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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
(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 29, 1998.
/ / 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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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._X_Yes ____ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
As of November 25, 1998, none of the registrant's Common Stock, par value
$.01 per share, was held by non-affiliates of the registrant.
As of November 25, 1998, the number of shares outstanding of the
registrant's Common Stock was 19,200, all of which was held by Fannie May
Holdings, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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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............................................... 8
Item 4--Submission of Matters to a Vote of Security Holders............. 8
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..................... 18
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures................................................. 18
PART III
Item 10--Directors and Executive Officers of the Company................ 19
Item 11--Executive Compensation......................................... 20
Item 12--Security Ownership of Certain Beneficial Owners and
Management............................................................ 24
Item 13--Certain Relationships and Related Transactions................. 27
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form
8-K................................................................... 29
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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.
GENERAL
Archibald Candy Corporation is a manufacturer and marketer of boxed
chocolates and other confectionery items. Founded in 1921, the Company sells its
Fannie May and Fanny Farmer candies primarily in the Midwestern and Eastern
United States in 317 Company-operated stores and approximately 6,000 third-party
retail outlets as well as through quantity order, mail order and fundraising
programs. 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 (as defined) has
increased from $8.2 million in fiscal 1994 to $19.0 million in fiscal 1998 and
EBITDA margins have increased from 7.1% to 15.0% over the same period.
Management believes that the integration of Fannie May and Fanny Farmer has been
completed and has turned its focus to growing sales and earnings by building on
the Fannie May and Fanny Farmer brand names, acquiring additional confectionery
brands and increasing points of availability for its branded products.
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, total
U.S. retail candy sales grew to approximately $23 billion in 1997, with the per
capita consumption of candy increasing from approximately 18 pounds in 1987 to
over 27 pounds in 1997. Total sales in the boxed chocolate market were
approximately $1.6 billion in 1997. 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 of the boxed chocolate
market 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 grow its core brands and acquire and
build other leading brand names in the confectionery industry and to leverage
these brands through a multi-channeled distribution network. The Company has,
and expects to continue to grow its brands with, a strategy that includes (i)
continued improvement in Company-operated retail stores as measured by same
store sales and profitability, (ii) increasing product availability nationwide
among third-party retailers by expanding existing and establishing new
distribution channels and (iii) growing non-retail sales through enhanced
product merchandising and market development.
CONTINUE IMPROVEMENT IN COMPANY-OPERATED RETAIL PERFORMANCE. The Company's
retail store strategy is focused on (i) continuing to improve same store sales
by enhancing merchandising, customer service and
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product selection and (ii) reducing store operating costs, primarily by
selectively closing unprofitable stores. The Company has 317 Fannie May and
Fanny Farmer retail stores in 18 states and the District of Columbia. These
stores had average annual sales of approximately $289,000 in fiscal 1998 and
achieved average annual same store sales growth of 4.0% during the past five
years.
INCREASE PRODUCT AVAILABILITY THROUGH THIRD-PARTY RETAIL PROGRAMS. The
Company's 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 during the peak holiday seasons through
approximately 5,000 grocery stores, drug stores and mass merchandisers
nationwide, including Target and American Stores. As a result of this strategy,
the Company has increased sales through third-party retail programs from $13.0
million in fiscal 1994 to $18.2 million in fiscal 1998.
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 approximately
43,000 organizations for corporate gift giving or member purchases, (ii) mail
order program, through which customers can order products over the Internet at
the Company's web site (www.fanniemaycandies.com) and through a catalog which
has a national circulation of over 2.1 million catalogs annually and a database
of over 350,000 customers, and (iii) fundraising program, in which products are
sold to schools and non-profit organizations nationwide for resale to their
supporters. Management believes that these non-retail sales 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 $17.0 million in
fiscal 1998.
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
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.
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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 and North 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 1998. Merckens Chocolate
Company ("Merckens"), a division of Archer-Daniels-Midland Company, 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 1998. 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
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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 Fannie May and Fanny Farmer candies primarily in the
Midwestern and Eastern United States in 317 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").
COMPANY-OPERATED RETAIL. As of August 29, 1998, the Company operated 231
Fannie May stores and 86 Fanny Farmer stores. In fiscal 1998, this sales channel
accounted for $91.5 million, or 72.2%, 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.
As of August 29, 1998, the Company's stores were located in 18 states and
the District of Columbia as follows:
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STATE FANNIE MAY FANNY FARMER TOTAL STORES
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Illinois............................................ 157 -- 157
Minnesota........................................... 4 23 27
Indiana............................................. 23 -- 23
New York............................................ -- 20 20
Michigan............................................ 8 11 19
Wisconsin........................................... 6 8 14
Florida............................................. 10 3 13
Missouri............................................ 7 -- 7
Massachusetts....................................... -- 7 7
Pennsylvania........................................ 6 -- 6
Iowa................................................ 2 4 6
Virginia............................................ 4 -- 4
Ohio................................................ -- 4 4
North Dakota........................................ -- 2 2
New Hampshire....................................... -- 2 2
Maryland............................................ 2 -- 2
Rhode Island........................................ -- 2 2
New Jersey.......................................... 1 -- 1
District of Columbia................................ 1 -- 1
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Total............................................. 231 86 317
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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: 140 in shopping malls, 86 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.
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The size of the Company's stores, including both leased and Company-owned
stores, generally ranges 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 consistency among all Fannie May and
Fanny Farmer stores. Company-operated store openings and closings for fiscal
1994, 1995, 1996, 1997 and 1998 are set forth below.
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FISCAL YEAR 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
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Total..................... 45 40 36 22
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AUGUST 29, 1998
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OPENINGS:
Fannie May.................. 9
Fanny Farmer................ 0
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Total..................... 9
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CLOSINGS:
Fannie May.................. 1
Fanny Farmer................ 13
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Total..................... 14
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Since fiscal 1994, the Company has opened 41 new stores and closed 157
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%, 5.2% and 4.2% in
fiscal 1994, 1995, 1996, 1997 and 1998, respectively.
Management plans to continue its emphasis on improving store mix rather than
store expansion for the near future, and, over the next three fiscal years,
intends to open approximately 20 new stores and close approximately 30
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, mass market and kiosk
licensing 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 kiosk licensing 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 Jewel Foods,
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 1998, frozen fresh sales accounted for $13.5
million, or 10.7%, of total net sales.
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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. Under this program, the Company has obtained approximately
5,000 outlets, operated mostly by retail chains, including Target and American
Stores. For fiscal 1998, mass market sales accounted for $3.5 million, or 2.7%,
of total net sales.
In fiscal 1997, the Company announced the roll-out of its specialty markets
program through which it markets 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 is positioned at higher price points
and sold only during the peak seasons of Christmas, Valentine's Day and Easter.
For fiscal 1998, specialty markets program sales accounted for $0.5 million, or
0.4% of total net sales. In fiscal 1998, the Company launched its kiosk
licensing program. For fiscal 1998, sales in this program accounted for $0.7
million, or 0.6%, of total net sales.
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 holiday seasons. A quantity order catalog is distributed at the beginning
of each fiscal year and prior to each holiday season. The Company also has
targeted fundraising organizations, including over 90,000 schools throughout the
United States, for its product offerings. For fiscal 1998, quantity order and
fundraising sales accounted for $10.6 million, or 8.4%, of total net sales.
In addition, the Company sells its products through a mail order program
through which customers can order products over the Internet at the Company's
web site (www.fanniemaycandies.com) and through a catalog which has a national
circulation of over 2.1 million catalogs annually and a database of over 350,000
customers. The Company sends both Fannie May and Fanny Farmer mail order
catalogs to established and prospective customers during key selling seasons.
Mail order catalogs also are made available to the general public through
Company-operated retail stores. In fiscal 1998, approximately 139,000 orders
were placed through the mail order program, with an average transaction value of
approximately $48.00. While this program was established in 1985, mail order
sales have grown at an average annual rate of 14.2% since fiscal 1994. For
fiscal 1998, mail order sales accounted for $6.4 million, or 5.0%, of total net
sales. 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.
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
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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. Although
Company-operated stores do not compete directly with See's Candies stores, which
are located primarily west of the 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 generally is 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 29, 1998, the Company employed approximately 2,135 people of
which 1,332 worked in Fannie May stores, 367 worked in Fanny Farmer stores and
the remainder worked primarily in the Chicago manufacturing, distribution and
headquarters facilities. Of the total number of employees, 175 were salaried and
the remainder 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 29, 1998, over
one-half of the hourly store personnel were employed on a part-time basis.
Management believes that its salaried and 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 29, 1998, approximately
800 of the Company's employees were members of one of the various labor unions
that represent employees of the Company. The Company currently is subject to
seven collective bargaining agreements, all of which expire on or before March
31, 2003. 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.
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ITEM 2--PROPERTIES
As of August 29, 1998, the Company operated 231 Fannie May stores and 86
Fanny Farmer stores in 18 states and the District of Columbia. The Company
leases all 86 of its Fanny Farmer stores. Within four years following August 29,
1998, 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.
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 1998.
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 1998.
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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
August 29, 1998, 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 did not pay any cash dividend on its common stock in fiscal 1997
or 1998. However, the Company funded cash to Holdings to the extent necessary to
allow Holdings to pay cash dividends on its 5% Senior Preferred Stock (the
"Senior Preferred Stock") ($282,000 with respect to such dividends paid for 1997
and $288,000 with respect to such dividends paid for 1998). Holdings did not pay
any cash dividend on Holdings' Common Stock in fiscal 1997 or 1998. 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
The following table sets forth the selected historical financial data of the
Company for the fiscal year ended August 31, 1994, August 26, 1995, August 31,
1996, August 30, 1997 and August 29, 1998, which have been derived from the
audited financial statements of the Company. 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 YEAR ENDED
-------------------------------------------------------------------------------------------
AUGUST 26, AUGUST 31, AUGUST 30, AUGUST 29,
AUGUST 31, 1994 1995(1) 1996(1) 1997(1) 1998(1)
--------------- ----------------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Company-Operated Retail
(2)...................... $ 91,408 $ 90,077 $ 88,938 $ 89,276 $ 91,488
Third-Party Retail (3)..... 13,027 12,954 14,924 17,074 18,230
Non-Retail (4)............. 11,297 12,524 13,486 15,583 17,024
--------------- -------- -------- -------- --------
Total net sales........ $ 115,732 $ 115,555 $ 117,348 $ 121,933 $ 126,742
--------------- -------- -------- -------- --------
--------------- -------- -------- -------- --------
Gross profit................. $ 72,298 $ 75,309 $ 76,338 $ 79,649 $ 82,764
Operating income (loss)...... (5,850) 3,290 7,945 10,801 12,539
Interest expense............. 8,913 9,237 9,455 9,235 10,346
Other income................. 207 275 444 411 1,386
Income tax (benefit)......... (358) (68) 349 250 276
Net income (loss) (5)........ (16,440) (5,604) (1,415) (1,171) 3,303
OTHER DATA:
EBITDA (6)................... $ 8,239 $ 13,527 $ 14,731 $ 16,868 $ 18,964
Net cash provided by (used
in) operating activities... (1,571) 4,551 4,117 3,919 4,206
Net cash (used in) investing
activities................. (3,601) (1,958) (1,121) (3,688) (4,709)
Net cash provided by (used
in) financing activities... 5,201 (3,470) (3,098) 15,190 (2,217)
Depreciation and
amortization............... 13,216 9,999 6,807 5,932 6,233
Capital expenditures......... 3,655 2,325 2,280 3,688 4,574
Total net sales growth....... 2.8% (0.2)% 1.6% 3.9% 3.9%
Gross margin................. 62.5% 65.2% 65.1% 65.3% 65.3%
EBITDA margin (7)............ 7.1% 11.7% 12.6% 13.8% 15.0%
Ratio of earnings to fixed
charges (8)................ -- -- -- -- 1.2
STORE DATA:
Number of Company-operated
stores at period end:
Fannie May stores........ 231 228 225 223 231
Fanny Farmer stores...... 169 144 115 99 86
--------------- -------- -------- -------- --------
Total number of
stores............... 400 372 340 322 317
--------------- -------- -------- -------- --------
--------------- -------- -------- -------- --------
Increase in same store sales:
(9)
Fannie May stores........ 1.5% 4.6% 2.1% 5.4% 4.3%
Fanny Farmer stores...... 11.8% 0.0% 4.5% 4.6% 3.7%
Total increase......... 4.5% 3.4% 2.6% 5.2% 4.2%
BALANCE SHEET DATA:
Cash and cash equivalents.... $ 1,359 $ 482 $ 380 $ 15,801 $ 13,081
Working capital
(deficiency)............... (5,549) (3,641) (4,349) 23,475 26,988
Total assets................. 88,548 83,098 78,668 95,660 98,089
Long-term debt............... 73,883 73,676 72,721 100,521 100,145
Shareholder's equity
(deficit).................. (8,429) (14,033) (15,448) (16,619) (14,944)
</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).
