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COMMISSION FILE NUMBER: 333-33751
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended August 30, 1997.
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
.
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ARCHIBALD CANDY CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
ILLINOIS 36-0743280
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
1137 WEST JACKSON BOULEVARD, TELEPHONE: (312) 243-2700
CHICAGO, ILLINOIS 60607
(Address and telephone number of the of the registrant's
principal executive office)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 243-2700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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 ____ 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
As of November 26, 1997, none of the registrant's Common Stock, par value
$.01 per share, is held by non-affiliates of the registrant.
As of November 26, 1997, the number of shares outstanding of the
registrant's Common Stock was 19,200 shares, all of which is held by Fannie May
Holdings, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Item 14 of Part IV of this report are incorporated by
reference to the registrant's Registration Statement on Form S-1 (Commission
File No. 333-33751) filed on October 9, 1997 and certain exhibits to such
Registration Statement.
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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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PAGE
NUMBER
OR
REFERENCE
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PART I
Item 1--Business........................................................ 1
Item 2--Properties...................................................... 8
Item 3--Legal Proceedings............................................... 9
Item 4--Submission of Matters to a Vote of Security Holders............. 9
PART II
Item 5--Market for the Company's Common Equity and Related Stockholder
Matters............................................................... 9
Item 6--Selected Financial Data......................................... 10
Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 12
Item 8--Financial Statements and Supplementary Data..................... 20
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures................................................. 20
PART III
Item 10--Directors and Executive Officers of the Company................ 20
Item 11--Executive Compensation......................................... 22
Item 12--Security Ownership of Certain Beneficial Owners and
Management............................................................ 25
Item 13--Certain Relationships and Related Transactions................. 27
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form
8-K................................................................... 30
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The Form 10-K for the fiscal year ended August 30, 1997 is hereby amended in
its entirety as follows:
PART I
ITEM 1--BUSINESS
AS USED IN THIS REPORT, THE "COMPANY" OR "ARCHIBALD" REFERS TO ARCHIBALD
CANDY CORPORATION AND "HOLDINGS" REFERS TO FANNIE MAY HOLDINGS, INC. THE COMPANY
IS A WHOLLY-OWNED SUBSIDIARY OF HOLDINGS. IN AUGUST 1995, THE COMPANY CHANGED
ITS FISCAL YEAR END FROM AUGUST 31 TO THE LAST SATURDAY IN AUGUST. ALL
REFERENCES IN THIS REPORT TO FISCAL YEARS PRIOR TO 1995 REFER TO THE FISCAL YEAR
OF THE COMPANY ENDED ON AUGUST 31 OF SUCH YEAR AND ALL REFERENCES IN THIS REPORT
TO FISCAL YEARS FROM AND AFTER 1995 REFER TO THE FISCAL YEAR OF THE COMPANY
ENDED ON THE LAST SATURDAY IN AUGUST FOR SUCH YEAR. FANNIE
MAY-REGISTERED TRADEMARK-, FANNY FARMER-REGISTERED TRADEMARK-,
PIXIE-REGISTERED TRADEMARK- AND TRINIDAD-REGISTERED TRADEMARK- ARE REGISTERED
TRADEMARKS OF THE COMPANY.
GENERAL
Archibald Candy Corporation is a manufacturer and retailer of boxed
chocolates and other confectionery items. Founded in 1921, the Company sells its
Fannie May and Fanny Farmer candies in 322 Company-operated stores and
approximately 6,000 third-party retail outlets as well as through quantity
order, mail order and fundraising programs primarily in the Midwestern and
Eastern United States. Management believes that the Company's products are
widely recognized for their quality, freshness and value, and that the Fannie
May and Fanny Farmer brand names are among the strongest in the confectionery
industry and offer significant opportunities for growth.
In late fiscal 1994, the Company installed its current management team with
the immediate goal of integrating the Fanny Farmer brand name and stores, which
were acquired in fiscal 1992, into the Company's existing Fannie May operations.
Since the arrival of the current management team, EBITDA has increased from $8.2
million in fiscal 1994 to $16.9 million for fiscal 1997. In fiscal 1997,
operating income was $10.8 million as compared to a loss of $5.9 million in
fiscal 1994. Management believes that the integration of Fannie May and Fanny
Farmer has been principally completed, and, more recently, has turned its focus
to growing sales and earnings by building on the Fannie May and Fanny Farmer
brand names, increasing points of availability for the Company's branded
products and pursuing certain initiatives designed to maintain and strengthen
operating margins.
THE INDUSTRY
The domestic candy industry is characterized by moderate long-term growth in
consumer demand and the existence of strong national and regional brands.
According to a report prepared by the National Confectioners Association, the
per capita consumption of candy in the United States increased from
approximately 18 pounds in 1987 to over 23 pounds in 1995, and total U.S. retail
candy sales grew to $21 billion in 1996. Total sales in the boxed chocolate
market were approximately $1.2 billion in 1995. Management believes that the
boxed chocolate market can be divided into premium, mid-priced and low-priced
segments. The Company competes primarily in the mid-priced segment in which
products generally retail for between $10.00 and $18.00 and are commonly
purchased for gift-giving occasions. Competition within this price tier is
regional.
BUSINESS STRATEGY
The Company's business strategy is to leverage the highly-regarded Fannie
May and Fanny Farmer brand names, principally by strengthening and expanding its
multi-channeled distribution network. To further this strategy, the Company has
sought to (i) build on recent improvements in Company-operated store performance
as measured by same store sales and overall profitability, (ii) increase product
availability nationwide among third-party retailers by expanding existing and
establishing new distribution
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channels and (iii) grow Non-Retail sales through enhanced product merchandising
and database management. In addition, the Company plans to continue to
strengthen operating margins through a variety of merchandising, production and
logistical initiatives.
CONTINUE IMPROVEMENT IN COMPANY-OPERATED RETAIL PERFORMANCE. The Company
has 322 Fannie May and Fanny Farmer retail stores in 19 states. These
Company-operated stores represent a mature, highly efficient and profitable
distribution channel. The Company's retail store strategy is focused on (i)
continuing to improve same store sales by enhancing merchandising, customer
service, and product selection and (ii) reducing store operating costs,
primarily by selectively closing unprofitable Fanny Farmer stores. Management
believes that it has been successful in the execution of this strategy. For the
period from fiscal 1994 through fiscal 1997, same store sales have increased
each year at an average annual rate in excess of 3.9%, and store operating costs
have declined by $4.4 million.
INCREASE PRODUCT AVAILABILITY THROUGH THIRD-PARTY RETAIL PROGRAMS. The
Company's several Third-Party Retail programs are designed to make its Fannie
May and Fanny Farmer brands more readily available to customers in new and
existing markets. Management has implemented a two-tiered distribution and
pricing strategy to capitalize on the Company's strong brand names. Management's
strategy is to position the Company's Third-Party Retail programs under the
Fannie May brand at a higher retail price point for the specialty retail market
while offering the Fanny Farmer brand at a lower retail price point more
appropriate for the mass market. The Fannie May Third-Party Retail programs (i)
service approximately 1,200 grocery, drug and variety stores in the greater
Chicago metropolitan area, on a year-round basis, and (ii) target department
stores, specialty shops and card and gift stores nationwide, during the
Christmas, Valentine's Day and Easter seasons. The Fanny Farmer Third-Party
Retail program sells to the mass market through approximately 5,000 grocery
stores, drug stores and mass merchandisers nationwide, during the peak holiday
seasons. As a result of this strategy, the Company has increased sales through
Third-Party Retail programs from $13.0 million in fiscal 1994 to $17.1 million
for fiscal 1997.
GROW NON-RETAIL SALES. The Company has developed several Non-Retail sales
channels for its Fannie May and Fanny Farmer brands, including its (i) quantity
order program, through which the Company markets its products to 43,000
organizations for corporate gift giving or member purchases, (ii) mail order
program, which has a national circulation of over 2.1 million catalogs annually
and a database of 345,000 customers, and (iii) fundraising program, in which
product is sold to schools and non-profit organizations nationwide for resale to
their supporters. Management believes that these channels provide potential
future sales growth without the overhead generally associated with maintaining a
retail store presence. The Company has increased sales through Non-Retail sales
channels from $11.3 million in fiscal 1994 to $15.6 million for fiscal 1997.
STRENGTHEN OPERATING MARGINS. Since 1994, the Company's new management team
has implemented a coordinated pricing and merchandising strategy in order to
increase the average dollar value of retail consumer transactions which, in
conjunction with more efficient operations and lower overhead costs, has
resulted in improved margins. From fiscal 1994 to fiscal 1997, the Company's
gross margin improved from 62.5% to 65.3%. During this period, management also
reduced selling, general and administrative expenses by $2.0 million, and raised
EBITDA margins from 7.1% to 13.8%. Management's strategy is to continue to
strengthen operating margins primarily by (i) pursuing innovative merchandising
and packaging strategies, (ii) reducing production costs through process and
productivity improvements and (iii) containing fulfillment and distribution
costs while improving service to Company-operated stores, third-party retailers
and consumers.
PRODUCTS
The Company manufactures over three-quarters of the products it sells and
maintains proprietary specifications for a significant amount of the
confectionery product, such as seasonal novelties, that it purchases from other
sources for resale. The Company's manufactured products include more than 125
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items, including its best selling Pixie, Mint Meltaway and Trinidad lines.
Products sourced from vendors for resale include assorted nuts, hard candy,
novelties, ice cream and an extensive line of gift items. The Company believes
that the superior quality and freshness of its products differentiates the
Company from many other confectionery manufacturers. The Company relies on
proven recipes, many dating back to the 1920s, for its traditional chocolates.
Because the Company relies on freshness rather than preservatives to ensure a
high-quality product, it is the Company's policy to destroy products not sold
within specified periods.
OPERATIONS
MANUFACTURING AND PRODUCTION. All of the Company's manufacturing operations
are located in its headquarters facility in Chicago, Illinois. The facility
includes space for manufacturing, cold and dry storage and office and
administrative functions.
The production process is split functionally into cooking, enrobing and
packaging. Each area is managed by one department head who in turn reports to
the plant manager. Additional departmental detail is shown below.
COOKING
There are separate cooking areas in the Company's plant for its various
products. Gas-fired copper kettles and steam-jacketed stainless steel kettles
are used to cook ingredients to achieve the appropriate moisture level and
flavor profile. The finished batches are further processed at the enrobers or in
other areas of the plant.
ENROBING
Approximately 75% of the pounds of candy produced in the Company's plant
pass through six enrobers ranging in size from 34 to 42 inches. The enrobers
form batches of cooked candy into shapes and cover the candy with a variety of
coatings, including milk chocolate, vanilla chocolate, liquor chocolate and
pastel.
PACKAGING
Approximately 68% of the pounds produced at the Company's plant are
hand-packed into boxes for sale through Company-Operated Retail or other
distribution channels. The Company utilizes six packing lines with an average
crew size of 21 packers to place the pieces of candy into distinctive white
paper cups and then into boxes. The boxes are wrapped by automatic wrapping
machines and placed into corrugated cartons for storage or shipment. Candy which
is not packed in the factory is delivered on pans to Company-operated stores so
that customers can select their own assortments.
The Company's plant currently operates on a seasonal basis with the busiest
seven-month period commencing after Labor Day and running through Easter. After
Easter, the Company reduces production by approximately 20% until late summer.
There is an annual two-week plant shutdown during the summer to allow for
comprehensive maintenance and cleaning activities.
WAREHOUSING AND DISTRIBUTION. In order to maintain product freshness and to
ensure prompt deliveries, the Company maintains warehousing and distribution
facilities in both Chicago, Illinois and Bensalem, Pennsylvania, which
facilities have 112,000 and 17,000 square feet of warehousing and distribution
space, respectively. These facilities maintain temperature and sanitation
controls in order to protect the quality of the products. Employees generally
fill orders daily to allow weekly deliveries to each of the Company-operated
retail locations and on an "as needed" basis to others. The Company's fleet of
24 trucks are refrigerated in order to provide appropriate shipping conditions
for pan candy, pre-boxed chocolates and necessary shop supplies. With the
exception of all Florida locations and certain Minnesota
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and North and South Dakota locations, all shops typically are serviced by the
Company's own fleet. All other sales channels are supplied via parcel service
and selected common carriers and freight forwarding companies.
SUPPLIERS AND PURCHASING. The Company's primary raw materials include
chocolate coatings, nutmeats, natural sweeteners, such as corn syrup and sugar,
and fresh dairy products, including sweetened-condensed milk, high-butterfat
cream and butter. The Company has long-standing relationships with its suppliers
for each of these products to ensure quality, consistency and cost control.
Written specifications are provided to the suppliers and certificates of
analysis must accompany incoming shipments. Peter's Chocolate Company ("Peter's
Chocolate"), a division of Nestle Company, Inc., has been the Company's primary
chocolate coating supplier for over 50 years and accounted for approximately
one-half of the Company's chocolate purchases in fiscal 1997. Merckens Chocolate
Company ("Merckens"), a division of ADM, also has been a leading supplier of
chocolate coating to the Company for over 20 years, and accounted for
approximately one-third of the Company's chocolate purchases in fiscal 1997.
Management believes that the Company is one of the leading bulk customers, by
volume, of each of Peter's Chocolate and Merckens. The Company currently has
short term (less than one year) supply agreements with Peter's Chocolate Company
and Merckens Chocolate Company. All chocolate coatings prepared for the Company
are proprietary and are produced according to the Company's recipes. All other
raw materials are provided by multiple suppliers that meet the Company's
specifications for quality and price. The Company believes that its volume
requirements and long-standing relationships provide leverage to negotiate
pricing and terms from many of its suppliers. In addition, the Company continues
efforts to certify other suppliers of key ingredients in order to improve vendor
performance.
MARKETING AND SALES
The Company sells its candy products through three channels: (i)
Company-Operated Retail, (ii) Third-Party Retail and (iii) Non-Retail.
COMPANY-OPERATED RETAIL. As of August 30, 1997, the Company operated 223
Fannie May stores and 99 Fanny Farmer stores. In fiscal 1997, this sales channel
accounted for $89.3 million, or 73.2%, of the Company's total net sales;
however, other sales channels are growing and have become an increasingly
important element of the Company's ongoing business strategy. While Fannie May
and Fanny Farmer stores co-exist in certain states, such stores generally do not
compete in the same local markets. Fannie May stores are found in strip centers
and shopping malls or as street front units and stand-alone roadside sites.
Fanny Farmer stores typically are located in shopping malls.
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As of August 30, 1997, the Company's stores were located in 19 states and
the District of Columbia as follows:
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STATE FANNIE MAY FANNY FARMER TOTAL STORES
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Illinois............................................ 149 -- 149
Minnesota........................................... 4 23 27
New York............................................ -- 24 24
Indiana............................................. 22 1 23
Michigan............................................ 8 11 19
Florida............................................. 10 5 15
Wisconsin........................................... 6 10 16
Massachusetts....................................... -- 9 9
Pennsylvania........................................ 6 -- 6
Missouri............................................ 8 -- 8
Iowa................................................ 2 4 6
Virginia............................................ 4 -- 4
Ohio................................................ -- 4 4
North Dakota........................................ -- 3 3
New Hampshire....................................... -- 2 2
Maryland............................................ 2 -- 2
Rhode Island........................................ -- 2 2
New Jersey.......................................... 1 -- 1
District of Columbia................................ 1 -- 1
South Dakota........................................ -- 1 1
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Total............................................. 223 99 322
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The Company owns 33 Fannie May stores. These stores typically are located in
stand-alone roadside structures and tend to be among the Company's highest
grossing sales locations. The Company's leased stores are in the following
locations: 151 in shopping malls, 80 in strip centers, 43 in street-front units
and 15 in other locations. Lease terms and rates vary by location with the
typical lease providing a five-year term with a minimum base rent plus
additional rent based on a percentage of sales and common area charges.
