay dividends or make other restricted payments, grant liens, make loans, advances and investments, engage in transactions with affiliates, dispose of assets, enter into sale-leaseback arrangements, effect mergers, consolidations, and dissolutions or issue preferred stock. In addition, Frank's is required to prepay borrowings under this facility with the net cash proceeds from the sale of certain assets. The Kimco facility does not contain any financial covenants, but a default by the Company under its credit facility with Congress Financial would trigger a default under the Kimco facility. Kimco Capital Corp. is an affiliate of (i) Kimco Realty Services, Inc. and Kimco Realty Corporation, which, based on the most recent filings with the Securities Exchange Commission, are the beneficial owners of 51.9% of the Company's common stock, (ii) Kimco Select Investments, and (iii) Kimco Realty Corporation. A portion of the credit facility has been participated by Kimco Capital Corp. to Third Avenue Trust and/or its designees, which, collectively with its affiliates, is the beneficial owner of 22.6% of the Company's common stock, based on the most recent filings with the Securities Exchange Commission. 19 ADEQUACY OF CAPITAL RESOURCES The Company's principal sources of liquidity are cash flows from operations and borrowings under the two credit facilities. Based on current and anticipated levels of operations, the Company's management believes that cash flows from operations, together with amounts available under the Company's credit facilities, will be adequate to meet the Company's anticipated cash requirements, including debt service requirements and planned capital expenditures. The Company's most significant cash requirements are for merchandise inventory, and these requirements fluctuate throughout the year due to the seasonality of the business. Cash requirements increase substantially in August and September in anticipation of the Christmas season and in March and April for the lawn and garden business. Additionally, the Company's business depends, in part, on normal weather patterns across its markets. Any unusual weather patterns can have a material and adverse impact on the Company's revenues, particularly on the lawn and garden sector. In the months leading up to the Company's peak selling seasons, the Company orders product for delivery prior to and during the selling seasons. Frank's negotiates payment terms with suppliers on a case-by-case basis. Historically, the majority of payments are made during or shortly after the selling season, and a small percentage is paid prior to the influx of sales receipts. Working capital for pre-seasonal inventory buildup comes from the Company's two revolving credit facilities and/or cash generated by operations. The Company's revolving credit facility with Congress Financial Corporation is asset-based and allows for borrowing at a percentage of inventories on hand, net of amounts reserved under the credit agreement. The amounts reserved are based on a number of variables, including inventory levels, merchandise purchases and sales levels, and the types of reserves include inventory shrinkage, letters of credit outstanding, sales taxes and other liabilities of the Company. The total amount of these reserves varies by season but typically ranges from 10% to 25% of the cost of eligible inventory. The Company's revolving credit facility with Kimco Capital Corp. is secured by real estate and a second lien on the Company's inventory and other assets. Availability under the facility does not fluctuate from month to month as it is not tied to a borrowing base. Hence, the Company uses the Kimco revolver to fund most of the pre-seasonal inventory buildup, and the Congress facility when inventory levels and advance rates rise. 20 The Company believes that its existing credit facilities will be adequate to cover its working capital needs until the facilities expire in May 2005. At that time, the Company plans to either renew the facilities or seek alternative outside financing. In the event that cash flows from operations, together with available borrowings under the Company's credit facilities are not sufficient to meet the Company's cash requirements, the Company would be required to obtain alternative financing and/or reduce planned capital expenditures. The Company can provide no assurance that alternative financing would be available on acceptable terms, especially in light of the fact that, except for miscellaneous real property and equipment, substantially all of the Company's existing assets are pledged as collateral for the existing credit facilities or that reductions in planned capital expenditures would be sufficient to cover any cash shortfalls. The Company regularly reviews opportunities to engage in sales-leaseback transactions. The Company anticipates spending approximately $2.4 million for capital expenditures for 2004, primarily for store REMODELING. No store openings are planned for the remainder of 2004. The following table sets forth a summary of the Company's contractual commitments as of January 25, 2004 (revolving portion of the Company's credit facilities is assumed to be repaid in 2004):

CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company's significant accounting policies and estimates for restructuring costs are discussed in Notes 2 and 4 of the notes to the audited financial statements included herein. The Company's critical accounting policies are subject to judgments and uncertainties that affect the application of these policies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, valuation of inventory, deferred tax assets, 21 impairment of long-lived assets and restructuring costs. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in the subsequent period to reflect more current information. The material accounting policies that the Company believes are most critical to the understanding of the Company's financial position and results of operation are discussed below. REVENUE RECOGNITION. The Company recognizes revenue when the customer takes possession of the merchandise at the point of sale. The Company has a formal right of return policy that requires original receipt. The Company annually reviews sales returns to determine the length of time between the date of sale and the return date. Based upon its annual review and the applicable rules guiding revenue recognition, the Company has deemed that a reserve for sales returns is necessary. INVENTORY VALUATION. Inventories are valued at the lower of cost or market; cost being determined under weighted average method which approximates the first in, first out method. Calculations of the carrying value of inventory are made on an item-by-item basis. The Company annually reviews its inventory levels in order to identify obsolete, slow-moving merchandise and uses merchandise markdowns to clear such merchandise throughout the year. Where the markdown may result in an item being sold for less than its cost the Company provides a reserve for the difference between the cost and the expected selling price of all inventory items expected to be sold below cost. Additionally, the Company reduces the ending inventory value for estimated losses related to shrink. This estimate is determined based upon analysis of historical shrink losses as well as the results of interim cycle counts of seasonal inventory and its annual physical inventory. If there are items in inventory that do not sell as expected or there is an increase or decrease in inventory shrink as compared to historical norms, then the recorded reserves would be subject to change. DEFERRED INCOME TAXES AND VALUATION ALLOWANCE. Deferred income tax assets and liabilities represent the future income tax effect of temporary differences between the book and tax bases of the Company's assets and liabilities, assuming they will be realized and settled at the amounts reported in the Company's financial statements. The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. This assessment includes consideration for the scheduled reversal of temporary taxable differences, projected future taxable income and tax planning strategies. IMPAIRMENT OF LONG-LIVED ASSETS. It is the Company's policy to review the long-lived assets annually or whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. As a result of the bankruptcy proceedings and fresh-start accounting, the Company's long-lived assets have been revalued in accordance with SOP 90-7. Assumptions and estimates used in the evaluation of impairment, including current and future economic trends for stores are subject to judgment and changes in the assumptions and estimates may affect the carrying value of long-lived assets, and could result in additional impairment charges in future periods. 22 RESTRUCTURING COSTS. As a result of the bankruptcy proceedings, certain estimates for pre petition claim payments, amounts for personal injury claims and attorney fees have been recorded. Resolution of these claims can affect the accuracy of the current estimates that could result in additional charges or reversals of previously recorded estimates in future periods. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company perceives its market risk is related to interest rate risk and foreign currency exchange rate risk for its borrowings under the credit facility with Congress Financial, which is a variable rate financing agreement. Borrowings under the credit facility may be based upon the U.S. prime interest rate or the Eurodollar rate. The Company does not use swaps or other interest rate protection agreements to hedge this risk. During the period beginning January 27, 2003 through January 25, 2004, the Company's average outstanding balance under the credit facility was $14.5 million. At such level, a 200 basis point change in the interest rate on the credit facility would result in an increase in interest expense of $290,000 per year. The Company's borrowings outstanding under the Congress facility at January 25, 2004 were $7.7 million. Interest under the credit facility with Kimco Capital Corporation is fixed at 10-1/4% per annum and $48.0 million was outstanding at January 25, 2004. The Company does not enter into derivative or interest rate transactions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item are included in the Financial Statements set forth on pages F-1 through F-29, attached hereto and found following the signature page of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES The Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the "Act") as of the end of the period covered by this report and have determined that such disclosure controls and procedures are effectively designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Based on that evaluation, and in concert with the Company's independent certified public accountants, Grant Thornton LLP, management advised the audit committee of the Company's board of directors that it had identified ineffective policies and procedures regarding accounting for leases, which resulted from a lack of sufficient accounting personnel. The Company and Grant Thornton LLP, considered this to be a deficiency in the Company's internal controls, which constitute a material weakness under standards established by the American Institute of Certified Public Accountants. The Company has implemented a new process for accounting for leases to remedy the deficiencies noted above. Additionally, the Company has implemented a new internal control review process, which includes sub-certifications and attestations by key operating executives and staff, with respect to critical processes and procedures. The Company is also reviewing its staffing requirements in the accounting area and plans to take appropriate action in 2004, as deemed necessary. There was no change in the Company's internal control over financial reporting that occurred during the fourth quarter of fiscal 2003 that has materially affected, or that is likely to materially affect, the Company's internal control over financial reporting. 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information required by Part III (Items 10, 11, 12, 13, and 14) of this Form 10-K is incorporated by reference from the Company's definitive Proxy Statement for its 2004 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report on Form 10-K. 24 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The financial statements filed with this Report are listed on page F-1. 2. FINANCIAL STATEMENTS SCHEDULE The financial statements schedule filed with this Report is listed on page F-1. 3. EXHIBITS The exhibits filed with this Report are listed in the Exhibit Index on pages E-1 through E-3. (b) REPORTS ON FORM 8-K None. 25 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. Dated: April 23, 2004 FRANK'S NURSERY & CRAFTS, INC. By: /s/ Alan Minker ----------------------------- Alan Minker Interim Chief Operating Officer, Senior Vice President, Chief Financial Officer and Treasurer 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 April 23, 2004.

26 INDEX TO FINANCIAL STATEMENTS

F-1 Report of Independent Certified Public Accountants Board of Directors and Stockholders Frank's Nursery & Crafts, Inc. We have audited the accompanying balance sheets of Frank's Nursery & Crafts, Inc. as of January 25, 2004 and January 26, 2003, and the related statements of operations, stockholders' equity (deficit) and cash flows for the year ending January 25, 2004, the period from January 28, 2002 to May 19, 2002 (predecessor operations), the period from May 20, 2002 to January 26, 2003 (successor operations). 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 in accordance with auditing standards generally accepted in the United States of America. 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. as of January 25, 2004 and January 26, 2003 and the results of its operations and its cash flows for the year ending January 25, 2004, the period from January 28, 2002 to May 19, 2002 (predecessor operations), and the period from May 20, 2002 to January 26, 2003 (successor operations) in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, the accompanying financial statements as of and for the thirty-six weeks ended January 26, 2003 and for the sixteen weeks ended May 19, 2002 have been adjusted to properly reflect a 1999 defined benefit plan reversion. We have also audited Schedule II of Frank's Nursery & Crafts, Inc. for the year ending January 25, 2004, for the period from January 28, 2002 to May 19, 2002 (predecessor operations) and the period from May 20, 2002 to January 26, 2003 (successor operations). In our opinion this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ Grant Thornton LLP Southfield, Michigan April 14, 2004 F-2 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholder Frank's Nursery & Crafts, Inc. We have audited the accompanying statements of operations, changes in shareholder's equity (deficiency in assets), and cash flows of Frank's Nursery & Crafts, Inc. (the "Company") for the year ended January 27, 2002. Our audit also included the financial statement schedule listed in the Index at Item on page F-1. 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 audits. We conducted our audit 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 results of operations of Frank's Nursery & Crafts, Inc. and its cash flows for the year ended January 27, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that Frank's Nursery & Crafts, Inc. will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses, has a working capital deficiency and is in default of certain covenants under the terms of the agreement for its senior subordinated notes and its debtor-in-possession financing agreement. The Company also filed for reorganization under Chapter 11 of the United States Bankruptcy Code on February 19, 2001. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP Detroit, Michigan March 29,2002 F-3 FRANK'S NURSERY & CRAFTS, INC. BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT FOR PAR VALUE)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-4 FRANK'S NURSERY & CRAFTS, INC. STATEMENTS OF OPERATIONS THE FISCAL YEAR ENDED JANUARY 25, 2004 ("2003"), THE THIRTY-SIX WEEKS ENDED JANUARY 26, 2003, THE SIXTEEN WEEKS ENDED MAY 19, 2002, AND THE FISCAL YEAR ENDED JANUARY 27, 2002 ("2001") (IN THOUSANDS, EXCEPT PER SHARE DATA)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-5 FRANK'S NURSERY & CRAFTS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) 2003, THE THIRTY-SIX WEEKS ENDED JANUARY 26, 2003, THE SIXTEEN WEEKS ENDED MAY 19, 2002, AND 2001 (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)