Fiscal 1997 and 1998 each had 52 weeks (364 days).
(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."
10
<PAGE>
(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. EBITDA as reported herein for
fiscal 1994 excludes 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 1994, 1995, 1996 and 1997 earnings were insufficient to cover
fixed charges by approximately $29.0 million, $20.2 million, $15.2 million
$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.
11
<PAGE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a manufacturer and marketer of boxed chocolates and other
confectionery items. The Company sells its Fannie May and Fanny Farmer candies
primarily in the Midwestern and Eastern United States in 317 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 1998, EBITDA was $19.0
million, or 15.0%, of total net sales as compared to $14.7 million, or 12.6%, of
total net sales in fiscal 1996.
Historically, Company-Operated Retail has represented the most significant
distribution channel for the Company's products and accounted for $91.5 million,
or 72.2%, of total net sales in fiscal 1998. The Company's Third-Party Retail
and Non-Retail businesses collectively accounted for $35.3 million, or 27.8%, of
total net sales in fiscal 1998. 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. 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 fluctuations for specific items. See
"Business--Operations--Suppliers and Purchasing." Labor costs consist primarily
of hourly wages plus incentives based on achieving 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.
12
<PAGE>
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 YEAR ENDED
-------------------------------------------------
AUGUST 31, 1996 AUGUST 30, 1997 AUGUST 29, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
PERCENTAGE OF TOTAL NET SALES:
Company-Operated Retail......................................... 75.8% 73.2% 72.2%
Third-Party Retail.............................................. 12.7 14.0 14.4
Non-Retail...................................................... 11.5 12.8 13.4
------ ------ ------
Total net sales............................................... 100.0% 100.0% 100.0%
------ ------ ------
------ ------ ------
POUNDS SOLD (IN MILLIONS):
Company-Operated Retail......................................... 8.7 8.3 8.2
Third-Party Retail.............................................. 1.9 2.1 2.1
Non-Retail 1.5 1.7 1.9
------ ------ ------
Total pounds sold............................................. 12.1 12.1 12.2
------ ------ ------
------ ------ ------
AVERAGE SELLING PRICE:
Company-Operated Retail......................................... $ 10.23 $ 10.73 $ 11.12
Third-Party Retail.............................................. 7.92 8.35 8.61
Non-Retail...................................................... 8.75 9.16 9.05
Total average selling price................................... 9.68 10.10 10.36
COMPANY-OPERATED STORES (AT PERIOD END)........................... 340 322 317
</TABLE>
As a percentage of total net sales, Company-Operated Retail sales decreased
from 75.8% in fiscal 1996 to 72.2% in fiscal 1998. This decrease was due
primarily to management's strategy of (i) closing unprofitable stores and (ii)
expanding channels of distribution other than Company-Operated Retail. From
fiscal 1996 to fiscal 1998, the number of Company-operated stores decreased from
340 to 317 which contributed to a decrease in total pounds sold in
Company-Operated Retail from 8.7 million to 8.2 million over this period.
Pounds sold in Third-Party Retail increased from 1.9 million in fiscal 1996
to 2.1 million in fiscal 1998 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. As a percentage of total net
sales, Third-Party Retail sales increased from 12.7% in fiscal 1996 to 14.4% in
fiscal 1998. This increase reflects an increase in Third-Party Retail pounds
sold resulting from 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. The Company
recently launched the sale of Fannie May products in department stores,
specialty shops and card and gift stores, and expects Third-Party Retail sales
to continue to grow as a percentage of total net sales.
Pounds sold in Non-Retail increased from 1.5 million in fiscal 1996 to 1.9
million in fiscal 1998. As a percentage of total net sales, Non-Retail sales
increased from 11.5% in fiscal 1996 to 13.4% in fiscal 1998. These increases,
which resulted primarily from the growth in net sales through the companies
fundraising program and improved product mix and merchandising, reflect the
results of management's strategy to expand Non-Retail sales.
13
<PAGE>
FISCAL YEAR ENDED AUGUST 29, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 30, 1997
TOTAL NET SALES. Total net sales in fiscal 1998 were $126.7 million, an
increase of $4.8 million, or 3.9%, from $121.9 million in fiscal 1997. Pounds
sold in fiscal 1998 were 12.2 million, an increase of 0.1 million, or 0.1%, from
fiscal 1997. This increase was due to an increase in Non-Retail pounds sold from
1.7 million in fiscal 1997 to 1.9 million in fiscal 1998. Company-Operated
Retail sales were $91.5 million in fiscal 1998, an increase of $2.2 million, or
2.5%, from $89.3 million in fiscal 1997. This increase reflects same store sales
growth of 4.2%, partially offset by the closing of 14 stores. In fiscal 1998,
Third-Party Retail sales were $18.2 million, an increase of $1.2 million, or
6.8%, from $17.1 million in fiscal 1997. 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 $17.0
million in fiscal 1998, an increase of $1.4 million, or 9.2%, from $15.6 million
in fiscal 1997. Increases in the boxed chocolate fundraising business and mail
order sales were primarily responsible for the growth in Non-Retail sales.
GROSS PROFIT. Gross profit in fiscal 1998 was $82.8 million, an increase of
$3.1 million, or 3.9%, from $79.6 million in fiscal 1997. This increase in gross
profit was primarily due to the increase in total net sales partially offset by
an increase in manufactured and purchased product costs. Gross profit as a
percentage of total net sales was 65.3% in fiscal 1998, unchanged from fiscal
1997.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A costs were $63.5 million in
fiscal 1998 an increase of $1.0 million, or 1.7%, from $62.4 million in fiscal
1997. This increase resulted primarily from an increase in costs related to the
development of Third-Party Retail and Non-Retail programs, particularly costs
related to growth of the mass market and fundraising programs. As a percentage
of total net sales, SG&A decreased to 50.1% in fiscal 1998 from 51.2% in fiscal
1997 as the Company was able to leverage its costs against higher total net
sales.
EBITDA. EBITDA was $19.0 million in fiscal 1998, an increase of $2.1
million, or 12.4%, from $16.9 million in fiscal 1997. As a percentage of total
net sales, EBITDA was 15.0% in fiscal 1998 as compared to 13.8% in fiscal 1997.
The increase in EBITDA and EBITDA margin was the result of a combination of the
factors described above.
OPERATING INCOME. Operating income was $12.5 million in fiscal 1998, an
increase of $1.7 million, or 16.1%, from $10.8 million in fiscal 1997. As a
percentage of net sales, operating income was 9.9% in fiscal 1998 as compared to
8.9% in fiscal 1997. This increase in operating income and operating margin
reflects an increase in EBITDA of $2.1 million resulting primarily from growth
in the total net sales in each of the Company's distribution channels.
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 in fiscal 1997 were 12.1 million, unchanged from fiscal 1996.
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
reflected same store sales growth of 5.2%, partially offset by the operation of
18 fewer 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 reflected 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 in fiscal 1997, an increase of
$2.1 million, or 15.5%, from $13.5 million in fiscal 1996.
14
<PAGE>
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 from 65.1% in fiscal 1996 to 65.3% in
fiscal 1997. This increase in gross profit and gross margin was primarily due to
the increase in total net 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. This increase resulted primarily from an increase in costs related to the
development of Third-Party Retail and Non-Retail programs, particularly costs
related to growth of the Fanny Farmer mass merchandising programs. This increase
was partially offset by lower store operating costs resulting from store
closings. As a percentage of total net sales, SG&A decreased to 51.2% in fiscal
1997 from 52.1% in fiscal 1996, as the Company was able to leverage its costs
against higher total net sales.
EBITDA. 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.
The increase in EBITDA and EBITDA margin was a result of a combination of the
factors described above.
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. This
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.
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 three fiscal years primarily with long-term and seasonal borrowings, the
proceeds of the Company's offering on July 2, 1997 of 10 1/4% Senior Secured
Notes due 2004 (the "Notes"), and cash generated by operating activities. During
fiscal 1996, 1997 and 1998, the net cash generated by the Company's operating
activities was $4.1 million, $3.9 million and $4.2 million, respectively.
On July 2, 1997, the Company entered into a Revolving Credit Agreement with
The First National Bank of Chicago, as agent (the "Revolving 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 percentage of eligible accounts
receivable, eligible inventory and certain real estate of the Company. For
fiscal 1998, there were no borrowings under the Revolving Credit Facility. As of
August 29, 1998, the Company's cash balance was $13.1 million. 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.
The Company's capital expenditures (including capital lease obligations) for
fiscal 1996, 1997 and 1998 were $2.3 million, $3.7 million and $4.6 million,
respectively. These expenditures related primarily to retail store development
and renovation, purchases of manufacturing and distribution equipment and
improvements in the Company's management information systems. Management expects
that capital
15
<PAGE>
expenditures over the next twelve months will relate primarily to (i) the
remodeling of existing stores, (ii) the purchase of manufacturing and
distribution equipment and (iii) improvements in the Company's management
information systems. Management expects capital expenditures of $5.0 million for
such period, of which approximately $2.5 million will be maintenance capital
expenditures.
Based upon the Company's current level of operations and anticipated growth,
management believes that available cash flow, together with cash on the
Company's balance sheet and available borrowings under the Revolving Credit
Facility, will be adequate to meet the Company's anticipated future requirements
for capital expenditures, working capital and debt service obligations. The
Revolving Credit Facility will expire on July 2, 2000, and the Company will need
to seek to extend or renew the Revolving 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 following
three 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.
In order for Holdings to make such redemption payments, Holdings must cause
the Company to advance the necessary funds to Holdings by dividend or otherwise,
to the extent permitted by the Revolving Credit Facility and the indenture (the
"Indenture") dated as of July 2, 1997 between the Company and The Bank of New
York, as trustee (the "Trustee"), pursuant to which the Notes were issued. 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 Notes or the Revolving 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 Revolving
Credit Facility and 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 Revolving 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 Revolving 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 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 Revolving Credit Facility requires the Company
to comply with specified financial ratios, including minimum fixed charge
coverage
16
<PAGE>
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
holiday seasons. 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 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 seasons.
The following table summarizes the total net sales and EBITDA of the Company
by quarter for fiscal 1997 and 1998.
<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. 30, MAR. 1, MAY 31, AUG. 30, NOV. 29, FEB. 28, MAY 30, AUG. 29,
1996 1997(1) 1997(1) 1997 1997 1998 1998 1998
--------- ----------- ----------- --------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 24,892 $ 56,180 $ 25,905 $ 14,956 $ 27,173 $ 58,397 $ 26,216 $ 14,956
EBITDA.................. 1,061 17,888 1,987 (4,068) 1,057 19,588 2,116 (3,797)
</TABLE>
- --------------------------
(1) Because of the timing of the 1997 Easter holiday season, 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 Financial Data."
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-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 causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
17
<PAGE>
The Company has surveyed all of its electronic systems and is in the process
of contacting suppliers and consultants to address year 2000 issues for the
software and hardware used by the Company. The Company currently is in the
process of upgrading and improving its internal computer systems, which work is
expected to be completed by August 1999. Following the completion of this work,
the Company's computer systems will be year 2000 compliant. The Company does not
believe that the costs associated with making its computer systems year 2000
compliant will be material. However, if the Company's systems or the systems of
other companies on whose services the Company depends or with whom the Company's
systems interface are not year 2000 compliant, it could have a material adverse
effect on the Company's results of operation and financial condition.
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 1997 and fiscal 1998, 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.
18
<PAGE>
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 executive officers of the Company as of August 29,
1998.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------------------------- --- -------------------------------------------------------------------
<S> <C> <C>
Thomas H. Quinn........................ 51 Chairman of the Board and Chief Executive Officer*
Ted A. Shepherd........................ 39 President and Chief Operating Officer*
Donna M. Snopek........................ 39 Vice President--Finance and Accounting and Secretary*
Alan W. Petrik......................... 45 Vice President--Business Systems
Caroline Kies.......................... 37 Vice President--Specialty Division
Ricky L. Lelli......................... 46 Vice President--Manufacturing and Operations
John W. Jordan II...................... 50 Director*
Adam E. Max............................ 40 Director, Vice President, Assistant Treasurer and Assistant
Secretary*
Jeffrey Rosen.......................... 49 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 16 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 18 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.
MR. PETRIK has served as Vice President of Business Systems of the Company
since 1997. Mr. Petrik has been with the Company for 18 years and has held
various senior management positions with the Company, including Vice President
of Manufacturing.
MS. KIES has served as Vice President of the Specialty Division of the
Company since joining the Company in July, 1998. Ms. Kies has over 15 years of
experience in various sales and marketing positions. Prior to joining the
Company, Ms. Kies worked for Mars, Incorporated where she served as National
Sales Director of Convenience Stores.