Historically, the Company has been able to renew its store leases upon
expiration.
Store sizes, including both leased and Company-owned stores, generally range
from 600 square feet mall locations to 2,900 square feet stand-alone roadside
locations, with an average store size of approximately 824 square feet.
Company-operated stores typically are open seven days per week and employ six to
ten people, including a full-time manager and several part-time employees.
Employees are trained to provide customers with customized selections and to
weigh and price each purchase accordingly. Customers are served primarily by
store staff, although many of the larger stores also have a self-service section
with prepacked boxes. The Company controls each store's design, signage and
layout to maintain
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consistency among all Fannie May and Fanny Farmer stores. Company-operated store
openings and closings for fiscal 1994, 1995, 1996 and 1997 are set forth below.
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FISCAL YEARS ENDED
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AUGUST 31, 1994 AUGUST 26, 1995 AUGUST 31, 1996 AUGUST 30, 1997
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OPENINGS:
Fannie May................................... 8 7 4 4
Fanny Farmer................................. 4 5 0 0
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Total...................................... 12 12 4 4
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-- -- -- --
CLOSINGS:
Fannie May................................... 23 10 7 6
Fanny Farmer................................. 22 30 29 16
-- -- -- --
Total...................................... 45 40 36 22
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-- -- -- --
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Since fiscal 1994, the Company has opened 32 new stores and closed 143
stores, most of which were unprofitable. The majority of the closed stores had
been acquired by the Company in fiscal 1992 as part of its acquisition of the
Fanny Farmer brand name and selected assets. As a result of management's efforts
to improve Company-operated retail store performance and to eliminate weaker
store locations, same store sales increased 4.5%, 3.4%, 2.6% and 5.2% in fiscal
1994, 1995, 1996 and 1997, respectively, and store operating costs decreased
10.2% during the period from fiscal 1994 through fiscal 1997.
Management plans to continue its emphasis on improving store mix rather than
store expansion for the near future, and, over the next four fiscal years,
intends to open approximately 14 new stores and close approximately 40
additional unprofitable stores upon expiration of their respective lease terms.
THIRD-PARTY RETAIL. Through its Third-Party Retail channel, the Company
markets its products to grocery stores, drug stores, department stores and other
variety stores through its frozen fresh, specialty market and mass market
programs. These programs are designed to make its Fannie May and Fanny Farmer
branded products more readily available to consumers in new and existing
markets. Within the mid-priced segment of the boxed chocolate market, management
has implemented a two-tiered distribution and pricing strategy to differentiate
the Company's brand names. The Company utilizes the Fannie May brand for its
higher price point frozen fresh and specialty market programs and has positioned
the Fanny Farmer brand at a lower price point for the mass market.
Under the frozen fresh program, the Company distributes frozen products to
higher price point retailers who then maintain the products in freezer display
cases. The Company initiated the frozen fresh program under the Fannie May brand
name in the early 1950's as a way to market a limited number of its best-selling
assortments through independent retailers on a year-round basis. The Company has
approximately 1,200 frozen fresh accounts, the vast majority of which are in the
greater Chicago metropolitan area and include stores operated by Osco Drug,
Dominick's and Walgreen Company (which collectively account for over 65% of the
Company's frozen fresh candy sales). These accounts generally purchase Fannie
May branded products from the Company at wholesale prices and mark-up the
product to prices comparable to those for products sold in Company-operated
stores. For fiscal 1997, frozen fresh sales accounted for $14.0 million, or
11.4%, of total net sales.
In fiscal 1996, the Company established a national mass market program under
the Fanny Farmer brand name. This wholesale program is targeted to grocery
stores, drug stores and mass merchandisers, with product availability limited to
the peak selling seasons of Christmas, Valentine's Day and Easter. The terms of
sale are similar to those terms given to frozen fresh accounts, but the products
for this program are selected and packaged to meet lower price points typical of
the mass market. The Company has
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obtained approximately 5,000 outlets, operated mostly by retail chains, under
this program. For fiscal 1997, mass market sales accounted for $3.1 million, or
2.6%, of total net sales.
In fiscal 1997, the Company announced the roll-out of its specialty markets
program through which it will market nationally under the Fannie May brand name
to department stores, card and gift stores and direct mail catalog companies.
The product line for this program, which consists of a variety of boxed and
novelty items, is intended to meet unfulfilled consumer demand in the mid-priced
segment of the specialty market. This product line will be positioned at higher
price points and sold only during the peak seasons of Christmas, Valentine's Day
and Easter. Management expects that initial revenues will be realized during the
1997 Christmas season.
NON-RETAIL. The Company's Non-Retail channel consists of quantity order,
fundraising and mail order catalog programs. Under the quantity order program,
companies and organizations buy large amounts of prepackaged candy for
gift-giving purposes or consolidate individual orders from employees or members
in order to obtain discount pricing. Under this program, the Company is
responsible for all of the administrative details and timely delivery of
product. Historically, the Company has found a high level of repeat sales in
this segment, as quantity order customers tend to renew or expand on their prior
year's order. The Company's current active quantity order database includes
approximately 43,000 customers. The quantity order program is available
year-round, but peaks in activity during the Christmas, Valentine's Day and
Easter holidays. A quantity order catalog is distributed at the beginning of
each fiscal year and prior to each holiday season. The Company has also targeted
fundraising organizations, including over 90,000 schools throughout the United
States, for its product offerings. The Company's fundraising sales are primarily
through, and highly dependent upon, a single, independent national distributor.
For fiscal 1997, quantity order and fundraising sales accounted for $9.6
million, or 7.9%, of total net sales.
In addition, the Company sells its products through a mail order program. In
fiscal 1997, approximately 149,000 orders were placed, with an average
transaction value of approximately $44.25. While this program was established in
1985, mail order sales have grown at an average annual rate of 14.5% since
fiscal 1994. The Company believes that this growth, which corresponds with the
arrival of the current management team, is the result of improved product
selection and catalog presentation as well as more effective database
management. The Company sends both Fannie May and Fanny Farmer mail order
catalogs to over 345,000 established and prospective customers during key
selling seasons. Mail order catalogs are also made available to the general
public through Company-operated retail stores. For fiscal 1997, mail order sales
accounted for $6.0 million, or 4.9%, of total net sales.
COMPETITION
The Company generally competes in the quality boxed chocolate market, which
management believes can be divided into premium, mid-priced and low-priced
segments. The low-priced segment, which represents the largest share of the
boxed chocolate market, is generally comprised of products retailing for less
than $10.00, which management believes usually are of lower quality than other
boxed chocolates. The primary competitor in this market is Russell Stover
Candies, Inc. which sells under the Whitman's Chocolates and Russell Stover
brand names and competes primarily on price for sales to grocery stores, drug
stores and discount stores. The Company believes that it competes primarily in
the mid-priced segment though it also competes against Russell Stover Candies
and other lower-priced suppliers in certain distribution channels.
The mid-priced segment is generally comprised of those chocolates which
retail for between $10.00 and $18.00. The Company's competitors in the
mid-priced segment are primarily local confectionery companies against whom the
Company competes through Company-operated stores on the basis of price and
quality. See's Candies, a subsidiary of Berkshire Hathaway Inc., is believed by
management to be the largest participant in the mid-priced segment, with fiscal
1996 sales of $248.9 million. Although Company-operated stores do not compete
directly with See's Candies stores, which are located primarily west of the
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Rocky Mountains, Company-operated stores do compete indirectly with certain mail
order and corporate gift programs which See's Candies markets nationally.
The premium segment is generally comprised of expensive chocolates retailing
in excess of $18.00. The leading participant in this segment is Godiva
Chocolatier, Inc., a subsidiary of the Campbell Soup Company. Other brands in
this market include Perugina, Tobler and Lindt. Most of these chocolates are
imported from abroad and, despite their high prices, management does not believe
that such brands provide the same freshness as the Company's chocolates. The
Company competes in the premium segment on the basis of quality and packaging
primarily through Third-Party Retail sales of its Fannie May branded products in
department stores.
The Company also competes with manufacturers, distributors and retailers of
other snack food products, including cookies, ice cream and coffee, as well as
with gift manufacturers, distributors and retailers, such as florists and card
and gift shops, that offer products at price points comparable to those of the
Company's products.
EMPLOYEES
As of August 30, 1997, the Company employed approximately 2,050 people of
which 1,093 worked in Fannie May stores, 422 worked in Fanny Farmer stores and
the remainder primarily worked in the Chicago manufacturing, distribution and
headquarters facilities. Of the total number of employees, 120 were salaried and
the remainder, including all store personnel, were compensated on an hourly
basis. Typically, the number of employees increases by approximately 500 (many
of whom work part-time in Company-operated retail stores) during periods of high
seasonal retail demand in the Company's second and third fiscal quarters. As of
August 30, 1997, over one-half of the hourly store personnel were employed on a
part-time basis. Management believes that the hourly store personnel represent a
relatively well-trained and stable base of employees, with many averaging
several years of tenure with the Company. As of August 30, 1997, approximately
800 of the Company's employees were members of one of the various labor unions
that represent Company employees. The Company currently is subject to eight
collective bargaining agreements, all of which expire on or before June 30,
2000. Management generally considers its employee relations to be good.
INTELLECTUAL PROPERTY
The Company owns numerous trademarks in the United States. The names Fannie
May and Fanny Farmer and certain product names, including Pixie and Trinidad,
are registered trademarks of the Company. The Company's trademarks are material
to the sale of the Company's products. Trademarks generally are valid as long as
they are in use and/or their registrations are properly maintained and provided
that such trademarks have not been found to have become generic.
ITEM 2--PROPERTIES
As of August 30, 1997, the Company operated 223 Fannie May stores and 99
Fanny Farmer stores. Of the 223 Fannie May stores, 33 are owned by the Company
and 190 are leased by the Company. The Company leases all 99 of its Fanny Farmer
stores. Fannie May stores are found in strip centers and shopping malls or as
street front units and stand-alone roadside sites. Fanny Farmer stores typically
are located in shopping malls. Store sizes, including both leased and
Company-owned stores, generally range from 600 square feet mall locations to
2,900 square feet stand-alone roadside locations, with an average store size of
approximately 824 square feet. As of August 30, 1997, the Company's stores were
located in 19 states and the District of Columbia. While Fannie May and Fanny
Farmer stores co-exist in certain states, such stores generally do not compete
in the same local markets.
The Company's 33 Fannie May stores typically are located in stand-alone
roadside structures. The Company's 289 leased stores are in the following
locations: 151 in shopping malls, 80 in strip centers, 43 in street-front units
and 15 in other locations. Lease terms and rates vary by location with the
typical lease providing a five-year term with a minimum base rent plus
additional rent based on a percentage of sales and common area charges. Within
five years following August 30, 1997, approximately 90% of the Company's retail
store leases are due to expire. The Company believes that it will be able to
renew expiring leases at reasonable rates in the future, but there can be no
assurances that it will be able to do so.
8
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In addition to its Company-operated stores, the Company has three other
principal properties: an approximately 320,000 square foot manufacturing,
storage and headquarters facility that the Company owns in Chicago, Illinois; an
approximately 112,000 square foot warehouse and distribution facility that the
Company leases in Chicago, Illinois; and an approximately 17,000 square foot
warehouse and distribution facility that the Company owns in Bensalem,
Pennsylvania. At the Chicago manufacturing and headquarters facility,
approximately 162,000 square feet are used for manufacturing, 118,000 square
feet for cold and dry storage and 40,000 square feet for office and
administrative functions. The lease of the Chicago warehouse and distribution
facility expires in June 2000. Management believes that substantially all of the
Company's property and equipment is in good condition and that it has sufficient
capacity to meet its current manufacturing and distribution requirements.
ITEM 3--LEGAL PROCEEDINGS
From time to time, the Company is involved in routine litigation incidental
to its business. The Company is not a party to any pending or threatened legal
proceeding which management believes would have a material adverse effect on the
Company's results of operations or financial condition. Also, the Company was
not party to any such legal proceeding that terminated during the fourth quarter
of fiscal 1997.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5--MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Holdings owns all of the Company's issued and outstanding common stock.
There is no established public trading market for the Company's common stock.
Holdings has four classes of authorized common stock (collectively, "Holdings'
Common Stock"), all of which are subject to restrictions on sale and transfer.
There is no established public trading market for Holdings' Common Stock. As of
November 26, 1997, there were seven holders of record of Holdings' Class A
Common Stock, no outstanding shares of Holdings' Class B Common Stock, twelve
holders of record of Holdings' Class C Common Stock and one holder of record of
Holdings' Class D Common Stock.
The Company has not paid any cash dividend on its common stock in fiscal
1996 or fiscal 1997, except to the extent necessary to allow Holdings to pay
cash dividends on its 5% Senior Preferred Stock (the "Senior Preferred Stock")
($275,000 with respect to such dividends paid for 1996 and $282,000 with respect
to such dividends paid for 1997). Holdings has not paid any cash dividend on
Holdings' Common Stock in fiscal 1996 or fiscal 1997. Any payment of dividends
in the future is dependent upon the financial condition, capital requirements,
earnings of the Company and Holdings, as well as other factors. Nevertheless,
the Company currently intends to retain all future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends to Holdings in the foreseeable future, except to the
extent necessary to allow Holdings to satisfy its dividend and redemption
obligations with respect to its preferred stock or as required by the Tax
Sharing and Management Agreement (as defined). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions-- Tax Sharing and
Management Agreement." Also, the Company is subject to certain contractual
restrictions on the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Note 7, "Debt" of the notes to the financial statements included
in this report for information concerning such restrictions.