(1) 17,217,241 shares issued and 2,782,759 to be issued. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-6 FRANK'S NURSERY & CRAFTS, INC. STATEMENTS OF CASH FLOWS 2003, THE THIRTY- SIX WEEKS ENDED JANUARY 26, 2003, THE SIXTEEN WEEKS ENDED MAY 19, 2002, AND 2001 (DOLLARS IN THOUSANDS)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-7 FRANK'S NURSERY & CRAFTS, INC. Notes to Financial Statements January 25, 2004, January 26, 2003 and January 27, 2002 (Tables in thousands, except for per share data) NOTE 1: REORGANIZATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS Frank's Nursery & Crafts, Inc., a Delaware corporation ("Frank's" or the "Company"), operates the nation's largest chain of lawn and garden specialty retail stores (as measured by sales). Frank's is also a retailer of Christmas trim-a-tree merchandise, artificial flowers and arrangements, garden decor and home decorative products. CHAPTER 11 PROCEEDINGS AND REORGANIZATION On February 19, 2001 (the "Petition Date"), Frank's Nursery & Crafts, Inc., a Michigan corporation ("Old Frank's"), and FNC Holdings Inc. ("Holdings"), the sole shareholder of Old Frank's, (collectively with Old Frank's, the "Debtors"), filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Maryland (the "Bankruptcy Court"). The Chapter 11 cases for the Debtors (the "Chapter 11 Cases") were jointly administered for procedural purposes. From the Petition Date until May 19, 2002, the Debtors operated their businesses as debtors-in-possession pursuant to the Bankruptcy Code. On May 7, 2002, the Bankruptcy Court confirmed the Debtors' Second Amended Joint Plan of Reorganization, with certain modifications (as so modified, the "Plan"). On May 20, 2002 (the "Effective Date"), the Plan became effective and the Debtors successfully emerged from their chapter 11 bankruptcy proceedings. Pursuant to the Plan, the following transactions were completed on or about the Effective Date: - all of Old Frank's and Holdings issued and outstanding common stock was cancelled; - Old Frank's merged with and into Holdings, and then changed its name to Frank's, which was reincorporated in Delaware (the "Merger"); - certain indebtedness of the Debtors was cancelled in exchange for cash and/or common stock, par value $.001 per share, of Frank's ("Common Stock"); - executory contracts or unexpired leases to which any Debtor was a party were assumed or rejected; - members of the board of directors and officers of Frank's were elected or appointed and began serving their respective terms; and F-8 - the overall corporate structure was simplified through the restructuring and dissolution of certain Old Frank's and Holdings subsidiaries. On the Effective Date, 50,000,000 shares of Common Stock were authorized and (a) 20,000,000 shares of Common Stock were reserved for distribution in respect of claims against the Debtors, (b) 913,044 shares of Common Stock were reserved for issuance of warrants to purchase shares of Common Stock ("Warrants") at an exercise price of $1.38 for the old equity holders of Holdings, (c) 3,652,174 shares of Common Stock were reserved for a new stock option plan, which was implemented in accordance with the Plan and (d) 5,869,565 shares of Common Stock were reserved for the conversion rights of Kimco Realty Services Inc., an affiliate of Kimco Capital Corporation ("Kimco"), as part of the exit financing. In addition, on the Effective Date, Frank's entered into a three-year $50 million secured revolving credit facility, that includes $25 million for letters of credit (the "Exit Revolver Facility") with Congress Financial Corporation as agent for a syndicate of lenders and a $30 million term and revolving loan with Kimco Capital Corp.(the "Exit Term and Revolving Loan"). See Note 7 for a more detailed description of the exit financing. FRESH START ADJUSTMENTS The Debtors emerged from their chapter 11 bankruptcy proceedings on May 20, 2002, which for financial reporting purposes was deemed the effective date of the Plan. In accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh start reporting because holders of existing voting shares of Holdings immediately before filing and confirmation of the Plan received less than 50% of the Common stock distributed under the Plan and the Company's reorganization value was less than the Debtors' post-petition liabilities and allowed claims in the aggregate on a consolidated basis. Fresh start reporting requires that the reorganization value of the Company be allocated to its assets in conformity with Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations". The excess of the fair value of the specific tangible or identifiable intangible net assets over reorganization value, or negative goodwill, is to be allocated to non-current non-monetary assets on a pro rata basis. Based on the consideration of many factors and various valuation methods, including a discounted cash flow, a comparable public company analysis, a comparable acquisitions analysis, and other applicable analyses believed by the Company's management to be appropriate for the Company's business and industry, the Company determined the reorganization value of the Company to be approximately $90 million, which served as the basis for the Plan approved by the Bankruptcy Court. Approximately $67 million of the reorganization value related to debt and other obligations outstanding as of the Effective Date, and the remaining reorganization value of approximately $23 million was assigned as the initial equity of the Company. Due to the cyclical nature of the business and the timing of emergence, the reorganization value related to debt was based upon average historical levels and is not equal to the debt levels of the successor company at May 20, 2002, thus resulting in a change to the original estimated negative goodwill of $58 million in the Plan. F-9 The fair value of the net assets exceeded the reorganization value by $35.2 million, resulting in negative goodwill. The negative goodwill has been allocated to property, equipment and leasehold improvements. The following table reflects the adjustments to Old Frank's balance sheet as of May 20, 2002:

(a) To record elimination of pre-petition liabilities which were cancelled. (b) To record extinguishment of debt. (c) To record elimination of subordinated debt and related accrued interest. (d) To record gain on cancellation of pre-petition liabilities ($184.9 million) and loss on extinguishment of debt ($1.4 million). (e) To record refinanced mortgages. (f) To reflect assets and liabilities at fair value, resulting in negative goodwill ($35.2 million). (g) To record common stock to be issued and write-off of Old Frank's accumulated deficit and net parent investment. BASIS OF PRESENTATION References in these financial statements to "Predecessor" refer to Old Frank's on and prior to May 20, 2002. References to "Successor" refer to Frank's on and after May 20, 2002, after giving effect to the implementation of fresh start reporting. The accompanying financial statements for the fiscal year ended January 25, 2004, the thirty-six weeks ended January 26, 2003, the sixteen weeks ended May 19, 2002 (Predecessor), the fiscal years ended January 27, 2002 and as of January 27, 2002 (Predecessor) have been presented in accordance with SOP 90-7 and assumed that the Debtors would continue as a going concern. In the Chapter 11 Cases, substantially all unsecured liabilities as of the Petition Date were subject to compromise or other treatment under the Plan. Pursuant to SOP 90-7, professional fees and other costs associated with the Chapter 11 Cases were expensed as incurred and reported as restructuring items. Interest expense was reported only to the extent that it was expected to be paid following the Chapter 11 Cases. F-10 Certain reclassifications have been made to prior periods (Predecessor) to conform to the financial statements for the fiscal year ended January 25, 2004 (Successor). RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS In October, 2003, the Company became aware of certain potential accounting issues related to marketable securities from a 1999 defined benefit plan reversion that the Company has determined were not properly recorded in the Company's accounting records. Under the direction and oversight of the Audit Committee and with the assistance of outside legal advisors and accounting consultants, the Company conducted an inquiry into these and related accounting issues. As a result of this process, the Company is, by means of this filing, restating its previously issued financial statements for the thirty-six weeks ended January 26, 2003. At May 19, 2002, the balance of $1 million was reclassified to property, equipment, and leasehold improvements as an adjustment to fresh-start accounting. The restatement of the Company's Balance Sheets as of January 26, 2003 resulted in a decrease in assets of $54 thousand and an increase in accumulated deficit of $54 thousand. The restatement of the Company's Statements of Operations thirty-six weeks ended January 26, 2003 resulted in an increase in selling, general, and administrative expenses ("SG&A") of $25 thousand and a decrease in interest income of $29 thousand. Unless otherwise expressly stated, all financial information in this Annual Report on Form 10-K is presented inclusive of these revisions. LIQUIDITY The Company has sustained losses from operations since emergence from bankruptcy on May 20, 2002 and has a deficit in working capital and stockholders equity as of January 25, 2004. As discussed in note 7, the Company and its lenders have amended the existing credit agreements to eliminate certain covenant requirements through January 25, 2004 and has reset future financial covenants while at the same time providing a significant increase in borrowing capacity. Management believes they can remain in compliance with the new covenants through fiscal 2005. On April 6, 2004, the Company also entered into a commitment letter with Kimco Capital Corp., which provides for additional financing of $15 million. Kimco's commitment is subject to the negotiations, execution and delivery of an amendment to the Kimco credit facility in form and substance satisfactory to Kimco. The Company believes these financing transactions coupled with Management's efforts to improve operations are sufficient to provide the Company with the ability to continue its operations for the next fiscal year. There can be no guarantee of the success of such efforts and accordingly, the Company may need to develop strategic alternatives. F-11 NOTE 2: DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR The fiscal year is comprised of 52 or 53 weeks, ending on the last Sunday in January. The 2003 fiscal year reflects a 52-week period ended January 25, 2004 ("2003"). The 2002 fiscal periods aggregate 52 weeks ended January 26, 2003 ("2002") and the 2001 fiscal year reflects a 52-week period ended January 27, 2002 ("2001"). USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. REVENUE RECOGNITION The Company recognizes revenue when the customer takes possession of the merchandise at the point of sale. The Company has a formal right of return policy that requires original receipt. The Company annually reviews sales returns to determine the length of time between the date of sale and the return date. Based upon its annual review, the Company recorded a reserve for sales returns based on historical trends. FAIR VALUE OF BALANCE SHEET FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of other financial instruments are included in Note 7. 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. ACCOUNTS RECEIVABLE Management estimates the allowance for doubtful accounts based upon the circumstances surrounding each individual receivables' collectibility. At the end of 2003, management determined that certain receivables were uncollectible and a bad debt expense and allowance of $26,000 was recorded. During the fourth quarter of 2002 management determined that certain receivables were uncollectible and a bad debt expense and allowance of $295,000 was recorded. At the end of 2001, no allowance for doubtful accounts was considered necessary and there was no bad debt expense recognized. MERCHANDISE INVENTORIES F-12 Merchandise inventories are stated at the lower of cost or market, with cost being determined under the weighted average method which approximates the first-in, first-out method. ADVERTISING COSTS Advertising costs are expensed when the advertising first takes place. Advertising expenditures were $17.5 million for 2003, $13.7 million for 2002, and $16.8 million for 2001. STORE CLOSING COSTS In 2001, provisions for store closing costs were charged to operations in the period when the decision was made to close a retail unit. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements, including significant improvements thereto, are recorded at cost and depreciated over the estimated useful lives of the related assets using the straight-line method. Expenditures for repairs and maintenance are charged to expense as incurred. Estimated useful lives, including capital leases, are: buildings, 10-40 years or, if shorter, the terms of the lease; equipment, 5-10 years. Leasehold improvements are depreciated over the lease terms of the respective leases or the estimated useful lives. Upon sale or other disposition of assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is recognized in the statement of operations. GOODWILL Goodwill represented the costs in excess of the fair value of identifiable assets for acquired businesses and was amortized on a straight-line basis over the estimated future periods benefited, not to exceed forty years. As a result of the Chapter 11 Reorganization and recurring operating losses, the Company reevaluated the useful lives and recoverability of its remaining goodwill and wrote-off the remaining balance of goodwill of $14.4 million during 2001. This impairment loss was reflected in restructuring charges in the statements of operations. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets consist primarily of land, furniture and equipment and leasehold improvements. It is the Company's policy to review the long-lived assets for possible impairment annually or when events and circumstances warrant such a review by the Company in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." If indicators are present, estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying value to determine if an impairment exists. If the expected future cash flows and eventual disposition 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. Assets to be disposed of are reported at the amount of fair value less costs to sell and classified as assets held for sale. LEASES Leases that meet the accounting criteria for capital leases are recorded as property, equipment and leasehold improvements, and the related capital lease obligations (the aggregate present value of minimum future lease payments, excluding executory costs such as taxes, maintenance F-13 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 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. This method also requires the recognition of future tax benefits such as net operating loss carryforwards to the extent that realization of such benefits is more likely than not. STOCK OPTIONS In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Company applies the accounting provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provides pro forma net income and earning per share disclosures for stock option grants as if the fair-value based method defined in SFAS No. 123 had been applied. The Company applies APB Opinion No. 25 and related interpretations and accordingly, no compensation expense has been recognized for stock options issued to employees and non-employee directors in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date consistent with the method prescribed in SFAS No. 123, the Company's pro forma net loss and loss per share for 2003 and the thirty-six weeks ended January 26, 2003 would have been as follows: ($ in thousands, except per share data) F-14