MR. LELLI has served as Vice President of Manufacturing and Operations of
the Company since 1997. Mr. Lelli joined the Company in 1994 as Director of
Manufacturing. Mr. Lelli has over 22 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.
19
<PAGE>
MR. JORDAN has served as Director of the Company since its acquisition by
Holdings in 1991. Mr. Jordan is a managing director of The Jordan Company LLC, 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 managing director of The Jordan Company LLC,
which he joined in 1986. Mr. Max is also a director of Rockshox, Inc.
MR. ROSEN has served as a Director of the Company since 1997. Mr. Rosen is a
partner in the law firm of O'Melveny & Meyers LLP, counsel for TCW Capital.
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 $100,000 (collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------- ------------------
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) SARS (#)
- ---------------------------------------------- --------- ---------- ---------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Thomas H. Quinn, ............................. 1998 -- -- $ 52,000(1) --
Chairman of the Board and Chief Executive 1997 -- -- 52,000(1) --
Officer 1996 -- -- 52,000(1) --
Ted A. Shepherd, ............................. 1998 $ 235,000 $ 200,000 -- 9.75(3)
President and Chief Operating 1997 221,583 311,000 -- --
Officer (2) 1996 200,163 101,491 -- 7.00(3)
Donna M. Snopek, ............................. 1998 121,167 67,500 -- 1.00(3)
Vice President--Finance and Accounting and 1997 110,167 103,575 -- --
Secretary (4) 1996 93,500 24,310 -- 3.00(3)
</TABLE>
- ------------------------
(1) Reflects a consulting fee the Company paid Mr. Quinn in each of fiscal 1998,
1997 and 1996 in lieu of salary. See "Certain Relationships and Related
Transactions--Director's Consulting Fee and TCW Investors' Expense
Reimbursement."
(2) Reflects positions held by Mr. Shepherd since March 1996.
(3) Reflects stock appreciation rights ("SARs") granted pursuant to Holdings'
SAR Plan (as defined). Holdings subsequently has converted all of Mr.
Shepherd's SARs into an equivalent number of shares of Holdings' Class A
Common Stock.
(4) Reflects position currently held by Ms. Snopek. During fiscal 1996, Ms.
Snopek served as Secretary and Vice President--Controller of the Company.
20
<PAGE>
HOLDINGS' STOCK APPRECIATION RIGHTS PLAN
The Fannie May Holdings, Inc. Stock Appreciation Rights Plan (the "SAR
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 SARs are
authorized for grant under the SAR Plan representing the economic equivalent of
52.75 shares, or 5.0%, of Holdings Common Stock, on a fully diluted basis. As of
August 29, 1998, 52.75 SARs were outstanding under the SAR Plan, with 40.75 SARs
issued to current employees of the Company and the balance held by former
employees.
As of September 30, 1998, Holdings converted Mr. Shepherd's 19.75 SARs into
the same number of shares of Holdings' Class A Common Stock. Therefore, as of
September 30, 1998, 33 SARs were outstanding under the SAR Plan, with 21 SARs
issued to current employees of the Company and the balance held by former
employees. In addition, following the conversion of Mr. Shepherd's 19.75 SARs,
the 52.75 SARs authorized for grant under the SAR Plan represent the economic
equivalent of 52.75 shares, or 4.9%, of Holdings' Common Stock, on a fully
diluted basis.
The SAR 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 SAR 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 SAR 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 SAR 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 SAR Plan provides that in the event the
employment of any holder of an SAR terminates for (i) Cause (as defined in the
SAR 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 SAR 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 SAR Plan) exceeds
the dollar amount of all debt and preferred stock obligations of Holdings. At
Holdings' option, such repurchase amounts may be paid by a note payable over
three years.
21
<PAGE>
SAR GRANTS IN FISCAL 1998
The following table sets forth certain information with respect to SARs
granted by the Company to the Named Executives during fiscal 1998.
<TABLE>
<CAPTION>
SAR GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------
% OF TOTAL SARS
NUMBER OF SHARES GRANTED TO EXERCISE OR
UNDERLYING SARS EMPLOYEES IN FISCAL BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED YEAR(1) ($/SH) DATE(2) PRESENT VALUE(3)
- --------------------------------------- ----------------- ------------------- --------------- ----------- ---------------------
<S> <C> <C> <C> <C> <C>
Ted A. Shepherd........................ 9.75 61.9% $ 0 -- $ 0
Donna M. Snopek........................ 1.00 6.3% 0 -- 0
</TABLE>
- ------------------------
(1) A total of 15.75 SARs were granted to employees in fiscal 1998 pursuant to
the SAR Plan.
(2) SARs issued pursuant to the SAR Plan have no expiration date. However, all
or a part of an SAR is automatically terminated under certain circumstances
in connection with an employee's termination of employment with the Company.
(3) Based on the formulation specified in the SAR agreements of the respective
Named Executives. The actual value of an SAR is subject to and not
determinable until the occurrence of either (a) a Cash Out Event (as defined
in the SAR Plan) 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.
AGGREGATED SAR EXERCISES IN FISCAL YEAR 1998 AND 1998 FISCAL YEAR-END SAR VALUES
The following table sets forth certain information with respect to SAR
exercises by the Named Executives during fiscal 1998 and the number of shares of
Holdings' Common Stock underlying SARs held by each of the Named Executives and
the value of such Named Executives' exercisable and unexercisable SARs on August
29, 1998.
<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)
- ------------------------------ --------------- ----------------- --------------------- -------------------------------
<S> <C> <C> <C> <C>
Ted A. Shepherd............... -- -- 0/19.75 $ 0/$0
Donna M. Snopek............... -- -- 0/ 4.00 0/ 0
</TABLE>
- ------------------------
(1) No SARs were exercised during fiscal 1998.
(2) Based on the formulation specified in the SAR agreements of the respective
Named Executives. The actual value 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.
22
<PAGE>
HOLDINGS' 1998 STOCK BONUS PLAN
The Fannie May Holdings, Inc. 1998 Stock Bonus Plan (the "1998 Stock Bonus
Plan") was adopted by the Board of Directors of Holdings in August 1998 to
promote the long-term success of Holdings and its subsidiaries by strengthening
Holdings' ability to attract and retain highly competent management employees
and to provide a means to encourage stock ownership and proprietary interests in
Holdings. The 1998 Stock Bonus Plan provides for the issuance of the right to
acquire shares of Holdings' Class A Common Stock to those management employees
who can significantly enhance the long-term performance of Holdings and its
subsidiaries and is intended to provide, in combination with other forms of
compensation and benefits, a total compensation program which is competitive
with the reward programs of other similar enterprises in the confectionery
industry. No more than 33 shares of Holdings' Class A Common Stock may be issued
under the 1998 Stock Bonus Plan. The 1998 Stock Bonus Plan terminates on July 1,
2008. Holdings has issued 19.75 shares in aggregate of Holdings' Class A Common
Stock pursuant to the 1998 Stock Bonus Plan.
The 1998 Stock Bonus Plan is administered under the direction of the Board
of Directors of Holdings. The Board determines the management employees to
receive shares of Holdings' Class A Common Stock under the 1998 Stock Bonus
Plan, the number of shares to be granted, the consideration, if any, to be paid
for such shares and the other terms and conditions of any such issuances.
Holdings has issued 19.75 shares of Holdings' Class A Common Stock to Mr.
Shepherd pursuant to the 1998 Stock Bonus Plan as consideration for the
cancellation of Mr. Shepherd's 19.75 SARs.
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.
23
<PAGE>
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
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 29, 1998 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 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
JZ Equity Partners PLC (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(9)(10).............. Class A Common 151.128 21.7 15.1
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., JZ Equity Partners PLC, John W. Jordan II, Thomas H. Quinn and Adam E.
Max.
(2) As of August 29, 1998, 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). As of
September 30, 1998, Holdings issued 19.75 shares of Holdings' Class A Common
Stock to Mr. Shepherd in consideration of the cancellation of his 19.75
SARs. Such issuance was made pursuant to Holdings' 1998 Stock Bonus Plan (as
defined). 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
24
<PAGE>
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 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 29, 1998, there also were
outstanding (A) 1,155.043795 shares of Holdings' Senior Preferred Stock, 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 August 31, 1998, Holdings issued 28.8760949 shares of its
Senior Preferred Stock in partial satisfaction of the dividend payable on
Holdings' Senior Preferred Stock on such date and paid a cash dividend to
satisfy the remainder of such dividend. 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 would 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 29, 1998, TCW Investors
owned 45.3% of the outstanding voting Holdings' Common Stock. As of August
29, 1998, 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 August 29, 1998, 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 Arbor Lake 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 August 29, 1998, JZ Equity Partners PLC Limited (formerly known as
MCIT (Existing Pool) Limited) also owned 63.5007 shares of Holdings' Junior
Class A PIK Preferred Stock. The principal address of JZ Equity Partners PLC
Limited is c/o The Jordan Company, 767 Fifth Avenue, New York, New York
10153.
(6) As of August 29, 1998, 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
25
<PAGE>
Investment Pte Ltd. is c/o Government of Singapore Investment Corporation,
255 Shoreline Drive, Suite 600, Redwood City, California 94065.
(7) Mezzanine Capital is affiliated with TCW Capital. As of August 29, 1998,
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 August 29, 1998, 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 LLC, 767 Fifth Avenue, New York, New York 10153.
(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 August 29, 1998, 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 LLC, 767 Fifth Avenue, New York, New York 10153.
26
<PAGE>
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT CONSULTING AGREEMENT
On July 2, 1997 Holdings entered into a 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. 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.
TAX SHARING AND MANAGEMENT AGREEMENT
On July 2, 1997, Holdings and the Company entered into a Tax Sharing and
Management Consulting Agreement (the "Tax Sharing and Management Agreement"),
pursuant to which the Company agreed to pay or distribute 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 29, 1998; (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 TJC Management Corp. 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; 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. In fiscal 1998, the Company paid Holdings
(a) $1,628,000 as the Company's share of income taxes and (b) $412,000 in
management consulting fees pursuant to the Tax Sharing and Management Agreement.
PREFERRED STOCK
As of August 29, 1998, 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.
DIRECTOR'S CONSULTING FEE AND TCW INVESTORS' EXPENSE REIMBURSEMENT
In each of fiscal 1996, 1997 and 1998, 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."
27
<PAGE>
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 (as amended by the First Amendment thereto dated as of
July 2, 1997, 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 a 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.
ISSUANCE OF HOLDINGS' CLASS A COMMON STOCK TO COMPANY MANAGEMENT
Pursuant to the 1998 Stock Bonus Plan, Holdings issued to Mr. Shepherd, as
of September 30, 1998, 19.75 shares of Holdings' Class A Common Stock in
consideration for the cancellation of Mr. Shepherd's 19.75 SARs. The terms and
conditions of Mr. Shepherd's ownership of such shares are set forth in the
Executive Subscription Agreement dated as of September 30, 1998 between Mr.
Shepherd and Holdings (the "Shepherd Subscription Agreement"). Pursuant to the
Shepherd Subscription Agreement, Mr. Shepherd has agreed to be bound by the
terms and conditions of the Shareholders Agreement to the same extent as if
named a "Shareholder" or "Holder" thereunder.
28
<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 30, 1997 and August 29, 1998.
Statements of Operations for the years ended August 31, 1996, August 30,
1997 and August 29, 1998.
Statement of Changes in Shareholder's Equity (Deficit) for the years
ended August 31, 1996, August 30, 1997 and August 29, 1998.
Statements of Cash Flows for the years ended August 31, 1996, August 30,
1997 and August 29, 1998.
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 29, 1998.