9
<PAGE>
ITEM 6--SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The following table sets forth the selected historical financial data of the
Company for the fiscal years ended August 31, 1993, August 31, 1994, August 26,
1995, August 31, 1996 and August 30, 1997, which have been derived from the
audited financial statements of the Company. In August 1995, the Company changed
its fiscal year end from August 31 to the last Saturday in August. All
references in this report to fiscal years prior to 1995 refer to the fiscal year
of the Company ended on August 31 of such year and all references in this report
to fiscal years from and after 1995 refer to the fiscal year of the Company
ended on the last Saturday in August for such year. The following information
should be read in conjunction with the Financial Statements of the Company, and
the related notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this Report.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------------------------------------------------
AUGUST 26, AUGUST 31, AUGUST 30,
AUGUST 31, 1993 AUGUST 31, 1994 1995(1) 1996(1) 1997(1)
--------------- --------------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Company-Operated Retail
(2)....................... $ 89,109 $ 91,408 $ 90,077 $ 88,938 $ 89,276
Third-Party Retail (3)...... 13,542 13,027 12,954 14,924 17,074
Non-Retail (4).............. 9,919 11,297 12,524 13,486 15,583
--------------- --------------- -------- -------- --------
Total net sales......... $ 112,570 $ 115,732 $ 115,555 $ 117,348 $ 121,933
--------------- --------------- -------- -------- --------
--------------- --------------- -------- -------- --------
Gross profit.................. $ 71,135 $ 72,298 $ 75,309 $ 76,338 $ 79,649
Operating income (loss)....... (3,485) (5,850) 3,290 7,945 10,801
Interest expense.............. 8,492 8,913 9,237 9,455 9,235
Other income.................. 307 207 275 444 411
Income tax (benefit).......... (4,295) (358) (68) 349 250
Net income (loss) (5)......... (7,375) (16,440) (5,604) (1,415) (1,171)
OTHER DATA:
EBITDA (6).................... $ 10,256 $ 8,239 $ 13,527 $ 14,731 $ 16,868
Depreciation and
amortization................ 13,478 13,216 9,999 6,807 5,932
Capital expenditures.......... 3,085 3,655 2,325 2,280 3,688
Total net sales growth........ n/a 2.8% (0.2)% 1.6% 3.9%
Gross margin 63.2% 62.5% 65.2% 65.1% 65.3%
EBITDA margin (7)............. 9.1% 7.1% 11.7% 12.6% 13.8%
Ratio of earnings to fixed
charges (8)................. -- -- -- -- --
STORE DATA:
Number of Company-operated
stores at period end:
Fannie May stores......... 246 231 228 225 223
Fanny Farmer stores....... 187 169 144 115 99
--------------- --------------- -------- -------- --------
Total number of
stores................ 433 400 372 340 322
--------------- --------------- -------- -------- --------
--------------- --------------- -------- -------- --------
Increase in same store sales:
(9)
Fannie May stores......... n/a 1.5% 4.6% 2.1% 5.4%
Fanny Farmer stores....... n/a 11.8% 0.0% 4.5% 4.6%
Total increase.......... n/a 4.5% 3.4% 2.6% 5.2%
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 830 $ 1,359 $ 482 $ 380 $ 15,801
Working capital
(deficiency)................ (4,042) (4,768) (2,886) (4,264) 23,999
Total assets.................. 101,438 88,548 83,098 78,668 95,660
Long-term debt................ 65,435 73,883 73,676 72,721 100,521
Shareholder's equity
(deficit)................... 8,273 (8,429) (14,033) (15,448) (16,619)
</TABLE>
- ------------------------------
(1) In 1995, the Company changed its fiscal year to the last Saturday in August
from the last day in August. As a result of this change, fiscal 1995 had
less than 52 weeks (360 days) and fiscal 1996 had 53 weeks (371 days).
10
<PAGE>
(2) Company-Operated Retail includes sale of Company branded products through
Company-operated Fannie May and Fanny Farmer stores. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
(3) Third-Party Retail includes grocery stores, drug stores and other
independent retailers that purchase the Company's branded products at
wholesale pricing for resale to the consumer. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview."
(4) Non-Retail includes sale of Company branded product through the Company's
quantity order, mail order and fundraising programs. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
(5) The Company's net loss for fiscal 1994 includes an extraordinary loss of
$2.2 million for the write-off of deferred financing fees related to an
early extinguishment of debt. The Company's net loss for fiscal 1994 also
includes a loss of $0.7 million relating to the discontinued Fanny Farmer
Homestead product line (the "Homestead Loss"). The Company's net loss for
fiscal 1997 includes an extraordinary loss of $2.9 million for the write-off
of deferred financing fees and a prepayment penalty related to the early
extinguishment of debt.
(6) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. While EBITDA should not be construed as a substitute for
operating income or a better indicator of liquidity than cash flow from
operating activities, which are determined in accordance with GAAP, it is
included herein to provide additional information with respect to the
ability of the Company to meet its future debt service, capital expenditure
and working capital requirements. Although EBITDA is not necessarily a
measure of the Company's ability to fund its cash needs, management believes
that certain investors find EBITDA to be a useful tool for measuring the
ability of the Company to service its debt. The Company's financial results
as reported herein for fiscal 1994 exclude the Homestead Loss. In fiscal
1994, the Fanny Farmer Homestead product line accounted for $0.9 million of
Third-Party Retail sales.
(7) EBITDA margin is EBITDA divided by total net sales.
(8) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness and capitalized interest,
amortization of deferred financing costs and that portion of rental expense
on operating leases deemed by the Company to be attributable to interest.
For fiscal 1993, 1994, 1995, 1996 and 1997 earnings were insufficient to
cover fixed charges by approximately $25.7 million, $29.0 million, $20.2
million, $15.2 million and $14.6 million, respectively.
(9) Same store sales are defined as the aggregate sales from stores open for the
entire periods being compared. Increases reflect changes from the
immediately prior comparable period. Such data is not available for fiscal
1993.
11
<PAGE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE SELECTED
FINANCIAL DATA, THE FINANCIAL STATEMENT SCHEDULES AND THE OTHER FINANCIAL
INFORMATION AND DATA APPEARING ELSEWHERE HEREIN. IN AUGUST 1995, THE COMPANY
CHANGED ITS FISCAL YEAR END FROM AUGUST 31 TO THE LAST SATURDAY IN AUGUST. ALL
REFERENCES IN THIS REPORT TO FISCAL YEARS PRIOR TO 1995 REFER TO THE FISCAL YEAR
OF THE COMPANY ENDED ON AUGUST 31 OF SUCH YEAR AND ALL REFERENCES IN THIS REPORT
TO FISCAL YEARS FROM AND AFTER 1995 REFER TO THE FISCAL YEAR OF THE COMPANY
ENDED ON THE LAST SATURDAY IN AUGUST FOR SUCH YEAR.
OVERVIEW
The Company is a manufacturer and retailer of boxed chocolates and other
confectionery items. The Company sells its Fannie May and Fanny Farmer candies
in 322 Company-operated stores ("Company-Operated Retail") and approximately
6,000 third-party grocery stores, drug stores and independent retail accounts
("Third-Party Retail"), as well as through a variety of non-retail programs,
including quantity order, mail order and fundraising programs ("Non-Retail"). In
fiscal 1997, EBITDA was $16.9 million, or 13.8% of total net sales, as compared
to $13.5 million, or 11.7% of total net sales in fiscal 1995. This increase in
EBITDA and EBITDA margin reflects the benefits of certain initiatives
implemented by the current management team, which joined the Company in late
fiscal 1994. These initiatives included (i) a number of programs to improve same
store sales and overall profitability in the Company-Operated Retail channel,
(ii) the expansion of existing and the introduction of new Third-Party Retail
and Non-Retail programs to increase product availability and (iii) merchandising
and pricing strategies which, in conjunction with reduced overhead and other
improvements in operating efficiencies, were intended to strengthen margins.
Historically, Company-Operated Retail has represented the most significant
distribution channel for the Company's products and accounted for $89.3 million,
or 73.2% of total net sales in fiscal 1997. The Company's Third-Party Retail and
Non-Retail businesses collectively accounted for $32.7 million, or 26.8% of
total net sales in fiscal 1997. The continued growth of Third-Party Retail and
Non-Retail channels remains a priority for the Company because management
believes that these channels present opportunities for significant sales growth
and greater product distribution without the higher operating expenses and
capital expenditures required by Company-operated stores.
The Company's costs of sales include (i) costs associated with the Company's
manufactured products and (ii) costs associated with product purchased from
third parties and resold by the Company. The principal elements of the Company's
cost of sales are raw materials, labor, manufacturing overhead, and purchased
product costs, which accounted for 32%, 28%, 15% and 25%, respectively, of total
cost of sales in fiscal 1997. Raw materials consist primarily of chocolate,
nutmeats, natural sweeteners and fresh dairy products, the overall cost of which
has remained relatively stable despite susceptibility to significant
fluctuations for specific items. See "Business--Operations--Suppliers and
Purchasing." Labor costs consist primarily of hourly wages plus incentives based
on operating efficiencies. Manufacturing overhead generally includes employee
fringe benefits, utilities, rents and manufacturing supplies. Historically, the
Company generally has been able to raise prices of its products equal to or in
excess of any increases in cost of sales; however, there can be no assurance
that the Company will be able to continue to do so in the future.
Selling, general and administrative ("SG&A") costs include, but are not
limited to: (i) Company-Operated Retail store operating costs, such as wages,
rent and utilities, (ii) expenses associated with Third-Party Retail and
Non-Retail sales, which include, among other things, catalog expenses and direct
wages and (iii) general overhead expenses, which consist primarily of
non-allocable wages, professional fees and office overhead. In fiscal 1997, SG&A
costs were $62.4 million, or 51.2% of total net sales, compared to $61.5
million, or 53.3% of total net sales in fiscal 1995. The reductions in SG&A
costs and SG&A margins
12
<PAGE>
(defined as SG&A costs divided by total net sales) during this period were
primarily a result of lower store operating costs due to management's strategy
of selectively closing unprofitable stores and reduced general overhead
expenses. These reductions were partially offset by an increase in costs related
to the development of Third-Party Retail and Non-Retail programs.
RESULTS OF OPERATIONS
The following tables summarize the Company's percentage of total net sales,
pounds of product sold and average selling price, according to distribution
channel, and number of Company-operated stores, in each case, for the periods
indicated.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------------------------------
AUGUST 31, 1994 AUGUST 26, 1995 AUGUST 31, 1996 AUGUST 30, 1997
----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
PERCENTAGE OF TOTAL NET SALES:
Company-Operated Retail......................... 79.0% 78.0% 75.8% 73.2%
Third-Party Retail.............................. 11.3 11.2 12.7 14.0%
Non-Retail...................................... 9.7 10.8 11.5 12.8%
----- ----- ------ ------
Total net sales............................... 100.0% 100.0% 100.0% 100.0%
----- ----- ------ ------
----- ----- ------ ------
POUNDS SOLD (IN MILLIONS):
Company-Operated Retail......................... 10.9 9.1 8.7 8.3
Third-Party Retail.............................. 2.0 1.7 1.9 2.1
Non-Retail...................................... 1.5 1.5 1.5 1.7
----- ----- ------ ------
Total pounds sold............................. 14.4 12.3 12.1 12.1
----- ----- ------ ------
----- ----- ------ ------
AVERAGE SELLING PRICE:
Company-Operated Retail......................... $ 8.39 $ 9.83 $ 10.23 $ 10.73
Third-Party Retail................................ 6.52 7.71 7.92 8.35
Non-Retail........................................ 7.37 8.52 8.75 9.16
Total average selling price................... 8.03 9.38 9.68 10.10
COMPANY-OPERATED STORES (AT PERIOD END)........... 400 372 340 322
</TABLE>
As a percentage of total net sales, Company-Operated Retail sales decreased
from 78.0% in fiscal 1995 to 73.2% for fiscal 1997. This decline was due
primarily to management's strategy of (i) increasing the average dollar value of
retail consumer transactions in Company-operated stores offset by (ii) closing
unprofitable stores and (iii) expanding channels of distribution other than
Company-Operated Retail. As a result, from fiscal 1995 to fiscal 1997, the
average price per pound of candy sold in Company-Operated Retail increased from
$9.83 to $10.73 and the number of Company-operated stores decreased from 400 to
322, both of which contributed to a decline in total pounds sold in
Company-Operated Retail from 9.1 million to 8.3 million. Management has targeted
approximately 40 additional unprofitable stores for closure over the next four
years and intends to selectively open new stores.
As a percentage of total net sales, Third-Party Retail sales increased from
11.2% in fiscal 1995 to 14.0% for fiscal 1997. This increase was due primarily
to a general increase in pounds of product sold to existing customers and
limited price increases. Pounds sold declined in fiscal 1995 to 1.7 million as a
result of the termination of the Homestead product line, but have since
increased to 2.1 million for fiscal 1997 as a result of increased volume with
existing customers, the launch of new Fannie May products and the introduction
of the Fanny Farmer mass market program in fiscal 1996. Management intends to
launch the sale of Fannie May products to department stores, specialty shops and
card and gift stores this year, and expects Third-Party Retail sales to continue
to grow as a percentage of total net sales.
As a percentage of total net sales, Non-Retail sales increased from 10.8% in
fiscal 1995 to 12.8% for fiscal 1997. This increase was due primarily to the
growth in number and value of mail order transactions
13
<PAGE>
as well as the launch of the fundraising program. Pounds sold have remained
constant while the price per pound sold has increased primarily as a result of
improved product mix and merchandising.
FISCAL YEAR ENDED AUGUST 30, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996
TOTAL NET SALES. Total net sales in fiscal 1997 were $121.9 million, an
increase of $4.6 million, or 3.9%, from $117.3 million in fiscal 1996. Pounds
sold were 12.1 million in fiscal 1997, unchanged from fiscal 1996.
Company-Operated Retail pounds decreased, but was offset by growth in
Third-Party Retail and Non-Retail distribution channels. Company-Operated Retail
sales were $89.3 million in fiscal 1997, an increase of $0.3 million, or 0.4%,
from $88.9 million in fiscal 1996. This increase was primarily a result of same
store sales growth of 5.2%, partially offset by the closings of 22 stores. In
fiscal 1997, Third-Party Retail sales were $17.1 million, an increase of $2.2
million, or 14.4%, from $14.9 million in fiscal 1996. This increase reflects the
continued results of management's strategy to expand Third-Party Retail sales
into new markets, including providing Fanny Farmer branded products to mass
merchandisers and developing Fannie May product line extensions. Non-Retail
sales were $15.6 million, an increase of $2.1 million, or 15.5%, from $13.5
million in fiscal 1996. The increase in the boxed chocolate fundraising business
and the increase in mail order sales were the primary contributors to this
growth in Non-Retail sales.
GROSS PROFIT. Gross profit in fiscal 1997 was $79.6 million, an increase of
$3.3 million, or 4.3%, from $76.3 million in fiscal 1996. Gross profit as a
percentage of total net sales increased slightly to 65.3% in fiscal 1997 from
65.1% in fiscal 1996. This increase in gross margin was primarily due to the
higher price per pound of candy sold, partially offset by an increase in product
costs and a continuing shift from Company-Operated Retail sales to lower priced
Third-Party Retail and Non-Retail sales.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A costs were $62.4 million in
fiscal 1997, an increase of $1.3 million, or 2.2%, from $61.1 million in fiscal
1996. Third-Party Retail operating expenses increased over fiscal 1996 due to
growth of the Fanny Farmer mass merchandising programs. This increase was
partially offset by lower store operating costs as a result of store closings.
As a percentage of total net sales, SG&A decreased to 51.2% in fiscal 1997 from
52.1% in fiscal 1996. SG&A costs also included $0.3 million of corporate
management expenses in fiscal 1997 for a position that management eliminated and
does not expect to fill. In fiscal 1996, nonrecurring management and
administrative expenses were $0.5 million.
EBITDA. As a result of the foregoing, EBITDA was $16.9 million in fiscal
1997, an increase of $2.1 million, or 14.5%, from $14.7 million in fiscal 1996.
As a percentage of total net sales, EBITDA was 13.8% in fiscal 1997 as compared
to 12.6% in fiscal 1996.
OPERATING INCOME. Operating income was $10.8 million in fiscal 1997, an
increase of $2.9 million, or 35.9%, from $7.9 million in fiscal 1996. The
increase in operating income was primarily a result of higher EBITDA of $2.1
million and a reduction of depreciation and amortization expense of $0.9
million.