The per share weighted-average fair value of stock options granted in 2003 was $0.16 on the grant date using the Black-Scholes option-pricing model with weighted average assumptions as follows: expected dividend yield of 0%; stock price volatility of 10.8%; a risk free interest rate of 3.02%; and an expected option term of 5 years. The per share weighted-average fair value of stock options granted in the thirty-six weeks ended January 26, 2003 was $.54 on the grant date using the Black-Scholes option-pricing model with weighted average assumptions as follows: expected dividend yield of 0%; stock price volatility of 50%; a risk free interest rate of 3.07%; and an expected option term of 5 years. LOSS PER SHARE Basic loss per share is computed by dividing earnings on common shares by the weighted average number of common shares outstanding during each period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock. For 2003 and the thirty-six weeks ended January 26, 2003 the incremental shares that would have been exercisable and outstanding (142,350 shares at January 25, 2004 and 189,000 shares at January 26, 2003) and warrant agreements (0 shares at January 25, 2004 and 1,189,000 shares at January 26, 2003) were not included in the computation of diluted earnings per share because the effect would be anti-dilutive. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin 51, "Consolidated Financial Statements," for certain entities that do not have sufficient equity at risk F-15 for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest ("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after December 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after March 15, 2004, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 is effective for the Company in the fiscal quarter ending May 16, 2004. The adoption of FIN 46 is being evaluated to determine what impact, if any, the adoption of the provisions will have on the Company's financial condition or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company determined that there was no impact on the Company's financial condition or results of operations. NOTE 3: STORE CLOSURE PROGRAMS During fiscal 2001, as part of the restructuring process, the Court approved the Company's plan to close 46 stores the ("2001 Program"). The last 12 were closed as of March 2002. As a result, the Company recorded charges of $6.7 million in 2001, of which $4.1 million, included in cost of goods sold, represented a loss for the inventory that was liquidated. The remaining $2.6 million included in the restructuring charge of $40.9 million (Note 4), represented fixed asset write-downs to fair value. NOTE 4: RESTRUCTURING AND OTHER RELATED CHARGES As a result of the Company's operating losses for 2001 and 2000, and the Chapter 11 Reorganization (Note 1), the Company performed an impairment analysis as required under FAS 121 for both 2001 and 2000. The estimated fair value of the impaired assets was determined by comparing expected future cash flows for each store to the combined net property, equipment and leasehold improvements and allocated goodwill. In 2000, the Company rejected store leases and reversed a store closing provision for remaining lease obligations from 1993. Additionally, the Company recorded a fixed asset impairment charge related to 22 leased stores that were approved for closure by the Court subsequent to 2000. Bankruptcy related costs for the thirty-six weeks ended January 26, 2003 included $2 million for additional pre-petition claim payments and $0.2 million for professional fees offset by a $1 million adjustment for the net selling price of the properties classified as assets to be disposed of that were sold during 2002. Bankruptcy costs for the sixteen weeks ended May 19, 2002 F-16 included $15.5 million for costs of lease rejections, $2.6 million for professional fees, $1.8 million for severance and employee retention plans, $1.1 million for costs of mortgage debt and $0.8 million of miscellaneous. Bankruptcy related costs for 2001 included $4.6 million for professional fees, $3.2 million for severance and employee retention plans approved by the Court under the Chapter 11 Reorganization and $0.9 million for miscellaneous items. The impairment analysis and the Chapter 11 Reorganization resulted in the following charges: ($ in thousands)

During the fourth fiscal quarter of 2002 and the second fiscal quarter of 2003, the Company implemented two corporate overhead restructuring initiatives to reduce costs at its corporate headquarters. Additionally, during the fiscal second quarter of 2003, the Company announced the closure of its Harrisburg, PA warehouse and during the fourth quarter of 2003, the Company announced the closure of its East Windor, NJ store and the termination of its chief executive officer. As a result of the two restructuring initiatives, the Company recorded non-recurring charges for workforce reductions of $0.7 million during the fourth fiscal quarter of 2002, $0.9 million during the fiscal second quarter of 2003, and $2.0 million during the fourth fiscal quarter of 2003. The Company also recorded $0.9 million for asset impairment during the fourth fiscal quarter of 2003. For the fiscal year ended January 26, 2003, the Company recorded restructuring charges based on Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." For the fiscal year ended January 25, 2004, the Company records restructuring charges based on Financial Accounting Standards Board ("FASB") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Reconciliation of the restructuring liability, as of January 25, 2004, is as follows: ($ in thousands) F-17

(a) Of the planned downsizing of 59 position, 57 reductions had been implemented as of January 25, 2004. (b) Asset impairment relates to the closing of the Harrisburg, PA warehouse and the March 2004 closing of the East Windsor, NJ store. The Company expects that substantially all remaining payments will be made within the next twelve months. NOTE 5: INCOME TAXES In connection with the reorganization, a gain on cancellation of indebtedness was realized by the Predecessor in the amount of approximately $185 million. This gain is not taxable since the gain resulted from reorganization under the Bankruptcy Code. However, the Company is required, as of the beginning of its fiscal 2003 tax year, to reduce net operating loss carryforwards ("NOLs"), in an amount equal to such gain on extinguishment. F-18 The reconciliation of income taxes computed at the federal statutory tax rate to income tax benefit is: ($ in thousands)

Deferred tax assets and liabilities are composed of the following:

Due to the Company's historical operating results, a valuation allowance for the net deferred tax asset balance is recorded at January 25, 2004 and January 26, 2003. At January 25, 2004 the federal tax NOL carryforwards, on a consolidated basis, approximated $76.1 million, and will expire over various dates from 2021-2024. F-19 The reorganization of the Company as it emerged from bankruptcy constituted an ownership change under Internal Revenue Code Section 382. Consequently, the use of any of the NOLs and tax credits generated prior to this change may be subject to an additional annual limitation. NOTE 6: PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS Upon emergence from bankruptcy, the Company revalued its property, equipment and leasehold improvements in accordance with SOP 90-7 as discussed in Note 1. Major categories of property, equipment and leasehold improvements are as follows: ($ in thousands)

F-20 NOTE 7: FINANCING AND LONG-TERM DEBT Long-term debt consists of the following: ($ in thousands)