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 Company's 10 1/4% Senior Secured Notes due 2004 (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))
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
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))
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))
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
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))
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))
10.11 Fannie May Holdings, Inc. 1998 Stock Bonus Plan
10.12 Executive Subscription Agreement dated as of September 30, 1998 between
Holdings and Ted A. Shepherd
12.1 Statements re: Computation of Earnings to Fixed Charges
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
</TABLE>
31
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
ARCHIBALD CANDY CORPORATION
Report of Independent Auditors........................................................................... F-2
Balance Sheets as of August 30, 1997 and August 29, 1998................................................. F-3
Statements of Operations for the years ended August 31, 1996, August 30, 1997, and August 29, 1998....... F-4
Statement of Changes in Shareholder's Equity (Deficit) for the years ended August 31, 1996, August 30,
1997, and August 29, 1998.............................................................................. F-5
Statements of Cash Flows for the years ended August 31, 1996, August 30, 1997, and August 29, 1998....... 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 30, 1997 and August 29, 1998 and the related statements
of operations, shareholder's equity (deficit), and cash flows for the fiscal
years ended August 31, 1996, August 30, 1997, and August 29, 1998. 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 1996, 1997 and 1998 financial statements referred to
above present fairly, in all material respects, the financial position of
Archibald Candy Corporation as of August 30, 1997 and August 29, 1998, and the
results of its operations and its cash flows for the fiscal years ended August
31, 1996, August 30, 1997, and August 29, 1998, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
October 16, 1998
Chicago, Illinois
F-2
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
BALANCE SHEETS
AS OF AUGUST 30, 1997 AND AUGUST 29, 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 15,801 $ 13,081
Accounts receivable, net........................ 576 1,380
Inventories..................................... 18,965 24,602
Prepaid expenses and other current assets....... 267 306
------------ ------------
Total current assets.............................. 35,609 39,369
Due from affiliate................................ 825 --
Property, plant, and equipment.................... 20,330 20,927
Goodwill, less accumulated amortization of $6,310
($5,376 in 1997)................................ 31,960 31,161
Noncompete agreements and other intangibles, less
accumulated amortization of $108 ($90 in
1997)........................................... 127 109
Deferred financing fees, less accumulated
amortization of $789 ($108 in 1997)............. 4,166 3,698
Other assets...................................... 2,643 2,825
------------ ------------
Total assets................................ $ 95,660 $ 98,089
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................ $ 4,769 $ 4,728
Accrued liabilities............................. 4,964 4,956
Payroll and related liabilities................. 2,025 2,600
Current portion of long-term debt and capital
lease obligations............................. 376 97
------------ ------------
Total current liabilities......................... 12,134 12,381
Due to affiliate.................................. -- 604
Long-term debt, less current portion.............. 100,000 100,000
Capital lease obligations, less current portion... 145 48
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............................. (35,319) (33,644)
------------ ------------
Total shareholder's equity (deficit).............. (16,619) (14,944)
------------ ------------
Total liabilities and shareholder's equity
(deficit)....................................... $ 95,660 $ 98,089
------------ ------------
------------ ------------
</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 31, 1996, AUGUST 30, 1997, AND AUGUST 29, 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales.................................................................... $ 117,348 $ 121,933 $ 126,742
Cost of sales, excluding depreciation and amortization....................... 41,010 42,284 43,978
Selling, general, and administrative expenses, excluding depreciation and
amortization............................................................... 61,120 62,442 63,478
Depreciation and amortization expense........................................ 5,135 4,319 4,600
Amortization of goodwill and other intangibles............................... 1,672 1,613 1,633
Management fees and other fees............................................... 466 474 514
---------- ---------- ----------
Operating income............................................................. 7,945 10,801 12,539
Other (income) and expense:
Interest expense........................................................... 9,455 9,235 10,346
Interest and other income and expense...................................... (444) (411) (1,386)
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item..................... (1,066) 1,977 3,579
Provision for income taxes................................................... 349 250 276
---------- ---------- ----------
Income (loss) before extraordinary item...................................... (1,415) 1,727 3,303
Extraordinary item--Loss from early extinguishment of debt................... -- 2,898 --
---------- ---------- ----------
Net Income (loss)............................................................ $ (1,415) $ (1,171) $ 3,303
---------- ---------- ----------
---------- ---------- ----------
</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 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)
Net Income......................................... -- -- -- 3,303 3,303
Distribution under tax-sharing agreement........... -- -- -- (1,628) (1,628)
----------- ----------- ----------- ------------ -------------
Balance at August 29, 1998......................... 19,200 $ -- $ 18,700 $ (33,644) $ (14,944)
----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ------------ -------------
</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 31, 1996, AUGUST 30, 1997, AND AUGUST 29, 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................................. $ (1,415) (1,171) $ 3,303
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization................................................ 6,807 5,932 6,233
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................................................... 355 (247) (804)
Due from affiliate......................................................... (543) (282) 1,429
Inventories................................................................ (273) (327) (5,637)
Prepaid expenses and other current assets.................................. 210 361 (39)
Other assets............................................................... (468) (194) (805)
Accounts payable and accrued liabilities................................... (115) (1,301) 526
---------- --------- ----------
Net cash provided by operating activities...................................... 4,117 3,919 4,206
INVESTING ACTIVITIES
Purchase of property, plant, and equipment..................................... (2,280) (3,688) (4,574)
Acquisition.................................................................... (135)
Proceeds from sale of property, plant, and equipment........................... 1,159 -- --
---------- --------- ----------
Net cash used in investing activities.......................................... (1,121) (3,688) (4,709)
FINANCING ACTIVITIES
Proceeds from long-term debt................................................... -- 100,000 --
Net decrease in revolving line of credit....................................... (1,900) (9,100) --
Repayments of long-term debt................................................... (900) (71,086) --
Payments of capital lease obligations.......................................... (269) (350) (376)
Costs related to loan agreement................................................ (29) (4,274) (213)
Distribution under tax-sharing agreement....................................... (1,628)
---------- --------- ----------
Net cash provided by (used in) financing activities............................ (3,098) 15,190 (2,217)
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents........................... (102) 15,421 (2,720)
Cash and cash equivalents at beginning of year................................. 482 380 15,801
---------- --------- ----------
Cash and cash equivalents at end of year....................................... $ 380 $ 15,801 $ 13,081
---------- --------- ----------
---------- --------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Acquisition of equipment under capital lease agreements........................ $ 214 $ -- $ --
---------- --------- ----------
---------- --------- ----------
SUPPLEMENTAL SCHEDULE OF CASH TRANSACTIONS
Interest paid.................................................................. $ 10,631 $ 9,130 $ 10,261
---------- --------- ----------
---------- --------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
AUGUST 29, 1998
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The Company is a manufacturer and a retailer of boxed chocolates and other
confectionery items. The Company sells its Fannie May and Fanny Farmer candies
in over 300 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 years ended August 30, 1997, and August 29, 1998 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 using the liability method. Under this
method, a current tax asset or liability is recognized for the 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
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)
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 $2,733, $2,853, and $3,051
for 1996, 1997, and 1998, respectively. At August 30, 1997 and August 29, 1998,
the Company had $240 and $459 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 and 1997 financial statements have been
reclassified to conform with the 1998 presentation.
3. INVENTORIES
Inventories at August 30, 1997 and August 29, 1998 are comprised of the
following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Raw materials........................................................... $ 7,688 $ 10,110
Work in process......................................................... 218 237
Finished goods.......................................................... 11,059 14,255
--------- ---------
$ 18,965 $ 24,602
--------- ---------
--------- ---------
</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 30, 1997 and August 29, 1998 are
comprised of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Land.................................................................. $ 3,539 $ 3,539
Machinery and equipment............................................... 15,324 17,135
Buildings and improvements............................................ 15,974 17,000
Furniture and fixtures................................................ 2,531 2,741
Leasehold improvements................................................ 11,659 13,186
---------- ----------
49,027 53,601
Less: Accumulated depreciation........................................ (28,697) (32,674)
---------- ----------
$ 20,330 $ 20,927
---------- ----------
---------- ----------
</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 31, 1996, August 30, 1997, and August 29, 1998, consists of the
following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Service cost...................................................... $ 350 $ 370 $ 369
Interest cost..................................................... 379 389 396
Return on plan assets............................................. (710) (1,700) 114
Other............................................................. 267 1,248 (747)
--------- --------- ---------
$ 286 $ 307 $ 132
--------- --------- ---------
--------- --------- ---------
</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 30, 1997 and
August 29, 1998:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Actuarial present value of:
Accumulated benefit obligations:
Vested................................................................. $ 3,677 $ 4,675
Nonvested.............................................................. 739 885
--------- ---------
4,416 5,560
Present value of future compensation..................................... 555 727
--------- ---------
4,971 6,287
Assets relating to such benefits:
Market value of funded assets, primarily invested in money market and
equity securities...................................................... 6,980 6,420
--------- ---------
Overfunded projected benefit obligation................................ 2,009 133
Unrecognized (gain) loss............................................... (963) 781
--------- ---------
Pension asset recorded as a long-term asset............................ $ 1,046 $ 914
--------- ---------
--------- ---------
</TABLE>
The assumptions used in determining the present value of benefits were:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Discount rate................................................................... 8.0% 7.0%
Expected rate of return on assets............................................... 8.0 8.0
Rate of increase in compensation................................................ 4.0 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 1996, 1997, and 1998 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 31, 1996, August 30, 1997, and August
29, 1998, consisted of the following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Fixed minimum.................................................... $ 8,390 $ 7,867 $ 7,746
Rent based on percentage of sales................................ 523 672 548
--------- --------- ---------
$ 8,913 $ 8,539 $ 8,294
--------- --------- ---------
--------- --------- ---------
</TABLE>
During 1996, the Company entered into capital leases for machinery and
equipment of $214.
Future minimum lease payments required under the noncancellable leases
having lease terms in excess of one year at August 29, 1998, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- -----------
<S> <C> <C>
1999..................................................................... $ 5,989 $ 107
2000..................................................................... 4,295 33
2001..................................................................... 2,964 21
2002..................................................................... 2,091 --
2003..................................................................... 1,294 --
Thereafter............................................................... 1,582 --
----------- -----
18,215 161
Interest................................................................. -- (16)
----------- -----
$ 18,215 $ 145
----------- -----
----------- -----
</TABLE>
7. DEBT
Debt at August 30, 1997 and August 29, 1998, is comprised of $100 million of
Senior Secured Notes.
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 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.
A portion of the original credit agreements were held by affiliates of The
Jordan Company (TJC) and affiliates of TCW Capital (Note 9). The 1997 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.
F-11
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
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 29, 1998) plus a margin or the Eurodollar rate (5.5% at
August 29, 1998) 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 29, 1998.
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 collateralized 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 30,
1997 and August 29, 1998, approximates fair value.
F-12
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
AUGUST 29, 1998
(DOLLARS IN THOUSANDS)
8. INCOME TAXES
The provision for income taxes consists of the following for the years ended
August 31, 1996, August 30, 1997, and August 29, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................. $ 133 $ 50 $ 100
State............................................................... 216 200 176
--------- --------- ---------
$ 349 $ 250 $ 276
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred taxes consist of the following at August 30, 1997 and August 29,
1998:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Assets:
Net operating loss carryforward....................................... $ 7,536 $ 5,889
Other................................................................. 3,122 1,817
--------- ---------
Total assets............................................................ 10,658 7,706
Liabilities:
Accelerated tax depreciation.......................................... 366 171
Pension and other..................................................... 2,178 1,450
--------- ---------
Total liabilities....................................................... 2,544 1,621
--------- ---------
8,114 6,085
Valuation allowance..................................................... (8,114) (6,085)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>
The Company files a consolidated income tax return with Holdings. In
accordance with generally accepted accounting principles, the provision 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 1998, the Company must compute an amount both with and
without the benefit of the NOL carryforward 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. A distribution of $1,628 was made in 1998
under this agreement.
F-13
<PAGE>
ARCHIBALD CANDY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF FANNIE MAY HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 29, 1998
(DOLLARS IN THOUSANDS)
8. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of income tax expense
computed by applying the United States federal income tax rate to the income
(loss) before income taxes. A reconciliation of the differences for the years
ended August 31, 1996, August 30, 1997, and August 29, 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Computed statutory tax provision (benefit)........................ $ (362) $ (313) $ 1,217
Increase (decrease) resulting from:
Amortization of goodwill........................................ 317 289 289
Alternative minimum tax......................................... 133 50 100
Valuation allowance............................................. 54 567 (2,029)
Changes in deferred tax assets.................................. -- 208
State taxes, net of federal benefit............................. -- 116
Other items, net................................................ 207 (343) 375
--------- --------- ---------
Provision for income taxes........................................ $ 349 $ 250 $ 276
--------- --------- ---------
--------- --------- ---------
</TABLE>
At August 29, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $15 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 $50, $50 and $50 for directors' fees for 1996,
1997, and 1998 respectively. A member of the Board of Directors affiliated with
TJC was paid $52 as a consulting fee during 1996, 1997, and 1998. 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 1996 and $304 in 1997.
Management consulting and investment banking fees of $1,501 were accrued at
August 31, 1996 and were paid on July 2, 1997 as part of the debt offering.
On July 2, 1997, the Company entered into a new 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 and $412 in 1998.
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 November 25, 1998.
<TABLE>
<S> <C> <C>
ARCHIBALD CANDY CORPORATION
By: /s/ TED A. SHEPHERD
-----------------------------------------
Ted A. Shepherd
PRESIDENT AND CHIEF OPERATING OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ THOMAS H. QUINN
- ------------------------------ Chairman of the Board and November 25, 1998
Thomas H. Quinn Chief Executive Officer
President and Chief
/s/ TED A. SHEPHERD Operating Officer
- ------------------------------ (Principal Executive November 25, 1998
Ted A. Shepherd Officer)
Vice President Finance and
/s/ DONNA M. SNOPEK Accounting (Principal
- ------------------------------ Financial and Accounting November 25, 1998
Donna M. Snopek Officer)
/s/ JOHN W. JORDAN II
- ------------------------------ Director November 24, 1998
John W. Jordan II
/s/ ADAM E. MAX
- ------------------------------ Director November 24, 1998
Adam E. Max
/s/ JEFFREY ROSEN
- ------------------------------ Director November 24, 1998
Jeffrey Rosen
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 1998
or (2) any proxy statement, form of proxy or other proxy soliciting materials.