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 26, 1995
TOTAL NET SALES. Total net sales in fiscal 1996 were $117.3 million, an
increase of $1.7 million, or 1.6%, from $115.6 million in fiscal 1995. Pounds
sold decreased 1.6% to 12.1 million in fiscal 1996 from 12.3 million in fiscal
1995, primarily as a result of lower Company-Operated Retail pounds sold
partially offset by an increase in Third-Party Retail pounds sold.
Company-Operated Retail sales were $88.9 million in fiscal 1996, a decrease of
$1.2 million, or 1.3%, from $90.1 million in fiscal 1995. This decrease was a
result of 32 fewer Company-operated stores at the end of fiscal 1996 compared to
the end of fiscal 1995, partially offset by same store sales growth of 2.6%. In
fiscal 1996, Third-Party Retail sales were $14.9 million, an increase of $1.9
million, or 15.2%, from $13.0 million in fiscal 1995. This increase reflects the
first tangible results of management's strategy to expand Third-Party Retail
sales into new markets, including providing Fanny Farmer branded products to
mass merchandisers and developing Fannie May product line extensions. Non-Retail
sales were $13.5 million, an increase of $1.0 million, or 7.7%, from $12.5
million in
14
<PAGE>
fiscal 1995. The launch of the boxed chocolate fundraising business commencing
in early fiscal 1996 and the increase in mail order sales were the primary
contributors to this growth in Non-Retail sales.
GROSS PROFIT. Gross profit in fiscal 1996 was $76.3 million, an increase of
$1.0 million, or 1.4%, from $75.3 million in fiscal 1995. Gross profit as a
percentage of total net sales decreased slightly to 65.1% in fiscal 1996 from
65.2% in fiscal 1995. This reduction in gross margin was primarily due to
increased raw material costs and a shift in sales mix from Company-Operated
Retail to lower priced Third-Party Retail, partially offset by an overall higher
price per pound of candy sold.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A costs were $61.1 million in
fiscal 1996, a decrease of $0.4 million, or 0.7%, from $61.5 million in fiscal
1995. This decrease reflected reduced store operating costs resulting from the
closing of 32 Company-operated stores during fiscal 1996 offset by an increase
in Third-Party Retail operating expenses as a result of the start-up of the
Fanny Farmer mass merchandising program. SG&A costs also included $0.5 million
and $0.4 million of corporate management and administrative expenses in fiscal
1996 and fiscal 1995, respectively, for positions that management has eliminated
and for which it does not expect the Company to incur costs on an ongoing basis.
As a percentage of total net sales, SG&A decreased to 52.1% in fiscal 1996 from
53.3% in fiscal 1995.
EBITDA. As a result of the foregoing, EBITDA was $14.7 million in fiscal
1996, an increase of $1.2 million, or 8.9%, from $13.5 million in fiscal 1995.
As a percentage of total net sales, EBITDA was 12.6% in fiscal 1996 as compared
to 11.7% in fiscal 1995.
OPERATING INCOME. Operating income was $7.9 million in fiscal 1996, an
increase of $4.7 million, or 141.5%, from $3.3 million in fiscal 1995. The
increase in operating income was a result of higher EBITDA of $1.2 million and a
reduction in depreciation and amortization expense of $3.2 million.
FISCAL YEAR ENDED AUGUST 26, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1994
TOTAL NET SALES. Total net sales in fiscal 1995 were $115.6 million, a
decrease of $0.1 million, or 0.2%, from $115.7 million in fiscal 1994. This
decrease in total net sales was a result of a decrease in pounds sold due to a
strategic decision to terminate the promotion and discounting strategy
implemented by prior management and, instead, to coordinate merchandising and
pricing strategy in order to increase the average dollar value of retail
consumer transactions. Pounds sold in fiscal 1995 were 12.3 million, a decrease
of 2.1 million pounds, or 14.6%, from 14.4 million pounds in fiscal 1994.
Company-Operated Retail sales were $90.1 million in fiscal 1995, a decrease of
$1.3 million, or 1.5%, from $91.4 million in fiscal 1994. This decrease was the
result of 28 fewer Company-operated stores at the end of fiscal 1995 compared to
the end of fiscal 1994 offset by same store sales growth of 3.4%. Third-Party
Retail sales were $13.0 million in both fiscal 1994 and fiscal 1995, reflecting
the discontinuance of the Fanny Farmer Homestead product line (a purchased
product offered by the Company to compete in the low-priced boxed chocolate
segment, which accounted for $0.9 million in sales in fiscal 1994) offset by
improved performance in the Fannie May brand programs. Non-Retail sales were
$12.5 million, an increase of $1.2 million, or 10.9%, from $11.3 million in
fiscal 1994. Sales growth in Non-Retail was due primarily to increases in mail
order and quantity order sales.
GROSS PROFIT. Gross profit in fiscal 1995 was $75.3 million, an increase of
$3.0 million, or 4.2%, from $72.3 million in fiscal 1994. Gross profit as a
percentage of total net sales increased to 65.1% in fiscal 1995 from 62.5% in
fiscal 1994 as a result of the pricing strategy described above partially offset
by higher labor costs and lower overhead absorption due to the decline in pounds
of candy sold.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A costs were $61.5 million in
fiscal 1995, a decrease of $3.0 million, or 4.5%, from $64.5 million in fiscal
1994. The primary reason for the decrease was 28 fewer Company-operated stores
open at the end of fiscal 1995 as compared to the end of fiscal 1996. As a
percentage of total net sales, SG&A decreased to 53.3% in fiscal 1995 from 55.7%
in fiscal 1994.
15
<PAGE>
EBITDA. As a result of the foregoing, EBITDA was $13.5 million in fiscal
1995, an increase of $5.3 million, or 64.2%, from $8.2 million in fiscal 1994.
As a percentage of total net sales, EBITDA was 11.7% in fiscal 1995 as compared
to 7.1% in fiscal 1994.
OPERATING INCOME. Operating income was $3.3 million in fiscal 1995, an
increase of $9.2 million from a loss of $5.9 million in fiscal 1994. The
increase in operating income was primarily a result of higher EBITDA of $5.3
million and a reduction of depreciation and amortization expense of $3.2
million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have arisen principally from various
capital expenditures, seasonal and general working capital requirements and debt
service obligations. The Company has satisfied these requirements during the
past four fiscal years primarily with long-term and seasonal borrowings and cash
generated by operating activities. During fiscal 1994, 1995, 1996 and 1997, the
net cash generated (used) by the Company's operating activities was ($1.1)
million, $4.6 million, $4.1 million and $3.9 million, respectively.
The Company's capital expenditures (including capital lease obligations) for
fiscal 1994, 1995, 1996 and 1997 were $4.2 million, $2.6 million, $2.5 million
and $3.7 million, respectively. These expenditures related primarily to retail
store development and renovation as well as the purchase of manufacturing and
distribution equipment. Management expects that capital expenditures over the
next twelve months will relate primarily to the remodeling of existing stores,
the purchase of manufacturing and distribution equipment and improvements in the
management information systems, and expects capital expenditures of $4.0 million
for such period. The capital resources that are available will be adequate to
cover the Company's anticipated capital requirements over the next twelve
months.
The Company has historically financed its seasonal working capital needs
through bank borrowings. For fiscal 1997, average revolver borrowings under the
Old Credit Facility (as defined) were $3.9 million, with peak borrowings of
$16.0 million. As of August 30, 1997, the Company's cash balance was $15.8
million and there were no borrowings under the New Credit Facility (as defined)
as compared to a cash balance of $0.4 million and $9.1 million of borrowings
under the Old Credit Facility as of August 31, 1996. Inventories historically
have represented the Company's most significant working capital requirement and
inventory levels fluctuate significantly during the year. The Company's ratio of
inventories to total net sales is typically highest during the fiscal fourth
quarter when the Company experiences lower seasonal demand for its products and
begins to build inventories for its key sales periods. See "--Quarterly Results
and Seasonality." Receivables have not been a material component of the
Company's working capital because sales through Company-operated stores are made
on a cash or credit card basis. As the Company continues to pursue a strategy to
develop its Third-Party Retail business with grocery stores, drug stores and
other independent retailers, all of which typically pay vendors on 45 to 60 day
terms or longer and which often require large shipments in order to roll-out
product simultaneously in several markets, the Company expects its working
capital needs relating to inventory and receivables to increase.
On July 2, 1997, the Company issued and sold $100,000,000 in aggregate
principal amount of its 10 1/4% Senior Secured Notes due July 1, 2004 (the "Old
Notes") in a transaction (the "Offering") exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"). The net proceeds from
the Offering were used by the Company (i) to repay in full all outstanding
indebtedness under the Company's then existing bank credit facility (the "Old
Credit Facility"), including accrued and unpaid interest thereon, (ii) to
repurchase all of the Company's Senior Subordinated Notes and to pay accrued and
unpaid interest thereon and the prepayment premium applicable thereto and (iii)
for general corporate and working capital purposes. Concurrently with the
consummation of the Offering, the Company entered into a new credit facility
with The First National Bank of Chicago, as agent (the "New Credit Facility"),
which provides for revolving loans to the Company in an aggregate principal
amount at any time not to exceed the lesser of (i) $20 million and (ii) a
borrowing base comprised primarily of a
16
<PAGE>
percentage of eligible accounts receivable, eligible inventory and certain real
estate of the Company. The New Credit Facility is secured by first priority
liens on the Company's accounts receivable, raw materials and finished goods
inventories and certain of the Company's owned store locations. The New Credit
Facility expires on July 1, 2000, unless extended. The New Credit Facility
provides that borrowings thereunder will accrue interest at a variable annual
rate equal to the Alternate Base Rate (generally defined as the greater of (i)
the corporate base rate of interest announced by The First National Bank of
Chicago from time to time or (ii) the Federal Funds Effective Rate (as defined
in the New Credit Facility) plus .5% per annum) plus 1.25% or a fixed rate equal
to the Eurodollar Rate (as defined in the New Credit Facility) plus 2.50%.
Interest rates may be adjusted downward, depending upon the Company's leverage
ratio (as defined therein). The Company is required to pay ongoing fees in
connection with the New Credit Facility, including, but not limited to, a
commitment fee of 0.375% to 0.50%, on the undrawn portion (based on the
Company's Leverage Ratio (as defined in the New Credit Facility)). As of
November 26, 1997, the Company had no indebtedness outstanding under the New
Credit Facility.
On November 13, 1997, the Company exchanged $100,000,000 in an aggregate
principal amount of its new 10 1/4% Senior Secured Notes due July 1, 2004, which
have been registered under the Securities Act (the "New Notes"), for
$100,000,000 in aggregate principal amount of the Old Notes (the "Exchange"; the
Offering, the New Credit Facility and the Exchange are herein referred to as the
"Transactions"). The form and terms of the New Notes are substantially identical
(including principal amount, interest rate, maturity, security and ranking) to
the form and terms of the Old Notes, except that the New Notes (i) are freely
transferable by holders thereof (subject to certain exceptions) and (ii) are not
entitled to certain registration rights and certain liquidated damage provisions
which are applicable to the Old Notes under the registration rights agreement
entered into by the Company in connection with the Offering. The New Notes bear
interest at the rate of 10 1/4% per annum, payable semi-annually on January 1
and July 1 of each year, commencing January 1, 1998. The New Notes are senior
secured obligations of the Company and rank senior in right of payment to all
subordinated indebtedness of the Company and pari passu in right of payment with
all senior indebtedness of the Company, including the New Credit Facility. The
New Notes are secured by first priority liens on certain of the Company's
equipment, fixtures and general intangibles, including trademarks, and mortgages
on certain of the Company's owned real property.
The consummation of the Transactions has resulted in a significant increase
in the Company's entire debt over historical levels due to the issuance of the
New Notes and potential borrowings under the New Credit Facility. Based upon the
Company's current level of operations and anticipated growth, management
believes that available cash flow, together with available borrowings under the
New Credit Facility, will be adequate to meet the Company's anticipated future
requirements for capital expenditures, working capital and debt service
obligations. The New Credit Facility will expire on July 1, 2000, and the
Company will need to seek to extend or renew the New Credit Facility or obtain
alternative financing to meet its seasonal working capital needs and other
requirements.
In addition, Holdings has certain dividend and redemption obligations for
which the Company must generate the necessary funds. Holdings has the three
following classes of preferred stock: Senior Preferred Stock, Junior Class A PIK
Preferred Stock and Junior Class B PIK Preferred Stock. The Senior Preferred
Stock was issued in 1991 in the original face amount of $10.0 million and is
subject to mandatory redemption on August 31, 2001. Assuming that Holdings
continues to exercise its option to pay 50% of the dividends in kind, the
redemption value of the Senior Preferred Stock on August 31, 2001 will be
approximately $12.7 million. The Junior Class A PIK Preferred Stock and the
Junior Class B PIK Preferred Stock were issued in 1991 in the original face
amounts of $7.0 million and $0.7 million, respectively. Both classes of Junior
PIK Preferred Stock are subject to mandatory redemption on November 1, 2001.
Assuming that Holdings continues to exercise its option to pay all dividends in
kind, the redemption value of the Junior Class A PIK Preferred Stock and the
Junior Class B PIK Preferred Stock on November 1, 2001 will be approximately
$15.1 million and $1.5 million, respectively.
17
<PAGE>
In order for Holdings to make such redemption payments, Holdings must cause
the Company, to the extent permitted by the instruments governing the New Notes
and the New Credit Facility, to advance the necessary funds to Holdings by
dividend or otherwise. Such advances, if paid, will reduce the funds available
for the Company's operations. To the extent that such funds are not available,
whether due to the restrictions set forth in the instruments governing the New
Notes or the New Credit Facility or otherwise, the failure to make required
redemption payments would trigger various provisions of Holdings' preferred
stock, including provisions providing for a change of control of Holdings' and
the Company's Boards of Directors.
Instruments governing the Company's indebtedness, including the New Credit
Facility and the indenture pursuant to which the New Notes were issued (the
"Indenture"), contain financial and other covenants that restrict, among other
things, the Company's ability to make investments, loans and advances, pay
dividends and make certain other restricted payments, incur additional
indebtedness, incur liens, merge or consolidate with any other person, sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of the Company, consummate certain other asset sales and enter
into certain transactions with affiliates. The New Credit Facility prohibits,
except in certain limited circumstances, the Company from making dividend
payments or other distributions on its outstanding shares of capital stock if
either (i) certain defaults under the New Credit Facility shall have occurred
and shall be continuing at the date of declaration, payment or making thereof or
would result therefrom or (ii) the New Notes or the Indenture prohibit such
distributions. The Indenture provides that, except in certain limited
circumstances, the Company will not, and will not permit any of its subsidiaries
to, make dividend payments or other distributions on the Company's outstanding
shares of capital stock unless at the time of such distribution: (a) no default
under the Indenture has occurred and is continuing or would occur as a
consequence thereof, (b) immediately after such distribution, the Company would
comply with certain interest coverage ratios and (c) such distributions do not
exceed an amount determined by reference to a formula consisting primarily of
prior distributions and payments, prior income and the proceeds of the sale of
securities. In addition, the New Credit Facility requires the Company to comply
with specified financial ratios, including minimum fixed charge coverage and
maximum leverage ratios. The Indenture prohibits the incurrence of indebtedness
unless, among other things, the Company complies with certain minimum interest
coverage ratios. Such limitations, together with the highly leveraged nature of
the Company, could limit corporate and operating activities, including the
Company's ability to respond to market conditions, to provide for unanticipated
capital expenditures or to take advantage of business opportunities.