Revolving Credit Facility with Congress Financial Corporation The Company entered into a revolving credit facility with Congress Financial Corporation on May 20, 2002 ("the Congress facility"). The Congress facility is a $50 million, secured revolving loan facility, which includes $25 million of availability for letters of credit. On November 25, 2003, Congress and the Company executed an amendment to the credit facility which, among other things, limited borrowings under the facility to $42 million until additional lenders become parties to the credit facility and provide aggregate commitments of at least $8 million. The November 25, 2003 amendment is discussed further below. The availability of borrowings under this facility generally is based on a percentage of eligible inventory and certain other assets, subject to certain reserves. The amounts reserved are based on a number of variables, including inventory levels, merchandise purchases and sales levels, and the types of reserves include inventory shrinkage, letters of credit outstanding, sales taxes and other liabilities of the Company. The total amount of these reserves varies by season but typically ranges from 10% to 25% of the cost of eligible inventory. As of January 25, 2004, there were $7.7 million in borrowings outstanding under the Congress facility and outstanding letters of credit aggregated $4.9 million. Excess availability as of January 25, 2004 was $5.3 million. The Congress facility allows prime rate loans or Eurodollar loans. Depending upon the Company's excess availability, loans under the facility bear interest either at the prime rate plus 0.50% or 1.00% or a Eurodollar rate plus 2.75%, 3.25%, or 3.50%. These rates were increased by an amendment to the Congress facility on January 27, 2004, and prior to such amendment, the interest rates under the Congress facility either were the prime rate plus 0.25% or 0.75% or a Eurodollar rate plus 2.75%, 3.25%, or 3.50% These rates were increased F-21 by an amendment to the Congress facility on February 10, 2003, and prior to such amendment, the interest rates under the Congress facility either were the prime rate plus 0.25% or 0.50% or a Eurodollar rate plus 2.75%, 3.00%, or 3.25%. The interest rate at January 25, 2004 is 4.75%. The Congress facility has an initial term of three years and renews for successive one-year terms thereafter unless the lender or the Company elects to terminate the Congress facility as of the end of the initial term or any renewal term. The Congress facility includes an unused line fee of 0.25% per year, a servicing fee of $10,000 per calendar quarter, and an early termination fee in an amount equal to 1.00% of the amount of the maximum credit if the Congress facility is terminated in whole during the second year and 0.50% if terminated during the third year. The Congress facility contains a number of covenants, which restrict, among other things, Frank's ability to incur additional debt or make other restricted payments, grant liens, make loans, advances, and investments, engage in transactions with affiliates, dispose of assets, prepay and refinance debt, and make certain changes in its business. The Congress facility also prohibits the declaration or payment by the Company of dividends on shares of its capital stock. The Congress facility, as amended, contains two financial covenants; a minimum quarterly level of adjusted EBITDA (as described below) and a minimum ratio of accounts payable to inventory. On February 10, 2003, the Company and Congress Financial entered into an amendment to the facility which revised the measurement of minimum level of inventory from a daily to a weekly basis, lowered the minimum quarterly adjusted EBITDA levels, revised the minimum ratio of inventory to accounts payable to be a ratio of accounts payable to inventory, and increased the interest rates for the Congress facility as described above. The amended financial covenants are measured only if (1) the Company's excess availability, plus the amount of cash equivalents maintained by the Company in an account under the control of Congress Financial, falls below $4.0 million at any time or (2) the Company's average excess availability, plus the average amount of cash equivalents maintained in such account, for any four-week period falls below $9.0 million. In such event, the minimum adjusted EBITDA covenant is measured quarterly and the minimum accounts payable to inventory ratio covenant is measured for each accounting period, and the minimum levels required by each covenant varies from period to period. Management believes that the amended covenants are less restrictive and provide the Company with more flexibility than the original covenants. The required minimum accounts payable to inventory ratio for January 25, 2004 was 30.1%, and the company's actual ratio at such date was 47.2%. On January 27, 2004, the parties entered into an amendment to the credit facility which eliminated the minimum accounts payable to inventory ratio covenant with respect to accounting periods in the fiscal year ending January 25, 2004 and reset the accounts payable to inventory ratio covenant for the accounting periods in the fiscal year ended January 30, 2005 and thereafter, as set forth in the table below. Adjusted EBITDA for the period from January 27, 2003 through January 25, 2004 was $(11.3) million, as shown below. Adjusted EBITDA, as measured under the Congress facility, equals the net income of the Company for the applicable fiscal period, minus extraordinary gains included in such net income for such fiscal period, plus interest expense, income taxes, depreciation and amortization, other non-cash charges (other than to the extent requiring an accrual or reserve for future cash F-22 expenses) and non-cash extraordinary losses deducted from such net income for such fiscal period, plus, for the fifth, sixth and seventh accounting periods of the Company's 2002 fiscal year, restructuring charges of up to $500,000 in the aggregate for such accounting periods deducted from such net income for such fiscal period, all as determined in accordance with generally accepted accounting principles ("GAAP"). A summary of the calculation of the Company's adjusted EBITDA for the period from January 27, 2003 through January 25, 2004 is set forth below.

The adjusted EBITDA set forth above should not be considered an alternative to GAAP net income as an indication of the Company's performance. The computation of adjusted EBITDA required by the Congress facility may differ from the methodology for calculating adjusted EBITDA utilized by other companies, and therefore, may not provide an appropriate comparison to the results of other companies. On November 25, 2003, the Company and Congress Financial Corporation entered into an amendment to the Congress facility which eliminated the requirement to comply with the accounts payable to inventory ratio covenant and the adjusted EBITDA covenant for any accounting period during the fiscal year ending January 25, 2004, and limited total borrowings under the facility to $42 million until additional lenders become parties to the credit facility and provide aggregate commitments of at least $8 million. The amendment also provides that the accounts payable to inventory ratio covenant will be reset for the accounting periods in the fiscal year ended January 30, 2005 based upon the good faith and reasonable projections by the Company, to be determined by the agreement of Congress and the Company. The following table summarizes the minimum adjusted EBITDA levels required by the Congress Financial credit facility for each applicable period. As used in the table, "Accounting Period" refers to the 13 four-week calendar periods within the Company's fiscal year; provided, however, that the last Accounting Period in each fiscal year may consist of five weeks.

F-23

The following table summarizes the minimum accounts payable to inventory ratio required by the Congress Financial credit facility for each applicable period.