<PAGE>
FANNIE MAY HOLDINGS, INC.
1998 STOCK BONUS PLAN
1. PURPOSES.
This 1998 Stock Bonus Plan (this "Plan") is designed to promote the
long-term success of Fannie May Holdings, Inc., a Delaware corporation
("Holdings"), and its subsidiaries by strengthening Holdings' ability to attract
and retain highly competent management employees and to provide a means to
encourage stock ownership and proprietary interest in Holdings.
This Plan provides for the issuance of the right to acquire shares of Class
A Common Stock (as hereinafter defined) to those management employees who can
significantly enhance the long-term performance of Holdings and its subsidiaries
and is intended to provide, in combination with other forms of compensation and
benefits, a total compensation program which is competitive with the reward
programs of other similar enterprises in the candy and confectionery industries.
2. ELIGIBILITY.
Any management employee of the Company (as hereinafter defined) shall be
eligible to receive one or more awards under this Plan. The participants in
this Plan shall be determined by the Board of Directors of Holdings (the
"Board"), in its sole discretion, from management employees who, in the Board's
sole judgment, have a significant opportunity to influence the growth of the
Company or whose outstanding performance or potential merit further incentive
and reward for continued employment and accomplishment.
3. DEFINITIONS.
As used in this Plan, the following terms have the following respective
meanings:
(a) "BOARD" has the meaning provided in SECTION 2 hereof.
(b) "BONUS" means a stock bonus granted under this Plan.
(c) "CLASS A COMMON STOCK" means Holdings' Class A common stock, $0.01 par
value per share.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMON STOCK" means Holdings' common stock of whatever class, whether
voting or non-voting.
(f) "COMPANY" means Holdings and any subsidiaries of Holdings.
<PAGE>
(g) "CONSIDERATION" has the meaning provided in SECTION 7 hereof.
(h) "DESIGNATED BENEFICIARY" means the person or persons who upon the
death of a Holder shall have acquired, by written designation of the Holder or
by will, the laws of descent and distribution, or other legal proceeding, the
right to the Common Stock acquired by the Holder under this Plan.
(i) "EFFECTIVE DATE" has the meaning provided in SECTION 4 hereof.
(j) "EMPLOYMENT" means the employment of a Holder by the Company.
(k) "EXECUTIVE SUBSCRIPTION AGREEMENT" has the meaning provided in SECTION
7 hereof.
(l) "HOLDER" means a person (or, upon such individual's death, his or her
Designated Beneficiary) who holds Common Stock pursuant to this Plan.
(m) "HOLDINGS" has the meaning provided in SECTION 1 hereof.
(n) "PERMITTED TRANSFEREE" means the Holder's spouse and/or Designated
Beneficiaries, any trust or similar entity all of the beneficiaries of which
are, or a corporation, partnership or limited liability company all of the
stockholders, partners or members of which are, the Holder and/or the Holder's
spouse and Designated Beneficiaries.
(o) "PERSON" means a natural person, partnership, limited partnership,
limited liability company, trust, business trust, estate, association,
corporation, custodian, nominee or any other individual or entity in its own or
any represented capacity.
(p) "PLAN" has the meaning provided in SECTION 1 hereof.
(q) "SECURITIES ACT" has the meaning provided in SECTION 10 hereof.
(r) "SHAREHOLDERS AGREEMENT" means that certain Shareholders Agreement
dated as of October 30, 1991 and amended by the First Amendment thereto dated as
of July 2, 1997 by and among all of the holders of Holdings' Common Stock, as
may be further amended, restated, supplemented or otherwise modified from time
to time in accordance with the terms thereof.
(s) "TRANSFER" has the meaning provided in SECTION 12 hereof.
4. EFFECTIVE DATE; TERMINATION.
This Plan is effective as of July 1, 1998 (the "Effective Date"). This
Plan shall terminate at the close of business on the tenth anniversary of the
Effective Date, unless terminated earlier under SECTION 14(a) hereof.
<PAGE>
5. ADMINISTRATION OF THIS PLAN.
The Board shall be responsible for administering this Plan. The Board
shall have all the powers vested in it by the terms of this Plan, such powers to
include exclusive authority (within the limitations described herein) to select
the management employees to be granted Bonuses under this Plan and to determine
the terms and conditions of each Bonus to be made to each management employee
selected. The Board shall have full and exclusive power and authority to
administer and interpret this Plan, consistent with the terms of this Plan, and
to adopt such rules, regulations, agreements, guidelines and instruments for the
administration of this Plan and for the conduct of its business as the Board
deems necessary or advisable. The Board's interpretation of this Plan,
consistent with the terms of this Plan, and all actions taken and determinations
made by the Board pursuant to the powers vested in it hereunder, shall be
conclusive and binding on all parties concerned, including the Company and all
Holders.
6. SHARES OF CLASS A COMMON STOCK SUBJECT TO THIS PLAN.
Subject to SECTION 11 hereof, the shares of Class A Common Stock that may
be issued under this Plan shall not exceed thirty-three (33) shares of Class A
Common Stock. Any shares of Class A Common Stock issued pursuant to a Bonus
which for any reason are redeemed by Holdings or forfeited by a Holder shall
again be available for issuance under this Plan.
7. CONSIDERATION.
The consideration (the "Consideration") received in exchange for shares of
Class A Common Stock under this Plan shall be as determined by the Board in its
sole discretion and set forth in a subscription agreement to be entered into
between Holdings and the Holder concurrently with the grant of a Bonus under
this Plan (as may be amended, restated, supplemented or otherwise modified from
time to time in accordance with the terms thereof, each an "Executive
Subscription Agreement"). In addition, prior to or concurrently with delivery to
a Holder of a certificate representing Class A Common Stock issued, the Board
may require that such Holder pay any and all amounts necessary to satisfy
applicable federal, state and local tax requirements relating to such issuance
(including all withholding requirements).
8. TERMINATION OF EMPLOYMENT.
The Board, in its sole discretion, may make the shares of Class A Common
Stock issued pursuant to a Bonus subject, in whole or in part, to forfeiture,
call, redemption or put in the event of any termination of the respective
Holder's Employment. The terms and conditions of any such forfeiture, call,
redemption or put provisions shall be set forth in the Holder's Executive
Subscription Agreement.
3
<PAGE>
9. SHAREHOLDERS AGREEMENT.
Each share of Class A Common Stock issued pursuant to this Plan shall be
subject to the terms of the Shareholders Agreement. Each Holder who becomes a
Holder of shares of Class A Common Stock shall become a party to the
Shareholders Agreement as a "Shareholder" and a "Holder" thereunder by executing
an amendment or restatement of the Shareholders Agreement or a supplementary
agreement to that effect, which supplementary agreement may be incorporated into
an Executive Subscription Agreement. Each certificate representing shares of
Class A Common Stock issued under this Plan shall bear substantially the
following legend:
"THIS CERTIFICATE IS SUBJECT TO, AND IS TRANSFERABLE ONLY UPON
COMPLIANCE WITH, THE PROVISIONS OF AN EXECUTIVE SUBSCRIPTION
AGREEMENT, DATED , BETWEEN HOLDINGS AND THE ORIGINAL
HOLDER OF THE CLASS A COMMON STOCK REPRESENTED BY THIS
CERTIFICATE (THE "SUBSCRIPTION AGREEMENT"). THE SUBSCRIPTION
AGREEMENT GRANTS CERTAIN PURCHASE RIGHTS TO HOLDINGS (OR ITS
ASSIGNEES) UPON TERMINATION OF SUCH HOLDER'S SERVICE WITH THE
COMPANY. A COPY OF THE ABOVE REFERENCED AGREEMENT IS ON FILE AT
THE PRINCIPAL OFFICE OF THE COMPANY.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED
OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES UNLESS THE
ISSUER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE ISSUER STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM
THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT
OR THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
RESTRICTIONS CONTAINED IN A SHAREHOLDERS AGREEMENT DATED AS OF
OCTOBER 30, 1991, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE
SECRETARY OF THE COMPANY."
4
<PAGE>
10. COMPLIANCE WITH SECURITIES LAWS.
(a) Unless the Class A Common Stock issued is registered under the
Securities Act of 1933, as amended (the "Securities Act"), and the securities
laws of all other appropriate jurisdictions, the obligation of Holdings to issue
Class A Common Stock pursuant to this Plan shall be subject to receipt from the
Holder of a written representation to the effect that the Holder acknowledges
and represents and warrants to Holdings that he has been advised by Holdings
that: (i) the shares of Class A Common Stock have not been registered under the
Securities Act; (ii) the shares of Class A Common Stock must be held
indefinitely and the Holder must continue to bear the economic risk of the
investment in the shares of Class A Common Stock unless an offer and sale of
such shares of Class A Common Stock is subsequently registered under the
Securities Act and all applicable state securities laws or an exemption from
such registration is available; (iii) there is no established market for the
shares of Class A Common Stock and it is not anticipated that there will be any
public market for the shares of Class A Common Stock in the foreseeable future;
(iv) Rule 144 promulgated under the Securities Act is not presently available
with respect to the sale of any securities of Holdings, and Holdings has made no
covenant to make such Rule available; (v) when and if shares of Class A Common
Stock may be disposed of without registration under the Securities Act in
reliance on Rule 144, such disposition can be made only in limited amounts and
in accordance with the terms and conditions of such Rule; (vi) if the Rule 144
exemption is not available, public offer or sale without registration will
require the availability of an exemption under the Securities Act; (vii) a
restrictive legend shall be placed on the certificates representing the shares
of Class A Common Stock; and (viii) a notation shall be made in the appropriate
records of Holdings indicating that the shares of Class A Common Stock are
subject to restrictions on transfer and, if Holdings should at some time in the
future engage the services of a securities transfer agent, appropriate
stop-transfer instructions will be issued to such transfer agent with respect to
the shares of Class A Common Stock.
(b) In addition, the obligation of Holdings to issue Class A Common Stock
shall be subject to receipt from the Holder of a written representation to the
effect that the Holder acknowledges and represents and warrants to Holdings
that: (i) the Holder's financial situation is such that he can afford to bear
the economic risk of holding the shares of Class A Common Stock for an
indefinite period of time, has adequate means for providing for his current
needs and personal contingencies, and can afford to suffer complete loss of his
investment in the shares of Class A Common Stock; (ii) the Holder's knowledge
and experience in financial and business matters are such that he is capable of
evaluating the merits and risks of the investment in the shares of Class A
Common Stock as contemplated by this Plan; (iii) the Holder understands that the
shares of Class A Common Stock are a speculative investment which involve a high
degree of risk of loss of his investment therein, there are substantial
restrictions on the transferability of the shares of Class A Common Stock, and,
on the date hereof and for an indefinite period, there will be no public market
for the shares of Class A Common Stock and, accordingly, it may not be possible
for the Holder to liquidate his investment in case of emergency, if at all; (iv)
in making his decision to acquire the shares of Class A Common Stock under this
Plan, the Holder has relied upon independent investigations made by him and, to
the extent believed by the Holder to be appropriate, his
5
<PAGE>
representatives, including his own professional, financial, tax and other
advisors; (v) the Holder and his representatives have been given the
opportunity to examine all documents and to ask questions of, and to receive
answers from, Holdings and their representatives concerning the terms and
conditions of the acquisition of the shares of Class A Common Stock and to
obtain any additional information which the Holder or his representatives deem
necessary; (vi) the Holder is a management employee of the Company and as such
has a high level of familiarity with the business, operations, financial
condition and prospect of Holdings; and (vii) the Holder understands that no
dividends are expected to be paid on the shares of Class A Common Stock in the
foreseeable future.
11. DILUTION AND OTHER ADJUSTMENTS.
In the event the shares of Class A Common Stock, as presently constituted,
shall be changed into or exchanged for a different number or kind of shares of
stock or other securities of Holdings or of another corporation (whether by
reason of merger, consolidation, recapitalization, reclassification, split,
reverse split, combination of shares or otherwise) or if the number of such
shares of Class A Common Stock shall be increased through the payment of a stock
dividend, then there shall be substituted for or added to each share of Class A
Common Stock under this Plan, the number and kind of shares of stock or other
securities into which each outstanding share of Class A Common Stock shall be so
changed, or for which each such share of Class A Common Stock shall be
exchanged, or to which each such share of Class A Common Stock shall be
entitled, as the case may be.