INFLATION
Inflationary factors such as increases in the costs of ingredients,
purchased product, labor and corporate overhead may adversely affect the
Company's operating profit. In addition, store operating costs, including most
of the Company's retail store leases which require the Company to pay additional
rent based on a percentage of sales as well as taxes, insurance and maintenance
expenses, are subject to inflation. Although the Company's results to date have
not been significantly affected by inflation, there can be no assurance that a
high rate of inflation in the future would not have an adverse effect on the
Company and its operating results.
QUARTERLY RESULTS AND SEASONALITY
The Company's sales and earnings are highly seasonal with the second and
third fiscal quarters historically generating the highest sales and profits due
to increased consumer demand during the Christmas, Valentine's Day and Easter
holidays. The Company's sales generally have been lowest during the fourth
quarter, reflecting reduced demand for the Company's products during the summer
months and resulting in an EBITDA loss in this period. In light of the
seasonality of the Company's business, results for any interim period are not
necessarily indicative of the results that may be realized for the full year.
The Company's working capital requirements also fluctuate throughout the year
based on the Company's
18
<PAGE>
inventories in anticipation of sales. Such inventory requirements generally are
highest during the first four months of each fiscal year as the Company
increases its raw material and other inventories to accommodate anticipated
product sales for the Christmas, Valentine's Day and Easter holiday periods.
The following table summarizes the total net sales and EBITDA of the Company
by quarter for fiscal 1996 and 1997.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
NOV. 25, FEB. 24, MAY 25, AUG. 31, NOV. 30, MARCH 1, MAY 31, AUGUST 30,
1995 1996 1996 1996(1) 1996 1997(2) 1997(2) 1997
--------- --------- --------- --------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 22,436 $ 52,827 $ 27,112 $ 14,973 $ 24,892 $ 56,180 $ 25,905 $ 14,956
EBITDA....................... 303 15,875 2,317 (3,764) 1,061 17,888 1,987 (4,068)
</TABLE>
- --------------------------
(1) The fourth quarter of fiscal 1996 consisted of 14 weeks. All other quarters
presented above consisted of 13 weeks.
(2) Because of the timing of the 1997 Easter holiday, management estimates that
total net sales of $1.4 million and EBITDA of $0.6 million attributable to
1997 Easter sales were realized during the second quarter of fiscal 1997. If
Easter had occurred later in calendar year 1997, some or all of such total
net sales and EBITDA would have been realized in the third quarter of fiscal
1997, and therefore, would not have been included in the second quarter of
fiscal 1997. See "Selected Historical Financial Data."
YEAR 2000 COMPLIANCE
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14, Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000, which provides
that costs associated with modifying computer software for the year 2000 be
expensed as incurred. The Company is assessing the necessary modifications to
its computer software.
The Company is in the process of conducting a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue. The
Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the Year 1900 rather than the Year 2000. This could result in a system failure
or miscalculations. Management has assessed the Year 2000 issue and does not
believe that the costs to become Year 2000 compliant will be material.
19
<PAGE>
ITEM 8--FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The audited financial statements of Archibald Candy Corporation are included
in this report beginning at page F-1.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
During fiscal 1996 and fiscal 1997, there has been no change in the
Company's accountants or any disagreement between the management of the Company
and the Company's accountants on any matter of accounting principles or
practices or financial statement disclosures.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table and summary below set forth certain information with
respect to the directors and management employees of the Company as of November
26, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------------------------- --- -------------------------------------------------------------------
<S> <C> <C>
Thomas H. Quinn........................ 50 Chairman of the Board and Chief Executive Officer*
Ted A. Shepherd........................ 38 President and Chief Operating Officer*
Donna M. Snopek........................ 39 Vice President--Finance and Accounting and Secretary*
Alan W. Petrik......................... 44 Vice President--Operations
Michael A. Perrino..................... 43 Vice President--Specialty Division
Ricky L. Lelli......................... 46 Vice President--Manufacturing
John W. Jordan II...................... 50 Director*
Adam E. Max............................ 39 Director, Vice President, Assistant Treasurer and Assistant
Secretary*
Jeffrey Rosen.......................... 48 Director*
Robert A. Schmitz...................... 56 Director*
</TABLE>
- ------------------------
* Reflects positions held with both Holdings and the Company.
MR. QUINN has served as Chairman of the Board and Chief Executive Officer of
the Company since its acquisition by Holdings in 1991. Since 1988, Mr. Quinn has
been President, Chief Operating Officer and a director of Jordan Industries,
Inc., a diversified industrial holding company affiliated with TJC. Mr. Quinn is
the Chairman of the Board and Chief Executive Officer of American Safety Razor
Company, a director of AmeriKing, Inc. and a director of other privately held
companies.
MR. SHEPHERD has served as President and Chief Operating Officer of the
Company since 1996. Mr. Shepherd joined the Company in December 1993 as Vice
President of the Specialty Division and was named Vice President of Sales and
Marketing in 1995. Mr. Shepherd has over 15 years of general management, sales
and marketing experience in the confectionery industry. Prior to joining the
Company, Mr. Shepherd worked for 11 years at Mars, Incorporated and affiliated
entities, where he held a variety of sales, marketing and general management
positions.
MS. SNOPEK has served as Vice President of Finance and Accounting of the
Company since 1996 and as Secretary of the Company since 1995. Ms. Snopek joined
the Company in 1993 as Controller. Ms. Snopek has over 17 years experience in
various finance and accounting positions. Prior to joining the Company, Ms.
Snopek worked for the NutraSweet Company, where she served as Planning and
Analysis Director.
20
<PAGE>
MR. PETRIK has served as Vice President of Operations of the Company since
1996. Mr. Petrik has been with the Company for 17 years and has held various
senior management positions with the Company, including Vice President of
Manufacturing.
MR. PERRINO has served as Vice President of the Specialty Division of the
Company since joining the Company in January 1997. Mr. Perrino has over 17 years
of sales and marketing experience in the consumer products industry. Prior to
joining the Company, Mr. Perrino worked for Weaver Popcorn Company as Senior
Manager, Concession Snack and Retail Business.
MR. LELLI has served as Vice President of Manufacturing of the Company since
1997. Mr. Lelli joined the Company in 1994 as Director of Manufacturing. Mr.
Lelli has over 21 years of experience in the food processing industry. Prior to
joining the Company, Mr. Lelli worked for five years at The Masterson Company, a
confectionery company, where he served as Vice President of Manufacturing.
MR. JORDAN has served as Director of the Company since its acquisition by
Holdings in 1991. Mr. Jordan is a managing partner of The Jordan Company, a
private merchant banking firm which he founded in 1982. Mr. Jordan is also a
director of Jordan Industries, Inc., American Safety Razor Company, Carmike
Cinemas, Inc., AmeriKing, Inc., Winning Ways, Inc., Motor and Gears, Inc.,
Rockshox, Inc. and Apparel Ventures, Inc., all of which are affiliates of TJC,
as well as other privately-held companies.
MR. MAX has served as Director of the Company since its acquisition by
Holdings in 1991. Mr. Max is a principal of The Jordan Company, which he joined
in 1986. Mr. Max is also a director of Rockshox, Inc. and Great American Cookie
Company, Inc.
MR. ROSEN has been designated by the TCW Investors to serve as a Director of
the Company. Mr. Rosen is a partner in the law firm of O'Melveny & Meyers LLP,
counsel for TCW Capital.
MR. SCHMITZ has been designated by the TCW Investors as a Director of the
Company and has served as such since 1994. Mr. Schmitz is President of Quest
Capital Ltd. and a director of several privately held companies which are
affiliates of TCW Capital. Mr. Schmitz was formerly a managing director of Trust
Company of the West and TCW Capital.
21
<PAGE>
ITEM 11--EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid or accrued by the Company during each of the three most recent fiscal years
to the Company's chief executive officer and each of the executive officers of
the Company whose total annual salary and bonus for each of such fiscal years
exceeded $100,000 (collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------------------------
SECURITIES
UNDERLYING SARS
(#)
OTHER ANNUAL LONG-TERM
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) COMPENSATION AWARDS
- ---------------------------------------------- --------- ---------- ---------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Thomas H. Quinn, ............................. 1997 -- -- $ 52,000(1) --
Chairman of the Board and Chief Executive 1996 -- -- 52,000(1) --
Officer 1995 -- -- 52,000(1) --
Ted A. Shepherd, ............................. 1997 $ 221,583 $ 311,000 -- --
President and Chief Operating Officer (2) 1996 200,163 101,491 -- 7.00
1995 179,999 10,000 -- --
Donna M. Snopek, ............................. 1997 110,167 103,575 -- --
Vice President--Finance and Accounting and 1996 93,500 24,310 -- 3.00
Secretary (3) 1995 83,334 10,000 -- --
Joseph S. Secker, ............................ 1997 215,042 -- -- --
Chief Financial Officer (4) 1996 194,667 71,456 -- --
1995 187,000 0 -- --
</TABLE>
- ------------------------
(1) Reflects a consulting fee the Company paid Mr. Quinn in each of fiscal 1997,
1996 and 1995 in lieu of salary. See "Certain Transactions--Director's
Consulting Fee and TCW Investors' Expense Reimbursement."
(2) Reflects position held by Mr. Shepherd since March, 1996. In fiscal 1995,
Mr. Shepherd served as Vice President of Sales and Marketing.
(3) Reflects position currently held by Ms. Snopek. During fiscal 1996 and 1995,
Ms. Snopek served as Vice President--Controller of the Company. Ms. Snopek
has served as Secretary of the Company since fiscal 1995.
(4) Mr. Secker was the Chief Financial Officer of the Company during the first
month of fiscal 1997 and for all of fiscal 1996 and 1995. Mr. Secker
resigned from the Company in September 1996 to pursue other career
objectives. In connection with his resignation from the Company, Mr. Secker
received a payment equal to $100,000 in consideration for the cancellation
of 5.264 SARs previously granted to him and a continuation of his salary
through September 1997.
HOLDINGS' STOCK APPRECIATION RIGHTS PLAN
The Fannie May Holdings, Inc. Stock Appreciation Rights Plan (the "Plan")
was adopted by the Board of Directors of Holdings in October, 1991 to afford
selected employees of Holdings and its subsidiaries, including the Company, an
opportunity to participate in the potential economic appreciation of Holdings'
consolidated common stock equity value. A total of 52.75 stock appreciation
rights ("SARs") are authorized for grant under the Plan representing the
economic equivalent of 52.75 shares, or 5.0%, of
22
<PAGE>
Holdings Common Stock, on a fully diluted basis. As of August 30, 1997, 40 SARs
were outstanding under the Plan, with 28 SARs issued to current employees of the
Company and the balance held by former employees.
The Plan is administered under the direction of the Board of Directors of
Holdings. The Board selects the employees to receive SARs and the number of SARs
subject to each such grant and determines the exercise or vesting schedule for
each SAR granted. Pursuant to the Plan, each SAR entitles the holder to
surrender all or a portion thereof to Holdings upon the occurrence of any Cash
Out Event (as defined in the Plan) for a payment in an amount based upon the
value of one share of Holdings Common Stock, or a percentage thereof, determined
with reference to the applicable Cash Out Event. In certain cases, all such
payments may be deferred if Holdings is not permitted to pay the same by the
governing debt documents. The Plan generally defines a Cash Out Event to include
(i) certain public offerings of Holdings Common Stock, (ii) any merger,
combination, consolidation or similar transaction involving Holdings in which
the holders of a majority of the outstanding Holdings Common Stock immediately
prior to such transaction are not the holders of a majority of the ordinary
voting securities of the entity surviving such transaction, (iii) the sale of
all or substantially all of the assets of Holdings or (iv) the sale of a
majority of Holdings Common Stock. The Plan provides that in the event the
employment of any holder of an SAR terminates for (i) Cause (as defined in the
Plan) at any time or (ii) any other reason except death or disability within a
prescribed period (the "Vesting Period") following the grant of the subject SAR,
then all of such holder's rights in such SAR shall automatically terminate. The
Plan further provides that upon any termination of any SAR holder's employment
following the Vesting Period, such holder's SARs shall be subject to repurchase
by Holdings at the option of either Holdings or the holder. The price payable by
Holdings in connection with any such repurchase is the amount allocable to such
SAR by which the value of Holdings (determined by reference to certain book
value and earnings measures established by the Plan) exceeds the dollar amount
of all debt and preferred stock obligations of Holdings. At the Company's
option, such repurchase amounts may be paid by a note payable over three years.
SAR GRANTS IN FISCAL 1997
No SAR grants were made to the Named Executives during fiscal 1997.
AGGREGATED SAR EXERCISES IN FISCAL YEAR 1997 AND 1997 FISCAL YEAR-END SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED SARS AT VALUE OF UNEXERCISED IN-THE-
SHARES ACQUIRED FISCAL YEAR- END, MONEY SARS AT FISCAL YEAR- END,
ON EXERCISE VALUE REALIZED EXERCISABLE/ EXERCISABLE/UNEXERCISABLE
NAME (#)(1) ($) UNEXERCISABLE (#)(2) (#)(3)
- ------------------------------ --------------- ----------------- --------------------- -------------------------------
<S> <C> <C> <C> <C>
Thomas H. Quinn............... -- -- 0/0 $ 0/$0
Ted A. Shepherd............... -- -- 0/10.00 0/0
Donna M. Snopek............... -- -- 0/3.00 0/0
</TABLE>
- ------------------------
(1) No SARs were exercised during the fiscal 1997.
(2) Each SAR is exercisable only upon the occurrence of a Cash Out Event (as
defined in the Plan) or, in certain circumstances, following the termination
of the holder's employment with the Company.
(3) Based on the formulation specified in the SAR agreements of the respective
Named Executives. The actual amount payable upon exercise of an SAR is
subject to and not determinable until the occurrence of either (a) a Cash
Out Event or (b) in certain circumstances, the call or put election of
Holdings or the holder, respectively, following the termination of the
holder's employment with the Company.
23
<PAGE>
BENEFIT PLANS
The Company sponsors two noncontributory defined benefit pension plans, one
for eligible collective bargaining employees and one for eligible non-collective
bargaining employees (collectively, the "Pension Plans"). An employee of the
Company is generally eligible to become a participant in the applicable Pension
Plan upon attaining age 21 and completing a 12-month period of service to the
Company. Participants become vested in their accrued benefits under the
applicable Pension Plan based on a three to seven year graded vesting schedule
at the rate of 20% per year after three years of "Vesting Service" as defined in
the Pension Plans. The Company makes annual contributions to the Pension Plans
in amounts determined by the actuary for the Pension Plans.
The normal retirement age under the Pension Plans is the later of age 65 or
the fifth anniversary of participation for participants who enter the Plan on or
after September 1, 1988 and age 65 for participants who enter the Plan before
September 1, 1988. A reduced early retirement benefit is available when a
participant has attained age 55 and completed at least ten years of Vesting
Service. A participant's accrued annual benefit under the applicable Pension
Plan, starting at age 65, is the sum of (a) his accrued annual benefit, if any,
as of August 31, 1992 and (b) one-half of one percent of the compensation (as
defined) paid to the participant during each year of "Credited Service" (as
defined in the Pension Plans) after August 31, 1992. Compensation is generally
defined in the Pension Plans as the total cash remuneration paid for the 12
months ending August 31 of each year, and is limited by federal law to $150,000
per year (as adjusted for cost-of-living increases).