F-24 TERM LOAN AND REVOLVING CREDIT FACILITY ARRANGED BY KIMCO CAPITAL CORP. The Company has a three-year, $65 million credit facility arranged by Kimco Capital Corp. ("the Kimco facility"). Originally, the facility provided for a $20 million term loan and $10 million of revolving loans. Frank's and Kimco Capital Corp. amended the Kimco facility on January 23, 2003, providing for an increase in the amount of revolving loans available under the Kimco facility to $20 million. The Company and Kimco Capital Corp. entered into an amendment to the Kimco facility as of October 30, 2003 to allow for overline revolving loan advances of up to $7 million during the period from January 1, 2004 to April 1, 2004. On January 21, 2004, the Company and Kimco Capital Corp. entered into an amendment to the Kimco facility to allow for overline revolving loan advances of up to $25 million. The last $3 million of borrowings are available only under certain circumstances. The Kimco facility is secured by a first priority lien on certain of the Company's owned real property and a second lien on the Company's inventory and other assets. These loans bear interest at 10.25% per year for an initial term of three years, with the option for the Company to renew the loans for up to an additional two years, provided that the Company is not then in default. A portion of the Kimco facility has been participated by Kimco Capital Corp. to Third Avenue Trust and/or its designees. As of January 25, 2004 total debt outstanding under the Kimco facility was $48.0 million. The Kimco facility contains a number of covenants, which restrict, among other things, Frank's ability to incur additional debt, pay dividends or make other restricted payments, grant liens, make loans, advances and investments, engage in transactions with affiliates, dispose of assets, enter into sale-leaseback arrangements, effect mergers, consolidations, and dissolutions or issue preferred stock. In addition, Frank's is required to prepay borrowings under this facility with the net cash proceeds from the sale of certain assets. The Kimco facility does not contain any financial covenants, but a default by the Company under its credit facility with Congress Financial would trigger a default under the Kimco facility. Kimco Capital Corp. is an affiliate of (i) Kimco Realty Services, Inc. and Kimco Realty Corporation, which, as of April 23, 2004, are the beneficial owners of 51.9% of the Company's common stock, (ii) Kimco Select Investments, and (iii) Kimco Realty Corporation. A portion of the credit facility has been participated by Kimco Capital Corp. to Third Avenue Trust and/or its designees, which, collectively with its affiliates, is the beneficial owner of 22.6% of the Company's common stock as of April 23, 2004. In connection with the facility, the Company issued warrants to the participating lenders and their affiliates to purchase up to an aggregate of 5,869,565 shares of common stock at an exercise price of $1.15 per share, subject to certain anti-dilution adjustments. In connection with the amendment of the credit facility on January 23, 2003, the Company issued warrants to the lenders and their affiliates to acquire an additional 5,000,000 shares of common stock at an exercise price of $2.00 per share, subject to certain anti-dilution adjustments. The warrants may be exercised in whole or in part at any time until the later or May 20, 2005 or the repayment or termination of the credit facility. In accordance with Accounting Principles Board 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants" the issuer is required to allocate the proceeds F-25 received in a financing transaction that includes detachable warrants to the debt instrument and detachable warrants included in the exchange on a relative fair value basis. For 2002 all warrants became available for exercise and were included for valuation purposes. The independent valuation issued in connection with the Term Loan and Revolving Credit Facility $20 million proceeds resulted in an allocation to the warrants of $4.4 million as shown in the statement of shareholders' equity and the remaining $15.6 million to the Term Loan. The fair value of the warrants was based upon the Black-Scholes option pricing model. The following assumptions were used in the Black-Scholes option pricing model for warrants issued: risk-free interest rate of approximately 3.95%; an expected life of 3 years from the vest date based upon the warrant expiration date; 50% expected volatility; and no payments of dividends. The stock price volatility during the life of the warrants was estimated by reviewing the historical price volatility of other publicly traded specialty retailers. This was done due to the limited historical time period that Frank's common stock has been publicly traded (since September 2002). The $4.4 million is being amortized to interest expense over the initial term of the debt. As of January 25, 2004, the un-amortized discount is $2.1 million. The carrying and fair values of these financial instruments for 2003 and 2002 are presented below. The fair values for 2003 and 2002 approximate market. ($ in thousands)

Scheduled Maturities Aggregate maturities of long-term debt for each of the five years following January 25, 2004 and thereafter, assuming the unpaid balance at January 25, 2004 under the revolving credit facility remains unchanged and excluding capital lease obligations, are as follows: ($ in thousands)

F-26 The scheduled maturities reflect the expiration of the Kimco Revolving Loans in 2004 and the payment of the Kimco Term Loan for $20 million in 2005. The scheduled maturities are based on contractual payment terms. NOTE 8: LEASES The Company's capital leases are principally for retail store locations, for periods ranging up to 25 years. The Company's operating leases are principally for retail store locations, some of which include renewal, purchase or escalation clauses. Annual minimum lease payments under all capital and operating leases with lease terms longer than one year at January 25, 2004 are as follows: ($ in thousands)