12. RESTRICTIONS ON TRANSFER.
(a) The Holder agrees that he will not sell, transfer, assign, pledge,
hypothecate or otherwise dispose of ("Transfer") all or any portion of the
shares of Class A Common Stock granted to him pursuant to this Plan otherwise
than (i) to a Permitted Transferee, or (ii) in accordance with the terms of this
Plan, any agreement thereunder and the Shareholders Agreement. Notwithstanding
this SECTION 12, the provisions of SECTION 8 with regard to the termination of
employment of the Holder shall continue in full force and effect and shall apply
to the rights contained herein whether then held by the Holder or any transferee
of the Holder.
(b) Holdings shall not be required: (i) to reflect on its books any
purported Transfer of shares of Class A Common Stock in violation of any of the
provisions set forth in this Plan, any agreement thereunder or the Shareholders
Agreement; (ii) to treat any purported transferee of such shares of Class A
Common Stock as a record owner of such shares of Class A Common Stock; or (iii)
to afford such purported transferee any right to vote, or to receive dividends
in respect of, such shares of Class A Common Stock.
(c) As a condition to any Transfer to a Permitted Transferee, the
Permitted Transferee shall execute and deliver to Holdings a valid and binding
agreement satisfactory to Holdings and its legal counsel to the effect that any
shares of Class A Common Stock so Transferred shall continue to be subject to
all of the provisions and conditions of this Plan, any agreement thereunder and
the
6
<PAGE>
Shareholders Agreement, and that such Permitted Transferee agrees to be jointly
and severally bound with the Holder hereby and thereby as if an original party
hereto and thereto; and further provided that no Transfer to any Permitted
Transferee shall relieve the Holder of any obligation or liability under this
Plan, any agreement thereunder or the Shareholders Agreement.
13. MISCELLANEOUS PROVISIONS.
(a) All Bonuses granted under this Plan shall be evidenced by an Executive
Subscription Agreement in such form and containing such terms and conditions
(not inconsistent with this Plan) as the Board shall adopt.
(b) No employee or other person shall have any right to be granted an
award under this Plan. None of this Plan, any Executive Subscription Agreement,
any Common Stock or any action taken hereunder shall be construed as giving any
employee any right to be retained in the employ of the Company or shall
interfere with or restrict in any way the rights of the Company, which are
hereby reserved, to discharge any employee at any time for any reason
whatsoever, with or without cause.
(c) The costs and expenses of administering this Plan shall be borne by
Holdings and not charged to any Holder or to any person granted a Bonus.
(d) During the term of this Plan, Holdings will at all times reserve and
keep available such numbers of shares of Class A Common Stock as may be issuable
under this Plan.
(e) In the event that a court of competent jurisdiction determines that
Holdings has failed to perform in any material respect any of its obligations
under this Plan or any Executive Subscription Agreement, Holdings shall pay all
reasonable attorneys' fees and disbursements incurred by a Holder in enforcing
its rights hereunder or thereunder with respect to such failure to perform.
14. AMENDMENTS.
(a) This Plan may be amended by the Board as it deems necessary or
appropriate to achieve the purposes of this Plan. The Board may suspend this
Plan or terminate this Plan at any time, provided, that no such action shall
adversely affect any outstanding Bonus or Class A Common Stock issued pursuant
to a Bonus.
(b) The Board, in its sole discretion, may amend outstanding Executive
Subscription Agreements or this Plan as it relates to a Bonus without the
consent of the Holders party thereto, but not in any manner adversely affecting
the rights, interests or obligations of the Holders thereunder.
15. OTHER BENEFIT AND COMPENSATION PROGRAMS.
7
<PAGE>
Unless otherwise specifically determined by the Board, stock received by
Holders under this Plan is intended to be "non-qualified compensation" under the
Code and shall not be deemed a part of a Holder's regular, recurring
compensation for purposes of calculating payments or benefits from any Holdings
benefit plan or severance program. Further, Holdings may adopt other
compensation programs, plans or arrangements as it deems appropriate or
necessary.
16. REGULATORY APPROVALS.
The implementation of this Plan and the issuance of shares of Class A
Common Stock under this Plan shall be subject to Holdings' procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over this Plan or the shares of Class A Common Stock issued pursuant to it.
17. SUCCESSORS AND ASSIGNS; BINDING EFFECT.
The provisions of this Plan shall be binding upon the parties hereto and
their respective heirs, legal representatives, successors and permitted assigns,
including, without limitation, the Holder's Designated Beneficiary, the estate
of such Holder and the executor, administrator or trustee of such estate, or any
receiver or trustee in bankruptcy or representative of the Holder's creditors.
18. SEVERABILITY.
The invalidity, illegality or unenforceability of one or more of the
provisions of this Plan or any agreements thereunder in any jurisdiction shall
not affect the validity, legality or enforceability of the remainder of this
Plan or any agreements thereunder in such jurisdiction or the validity, legality
or enforceability of this Plan or any agreements thereunder, including any such
provision, in any other jurisdiction, it being intended that all rights and
obligations of the parties hereunder shall be enforceable to the fullest extent
permitted by law.
19. APPLICABLE LAW.
THIS PLAN AND ANY AGREEMENTS ENTERED INTO THEREUNDER SHALL BE GOVERNED BY,
CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE, WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS OF ANY STATE.
IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR
ARISING OUT OF THIS PLAN OR ANY AGREEMENTS ENTERED INTO THEREUNDER OR THE
VALIDITY, INTERPRETATION OR ENFORCEMENT HEREOF OR ANY OTHER CLAIM OR DISPUTE
HOWEVER ARISING BETWEEN HOLDINGS AND THE HOLDER, THE HOLDER, TO THE FULLEST
EXTENT THAT HE MAY EFFECTIVELY DO SO, WAIVES ANY RIGHT TO TRIAL BY JURY. THE
HOLDER AGREES THAT THIS SECTION 19 IS A SPECIFIC AND MATERIAL ASPECT OF THE PLAN
AND ANY AGREEMENT ENTERED
8
<PAGE>
INTO THEREUNDER AND ACKNOWLEDGES THAT HOLDINGS WOULD NOT ENTER INTO AN AGREEMENT
UNDER THIS PLAN IF THIS SECTION 19 WERE NOT A PART HEREOF.
20. ARBITRATION.
Any dispute between any of the parties concerned, including the Company and
all Holders and any other management employee of the Company relating to or in
respect of this Plan and agreements entered into thereunder, their negotiation,
execution, performance, subject matter, or any course of conduct or dealing or
actions under or in respect of this Plan or such agreements, including without
limitation any claim under the Securities Act, the Securities Exchange Act of
1934, as amended, any other state or federal law relating to securities or fraud
or both, shall be submitted to, and resolved exclusively pursuant to,
arbitration in accordance with the commercial arbitration rules of the American
Arbitration Association. Such arbitration shall take place in Chicago,
Illinois. Decisions as to findings of fact pursuant to such arbitration shall be
final, conclusive and binding on the parties. Within thirty (30) days following
the award of any arbitrator hereunder, any party may apply to a court of
competent jurisdiction for a resolution of any questions of law bearing on such
award, and no such award shall be binding and enforceable unless the
arbitrator's determinations as to such questions of such law have been
judicially approved or until the passage of such thirty (30) day period without
such application having been made. Any final award shall be enforceable as a
judgment of a court of record.
21. DESCRIPTIVE HEADINGS.
The headings in this Plan are for convenience of reference only and shall
not limit or otherwise affect the meaning of terms contained herein.
[End of text of 1998 Stock Bonus Plan]
9
<PAGE>
EXECUTIVE SUBSCRIPTION AGREEMENT
This EXECUTIVE SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of
September 30, 1998, is by and between Fannie May Holdings, Inc., a Delaware
corporation (the "Company"), and Ted A. Shepherd, the President and Chief
Operating Officer of the Company (the "Executive").
RECITALS
WHEREAS, all of the holders of the Company's common stock are parties
to that certain Shareholders Agreement dated as of October 30, 1991 and amended
by the First Amendment thereto dated as of July 2, 1997 (as may be further
amended, modified or supplemented from time to time in accordance with the terms
thereof, the "Shareholders Agreement");
WHEREAS, in accordance with the Shareholders Agreement and other
agreements to which the Company is party, the Board of Directors of the Company
has adopted the 1998 Stock Bonus Plan that allows the Board of Directors to
authorize the issuance of up to 33 shares in aggregate of the Company's Class A
Common Stock, $0.01 par value per share (the "Class A Common Stock"), to certain
management employees of the Company; and
WHEREAS, pursuant to the 1998 Stock Bonus Plan, the Board of Directors
of the Company has authorized the grant to the Executive of the right to
subscribe for and acquire from the Company 19.75 shares (the "Shares") of Class
A Common Stock in exchange for the Executive's transfer to the Company of all of
his rights, title and interest in 19.75 stock appreciation rights in the Company
(the "SARs") on the terms and conditions set forth herein;
NOW, THEREFORE, in order to implement the foregoing and in
consideration of the mutual representations, warranties, covenants and
agreements contained herein, the parties hereto agree as follows:
1. SUBSCRIPTION FOR AND ACQUISITION OF SHARES.
1.1. ACQUISITION OF SHARES; TERMINATION OF SAR AGREEMENTS. (a) Upon
the terms and subject to the conditions set forth in this Agreement, the
Executive hereby subscribes for and agrees to acquire, and the Company hereby
agrees to issue to the Executive, the Shares. The Executive shall receive the
Shares in exchange for the transfer to the Company of all his right, title and
interest in the SARs. Upon the Executive's transfer of the SARs to the Company,
each Stock Appreciation Rights Agreement between the Company and the Executive
shall be deemed terminated and of no further force or effect.
(b) The Executive acknowledges to the Company that he
understands and agrees, as follows:
<PAGE>
(i) THE SHARES HAVE NOT BEEN REGISTERED UNDER FEDERAL OR STATE
SECURITIES LAWS;
(ii) THE SHARES ARE A HIGHLY SPECULATIVE AND RISKY INVESTMENT;
(iii) THERE IS NO PUBLIC OR OTHER MARKET FOR THE SHARES NOR IS ANY LIKELY
TO DEVELOP; AND
(iv) THE EXECUTIVE MAY AND CAN AFFORD TO LOSE HIS ENTIRE INVESTMENT AND
THAT HE UNDERSTANDS HE MAY HAVE TO HOLD THIS INVESTMENT INDEFINITELY.
(c) Each certificate evidencing the Shares being issued pursuant
to this Agreement shall bear legends reflecting (i) this Agreement's existence
and (ii) the fact that the Shares have not been registered under Federal or
state securities laws and are subject to the limitations on transfer set forth
herein. The Executive acknowledges that the effect of these legends, among
other things, is or may be to significantly limit or diminish the value of the
Shares for purposes of sale or for use as loan collateral. The Executive
consents to the notation of "stop transfer" instructions against the Shares
being acquired hereunder.
1.2. DOCUMENT ACCESS. The Company has afforded the Executive and his
advisors, if any, the opportunity to discuss an investment in the Shares and to
ask questions of representatives of the Company concerning the terms and
conditions of the acquisition of the Shares, and such representatives have
provided answers to all such questions concerning the acquisition of the Shares.
The Executive has consulted his own financial, tax, accounting and legal
advisors, if any, as to the Executive's investment in the Shares and the
consequences thereof and risks associated therewith. The Executive and his
advisors, if any, have examined or have had the opportunity to examine before
the date hereof all documents and other information that the Executive deems to
be material to an understanding of the business, operations and financial
condition of the Company and the investment in the Shares contemplated hereby.
1.3. REPRESENTATIONS AND WARRANTIES OF THE EXECUTIVE. The Executive
represents, warrants and covenants to the Company as follows:
(a) the Executive has full power and authority to execute and
deliver this Agreement and to perform his obligations hereunder and this
Agreement has been duly executed and delivered by the Executive and is valid,
binding and enforceable against the Executive in accordance with its terms;
(b) none of the execution, delivery or performance of this
Agreement by the Executive will result in any material breach of any terms or
provisions of, or constitute a material default under, any material contract,
agreement or instrument to which the Executive is a party or
<PAGE>
by which the Executive is bound;
(c) the Executive owns all of the SARs free and clear of all
liens, claims, charges, restrictions, equities or encumbrances of any kind
(other than those in favor of the Company); and
(d) the Executive will complete, execute and file a form of
election with respect to the Shares under Section 83(b) of the Internal Revenue
Code of 1986, as amended, with the Internal Revenue Service not later than
thirty (30) days after the date hereof.