The estimated annual benefits payable to the Named Executives under the
Pension Plans upon retirement at normal retirement age, assuming continuous
service and constant salary to normal retirement date, is approximately $36,000,
in aggregate.
24
<PAGE>
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
OWNERSHIP OF CAPITAL STOCK
Holdings owns all of the Company's issued and outstanding capital stock. The
following table sets forth certain information with respect to the beneficial
ownership of the equity securities of Holdings as of August 30, 1997 by (i) each
person who is known by the Company to beneficially own more than 5% of the
outstanding shares of any class of Holdings' voting securities; (ii) each of the
directors and Named Executives of the Company and Holdings who own shares of
Holdings' equity securities; and (iii) all directors and executive officers of
the Company and Holdings, as a group, who own shares of Holdings' equity
securities.
<TABLE>
<CAPTION>
PERCENTAGE OF ALL
NUMBER OF PERCENTAGE OF OUTSTANDING VOTING
NAME (1) TITLE OF CLASS (2) SHARES CLASS (3) COMMON STOCK
- --------------------------------------------- -------------------- ------------ --------------- -----------------------
<S> <C> <C> <C> <C>
TCW Capital (3).............................. Class A Common 339.741000 48.9% 34.0%
Jordan Industries, Inc. (4).................. Class A Common 151.128000 21.7 15.1
MCIT (Existing Pool) Limited (5)............. Class A Common 100.752000 14.5 10.1
WCT Investment Pte Ltd. (6).................. Class A Common 82.573000 11.9 8.3
Mezzanine Capital (7)........................ Class A Common 21.069000 3.0 2.1
Leucadia Investors, Inc. (8)................. Class C Common 65.788625 22.3 6.6
John W. Jordan II (9)........................ Class A Common 151.128000 21.7 15.1
Class C Common 43.945960 14.9 4.4
Thomas H. Quinn (10)......................... Class A Common 151.128000 21.7 15.1
Class C Common 31.582500 10.7 3.2
Adam E. Max (11)............................. Class C Common 26.315450 8.9 2.6
TCW Special Placements Fund III (7).......... Class D Common 10.000000 100.0 1.0
All directors and executive officers of
Holdings as a group........................ Class C Common 101.84296 34.5 10.2
</TABLE>
- ------------------------
(1) For purposes herein, (a) the term "TCW Investors" consists of the
following: TCW Capital, WCT Investment Pte Ltd., Mezzanine Capital and TCW
Special Placements Fund III; and (b) the term "TJC Investors" includes,
among others, the following: Jordan Industries, Inc., Leucadia Investors,
Inc., MCIT (Existing Pool) Limited, John W. Jordan II, Thomas H. Quinn and
Adam E. Max.
(2) As of August 30, 1997, there were outstanding (i) 695.263 shares of
Holdings' Class A Common Stock, (ii) no shares of Holdings' Class B Common
Stock, (iii) 294.737 of Holdings' Class C Common Stock and (iv) 10 shares of
Holdings' Class D Common Stock, aggregating to 1,000 outstanding shares of
Holdings' Common Stock. Holdings' Class B Common Stock is non-voting (except
as provided by law and in certain other limited circumstances). Each of the
other classes of Holdings' Common Stock has one vote per share for the
election of directors and all other corporate matters, except as follows:
(i) the holders of Holdings' Class C Common Stock, as a class, subject to
the rights of holders of Holdings' Senior Preferred Stock and Class D Common
Stock described below, may elect a director who is entitled to exercise 51%
of the voting power of the Board of Directors of Holdings; (ii) upon the
occurrence of certain triggering events (including a failure by Holdings to
redeem its Junior Class A PIK Preferred Stock on November 1, 2001), the
holders of Holdings' Class D Common Stock, voting separately as a class,
have the right to elect an additional director and such director shall have
51% of the voting power of the Board of Directors of Holdings (unless, due
to a failure by Holdings to make a dividend payment or a mandatory
redemption payment with respect to its Senior Preferred Stock (whether or
not such payment is legally permissible), the holders of Holdings' Senior
Preferred Stock have elected a director who is entitled to exercise 51% of
the voting power of the Board of Directors of Holdings); and (iii) certain
events, such as amendments to Holdings' certificate of
25
<PAGE>
incorporation or by-laws which adversely affect the rights of holders and
certain merger and consolidation transactions, require the approval of a
majority of holders of each class voting separately as a class. No event has
occurred which would give either the holders of Holdings' Class D Common
Stock or Holdings' Senior Preferred Stock the right to elect a director who
is entitled to exercise 51% of the voting power of the Board of Directors of
Holdings. In addition, all holders of Holdings' Common Stock are parties to
the Shareholders Agreement (as defined). See "Certain Relationships and
Related Transactions--Shareholders Agreement." As of August 30, 1997, there
also were outstanding (A) 1,155.0437949 shares of Holdings' Senior Preferred
Stock (28.1717999 shares of which were issued on August 29, 1997 in partial
satisfaction of the dividend payable on such date), all of which is owned by
former owners of the Company through the Denton Thorne Trust A, the Denton
Thorne Trust B and the Denton Thorne Trust C, (B) 411.5785 shares of
Holdings' Junior Class A PIK Preferred Stock, approximately 36% of which is
owned by TJC Investors and approximately 64% of which is owned by TCW
Investors, and (C) 41.1578 shares of Holdings' Junior Class B PIK Preferred
Stock, approximately 80% of which is owned by TJC Investors. On November 1,
1997, Holdings issued 32.9263 shares of its Junior Class A PIK Preferred
Stock in full satisfaction of the dividend payable on Holdings' Junior Class
A PIK Preferred Stock on such date and 3.2926 shares of its Junior Class B
PIK Preferred Stock in full satisfaction of the dividend payable on
Holdings' Junior Class B PIK Preferred Stock on such date. Holdings'
certificate of incorporation provides that in the event that Holdings fails
to (i) pay on any dividend payment date the full amount of dividends then
accrued and unpaid on the Senior Preferred Stock or (ii) redeem all shares
of Holdings' Senior Preferred Stock then outstanding on the dividend payment
date occurring in 2001, the Board of Directors of Holdings shall
automatically be increased by one director and the holders of Holdings'
Senior Preferred Stock shall have the right to elect an individual to fill
such newly created directorship. The director elected by the holders of
Holdings' Senior Preferred Stock shall have 51% of the total voting power of
the Board of Directors of Holdings.
(3) The Class A Common Stock indicated as owned by TCW Capital is actually held
as follows: (i) 311.408 shares are held in the name of TCW Special
Placements Fund III; (ii) 23.74 shares are held in the name of TCW Capital,
as Investment Manager pursuant to an Investment Management Agreement dated
as of April 18, 1990; and (iii) 4.593 shares are held in the name of TCW
Capital, as Investment Management pursuant to an Investment Management
Agreement dated as of June 19, 1989. As of August 30, 1997, TCW Investors
owned 43.3% of the outstanding voting Holdings' Common Stock. As of August
30, 1997, TCW Investors also owned approximately 64% of Holdings' Junior
Class A PIK Preferred Stock. The principal address of TCW Capital is c/o
Trust Company of the West, Representative Office, 200 Park Avenue, Suite
2200, New York, New York 10166.
(4) As of November 26, 1997, Jordan Industries, Inc. and other TJC Investors
also owned approximately 36% of Holdings' Junior Class A PIK Preferred
Stock. The principal address of Jordan Industries, Inc. is ArborLake Center,
1751 Lake Cook Road, Suite 550, Deerfield, Illinois 60015. Mr. Jordan is
Chairman of the Board and Chief Executive Officer of Jordan Industries, Inc.
Mr. Quinn is President, Chief Operating Officer and a Director of Jordan
Industries, Inc.
(5) As of November 26, 1997, MCIT (Existing Pool) Limited also owned 63.5007
shares of Holdings' Junior Class A PIK Preferred Stock. The principal
address of MCIT (Existing Pool) Limited is c/o The Jordan Company, 9 West
57th Street, New York, New York 10019.
(6) As of November 26, 1997, WCT Investment Pte Ltd. also owned 50.4744 shares
of Holdings' Junior Class A PIK Preferred Stock. In connection with its
acquisition in 1992 from certain affiliates of TCW Capital of shares of
Holdings' Class A Common Stock and Junior Class A PIK Preferred Stock, WCT
Investment Pte Ltd. granted an irrevocable proxy to TCW Special Placements
Fund III for the purpose of approving or consenting to certain actions by
Holdings. The principal address of WCT Investment Pte Ltd. is c/o Government
of Singapore Investment Corporation, 255 Shoreline Drive, Suite 600, Redwood
City, California 94065.
26
<PAGE>
(7) Mezzanine Capital is affiliated with TCW Capital. As of November 26, 1997,
Mezzanine Capital also owned 13.3686 shares of Holdings' Junior Class A PIK
Preferred Stock. The principal address for each of Mezzanine Capital and TCW
Special Placements Fund III is c/o TCW Special Placements Fund III, 865 S.
Figueroa St., Suite 1800, Los Angeles, California 90017.
(8) As of November 26, 1997, Leucadia Investors, Inc. also owned 11.1125 shares
of Holdings' Junior Class B PIK Preferred Stock. The principal address of
Leucadia Investors, Inc. is 315 Park Avenue South, New York, New York 10010.
(9) Information presented includes 151.128 shares of Holdings' Class A Common
Stock held by Jordan Industries, Inc. (Mr. Jordan is Chairman of the Board
and Chief Executive Officer of Jordan Industries, Inc.) and 43.94596 shares
of Holdings' Class C Common Stock held by The John W. Jordan II Revocable
Trust, of which Mr. Jordan is trustee. Mr. Jordan's address is c/o The
Jordan Company, 9 West 57th Street, New York, New York 10019.
(10) Information presented includes 151.128 shares of Holdings Class A Common
Stock held by Jordan Industries, Inc. (Mr. Quinn is the President, Chief
Operating Officer and a director of Jordan Industries, Inc.). Mr. Quinn's
address is c/o Archibald Candy Corporation, 1137 West Jackson Boulevard,
Chicago, Illinois 60607.
(11) As of November 26, 1997, Mr. Max also owned 4.4451 shares of Holdings'
Junior Class B PIK Preferred Stock. The address of Mr. Max is c/o The
Jordan Company, 9 West 57th Street, New York, New York 10019.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT CONSULTING AGREEMENT AND INVESTMENT BANKING FEES
Since the formation of Holdings and its acquisition of the Company in 1991,
the Company has paid (or accrued), pursuant to a Management Consulting Agreement
dated as of October 30, 1991 between Holdings and TJC Management Corp. (the
"Original Management Consulting Agreement") certain fees to TJC Management Corp.
and its designees, affiliates of the TJC Investors, in exchange for management,
consulting, investment banking and similar services to the Company and Holdings
and has reimbursed TJC Management Corp. for expenses incurred in connection with
the performance of such services. For fiscal 1994, 1995, 1996 and 1997 (through
July 2, 1997), the Company had accrued $273,000, $364,000, $364,000 and
$304,000, respectively, representing fees due to TJC Management Corp. under the
Original Management Consulting Agreement for an aggregate amount of $1,305,000.
The Company paid all such accrued and unpaid amounts out of the proceeds of the
Offering. Concurrently with the Offering, the Original Management Consulting
Agreement was terminated and Holdings simultaneously entered into a new, five
year Management Consulting Agreement with TJC Management Corp. (the "Management
Consulting Agreement"), pursuant to which TJC Management Corp. or its designee
will receive a fixed fee for management, consulting and similar services in the
amount of $364,000 per annum plus any out-of-pocket expenses and additional fees
for any investment banking services rendered. In addition, affiliates of the TCW
Investors will be paid $48,000 in aggregate per year as reimbursement of
expenses. See "--Director's Consulting Fee and TCW Investors' Expense
Reimbursement." The Company believes that the terms of the Management Consulting
Agreement are comparable to the terms that it would obtain from disinterested
third parties for comparable services.
Pursuant to the terms of an Investment Banking Fee Agreement dated as of
October 30, 1991 (and amended in September 1992) between Holdings and TJC
Management Corp., an affiliate of the TJC Investors (the "Investment Banking Fee
Agreement"), TJC Management Corp. earned investment banking fees of $2.0 million
in aggregate in connection with Holdings' acquisition of the Company in 1991, of
which $1.5 million was paid at that time. The Company paid $0.5 million of such
accrued but unpaid fees out of the proceeds of the Offering. The Company
believes that the terms of the Investment Banking Fee
27
<PAGE>
Agreement were comparable to the terms that it could have obtained from
disinterested third parties for comparable services.
TAX SHARING AND MANAGEMENT AGREEMENT
Concurrently with the closing of the Offering, Holdings and the Company
entered into a Tax Sharing and Management Consulting Agreement ("Tax Sharing and
Management Agreement"), pursuant to which the Company agreed to advance to
Holdings (i) so long as Holdings files consolidated income tax returns that
include the Company, payments for the Company's share of income taxes, assuming
the Company is a stand-alone entity and without giving effect to any
consolidated net operating loss carry forwards of Holdings accumulated through
August 30, 1997; (ii) an annual fee of $412,000 for management, consulting,
investment banking and similar services, plus an amount equal to the expenses
incurred by Holdings in connection with the performance of such services, (iii)
investment banking fees incurred by Holdings on behalf of the Company with the
TJC Investors in connection with (a) any future recapitalizations, acquisitions
or any similar transaction, which fee shall not exceed 2% of the transaction
value, and (b) any financing transactions, which fee shall not exceed 1% of the
transaction value; (iv) amounts sufficient for Holdings to pay fees, expenses
and indemnities to directors of Holdings in accordance with its bylaws and
indemnification agreements in effect as of the closing of the Offering; and (v)
payments to or on behalf of Holdings in respect of franchise or similar taxes
and governmental charges incurred by it relating to the business, operations or
finances of the Company. The Company believes that the terms of the management
services provided under the Tax Sharing and Management Agreement are comparable
to the terms that it would obtain from disinterested third parties for
comparable services. The Company paid Holdings $68,000 in management consulting
fees in fiscal 1997 pursuant to the Tax Sharing and Management Agreement.
PARTICIPATION BY JORDAN INDUSTRIES IN OLD CREDIT FACILITY
In June 1995, in connection with an amendment to the Old Credit Facility,
and contemporaneously with its acquisition of certain securities that had been
issued under the Securities Purchase Agreement, Jordan Industries, Inc. ("Jordan
Industries"), which is one of the TJC Investors, acquired a $7.0 million
undivided participating interest in the Term Loan under the Old Credit Facility
and agreed to acquire additional participating interests therein under certain
circumstances in an amount not to exceed $3.0 million. Jordan Industries did not
acquire any such additional interests. Under the terms of the participation
agreement, Jordan Industries was not entitled to repayment of any principal or
interest on its portion of the Term Loan until all other lenders under the Term
Loan were paid in full. The repayment of the Old Credit Facility out of the net
proceeds of the Offering satisfied the principal and interest owing to Jordan
Industries ($8.3 million, as of July 2, 1997) with respect to its participation
in the Old Credit Facility. Jordan Industries is not a participant in the New
Credit Facility, but continues to hold Class A Preferred Stock and Holdings
Common Stock.