Rent expense was $17.4 million for 2003, $10.8 million for the thirty-six weeks ended January 26, 2003, $6.0 million for the sixteen weeks ended May 19, 2002, $15.4 million in 2002, and $22.6 million in 2001. Rent expense includes additional rentals based on retail store sales (in excess of the minimums specified in leases) of $119,000 for 2003, $69,000 for the thirty-six weeks ended January 26, 2003, $42,000 for the sixteen weeks ended May 19, 2002, and $133,000 in 2001 and is reduced by sublease rental income of $797,000 for 2003, $511,000 for the thirty-six weeks ended January 26, 2003, $260,000 for the sixteen weeks ended May 19, 2002, and $673,000 in 2001. NOTE 9: SHAREHOLDERS' EQUITY The Company's authorized capital stock consists of 50,000,000 shares of common stock, par value $.001 per share and 10,000,000 shares of preferred stock, par value $.001 per share. On May 20, 2002, pursuant to the Plan, 20,000,000 shares of common stock were reserved and will be distributed to the Company's former creditors of which 17,217,241 shares have been distributed as of January 25, 2004. F-27 The holders of the Company's common stock are entitled to one vote per share upon each matter submitted to a vote at a meeting of stockholders. Holders of common stock are entitled to receive ratable dividends, if any, as may be declared by the Company's board of directors out of funds legally available. On May 20, 2002 the Company issued warrants to acquire an aggregate of 913,044 shares of the Company's common stock at an exercise price of $1.38 per share for the old equity holders of FNC Holdings, Inc. These warrants may be exercised in whole or in part at any time until May 20, 2006. In addition the Company issued warrants to acquire an aggregate of 5,869,565 shares of the Company's common stock to certain of the Company's lenders and their affiliates. These warrants may be exercised in whole or in part at any time until the later of May 20, 2005 or the repayment or termination of the related credit facility. The warrant can be exercised at a price of $1.15 per share, subject to certain adjustments in the event that the Company issues any shares of its common stock or securities convertible into such shares at below fair market value. On January 23, 2003, the Company issued warrants to acquire an aggregate of 5,000,000 shares of the Company's common stock to Kimco Realty Services, Inc., an affiliate of Kimco Capital Corp., in connection with, and in consideration for, an amendment to the Company's credit facility with Kimco Capital Corp. These warrants may be exercised in whole or in part at any time until the later of May 20, 2005 or the repayment or termination of the related credit facility. These warrants can be exercised at a price of $2.00 per share, subject to certain adjustments. On May 20, 2002 pursuant to the plan of reorganization, the Company adopted its 2002 Stock Option Plan. The plan, which is administered by the Compensation Committee of the Company's Board of Directors, allows for the issuance of stock options to the Company's key employees and non-employee directors representing the right to acquire up to an aggregate of 3,652,174 shares of the Company's common stock. The Committee has the discretion to determine which key employees and non-employee directors receive options under the Plan, the number of options granted to such participants, and the grant date, vesting schedule, and the expiration date of the options granted. The exercise price of the options granted under the Plan also will be determined by the Committee but will be not less than the fair value of the underlying stock on the date of grant, if the option is intended to qualify as performance-based compensation under Section 162 (m) of the Internal Revenue Code. In addition, any incentive options granted to an owner of more than 10% of the Company's voting capital stock will have an exercise price of not less than 110% of the fair market value of the underlying stock on the date of grant. Options issued to date under this plan generally vest over a three-year period and expire ten years from the grant date. On September 12, 2002 the Company granted options to key executives and outside directors for 2,476,117 in two groupings with a grant price of $1.15 per share. The first group of options for 1,826,117 were to vest as follows: 50% vested at September 12, 2002 and the remaining 50% on May 20, 2003. The options that vested at September 12, 2002 expired July 31, 2003 and the remaining 50% were cancelled. The second group of options for 650,000 will vest over three years (33 1/3% per year) beginning May 20, 2003 and will expire ten years from grant date if not exercised. F-28 On December 5, 2002, the Company granted an option to purchase 25,000 shares of its common stock at a price of $1.65 per share to Mr. Joseph Nusim, one of the Company's directors, pursuant to, and in consideration for, a consulting arrangement with Mr. Nusim which terminates April 2004. This option is exercisable from the date of grant through December 5, 2012. This option was offered only to Mr. Nusim and was granted in reliance on the exemption from registration contained in Section 4(2) of the Securities Act as the grant did not involve a public offering. On January 29, 2003, the Company granted an option to purchase 100,000 shares of its common stock at a price of $1.19 per share to an employee of the Company pursuant to the Company's 2002 Stock Option Plan in consideration of such employee's services to the Company. These options were only offered to such employee and were granted in reliance on the exemption from registration contained in Section 4(2) of the Securities Act as the grant did not involve a public offering. On February 11, 2003, the Company granted options to purchase an aggregate of 412,500 shares of its common stock at a price of $1.10 per share to employees of the Company pursuant to the Company's 2002 Stock Option Plan in consideration of such employees' services to the Company. The options were offered only to such employees and were granted in reliance on the exemption from registration contained in Section 4(2) of the Securities Act as the grants did not involve a public offering. On April 1, 2003, the Company granted options to purchase an aggregate of 1,000,000 shares of its common stock at a price of $0.80 per share to Mr. Bruce Dale, the Company's Chief Executive Officer, pursuant to the Company's 2002 Stock Option Plan, as amended, in consideration of his services to the Company. The option was offered only to such employee and was granted in reliance on the exemption from registration contained in Section 4(2) of the Securities Act as the grant did not involve a public offering. On January 21, 2004, the Company granted options to purchase an aggregate of 1,000,000 shares of its common stock at a price of $0.75 per share to Abacus Advisors, LLC as part of an agreement with the Company to provide strategic and operational advisory and consulting services. The option was offered only to such entity and was granted in reliance on the exemption from registration contained in Section 4(2) of the Securities Act as the grant did not involve a public offering. The Company applied APB Opinion No. 25 and related interpretations in accounting for stock option grants issued under the 2002 Stock Option Plan; accordingly, no compensation cost has been recognized (Note 2). The Company applied SFAS No. 123 and related interpretation in accounting for stock option grants issued outside of the 2002 Stock Option Plan; accordingly, consulting fees of $39 thousand and $41 thousand for 2003 and 2002, respectively, have been recognized. F-29 A summary of changes in stock options are as follows:

In addition, the Company had 1,626,131 additional shares available for future grants under the 2002 Stock Option Plan at January 25, 2004. NOTE 10: 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 has been amended to provide an employer match of 25% of the employee contribution. The Company's contribution is limited to 1.5% of salary and became effective November 1998. Total expenses related to the 401(k) plan were $123 thousand for 2003 and $0 for 2002. NOTE 11: LITIGATION AND OTHER CONTINGENCIES In the normal course of business the Company is subject to various claims. These claims should be resolved in connection with the Company's Chapter 11 Reorganization. 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 12: RELATED PARTY TRANSACTIONS Included in cost of sales and interest expense for 2003 is approximately $0.9 million and $3.5 million for lease payments and interest payments, respectively, to Kimco Capital Corp. and its affiliates, a majority shareholder of the Company. Included in cost of sales and interest expense for 2002 is approximately $0.8 million and $1.3 million for lease payments and interest F-30 payments, respectively. At January 25, 2004, the Company recorded a receivable for approximately $43 thousand, an accrual for interest expense payable to Kimco of $289 thousand, and prepaid rent of $15 thousand. The Company believes its lease payments to Kimco Capital Corp. and its affiliates approximate fair market value. NOTE 13: SUBSEQUENT EVENT On March 15, 2004, the Company closed its East Windsor, NJ store. NOTE 14: Selected Quarterly Financial Data (Unaudited) The following tables present unaudited financial data of the Company for each fiscal quarter of 2003 and 2002. All dollar amounts are stated in thousands, except per share data.

(1) Basic earnings per share for 2003 and the second, third, and fourth quarters of 2002 is computed by dividing earnings on common shares by the weighted average number of common shares outstanding during each quarter. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock. (2) No earnings (loss) per share is shown for the Predecessor quarter. The outstanding common stock of 1,000 shares was held by FNC Holdings, Inc., the sole shareholder of the Predecessor company. There was no public trading market for the outstanding shares. F-31 FRANK'S NURSERY & CRAFTS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 2003, THE THIRTY-SIX WEEKS ENDED JANUARY 26, 2003, SIXTEEN WEEKS ENDED MAY 19, 2002, AND 2001 (DOLLARS IN THOUSANDS)

(1) Represents reduction against cost of goods sold. (2) Represents severance and taxes for the 2000 Store Closure Program. (3) Represents charge for restructuring. (4) Represents payments of liabilities. S-1 EXHIBIT INDEX

E-1 EXHIBIT INDEX (CONTINUED)

E-2 EXHIBIT INDEX (CONTINUED)

E-3 EXHIBIT INDEX (CONTINUED) 10.19 Waiver and Amendment No. 4 to Loan and Security Agreement, dated as of January 27, 2004, among the Registrant, Congress Financial Corporation, as Administrative Agent, and the Lenders party thereto (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated January 21, 2004) (File No. 000-50158) 31.1 Certification of Principal Executive Officer 31.2 Certification of Principal Financial Officer 32.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 32.2 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

E-4

FRANKS NURSERY & CRAFTS INC 10-K