1.4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Executive as follows:
(a) the Company is duly incorporated, validly existing and in
good standing in the State of Delaware, with full power to enter into this
Agreement and to perform its obligations hereunder;
(b) the Company has duly and validly executed and delivered this
Agreement, and this Agreement is valid, binding and enforceable against the
Company in accordance with its terms;
(c) the execution, delivery and performance of this Agreement by
the Company will not (i) violate, conflict with, or result in the breach,
acceleration, default or termination of, or otherwise give any other contracting
party the right to terminate, accelerate, modify or cancel any of the terms,
provisions or conditions of any agreement or instrument to which the Company is
a party or by which it or its assets are bound, or (ii) constitute a violation
of any applicable law, rule or regulation, or of any judgment, order,
injunction, award or decree of any court, administrative agency or other
governmental authority applicable to it;
(d) prior to the issuance of the Shares, the authorized capital
stock of the Company consists of (i) 2,000 shares of Class A Common Stock, $0.01
par value, of which 695.263 shares are issued and outstanding, (ii) 2,000 shares
of Class B Common Stock, $0.01 par value, none of which are issued and
outstanding, (iii) 1,000 shares of Class C Common Stock, $0.01 par value, of
which 294.737 shares are issued and outstanding, (iv) 1,000 shares of Class D
Common Stock, $0.01 par value, of which 10 shares are issued and outstanding,
(v) 1,500 shares of 5% Senior Preferred Stock, no par value, of which
1,155.043795 shares are issued and outstanding, (vi) 625 shares of 8% Junior A
PIK Preferred Stock, no par value, of which 444.5048 shares are issued and
outstanding, and (vii) 62 shares of 8% Junior B PIK Preferred Stock, no par
value, of which 44.4504 shares are issued and outstanding; and
(e) the authorized capital stock of Archibald Candy Corporation
consists of 25,000 shares of common stock, $0.01 par value, 19,200 shares of
which are issued and outstanding and all of which are owned by the Company.
-3-
<PAGE>
2. INVESTMENT REPRESENTATIONS OF THE EXECUTIVE.
2.1. INVESTMENT INTENTION. The Executive hereby represents and
warrants to the Company that the Executive is acquiring the Shares for
investment solely for his own account and not with a view to, or for resale in
connection with, the distribution or other disposition thereof.
2.2. LEGEND. Each certificate representing Shares shall bear
substantially the following legend:
"THIS CERTIFICATE IS SUBJECT TO, AND IS TRANSFERABLE ONLY UPON
COMPLIANCE WITH, THE PROVISIONS OF AN EXECUTIVE SUBSCRIPTION
AGREEMENT, DATED SEPTEMBER 30, 1998, BETWEEN THE COMPANY AND THE
ORIGINAL HOLDER OF THE CLASS A COMMON STOCK REPRESENTED BY THIS
CERTIFICATE (THE "SUBSCRIPTION AGREEMENT"). THE SUBSCRIPTION
AGREEMENT GRANTS CERTAIN PURCHASE RIGHTS TO THE COMPANY (OR ITS
ASSIGNEES) UPON TERMINATION OF SUCH HOLDER'S SERVICE WITH THE
COMPANY. A COPY OF THE ABOVE REFERENCED AGREEMENT IS ON FILE AT
THE PRINCIPAL OFFICE OF THE COMPANY.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED
OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES UNLESS THE
ISSUER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE ISSUER STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM
THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT
OR THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
RESTRICTIONS CONTAINED IN A SHAREHOLDERS AGREEMENT DATED AS OF
OCTOBER 30, 1991, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE
SECRETARY OF THE COMPANY."
2.3. RISK FACTORS.
-4-
<PAGE>
(a) The Executive acknowledges that he knows and understands
that it is unlikely the Company will pay dividends on the Shares; there is no
legal requirement or promise made by the Company to declare or pay such
dividends and such dividends may not in any event be paid if such payment would
violate any term of any agreement binding on the Company. The ability of the
Company to make any dividend or other payments or distributions in respect of
the Shares may be restricted by future agreements or instruments binding on the
Company. If the Executive ceases to be an employee of the Company, the Shares
may be subject to certain rights of the Company to redeem or purchase such
Shares under this Agreement.
(b) The Executive acknowledges that any financial projections or
forecasts with respect to the Company are subject to many assumptions and
factors beyond the Company's control, and that there are no assurances that
these projections or forecasts will be realized.
(c) The Executive acknowledges that he knows and understands
that his acquisition of the Shares is a speculative investment which involves a
high risk of loss and that on and after the date hereof there will be no public
market for the Shares, and that such a public market may never develop.
(d) The Executive understands that Jordan Industries, Inc.
("Jordan Industries") and its affiliates own a significant percentage of the
outstanding capital stock of the Company and may have sufficient voting power to
exercise control over the business, policies and affairs of the Company. The
Company has entered, and from time to time may enter, into various agreements
and arrangements with Jordan Industries and its affiliates in exchange for the
provision of services to the Company or to provide financing to the Company.
Further, the Executive acknowledges that Jordan Industries and its affiliates,
including The Jordan Company ("Jordan"), are engaged in the business of
investing in, acquiring and/or managing businesses for their own accounts, the
accounts of their affiliates and associates and for the account of unaffiliated
third parties. No aspect or element of such activities shall be deemed to be
engaged in for the benefit of the Company or its subsidiaries nor to constitute
a conflict of interest. Jordan Industries and its affiliates shall have no
obligation to present any investment or business opportunities to the attention
of the Company or its subsidiaries or stockholders and the Executive hereby
waives any claim he may have against Jordan Industries or its affiliates for the
failure of Jordan Industries or its affiliates to present any such opportunity
to the Company, its subsidiaries or stockholders or to pursue such opportunity
for the benefit of such parties.
2.4. SECURITIES LAW MATTERS. (a) The Executive represents and
warrants that he did not use a "purchaser's representative" (as that term is
used in Regulation D as promulgated by the Securities and Exchange Commission)
in connection with the transactions contemplated by this Agreement. The
Executive represents and warrants that neither Jordan, Jordan Industries nor any
of their respective employees or affiliates has acted as a representative of the
Executive in connection with such transactions. The Executive hereby releases
Jordan, Jordan Industries, and each of their respective partners, principals,
directors, officers, employees, agents and representatives
-5-
<PAGE>
(collectively, the "Jordan Entities") from and against any claims in respect of
the Executive's subscription for the Shares and any related transactions
hereunder. The Executive represents and warrants that his decision to acquire
the Shares has been made by the Executive independent of any statements,
disclosures or judgments as to the properties, business, prospects or condition
(financial or otherwise) of the Company which may have been made or given by any
person, including any of the Jordan Entities.
(b) The Executive acknowledges and represents and warrants to
the Company that he has been advised by the Company that (i) the Shares have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"); (ii) the Shares must be held indefinitely and the Executive must continue
to bear the economic risk of the investment in the Shares unless an offer and
sale of such Shares is subsequently registered under the Securities Act and all
applicable state securities laws or an exemption from such registration is
available; (iii) there is no established market for the Shares and it is not
anticipated that there will be any public market for the Shares in the
foreseeable future; (iv) Rule 144 promulgated under the Securities Act is not
presently available with respect to the sale of any securities of the Company,
and the Company has made no covenant to make such Rule available; (v) when and
if Shares may be disposed of without registration under the Securities Act in
reliance on Rule 144, such disposition can be made only in limited amounts and
in accordance with the terms and conditions of such Rule; (vi) if the Rule 144
exemption is not available, public offer or sale without registration will
require the availability of an exemption under the Securities Act; (vii) a
restrictive legend in the form heretofore set forth shall be placed on the
certificates representing the Shares; and (viii) a notation shall be made in the
appropriate records of the Company indicating that the Shares are subject to
restrictions on transfer and, if the Company should at some time in the future
engage the services of a securities transfer agent, appropriate stop-transfer
instructions will be issued to such transfer agent with respect to the Shares.
2.5. ADDITIONAL INVESTMENT REPRESENTATIONS. The Executive represents
and warrants that (a) the Executive's financial situation is such that he can
afford to bear the economic risk of holding the Shares for an indefinite period
of time, has adequate means for providing for his current needs and personal
contingencies, and can afford to suffer complete loss of his investment in the
Shares; (b) the Executive's knowledge and experience in financial and business
matters are such that he is capable of evaluating the merits and risks of the
investment in the Shares as contemplated by this Agreement; (c) the Executive
understands that the Shares are a speculative investment which involve a high
degree of risk of loss of his investment therein, there are substantial
restrictions on the transferability of the Shares, and, on the date hereof and
for an indefinite period, there will be no public market for the Shares and,
accordingly, it may not be possible for the Executive to liquidate his
investment in case of emergency, if at all; (d) in making his decision to
acquire the Shares hereby acquired, the Executive has relied upon independent
investigations made by him and, to the extent believed by the Executive to be
appropriate, his representatives, including his own professional, financial, tax
and other advisors; (e) the Executive and his representatives have been given
the opportunity to examine all documents and to ask questions of, and to receive
answers from, the Company and their representatives concerning the terms and
conditions of the acquisition
-6-
<PAGE>
of the Shares and to obtain any additional information which the Executive or
his representatives deem necessary; (f) the Executive is a management employee
of the Company and as such has a high level of familiarity with the business,
operations, financial condition and prospect of the Company; and (g) the
Executive understands that no dividends are expected to be paid on the Shares in
the foreseeable future.
2.6. SHAREHOLDERS AGREEMENT. The Executive hereby agrees to become a
party to the Shareholders Agreement and to be bound by the terms and conditions
of the Shareholders Agreement as a "Shareholder" and as a "Holder" thereunder
for all purposes thereof (including, without limitation, Articles 4 and 5
thereof), for so long as the Executive owns shares of the Company's Common
Stock. The Company and the Executive agree that this Agreement shall constitute
a counterpart of the Shareholders Agreement for purposes of Section 9(h)
thereof.
3. RESTRICTIONS ON TRANSFER.
3.1. GENERAL RESTRICTIONS ON TRANSFER. (a) The Executive agrees that
he will not sell, transfer, assign, pledge, hypothecate or otherwise dispose of
("Transfer") all or any portion of the Shares otherwise than (i) to a Permitted
Transferee or (ii) in accordance with the terms of the Plan, this Agreement and
the Shareholders Agreement. Notwithstanding this Section 3.1(a), the provisions
of Section 4 with regard to the termination of employment of the Executive shall
continue in full force and effect and shall apply to the rights contained herein
whether then held by the Executive or any transferee of the Executive.
(b) The Company shall not be required (i) to reflect on its
books any purported Transfer of Shares in violation of any of the provisions set
forth in this Agreement, (ii) to treat any purported transferee of such Shares
as a record owner of such Shares or (iii) to afford such purported transferee
any right to vote, or to receive dividends in respect of, such Shares.
3.2. CERTAIN PERMITTED TRANSFERS. As a condition to any Transfer to a
Permitted Transferee, the Permitted Transferee shall execute and deliver to the
Company a valid and binding agreement satisfactory to the Company and its legal
counsel to the effect that any Shares so Transferred shall continue to be
subject to all of the provisions and conditions of this Agreement and that such
Permitted Transferee agrees to be jointly and severally bound with the Executive
hereby as if an original party hereto; and further provided that no Transfer to
any Permitted Transferee shall relieve the Executive of any obligation or
liability under this Agreement.
4. TERMINATION OF EMPLOYMENT
(a) If the Executive ceases to be employed by the Company or any of
its subsidiaries at any time prior to the completion of the fifth anniversary of
January 20, 1998, for any reason other than his death or Disability or
termination for Cause, then (i) the Company shall have the right to redeem, for
a redemption price equal to $1.00 per Share redeemed, a number of Shares equal
to the product of (A) 9.75 MULTIPLIED BY (B) the applicable "Percentage of
Shares Redeemable"
-7-
<PAGE>
set forth in the following table based on the number of anniversaries of January
20, 1998 elapsed prior to such employment termination and (ii) all of the
Executive's rights and interests hereunder and under the Shareholders Agreement
shall automatically and without further action terminate and be of no further
force or effect upon any such redemption to the extent relating to any Shares
redeemed.
<TABLE>
<CAPTION>
Number of Anniversaries of Percentage of
January 20, 1998 Elapsed Shares Redeemable
------------------------ -----------------
<S> <C>
less than one 100.00%
one but less than two 77.56%
two but less than three 55.13%
three but less than four 32.69%
four but less than five 10.53%
five or more 0.00%
</TABLE>
(b) If the Executive ceases to be employed by the Company or any of
its subsidiaries on account of his death or Disability or, at any time after
January 20, 1999 due to any reason other than termination for Cause, then the
Company shall have an option (the "Call Option") exercisable upon 30 days notice
given at any time within six months after such termination (the "Option Period")
to purchase from the Executive all or any portion of his Shares, to the extent
remaining after the application of Section 4(a) above, at a purchase price per
Share equal to the difference between: (i) the result obtained by taking the
greater of:
(A) the Company's book value (as of the most recent quarterly financial
statement of the Company) at the time the Call Option is exercised; or
(B) four times the Company's earnings before interest and taxes for its
last completed fiscal year prior to the date of the exercise of the
Call Option less the amount of the Company's funded debt as of the end
of such fiscal year (in each case as determined from the most recent
annual financial statement of the Company);
divided, in either case, by the number of shares of Common Stock (as hereinafter
defined) Outstanding (as hereinafter defined) as at the end of such quarter or
year, as the case may be; minus (ii) the quotient of the sum of $17,700,000 plus
any accrued and unpaid dividends on the shares of the Preferred Stock (as
hereinafter defined) of the Company and Common Stock as of the date of exercise
divided by the number of shares of Common Stock Outstanding. The Call Option
shall be exercised by the Company by tendering to the Executive the purchase
price for his Shares, by certified or official bank check, prior to the
expiration of the period of the notice provided above.