SUBORDINATED NOTES
Certain of the TJC Investors, including Jordan Industries, and the TCW
Investors owned $12.5 million and $22.5 million, respectively, in aggregate
principal amount of Subordinated Notes which were prepaid in their entirety out
of the proceeds of the Offering. As a result of such prepayment, the holders of
the Subordinated Notes received a 5.0% prepayment premium with the TCW Investors
receiving $1,125,000 and the TJC Investors receiving $625,000.
PREFERRED STOCK
As of August 30, 1997, the TCW Investors owned approximately 64% of the
Class A Preferred Stock and the TJC Investors owned approximately 36% of the
Class A Preferred Stock and approximately 80% of the Class B Preferred Stock,
all of which is subject to redemption.
28
<PAGE>
DIRECTOR'S CONSULTING FEE AND TCW INVESTORS' EXPENSE REIMBURSEMENT
In each of fiscal 1995, 1996 and 1997, the Company paid Mr. Quinn a
consulting fee equal to $52,000 in lieu of a salary in exchange for services
rendered to the Company. Mr. Quinn consulted with the Company with respect to
its financial and business affairs, its relationships with its lenders and
stockholders, and the operation and expansion of its business. Such fee is
expected to continue in the future and is subject to reasonable increases.
Pursuant to the Tax Sharing and Management Agreement, certain affiliates of the
TCW Investors who are members of the Board of Directors will receive $48,000 in
the aggregate per year as reimbursement of expenses incurred in performing
financial and management consulting services for the Company. See "--Tax Sharing
and Management Agreement."
SHAREHOLDERS AGREEMENT
In connection with the formation of Holdings and its acquisition of the
Company in 1991, TJC Investors and TCW Investors and the other initial investors
entered into an agreement (the "Shareholders Agreement"), which contains certain
provisions relating to the governance of the Company and Holdings and
restrictions on, and rights in the event of, the transfer of Holdings' Common
Stock. Among other things, the Shareholders Agreement provides that, subject to
certain limited exceptions, (i) the composition of the Board of Directors of
Holdings and the Company shall be identical and (ii) the number of directors of
Holdings and the Company shall be five, with the TJC Investors nominating three
directors and the TCW Investors nominating two directors. The Shareholders
Agreement also provides that upon the occurrence of certain triggering events
(unless the TCW Investors as holders of Holdings' Class D Common Stock have
already elected their director with 51% of the voting power of the Board of
Directors of Holdings), Holdings shall not, without the approval of 60% of the
outstanding Holdings' Common Stock (other than Holdings' Class B Common Stock),
(a) enter into any transaction of merger, consolidation or amalgamation, or
liquidate, wind up or dissolve itself, (b) convey, sell, lease, transfer or
otherwise dispose of in a transaction or related series of transactions 25% or
more of the property, business or assets of Holdings and its subsidiaries, (c)
acquire by purchase or otherwise the business or any assets of, or stock or
other evidences of beneficial ownership of, any person with a purchase price in
excess of 20% of the then net worth of Holdings and its subsidiaries or (d)
issue certain equity securities or redeem equity shares. The Shareholders
Agreement further provides that without the approval of a director nominated by
the TCW Investors, neither Holdings nor any of its subsidiaries shall (a) make
any amendment to Holdings' certificate of incorporation or by-laws or (b) enter
into any transaction with any affiliate, except for transactions entered into in
the ordinary course of business in good faith and on fair and reasonable terms
no less favorable to Holdings than Holdings would be able to obtain in a
comparable arm's-length transaction with an unrelated third party. In addition,
the Shareholders Agreement restricts the transfer of Holdings' Common Stock by
providing, in part, that any subsequent holder of Holdings' Common Stock must
agree to be bound by all the provisions of the Shareholders Agreement. In the
event of a transfer of Holdings' Common Stock other than to a permitted
transferee, the Shareholders Agreement provides each other holder of Holdings
Common Stock with certain tag-along rights and preemptive rights.
In connection with its acquisition in 1992 from certain affiliates of TCW
Capital of shares of Holdings' Class A Common Stock and Junior Class A PIK
Preferred Stock, WCT Investment Pte Ltd. granted an irrevocable proxy to TCW
Special Placements Fund III for the purpose of approving or consenting to
certain actions by Holdings, including mergers, consolidations, acquisitions of
other entities, recapitalizations, issuances of equity securities and
modifications of Holdings' business.
29
<PAGE>
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K.
1. Report of Independent Auditors
Balance Sheets as of August 31, 1996 and August 30, 1997.
Statements of Operations for the years ended August 26, 1995, August 31,
1996 and August 30, 1997.
Statement of Changes in Shareholder's Equity (Deficit) for the years
ended August 26, 1995, August 31, 1996 and August 30, 1997.
Statements of Cash Flows for the years ended August 26, 1995, August 31,
1996 and August 30, 1997.
Notes to Financial Statements.
2. Other Financial Information. None.
3. The exhibits listed in the following "Index to Exhibits" are filed with
this Form 10-K or incorporated by reference as set forth below.
(b) The following reports on Form 8-K were filed during the fiscal quarter ended
August 30, 1997.
None.
(c) The exhibits listed in the following "Index to Exhibits" are filed with this
Form 10-K or incorporated by reference as set forth below.
(d) Additional Financial Statement Schedules.
None.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File Nos. 333-33751))
3.2 Amended and Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File
Nos. 333-33751))
4.1 Form of the New Notes (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (File Nos. 333-33751)
4.2 Indenture dated as of July 2, 1997 between the Company and the Trustee
(incorporated by reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-1 (File Nos. 333-33751))
4.3 Pledge and Security Agreement dated as of July 2, 1997 between the Company
and the Trustee (incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-1 (File Nos. 333-33751))
4.4 Intellectual Property Security Agreement dated as of July 2, 1997 between
the Company and the Trustee (incorporated by reference to Exhibit 4.7 to
the Company's Registration Statement on Form S-1 (File Nos. 333-33751))
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
4.5 Mortgage, Security Agreement, Assignment of Leases and Rents, Fixture
Filing and Financing Statement dated July 2, 1997 relating to the
Company's Chicago, Illinois manufacturing and headquarters facility
(incorporated by reference to Exhibit 4.8 to the Company's Registration
Statement on Form S-1 (File Nos. 333-33751))
4.6 Open-End Mortgage, Security Agreement, Assignment of Leases and Rents,
Fixture Filing and Financing Statement dated July 2, 1997 relating to
the Company's Bensalem, Pennsylvania warehouse and distribution facility
(incorporated by reference to Exhibit 4.9 to the Company's Registration
Statement on Form S-1 (File Nos. 333-33751))
4.7 Amended and Restated Credit Agreement dated as of July 2, 1997 among the
Company, the lenders signatory thereto and The First National Bank of
Chicago, as Agent (incorporated by reference to Exhibit 4.10 to the
Company's Registration Statement on Form S-1 (File Nos. 333-33751))
4.8 Amended and Restated Security Agreement dated as of July 2, 1997 between
the Company and The First National Bank of Chicago, as Agent
(incorporated by reference to Exhibit 4.11 to the Company's Registration
Statement on Form S-1 (File Nos. 333-33751))
4.9 Form of SAR Agreements (incorporated by reference to Exhibit 4.12 to the
Company's Registration Statement on Form S-1 (File Nos. 333-33751))
4.10 Lease dated April 17, 1997 between Chicago Midway Joint Venture, as
landlord, and the Company, as tenant, relating to the Company's Chicago,
Illinois warehouse and distribution facility (incorporated by reference
to Exhibit 4.13 to the Company's Registration Statement on Form S-1
(File Nos. 333-33751))
10.1 Indemnification Agreements dated as of July 2, 1997 between the Company
and each of its directors and executive officers (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (File Nos. 333-33751))
10.2 Securities Purchase Agreement dated as of October 30, 1991 among Holdings,
the Company and the Purchasers (as defined therein), together with First
Amendment thereto dated as of September 18, 1992, Second Amendment
thereto dated as of August 12, 1994 and Third Amendment thereto dated as
of July 2, 1997 (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (File Nos. 333-33751))
10.3 Shareholders Agreement dated as of October 30, 1991 among the holders of
the Company's common stock, together with First Amendment thereto dated
as of July 2, 1997 (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (File Nos. 333-33751))
10.4 Tax Sharing and Management Consulting Agreement dated as of July 2, 1997
between the Company and Holdings (incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1 (File Nos.
333-33751))
10.5 Management Consulting Agreement by and between Holdings and TJC Management
Corp. dated as of July 2, 1997 (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1 (File Nos.
333-33751))
10.6 Supply Agreement dated February 11, 1997 between the Company and Nestle
Food Company (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File Nos. 333-33751))
10.7 Supply Agreement dated June 24, 1997 between the Company and ADM Cocoa
(incorporated by reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (File Nos. 333-33751))
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
10.8 Supply Agreement dated January 22, 1997 between the Company and Grace
Cocoa Chocolate Americas (incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 (File Nos. 333-33751))
10.9 Supply Agreement dated September 5, 1996 between the Company and The
Western Sugar Company (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (File Nos. 333-33751))
10.10 Supply Agreement dated March 25, 1997 between the Company and Cerestar
USA, Inc. (incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (File Nos. 333-33751))
12.1 Statements re: Computation of Earnings to Fixed Charges (incorporated by
reference to Exhibit 12.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended August 30, 1997 (File Nos. 333-33751))
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to
the Company's Registration Statement on Form S-1 (File Nos. 333-33751))
27.1 Financial Data Schedule (incorporated by reference to Exhibit 27.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended August
30, 1997 (File Nos. 333-33751))
</TABLE>
32
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
ARCHIBALD CANDY CORPORATION
Report of Independent Auditors........................................................................... F-2
Balance Sheets as of August 31, 1996 and August 30, 1997................................................. F-3
Statements of Operations for the years ended August 26, 1995, August 31, 1996, and
August 30, 1997........................................................................................ F-4
Statement of Changes in Shareholder's Equity (Deficit) for the years ended August 26, 1995, August 31,
1996, and August 30, 1997.............................................................................. F-5
Statements of Cash Flows for the years ended August 26, 1995, August 31, 1996, and
August 30, 1997........................................................................................ F-6
Notes to Financial Statements............................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Archibald Candy Corporation
We have audited the accompanying balance sheets of Archibald Candy
Corporation as of August 31, 1996 and August 30, 1997 and the related statements
of operations, shareholder's equity (deficit), and cash flows for the fiscal
years ended August 26, 1995, August 31, 1996, and August 30, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1995, 1996, and 1997 financial statements referred to
above present fairly, in all material respects, the financial position of
Archibald Candy Corporation as of August 31, 1996 and August 30, 1997, and the
results of its operations and its cash flows for the fiscal years ended August
26, 1995, August 31, 1996, and August 30, 1997, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
October 20, 1997
Chicago, Illinois
F-2
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
BALANCE SHEETS
AS OF AUGUST 31, 1996 AND AUGUST 30, 1997
<TABLE>
<CAPTION>
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 380 $ 15,801
Accounts receivable, net........................ 329 576
Inventories..................................... 18,638 18,965
Prepaid expenses and other current assets....... 1,083 791
------------ ------------
Total current assets.............................. 20,430 36,133
Due from affiliate................................ 543 825
Property, plant, and equipment.................... 20,651 20,330
Goodwill, less accumulated amortization of $5,376
($4,443 in 1996)................................ 32,893 31,960
Noncompete agreements and other intangibles, less
accumulated amortization of $90 ($72 in 1996)... 145 127
Deferred financing fees, less accumulated
amortization of $108 ($1,613 in 1996)........... 1,701 4,166
Other assets...................................... 2,305 2,119
------------ ------------
Total assets................................ $ 78,668 $ 95,660
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit........................ $ 9,100 $ --
Accounts payable................................ 4,467 4,769
Accrued liabilities............................. 3,846 4,964
Accrued management fee.......................... 1,501 --
Payroll and related liabilities................. 1,717 2,025
Current portion of long-term debt and capital
lease obligations............................. 4,063 376
------------ ------------
Total current liabilities......................... 24,694 12,134
Long-term debt, less current portion.............. 68,872 100,000
Capital lease obligations, less current portion... 550 145
Shareholder's equity (deficit):
Common stock, $0.01 par value:
Authorized-- 25,000 shares....................
Issued and outstanding--19,200 shares......... -- --
Additional paid-in capital...................... 18,700 18,700
Accumulated deficit............................. (34,148) (35,319)
------------ ------------
Total shareholder's equity (deficit).............. (15,448) (16,619)
------------ ------------
Total liabilities and shareholder's equity
(deficit)....................................... $ 78,668 $ 95,660
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 26, 1995, AUGUST 31, 1996, AND AUGUST 30, 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales.................................................................... $ 115,555 $ 117,348 $ 121,933
Cost of sales, excluding depreciation........................................ 40,246 41,010 42,284
Selling, general, and administrative expenses, excluding depreciation........ 61,544 61,120 62,442
Depreciation and amortization expense........................................ 6,651 5,135 4,319
Amortization of goodwill and other intangibles............................... 3,348 1,672 1,613
Management fees and other fees............................................... 476 466 474
---------- ---------- ----------
Operating income (loss)...................................................... 3,290 7,945 10,801
Other (income) and expense:
Interest expense........................................................... 9,237 9,455 9,235
Interest and other income and expense...................................... (275) (444) (411)
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item..................... (5,672) (1,066) 1,977
Provision (benefit) for income taxes......................................... (68) 349 250
---------- ---------- ----------
Income (loss) before extraordinary item...................................... (5,604) (1,415) 1,727
Extraordinary item--Loss from early extinguishment of debt................... -- -- 2,898
---------- ---------- ----------
Net loss..................................................................... $ (5,604) $ (1,415) $ (1,171)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ ADDITIONAL SHAREHOLDER'S
NUMBER OF PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
----------- ----------- ----------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1994......................... 19,200 $ -- $ 18,700 $ (27,129) $ (8,429)
Net loss........................................... -- -- -- (5,604) (5,604)
----------- ----------- ----------- ------------ -------------
Balance at August 26, 1995......................... 19,200 -- 18,700 (32,733) (14,033)
Net loss........................................... -- -- -- (1,415) (1,415)
----------- ----------- ----------- ------------ -------------
Balance at August 31, 1996......................... 19,200 -- 18,700 (34,148) (15,448)
Net loss........................................... -- -- -- (1,171) (1,171)
----------- ----------- ----------- ------------ -------------
Balance at August 30, 1997......................... 19,200 $ -- $ 18,700 $ (35,319) $ (16,619)
----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ------------ -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 26, 1995, AUGUST 31, 1996, AND AUGUST 30, 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................................................... $ (5,604) $ (1,415) $ (1,171)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................ 9,999 6,807 5,932
Net gain on disposal of property, plant, and equipment....................... -- (441) --
Write-off of deferred financing fees......................................... -- -- 1,148
Changes in operating assets and liabilities:
Accounts receivable, net................................................... (382) 355 (247)
Due from affiliate......................................................... -- (543) (282)
Inventories................................................................ (1,863) (273) (327)
Prepaid expenses and other current assets.................................. (793) (263) (19)
Other assets............................................................... 380 5 186
Accounts payable and accrued liabilities................................... 2,814 (115) (1,301)
---------- --------- ----------
Net cash provided by operating activities...................................... 4,551 4,117 3,919
INVESTING ACTIVITIES
Purchase of property, plant, and equipment..................................... (2,325) (2,280) (3,688)
Proceeds from sale of property, plant, and equipment........................... 367 1,159 --
---------- --------- ----------
Net cash used in investing activities.......................................... (1,958) (1,121) (3,688)
FINANCING ACTIVITIES
Proceeds from long-term debt................................................... 34,200 -- 100,000
Net decrease in revolving line of credit....................................... (2,500) (1,900) (9,100)
Repayments of long-term debt................................................... (34,450) (900) (71,086)
Payments of capital lease obligations.......................................... (229) (269) (350)
Costs related to loan agreement................................................ (491) (29) (4,274)
---------- --------- ----------
Net cash provided by (used in) financing activities............................ (3,470) (3,098) 15,190
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents........................... (877) (102) 15,421
Cash and cash equivalents at beginning of year................................. 1,359 482 380
---------- --------- ----------
Cash and cash equivalents at end of year....................................... $ 482 $ 380 $ 15,801
---------- --------- ----------
---------- --------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Acquisition of equipment under capital lease agreements........................ $ 272 $ 214 $ --
---------- --------- ----------
---------- --------- ----------
SUPPLEMENTAL SCHEDULE OF CASH TRANSACTIONS
Interest paid.................................................................. $ 6,566 $ 10,631 $ 8,934
---------- --------- ----------
---------- --------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
AUGUST 30, 1997
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The Company is a manufacturer and retailer of boxed chocolates and other
confectionery items. The Company sells its Fannie May and Fanny Farmer brand
candies in 322 Company-operated stores and approximately 6,000 third-party
retail outlets as well as through quantity order, mail order and fundraising
programs primarily in the Midwestern and Eastern United States.