-8-
<PAGE>
The Company at its option may instead deliver a promissory note, payable in
three equal annual installments (the first installment shall by payable on the
first anniversary of the purchase of such Shares), which note shall be
subordinated to all other debt and creditors of the Company, and shall bear
interest at 8.0% per annum payable semiannually.
(c) If the Executive ceases to be employed by the Company or any of
its subsidiaries at any time due to termination for Cause, then (A) the Company
shall have the right to redeem any or all of the Shares for a redemption price
equal to $1.00 per Share redeemed and (B) all of the Executive's rights and
interests hereunder and under the Shareholders Agreement shall automatically and
without further action terminate and be of no further force or effect upon any
such redemption to the extent relating to any Shares redeemed.
(d) All determinations under this Section 4 shall be made by the
Board of Directors (as hereinafter defined), whose decision will be final and
binding.
(e) The Executive shall have a "put" option on the same time and
price provisions as the "Call Option".
5. RIGHT OF SET OFF. The Company shall be entitled to set off and
reduce any amounts payable to the Executive upon the purchase of Shares pursuant
to Section 4 for any other obligations or liabilities of the Executive to the
Company under this Agreement or any other written agreement between the Company
and the Executive.
6. DEFINITIONS.
(a) "BOARD OF DIRECTORS" means the Company's Board of Directors
or any properly constituted committee thereof.
(b) "CAUSE" means material injury to the Company resulting from
the Executive's gross negligence in the performance of, or the Executive's
willful failure after written notice to perform, any of his duties as an
employee of the Company; the Executive's willful or intentional injury of the
Company; or any act of the Executive involving moral turpitude which results in
material injury to the name or the goodwill of the Company.
(c) "COMMON STOCK" means the Company's common stock, par value
$.01 per share, of whatever class, whether voting or non-voting.
(d) "DISABILITY" means the inability of the Executive to perform
substantially his duties to the Company by reason of physical or mental
disability or infirmity that, in the reasonable judgment of the Board of
Directors, is documented by medical evidence.
(e) "OUTSTANDING" means, with respect to the Common Stock, the
issued and outstanding Common Stock, shares of Common Stock issuable pursuant to
options, convertible
-9-
<PAGE>
securities or other rights, and stock appreciation rights in respect of Common
Stock.
(f) "PERMITTED TRANSFEREE" means the Executive's spouse and/or
descendants, any trust or similar entity all of the beneficiaries of which are,
or a corporation, partnership or limited liability company all of the
stockholders, partners or members of which are, the Executive and/or the
Executive's spouse and descendants.
(g) "PREFERRED STOCK" means the Company's preferred stock, of
whatever class, whether voting or non-voting.
7. MISCELLANEOUS.
7.1. BINDING EFFECT. The provisions of this Agreement shall be
binding upon the parties hereto and their respective heirs, legal
representatives, successors and permitted assigns. Neither this Agreement nor
any purchase or sale of Shares pursuant hereto shall create, or be construed or
deemed to create, any right to employment in favor of the Executive or any other
person by the Company or any of its subsidiaries. The language used in this
Agreement will be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction will be applied
against any person.
7.2. SEVERABILITY. The invalidity, illegality or unenforceability of
one or more of the provisions of this Agreement in any jurisdiction shall not
affect the validity, legality or enforceability of the remainder of this
Agreement in such jurisdiction or the validity, legality or enforceability of
this Agreement, including any such provision, in any other jurisdiction, it
being intended that all rights and obligations of the parties hereunder shall be
enforceable to the fullest extent permitted by law.
7.3. AMENDMENT. This Agreement may be amended only by a written
instrument signed by the Company and the Executive.
7.4. NOTICES. All notices and other communications provided for
herein shall be dated and in writing and shall be deemed to have been duly given
when delivered, if delivered personally, sent by registered or certified mail,
return receipt requested, postage prepaid or sent by confirmed telecopy and when
received if delivered otherwise, to the party to whom it is directed:
(a) If to the Company, to it at the following address:
Fannie May Holdings, Inc.
ArborLake Centre, Suite 550
1751 Lake Cook Road
Deerfield, Illinois 60015
Attention: Thomas H. Quinn
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<PAGE>
(b) If to the Executive, to him at the following address:
Ted A. Shepherd
Fannie May Holdings, Inc.
1137 W. Jackson Blvd.
Chicago, IL 60607
or at such other address as the parties hereto shall have specified by notice in
writing to the other parties (provided that such notice of change of address
shall be deemed to have been duly given only when actually received).
7.5. APPLICABLE LAW; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL BE
GOVERNED BY, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF DELAWARE, WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS OF ANY STATE.
EACH PARTY AGREES THAT JURISDICTION AND VENUE WILL BE PROPER IN CHICAGO,
ILLINOIS AND WAIVES ANY OBJECTIONS BASED UPON FORUM NON CONVENIENS. EACH PARTY
WAIVES PERSONAL SERVICE OF PROCESS AND AGREES THAT A SUMMONS AND COMPLAINT
COMMENCING AN ACTION OR PROCEEDING SHALL BE PROPERLY SERVED AND SHALL CONFER
PERSONAL JURISDICTION IF SERVED BY REGISTERED OR CERTIFIED MAIL TO THE PARTY AT
THE ADDRESS SET FORTH IN THIS AGREEMENT, OR AS OTHERWISE PROVIDED BY THE LAWS OF
THE STATE OF ILLINOIS OR THE UNITED STATES. THE CHOICE OF FORUM SET FORTH IN
THIS SECTION 7.5 SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT
OBTAINED IN ANY OTHER FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO
ENFORCE SAME IN ANY OTHER APPROPRIATE JURISDICTION.
IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR
ARISING OUT OF THIS AGREEMENT OR THE VALIDITY, INTERPRETATION OR ENFORCEMENT
HEREOF OR ANY OTHER CLAIM OR DISPUTE HOWEVER ARISING BETWEEN THE COMPANY AND
THE EXECUTIVE, THE EXECUTIVE, TO THE FULLEST EXTENT THAT HE MAY EFFECTIVELY DO
SO, WAIVES ANY RIGHT TO TRIAL BY JURY. THE EXECUTIVE AGREES THAT THIS SECTION
7.5 IS A SPECIFIC AND MATERIAL ASPECT OF THIS AGREEMENT AND ACKNOWLEDGES THAT
THE COMPANY WOULD NOT ENTER INTO THIS AGREEMENT IF THIS SECTION 7.5 WERE NOT A
PART HEREOF.
7.6. ARBITRATION. Any dispute between or among the parties to this
Agreement relating to or in respect of this Agreement, its negotiation,
execution, performance, subject matter, or any course of conduct or dealing or
actions under or in respect of this Agreement, including without limitation any
claim under the Securities Act, the Securities Exchange Act of 1934, as amended,
any other state or federal law relating to securities or fraud or both, shall be
submitted to, and resolved exclusively pursuant to, arbitration in accordance
with the commercial arbitration rules
-11-
<PAGE>
of the American Arbitration Association. Such arbitration shall take place in
Chicago, Illinois. Decisions as to findings of fact pursuant to such arbitration
shall be final, conclusive and binding on the parties. Within thirty (30) days
following the award of any arbitrator hereunder, any party may apply to a court
of competent jurisdiction for a resolution of any questions of law bearing on
such award, and no such award shall be binding and enforceable unless the
arbitrator's determinations as to such questions of such law have been
judicially approved or until the passage of such thirty (30) day period without
such application having been made. Any final award shall be enforceable as a
judgment of a court of record.
7.7. INTEGRATION. This Agreement and the documents referred to
herein or delivered pursuant hereto which form a part hereof contain the
entire understanding of the parties with respect to the subject matter
hereof. There are no restrictions, agreements, promises, representations,
warranties, conditions, covenants or undertakings with respect to the subject
matter hereof other than those expressly set forth herein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to the subject matter referred to herein and therein.
7.8. DESCRIPTIVE HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning of terms contained herein.
7.9. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which shall constitute one
and the same instrument.
7.10. EXPENSES. Unless otherwise agreed, the Company and the
Executive shall each pay their own costs in connection with the preparation,
negotiation, execution and delivery of this Agreement and in connection with the
issuance of the Shares, including, but not limited to, all transfer taxes, fees
or other charges which may be payable in connection with the acquisition or
issuance of the Shares pursuant to this Agreement and all costs in connection
with the preparation, execution and delivery of any waiver, amendment or consent
(whether or not executed) relating to this Agreement, including reasonable fees
and disbursements of counsel.
7.11. RIGHTS CUMULATIVE; WAIVER. The rights and remedies of the
Executive and the Company under this Agreement shall be cumulative and not
exclusive of any rights or remedies which either would otherwise have hereunder
or at law or in equity or by statute, and no failure or delay by either party in
exercising any right or remedy shall impair any such right or remedy or operate
as a waiver of such right or remedy, nor shall any single or partial exercise of
any power or right preclude such party's other or further exercise or the
exercise of any other power or right. The waiver by any party hereto of a
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any preceding or succeeding breach and no failure by either party to
exercise any right or privilege hereunder shall be deemed a waiver of such
party's rights or privileges hereunder or shall be deemed a waiver of such
party's rights to exercise the same at any subsequent time or times hereunder.
-12-
<PAGE>
7.12. SPECIFIC PERFORMANCE. Each of the parties hereto
acknowledges and agrees that in the event of any breach of this Agreement,
the non-breaching party would be irreparably harmed and could not be made
whole by monetary damages. It is accordingly agreed that the parties hereto
will waive the defense in any action for specific performance that a remedy
at law would be adequate and that the parties hereto, in addition to any
other remedy to which they may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement in any action
instituted in the United States District Court for any District located in
the State of Illinois, or, in the event such court would not have
jurisdiction of such action, in any court of the United States or any state
thereof having subject matter jurisdiction of such action.
7.13. LIMITED OBLIGATION. The Executive acknowledges and agrees
that the obligations of the Company under this Agreement are solely the
obligations of the Company, and that none of the Company's stockholders,
directors, officers or lenders will have any obligation or liability, contingent
or otherwise, in respect of this Agreement and the subject matter hereof.
[signature page follows]
-13-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Executive
Subscription Agreement as of the date first above written.
FANNIE MAY HOLDINGS, INC.
By: /s/ Thomas H. Quinn
----------------------------
Name: Thomas H. Quinn
----------------------
Title: Chairman of the Board
----------------------
/s/ Ted A. Shepherd
------------------------------
TED A. SHEPHERD
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------------------
AUGUST 31, AUGUST 31, AUGUST 26, AUGUST 31, AUGUST 30, AUGUST 29,
1993 1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense....................... $ 8,492 $ 8,913 $ 9,237 $ 9,455 $ 9,235 $ 10,346
Amortization of debt expense........... 963 933 957 720 661 681
Rental expense included in fixed
charges.............................. 4,562 4,548 4,342 3,949 3,802 3,721
----------- ----------- ----------- ----------- ----------- -----------
Total fixed charges.................. $ 14,017 $ 14,394 $ 14,536 $ 14,124 $ 13,698 $ 14,748
----------- ----------- ----------- ----------- ----------- -----------
Earnings:
Pre-tax (loss) income.................. $ (11,670) $ (14,556) $ (5,672) $ (1,066) $ (921) $ 3,579
Plus: fixed charges.................... 14,017 14,394 14,536 14,124 13,698 14,748
----------- ----------- ----------- ----------- ----------- -----------
Total earnings....................... $ 2,347 $ (162) $ 8,864 $ 13,058 $ 12,777 $ 18,327
----------- ----------- ----------- ----------- ----------- -----------
Ratio of earnings to fixed charges....... n/a n/a n/a n/a n/a 1.2
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF ARCHIBALD CANDY CORPORATION AS OF AUGUST 29, 1998 AND
FOR THE FISCAL YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> AUG-29-1998
<CASH> 13,081
<SECURITIES> 0
<RECEIVABLES> 1,634
<ALLOWANCES> (254)
<INVENTORY> 24,602
<CURRENT-ASSETS> 39,369
<PP&E> 53,603
<DEPRECIATION> (32,676)
<TOTAL-ASSETS> 98,089
<CURRENT-LIABILITIES> 12,381
<BONDS> 100,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 98,089
<SALES> 126,742
<TOTAL-REVENUES> 126,742
<CGS> 43,978
<TOTAL-COSTS> 70,225
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,346
<INCOME-PRETAX> 3,579
<INCOME-TAX> 276
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,303
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