In 1995, the Company changed its fiscal year-end to the last Saturday in
August from the last day in August. The fiscal year ended August 31, 1996, had
53 weeks while the fiscal year ended August 30, 1997, had 52 weeks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventories are
valued primarily at either average or first in, first out (FIFO) cost.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation and
amortization are determined over the estimated useful lives of the assets using
the straight-line method for both financial reporting and tax purposes.
Leasehold improvements at various locations are amortized over a predetermined
life, considering the term of each lease.
INTANGIBLES AND DEFERRED COSTS
Goodwill is amortized on a straight-line basis over a 40-year period.
Deferred financing costs are amortized over the terms of the loans.
The Company evaluates whether indicators of impairment of long-lived assets,
including goodwill, are present, and if such indicators are present, the Company
determines whether the sum of the estimated undiscounted future cash flows
attributable to such assets is less than their carrying amounts. If so, the
Company would recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. The Company has determined that no
impairment loss has occurred related to long-lived assets.
INCOME TAXES
Income taxes are accounted for under Financial Accounting Standards Board
(FASB) Statement 109, ACCOUNTING FOR INCOME TAXES. Statement 109 requires the
liability method for financial accounting and reporting for income taxes. Under
this method, a current tax asset or liability is recognized for the
F-7
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimated taxes payable or refundable on tax returns for the current year, and
deferred tax assets or liabilities are recognized for the estimated future tax
effects attributable to temporary differences and carryforwards using the
enacted rates and laws that will be in effect when the differences are expected
to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ADVERTISING COSTS
The Company expenses advertising costs as incurred, except for the costs
associated with the development of print advertising which are deferred and
expensed upon first showing. Advertising expense was $3,170, $2,733, and $2,853
for 1995, 1996, and 1997, respectively. At August 31, 1996 and August 30, 1997,
the Company had $388 and $240, respectively, of print advertising costs which
are included in prepaids and other current assets in the accompanying balance
sheets.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
3. INVENTORIES
Inventories at August 31, 1996 and August 30, 1997 are comprised of the
following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Raw materials......................................................... $ 8,101 $ 7,688
Work in process....................................................... 168 218
Finished goods........................................................ 10,369 11,059
---------- ----------
$ 18,638 $ 18,965
---------- ----------
---------- ----------
</TABLE>
F-8
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at August 31, 1996 and August 30, 1997 are
comprised of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Land.................................................................. $ 3,539 $ 3,539
Machinery and equipment............................................... 13,569 15,324
Buildings and improvements............................................ 15,208 15,974
Furniture and fixtures................................................ 2,323 2,531
Leasehold improvements................................................ 10,704 11,659
---------- ----------
45,343 49,027
Less: Accumulated depreciation........................................ (24,692) (28,697)
---------- ----------
$ 20,651 $ 20,330
---------- ----------
---------- ----------
</TABLE>
5. BENEFIT PLANS
The Company maintains noncontributory pension plans for substantially all
employees. The Company intends to fund pension costs in amounts not less than
amounts required by the Employee Retirement Income Security Act of 1974.
The net periodic pension cost recognized as expense for the years ended
August 26, 1995, August 31, 1996, and August 30, 1997, consists of the
following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Service cost...................................................... $ 350 $ 350 $ 370
Interest cost..................................................... 366 379 389
Return on plan assets............................................. (531) (710) (1,700)
Other............................................................. 123 267 1,248
--------- --------- ---------
$ 308 $ 286 $ 307
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-9
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. BENEFIT PLANS (CONTINUED)
The following table sets forth the Plans' funded status and amounts
recognized in the Company's consolidated balance sheets at August 31, 1996 and
August 30, 1997:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Actuarial present value of:
Accumulated benefit obligations:
Vested................................................................. $ 3,630 $ 3,677
Nonvested.............................................................. 810 739
--------- ---------
4,440 4,416
Present value of future compensation..................................... 384 555
--------- ---------
4,824 4,971
Assets relating to such benefits:
Market value of funded assets, primarily invested in money market and
equity securities...................................................... 6,001 6,980
--------- ---------
Overfunded projected benefit obligation.................................. 1,177 2,009
Unrecognized (gain) loss................................................. 177 (963)
--------- ---------
Pension asset recorded as a long-term asset................................ $ 1,354 $ 1,046
--------- ---------
--------- ---------
</TABLE>
The assumptions used in determining the present value of benefits were:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Discount rate................................................................... 8.0 % 8.0 %
Expected rate of return on assets............................................... 8.0 8.0
Rate of increase in compensation................................................ 3.0 4.0
</TABLE>
The Company also maintains 401(k) and profit-sharing trust plans for
substantially all employees. Effective January 1, 1994, the Company amended the
Plan to include the 401(k) deferral option for the employees. The Company allows
full-time, regular employees to elect to participate in the 401(k) portion of
the plans upon hire or upon the next entry date of March 1 or September 1 upon
the attainment of age 21. Employees can also become participants in the
profit-sharing portion of the plans on March 1 or September 1 upon the
attainment of the age of 21 and the completion of one year and at least 1,000
hours of service. Employees may contribute 1% to 15% of their compensation. The
Company contributes to the Plans a discretionary amount as approved by the Board
of Directors. In 1995, 1996, and 1997, the total Company expense related to the
Plans was $75 annually.
F-10
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LEASES
The Company leases the majority of its retail stores under operating leases.
Rent expense, for the years ended August 26, 1995, August 31, 1996, and August
30, 1997, consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Fixed minimum.................................................... $ 9,270 $ 8,390 $ 7,867
Rent based on percentage of sales................................ 563 523 672
--------- --------- ---------
$ 9,833 $ 8,913 $ 8,539
--------- --------- ---------
--------- --------- ---------
</TABLE>
During 1995 and 1996, the Company entered into capital leases for machinery
and equipment of $272 and $214, respectively.
Future minimum lease payments required under the noncancellable leases
having lease terms in excess of one year at August 30, 1997, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- -----------
<S> <C> <C>
1998..................................................................... $ 6,670 $ 410
1999..................................................................... 5,070 107
2000..................................................................... 3,613 33
2001..................................................................... 2,291 21
2002..................................................................... 1,330 --
Thereafter............................................................... 1,317 --
----------- -----
20,291 571
Interest................................................................. -- (50)
----------- -----
$ 20,291 $ 521
----------- -----
----------- -----
</TABLE>
7. DEBT
Debt at August 31, 1996 and August 30, 1997, is comprised of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Revolving credit agreement............................................. $ 9,100 $ --
Senior secured notes................................................... -- 100,000
Senior term loan A..................................................... 29,850 --
Senior term loan B..................................................... 7,000 --
Subordinated notes..................................................... 35,000 --
--------- ----------
80,950 100,000
Less: Current portion.................................................. 12,842 --
--------- ----------
$ 68,108 $ 100,000
--------- ----------
--------- ----------
</TABLE>
On July 2, 1997, the Company sold $100 million in face amount of Senior
Secured notes through a private offering and retired its existing debt (except
capital leases) and related accrued interest. As a result
F-11
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
of this refinancing, the Company recognized an extraordinary charge of $2,898
related to deferred financing fees and prepayment penalties for the original
credit agreements.
Senior term loan B and a portion of the subordinated notes were held by
affiliates of The Jordan Company (TJC) and the balance of the subordinated notes
were held by affiliates of TCW Capital (Note 9). The prepayment penalty of
$1,750 for the original credit agreements was paid to affiliates of both TJC and
TCW Capital.
The Senior Secured notes bear interest at 10.25% and mature on July 1, 2004.
Interest is payable semiannually beginning January 1, 1998. The notes are
secured by certain of the Company's equipment, fixtures, and general intangibles
and mortgages on certain real property. The indenture contains covenants that
limit the ability of the Company to: (i) incur additional indebtedness or create
liens, (ii) sell certain assets, (iii) merge, consolidate, or sell substantially
all of the Company's assets, (iv) make restricted payments such as dividends,
purchases of its capital stock, or make payments on behalf of Holdings, and (v)
conduct transactions with affiliates.
Prior to July 1, 2000, the Company may redeem up to $33.0 million of the
Senior Secured notes at a redemption price of 110.25% with proceeds from one or
more public equity offerings. The Company may redeem the Senior Secured notes,
in whole or in part, at a redemption price of 105.125% beginning July 1, 2001,
102.563% in the year beginning July 1, 2002, and 100% beginning July 1, 2003.
During the term of the indenture, in the event of a change in control, whereby
there is a sale or transfer of substantially all the Company's assets or stock,
a merger, consolidation, or change in Board of Directors, the Company is
required to repurchase all the Senior Secured notes at a purchase price of 101%.
In November 1997, the Company exchanged these notes for new senior secured
notes which have been registered under the Securities Act of 1933. These new
notes are substantially identical (including principal amount, interest rate,
maturity, security, and ranking) to the form and terms of the old notes for
which they were exchanged.
On July 2, 1997, the Company amended its credit facility. The amended
facility provides for revolving loans up to $20.0 million (including a $2.0
million letter of credit facility), based on eligible assets, as defined, and
expires July 1, 2000. Borrowings under the credit facility bear interest at
prime (8.5% at August 30, 1997) plus a margin or the Eurodollar rate (5.5% at
August 30, 1997) plus a margin; the interest rate margins fluctuate based on the
Company's leverage ratio. There were no borrowings under the credit facility at
August 30, 1997.
The credit facility provides for a quarterly commitment fee of .375% to .5%,
based on the Company's leverage ratio, per annum.
The credit facility is guaranteed by the Company's accounts receivable,
certain inventories, and certain properties, as defined. The credit facility
contains covenants that restrict, among other things, dividends, loans,
prepayment of indebtedness, incurrence of additional indebtedness, granting
liens, the sale of assets, certain transactions with affiliates, mergers,
consolidations, or the sale of all or a substantial part of the Company's
property.
The carrying amount reported on the balance sheet for debt at August 31,
1996 and August 30, 1997, approximates fair value.
F-12
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended August 26, 1995, August 31, 1996, and August 30, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal............................................................. $ -- $133 $ 50
State................................................................. (68) 216 200
---- ---- ----
(68) 349 250
Deferred.............................................................. -- -- --
---- ---- ----
$(68) $349 $250
---- ---- ----
---- ---- ----
</TABLE>
Deferred taxes consist of the following at August 31, 1996 and August 30,
1997:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Assets:
Net operating loss carryforward....................................... $ 7,207 $ 7,536
Other................................................................. 3,432 3,122
--------- ---------
Total assets............................................................ 10,639 10,658
Liabilities:
Accelerated tax depreciation.......................................... 670 366
Other................................................................. 2,422 2,178
--------- ---------
Total liabilities....................................................... 3,092 2,544
--------- ---------
7,547 8,114
Valuation allowance..................................................... (7,547) (8,114)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>
The Company files a consolidated income tax return with Holdings. In
accordance with generally accepted accounting principles, the provision
(benefit) for income taxes has been determined as if the Company had filed a
separate income tax return and includes the benefit of its net operating loss
(NOL) carryforward. In accordance with its tax-sharing agreement with Holdings,
beginning in fiscal 1997, the Company must compute its tax liability without the
benefit of the NOL carryforward accrued as of August 30, 1997 and remit any
excess liability to Holdings. Payments under this agreement will be recorded as
an equity distribution to Holdings. The Company anticipates making its fiscal
1997 payment of approximately $250 under this tax sharing agreement in fiscal
1998.
The provision (benefit) for income taxes differs from the amount of income
tax expense computed by applying the United States federal income tax rate to
the loss before income taxes and extraordinary item.
F-13
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
A reconciliation of the differences for the years ended August 26, 1995, August
31, 1996, and August 30, 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Computed statutory tax benefit.................................... $ (1,928) $ (362) $ (313)
Increase (decrease) resulting from:
Amortization of goodwill........................................ 277 317 289
Alternative minimum tax......................................... -- 133 50
Valuation allowance............................................. 1,894 54 567
Other items, net................................................ (311) 207 (343)
--------- --------- ---------
Provision (benefit) for income taxes.............................. $ (68) $ 349 $ 250
--------- --------- ---------
--------- --------- ---------
</TABLE>
At August 30, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $19 million. Pursuant to the tax
sharing agreement, these carryforwards are available to reduce Holdings' future
taxable income and expire in varying amounts between 2006 and 2010.
9. RELATED PARTY TRANSACTIONS
The Board of Directors, which is comprised of parties affiliated with either
TJC or TCW Capital, was paid $60, $50, and $50 for directors' fees for 1995,
1996, and 1997, respectively. A member of the Board of Directors affiliated with
TJC was paid $52 as a consulting fee during 1995, 1996, and 1997. Principally
all of the common and preferred shareholders of Holdings are affiliated with TJC
or TCW Capital.
Management consulting fees to TJC were $364 in 1995 and 1996 and $304 in
1997. Management consulting and investment banking fees of $1,501 were accrued
at August 31, 1996 and were paid as part of the debt offering.
On July 2, 1997, the Company entered into a tax-sharing and management
consulting agreement with Holdings. Under this agreement, the Company will pay
$412 annually to Holdings in management consulting fees. Management consulting
fee expense was $68 in 1997.
The accompanying financial statements reflect all of the Company's costs of
doing business. There are no costs incurred by Holdings on behalf of the
Company.
F-14
<PAGE>
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, thereto duly authorized, on May 6, 1998.
<TABLE>
<S> <C> <C>
ARCHIBALD CANDY CORPORATION
By: /s/ TED A. SHEPHERD
-----------------------------------------
Ted A. Shepherd
PRESIDENT AND CHIEF OPERATING OFFICER
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
Registrant has not sent to any of its security holders any of the following:
(1) any annual report to security holders covering the Registrant's fiscal 1997
or (2) any proxy statement, form of proxy or other proxy soliciting materials.
